5 Factors that Affect the Price of Gold in India

With over 800 tonnes of gold being consumed in India in a single year, it comes as no surprise that India is the largest consumer of gold in the world. It is followed only by China and the USA and, fun fact, India’s annual gold consumption is more than three times that of the US. This means that there is a lot of demand for gold in India and that is because gold has always been considered a good investment for Indians. Gold being an investment means that at some point you are going to want to sell your gold for a price that is higher than what you bought it for.

 

So, what determines that price? Here are some of the factors that affect the gold rate in India.

 

1. High demand

Demand is a major factor that affects the price of gold. During festivals and the wedding seasons in India, the demand for gold increases dramatically. Apart from this, the demand for gold for the purpose of investment through ETFs (Exchange Traded Funds) has also increased dramatically. This is so because when investments are made in gold ETFs, the rules require physical gold equal to the amount being traded be maintained. This means that more gold needs to be brought in to support the trading.

 

2.                   Importing gold

Apart from being the largest consumer of gold, India is also the largest importer of gold, obviously to support the high demand. When gold is imported, fluctuations in the cost of importing the gold also affects the price of gold. If the cost of importing falls, then the price of gold also comes down but if it goes up, the price of gold goes up.

 

3.                   Exchange rates of the Rupee Vs the US dollar

This may seem like an unlikely candidate but the exchange rate of the Indian rupee and the US dollar affects gold. If the rupee becomes weak then the price of gold goes up and vice versa. This happens because, globally, gold is traded in USD. When gold is imported, it is paid for in USD, then converted into INR for domestic consumption. This is where the rupee to USD exchange rates affect gold.

 

4.                   Crisis in other countries

Gold is known as a safe haven because it is known to thrive even when the economy of a country is in a crisis. When there is a crisis in a country, regular investments fail to provide returns forcing investors to channel their funds into gold. This increase in investments in gold leads to fluctuations in the price of gold and affects the global markets too.

 

5.                   Supply and production cost

The demand for gold is high but since mining for this metal has been going on for thousands of years, it’s becoming increasingly difficult to mine. These difficulties lead to a rise in the cost of production of gold which then gets added onto the cost of gold making its price rise.

 

As the population of India rises, the demand for gold is expected to rise too. This means that we can expect to see even more fluctuations in the price of gold.