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Factors Affecting Gold Prices in India

07 Feb 2023 0 COMMENT

Gold is a precious metal that is widely used as a store of value, an investment, and a hedge against inflation. Gold rates are affected by a variety of factors, including global supply and demand, interest rates, currency fluctuations, and geopolitical events. Let us understand global and domestic factors affecting gold prices.

Global Factors

·         Supply and demand:

Supply and demand for any commodity determines the prices of that commodity and gold is not an exception. Gold supply comes from three different sources namely mining, recycled gold and producer hedging.

Gold is widely used in jewellery, technology, investment, and central bank purchases as a reserve. Gold, the most valuable of all precious metals, is prized all over the world for its beauty, liquidity, investment potential, and industrial properties. Gold is widely regarded as a financial asset that retains its value and purchasing power during inflationary periods.

According to the World Gold Council (WGC), mining accounts for 75% of global gold supply, with recycled gold accounting for the remaining 25%. Gold is consumed for fabrication, in the form of bars and coins, by central banks, and in the form of exchange traded funds and similar products. Fabrication demand accounts for 45% of total demand, followed by bars and coins at 24%, ETFs and similar products at 23%, and central banks at 7%.


Source: World Gold Council; Note: Data for 2022 is only for first 9-months; Data in tons

·         US Economic Indicators:

Economic indicators such as inflation, interest rates, GDP, job data drive the global bullion prices. Higher inflation leads to rise in gold prices; higher interest lowers the demand for non-interest bearing gold and vice versa; stronger growth in GDP lowers the appeal of gold as safe investment because of shift in investment to riskier assets; rise in unemployment shows challenges in the labour market leading to rise in gold prices.

·         US Treasury Yields:

US Government Bond Yields are the best leading indicators for future interest rate movement in the United States because gold is considered as a hedge against rising interest rates. The U.S. Treasury bond yields carry a negative relationship with gold prices. Both gold and Treasuries are regarded safe-haven assets; gold and bond prices have a positive link, while gold prices and bond yields have a negative correlation. This is because there are opportunity costs associated with storing gold, which pays no interest, thus capital flows from gold to bonds when yields are sufficiently high, and vice versa when yields are too low.

·         Dollar Index:

Since gold is benchmarked and traded in dollars around the world, changes in the Dollar Index has a considerable impact on gold prices. Dollar index has almost 0.80 to 0.95 inverse correlation with gold prices

·         Central Bank Reserves:

Gold is held as a reserve asset by majority of central banks around the world. To diversify its holdings, each central bank invests in a variety of currencies, bonds, and gold. For the past few years, emerging-market central banks, including the RBI, have been buying gold in huge quantities, instilling increased trust in gold as an asset class.

·         Geopolitical Factors:

In economic turbulent times, gold has long been seen as a safe haven asset.

Domestic factors

·         Supply demand:

India is the second largest consumer of gold in the world after and it is largely consumed during the periods of marriage season and festival season. The supply of gold mainly comes from imports and recycled gold supply. The supply-demand play a meagre role in determining the gold prices in India and it largely follows the international market.


Source: World Gold Council; Note – Data for 2022 is for the first 9 months

·         Currency movement:

Currency fluctuations also play a role in determining gold rates in India. Gold is typically priced in US dollars, so when the value of the US dollar falls relative to the Indian rupee, the price of gold in rupee terms increases. Conversely, when the value of the US dollar rises relative to the Indian rupee, the price of gold in rupee terms decreases. This is because gold is a global commodity, and changes in currency values affect the price of gold in different currencies.

·         Government intervention:

India is largely dependent on imports for meeting its gold demand, which leads to the outflow of a bigger foreign exchequer. In order to keep control on the import of gold in India, the central government announces tariffs and duties on gold imports. Gold tariffs are announced once in fortnight considering the price of gold in the international market. At present, gold attract an import duty of 12.5%.

In conclusion, gold rates in India are affected by a variety of factors, including global supply and demand, interest rates, currency fluctuations, geopolitical events, and domestic factors such as government policies and consumer demand. The global supply and demand, along with interest rates and currency fluctuations are the most significant factors affecting the gold rate in India. However, geopolitical events and domestic factors also play a role in determining gold rates in India. It is important to keep an eye on these factors and be aware of their potential impact on the gold rate in India.

Disclaimer: ICICI Securities Ltd. (I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. - ICICI Venture House, Appasaheb Marathe Marg, Prabhadevi, Mumbai - 400 025, India, Tel No : 022 - 6807 7100. The contents herein above shall not be considered as an invitation or persuasion to trade or invest. I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon. The contents herein above are solely for informational purpose and may not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments or any other product. Investments in securities market are subject to market risks, read all the related documents carefully before investing. Investors should consult their financial advisers whether the product is suitable for them before taking any decision. The contents herein mentioned are solely for informational and educational purpose.

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