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Chapter 8: Bullions (Gold and Silver) – Part 2

6 Mins 30 Sep 2022 0 COMMENT

Before you begin investing in the equity market, you may be analysing the company you are investing in through their balance sheet, profit and loss account, cash flow statement, management, development in the industry, where the company stands against their peers, etc. Likewise, the price movement in the commodity market is also influenced by various factors. In the following chapters, you will understand more about gold price disparity, price driving factors, bullion correlation with other asset classes, among other things.

What is Bullion?

Bullion refers to precious metals (with at least 99.5% and 99.9% purity) such as gold, silver, platinum, and palladium that are traded, typically in the form of bars, ingots, or coins. These metals are valued for their rarity, beauty, and intrinsic properties, making them desirable assets for investment, jewelry, industrial use, and currency backing.

Bullion is created through various processes. Let us understand how gold bullion is created. It is produced primarily through mining and refining processes. Gold ore is extracted from mines and processed to separate the gold from other minerals and impurities. The refined gold is then cast into bars or minted into coins of standardized weight and purity. Additionally, recycled gold from jewelry, electronic components, and other sources is refined and used to produce bullion.

Gold price disparity

India is a gold price follower despite the fact that it is the second largest importer in the world. Hence, Indian gold price reflects a disparity in comparison with its global benchmarks. The first and foremost differentiating aspect of gold contracts between COMEX and India is the purity of gold. COMEX gold is of 0.999 purity while Indian gold is of 0.995 purity. Gold imports have a large impact on India’s Current Account Deficit (CAD). Hence, the Government of India (GoI) controls import of gold into the country through various policies such as import tariffs and duties.

Import tariffs are announced once in a fortnight by the Ministry of Finance to maintain uniformity amongst all importers when it comes to paying import duty. Further, movement in USD-INR also plays a crucial role in determining gold price in India.

Following are the determinants of gold price disparity in India:

  1. COMEX Gold Price
  2. Import Tariff
  3. Import Duty
  4. USD-INR

But what drives the price of gold in India?

Many factors do, and we are highlighting a few here.

  • Economic indicators:
      Economic indicators such as inflation, interest rates and GDP drive global bullion prices. Higher inflation leads to a rise in gold prices as gold is considered a hedge against inflation. Higher interest rates lower the demand for gold and vice versa as more people shift to asset classes that carry high interest rates and offer better yield. Stronger growth in GDP lowers the appeal of gold as a safe investment because of a shift in investment to riskier assets like equity.
  • US treasury yields:
    US treasury bond yields are the best leading indicators for future interest rate movement in the United States. US treasury bond yields have a negative relationship with gold prices. Both gold and treasuries are considered 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.
  • Currency movement:
    Movement in USD-INR impacts Indian gold prices as gold is pegged to the dollar. When INR depreciates against USD, the value of gold rises because one has to pay more INR to buy one USD and vice versa.
  • Dollar index:
    Since gold is benchmarked and traded in dollars around the world, changes in the Dollar index have a considerable impact on gold prices. The 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 the majority of central banks around the world. To diversify 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 economically turbulent times, gold has long been seen as a safe haven asset.

Did you know?

Changes in interest rates in the United States announced by its central bank i.e., Federal Reserve (commonly known as Fed) largely impact gold prices. When the Fed raises the interest rate, then interest bearing assets move higher and consequently, lower the appeal of gold as it will not attract any interest.

Silver Bullion

Silver is considered a wonder metal because it is used both as precious metal and as an industrial metal. Apart from being used to create jewellery as well as silverware, silver is also a very good conductor of electricity and finds use in electronic components such as wires, switches, and circuit boards. All electronic gadgets such as smartphones, televisions, and smart watches contain silver.

Drivers of the price of Silver

  1. Since silver is considered as both a precious and industrial metal, it takes price cues from both gold and base metals.
  2. Macro-economic factors such as GDP, interest rates, inflation, manufacturing and services sector, have an impact on silver prices.
  3. Consumption and investment demand also drives the price of silver. Consumption in the form of jewellery, silverware, photovoltaic usage, solar panels, electronics as well as investment demand in the form of ETFs play an important role in movement of silver prices.
  4. Governments control supply by regulating (restricting or encouraging) material flow through trade policy (installation or suspension of taxes, penalties, and quotas).
  5. Armed warfare and geopolitical events involving governments or economic systems can result in substantial price movement.
  6. The true industrial demand for silver in India is a minor part of the total industrial demand for silver.
  7. Silver demand in India is mostly driven by the price level and volatility of the metal.

Details of Silver contracts

Futures trading in silver at Indian exchanges started in 2003 with the commencement of commodity derivatives trading. In order to facilitate silver trading by different sections of investors, MCX has three variants of silver Futures trading as detailed below:

  1. Silver 30 Kg
  2. Silver Mini – 5 kg
  3. Silver Micro – 1 kg

Silver Options trading is also permitted by the regulator with Silver 30 kg as underlying.

For detailed contract specifications of Futures and Options, please refer to tables in the previous chapter.

Why is Bullion Important to Investors?

Bullion is important to investors because spot prices of metals are measured by unit weight. Bullion, particularly gold and silver, has been historically recognized as a reliable store of value. Unlike fiat currencies, which can be subject to inflation and devaluation over time, bullion maintains its intrinsic value and purchasing power. Investors often turn to bullion as a safe haven asset during times of economic uncertainty or geopolitical instability.

Also, Bullion serves as an effective hedge against inflation, as its value tends to rise in response to increases in the general price level of goods and services. During periods of high inflation, the purchasing power of fiat currencies may decline, but the intrinsic value of bullion typically remains stable or increases. Investors hold bullion to preserve the real value of their wealth in inflationary environments.


  • For gold and silver, major factors driving price are supply, price movement in other asset classes such as equities, bonds, and currencies, and economic data such as inflation, interest rate, GDP, etc.
  • Geopolitical tensions, buying demand from various segments such as jewelry and technology industries, and central banks also determine the price movement of gold and silver. Gold carries an inverse correlation with equities, bonds, and the dollar index.
  • Silver is available for trading in three variants namely, Silver Regular of 30 kg; Silver Mini of 5 kg, and Silver Micro of 1 kg contract.

Gold and Silver Bullion FAQs

Is it better to buy gold or silver bullion? 

Both gold and silver bullion are considered a haven for investors. Which is better depends on the investors' investment goal. For example, silver bullion is more affordable, but it offers more volatility in terms of price fluctuation. Gold is more stable and may give better returns in the long term.

Why are gold and silver called bullion? 

Gold and silver are referred to as 'bullion' because of their role as raw, uncoined metals in bulk form. It comes from the French word "bouillon," meaning "boiling" or "melting," which was used to describe a melting refinery where precious metals were melted and poured into molds to create bars or ingots.

Is gold bullion pure gold?

Yes, gold bullion refers to gold that is typically in its purest form. Bullion bars are made of nearly pure gold, with purity levels typically ranging from 99.5% to 99.99%. 

Now, let's move on to the energy segment, which is the most important commodity segment. In the next chapter, we will take you through the crude oil market, types of crude oil, and some other exciting elements. 

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