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Did you know that the price of 1 gram of gold in India was ₹440 in 2000? The same quantity of gold is ₹6,185 today, which means 14 grams of gold (Approx.) in 2000 is equal to one gram of gold today. Despite the significant price rise, the demand for gold is high because it holds a special place in Indian tradition and culture.
But, have you ever wondered why gold prices vary daily, though in small percentages? What are the factors driving the prices of gold? How is gold’s price calculated? By the end of this article, you will have all these questions answered. So, let’s begin!
The gold market
India is one of the significant players in the global gold market. India stands number two in gold jewellery consumption. It also plays a major role in exporting gold to countries like the United States of America. The gold market contributes 1.3% to the country’s GDP, making it quite an important sector.
How is the gold price decided in India?
India Bullion and Jewellers Association (IBJA) determines the gold price in India. The association has most of the country’s gold dealers as members.
The association interacts with the top gold dealers in the forum to record their buy and sell quotes. An average of such quotes is calculated to determine the price of gold and is published daily.
The gold dealers determine their buy and sell quote based on the acquisition cost of gold. In the case of imported gold, they also factor in the exchange rate, import duty and other costs. They also add their margins to the acquisition cost before giving their final quotes to the association.
Factors affecting gold prices
Questions about why the gold rate is increasing in India are common in all our minds since we notice gold rate fluctuations daily. Though the asset is considered quite stable in the long run, there is a small variation every day. Hence, understanding the factors influencing its price is the key to investing in gold.
Inflation
Inflation is an economic scenario where the value of money decreases. Here, investors look for options to preserve their wealth’s value. Gold works as a suitable option in such cases, given its stable pricing in the long term. So, investing in gold during inflation does not reduce money value but keeps it intact or even leads to an increase in the future.
Hence, during inflation, the demand for gold increases, thereby causing a price increase. Gold, too, follows the basic economic concept of price varying based on demand and supply.
RBI’s gold reserves
Central banks of every economy maintain a sufficient quantity of gold in their reserves to help during times of crisis and turmoils. The Reserve Bank of India, too, maintains gold reserves. Currently, the RBI has about 800 tonnes of gold as reserves.
RBI’s decision about the quantity of reserves impacts the supply of gold in the economy, influencing the price of gold. If RBI decides to hold larger quantities in reserves, the supply decreases, and the price increases. The reverse of this happens when RBI decides to unreserve its gold.
Government policies
Apart from the cost of acquisition, gold is subject to different kinds of taxes. It is subject to GST (Goods and Service Tax), import duty, cess, etc. The government’s policies on tax rates directly impact the prices of gold. An increase in such rates leads to an increase in the overall price and vice versa.
Interest rates
Gold prices move against interest rates. A low-interest rate makes bonds and other financial instruments unattractive, leading to increased investment in gold. This improves the demand, causing an increase in prices. When interest rates increase, other financial assets become more attractive, causing a decrease in the gold rate.
Global market
Since the supply of gold also relies on imports, the price of gold in the international market has an impact on the local prices, too. Political and economic events in the global economy can cause gold rates to fluctuate. Besides these, the exchange rate of the Indian Rupee with other currencies impacts the gold rate to a large extent.
Disposable income
The disposable income of consumers and investors directly impacts the demand for gold in India. Higher disposable incomes lead to higher spending, raising the prices of gold and other assets. Lower disposable incomes lead to decreased demand. Income tax rates, employment opportunities, agricultural produce, prices of necessities, etc., are factors affecting disposable incomes.
Bottomline
Gold is a popular investment avenue among investors, both from financial and traditional perspectives. Understanding the factors influencing gold prices can help investors plan their finances accordingly to benefit from fluctuating rates.
FAQs
Despite multiple factors influencing the prices of the commodity, gold follows the basic economic principle, too. Demand and supply are the two primary factors affecting gold rates.
The price of gold in India reached an all-time high of about ₹65,000 in December 2023. Currently, the price seems to be quite stable. However, the price has significantly risen in the last five years from about ₹2,600 in 2016.
Gold is subject to Goods and Service Tax. Before GST was introduced, Value Added Tax (VAT) was applicable. Gold is subject to GST at the rate of 3%. If it is gold jewellery, an additional 5% is applicable on making charges.
Hallmark is a certificate to certify the quality of gold. A hallmark symbol on gold proves that it has been tested and meets the required purity standards. 18 carats, 22 carats and 24 carats are popular types of hallmark gold.
Yes, gold prices vary from city to city. Ideally, they should be the same since the price is determined for the entire country by IBJA. However, the cost of transport, local demand and supply and other costs impact the prices, which leads to varying prices.