Why Gold Prices Change: Factors Affecting Gold Rate in India

Gold has remained one of the significant components in Indian culture, investments, and economics throughout the ages. However, there is one mystery that has remained unanswered to date and which confuses buyers, investors, and jewellery lovers – what makes the gold rate in India fluctuate daily?

Ever thought about what is better for your future security, gold or insurance investment? Read our blog to answer all your questions: Gold vs Insurance Investment for Long-Term Wealth Building

An insight into what determines the rate of gold prices could come handy when making sound decisions when buying gold or investing in the market.

Factors Affecting the Gold Rate in India

The price of gold in India is determined by neither a company nor an authority. The price of gold is based on certain factors, which work together to determine the final market price.

Some of the factors include those within India while others are international and affect global gold prices.

Global Factors That Determine the Price of Gold in India

1. Gold Rates Internationally (London Bullion Market)

One of the major foundations of all gold prices in India is established at the London Bullion Market Association (LBMA). If international spot gold prices fluctuate upwards or downwards, gold prices in India respond in real-time.

All international gold transactions happen in US dollars and therefore the price of gold in India depends on the dollar index.

2. US Dollar's Strength

There exists an inverse correlation between the price of gold and strength of US dollars:

• Stronger US dollars lead to increased gold prices for foreign buyers, resulting in decreased demand and lower prices.
• Weaker US dollars make it easier for buyers to purchase gold, thereby increasing demand and driving up prices.

If the rupee weakens against the US dollar, it results in increased prices for imported gold in India.

3. US Fed Monetary Policy

US Federal Reserve's policies play a huge role in the price of gold across the globe:

• Interest rate increases are associated with falling gold prices, as higher rates make bonds and savings accounts more attractive compared to gold.
• Rate cuts and calm monetary policies lead to an increase in the price of gold as it is considered an inflation-hedge asset.

In the past, quantitative easing policies were associated with gold price surges as investors are afraid of currency depreciation.

4. Inflation and Recessions

Gold is often considered as the safe store of value in times of inflation:

• Higher inflation results in reduced buying power of paper money and thus, higher gold prices.
• Recessions and slowdowns in the economy encourage people to invest in gold.

Global post-pandemic inflation led to an all-time high gold price.

5. Geopolitical Concerns and Political Issues

It can be safely said that uncertainty drives up the price of gold.

• Any escalation in geopolitical risks would lead to increased demand for gold.
• Geopolitical issues such as war, diplomatic disputes, or military action lead to safe-haven investments.

Russia-Ukraine wars and unrest in the Middle East are examples where a sharp rise in gold prices occurred. Any political instability in developed nations pushes investors to invest in physical assets such as gold.

Domestic Issues Impacting the Gold Price in India

6. Import Duties and Tax

India imports nearly 800-900 tonnes of gold per year, being among the biggest importers in the world.

Import duties play a major role in influencing retail gold prices:

• More import duty means high retail prices for gold in India.
• Basic Customs Duty on gold has been cut to 6% from 15% in Union Budget 2024, hence dropping gold prices within the country.
• Gold Jewelry GST of 3% and making charges GST of 5% further add up to the cost.

7. Rupee vs. US Dollar Exchange Rate

Since gold is priced in US dollars globally, the INR/USD exchange rate is a critical domestic variable:

• A depreciating rupee means Indian importers pay more in rupee terms for the same amount of dollar-priced gold.
• Even when international gold prices remain flat, a weakening rupee can push Indian gold prices higher.
• Conversely, a stronger rupee can bring relief to gold buyers even when global prices are rising.

8. Seasonal Demand in India

India's domestic demand for gold is highly seasonal and culturally driven:

• Wedding season (October to December and April to May) sees a surge in jewellery buying.
• Akshaya Tritiya, Dhanteras, and Diwali are considered auspicious days to purchase gold, creating demand spikes.
• Harvest season in rural India correlates with increased gold purchases as agricultural incomes rise.
• These demand surges exert upward pressure on local gold prices.

9. RBI's Gold Reserves and Monetary Policy

The Reserve Bank of India (RBI) periodically buys gold to diversify its foreign exchange reserves:

• Increased RBI gold purchases signal confidence in the metal and can influence market sentiment.
• India's central bank has been steadily increasing its gold reserves, joining a global trend among emerging market central banks.
• Domestic liquidity conditions and RBI's interest rate stance also influence how attractive gold is compared to other instruments.

10. Stock Markets

There tends to be an inverse relationship between gold prices and stock market indices.

• Good performance in stock markets means that more people prefer to invest in stocks than in gold.
• In times when stock markets fall or perform badly, money tends to move into the safer hands of gold as a hedge.

"Hedge behaviour" during bear markets is the most consistent factor behind rising gold prices.

Calculation of Gold Prices in India

A breakdown of price calculation will make understanding consumer price easy:

• Price basis: International spot price converted into INR based on current exchange rate.
• Import Duty: 6 percent (basic customs duty) + other levies.
• GST: 3 percent of gold value.
• Making Charges: Different for each jeweller (8 to 25 percent of gold value).
• Hallmarking or certification charges: Small extra expense.

The total cost for the gold jewellery comes out to be much more than the official price of gold per gram.

Types of Gold

22 Karat Gold and 24 Karat Gold

• The purity level of 24 karat gold is 99.9 percent and serves as the reference gold for investing in gold instruments such as gold bars and coins.
• The purity level of 22 karat gold is 91.67 percent and is popularly used for making jewellery due to its durability.

The rate of 22 karat is derived in terms of 24 karat gold, so the reason why both rates move together, yet not at the same level.

Gold ETFs and Sovereign Gold Bonds (SGB)

• The gold ETFs are closely aligned with the global gold prices and are traded at stock exchanges.
• The sovereign gold bonds (SGB) are issued by RBI and give interest (now 2.5 percent) apart from the gains made from the rise in gold prices.

Both the instruments are free of making charges and storage charges for being purely an investment purpose.

Activity by Central Banks and Impact of Global Demand for Gold

All around the world, the central banks serve as the major gold buyers, so here’s the importance:

• China
• Russia
• Turkey
• India

have been acquiring gold actively in their reserves.

Central banks buying on a large scale help in decreasing the gold available in the market.

Frequently Asked Questions (FAQs)

Q1. Why does the gold rate differ between cities in India?

Gold rates vary slightly across cities like Mumbai, Delhi, Chennai, and Hyderabad due to differences in local taxes, transportation costs, and jeweller association rates. The variation is typically ₹50-₹200 per 10 grams.

Q2. Does the gold rate change every day?

Yes. Gold rates are updated daily based on international spot prices and the prevailing INR/USD exchange rate. Rates can even fluctuate multiple times within a trading day on commodity exchanges like MCX.

Q3. Is buying gold on Akshaya Tritiya actually cheaper?

Not necessarily. Since gold is priced by market forces, auspicious days often see higher demand but not lower prices, in fact, prices sometimes rise slightly due to increased buying pressure. The auspicious significance is cultural, not financial.

Q4. How does a weak rupee affect gold buyers in India?

A depreciating rupee increases the cost of importing gold since it is purchased in US dollars. This means Indian consumers effectively pay more even if global gold prices have not changed.

Q5. Should one buy gold when prices are falling?

This depends on the purpose of purchase. For investors, falling prices can represent a buying opportunity if the long-term outlook remains positive. For jewellery buyers, purchasing during price dips can result in meaningful savings, especially on higher-value purchases.

Q6. What is the impact of the government's import duty changes on gold prices?

Import duty changes have an immediate and direct impact on domestic gold prices. The 2024 duty reduction from 15% to 6% resulted in a price drop of approximately ₹5,000-₹6,000 per 10 grams almost overnight, benefiting both consumers and the industry by reducing smuggling incentives.

Q7. Is gold a good hedge against inflation in India?

Historically, yes. Gold has maintained its purchasing power over long periods. During high inflationary environments in India, gold has often delivered returns that outpace inflation, making it a reliable long-term wealth preservation tool.

Q8. How do gold ETFs compare to physical gold for investment?

Gold ETFs offer lower costs, higher liquidity, and no storage risk compared to physical gold. However, they lack the cultural and emotional value associated with physical gold jewellery, which remains the preferred form for gifting and ceremonial use in India.