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What factors influence the price of gold?

Do you know that India is one of the largest consumers of gold in the whole world?

The demand for gold in India accounts for almost 25% of the worldwide demand. Every auspicious occasion in India is complemented with either the purchase or gifting of gold items to near and dear ones. In addition to all this, gold makes for an excellent investment too. It is one of the most traditional and safest forms of investments that can bail one out of a financial crisis.

 

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Important occasions like Diwali or the wedding season see an upsurge in gold prices every year. However, gold has maintained its standard throughout the times.

The rising demand for gold is the most important contributing factor in its high price.

Also, international markets have a great impact on gold prices in India.

Here’s a quick compilation of the factors that determine the changing value of gold in India-

 

  • Demand and supply– As is the case with any other trading commodity, demand and supply play a major role in determining the gold price. The supply of gold is relatively scarce as compared to its demand. Therefore, if the demand increases, the prices of gold take an upswing.

 

  • Inflation– It is a well-known fact that during inflation the value of the currency goes down. Other forms of investment like the fixed deposits and stock markets also fail to deliver when the inflation rates rise. During such testing times, gold acts as a hedge because its value is not affected by fluctuations in currency.

 

  • Rate of interest– Rate of interest and prices of gold have an inverse relationship. Whenever the rates of interest fall, people do not get enough profit on their deposits. At this time, people usually break their deposits and purchase gold thus causing an increase in demand and eventually in its price.

 

  • Central bank– The Government of India has its own currency as well as gold reserves. Based on the policies, it can either buy or sell gold through RBI. Depending upon whether it buys more or sells more, the price of the gold gets impacted. If it holds more gold, the supply goes down causing the gold prices to increase.

 

  • Jewellery Market in India– Indians love to purchase gold jewellery during festivals and weddings. For this reason, the demand for gold rises during these occasions thus increasing its price.

 

  • Import duty– We know that India is the second largest consumer of gold globally. However, it contributes even less than 1% to the worldwide gold production. Therefore, India has to import a lot of gold to meet its demand. For this reason, the import duty has an essential role to play in deciding the gold price.

 

  • Currency fluctuations– Gold trading takes place in USD internationally. During import, USD gets converted into INR. Any fluctuations in USD or INR directly impact the import price and the selling price of the yellow metal.

 

  • Other factors– Geopolitical and economic stability are other essential factors that determine the price of gold. During a Geopolitical crisis like wars, the price of gold usually goes up because the demand for gold rises during these times.

 

These are the most common factors that influence the price of gold. Though prices of gold are catching the attention of all investors, it is best to first consider the above-mentioned aspects before jumping on the bandwagon.

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