How is Gold Rate in India Determined?

Nov 01, 2020

How is Gold Rate in India Determined?

Gold and gold ornaments are permanent fixtures in Indian culture and traditions. Since ages, this yellow metal has been a symbol of opulence and prosperity. Alongside its aesthetic and emotional importance, gold acts as a significant instrument for financial protection during tumultuous economic and geopolitical situations. Thus, it comes as no surprise that India accounts for 25% of the global physical demand for this precious metal, according to a publication in Economic Times.

This demand, undoubtedly, has a significant bearing on gold rate in India. And just as demand has an impact over gold prices, the latter along with per capita income, influence the market of gold as well. Nevertheless, gold’s demand is not the only factor due to which the prices fluctuate. There’s a host of other reasons that cause the price of gold to rise and dip.

Global Impact on the Rate of Gold

With respect to volume, India is the largest importer of gold across the world. India imports more than 800 tonnes of gold every year, according to an article in the Economic Times. Naturally, global conditions have a significant effect on the prices of gold in India.

Let’s take a look at how!

  1. Performance of other asset classes

Gold rate has an inverse relationship with the demand of other asset classes. Although there’s no statistically established correlation between the two, general trend reflects that when prices of different asset classes, such as stocks, fall rapidly, gold prices surge.

It is because investors consider gold to be a safe-haven. The factors that cause returns from other asset classes to fall or rise do not have any proven bearing on the price of gold. For this reason, investors flock towards gold to stabilise the volatility of their portfolios during situations of global unrest, like heightening US-China trade war.

The situation surrounding Covid-19 is also an excellent example of how global markets define 24 and 22-carat gold rate. The yellow metal’s prices have rallied more than 16% (up until May) ever since the beginning of 2020, according to CNBC.

Nationwide lockdowns have caused significant economic disruptions, resulting in a historic slump in economic growth globally. Moreover, the grave condition in the USA has put a damper on any hope of economic recovery anytime soon. Naturally, these developments have prompted scores of investors to seek gold as a safe-haven, in order to hedge their funds against the raging market volatility.

As a result, demand for gold has risen significantly, and so has the 1 gram gold rate.

  1. Impact of dollar

The US dollar denominates gold. Therefore, USD’s value has a significant bearing over gold’s price, which, in turn, impacts the 1 gram gold rate at which India imports this precious metal. Over long-term, dollar and gold prices share an inversely proportional relationship, i.e., a weakening dollar props up the value of gold and vice versa.

Why?

When the dollar tends to weaken, the value of other currencies across the world, including INR, grows stronger. Naturally, it leads to an increase in demand for commodities like gold. Another reason why USD value impacts the 22 carat gold rate today is its age-old appeal as a secured investment avenue. As USD starts to lose its value, investors turn to other alternatives for value storage, and gold is a top contender in that regard.

Also, there’s also the USD-INR relationship in play. Since gold is dollar-denominated, if INR falls in value against the dollar, import prices increase. You can track that when Rupee’s value lowers in relation to USD, there’ll be an increase in 1 gram gold rate in India.

  1. Stimulus packages

As a result of Covid-19, several central banks across the world have implemented stimulus packages. Additionally, there have also been significant cuts of interest rates to augment liquidity. And as per analysts, enhanced liquidity in the market typically translates to higher gold rate.

Gold as a Universal Currency

If you consider the free market system, gold can be considered a currency. Gold possesses a certain value or price. This price fluctuates every day and, in fact, every second (as long as commodity exchange markets are open) in relation to other forms of exchange such as the INR, USD, Euro, etc. Naturally, if you consider, the 22 carat gold rate today will be different from what it was yesterday or a week before.

Other features that lend gold the characteristics of currency are:

  • You can store gold.
  • It is highly liquid.
  • The yellow metal can be converted into other currencies with ease.

The points mentioned above also explain how gold acts as a currency. Just as geopolitical tensions in India can affect the price of INR, global conditions can impact the 1 gram gold rate in India today.

Other Factors Determining Rate of Gold

  1. Inflation

During a period of inflation, the rate of gold generally increases. That’s because, during inflation, a currency’s value lowers. This prompts individuals to store wealth in the form of gold, acting as a hedge against inflation.

  1. Rates of interest

Interest rates within an economy for financial services and products have an inverse relationship with the price of gold. For instance, when rates of interest for loans are high individuals will have less cash in their hands and, resultantly, there’ll be a dip in demand for gold.

On the other hand, when interest rates are high on fixed-income instruments, investors will flock to those options, resulting in low demand for gold. Therefore, you can look at the 22 carat gold rate today and determine how an economy is performing.

Differences in Current Gold Rates among Various States in India

You can also notice that the current gold rate will vary across different states. This difference in price among cities is due to the following factors:

  • Demand for gold in a particular geography.
  • Transportation costs.
  • Gold associations.

For instance, the 22-carat gold rate in Maharashtra on 31st July 2020 was Rs. 4973/gram and in Delhi, it was Rs. 4921.

This difference in gold prices also has an impact on the LTV of gold loans. LTV or loan to value ratio is the percentage of a loan amount you can avail against the market value of gold in your state. For example, if you have gold items worth Rs. 10 Lakh, and you are availing a loan with an LTV of 70%, then you can acquire Rs. 7 Lakh as principal.

Why a Gold Loan?

With a gold loan, you can have instant and easy access to external funding by utilising the equity on your possessions while retaining its ownership. This way, you can tap on to the currently rising gold rate. Especially with lenders like Rupeek Fintech Pvt. Ltd. providing the highest LTV on gold loan with industry-first doorstep service in 30 minutes, you can access substantial funds with ease from the comfort of your home.

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