In India, gold has always been looked upon with reverence and as a sign of auspice. It constitutes cultural symbolism as well as a mark of opulence besides being the oldest method of barter. A prominent reason why more people believe in gold being a great form of investment is its high and easy liquidity, which can be a great option during emergencies.
Many individuals may be wondering about the benefits of investing in this hard asset or leveraging these to finance emergency requirements. The foremost thing they need to consider before proceeding with this is India's gold price and the implications of several macroeconomic factors on it.
Some of the prominent factors affecting gold rate today have been explained in detail below, to make things easier.
Factors Influencing Gold Price In India
The pandemic-induced lockdown, spanning from March to July in most countries, left the global economy in tatters. Despite such circumstances, a rising gold rate in India is proof that there is a hoard of combined factors besides economic performance that affect this precious metal cost. Read on to develop a detailed understanding of these conditions that affect gold prices in one of its largest consumers worldwide.
The gradual rise in costs of products and services in an economy over a while is known as inflation. In other words, inflation refers to the reduced purchasing power of a currency. With depreciation in the value of Indian Rupee, more people in the country tend to acquire wealth in the form of gold, the latter being more stable in value. High demand for gold during inflation causes its price to rise, making the relationship between inflation and gold price directly proportional.
Therefore, during continually high inflation and uncertain economic conditions, gold acts as a hedging tool. It remains unaffected by fluctuations in currency value and promises high returns even amidst economic downfalls.
Demand and gold price in India have a direct correlation. Indians tend to make gold investments or purchase on special occasions. Given its limited supply, higher demand for gold results in its increased price, and it is most apparent during occasions like Dhanteras.
Alternatively, a lower demand results in a plunge in gold prices observed in the second quarter of this year. Given the nationwide lockdown, the Wire reported 70% depreciation in gold demand in the country, which resulted in a subsequent fall in prices by 57%.
A lower rate of interest on financial goods and services naturally leads to more cash in people’s reservoirs. This, in turn, encourages more people to purchase gold, leading to higher demand and hence a rise in the gold price. When these interest rates rise, investors spend on assets that yield a fixed return, which makes the demand and, hence, price for gold fall. Thus, interest rate trends have an inverse relationship with the gold price.
Since India imports most of its gold from outer countries, global market trends with regards to the current gold rate in India highly affects that in the country. During political chaos and the rise of any global movement, values of other financial assets and currency go down, and the confidence of common people in the government decreases. This results in more individuals turning to buy gold, which shoots up gold rates. Such changes in gold price worldwide automatically impacts gold import prices in the country, resulting in a rise in the gold price.
RBI serves as the financial reservoir of the country and possesses gold reserves besides storing currency. The Government of India can decide to hold or release gold via the state reservoir, thereby affecting the country's gold supply. This supply determines India's gold price significantly since it moves north with a decrease in supply and vice versa.
Historical Correlation To Other Assets
Since India is a significant importer of gold, fluctuations in the value of the US dollar considerably affect today's gold rate in the Indian market. A decrease in dollar value automatically shoots up currencies in other countries, including the Indian Rupee. This increases the demand for gold, thereby propping its price.
Also, depreciation in USD’s value enables gold traders to import this metal at a lower cost. This fuels gold’s demand, leading to an increase in its price. A perfect demonstration of this correlation is seen in a chart by Macrotrends, where the greatest difference between the daily LBMA gold price (1862) and closing US dollar index (86.85) in 10 years was observed on 15th August 2011.
The historical performance of gold concerning stock market shows an inverse proportion between the two. Gold acts as a shield for investors against economic downfall, so the demand for gold items such as coins, bars and pieces of jewellery increases during a poor performance of the stock market. Take, for instance, the recession of 2008, which saw a spike in gold demand, eventually leading to its increasing prices. A more recent hike in gold prices due to stocks' poor performance could be observed on 10th August 2020. 10-gram gold price soared up to Rs. 55,331 on that date, whereas Nifty closed at 11,270.15 points, according to Equityfriend.
Bitcoin Vis-à-vis Gold
Since it entered into the investment scenario, Bitcoin has been consistently compared with gold due to their uncannily similar features. These include both gold and bitcoins being rare resources, easy availability of liquid money in lieu of them, and high stock-to-flow ratios. For these reasons, bitcoins have also been termed as “digital gold”, with their advantage over the yellow metal being their easy transportation around the globe during lack of credit. All these similarities may make you question, “Can these digital currencies replace physical gold altogether?”
Here’s your answer. Although both gold and bitcoins are fixed supply assets, the primary con of these crypto-currencies over gold is its highly volatile nature, making it unsuitable to hedge against inflation. This makes gold a safer haven for investors. However, they can choose to invest in bitcoins to diversify their portfolio.
Standards Of Gold Pricing For Jewellers
Besides the factors mentioned above, the value of gold jewellery depends on how the jewellers price their products. It depends on the following factors.
The purity of gold is measured in Karats (KT). Jewellers determine the price of gold considering this measurement and the type of metal amalgamated with the concerned piece of jewellery. The purest form of gold is 24 Karat gold rate and contains 99.9% gold, whose soft texture is unfit for carving jewellery. Gold jewellery is most widely available in 22 KT, comprising 91.7% gold, and the 18KT contains 75% of gold.
The type of alloys mixed with gold, such as silver, copper, palladium, cadmium, or zinc, determines the price of gold besides making charges and taxes.
The Bureau of Indian Standards or BIS stamps its hallmark logo to confirm the purity of gold being purchased. This logo comprises gold purity, jeweller’s identification mark, fineness number relating to karat, and the mark of such hallmarking centre. Buyers must check this BIS hallmark to confirm the quality of gold jewellery they are paying for.
The making charges on gold ornaments differ across jewellery stores, and maybe a fixed price or calculated as a percentage of the original price. Additionally, the ornament's design also determines making charges, since it mostly depends on the amount of precision and detailing required in the jewellery‘s construction. Customers can have some say in determining these charges since these are not regulated for different jewellers.
When purchasing gold jewellery embedded with diamond-replicas and/or semi-precious stones, buyers must be aware that the jeweller adds the additional weight of stones with the weight of purchased gold while calculating the ornament’s final price. But when encashing these jewellery items, the gold’s price will be calculated based on the total value minus the weight of impurities and stones.
In addition to gold price in India, buyers also need to pay taxes on the quantity of the precious metal bought. The infrastructure of such taxes has changed considerably post introduction of the Goods and Services Tax.
Impact Of GST On Gold Price
Previously buyers had to bear a 1% service tax, and 1% value-added tax on gold. The implementation of GST in 2017 has impacted the tax-inclusive price of virtually all products and services, including gold. This modified tax regime imposes a 3% tax on gold prices; a hike from 2% under the previous regime.
It has impacted the sale of gold heavily and continues to impact the post-lockdown scenario.
Plus, buyers also need to bear additional charges calculated under capital gains titled STCG and LTCG.
Exemption Of GST On Gold
In the 31st GST council meeting, GOI introduced a category of notified private and public sector banks, which were spared from paying GST on gold imports under the scheme for “export against supply by the nominated agency”. However, gold vendors do not enjoy this privilege. Thus, it has no effect on the India gold rate for domestic buyers.
Since gold is a limited resource, this metal’s supply does not level up with the continuously increasing demand. Therefore, all such factors combined have affected gold prices over the years, leading to a gradual surge.
Rise In Gold Price Over The Years
Refer to the following table for a quick overview of the gradual rise in the gold price in India over the past 10 years.
Gold prices have appreciated by approximately 730% over 20 years, making it one of the most highly profitable assets.
Gold Investment Options
After a potential customer has weighed the pros and cons of holding gold as an asset, him/her must determine the best form of investment of this yellow metal.
It generally includes gold in the form of coins, bars, and jewellery. Although gold jewellery is the most common form of possession for most Indian households, it comes with its cons, such as burglary risk and previously mentioned overhead making charges. Plus, they can only be bought from a jeweller’s shop.
On the other hand, gold coins can be purchased from banks, NBFCs, and e-commerce websites besides jewellery stores. The Indian government facilitates a more ready and affordable investment avenue with the Indian Gold Coin Scheme's introduction. It involved the launch of coins engraved with Mahatma Gandhi's image on one side and the National Emblem of Ashoka Chakra, in denominations of 5 and 10 grams and gold bars in 20 grams.
These coins and bars come with BIS-standard hallmarks and are of 24KT purity. Willing buyers can purchase these gold items from such particular post office and bank branches.
A more trouble-free method of investing in gold is via digital gold. Buying e-gold or digital gold is made easier via e-wallets or mobile applications like Paytm, and websites like Stock Holding Corporation of India collaborate with MMTC-PAMP.
Another means of investing in the yellow metal online is through Sovereign Gold Bonds, which the Reserve Bank of India issues on behalf of the Indian government. These act as a great alternative for physical gold, since these are government-backed securities, with denominations in grams of gold, the most fundamental unit is 1 gram. Willing individuals can acquire sovereign gold bonds with cash and redeem them similarly upon completion of tenure.
Individuals can also enjoy the benefits of physical gold possessions without the hassle of storing one by investing in gold funds. These are mutual funds that involve investing in gold reserves stocks that act as a shield for investors against economic downturns. Investments are made in Gold Exchange Trade Funds (ETF) units, whose value depends on gold's current market rate. Specific fund managers head individual funds for effective investment.
Why Is Gold A Good Investment?
Following is a list of some of the most prominent reasons that make gold an excellent investment option.
Gold is a pre-dominantly non-volatile asset, which is why it maintains an inverse relation with equity investments. It impels people to hold this precious metal as an asset, facilitating ready liquidation when prices soar during a stock market plunge. The high-inflation years see currency units losing power to inflation, encouraging more people to invest in gold during a stock market plunge.
India is a country with the greatest worldwide demand for gold, mostly in the form of jewellery. In 2019, demand for gold in Indian was 690 metric tons, according to Statista. This demand sees the highest rise during the wedding season lasting from October to December. Besides being ingrained as a cultural symbol, gold has also earned the safest form of asset among investors. This metal’s demand has also increased due to the prosperity of emerging market economies. Increasing demand means ever-rising today’s gold rate, which eventually sets a great market for investors.
Investors spend on a combination of stocks, bonds, and gold for a diverse portfolio to decrease investments' overall risk and volatility. Gold has a historically negative correlation with other financial assets such as stocks which aids in this diversification.
The primary purpose of any financial investment is to act as a backup in times of crises. Gold does this job perfectly due to its property of being easy to liquidate in future. To fund any emergency, individuals can easily sell their gold possessions to their preferred buyer, which is a considerably hassle-free process.
Another excellent way for instant liquidation of gold is mortgaging it to avail a loan. Rupeek Fintech is one such NBFC which aims to make emergency funds available to any individual with adequate gold possession. These loans are also beneficial compared to other credit sources due to their minimal documentation, relaxed eligibility criteria, and low borrowing cost.
Considering all these factors that determine the gold price in India is extremely important for a wise investment. Prospective sellers must also consider these facts before deciding on a selling price most beneficial for them. In case they desire liquidation while still possessing their yellow gold items, they can seek mortgaging options as discussed previously.
Frequently Asked Questions
When purchasing physical gold worth over Rs. 2 lakhs, buyers will need to submit KYC documents such as Aadhaar card, Voter ID, PAN Card, or passport. They might also need to submit additional documents in case of sovereign gold bonds specified by the issuing bank.
Gold ETFs and Gold Mutual Funds' most prominent difference is that Gold ETFs' underlying asset is physical gold. Gold Mutual Funds are issued based on Gold ETFs as units. Plus, the additional charges on the latter are more compared to those levied on Gold ETFs.
According to Market Realist research, a positive correlation has been observed between crude oil prices and gold price. That’s because an increase in crude oil signifies inflation.
Gold rates change every second based on trading at the Multi Commodity Exchange or MCX. The gold price depends on the closing rate of each trading day.
Goods and Services Tax has unified the earlier payable taxes like Value Added Tax (VAT), Customs duty, Central Excise duty, etc., and the whole indirect tax structure has been brought under one umbrella.
GST on gold is levied when individuals opt for buying gold jewellery or bars. Individuals need to pay several taxes depending on the various processes involved in gold trading, manufacturing, and purchasing. To be precise, individuals need to pay GST of 5% on making charges, 10% on import duty and 3% on gold. However, the GST on making charges is a product of the new tax regime.
The new tax structure and implementation of several taxes have made gold expensive by 0.75%. Apart from the impact on gold prices, GST has stretched its effects on gold imports as well as across the organised and unorganised sectors, which are invariably linked with the increasing price of gold.
There are many micro and macroeconomic factors that determine the gold rates in India. Some of the factors that influence that gold rates are: gold production, inflation, government’s gold reserves, demand and supply of the gold commodity in the market, import rates, interest rates, taxes, local demand, etc. Since an unprecedented emergency is likely to arise at any moment, being a resident here, it is good to have an eye on the latest gold rates in cityname. The market price of the gold and the gold valuation offered by the lender is likely to vary. The lender calculates the average gold price of 22-Karat gold according to the rates from the past thirty dates. This is how the lender concludes on the gold gram rate. The value of the gold loan that you get is dependent on two factors – the average gold price and the lender’s LTV (loan to value) ratio. The RBI has also directed the lender to disburse up to 90% of the market value of the gold till March 31, 2021.
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