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Five factors affecting gold prices

FILE PHOTO: Gold bullion is displayed at GoldSilver Central's office in Singapore June 19, 2017. REUTERS/Edgar Su (REUTERS)Premium
FILE PHOTO: Gold bullion is displayed at GoldSilver Central's office in Singapore June 19, 2017. REUTERS/Edgar Su (REUTERS)

  • Jewelry is the primary source of gold demand in India. Gold jewelry has long been one of the most popular ways for Indians to store their wealth. Investing in gold has evolved through time as an excellent hedge against turbulent markets, as equities and gold frequently move in opposite ways. Let's look at some of the factors that influence gold pricing.

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The preference for gold as an investment option is ubiquitous in India. The sacred yellow metal is considered to be a safe investment in the long run. Still, the price volatility of gold cannot be dropped out of the question. As there are multiple stages from bringing gold from mines to the final buyer, multiple factors contribute to the price calculation of gold.

Here are five possible reasons behind rising gold prices at a given time-

International factors

Most of the gold in India is imported and thus the international spot price of gold is a determinant in deciding the metal value of gold. The spot price is decided in the London bullion market. If due to certain conditions the spot price rises, the cost of gold will also rise.

Additionally, other international factors including war and peace that dictate the global movement of gold prices also affect domestic gold prices. So, if the international conditions resulting in tensions and uncertainty are present, gold prices might rise.READ MORE: Is digital gold worth the investment?

Demand & Supply

The prices of all commodities in an economy are ruled by the laws of demand and supply and gold is no exception. When the demand for gold rises, the price will rise as well. This phenomenon can be observed around festivals, the wedding season, or after a good monsoon season profitable to the rural population.

The supply of gold in the country is affected by government reserves. If the RBI decides to buy more, the supply would fall in the country and if the demand remains constant then the price of gold will rise.

Inflation

Gold is used as a hedge by the Indian masses and is their go-to investment. When inflation rises people tend to buy more gold for security thereby driving up the price. Moreover, when inflation rises, the value of the rupee falls in the international market and this contributes to a higher conversion rate and hence a higher price.READ MORE: How are gold prices decided in India?

Value of the Indian rupee

As mentioned before, the spot price of gold is decided in the London bullion market. This price is valued in American dollars, euros, and pounds. Henceforth, the value of the Indian rupee influences the price of gold. When the value of the rupee falls, the exchange rate is higher. A higher exchange rate leads to a higher price.

Taxes & import duty

When gold is imported in India customs duty is levied on the shipment. So when a change in government regulations causes a rise in customs duty, the market price of gold is directly affected. Besides this, VAT, local taxes, and distribution costs depending on the demographic location add to the rate of gold. Accordingly, an increase in any of these factors pushes the price in an upward drift.

Gold investment is a popular option in India. One should take into account all of the relevant factors affecting gold prices before jumping into the trajectory of gold investors. Personal investment plan and risk appetite should be appraised prior to expanding hard-earned money.

For more such stories, visit MintGenie.

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