Wanting to invest in gold? Understand the factors that determine Gold prices in India

Factors to invest in gold

Gold is always in demand in India be it during weddings or festivals or even to show off your opulence. It is a highly revered metal and has deep-rooted cultural value across the country.  Ever since the lockdown and especially after the rollout of the Sovereign gold bonds, today gold has also become one of the preferred means for investing even if the gold price in India keeps fluctuating. Today gold price in India is not as volatile, that is why investing in gold has evolved as an ideal hedge for volatile markets primarily due to the scarcity of the metal.

Investors often wonder what drives the gold price in India. Although there is no sure way to determine where the yellow metal will be headed next, we can always learn a lot by looking at the following important factors that affect the gold price today in India.

Cultural Values in India

The first factor is the trade between China and India where the majority per cent (approximately 36% of the population lives in these countries) of the world population resides. Indians especially love gold and are very sentimental about it. They have a strong attachment to gold and they distribute gold in the form of coins or jewellery on almost every auspicious occasion. Traditionally it is given as a gift during important holidays like Diwali, Akshaya Tritiya, and marriage festivities. This culture is one of the main factors that determine the gold price today in India.

And because the middle class is surging every year in these countries the demand for gold keeps on increasing year by year and is expected to remain a strong factor. Always remember that when the demand increases, the prices also increase.

Central Bank Reserves

The Reserve Bank of India holds both currencies as well as gold reserves. When central banks of these countries start holding more gold reserves and procuring more gold, the gold price in India increases.

For example, the RBI decides to keep huge reserves of Dollars and Euros. We see that the values of these currencies keep fluctuating which means these currencies are unreliable in the exchange market. This makes gold reserves indispensable. The government can use this gold reserve for doing international trade as the rate of gold is almost the same throughout the world without much difference.

Fluctuation in the Rupee and Dollar Exchange Rates

The exchange rate of Rupee v/s Dollar also influences the gold price in India significantly. Gold is imported all across the globe. Ranking as the 3rd largest importers of gold, India has imported dollar value worth of gold during 2018 as high as $31.8 billion that is 11.1% of the total gold import.

If there is a global increase in gold prices then naturally India’s import price will change and that will affect the gold price today in India. It is a simple cause and effect.

If the value of the Indian rupee depreciates against the dollar, the gold price in India will rise. It will hamper the demand for gold in India.  In case the opposite happens, that is the value of the dollar decreases, this will increase the value of other foreign currencies, which then increases the demand for gold and therefore its prices. Secondly, when there is a crisis in the United States, gold becomes a good investment option to store the value.


It is one of the most important factors that affect the gold price in India.

So what is inflation and how does inflation affect the price of gold?

Basically, inflation means when the prices of goods and services rise and the value of the currency goes down. Once the prices of goods and services in the economy increase, it increases the demand, when demand increases consumers are willing to pay more for the product and that is how the cost of goods and services increases in an economy.

If there is an economic crisis, recession or lockdown consumer’s demand for products and services will increase which will push the price of goods and services in the economy higher. That means the value of currency decreases because now you have to pay more to get the same amount of goods. In such a case the only safe option for consumers is to invest in gold. When demand for gold increases, the price of gold will also increase. Hence in conclusion we can say that when inflation increases prices of gold also increase.

Interest Rates

Interest rate means the cost of borrowing. So how does it affect gold prices in India?

When banks reduce the interest rate, more people can borrow money. The result is that consumers will have more money to spend. When consumers have more money in their hands, their consumption increases. That means their demands increase when demand increases, price increases. Hence consumers are willing to pay more for the product. And that is how the price of goods and services increases which in turn causes the economy to grow. This growth in the economy will boost inflation and thereby affect the price of gold.

Similarly, when banks increase the interest rate people will borrow less money. There will be less money in the hands of consumers for circulation. This will reduce the consumption pattern and also reduce the demand for goods and services, thereby reducing the prices of goods and services. Now if you have more money in hand you will prefer to invest in other investment options like fixed deposits, which will give you a higher return. Thus gold takes a back seat and your demand for gold will decrease and the price of gold will also decrease or stay flat.

When customers start to sell gold this increases the supply of gold which leads to reduced rates of gold. That means interest rates can also determine the prices of gold.

Negative Interest Rate

The negative real interest rates are possibly the most important factors for determining the gold price today in India. The reason for it is that gold and real rate shares an inverse relationship with real rates for example when real rates turn negative gold tends to benefit.

But wait, what is the real rate? You can calculate the real rate by subtracting inflation from the return on a government bond. For example, an Indian government is paying 6% on a five-year treasury bond and inflation is running at 10% this means that the treasury is really yielding a -4%. You are paying to hold the government’s debt. And when this happens investors tend to avoid treasury which is costing them money and instead turned to assets that are of real value like gold. Thus boosting demand again.

Central Bank Policies

Another factor that impacts today’s gold price in India is the policies of the Reserve Bank of India.  Globally banks have been buying far more gold than they have been selling. This communicates that gold is so much more than just a metal but a real form of currency and right now central banks are adding more of this currency to diversify these as assets and to protect themselves from their very own policies. Investors would be wise to follow a similar strategy to diversify their assets with gold for their own benefit.

Growth in Money Supply and Printing of New Notes

Over the years the Reserve Bank of India has taken extra measures to boost the Indian economy and encourage growth.  This includes printing new notes excessively which erodes people's confidence in paper money and dilutes its value. Gold on the other hand is one of the most highly valued elements precisely because it cannot be replicated in the labs.

Despite the best efforts of alchemists and scientists, gold cannot be replicated in a lab. The only way to obtain more of it is to mine it. This makes the gold in the eyes of many investors more real and therefore more reliable than paper money. That brings us to the next factor.

Safe Investment

Similarly in times of crisis investors usually hold gold as a safe investment. Due to the countrywide lockdown, the gold market of India remained shut which means we couldn’t buy physical gold from the market due to lockdown so the only option is to invest in sovereign gold bonds.  The format of these securities is issued in the form of 1gm gold These bonds are issued by the Reserve Bank of India on behalf of the Government of India and are traded on the exchange. The only difference between physical gold and sovereign gold bonds is that when you buy a gold bond there is a lock-in period and a few conditions regarding the interest. The disadvantage of physical gold is its resale value. The resale value of jewellery is comparatively lower than gold bonds.

Other Uses of Gold

Apart from jewellery, gold is also used in small quantities by various electronic companies for the manufacturing of devices like television computers, etc. Even these requirements have a tremendous effect on the influence on the gold price in India. That means India has to import a huge quantity of gold and again as the demand increases, the gold price in India will also increase.

No New Mines

The lack of discoveries in gold mines has led to the global output of gold decline. As producers continue to reduce their spending on exploration, fewer and fewer gold deposits are discovered. The projects that have taken place in the past few years are of much lower grade, meaning they do not yield enough gold as much as older mine projects used to. What’s more, is that the number of years between deposit discovery and production is growing due to tougher industry rules and regulations. All of this has an effect that helps to keep the supply growth in check. Gold demand meanwhile continues to surge.

We can’t always know where the gold prices are headed but being aware of these factors can make investors better and more informed decisions on how to invest the money. Hope with the above guide you will be able to make the best of the situation the next time there is a fluctuation in the gold price in India.

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How do political scenarios around the world affect the gold price in India?

Gold usually has seen an upward trend especially when there are global political tensions. The war-like situation has a negative impact on most of the asset classes whereas the gold rate is positively influenced since the demand for gold increases to safely park the funds.

Physical gold v/s gold bonds, which is better?

Physical gold can also be purchased without the help of a broker It is universally accepted as money across the world, in case of an emergency, one can always sell their gold biscuits/bricks, gold coins to get instant cash. The lack of safety, lower resale value of jewellery, and concerns regarding the purity of gold are some of the disadvantages of physical gold.
Gold bonds can also be used as collateral for taking loans, similar to physical gold. Having said that, unlike physical gold the risk of theft is low with gold bonds. There is a fixed interest of 2.5%p.a. No TDS is deducted on interest. The capital gains tax on redemption has also been exempted for individuals. The disadvantage is that the tenure is 8 years with a locking period of 5 years. Based on these you can choose whether you want to invest in which one.

Why is gold important?

Gold prices are one of the indicators that show how the nation is performing. If the prices are falling down then the nation is doing well and vice versa.

How safe is gold investing?

Over the short term, there’s the risk that your investment could fall in value. Over the medium to long term, gold has proven to increase in value quicker than the inflation rate, proving to be a reliable store of wealth.

How has lockdown in India affected gold prices in India?

During a crisis, the demand for gold increases as you will realize that during a crisis such as a lockdown money has no value because money will get drained. This is why gold is the only safe investment and everybody is going to run to buy gold coins. This is the actual reason why gold prices in India are currently increasing during lockdown.