Gold is one of the most revered metals in the Indian culture. From festivals, to weddings to birthdays, no auspicious occasion goes by without making use of this metal. Indian temples are famous for their new as well as ancient gold idols which are guarded against any kind of theft or robbery. Most Indians look up to gold as a thing of investment which can be used in times of financial crisis. While gold has been living up to its standard for a very long time, lately the metal has started to lose its shine. The prices of gold have been tracing a downward spiral and as such customers have procured this metal in the hope of reaping substantial benefits when the price of the metal goes up again.
Let us look into some of the most important factors that determine the price of gold. One thing which is sure is that the prices of this metal are affected considerably by the international markets. India is one of the largest consumers of gold and as such any kind of movement in its prices internationally, has a huge impact on the prices here in India.
Gold, due to its almost steady character as compared to currency, holds significant value and is used to hedge inflation. This is why investors prefer to hold gold rather than currency. As a result, when the inflation is high, the demand for gold increases and vice versa. The price of gold will then shoot up as a result of high demand from customers. This holds true for both international inflation as well as that which occurs in India.
Any global movement in the price of gold affects the price of the yellow metal in India. This majorly derives from the fact that India is one of the largest importers of gold and as such when the import prices change due to global movement in price, the same is subsequently reflected in the prices of gold at home. Since, the value of currency as well as various financial products may fall during any political upheaval, gold is seen as a safe haven by investors and as such the demand and price of gold rise in times of political chaos as compared to peaceful times. The interest in buying gold rises among consumers when their confidence in the government and markets falter and as such gold is called as the crisis commodity.
Government Gold Reserves
Central banks of most major countries hold both currency as well as gold reserves. US Federal Reserve of the US and Reserve Bank of India are two prime examples of this. When central banks of large countries start holding gold reserves and procuring more gold, the price of gold goes up. This is because the flow of cash in the market is increased while the supply of gold goes down.
Indians love their gold jewelry. Be it festivals or birthdays, gold jewelry holds a special place in Indian households. During the wedding season and also during festivals like Diwali, gold prices go up as a result of increased consumer demand. The demand-supply mismatch leads to raised prices. The demand for gold does not just end at jewelry requirements. The metal is used in small quantities by various electronic companies for manufacturing of devices like television, computer, GPS etc. In India, gold is used for jewelry requirements, as a gifting article, for showing off wealth as well as a strong hedge against rising inflation. All these combined make the domestic demand for gold rise so much that India has to time and again import huge quantities of the yellow metal. The industrial demand for gold accounts for 12% of the total demand for gold in the country. Medicine is another
Interest rate trends
Interest rates on financial products and services are tied closely with the demand for gold. Current gold prices are generally good indicators of the interest rate trends of any country. With increased rates of interest, customers tend to sell gold to acquire cash and as such an increased supply of gold leads to reduced rates of the metal. Alternatively, lower interest rates translate to more cash in the hands of customers and as such greater demand of gold and thereby increased price of the metal.
Apart from the above factors listed below there are other similar factors too like the production of gold and its subsequent production cost that influence the price of this metal. However, the bottom line to keep in mind is that no matter how numerous the factors affecting gold rate may appear, ultimately it all boils down to the demand-supply game. The basic demand-supply mismatch is one of the primary reasons that drives the price of the yellow metal. This mismatch may however, be created by several situations, some of which are have been discussed in the points above.
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