The Reasons Behind Gold Rates’ Fluctuation
In India, gold is more than just an investment tool. It is an inseparable component of the nation’s socio-cultural roots. Weddings, auspicious occasions, temple donations, personal celebrations—Indians love to buy and adorn gold on all these occasions.
The precious metal has lived up to its name with stable growth and trust over the years. While the value of gold can’t be eroded completely, there are gold rate fluctuations due to various geopolitical events or upheavals in the financial world globally. Let us look at the reasons for gold price fluctuations so that you can arm yourself to safeguard your portfolio.
Why Do Gold Rates Fluctuate?
Gold rate fluctuations can be attributed to global headwinds as well as local factors. Let us understand the reasons why gold prices fluctuate:
Inflation is the phenomenon where money loses its value, marked by a widespread increase in the price of goods and services. At such times, investors look for safe instruments to park their money. For governments, institutions, and investors, gold is the instrument of preference for holding their cash reserves since currency loses its value over time. Gold acts as a hedge against inflation, and as a result, the demand for gold rises and prices move north.
2. Global Price Movement
The gold price movement in international markets also impacts the price of gold in India. For instance, global government policies impact the demand for gold in India and cause price fluctuations. For example, any increase announced in US Fed interest rates results in money flowing into government securities and the banking system from gold reserves.
This directly impacts the gold prices in the short term, and the gold rates come down marginally. Gold price fluctuation on global markets shows in Indian gold prices as well as India is one of the largest importers of gold worldwide.
3. Government Gold Reserves
Gold is the currency of exchange worldwide and a storehouse of value on par with any currency or investment. This is because of the inherent properties of gold. The commodity never loses its value entirely and has been a stable reserve of value for decades.
Governments hold their fund reserves in the form of currency and gold. The quantum of gold reserves indicates the health of an economy. Every time a government shores up its gold reserves, the price of gold increases in international as well as domestic markets. The ripple effect of global demand is visible in the domestic gold rate fluctuation graph.
4. Jewellery Market
Gold is a part of the Indian way of life across socioeconomic classes. Gold is purchased at every celebration, occasion, and festivity. Traditionally, Indians prefer gold as a safe long-term investment and a means to create generational wealth. Gold investment is simple as it does not require any market expertise, documents or cumbersome processes. This makes gold a favourite product for safekeeping money and personal use.
The demand for gold increases during the wedding season when the gold purchase forms a large part of the wedding budget. On festivals like Diwali, Dhanteras, and Akshaya Tritiya, buying gold is considered auspicious.
Every state in India has a festival where the masses buy gold as a customary ritual. During these times, the demand for gold becomes manifold, and so is the fluctuation in gold rates. The government imports gold heavily to meet the demand surge, and prices also rise.
5. Interest Rate Trends
Interest rate trends in an economy drive gold rate fluctuations. When interest rates rise, investors tend to move their investments into government bonds, deposits, and banks to take advantage of the high returns.
The funds invested in gold reserves move into other instruments and prices fall due to reduced demand for gold and excess supply of gold available in the market. Similarly, when interest rates fall, investors start ramping up gold reserves to preserve the value of their investments and ensure stable growth. As a result, gold demand and prices increase.
6. Oil Prices
Oil demand and supply also impact gold prices. When the global oil supply falls, it impacts all the markets and industries worldwide. When production decreases, it affects domestic production, consumption, and the economy as a whole. At such times, money flows into gold as a safe haven and demand for gold increases. Oil prices indirectly affect gold price fluctuations.
7. Currency Movements
Since India imports gold for domestic consumption, the import bill payments are made in foreign currency. Any movement in the currency shows up in the gold rate movement as well.
There are many factors that affect gold rates globally. As an investor, you should understand the global factors that affect the demand-supply equation for gold. You can keep an eye on international events to monitor gold rate fluctuations in the future. Domestic factors such as increase/decrease in repo rate and inflation also impact gold prices. Last but not the least, since most Indians buy gold on festivals and personal occasions, you may expect an increase in gold prices during the festivals and the wedding season.
Are the prices of gold the same in every state in India?
No, the prices of gold are not the same in every state in India. The taxes vary from one state to another, impacting the final price of gold.
Is it safe to purchase gold ETFs?
Yes, it is safe to purchase gold ETFs since the underlying security is 99.5 purity gold. The ETFs have listed securities on the BSE and NSE and can be traded easily.
Does the gold rate change every day?
Yes, gold prices fluctuate from one day to the next due to changes in demand and supply and economic factors. The gold price for sale and purchase is constant.
When should I buy gold?
It is difficult to time any investment, but you can buy gold at times when demand is not at its peak, e.g., during festivals or the wedding season. You can also buy gold systematically through gold saving schemes.