HomeInsights & AdviceWhat affects the gold price in India?

What affects the gold price in India?

by Marcus Briggs
5th Feb 20 12:46 pm

The gold price in India depends on whether you are an investor or buying decorative gold, which plays a major role in traditional celebrations and festivals.

Investment gold prices fluctuate on a global basis, whereas the cost of jewellery depends on its quality, changing tax laws and even the time of year.

Indian consumer demand is important to world gold prices

Gold is an unusual commodity in that it is never truly consumed in the way that oil is burned or grain eaten, so the total amount of gold in the world is always increasing as more is mined and refined.

However, prices do rise and fall based on changing demand, and the Indian market is a key reason why.

India generates around a quarter of the world’s demand for gold, buying around 800-850 tonnes each year. Indian consumers love to buy gold as jewellery, and in many cases these products are stored and not traded again. This practice removes a lot of that gold from the available global supply.

However, each new festive season brings new demand for decorative gold, which is again bought and stored as wealth. This makes India important as a driver of total global demand.

India’s market is growing but is not all-powerful

India’s GDP has increased in size by around 500 percent since 1990, making many of its citizens wealthier and so increasing their ability to buy gold.

A 2015 report by the World Gold Council found that the increase in India’s wealth was driving gold demand in the country, especially for jewellery to celebrate weddings and festivals.

However, demand for gold in India dropped 9 percent in 2019 due to the combination of a rise in gold prices and changes in the tax system, demonstrating that Indian consumers also respond to market conditions as much as they drive it.

Gold manufacturing is a major part of India’s economy

Local demand for jewellery has helped the development of India’s gold manufacturing sector, which caters to both the local and international market.

India lacks large gold mines so it needs to import around 85 percent of its gold, but the country is also one of the world’s leading exporters of jewellery. This industry contributes an estimated 7 percent of Indian GDP and employs more than four million people.

The importance of India in gold jewellery is underlined by the fact that it was the largest producer in the world in 2012, outstripping even China.

Local gold price in India

The price of investing in gold in India is roughly the same as investing in gold anywhere in the world, because investment price changes are communicated so quickly between markets.

However, the retail cost of gold products depends on what you are buying and where you buy it. The Indian government increased the import tax on gold in 2019, which pushed the cost up and also reduced demand.

Inevitably, this encouraged some people to find a way around the tax by the age-old practice of smuggling. One official estimated that smuggling would increase by up to 40 percent.

The retail gold price in India also depends on the quality of the product and what time of year you purchase it. During busy festive seasons like Diwali prices can rise dramatically as consumers flock to buy gold gifts.

The monsoon plays an important role in Indian demand

Rural India accounts for around 60 percent of the country’s gold consumption, and that part of the country’s population relies heavily on the success of the annual monsoon rains.

If the monsoon helps to produce good crops, then farmers will buy gold from their earnings, but if the monsoon is poor then farmers are more likely to have to sell their gold.

A poor monsoon is a double-whammy for the price of gold jewellery in India, because it increases supply and reduces demand.

Demand for gold in times of crisis

Just as in any other country, the gold price in India tends to rise during times of financial and political instability. Gold is seen as a safe haven for investment, so investors will often buy gold as stocks drop in value in response to market uncertainty.

Investors like gold as a safe investment during instability because it tends to retain its value, but they also see gold as providing low returns when the economy is doing well.

Unlike other investments, solid gold does not gather interest if you put it in a vault, but it does not deteriorate.

Overall, the price of gold in India depends on why and how you are buying it. The cost of investing in gold on commodities markets tracks global prices, whereas the price of gold jewellery fluctuates depending on local circumstances.

Marcus Briggs is an entrepreneur and non-executive director of Icon Gold and vice-president of Citi Group. He specialises in identifying and developing opportunities in the gold bullion markets of the Middle East and Africa. Read more at his blog https://www.marcus-briggs.com/

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