Market Commentary 12 Sep 2017
There is a tendency for gold demand in India to rise during the festive season. Many individuals believe that this also leads to an increase in prices of the precious metal. Does an increase in demand actually lead to an increase in gold prices? To answer the question, we first need to know the factors that influence gold prices.
India depends on gold imports to meets its requirements. Its production of gold is negligible and closure of the iconic Kolar gold mines brought an end to any meaningful production. While there are efforts being made to increase gold mining, this has yet to yield results. Even if it does, the effect on imports would be limited, given India's huge demand for gold.
Therefore, because we meet almost all of our requirements of gold through imports, international prices assume importance in determining the price of gold. To these international prices of gold, we add existing duties, tariffs and the currency rate (rupee rate vs dollar), however Government levies (tariffs and duties) do not change frequently; so what essentially determines gold prices at the retailer are two things: currency movement and international prices of gold.
Let us now examine how these two factors affect gold pricing.International prices
Gold is traded in the global markets and India's imported gold is determined by the market price, known as the ‘spot price’. For example, if the spot gold in the global markets is traded at $1250 an ounce. If it trades higher – i.e., the price on the market increases - and all other factors remain constant, the gold price in India will trend higher. International gold prices on the other hand are determined by a host of factors including inflation, interest rates, dollar movement against a basket of currencies, economic data etc. Another big aspect is geopolitical tensions, which can leave prices volatile, but these are not often occurring events. Demand and supply also have an impact on long-term gold prices.Currency movement
The rupee movement against the dollar is another factor that can cause variation to gold prices in India. Let us cite this with an example. If the rupee trades at 65 to the dollar and it gradually moves to 66 to the dollar, gold prices in India would become costlier assuming all other influencing factors stay constant. Similarly, if the rupee moves from its current levels of 65 to 64, gold prices in India would become cheaper. In the last one year the rupee has gained significantly from levels of 66 to 64.66, thus making gold prices cheaper.Conclusion
So, does festive season increase the price of the metal; the answer is "no". Gold prices depend on numerous factors as highlighted and the biggest of these is the global movement in gold prices.