Why Gold Prices Fluctuate: An Analysis of Supply and Demand
Gold prices fluctuate due to various factors that affect the supply and demand of the precious metal both globally and domestically. These factors include inflation, interest rates, currency fluctuations, geopolitical events, jewellery market, monsoon season, rupee strength, and government policies.
Gold and Silver Prices in India on September 12, 2023
| City | Gold (24k) per 10 grams | Price difference from Sep 5 | Silver per kg | Price difference from Sep 5 |
|---|---|---|---|---|
| Mumbai | Rs 60,865 | +Rs 6,015 | Rs 74,000 | -Rs 100 |
| Delhi | Rs 60,995 | +Rs 5,945 | Rs 74,000 | No change |
| Chennai | Rs 60,990 | +Rs 5,790 | Rs 77,500 | No change |
| Kolkata | Rs 60,955 | +Rs 6,055 | Rs 74,000 | No change |
| Bengaluru | Rs 61,025 | +Rs 5,825 | Rs 74,000 | No change |
| Hyderabad | Rs 60,950 | +Rs 5,800 | Rs 74,000 | No change |
| Ahmedabad | Rs 61,000 | +Rs 6,000 | Rs 74,000 | No change |
| Bhopal | Rs 60,895 | +Rs 6,000 | Rs 74,000 | No change |
| Visakhapatnam | Rs 61,000 | +Rs 5,800 | Rs 74,000 | No change |
| Jaipur | Rs 60,865 | +Rs 5,815 | Rs 74,000 | No change |
| Lucknow | Rs 60,895 | +Rs 5,845 | Rs 74,000 | No change |
| Coimbatore | Rs 60,895 | +Rs 5,695 | Rs 77,500 | No change |
| Madurai | Rs 61,060 | +Rs 6,000 | Rs 77,500 | -Rs100 |
The price difference is calculated by subtracting the price on September 5 from the price on September 12. A positive difference means the price has increased and a negative difference means the price has decreased.
Why Gold Prices Fluctuate
Gold prices fluctuate due to various factors that affect the supply and demand of the precious metal both globally and domestically. These factors include:
Inflation
Gold is seen as a hedge against inflation, as it tends to retain its value and purchasing power when the general price level rises. Therefore, when inflation is high, the demand for gold increases, and so does its price. Conversely, when inflation is low, the demand for gold decreases, and so does its price.
Interest rates
Gold does not pay any interest or dividend, unlike other financial assets such as bonds or stocks. Therefore, when interest rates are high, the opportunity cost of holding gold is high, and investors tend to sell gold and buy interest-bearing assets. This reduces the demand for gold and lowers its price. On the other hand, when interest rates are low, the opportunity cost of holding gold is low, and investors tend to buy gold and sell interest-bearing assets. This increases the demand for gold and raises its price .
Currency fluctuations
Gold is traded in US dollars in the international market, and therefore its price is affected by the exchange rate of the US dollar against other currencies. When the US dollar appreciates, gold becomes more expensive for buyers in other currencies, and this reduces the demand for gold and lowers its price. When the US dollar depreciates, gold becomes cheaper for buyers in other currencies, and this increases the demand for gold and raises its price.
Geopolitical events
Gold is considered a safe-haven asset that investors flock to during times of uncertainty,
crisis or conflict. Therefore when there are geopolitical events that create instability or tension in
the world such as wars terrorist attacks political unrest or natural disasters
the demand for gold increases and so does its price. When there are geopolitical events that create stability or peace in
the world such as diplomatic agreements trade deals or humanitarian aid
the demand for gold decreases and so does its price .
Domestic factors
Gold prices in India are also influenced by some domestic factors that affect the supply and demand of gold within the country. Some of these factors are:
The jewellery market
India is one of the largest consumers of gold jewellery in the world and therefore changes in
the jewellery demand affect the gold prices in India. The jewellery demand is influenced by various factors such as income levels consumer preferences cultural traditions festivals weddings etc. Generally the jewellery demand is higher during festive seasons such as Diwali or Akshaya Tritiya and during wedding seasons such as November to February. This increases the demand for gold and raises its price in India .
The monsoon
India is an agrarian economy that depends largely on rainfall for crop production. Therefore the monsoon season affects the income and spending patterns of rural households that constitute a significant portion of gold buyers in India. A good monsoon leads to higher crop output and higher income for farmers who then spend more on gold purchases. A bad monsoon leads to lower crop output and lower income for farmers who then spend less on gold purchases. This affects the demand for gold and its price in India.
Rupee strength
The exchange rate of the Indian rupee against the US dollar also affects the gold prices in India. Since gold is imported in India and paid in US dollars a stronger rupee makes gold cheaper for Indian buyers and increases the demand for gold and its price in India. A weaker rupee makes gold more expensive for Indian buyers and decreases the demand for gold and its price in India.
Government policies
The government policies regarding import duties taxes regulations etc. also affect the gold prices in India. For example higher import duties or taxes on gold increase the cost of importing gold and make it more expensive for Indian buyers. This reduces the demand for gold and lowers its price in India. Lower import duties or taxes on gold decrease the cost of importing gold and make it cheaper for Indian buyers. This increases the demand for gold and raises its price in India .
