What Drives Gold Prices in India?

Gold is considered as an auspicious metal in India. The demand for gold in the country is linked with its tradition, culture, fashion, and also wealth creation. But globally, the factors that drive the price of gold are inflation, demand & supply, ETF’s, economic conditions, and so on. But one of the major factors that influence the gold rate every now and then is inflation.

As compared to the global demand, the demand for gold in India constitutes nearly 25% of the overall demand worldwide, which makes India one of the largest gold consumers. And there is a further surge in the demand especially during the wedding and festive seasons, which lead to a rally in the prices of the precious metal.

While the demand for gold has a role to play in its price, there are several other factors that have a bearing on it as well.

Below are Some of the Important Factors in Detail that Move the Gold Rate:

Rise in  Gold Rate During Inflation

The value of currency falls when there is inflation and therefore a lot of people invest in gold to hold their money. Therefore, if there is inflation over a long period of time then gold seems to be the safest investment tool to hedge against inflation. Therefore, prices of gold rise when there is inflation. The inflation in India would affect the gold rate in Chennai, Delhi, Kolkata, and everywhere in the country.

Consumption Demand

As per the World Gold Council Data, there are two significant factors that affect consumer’s gold demand over the long-term i.e. jewelry, coins, and bars. Furthermore, the gold demand is driven by a rise in income levels. For a 1% rise in the per capita income the demand for the yellow metal also gets increased by 1%. And secondly, a steep rise in the gold prices deters the purchase pattern and vice versa. The demand for gold falls down by 0.5% on a 1% increase in prices.

The demand for gold in India is highly influenced by religious and cultural factors. Most of people buy gold as it seems to be a safe investment option.

Impact of Rupee-Dollar Equation

The equation of Rupee against Dollar also plays an important role in influencing the price of gold in India. Gold is imported across the world, and if the value of Indian rupee weakens against the dollar, the prices of gold will rise. It will further put a dent on the demand for gold in India. However, the variation in rupee-dollar rates does not have any impact on gold rates denominated in dollars.
Here’s why:

Dollar and Gold usually share an inverse relationship. Since the global value of gold is dollar-denominated, therefore a weakening dollar pushes up the rate of gold and vice versa. Firstly, a downfall in dollar increases the value of other currencies, which further increases the demand for gold and thus its prices. Secondly, when there is a downfall in the US, gold becomes a good alternative investment option to store the value.

Gold and Interest Rates

As per some industry experts, the relationship between gold and interest rates is usually negative. A rise in yield boosts the economy that adds to the inflation and gold is widely used to hedge against rising inflation. Also, when gold prices increase, investors prefer fixed-income investments offering a fixed return, unlike gold. And the demand takes a back seat while the prices remain flat.

Correlation with Other Asset Classes

As per some economists, gold effectively helps in diversifying your investment portfolio due to its low to negative link to other major asset classes. Even statistically gold shows no significant connection with mainstream asset classes. Still, some suggest of evidence that when the value of equities is falling rapidly, an inverse correlation can develop between equities and gold. And any macro-economic and micro-economic ups and down do not affect the gold rate, therefore the precious yellow metal can put protect your portfolio from market volatility that can affect the returns on the most asset classes.

Geo-Political Factors

Gold usually does well during geopolitical global turmoil. Any war-like situation can have a negative impact on most of the asset classes. While the gold rate is positively influenced since the demand for gold increases to safely park the funds.


Most of the times people prefer to buy or invest in gold to protect themselves from market volatility and risks. Investing in a physical asset like gold makes it a preferred choice for most Indian households and a safe investment haven when other assets continue to lose their value. Gold is considered as a trusted choice even if the prices are falling down or going up or even if there is a recession. The demand for gold stays and therefore the prices remain at peak most of the time.

How Does the Future Gold Demand and Price Look Like?

According to some reports, the global demand for gold is 1,000 tonnes more than its supply. And most of the gold is now recycled as no new mining capacities are coming through. Therefore, less supply is another factor that leads to variation in the gold rates. Whereas, inflation, on the other hand, is a positive driver of the gold rates across the world.

In a Nutshell

As you can see the gold rates are affected by numerous factors – both domestic and global factors. From demand and supply to inflation. Hope with the above guide you would be able to have some clarity the next time there is an upsurge in the prices of this precious metal.