Gold has long been considered a symbol of wealth, security, and status, especially in India. For centuries, it has been woven into the cultural fabric, used in weddings, festivals, and religious ceremonies, and remains a popular form of investment. With its perceived stability, gold is often seen as a safe haven in times of economic uncertainty. But what truly influences the price of gold?

This Diwali, as I reflect on the significance of gold, it’s fascinating to think about the various forces that determine its value. Let’s dive into the key factors that impact the price of gold.

The 12 Factors Affecting Gold Price

1. Demand and Supply

Most inportant Factors Affecting Gold Price – Gold’s supply is inherently limited—75% of the world’s gold has already been mined, leaving only about 25% yet to be unearthed. This scarcity means that gold is always in demand, and when demand spikes (as it often does in India), prices follow. Simply put, if more people want to buy gold than sell it, prices rise; if the opposite happens, prices can fall.

2. Inflation

Gold has traditionally been a go-to investment during inflationary times. When inflation rises, currency values decline, and people turn to gold to preserve their wealth. Over the last 30 years, gold, along with equities, has outpaced inflation, solidifying its role as a reliable hedge against the eroding value of money.

3. Central Bank Gold Reserves

Central banks, including the Reserve Bank of India (RBI), hold significant amounts of gold as part of their reserves. When these banks increase their gold holdings, demand naturally rises, pushing prices up. Recently, several central banks have been buying gold, contributing to a steady upward pressure on prices.

4. Interest Rates

Gold prices often have an inverse relationship with interest rates. When interest rates rise, people may sell gold in favor of investments with higher returns, reducing demand. Conversely, when interest rates fall, gold becomes more attractive, and demand (and therefore prices) tend to increase.

5. Monsoon and Rural Demand

In India, rural demand heavily influences gold purchases. A good monsoon season boosts farmers’ incomes, leading to higher gold purchases. During weaker monsoon years, however, people often retain gold as a financial safety net, adding another layer of demand even during challenging times. it is a local Factors Affecting Gold Price.

6. Import Duty

India imports most of its gold, so import duties play a significant role in setting domestic prices. For example, in the 2024 budget, a reduction in gold import duty led to a significant price drop of over 10%. Any changes in import duties can directly impact the affordability of gold in India.

7. The Indian Jewellery Market

Gold is deeply rooted in Indian culture, especially in the form of jewelry. Weddings, festivals, and special occasions call for gold, making it an indispensable part of Indian life. During these times, demand surges, often leading to temporary price increases. This is also a local Factors Affecting Gold Price in India mostly.

8. Government Reserves

In addition to central banks, governments also hold gold reserves. When the RBI or other central institutions increase their reserves, they reduce the available supply in the market, potentially driving up prices. If they sell, however, it can ease upward pressure on prices.

9. Currency Fluctuations

Gold is traded internationally in US dollars, so currency exchange rates play a significant role in setting gold prices in India. When the Indian rupee depreciates against the dollar, importing gold becomes more expensive, driving up local prices.

10. Protection from Volatility and Uncertainty

During times of crisis—be it war, political unrest, or economic turmoil—people often flock to gold as a “safe haven” asset. Gold is considered a stable store of value, so when other investments feel risky, the demand for gold usually increases, driving up prices.

11. Correlation with Other Assets

Gold has a low negative correlation with major asset classes, like equities. This means that when stock markets decline, gold prices often rise, making it a popular choice for portfolio diversification. Investors turn to gold when stocks are down, which can push up prices during bear markets.

12. Geopolitical Factors Affecting Gold Price

Gold is often the asset of choice during geopolitical turmoil. When global or regional tensions rise, other asset classes may lose value, but gold prices tend to climb as investors seek a safe place to park their funds.

Understanding these factors can help investors make informed decisions. From supply-demand dynamics and cultural significance to central bank reserves and currency fluctuations, each factor brings a new layer of complexity to the gold market.

Whether it’s a Diwali purchase, an investment for the future, or simply a hedge against economic uncertainty, the allure of gold remains strong. In a rapidly changing world, gold’s intrinsic value endures—a testament to its place in both Indian culture and the global financial system.