Gold has remained a symbol of status, wealth and financial security worldwide. Whether held as jewellery, coins or digital assets, it is a preferred investment for people looking to protect their capital.
However, the daily price of gold is never static. Several domestic and international factors influence gold prices, including global demand, interest rates, the geopolitical situation, inflation, currency movements and investor sentiment.
Making an accurate gold price prediction can be tough, even when one factor appears favourable for gold prices. Thus, understanding the underlying factors that can move gold prices can help buyers time their purchases and get the best rate possible.
It can also help investors understand short-term price fluctuations and make more informed decisions instead of reacting to sudden price changes.
Why Gold Prices in India Depend on Two Things
Gold is traded internationally as a global commodity priced primarily in US dollars (USD). This means the price of gold in India is influenced by both the global gold price and the rupee-dollar exchange rate.
Because India imports most of the gold it consumes, changes in international prices can directly affect domestic rates. Local taxes, import costs and other market factors can also affect the final price paid by consumers.
For example, if the international price of gold rises while the value of the rupee remains unchanged, the price of gold in India will generally increase. However, even if the international gold price remains stable, a weaker rupee can make gold more expensive for Indian buyers who will use Indian rupees to purchase the same amount of dollar-denominated gold.
The opposite can also happen. If the rupee strengthens against the US dollar, it can reduce the impact of a rise in the international gold price on domestic prices. Tracking both international gold prices and currency movements can clarify why domestic gold prices change from one day to the next.
How the US Interest Rate Affects Gold Price
US interest rates are a major factor that can influence gold prices. Gold does not generate interest or dividends. Therefore, when interest rates rise, interest-bearing investments, such as bonds and deposits, can become more attractive to investors. Higher interest rates can also increase the opportunity cost of holding gold.
As a result, demand for gold may weaken, putting downward pressure on the price. On the other hand, when US interest rates fall, the relative attractiveness of interest-bearing investments can decline. Investors may increase their allocation to gold, potentially supporting gold prices.
Expectations about future interest-rate changes can influence the gold price before a central bank actually changes rates. If markets expect interest rates to fall, investors might start buying gold in anticipation of lower rates.
However, interest rates do not operate in isolation. Inflation expectations, economic growth, currency movements and global uncertainty can strengthen or weaken their effect on gold.
How Global Uncertainty Affects Gold Price
Gold is considered to be a safe-haven asset. During economic or geopolitical tension, investors may seek assets that help them preserve their wealth. This can increase demand for gold and push its price higher.
- Geopolitical: Military tensions, international trade disputes and political instability can prompt institutional and retail investors to liquidate riskier assets and invest in gold to preserve value.
- Inflation: As purchasing power erodes due to high domestic or global inflation, investors buy precious metals as a hedge, since physical gold historically retains intrinsic value over time.
- Banking sector: Instability in the global banking or credit systems increases the demand for physical commodities unlinked to third-party credit defaults.
As demand for gold increases during periods of uncertainty, the price also increases.
What Makes Gold Prices Go Down
While macroeconomic tensions and falling interest rates push the prices of precious metals up, several factors can create downward pressure on the price:
- Strong Indian rupee: A stronger domestic currency reduces the cost of importing physical gold bullion into India. This passes the savings down to the local retail markets.
- High US interest rates: Higher global yields pull institutional investment out of commodities and into fixed-income securities.
- Easing geopolitical tensions: When international conflicts resolve or economic stability returns, markets return to assets like equities. This reduces the demand for safe-haven commodities.
- Falling consumer demand: High retail prices or weak seasonal buying within major consumer markets like India and China can temper price increases.
Does Gold Price Affect My Gold Loan?
Yes. Changes in gold prices can affect the maximum loan amount you can get against your pledged gold jewellery.
When you apply for a gold loan, NBFCs and banks check the pledged gold. Their value determines the total loan amount you can borrow based on factors like the ornament’s weight, purity and the present market rate of gold. The loan amount is then determined according to the lender’s policies and the applicable loan-to-value ratio.
The Reserve Bank of India has set the permissible loan amount, or Loan-to-Value (LTV) ratio, at 75%. This limit is meant to protect both borrowers and lenders from market volatility. An increase in the market price of gold can potentially increase the value against which a borrower can obtain a gold loan.
This does not mean a higher market price will automatically increase your gold’s eligibility. Factors like LTV ratio, purity and weight also matter. Before you apply for a gold loan, you can use a gold loan calculator to assess the value of the loan your jewellery can get you.