Deciphering the volatility in gold prices

India is one of the top gold importing countries, but since it hiked import duty on the metal to 15%, the country has observed a steep fall in imports and huge surge in exports.

The yellow metal has constantly recorded fluctuations in the prices all over the country over the past few weeks. Various international factors like changes in US dollar value, Federal Funds rate and gold price discovery drive prices of the commodity in India.

Image Credit: Pixabay

Gold, also referred as yellow metal has always been a strong substitute of hard cash in India. It is considered as a safe investment during times of financial uncertainty as lower interest rates reduce the opportunity cost of holding the non-yielding bullion. The price of the metal has been fluctuating since past few weeks due to various global factors.

On March 27, 2023, the precious 24 carat metal was priced at ₹ 59,650 per 10 grams, while the price of 22-carat gold stood at ₹ 54,640 per 10 grams. In Chennai, pure 24 carat gold was trading at about ₹ 52,285 per 10 grams, while 22-carat gold was trading at ₹ 47,927. In Delhi 24 carat gold costed about ₹ 60,150 per 10 grams and 22 carat gold was priced at about ₹ 55,150 per 10 grams.

Gold prices witnessed a surge in Kolkata with 24-carat gold costing about ₹ 60,000 and 22 carat gold for about ₹ 55,000 per 10 grams. Similarly in Mumbai, the prices of gold are hovering around ₹ 60,000 per 10 grams.

In the Feb-March 2023 period, MCX gold prices touched a low of Rs 55,535 per 10 gram on 19^th Feb and highest Rs 59,436 on 23^rd March 2023.

Source: Investing.com, Prices in INR per 10 gm

Speaking on the reasons that pulled down gold prices in February, Anuj Gupta, Vice President – Research at IIFL Securities said, “Gold prices came down after climbing a new peak, as US dollar became strong after upbeat US Current Account Deficit and other data. This helped the US dollar to bounce back from its 7-week lows. This rise in US currency led to profit booking trigger in the precious yellow metal.” He further added, “US dollar rate is expected to remain a major trigger for gold price movement in near term.”

What drives Gold prices in India?

Indians love to invest in gold, since they believe that it provides security at the times of inflation, can be used as jewellery and prices are generally stable.

Apart from socio-economic reasons, the prices of gold varies for different regions based on parameters like excise duty, making charges and state taxes. Key reasons for fluctuating gold prices in India are as below:

1. Strength of US Dollar: After hitting a 7-week low, the US dollar bounced back. An increase in dollar index of 0.1% is one of the major reasons for a drop in gold prices. Amid high inflation, the capacity to purchase more goods decreases, thereby denting the value of the US dollar. As the US dollar depreciates, the price of gold picks up.
2. Federal Funds Rate: The federal funds rate refers to the interest rate that banks charge for lending excess cash from their reserve balances on an overnight basis. Since rising interest rates make bonds and other fixed-income investments more attractive, funds will flow into higher-yielding investments and out of gold when rates move higher. So when the Federal Reserve raises its benchmark federal funds rate, a drop in gold rate is observed.
3. Hike in import duty of gold: Gold is considered as a crucial reserve since it supports the national currency. Countries with low gold reserves and high imports may witness their currency devalued. Due to similar reasons the Indian government has recently hiked import duty on gold from 10.75% to 15% to restrain increasing imports.
4. Demand of Gold: The increasing demand of gold is the most common cause of surge in prices. India is one of the top gold buying countries, be it for investments, weddings or simply financial security. Once the demand increases, a surge in prices is observed. Moreover, demand for the metal in electronics and medical devices is also a contributing factor to the fluctuating prices.
5. Gold Price Discovery: Gold prices are fixed twice a day by five London Bullion Market Associations (LMBA). The prices they set for gold are considered globally as the international standard for gold pricing. There are two kinds of gold prices:

India’s Gold trade

India has always been one of the top importers of gold, but after the imposition of hike in import duty, a steep fall has been observed in imports. As of January 2023, India imported gold worth US$ 697.77 million, recording a downfall of 70.72% YoY. During April-January, FY23, India imported gold worth US$ 29.1 billion, recording a YoY dip of 27.91%. In February 2023, imports stood at US$ 2.6 billion, declining by 44.9% YoY. This was attributed to jewellers delaying purchases in anticipation of a cut in import duties. For April-February, 2022-23, gold imports declined by 29.7% YoY to reach US$ 31.7 billion.

Chirag Sheth, Principal Consultant, India and South Asia at London has stated, “There is a slowdown in demand at the higher level and the Indian market price is quoted at a discount to the cost of import. March is usually a dull month for gold demand. At high prices, even impulsive and regular gold demand gets affected. The marriage season demand usually is sizable, but if prices remain high, some erosion to that segment’s demand does happen”.

Although the gold prices have been fluctuating according to recent trends, the overall demand is projected to rise in 2023. Tanya Rastogi, Director, India Bullion and Jewellers Association and Lala Jugal Kishore Jewellers, is confident that gold is on the cusp of a bull run, as she elucidates, “Gold prices in India are predicted to cross Rs 63,000 per 10 gram by the end of 2023.”

With upcoming festivals like Akshaya Tritiya in April 2023 and Diwali later this year, gold prices are expected to touch new highs in upcoming months. However, the industry as well as investors will be keenly looking forward to the government announcing a cut in the import duty.