How Inflation Affects the Gold Demand and Price in India?

Gold jewellery and assets have a unique value in India. The country is also one of the largest consumers of this yellow metal, in the world. People buy gold ornaments during festivals, weddings, and many occasions. The citizens of this country consider gold as an item of privilege, one which marks the financial wealth of a person. Gold also has auspicious notions attached to it. The yellow metal items are used in religious ceremonies, celebrations, and events.

Gifting anyone gold jewellery or token is considered as the most favourable gift. It is noted as a ‘good luck’ charm, which bestows happiness in the family, and opens the gate to financial fortune. But besides these ideas about gold jewellery and items, the people of India also hold gold in high regard, when it comes to investments and securing fund against the asset. This is why; it becomes imperative to understand the factors that affect the gold demand and price in India, especially inflation.

Importance of Gold Assets in India

In time of financial emergency, people are known to pledge their gold jewellery to banks to avail a loan. One can even sell off the gold assets to earn good profits. This asset is considered to be one of the best forms of gifts and investments. Thus, gold in India is more than just a valuable asset for occasions. With increased financial awareness among citizens, this yellow metal has gained interest of investors as well.

Be it availing funds against gold assets, selling the asset, or investing in it, one must understand exactly what affects the prices of gold. The ups and downs in gold rate will directly impact its demand and usage in the market. Today, we will explore how inflation in India can cause an impact on gold prices and demand.

Understanding Inflation Effect on Gold Rates

Gold can hedge inflationary conditions when inflation remains high for a long period. This also makes the price of the yellow metal high. Let us see how inflation can impact gold prices and rates:

• Rupee Dollar Equation: The equation of rupee-dollar does not have an effect on the global prices of this precious metal. The gold price will increase in terms of rupee when the rupee weakens against dollar. When inflation rises, the rupee value against dollar goes down, prompting people to hold money in the form of gold.

• Level of Income: Gold demand is influenced by income of population. So demand for this metal rises when income level rises. Similarly, when people lack funds or their income level reduces, they look for this precious yellow metal for cash back-up. This is the time when sale of gold increases, as the price of the metal too increases.

• Impact on Gold Loans: Taking a loan on gold when the price of the yellow metal is high will provide the person with more amount of fund. Even after inflation, the rate of gold is lower than credit card loans and personal loans. Rates of gold loans depend on the safety margin set by financial institutions.

Since the loan is secured in nature, the rates are lower than collateral-free loans. Gold offers a high mortgage value as well. A person can avail up to 75% of the gold’s current market value as loan amount.

What Factors Apart from Inflation Affect the Gold Price and Demand?

Here is how inflation and other factors influence the demand for gold and its price.

• Secured Returns: People invest or purchase gold to protect themselves from financial volatility and uncertainty. Physical assets such as gold coins and jewellery are viewed as valuable assets, and do not lose value. And when it comes to gold, it has a significant return value in contrast to other precious metals or gems. Investors take gold even when the domestic economy is not doing too well. It is because, when the gold price increases, one can sell the asset to earn maximum profits. Thus purchasing gold is a win-win situation for an investor, even when the economy is turbulent.

• Fixed Income Assets: Gold and interest rate share a negative relationship under normal circumstances. The rising yield makes people expect a stronger economy, giving rise to inflation. People invest in fixed-income assets that can assure a promised return. As gold does not have a fixed return, the demand for it reduces, and the prices remain flat. Remember, the price of gold is not influenced by the value of the rupee. Pricing of gold in the international market is influenced by the value of the dollar. If the value of the dollar decreases, there will be an increase in gold prices, and vice-versa.

• Agriculture and Demand for Gold: In India, demand for gold also depends on demand from the rural sector. The country sees a demand of 800 to 850 tonnes of gold just from rural area, which makes for 60% of the gold consumption for India. In monsoons, the demand increases. Farmers and agriculturists purchase gold from their income. When the crop production is not as expected, the farmers can sell the gold to obtain funds, or simply take a loan against this asset.

Ancestral gold is also eligible to get a loan on, and thus, farmers prefer to stock gold for future generations, as it can be used in times of financial emergencies by any member in the family. The gold in question however must meet the quality norms set by the banks and NBFCs. Usually gold to be pledged for funds must be between 18 carats and 22 carats. Also, gold plated assets are not acceptable as collateral.

• When the Value of Dollar Falls: Indian currency rises in value during fall in the dollar's value. In such a scenario, there is an increase in demand for gold and similar commodities. It also increases the gold rates. As this metal is an effective investment portfolio diversifier due to low to negative relation with other asset class, investors invest in gold.

To Conclude

By going through the above-mentioned facts, it is easy to conclude that rise and fall in inflation has a number of effects on gold prices and rates. Most assets classes do not have a direct influence on the gold prices. It is the micro and macro economic factors of a country that affect the gold rates and its demand. Gold is however a precious commodity for investment, even when the market is volatile.

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