Why Prices of Gold not falling in Indian Market???

Or

Why Gold is Expensive in Indian Market.

Many Investors are amazed at this point in time, when Gold was continuously falling in International markets, but not in Indian markets, basically it has to follow the suit and react accordingly.  Investors are right, but pricing model of Gold is not as straight.  In this article we try to investigate reasons behind variation in Indian Gold price and its prices in International markets.

Before going further we should take one glance at some of facts & figures about Gold.

  • First and fore most reason is India is net importer of goods & services, including Gold & Silver.
  • Whether we believe it or not Indian is the world’s largest consumer of Gold, India accounts for nearly one-third of the total world demand for gold.
  • Indian is not largest consumer but also largest Importer of Gold, and Average rate of growth of import from 2008 – 2011 is 26.8% p.a.  Gold’s share in total import bill of the country has gone up from 8.1 per cent in 2001-02 to 9.6 per cent in 2010-11.  In terms of percentage share of gold and silver combined were the 2ndmost imported commodity in 2010-11.

From above facts it can understood that India is the biggest consumer and importer of the Gold, due to variety of reasons, which can altogether become different topic to discuss for.  Now, coming to the point, because of India is net importer of Gold, price of Gold varies with the exchange rates from which India is importing.  Moreover such transactions happens in Dollar, considering most liquid and globally accepted currency; so price of gold varies with movement in US Dollar with Indian Rupee (USD/INR).  So if Rupee appreciates in compare to Dollar, price of Gold tends to fall, and if Rupee weakens so the Dollar appreciates, price of Gold increases, irrespective of fluctuation in International price of Gold, and obviously with fluctuation in International prices of Gold, pricing in India will be accordingly adjusted.

Above points can be looked with two base case scenario, one in which only prices of base currency changes and not the actual price of Gold, and other scenario could be prices of Gold changes without any change in currency quotes.  In real world, both scenarios occur simultaneously and a price of Gold varies keeping every aspect in consideration.

Lets look at first scenario, where a price of Gold remains static in International market, and we only notice change in price of Gold due to change in currency valuations.  If Rupee depreciates in compare to Dollar (Base Currency), for example current USD/INR quote is 55 and if quote rises to 56 than it means Rupee is depreciating in compare to Dollar, than in that case prices of Gold will rise; whereas if Rupee appreciates than prices of Gold tends to fall.

In second scenario, where we only notice fluctuation in price of Gold, assuming there is no change in currency quote.  It is very much obvious that keeping all other things constant, with rise in International price of Gold, inevitably price Gold in Indian market will rise.

In practicality things are not as simple as we explained above, commodity prices are influenced by number of factors namely, price is function of demand & supply, fundamental reasons which can affect the commodity prices and last not the least any asset class including commodities are influenced  by the speculative forces.

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