How Are Gold Rates Determined?

Gold loans have become an ideal avenue to raise immediate funds through a flexible loan product. However, for a gold buyer, seller or investor, it is essential to understand how gold price is determined to ensure they get the best price for the gold or the highest gold loan amount at the time of application.

How Are Gold Prices Determined?

One of the most common factors with gold in India is its price fluctuations, resulting in different prices daily. Suppose you are looking to buy gold today. The gold price may rise or fall tomorrow. Gold buyers and sellers constantly monitor these price fluctuations to ensure they get the best price for their gold.

However, understanding the price pattern and predicting if the gold price is likely to fall or rise requires understanding how the gold price is determined in India. 

• Demand and Supply

The demand and supply factors correlate with each other and directly affect the current price in the domestic market. If the demand for gold is higher than the supply, the gold price will rise. On the other hand, the gold price will fall if the market is lower than the supply.

• Economic Situation

People consider gold a safe investment to hedge against negative economic factors such as inflation. Suppose there are negative factors such as inflation and recession in the economy. In that case, it creates a fall in the financial markets. Investors may have limited liquidity and incur more losses. They prefer to invest in gold which may see higher demand in the domestic market.

• Interest Rates

The prevailing interest rates have an inverse relationship with domestic gold prices. RBI monitors and changes interest rates of gold loan such as repo rates and reverse repo rates to manage the money flow in the Indian market, which indirectly affect the gold prices in India.

If the interest rates increase, there is a heavy sell-off of gold, increasing supply. People prefer to buy gold when the interest rates decrease, increasing the demand.

Types of gold prices

In India, gold prices go beyond the simple spot and futures prices seen in the global market. Here's what matters:

• 22K and 24K Purity: Unlike the global market focusing on per ounce rates, India deals in grams of gold with prices based on purity (usually 22K or 24K).
   
• Making Charges: When buying gold jewellery, you'll encounter 'making charges' - the cost of crafting the piece. This adds to the base gold price.
   
• Taxes and Duties: The Indian government levies taxes like GST (Goods and Services Tax) and import duty on gold. These can fluctuate, impacting the final price you pay.
   
• Local Fluctuations: Gold prices can vary slightly across different jewellers and regions in India due to competition and market dynamics.

Sources of Gold Pricing

While global factors influence gold prices in India, domestic elements create a unique pricing symphony:

• Global Cues: International spot and futures prices set the baseline. A weaker rupee against the dollar can make imported gold costlier in India.
• MCX Gold Price: The Multi Commodity Exchange of India (MCX) plays a crucial role. Spot and futures contracts traded here influence domestic prices, reflecting local supply and demand.
• Government Regulations: Import duty and taxes like GST affect the final price. Changes in these can cause sudden price fluctuations.
• Local Supply and Demand: Festival seasons and wedding times often see a surge in gold buying, pushing prices up. Conversely, a weak agricultural season might decrease demand, leading to lower prices.
• Jeweler Markup: Individual jewelers add their "making charges" for crafting gold ornaments. This cost varies based on design complexity and can significantly impact the final price you pay.

How Gold Price Is Determined: The Mathematical Formula

Apart from the factors that affect the gold price in India regularly, there are two mathematical formulas to calculate the gold prices based on the quality of the gold. Understanding the formula can allow you to identify the best prices for gold before making a purchase. Listed below are the two methods to calculate the gold price and their formulas:

1. Purity Method (Percentage): Gold value = (Gold’s purity x weight x gold rate) / 24

2. Karats Method: Gold value = (Gold’s purity x weight x gold rate) / 100

Avail Of An Ideal Gold Loan With IIFL Finance

With IIFL Gold loan, you get industry-best benefits through our process designed to offer instant funds based on the value of your gold. IIFL Finance Gold Loans come with the lowest fee and charges, making it the most affordable loan scheme available. With a transparent fee structure, there are no hidden costs in applying for a loan with IIFL Finance.

FAQs:

Q.1: How the gold price is determined?
Ans: In the international and domestic markets, gold prices are determined based on demand and supply, economic situation, and prevailing interest rates. A change in such factors directly or indirectly influences gold prices.

Q.2: Do gold prices affect the gold loan amount?
Ans: Yes, gold prices directly affect the offered gold loan amount, as the loan amount depends on the actual value of gold in the market. On any given day, the higher the gold prices, the higher the offered gold loan amount.