There are various factors that lead to a change in gold prices in India. In fact, there are plenty of factors, but two of the most important ones are international prices of gold and currency fluctuation.
International prices of gold
India imports its requirement of gold, since we do not mine. So, when international prices rise, gold prices rise in India, assuming the currency is stable.
International prices of gold move on the basis of various factors. For example, when the dollar moves down, the prices of gold gain and vice versa.
For example, in international trade today gold was losing ground and trading below the $1,200 an ounce level, as the firm dollar dented the up move.
Now, let's see some other factors on how international prices move. A significant amount of gold goes into jewellery demand. But also demand for investment in gold is another big factor. This investment happens by way of Gold Exchange Traded Funds (ETFs).
Gold ETFs invest in gold through the electronic form. If there is a huge redemption from these funds it tends to affect gold prices, pushing international prices lower.
Apart from these the international prices of gold depend on physical demand for gold from huge consumption nations like China and India.
Any adverse policy decisions here could impact the prices of gold. For example, the government of India had hiked the import duty on gold.
This made gold costlier in India, which could have affected consumption. All these factors tend to affect the price of gold in the international markets.
Rupee and the price of gold
The movement of the rupee is another important factor that tends to affect the price of gold. When the rupee drops against the dollar in interbank trading it tends to increase the price of gold.
For example, when the price of the rupee against the dollar is Rs 60 and the same increases to Rs 61, it makes the price of gold costlier to import at Rs 61, then Rs 60.
It is therefore important to keep an eye on the international price of gold as also the movement of the rupee against the dollar.
If the price is steady for both, then the price of gold is expected to remain steady in India. So, watch out for the above two factors.