Those who have been keeping a close watch on the commodities market know for a fact that gold has been going up and down all this time, the significant rise in the prices of gold in India was seen since August 2019. Where in 10 days the prices rose by about 10%-12%. Gold prices are determined in the international markets just like Forex and other commodities, these prices are mainly determined in the US markets from where they are imported India and several factors play a role in its price determination ranging from the strength of INR against USD to RBI policies, and from simple factors of demand and supply to serious market crises. So to answer every question let’s begin the bant
First things first, how do we get gold in Indian markets. The answer is the USA. We import gold largely from the US and then the prices are decided by the IBJA (Indian bullion Jewellers association). Gold is imported and brought into Indian markets through banks, which is then supplied to bullion dealers. The rate fixed is based on customs duty and includes a fee. The Indian Bullion Jewellers Association (IBJA), based in Mumbai, fixes a rupee price for the gold that is determined based on the top 10 Biggest dealers of the bullion. (To know more about bullion and bullion banks visit: https://www.investopedia.com/terms/b/bullion.asp)
How do gold prices rise? - Gold prices are affected by a lot of events in the international as well as Indian markets. A big reason being Economic crises due to coronavirus. Gold is seen as a very liquid Asset since a very long time, and thus after every market crash gold increased in its value by a significant amount. And the same can be witnessed in today's market as people are investing more and more in gold to be assured for their money as there is much less volatility as compared to equity markets. Secondly, when RBI decided to increase its gold reserves and imports large amounts of gold from the USA this causes both, an increase due to increase in demand and due to increased imports the need to pay using USD thus devaluation of Indian currency which is another factor for Increased prices of gold. The prices in The US and Federal Reserve of USA's decisions can also affect the price of the commodity significantly. If we want to look at a bigger picture why gold has risen; trade wars, US- Iran conflict, US-China trade war, Nuclear threats and such events cause a lot of uncertainties in the Equity markets and at such a time gold strengthens.
So we have been seeing a lot of fluctuations since August 2019 and the major reason for this surge in prices was heavy buying of RBI. RBI started buying gold after 5 months and the Reserve Bank of India (RBI) bought 7.5 tonnes of gold in October 2019 for adding to its foreign exchange reserves, which swelled to $461 billion, including $28 billion gold. Due to this heavy demand by RBI and of course being a rare metal with its limited supply caused an increase price of gold in Indian markets but the demand of physical gold in terms of jewellery and coins was hitting an all-time low. Also, USD became very strong as compared to the Indian Rupee, going from 68.79 INR on 30 July it went to 71.74 INR on 31st August. This simply meant one has to pay more rupees to import gold thus importing prices went up and hence the prices in the market were high.
How do gold prices fall? - Like in an emergency we buy gold due to volatility of the Equity market similarly in a boom within the economy we invest in Commodities because of the simple reason that these equities can give a lot more returns than the traditional; investment of gold and due to the fall in demand the prices tend to go down. Another reason is when USD devalues; for e.g.-When India tries to become export-oriented at this time the INR gathers strength against the USD thus we have to pay less for the import of gold and hence the market pricing goes down, one thing to keep in mind is that gold can never be too cheap because of the investor's mindset as even at a low price people buy them for jewellery use and even for investment purposes (With the hope that it will go up). Another reason is that buying gold futures does not make a person own physical gold and thus a lot more futures may be issued than the existing physical gold and due to the simple concept of excess supply over demand the Physical gold prices tend to go down.
What's to follow?-
Analysts say that investors are preferring the safe-haven appeal of the world’s reserve currency (US dollar) against the shelter in the precious metal and this may be a reason for Gold's downfall but with Fed's lowered interest rates to improve economic growth makes the USD devalue and hence another price hike can be expected in gold not just in India but across the globe. To explain this," as a rule, if USD strengthens gold tends to become more expensive in other currencies, thus the demand goes down and when the USD loses its value(as now when interest rates are lowered) the prices will go down in other currencies but high in The US thus people will sell gold for USD thus creating a supply of money and gradually the dollar gain back its strength". Just remember a Gold vs USD has not happened for the first time as after 1929, when people started redeeming paper gold for actual gold the FED was scared they might run out of gold thus they increased the interest rates, and signing Gold Reserves Act of 1934 made the USD stronger than gold and was a new start for the USD even though that situation is entirely different from the one we are facing today still what we can learn is that The US can do the unthinkable to maintain its global dominance.