A study on India imports gold since there’s

insignificant mining in India.

increasing Gold is the 2nd largest commodity

imported in India after oil.
prices of However there's a fall in import of
gold in FY 19- 20 of 14%
GOLD.

24 carat Gold
rate surged
11% since
March till
June.

However the imports

have fallen by :
March - 63%
April - 99%
May - 99%
June - 86%
Before we start the post-mortem analysis of the price
surge, we shall understand
How GOLD is valued?
International pricing:
London is the home to
international prices of GOLD.
London Bullion Market
Association (LBMA) quotes the
“Buy” and “Sell” rates for gold.
LBMA is the global authority on
precious metals mainly
consisting of investment banks
that defines how precious
metals are refined and traded.
LBMA quotes the rates in USD.
Pricing in India:
Once the international pricing is
done by LBMA, Indian Bullion
Jewelers Association (IBJA) quotes
daily “Buy” and “Sell” rates.
IBJA a tight clique of 10 big and
influential jewelers which account
for almost all legal gold purchased
and sold in India.
These 10 dealers provide the daily
“Buy” and “Sell” rates of the gold
purchased by them to IBJA
“Buy” and “Sell” rates comprises
of -
- Daily price of gold fixed by
LBMA in USD converted to
INR.
- Import duties  
- Taxes  
- Margin
The “Buy” and “Sell “rates
provided are further averaged by
IBJA. This average rate calculated
by IBJA is the daily price of gold in
India.
 USD is the widely used currency
Well, why across world. How did USD
is Gold manage to become the widely
used currency requires a deep
quoted in dive in History.
USD?
Believe us, this History isn't boring.

Post World War I and the Great Depression of 1929, all

countries, except USA, abolished gold standard system, where
paper currency was printed restricted to the extent of gold held
by the country.

In 1944, with Bretton Woods Agreement,

44 countries agreed that currencies
couldn't be linked to gold, but they can be
linked to USD. Thus USD became world’s
reserve currency, backed by world’s largest
gold reserves.

Now, instead of gold reserves, other

countries accumulated US dollars.

In 1971, US abolished gold standard as it wasn’t able to meet the

expenses of the Vietnam War due to limited money supply and
resorted to Fiat Money – printing currency without any backing.
But this didn’t make other countries lose the trust and confidence
in the USD because of the size and strength of its economy
coupled with the dominance of its financial markets.
Since gold is quoted in USD, it becomes vital to understand
Relationship between Gold and USD

Inverse correlation
But why does inverse correlation
exists between USD
exists?
and Gold
As mentioned earlier, gold rates are
If USD appreciates,
quoted in USD. So, if USD appreciates,
prices of gold fall and
it becomes expensive for other
vice – versa. countries to buy anything quoted in
USD, so shall gold.

As a result, the quantity demanded for

gold shall decrease in other countries.
As demand for gold decreases, prices
of gold in USD shall decline

Thus, having known about the valuation of gold, history of

gold with USD and relationship between USD and Gold, we
lay down the factors leading to rise in rates of gold. We
have divided this discussion into 2 parts

Factors affecting Factors in Indian

USD
(As gold is quoted in USD, it is
necessary to understand the factors
affecting value of USD. To put it
short, anything affecting in USD in
the US, affects the prices of gold)
context
(As the quote of gold in India
includes various components, effect
on each component shall affect the
price of gold in India)
 Factors affecting USD
US Dollar index has fallen by almost 3% Gold rates have
since March 2020 increased from
$1600 per ounce This is mainly
(US Dollar index is an index of value of
(31 grams) to due to
USD relative to 6 foreign currencies –
following:
Euro, GBP, Japanese Yen, Swedish Krona, $1800 per
Canadian Dollar and Swiss Franc) ounce.

Gold is considered as safe haven. In the fiat money system, the

Safe paper currency doesn’t have any intrinsic value because what shall
Haven be the value of a note is not decided by demand and supply
factors but by the government. However gold has its intrinsic value.
Appeal During the period of crisis, investors become risk-averse. They
resort to investments that perform against inflation. Since gold
has intrinsic value, it becomes dire choice for investors.

Since investment in gold is a safe haven, there has been a surge in

Exchange Gold Exchange Traded Funds (ETF) across globe but significantly
Traded in the US and Europe. As per a report from Bloomberg, fear-driven
investment demand for gold in developed countries has
Funds contributed about 18% to this year’s gain in gold prices while the
weaker buying by emerging market consumers provided an 8%
drag in price. This shows that demand has not been stalled but has
been shifted to another market.

Traditionally, there is a negative correlation between interest rates

US Fed and prices of gold. This has held true in March when US Fed
Reserve Reserve cut interest rates to help cushion the economic damage
caused by the covid outbreak. This led to a surge of 3% on gold
fund rate spot in March 2020

The US has provided with several financial stimulus in order to

deal with the crisis caused by global pandemic.
Financial When an economy provides financial stimulus, the supply of
Stimulus  money in market increases. As a result of which prices of
commodities increase. Accordingly this is also one of the factors
which surged the price of gold in USD.
 Factors in Indian context

The major factor affecting the price in the Indian

context is Exchange Rate which is majorly affected due
to:

Fiscal stimulus to combat the economic impact of COVID-19

followed by RBI reducing interest rates, proves inflationary. And
thus, currency loses its purchasing power. Now since gold is priced in
USD, consumers are required to pay more INR to buy gold due to
decline in the value of INR.

Investments by FII influences the market. When FIIs invest, foreign

exchange is received in India and thus INR appreciates. However when
they divest, opposite happens; INR depreciates. Due to global
pandemic, FIIs have turned risk averse and withdrawn heavily from
Indian market during March and April. This is because FIIs resort to
safer assets and thus pull out their capital from India. This in turn
increases the demand for other currencies like the USD, which makes the
USD expensive. This leads to increase in price of gold as it is quoted in
USD. However investments by FIIs in Jio platforms during pandemic
have helped in maintianing the value of rupee.

Other factors such as taxes, import duties have remained unchanged

and thus not affecting the prices of gold
 CONCLUSION
To sum up, we see that Gold rates have been
increasing due to the surge in demand in the
West due to the safe haven appeal.

Right now, the demand from 2 biggest countries

in world in terms of Gold purchase – India and
China is at stall.

However if the jewelry market in India and

China restarts and the global pandemic still
persists, this demand shall further add to the
price rise reversing the 8% drag observed
above.

About the author:

This article is written by Porus Navale
(Chartered Accountant) and Rajendra Varma

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