Kumari Palany & Co

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Wonder knowing there are so many reasons for fluctuating gold prices in India

Posted on: 19/Mar/2017 12:03:08 PM
If one monitors the price trend of gold in India, one can note that the gold price will differ from one state to another. In some states, the gold price will be more as compared with others.

This is a point for wondering - what are the reasons for this? 

How is the price of gold fixed in India? Here is the highlight

The gold price in India is almost entirely dependent on International Market gold price. Hence, if the price of gold is up in the international market, the gold price will increase in cities throughout India.

India does not have any flourishing gold mines or gold production. So, the gold demand in India is mostly met by importing from other countries.

In India, gold is imported by the central government, banks, government-approved agents and companies. Through them, it is being distributed to other major gold traders.

The list of gold importing agencies and others changes all the time. So, the central government keeps releasing the new list at fixed intervals.

Who brings gold to India?

The State Bank of India, Bank of Baroda, Metals and Minerals Trading Corporation of India, Union Bank, and Syndicate Bank import gold. Actually, about 38 banks, import gold in India.

After import of gold, they estimate the equivalent value in India Rupees as per the prevailing International market rate, add some more taxes, including Import Tax and fix the price of the imported gold. This is the 1st stage price of the imported gold.

Why the final retail price of gold differs from the wholesale trade price?

In major cities like Mumbai, the gold price is decided by the Bullion Association. IBJA (Indian Bullion Jewellers Association) in Mumbai fixes a particular price and inform this to retail gold traders. However, before fixing the prices, IBJA gets in touch with the agents who do large quantum of trade and ascertain their opinions. IBJA will also consider the future demand while fixing the gold price.

There are several methods to calculate the gold price. Once you know the gold price at the international market, compare it with the prevailing value of Indian Rupee against the US Dollar, and arrive at the gold price. With this price, one has to add the profit margin of the importer, Value Added Tax, the customs tax of the city, and the local tariff and then arrive at the local gold retail price. So, please know that all the factors mentioned here are included in the price that you pay for gold in your local shop.

Why the gold price differs from one major city to another?

In the various states of India, the tariffs and local taxes vary a lot from one state to another. Apart from this, the cost of transporting also varies a lot from one state to another.

Some individuals tend to believe that gold price will be lower in port cities like Mumbai, Chennai, and Kolkata. This is mainly because the transportation cost in these port cities is considerably lower. However, this factor is not always valid. There are other factors apart from the transportation cost which affects the gold price.

Financial (payment) transactions play an important role in fixing gold price:

The cash exchange during the financial transaction of buying gold plays a significant role in deciding the gold price. For example, as India imports gold for its requirement, it needs to pay in US Dollars for this import. So, when the US Dollar to Indian Rupee conversion rate changes, (say if 1 US Dollar becomes Rs. 68 instead of 67) we need to pay the additional amount due to the conversion rate fluctuation.

When gold is imported in large quantities, it directly amounts that a lot of foreign exchange goes out of the country.