How Gold Prices Are Determined: Important Things to Know

Gold is in high demand not just for investment and jewellery but also for use in the manufacture of technological and medical devices. Gold prices are impacted by a variety of variables including market circumstances, supply and demand dynamics and economic policies. Let's look at how gold prices are decided both worldwide and in India.

Global Pricing Mechanism

The price of gold on the global market is primarily established in the London bullion market the largest bullion market in the world. The London Gold Fix served as the gold price regulator for many years. But as of March 20, 2015, this function has been assumed by the London Bullion Market Association (LBMA) which is run by ICE Administrative Benchmark. Together with national organizations connected to several governments throughout the globe, this group sets the price of gold. Twice a day, at 10:30 AM and 3 PM GMT prices are set.

Spot and Futures Prices

Gold prices can be categorized into two types:

1. Spot Price: This is the price at which gold is bought and sold for immediate payment and delivery. At market opening, members of each city's bullion organization decide. Slight variations may occur across cities because these prices are established by local bullion brokers.

2. Futures Price: This price is agreed upon in futures contracts, where participants commit to buying or selling gold at a predetermined price on a future date. The Multi Commodity Exchange of India (MCX) gathers information on the supply and demand for gold in Indian markets and considers the condition of global inflation into account when determining the price of gold futures. Before deciding on these values, the futures market consults with the London-based Bullion Market Association. Prices on MCX are declared by adding VAT, levies, and other costs to the determined futures price.

Domestic Factors Affecting Gold Prices in India

India is one of the largest importers of gold globally making its pricing structure unique. Several factors influence the price of gold in India:

1. Import Costs: The spot price is the amount of 24-carat gold set in London per ounce, plus import expenses such as shipping and handling fees. In India, this has a big impact on the ultimate selling price.

2. Taxes and Duties: The Indian government imposes taxes like Goods and Services Tax (GST) and import duties, which can vary and directly impact the final price paid by consumers. Changes in these regulations can lead to sudden price fluctuations.

3. Local Supply and Demand: Gold demand in India often increases during festivals and wedding seasons, driving prices higher. Conversely, poor agricultural yields can decrease demand and lower prices.

4. Market Conditions: Economic and political decisions, both domestically and internationally, can also influence gold prices. For instance, new regulations on gold imports or reduced production from gold-exporting countries can significantly impact pricing.