CHAPTER 1

1. INTRODUCTION TO GOLD
1.1. Historical Significance
Gold is a shiny metal that does not rust, corrode or decay. The reason why it is considered
more valuable than other metals like silver and copper which share the same physical
attributes as Gold is that it held the interest of human societies since the beginning and as
societies developed, gold was slowly accepted as the satisfactory form of payment. In a
nutshell history gave gold a power surpassing any other commodity on the planer, and since
then the power never really disappeared.

1.2. Prominence of Gold in India and Indian Culture

The significance of gold in Indian history is deeply ingrained, and over the years India’s
infatuation with gold has grown stronger and stronger, with Indians. In India has cultural
significance as regardless of religion, it is an integral part of religious ceremonies. As an
investment gold is considered as the safest investment option. This property of gold to protect
against bad times pushes Indians to consider it as one of the safest investment options. Thus,
despite the fact that a vast majority of Indians survive on meagre resources, they find ways to
purchase gold thereby making it an integral part of their life.

2. GOLD & INDIAN ECONOMY

There are several other areas of investment such as mutual funds, government bonds, stock
markets, and fixed deposits amongst others but people worldwide and especially in India still
prefer gold. Therefore, the monetary inflation in India is often reflected by the rise in price of
Gold. Rising inflation often harmonize with a booming economy. Thus, rise in gold prices
can be at times attributed to the booming economy. However, certain factors associated with
gold affects the growth of the Indian Economy negatively

1.1. Negative Impact of Gold on Indian Economy

Gold is not a profitable asset

As a commodity gold fails to add much to the economy’s productive capacity. In
India when someone purchases gold, it either gets converted into jewellery or is stored
 in bank lockers. In both these cases money spent on purchasing gold gets blocked
because gold is not a productive asset.
3.2.1. The gold imports of India have started to weigh down its economy

Most of the gold carried by the whole world lies in India. As India meets nearly all
its gold demand through imports.1 India’s grabby demand for imported Gold affects
the economy drastically. In 2019 India Imported a total of 831 tonnes of Gold.2

However, in 2020 due to COVID-19 pandemic the import of gold reduced

drastically in February 2020 India imported 44.8 tonnes of gold which was 26%
less as compared to the gold imported in February 2019; and in May 2020 India
imported only 1.9 tonnes of gold which was 98% less as compared to May 2019.
This happened because domestic activities in India were severely impacted due to
nationwide lockdown. The consumer demand collapsed and in May 2020 the
consumer confidence Index fell to an historic low of 63.7% from 85.6% in March
2020.3

3. HOW THE PRICE OF GOLD IS CALCULATED IN INDIA

There are various steps included in determining the price of retail price of gold in India.

Firstly, the London Bullion Market which is a over-the-counter wholesale market for trading
of silver and gold, determines the spot price of per troy ounce of raw gold of 24 karat
fineness. Spot price is the theoretical price of one troy ounce of raw gold which is available
for immediate delivery in the commodity market before being minted into A bullion bar or
coin.

For example, In India we have MCX [Multi Commodity Exchange]. It is an exchange for
trading commodities just as BSE is for trading stocks of companies. At MCX you can
exchange gold, silver and other precious metals along with agricultural commodities such as
coffee, cotton etc. The exchange provides transparent and secure trade mechanism and it
works in compliance with the regulatory framework.4

1
https://de.reuters.com/article/instant-article/idINKBN1Z20B5#:~:text=India%20meets%20nearly%20all
%20its,to%20%2431.22%20billion%2C%20he%20added.
2
supra
3
https://www.gold.org/goldhub/gold-focus/2020/06/india-gold-market-may-jewellery-demand-reviving-
gradually-indian-gold
4
https://www.mcxindia.com/about-us
 - The per troy ounce price of gold according to London Bullion Market on sixteen
October 2020 was USD 1908.20.5

Secondly, since most of the gold is imported in India, the exporting bank levies transactional
charges of 0.2% on the importing bank and it gets added to the retail price. Thus, the spot
price combined with transactional charges results in the metal value of gold.

- Adding 0.2% transaction charge to USD 1908.20 amounts to USD 1912.01

Thirdly, the per ounce price in American Dollars is then converted into Indian Rupees per 10
grams and metal value is determined.

- One troy ounce of consists of 31.1 grams and as of Sixteen October 2020 one USD
amounts to 71.35 INR6. Therefore, per gram price of Gold in India will be as follows.
o 1912.01/31.1 = USD 61.47. [Per gram price of raw Gold]
o 61.47 * 71.35 = INR 4,385.88 [Per gram price of raw Gold]
o 4,385.88 * 10 = INR 43,858.8 [Price of 10 grams of raw Gold]

Fourthly, custom duties and custom tariffs are levied to the metal value to arrive at the landed
price. However, the 2020 budget launched in February 2020 increased the import duty on
gold to 12.5% from 10%. By doing so the gold bullion sector is now equated under a single
import duty regime.7

- Therefore, to find the landed price 12.5% of import duty will be added into it.
o 43,858.8 * 12.5% = 5,482.35 INR [12.5% of metal value of Gold]
o 43,858.8 + 5,482.35 = 49,341.15 INR [Landed price of Gold]

Lastly, Market Trends and Government Policies helps to determine the spot price of Gold in
the context of Indian Market.

i) Market Demands – India is one of the importers as well as consumer of gold.

Traditionally there is an increase in demand for jewellery during the festival and
wedding seasons. If the demand is not met by the supply it leads to an increased
price of Gold.
ii) Government Policies – Government can also play a direct role in determining the
spot price of Gold.
5
http://www.lbma.org.uk/precious-metal-prices#/table
6
https://www.exchange-rates.org/Rate/USD/INR/10-16-2019
7
https://www.thehindubusinessline.com/markets/gold/import-duty-on-gold-coins-raised-to-
125/article30720330.ece
 a. Government Reserves – The Indian Government can hold reserves of gold. Based
on its policies. It can purchase or sell gold through the RBI (Reserve Bank of
India). The price of the gold can be affected if it buys or sells more gold.
b. Import Duty – Government of India can also increase the import duty on Gold
which will directly affect the price of Gold in India. Like in Budget 2020 the
Government of India increased the import duty from 10% to 12.5%.

Final Retail Price and difference in price of Gold of Different states

The price of gold is calculated by the international gold rates on a particular day. So,
technically the rate of gold should be the same everywhere, but it doesn’t happen exactly
because there are certain other variables applied which determine the final retail price of
Gold.

i) Transportation Cost – The moving of gold from one state to another entails
some cost. Which gets added in retail price of Gold. Therefore, transportation
costs also result in difference in price in different states.
ii) Large quantities = less price - Big Jewellers in large cities often offer discounts
if gold is purchased in large quantities. This can lead to a differentiation in the
price of Gold. This is why often the prices of gold in cities like Mumbai and Delhi
is marginally lower as compared to other cities.
iii) Making & Wastage Charges – Whenever the gold is purchased by any
individual, he/ she doesn’t just pay for the weight of the gold but also pays for the
artistry of the manufacturer who cut, polished, shaped and moulded that gold into
the crafted design the buyer also incurs the wastage charges which occur while
preparing the jewellery.
a. Making Charges – Making charges refers to the cost of converting raw gold
into fine jewellery. Purity of Gold plays an important part in determining the
making charges of Gold. As a more strong and durable gold can be moulded
into fine jewellery designs by the craftsmen. The making charges may vary
from state to state and sometimes even jeweller to jeweller. Availability of
craftsmen is one of the major reasons which result in different price of gold in
different states.
b. Wastage Charges – The crafting of Gold requires shaping, cutting, melting; it
leads to some amount of wastage. Traditional jewellers always keep a margin
for the amount of gold wastage which is usually charged from the buyer by
including it in the final price. Although modern machines have a wastage
charge component but it is successful in reducing the wastage cost to a large
extent.