Gold comes in various use-cases. You can own gold in the form of jewellery, coins and bars, or invest in products that give you exposure to price movements in gold. 

Gold prices vary by location. Not just across countries, gold prices change across states and cities within India as well. 

Read on to find out more about why do gold prices differ across cities in India.

Invest in Sovereign Gold Bonds

  • 2.5% interest per annum
  • No capital gains tax on maturity

Factors Influencing Gold Rates in India

1. Transportation Costs

India is one of the world’s largest gold importers. Since gold can be a physical asset, it requires transportation and incurs costs. A majority of the imports are done by air. Subsequently, gold is transported to different interior regions. Transportation costs cover things like fuel, vehicle expenses, personnel expenses etc. Apart from regular transportation costs, gold also requires high security, which adds to the costs. The higher the cost of transporting gold to a particular city or state, the more expensive gold will be in that region.

2. The Quantity of Gold Purchased

The demand for gold varies by city and state. South India accounts for nearly 40% of India’s total gold consumption. The state of Kerala consumes almost a third of gold imported by India. The demand for gold is higher in cities like Chennai, Mumbai, Delhi, and Kolkata than in tier 2 cities. It allows sellers to buy gold in bulk at discounted rates. As a result, they can sell at lower rates.

3. Local Jewellery Associations

Local jewellery or bullion associations play a role in setting the gold prices within a city. For example, The Jewellers and Diamond Traders’ Association, Madras, has a role in setting gold rates in Tamil Nadu. Likewise, there are several other associations across the country, which determine the local gold rates.

4. Purchase Price of Gold

It is the most important factor in influencing gold rates in different cities. Jewellers who have stock purchased at lower prices can charge lower rates. There is also an issue with the source of gold. Officially, gold attracts an import duty of 10% and a 3% tax in India. It is why the gold price is different in different countries as each country has its own duties and taxes.

However, gold smuggling, which is an illegal activity, is a challenge. Those who smuggle gold save on import duties and thus can charge lower rates. One should note that buying gold without a bill encourages gold smuggling and is a criminal act. 

5. Macroeconomic Factors

Broadly, like any asset class, gold prices are affected by supply and demand. As the demand for gold goes up, gold prices increase and vice versa. Several macroeconomic factors affect the demand for gold. For example, in times of economic uncertainty, the demand for gold increases as people are looking to invest in a safe asset class. 

Rising inflation decreases the value of money and makes gold more attractive than cash. Increasing interest rates incentivize people to invest in fixed income assets and reduce the demand for gold, which doesn’t provide any income. Monsoon is also a factor influencing gold rates. A good monsoon increases the demand for gold.

Key Takeaways

  • At a macroeconomic level, gold prices are influenced by supply and demand. The demand, and consequently the prices, are high during times of economic uncertainty. In such times, people prefer to invest in safe assets, such as gold.
  •  At a state level, gold prices are determined by the purchase price of gold, transportation costs, the quantity of gold purchased, and local jewellery associations.
  • Gold prices vary by state, and it is not possible to single out any one state as having the cheapest gold rates.

Why gold rates different in India – FAQs

  • Which state in India has the cheapest gold rate?

Based on the explanation above of why the gold rate is different in different states, it is impossible to single out any Indian state where gold is the cheapest. A state may have the most affordable gold rate today, but things may change in the future due to any of the factors mentioned above.

  • How does the pricing of digital gold rates work?

Digital gold is free from many of the factors that cause gold prices to vary. For example, digital gold does not involve transportation costs. Also, digital gold is free from the influence of jewellery associations. Digital gold bought through Groww involves a 3% GST.