Why is gold so valuable and expensive?

What makes gold so valuable?

Gold has long been one of the most popular investment options, but its value goes beyond being an investment instrument. It holds psychological value as well, and for good reasons. Here are some reasons why gold is so valuable despite market fluctuations:

Scarcity

Gold is one of the most precious natural resources formed over millions of years, and discoveries are not only rare but also very complex and expensive. Since the supply is restricted, its rarity plays a major role in maintaining the value.

Durability

You must have noticed how gold ornaments made even centuries ago still retain their shine and value. This durability makes gold ideal for long-term storage and preservation of wealth, making it a reliable and valuable asset.

High demand

Gold is one of the rare metals that is consistently in demand, whether it is for making jewellery, investment, or even industrial uses such as electronic and medical devices. The high demand also acts as one of the key reasons for maintaining its value.

Worldwide acceptance

They say, “Gold is valuable because people all across the globe believe it to be”. Gold is recognised and valued across all countries and cultures. This global acceptance makes it independent of any single economy or currency.

Liquidity

Since gold can be easily converted into cash, it becomes a convenient and flexible financial instrument as well.

How is gold price determined?

Gold prices are determined by several factors, ranging from policies of the central bank to investor sentiment and industrial demand. Understanding the key drivers behind gold prices is crucial if you are planning to invest in gold:

The global benchmark

Gold prices are set in the international market. The global benchmark for gold is established in London, which is considered the world’s largest physical hub for precious metals.

Did you know that the “London Fix” is one of the key drivers for the global supply change? Here, LBMA gold prices are determined twice daily through an electronic auction with 15 major market-making banks. 2

Currency movements

You might already know that gold is traded globally in US dollars. Due to this, any fluctuation in the currency exchange rate impacts its price in other countries. For instance, when the Indian rupee becomes weak, gold becomes more expensive in India.

Inflation and interest rates

Since gold is seen as a promising hedge against inflation, investors shift towards gold, which increases its demand and pushes the prices even higher. Every time inflation rises or interest rates fall, gold demand tends to increase.

Government policies

Government policy, such as GST, import duties, and other regulations, also impacts gold prices. For instance, higher taxes increase the cost for consumers, while policy changes can also influence both supply and demand dynamics.

Demand and supply

The basic economic principle of supply and demand also plays a key role. Whenever there is a high demand for gold, its price tends to increase and vice versa.

Gold demand breakdown: India vs global

Although gold is a valuable asset all around the globe, there is a difference in its demand in India and other countries. Let’s understand the gold demand in India Vs other countries in detail:

Jewellery driven market

Demand for gold in India is largely driven by gold jewellery, especially around festivals and weddings. According to 2024 reports, India was the largest consumer of gold jewellery, reaching more than 563 tonnes with annual demand valued at ₹3.6 crores.3

Investment demand

Globally, investors are more driven towards gold investments in instruments like ETFs, coins, and bars as a hedge against inflation and economic instability.

With the recent gold price rise, though, the Indian market has also seen a jump of 17% to 280.4 tonnes in 2024 in demand for gold bars and coins. These trends indicate a shift towards gold demand in India as a lucrative investment.4

Central bank purchases

Globally, central banks are major buyers of gold as it helps them diversify reserves and also reduce their reliance on currencies like the US dollar. In slight contrast, India’s gold demand is largely driven by households and jewellery consumption, with a relatively smaller contribution from Central Bank buying.

Did you know that Indian households hold around 30,000 tonnes cumulatively in gold, which is more than the size of the country’s GDP? 5

Reasons why gold is so valuable and expensive

There is a close relationship between why gold is expensive and why gold is valuable. Here are three reasons that make gold both valuable and expensive:

Cultural and emotional value

In India, gold is deeply rooted in traditions and social customs, as it is considered auspicious. The strong emotional and cultural attachment ensures steady, predictable demand, regardless of price fluctuations.

Demand across various sectors

The demand for gold is not limited to one sector. It is used in jewellery, central bank reserves, industries, investment portfolios, and a lot more. The diversified demand base shows that even if one sector closes down, others can sustain the overall demand and support prices.

Hedge against currency inflation

Historically, gold moves inversely to currencies like the US dollar. When currencies lose value, gold prices tend to rise, making it a preferred hedge. This makes gold an important tool for preserving purchasing power over time.

Final words

The strong value and price of gold are the result of a unique combination of scarcity, durability, and consistent global demand. In India, especially, the cultural importance of gold makes it both an emotional and financial asset. By understanding factors that influence its price, you can make more informed decisions and better manage your investment in gold.

If you’re looking to invest in digital gold, you can trust the JioFinance App to help you keep informed and plan better.