In a surprising turn of events, gold prices have sharply corrected by 7 percent or Rs 5,000 per 10 grams in the local markets following the government’s recent decision to slash the basic customs duty on gold. This significant price drop is seen as a boon for retail investors, encouraging increased investment in the precious metal, both as a commodity and as a financial asset.
Analysts have noted that the customs duty cut has made gold imports considerably cheaper. This move is expected to curb the rampant issue of gold smuggling and foster growth within the organized jewelry sector. “The cut in basic customs duty on gold prices makes the yellow metal cheaper. While this can lead to weaker market sentiments due to the sudden change, retail investors stand to benefit from the new, more attractive pricing for gold,” said Jateen Trivedi, VP Research Analyst of Commodity and Currency at LKP Securities.
Krishnan R, Director & CEO of Unimoni Financial Services, echoed these sentiments, stating that lower costs will encourage more people to invest in gold as it is often seen as a hedge against inflation and currency devaluation.
Following Finance Minister Nirmala Sitharaman’s Budget announcement that the government has slashed basic customs duties on gold and silver from 15 percent to 6 percent, gold prices fell by Rs 3,350 to Rs 72,300 per 10 grams in the national capital on Tuesday. The precious metal’s prices continued their downtrend, plunging by Rs 650 on Wednesday and nosediving by Rs 1,000 on Thursday to settle at Rs 70,650 per 10 grams, according to the All India Sarafa Association.
In the past three sessions since July 23, the yellow metal has declined by Rs 5,000 per 10 grams or 7.1 percent. Gold of 99.5 percent purity also saw a reduction, declining by Rs 1,000 to Rs 70,300 per 10 grams on Thursday.
The decline in gold prices has spurred demand for jewelry among consumers, who are flocking to jewelry outlets to take advantage of the lower prices. “The reduction in basic customs duties has spurred the demand for jewelry in the domestic markets. This will act as a sales booster for jewelers before the festive season, encouraging fresh buying by consumers due to lower prices,” said Balram Garg, Managing Director of PC Jeweller.
The reduction in gold prices is particularly beneficial for domestic jewelers, especially those in the organized sector. MP Ahammed, Chairman of Malabar Group, highlighted that the reduction has been a long-standing demand of traders in the gold sector. The move is expected to curb gold smuggling, which poses a substantial threat to the Indian economy. “With the new rates, the duty on one kilogram of gold drops from Rs 9.82 lakh to Rs 3.93 lakh, making smuggling less attractive and more manageable. This will help dismantle the mafia chain involved in smuggling, leading to growth in the organized jewelry sector and increasing government revenue through GST and income tax,” Ahammed said.
In futures trading on the Multi Commodity Exchange (MCX), gold futures partially recovered after three days of decline. The most traded August contract jumped Rs 288 to Rs 67,750 per 10 grams on the MCX, having settled at Rs 67,462 per 10 grams in the previous session on Thursday. However, silver contracts for September delivery continued their downward trend, declining by Rs 241 to Rs 81,090 per kg from Rs 81,331 per kg in the previous session.
Market experts anticipate that bullion prices will stabilize once there is clarity on several economic and political factors, such as potential interest rate cuts by the US Federal Reserve. “Stability in gold prices is expected once there is clarity on several economic and political factors including potential interest rate cuts in the US and India, and the outcome of the US Presidential elections will provide a clear direction for gold prices,” Trivedi added.
As the festive season approaches, the significant drop in gold prices is likely to benefit consumers and the organized jewelry sector, boosting sales and curbing illegal trade practices.