The Union Budget 2024’s unexpected cut in gold customs duty has triggered significant market turmoil. Gold prices plunged over five percent in a single day, wiping out approximately Rs 10.7 lakh crore in value. This dramatic drop represents the sixth largest wealth erosion in Indian market history, surpassing the volatility typically seen in equity markets.
Jateen Trivedi, VP Research Analyst – Commodity and Currency at LKP Securities, explained, “Gold prices faced major pressure from Comex, as Comex Gold dropped below $2,375, down from $2,409. Consequently, MCX Gold saw a sharp correction of Rs 1,100, settling at Rs 67,850. This pressure is due to ongoing profit booking, with the anticipated September rate cut already priced in. However, this may be a one-time cut before a pause, especially with the US elections in November 2024. Gold will now take cues from the Fed’s policy review on July 31.”
Gold prices on MCX hit a three-month low of Rs 67,700, down from a high of Rs 74,700 on July 17, 2024. This decline is attributed to:
- Customs Duty Cut: The announcement led to an immediate 6% price drop on July 23, 2024.
- Comex Gold Decline: Comex gold prices have consistently fallen, from $2,480 to $2,360 over seven trading sessions. Increased demand for the Japanese yen amid global market instability and speculation over a potential interest rate hike by the Bank of Japan have driven this decline.
Trivedi suggests that the current price drop presents a strategic opportunity to invest in gold and silver, especially before potential GST implementation on these metals, which could raise prices. With US interest rates possibly reversing in September, this period may be an attractive entry point for long-term investors.
However, investments in gold should align with financial goals and liquidity needs. Adhil Shetty, CEO of BankBazaar.com, advises, “As gold prices trend lower, it may be a good time to invest, but ensure your investment exposure is defined by your financial needs and not sentiments.”
Exploring sovereign gold bonds (SGBs) and gold ETFs can provide stability amidst economic uncertainties. Limiting exposure to precious metals to up to 10% of your portfolio and diversifying with other instruments can optimize potential gains. The festive season may see an uptick in gold prices, affecting long-term returns.
Sovereign Gold Bonds, whose price is based on prevailing gold prices, may see returns influenced by the recent customs duty reduction. The revised taxation treatment for Gold ETFs now taxes gain as per STCG and LTCG rates, providing a more favourable tax scenario for investors.
