Investors in paper gold have been left reeling after the recent Budget announcement that slashed the import duty on gold from 15% to 6%. This move caused domestic gold prices to plummet by more than 8%, from Rs.74,080 to Rs.68,388 per 10 grams, leaving investors feeling shortchanged as the value of their investments eroded overnight. Gold ETFs and sovereign gold bonds, which track the prices of physical gold, also saw a significant drop of 5-6%. The question on everyone’s mind is whether gold investors have truly been robbed of their gains by the government.
The nine percentage point reduction in the import duty on gold is unprecedented. Kavita Chacko, Research Head, India, World Gold Council, notes that this is the sharpest reduction on record and the lowest since June 2013. While the price of gold crashed due to the duty cut, the impact on gold bond and ETF prices varied. Some gold bonds saw only a marginal 1-3% drop. Mrin Agarwal, Founder Director, Finsafe India, believes that the impact of the duty cut on the value of gold has been exaggerated.
It is essential to view this cut in import duty in the context of the larger picture. This is the first reduction after a prolonged period of steadily increasing import duty on gold over the past 12 years. The duty had risen from 2% in January 2012 to 15% in July 2022, with only one cut in between. Each hike in duty led to a rise in domestic gold prices, benefiting investors. While the recent cut may have caused losses, investors have also gained from previous duty hikes. The changes in import duty are part of the government’s policy framework to manage the country’s current account deficit and curb smuggling of gold.
Chacko mentions that the duty reduction will discourage gold imports through unofficial channels and boost India’s exports of gems and jewellery. Chirag Mehta, CIO, Quantum AMC, explains that the elevated duty structure distorted the market by widening the gap between global and domestic gold prices. The duty cuts were aimed at rectifying this imbalance and supporting India’s exports.
Despite the initial shock to investors, experts believe that gold continues to offer a compelling investment opportunity. Agarwal emphasizes that gold prices are influenced by various factors beyond customs duty, such as international prices, demand-supply dynamics, and exchange rates. Mehta reaffirms that gold remains a valuable portfolio diversifier, store of value, and source of liquidity, providing stability in times of market volatility.
While investors may have experienced a setback in the short term, holding onto gold investments for the long term could help mitigate losses. The recent duty cut should not deter investors from considering gold as a strategic asset in their portfolios. As the market stabilizes and global factors come into play, gold’s intrinsic value and appeal as a safe haven asset are likely to endure.