Gold prices drop by Rs 5,000/10gm post Budget; bring cheers to retail investors

Gold prices have corrected sharply by 7% or Rs 5,000 per 10 grams in the local markets after the government slashed the basic customs duty on gold. Lower costs will encourage more people to invest in the yellow metal, both as a commodity and as a financial asset, experts say. Analysts said customs duty cut has made gold imports cheaper. The move will help curb the rampant issue of gold smuggling, leading to growth in the organised jewellery sector.

"The cut in basic custom 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

Echoing similar sentiments, Krishnan R, Director & CEO of Unimoni Financial Services said lower costs will encourage more people to invest in gold, both as a commodity and as a financial asset, which is often seen as a hedge against inflation and currency devaluation.

Following the budget announcement by finance minister Nirmala Sitharaman that the government has slashed basic customs duties on gold and silver from 15 per cent to 6 per cent, gold prices crashed by Rs 3,350 to Rs 72,300 per 10 grams in the national capital on Tuesday.

The precious metal prices continued the downtrend and plunged by Rs 650 on Wednesday. The yellow metal rates saw another steep fall on Thursday, nosediving by Rs 1,000 to settle at Rs 70,650 per 10 grams, as per the All India Sarafa Association.

After the duty cut, the yellow metal has declined Rs 5,000 per 10 grams or 7.1% in the past three sessions, since July 23 when it had fallen Rs 3,350 to end at Rs 72,300 per kg.

Also, gold of 99.5% purity declined by Rs 1,000 to Rs 70,300 per 10 grams on Thursday. It had also lost ground by Rs 5,000 per 10 grams in the previous three sessions.

On Thursday, silver rates also lost ground by Rs 3,500 per kg to Rs 84,000 per kg. In the past three sessions, the rates of the bright metal fell sharply by Rs 7,000 or 8.3% to Rs 84,000 per kg from Rs 91,000 per kg.

Traders also said that a sharp correction in gold prices have revived the demand for jewellery among consumers as they flocked to jewellery outlets to take advantage of lower prices.

"The reduction in basic custom duties have spurted the demand for jewellery in the domestic markets. Further, this will act as a sales booster for jewellers before the festive seasons, encouraging fresh buying by the consumers due to lower prices," PC Jeweller's Managing Director Balram Garg.

Low gold prices will help domestic jewellers, particularly the organised ones, Garg said.

According to MP Ahammed, Chairman, Malabar Group, the reduction has been a long-standing demand of traders in the gold sector, as it is expected to curb the rampant issue of 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 move will help dismantle the mafia chain involved in smuggling, leading to growth in the organised jewellery sector and increasing government revenue through GST and income tax," Ahammed said.

Meanwhile, in futures trade on the Multi Commodity Exchange (MCX), gold futures have partially recovered on Friday, after three days of slump. The most traded August contract jumped Rs 288 to Rs 67,750 per 10 grams on the MCX. It had settled at Rs 67,462 per 10 grams in the previous session on Thursday.

However, silver contracts for September delivery continued its downward trend by declining Rs 241 to Rs 81,090 per kg. It had closed at Rs 81,331 per kg in the previous session on Thursday.

Experts anticipate stability in bullion prices once there is clarity on several economic and political factors such as interest rate cut 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 said.