Papergold Prices Surge on Profit-Taking After Duty Hike

Government Hikes Gold Import Duty Amid Elevated Oil Prices

In a move to conserve precious foreign exchange, the government has increased the gold import duty by a staggering 9% overnight. This decision comes as the country struggles to cope with the economic impact of the ongoing conflict in West Asia, which has driven crude oil prices up 45% to above $107 a barrel.

The hike in gold import duty has been reflected in popular gold exchange-traded funds (ETFs), which closed around 6% higher despite the 9% duty hike effective Wednesday. Gold ETFs and derivatives include the landed price, which factors in the international rate, currency, and the import duty. Gold futures on the Multi Commodity Exchange of India (MCX) were trading up by a similar amount at the time of writing, underscoring a greater proportion of net sellers than buyers in the market to take advantage of the overnight hike in prices.

The price of gold ETFs or even MCX derivatives rose much less than 9%, indicating net selling rather than buying, which would have driven up prices by the extent of the duty hike. For instance, the most popular gold ETF, Nippon India's GoldBees, with assets under management of ₹55,700 crore as of Tuesday, closed up 5.7% per unit at ₹131.74. Similarly, ICICI Pru Gold ETF, SBI's Setfgold, HDFCGold, and Kotak MF's Gold1, with combined assets of ₹89,405 crore, closed between 5.7-5.9% above Tuesday's settlement price.

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On MCX, the active gold futures contract, expiring on 5 June, traded up 5.9% at the time of writing at ₹1.62 lakh per 10 gm. Open interest fell to 8,011 contracts from 9,530 on Tuesday. A rise in prices accompanied by a fall in open interest suggests long liquidation rather than short covering, which would have lifted prices above 6%.

Profit booking has limited the rally to 6% on derivatives despite the huge overnight duty hike. Even those holding sovereign gold bonds (SGBs) who can redeem them prematurely after 13 May will benefit hugely from the price rise. The SGB scheme commenced in November 2015 and was discontinued after February 2024.

The duty hike comes days after Prime Minister Narendra Modi urged citizens to defer gold purchases for a year to help cushion the economic impact of the conflict. India imports about 700 tonnes of gold annually, putting pressure on the current account deficit (CAD) at a time when the conflict has driven crude oil prices up 45% to above $107 a barrel. CAD reflects the gap that arises when a country imports more goods and services than it exports.

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India posted a trade deficit of $312.58 billion in the previous fiscal year. Asked whether demand would take a hit due to the duty hike, Surendra Mehta, national president of the India Bullion and Jewellers Association (IBJA), said the dent in demand could be to the tune of 5-10%, as factors other than the duty hike also play a role in gold demand.

Gold has outperformed benchmark stock indices by absolute returns at the one-, three-, and five-year horizons. For instance, while Nifty has generated a five-year return of 59.31%, GoldBees ETF has given a whopping 218% return. In the past one year, through Wednesday, Nifty has given a negative return of 4.74% based on Wednesday's closing of 23,412.6, while GoldBees generated an absolute return of 66.69% due initially to the impact of Trumpian tariffs and this year to the West Asia war.