Rs 10.7 lakh crore gone in one day: Will you still buy gold after Nirmala Sitharaman's duty chop?

The Union Budget 2024's surprise cut in gold customs duty triggered a dramatic market upheaval. Gold prices plummeted by over five percent in a single day, erasing around Rs 10.7 lakh crore in value. This unprecedented drop marked the sixth largest wealth erosion in Indian market history, surpassing the volatility often seen in equity markets.

Jateen Trivedi, VP Research Analyst - Commodity and Currency at LKP Securities, said, "Gold prices witnessed a major setback due to pressure from Comex, as Comex Gold fell below $2,375, down from $2,409. Consequently, MCX Gold saw a sharp correction of Rs 1,100, settling at Rs 67,850. The pressure is attributed to ongoing profit booking, as the anticipated September rate cut had been priced in. However, there is a high possibility that it could be a one-time cut before a pause, especially with the upcoming US elections in November 2024. Gold will now take cues from the Fed's policy review on 31 July."

Prithviraj Kothari, Managing Director of RiddhiSiddhi Bullions Limited (RSBL) and IBJA National Chief, said, "India attracted 15% Import duty and Agriculture cess earlier on Gold and Silver, which was cut to 6% in this union budget. As India imports all its gold to fulfil its 800 tonnes of requirement every year, domestic gold prices have become 9% cheaper after the budget announcement."

Gold prices on MCX have hit a three-month low of Rs 67,700, down from a high of Rs 74,700 on July 17, 2024. This sharp decline can be attributed to two key factors:

Custom Duty Cut: The announcement of a cut in customs duty led to an immediate price drop of 6% on July 23, 2024.

Comex Gold Decline: Comex gold prices have been falling consistently, dropping from $2,480 to $2,360 over seven trading sessions. This decline is due to increased safe-haven demand for the Japanese yen amid global market instability and speculation over a potential interest rate hike by the Bank of Japan, benefiting the yen.

While there's always the potential for high returns, it's crucial to approach investments with a long-term perspective and a solid understanding of your risk tolerance.

Trivedi added, "The current price drop presents a strategic opportunity to invest in gold and silver. Investors should consider making lump sum purchases now, as future GST implementation on these metals could lead to higher prices. Additionally, US interest rates are expected to potentially reverse direction starting in September, which could trigger renewed buying in precious metals. This makes the current period an attractive entry point for positional investors looking for long-term gains."

However, investing in gold should be done based on your financial goals and liquidity requirements. Adhil Shetty, CEO of BankBazaar.com, said, “As gold prices trend lower, it may be an opportune time to invest your money in these precious metals, but ensure that your investment exposure is defined by your actual financial needs and not sentiments.”

“If you do plan to invest, explore sovereign gold bonds (SGBs), gold ETFs, etc. In view of the ongoing economic uncertainties, exposing a portion of your portfolio to precious metals could provide stability. However, keep your exposure limited to up to 10% and diversify with other instruments for potential gains.”

Sovereign Gold Bonds, their price determined based on prevailing gold prices, may see returns influenced by the recent customs duty reduction.

With the festive season approaching, gold prices may see an uptick, impacting overall returns from a long-term perspective. Following the revised taxation treatment, the holding period for Gold ETFs is now 24 months. Previously, gains from gold ETFs were added to income and taxed as per the income slab. Now, they will be taxed as per STCG and LTCG rates, which are 20% and 12.5%, respectively.

For gold and silver prices to reach or surpass their all-time highs, several factors need to align:

• Interest rate cycles: A global shift towards lowering interest rates would infuse liquidity, likely weakening the US dollar and positively impacting gold prices.
• Central bank purchases: Increased gold buying by central banks would further support price increases.

Trivedi noted, "Currently, Comex gold prices are about 5% below their all-time highs, while in India, adjusted for duty changes, prices need to rally approximately 10%. Given the substantial run-up in 2024 from Rs 63,000 to Rs 74,500, reaching new highs will take time. We can expect gold prices to approach or achieve all-time highs by the end of the year or by March 2025, provided the global economic conditions are favorable."

"We have seen Indian investors and gold consumers rushing to buy gold and silver as prices are 10% cheaper in one week. This is the right time to buy gold as downside risk is limited to just 2-3%, while upside can be 8-10% in the next 5 to 6 months on strong fundamentals," said Kothari.