Golden blunder or new opportunity ?

Dipankar Jakharia *

After the announcement of the Union Budget on July 23, 2024, gold prices have crashed eight per cent in India. It reached Rs. 68,000 from a high of Rs. 74,000 per ten grams weight. This was also reflected in paper gold and it crashed around five to six per cent.

By paper gold, I mean Sovereign Gold Bond and Gold Exchange Traded Fund (ETF). This is because they keep track of the price of the physical gold and adjust their price accordingly.

Gold investors in India are crying havoc on it and are nervous about the volatility of the precious metal, which was considered as the safest inflation adjusted investment by a retail investor. And they are now uncomfortable about the future prospect of another rate cut and further downfall.

But those who are planning to invest in the precious metal and haven’t done it yet have hit the home run. They instantly got a discount of eight per cent overnight. But before you speculate and increase your blood pressure in the excitement, let us learn, what exactly happened. To understand what happened, you need to go back. You need to go back to 2012, at least in this context.

To understand, one should not see this event in isolation. Let’s go back to 2012. In 2012, the import duty on gold was only two per cent. Except for one year, almost every year it has been steadily increased and it reached 15 per cent in 2022. Now read this carefully:

Every hike in the import duty has resulted in an increase in gold price for an investor. That means, apart from the increase in gold price, as the price of the metal increases globally, in India, investors are reaping the fruit of the increasing import duty as investors.

Let’s take an example. Suppose you had purchased gold jewellery in 2012. Gradually, up to 2022, the import duty increased from two per cent to 15 per cent — that means you have gained a whopping 13 per cent only because of the increase in the import duty. The natural market return is different. This is over and above the natural increase in the price in the international market.

Check out the import duty since 2012:

Date Import duty on Gold
January 16, 2012 2%
March 16, 2012 4%
January 21, 2013 6%
June 5, 2013 8%
August 13, 2013 10%
July 6, 2019 12.88%
February 2, 2021 10.75%
July 1, 2022 15%
July 24, 2024 6%

Now you may ask, why such variables in import duty? This is because we are one of the largest importers of gold in the world. Last year, we stood at the fifth position in import and our main consumption in gold are the retail investors.

The government changes import duty on gold to balance many things in its balance sheet — sometimes to balance current account deficit, sometimes to strengthen the rupee, and maybe this time to lower or stop the smuggling of gold.

What will this do? This will definitely stop or reduce the illegal import of the precious material into India. Secondly, our own jewellery sector may explore ornament export options to other countries as labour is still very cheap here.

Opportunity to invest in some jewellers here? No, not my advice. But a good example in finding an opportunity in a fault line.