According to the World Gold Council, global gold prices have risen 18 per cent so far this year, driven by a 10 per cent rise in domestic gold prices, driven by strong buying by central banks, rising geopolitical risks and growing expectations of a monetary policy change from the US Federal Reserve.
The reduction in import duty has led to a revival in the demand for gold across India. Reports from the recently concluded India International Jewellery Show indicate that order bookings from retailers have increased significantly, especially in preparation for the upcoming festive and wedding season.
Manufacturers have found that in some cases, orders have reached levels not seen in many years, reflecting strong buying interest among jewellery retailers and consumers. Bar and coin buying also remains strong, with both consumers and jewellery retailers taking advantage of more attractive prices to stock up for future manufacturing needs.
Historical analysis suggests that Indian consumer demand, which includes demand for jewellery and bars and coins, could see an additional 50 tonnes or more in the second half of 2024. This potential growth is driven by a combination of an initial increase in consumer appetite due to more attractive prices and the long-term alignment of local prices with international rates.
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A notable change has been that domestic gold prices, which were trading at a discount to international prices for five consecutive months, have now started trading at a premium after the announcement of the Union Budget.
The discount had widened sharply in July, hitting a high of nearly $80 an ounce in the third week of the month, driven by weak demand and increased gold supply through various preferential trade agreements and unofficial channels.
However, wholesalers began selling gold at prices higher than landed cost to recoup their losses on inventory purchased under the old customs regime, further supported by increased consumer demand. While the premium has softened recently, from $28 an ounce to around $5 an ounce, the move highlights changing market sentiment and the impact of rising international gold prices and potential inventory valuation adjustments.
The changes made in the Union Budget, including a reduction in long-term investment holding period and lower tax rates, have made gold ETFs a more attractive investment option.
Data from the Association of Mutual Funds in India (AMFI) showed net inflows into gold ETFs in July at ₹13.4 billion (about $160 million), marking the highest monthly inflows since February 2020 and an 84 per cent increase compared to June 2024.
Despite these inflows, total assets under management (AUM) for Indian gold ETFs rose marginally by 0.3 per cent to ₹345 billion ($4.1 billion) over the previous month. This marginal increase can be attributed to an 8 per cent drop in domestic gold prices following a reduction in import duty.
Total net inflows into Indian gold ETFs have been ₹45 billion ($543 million) so far this year, with total AUM up 48 per cent from a year ago.
The Reserve Bank of India (RBI) has continued its trend of buying gold, although at a slower pace after a significant increase in June, when purchases reached 9.3 tonnes – the highest monthly total in nearly two years. Year-to-date, RBI’s gold acquisitions total 44.3 tonnes, surpassing the combined total of the previous two years.
RBI’s gold reserves have now reached a record high of 849 tonnes, accounting for 8.8 per cent of the total foreign reserves, as against 7.5 per cent a year ago.
Gold imports remained steady at $3.1 billion in July, maintaining the steady trend seen over the past three months. Between April and July, imports averaged $3.2 billion, with volumes ranging between 43 and 47 tonnes during the period.
The gold import bill for July 2024 was 11 per cent lower than the previous year, while in terms of quantity it was estimated to decline by 26 per cent to about 47 tonnes.
Despite the surge in international gold prices, domestic gold prices in India have witnessed a significant drop, primarily due to the 9 per cent cut in import duty announced in the Union Budget 2024-25. This policy change has led to a 6 per cent reduction in the landed cost of gold, reflecting a change in the dynamics of the domestic gold market.
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