Domestic gold prices surge 10% amid global rally and central bank buying

Domestic gold prices in India have surged by 10% year-to-date, closely following a global rally in gold prices, which have increased by 18% over the same period. This upward trend is largely attributed to robust central bank purchases, heightened geopolitical risks, and growing expectations of a potential monetary policy shift by the US Federal Reserve, according to the latest report from the World Gold Council.

The reduction in import duties has further spurred gold demand across India. Insights from the recent India International Jewellery Show reveal a substantial increase in order bookings from retailers, particularly in anticipation of the upcoming festive and wedding seasons. Manufacturers report that in some cases, order volumes have reached levels not seen in several years, reflecting strong buying interest among both jewellery retailers and consumers.

The trend in bar and coin purchases remains strong, with consumers and jewellers alike taking advantage of the more favorable prices to stock up for future needs. Historical trends suggest that Indian consumer demand, including both jewellery and bar and coin purchases, could see an additional 50 tonnes or more in the second half of 2024. This expected increase is driven by a combination of attractive pricing and a gradual alignment of local prices with international rates.

In a notable market shift, domestic gold prices, which had been trading at a discount to international prices for five consecutive months, have now begun trading at a premium following the Union Budget announcement.

In July, the discount reached a peak of around USD 80 per ounce due to subdued demand and increased gold supply through various preferential trade agreements and unofficial channels. However, wholesalers, who had previously purchased inventory under the old customs duty regime, began selling gold at a premium to offset losses, supported by rising consumer demand.

While premiums have recently moderated from USD 28 per ounce to around USD 5 per ounce, this change highlights the shifting market sentiment influenced by rising international gold prices and potential inventory valuation adjustments.

The Union Budget's introduction of a reduced long-term investment holding period and lower tax rates has also made gold ETFs a more attractive investment option. Data from the Association of Mutual Funds in India (AMFI) shows that net inflows into gold ETFs in July reached Rs 13.4 billion (approximately USD 160 million), the highest monthly inflows since February 2020 and an 84% increase compared to June 2024.

Despite these inflows, the total assets under management (AUM) for Indian gold ETFs grew marginally by 0.3% from the previous month, reaching Rs 345 billion (USD 4.1 billion). This modest increase can be attributed to the 8% fall in domestic gold prices following the import duty reduction. Year-to-date, net inflows into Indian gold ETFs have totaled Rs 45 billion (USD 543 million), with total AUM rising by 48% from a year ago.

The Reserve Bank of India (RBI) has continued its gold purchasing trend, although at a slower pace following a significant increase in June, when purchases reached 9.3 tonnes—the highest monthly total in nearly two years. So far this year, the RBI's gold acquisitions have totaled 44.3 tonnes, surpassing the total purchases of the past two years combined. The RBI's gold reserves now stand at a record 849 tonnes, representing 8.8% of total foreign reserves, up from 7.5% a year ago.

In July, gold imports remained steady at USD 3.1 billion, maintaining the stable trend observed over the previous three months. Between April and July, imports averaged USD 3.2 billion, with volumes ranging between 43 and 47 tonnes during this period. The gold import bill for July 2024 was 11% lower than the previous year, with an estimated 26% decrease in volume terms to around 47 tonnes.

Despite the surge in international gold prices, domestic gold prices in India have seen a notable decline, primarily due to the 9% reduction in import duties announced in the Union Budget 2024-25. This policy change has led to a 6% decrease in the landed cost of gold, significantly impacting domestic market dynamics.