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What has changed in the gold market?
Tue, 15 Oct Pre-Open

The most critical thing that has changed in gold market is the price of gold itself! And there are multiple reasons for it. To control the current account deficit (CAD), the government decided to increase the import duty on gold. This has led to an increase in price. The rupee depreciation too effectively increased the price of imported gold. Considering the shortage of gold due to imposition of duty, suppliers have started charging a premium. This has led to a further increase in gold price.

Increase in gold price has meant that the price of its derivative products like paper gold has also increased. Take the case of gold exchange traded fund (ETF). Quite a few ETFs are trading at a premium now. This is means that if you buy an ETF worth Rs 1,000, units worth less than Rs 1,000 get credited to your account. Curb on imports has meant that fewer new ETF units are created. As a result, the premium on existing ones has widened.

Another change that has happened in the gold market is the restriction of investment in certain form. For instance, earlier retail investors used to buy gold bars or coins from post offices and banks. However, now they can no longer do so. This means that direct exposure to gold in the form of bars and coins is not permitted. This is being done to rein in CAD. Even jewellers are also becoming reluctant to sell bars and coins. Thus, if one wants exposure to gold, buying jewellery seems to be the only option available at the moment. This is not an option one chooses if they were investing in gold as an investment.

So how does one monetize their gold?

One option for this was to take a loan against it. Gold acts a collateral. However, there have been quite a few restrictions on using it as collateral too. For instance, banks these days don't lend easily against gold coins, gold ETF's or gold mutual funds. Thus, monetizing gold from these forms too has become difficult. Also, lending norms by NBFCs for loan against gold have become stricter.

What next?

However, imposing restrictions on import has opened up a new option in domestic markets. Now, due to scarcity of gold, most jewellers are facing an acute shortage of the raw material. As a result, they are ready to pay a premium to people who are willing to trade their old jewellery. This has given a fillip to the practice of exchanging jewellery for cash.

All in all, restrictions on imports have not only impacted pricing but also the liquidity of gold. Investment restrictions in holding gold in certain forms have also been imposed. While we understand that managing CAD is currently a priority of government, imposing too many restrictions may open gates to black marketing and smuggling of gold. This would not help anyone. Least of all the CAD situation of the government.

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Mar 1, 2021 03:36 PM