Investors Hold on to Gold ETFs Despite Price Slump After Customs Duty Cut

Investors Hold on to Gold ETFs Despite Price Slump After Customs Duty Cut

Overview

The recent cut in Customs duties on gold, announced in the Union Budget, has led to a noticeable slump in domestic gold prices. Despite this, investors have shown remarkable resilience, holding onto their gold exchange-traded funds (ETFs) without a knee-jerk reaction. Here’s a closer look at how the gold market is adjusting and why investors are maintaining their positions.

Impact of Customs Duty Cut on Gold Prices

Following the Budget announcement, domestic gold prices took a hit, with the net asset value (NAV) of gold ETFs dropping around 5% on Tuesday. The assets under management (AUM) of gold ETFs declined by 5.2%, from Rs 34,868 crore on Monday to Rs 33,155 crore on Tuesday. However, when adjusted for the mark-to-market losses (decline in NAV), the AUM remained largely unaffected.

Investor Behavior and Market Response

Investors have largely avoided panic selling, despite the immediate drop in gold prices. On the National Stock Exchange, gold ETFs were trading at a premium to their NAV by the latter part of the session on Tuesday. For instance, Nippon India ETF Gold BeES, the largest in terms of AUM at Rs 10,941 crore, ended the session at Rs 60.16 per unit, compared to its NAV of Rs 58.62, with volumes swelling from 7.6 million on Monday to 26.8 million on Tuesday.

Expert Opinions

Investment advisors suggest that investors are choosing to hold onto their gold ETFs due to tax implications and the potential for future gains. Vishal Dhawan, founder and CEO of Plan Ahead Wealth Advisors, advises against exiting gold investments solely based on the change in import duty, as doing so could result in significant tax liabilities.

Navneet Damani, Group Senior Vice-President and Head of Commodity and Currency Research at Motilal Oswal Financial Services, points out that the market had already priced in a 2% cut in duties before the Budget announcement. He adds that the reduction in duties from 15% to 6% could boost retail demand and reduce smuggling activities, keeping the outlook on gold positive amid geopolitical tensions and rate-cut expectations by the US Federal Reserve.

Positive Sentiment Despite Volatility

Despite the recent fall due to duty changes, the outlook for gold remains positive. The revised rates set parity for gold at Rs 68,000 and silver at Rs 83,000. Vikas Singh, Managing Director & CEO of MMTC-PAMP, highlights the cultural significance of gold in India, predicting that the duty reduction will drive retail prices down, increase consumption, and contribute to economic growth.

Market Reactions and Future Projections

Jateen Trivedi, VP Research Analyst at LKP Securities, notes that the reduction in import duty has led to a significant drop in gold prices on the MCX. Mahendra Luniya, Chairman & Founder of Vignaharta Gold, believes that lower prices will drive higher consumer demand, benefiting companies through improved sales volumes and profitability.

Conclusion

The recent Customs duty cut on gold has led to a price slump, but investors have shown resilience by holding onto their gold ETFs. The positive outlook on gold, supported by potential increases in retail demand and reduced smuggling, suggests that the market will stabilize. As geopolitical tensions and economic factors continue to influence gold prices, investors remain optimistic about their gold investments.