Why Analysts Want You to Stop Buying Gold

The affinity for gold among Indians is well-known. Gold prices are tracked religiously in many households across the country and people tend to buy jewellery whenever prices dip for auspicious events months in advance.

But there's a case for holding on to gold purchases ahead of the Budget later this month, analysts say. That's because of the buzz that Finance Minister Arun Jaitley may slash import duty on gold in the forthcoming Budget, analysts say. Custom duty on gold has been at a record 10 per cent since 2013.

Vikas Vaid, head of commodities and currency at Prabhudas Lilladher, said there are strong expectations of a duty cut in the Budget.

The duty has been kept at a record high to dissuade gold imports so that the country could save precious foreign exchange; India is the biggest importer of the yellow metal in the world. But since the last Budget in July 2014, the macroeconomic situation has improved dramatically.

Forex reserves are at a record high and the rupee is relatively stable, which gives the government the headroom to cut duty, analysts say.

The expectations of a duty cut have gone up after the Reserve Bank made importing the yellow metal easier in a series of steps.

But not all analysts are hopeful of a duty cut on February 28, when Budget will be announced.

Anand James of Geojit BNP Paribas Financial Services says a duty cut may happen, but not in the Budget. The government may give some relief to the industry later in the year, he said.

A duty cut would result in a drop in gold and jewellery prices. Naveen Mathur of Angel Commodities said, "If import duty on gold is cut, prices will come down in India to the extent of reduction in the duty."

Outlook on Gold Prices

Gold prices are already under pressure because of the huge liquidity in international markets. 2013 marked the big reversal for gold, as prices crashed by 28 per cent in first drop in 13 years. In 2014, gold declined by 1.5 per cent. Since peaking at near Rs 33,000 levels per 10 grams in 2012, spot gold prices are hovering around Rs 27,300 levels currently.

Angel Broking expects gold prices to remain weak this year on apprehensions of a rise in US interest rates. "MCX Gold (current prices for April delivery at Rs 26,367) prices are likely to edge lower towards Rs 24,500/10 gm mark in 2015. US economy is growing and this might lead the Federal Reserve to raise the interest rates which can put pressure on gold prices," Mr Mathur said.