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One of the biggest casualties of the US Federal Reserve's decision to taper its quantitative easing programme has been the international gold prices, which have shown a sharp downtrend. This has led to a strange situation in Indian markets as the international prices are going down but the domestic prices still remain near high levels. Consumers in India are not witnessing the same kinds of fall that are actually being seen by investors elsewhere and hence, are wondering about the reasons behind such a situation. The question is whether investors should consider this as an opportunity to invest or actually stay away. Here is a look at the issue in detail.
Cause for difference:
The situation that has been witnessed till now is that while international prices have fallen significantly, the prices in India have gone down relatively less. There are several reasons that are responsible for this particular situation. One is definitely the currency movement, whereby the rupee has weakened and a part of the difference is on account of this. The other one is that there is a 10 per cent import duty that is levied on gold that comes into the country. This becomes another contributor as to why the figure shows a difference in India because the local prices immediately increases by this percentage. Other conditions like restrictions on gold imports and its linkage to exports have virtually stopped the flow of physical gold in the country. This has led to another rise in the value of the gold, as there is a premium that is being realised for this purpose, which is built into the overall price that is being witnessed now.
Elimination:
The moment there is some action that will actually look at reversing the restrictions on gold imports, the premium would start to narrow down. This could happen suddenly or over a period of time, which would actually go on to impact investors who already hold the yellow metal or who have already invested in it at a higher cost. This is significant because the current investors are actually earning a premium compared to what the actual price should be and those who actually want to book the profits can sell the gold and take the money, as this could just be temporary in nature.
New investments:
As far as the situation on new investments is considered, there has to be extreme caution that has to be exercised by investors. The reason behind the purchase is significant in the sense that if this is meant for some use immediately then there is no choice for individuals but to go and actually complete the purchase. There would not be much of a deliberation about the decision making process in this scheme of things as the gold would be used up for the purpose for which it is required. On the other hand, if the gold purchase is meant as an investment then there should be a rethink on this entire issue and the individual should wait for some time before the premium disappears and then make their investment.
The risk is that if there is immediate action that is taken then there could be a sudden erosion in the price, which would impact the value of the investment and hence, this is something that the investor should try and avoid. Also a sudden reversal in the rupee-dollar rate would also lead to a plunge in the prices. As long as the premium conditions persist, it makes sense to stay away from purchasing gold for investment purposes and hence, patience would be something that would turn out to be a virtue.
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