February gold 2% cheaper on duty cut hopes

The MCX February gold contract is quoting Rs 510, or 1.8 per cent, lower than the spot market in Mumbai’s Zaveri Bazaar’s Friday closing price of Rs 28,890 per 10 gm on expectations of an import duty cut. 

Futures prices are usually higher than spot prices because these include a cost for carrying forward positions, but the market is expecting the government will lower the import duty on gold. The April contract is trading even lower than the February price.

With declining imports and a virtual collapse of the black economy, the government might bring the gold duty structure in line with the proposed 4-6 per cent goods and services tax rate for precious metals, a trader said. He added a duty cut would also deal a blow to smuggling.

Arbitrage traders, especially those who have ready bullion, prefer to sell in the spot market now and buy futures. When futures used to fetch a premium, they bought in the spot market and sold on the MCX.

The year has begun on a strong note for gold and prices in the international market have risen 4-5 per cent. Prices in India also reflect the market turning from a discount to a marginal premium and a depreciating rupee making gold more lucrative. 

Rising prices have, however, nudged bears to increase their short positions. The open interest in MCX gold futures in January has increased by 23 per cent to 10,213 lots. The long positions of the top 10 players, according to MCX data, were 2,788 lots while the short positions were 5,849 lots, suggesting the market expects the rise in gold prices will not sustain. 

Domestic demand has improved in January, resulting in December’s discount turning to a marginal premium. Globally, gold prices have risen $50 in 2017 to trade at $1,197 an oz.

Investor selling has slowed but has not halted. The US SPDR, the largest gold exchange-traded fund, has seen a fall of 17 tonnes in 2017.