Look after! Gold, silver on MCX, ETFs trading at a premium to international rates

Precious metals, gold and silver, are trading at abnormally high premiums to international benchmarks in India as traders, both on MCX and ETFs, are trading on rumors about the possibility of a possible hike in customs duties in the upcoming Union Budget, which will be presented in Parliament on February 1.The premium spike, which exceeds Rs 30,000 per kg for silver and 3-4% for gold, marks a sharp deviation from the typical minimum spread between Multi Commodity Exchange (MCX) and COMEX prices, signaling widespread market fear over possible policy action.

“The premium in the Indian market is abnormally high this time as the market is expecting that there may be an excise hike in the budget. Hence, the premium is increasing,” Manoj Kumar Jain, Director and Head of Commodity and Currency Research at Prithvi Finmart told ET.The rise comes against the backdrop of dramatic price movements, with MCX gold futures trading around 5% higher at Rs 1,57,750 in February at 5 p.m., while March silver futures rose 3% to Rs 3,33,672. Gold ETFs posted even sharper gains: Gold BeES ETF shot up 7.6%, Zerodha Gold ETF soared 9.6% higher and Nippon India Silver ETF climbed 4.8%.

The abnormal premium causes technical dislocations in arbitrage transactions. “International traders also engage in arbitrage between COMEX and MCX. Normally, international traders are long on COMEX and short on MCX. As the price rises, the spread widens and they incur losses. So there is a technical reason for this premium too,” Jain explains.

Speculation centers on whether the government could reverse its July 2024 decision to cut customs duties on gold and silver from 15% to 6%, a move initially aimed at supporting the gems and jewelery sector and curb smuggling.

“Now, rising gold prices have a direct impact on the depreciation of the rupee. The government could increase the duty to protect the depreciation of the rupee,” Jain added, pointing out the possible policy basis behind the market fear. On Wednesday, the rupee fell by 67 paise to close at an all-time low of 91.64 (provisional) against the US currency, pressured by continued foreign fund outflows amid heightened uncertainty and risky sentiment in global markets.

Despite the near-term volatility, analysts remain bullish on precious metals for 2026. HDFC Securities noted that “based on fundamental and technical conditions, gold and silver’s long-term bullish trend appears intact and still has the potential to deliver extraordinary returns in the year 2026.”

However, the brokerage warned that “if the government cuts import duties on gold and silver in the upcoming budget, domestic prices could come under pressure and act as a headwind for domestic prices in the near term.”

Given the high silver premiums, Jain advised caution. “Given the sharp rise in prices, we have told customers to avoid silver. It is better to have gold. Investors who have riskier assets in their portfolios should invest more in gold,” he said.

HDFC Securities recommended investors invest up to 10% of their portfolio in precious metals, with the option to increase exposure based on individual risk appetite. This suggests that ETFs are the preferred vehicle for gaining exposure to this asset class.

(Disclaimer: Recommendations, suggestions, views and expert opinions are their own. These do not represent the views of the Economic Times)