From geopolitical shocks to market reactions, July 2024 has been a rollercoaster for precious metals, with gold and silver prices swaying under the weight of political drama and economic speculation. Sanjiv Arole reports.
World War I was said to have been sparked off by a single bullet fired by a Serbian patriot that assassinated Archduke Franz Ferdinand of Austria on 28th June, 1914 in the city of Sarajevo. More than a hundred years later on 13th July, 2024, a 20-year-old nearly assassinated former US president Donald Trump at an election rally at Butler, Pennsylvania. Although it is not likely to culminate into any World War in the foreseeable future, it may have possibly been the starting point of another Trump presidency post the November presidential elections. For, though the bullet was fired at Trump it has already claimed its first victim in President Joe Biden as he withdrew from the November elections.
Probably, Donald Trump already has taken his ascent to the White House for granted as he literally ordered US Fed chief, Jerome Powell, not to cut interest rates till after the presidential elections in November. Since US interest rates and gold have a tumultuous relationship over the last two years as high interest rates have been the bane for gold prices. This, in turn, could have widespread repercussions on the rest of precious metals basket for remainder of the year.
July has been a tumultuous month so far for the precious metals. In the first week, palladium surprised all with a sprint past $1,000 per ounce and even relegating platinum below its price for a few days (4-5 days). Platinum, of the notorious platinum alloy in India with its very high gold content, recovered from the setback and regained its pre-imminent position vis-à-vis palladium and is currently closer to $950 per ounce, while palladium is struggling below the $900 per ounce mark.
Gold once again crossed the $2,400 per ounce mark and even scaled another fresh all-time high of $2,484 per ounce on the 17th of July, but went below $2,400 per ounce after Trump’s warning to the US Fed. Silver too could not pass through the $31.30 per ounce barrier and dived even below the $28 per ounce level. The Israeli bombing of Yemen and the forced change in democratic candidate after Joe Biden’s withdrawal from the presidential race could not give a boost to gold and silver.
US Fed chief, Jerome Powell, has for long linked US inflation target of 2% with any possible interest rate cut. Now, with US CPI inflation declining by 0.1% to its lowest level in more than 3 years in June 2024 and with its core inflation increase at around 2.6% in May 2024, the stage seems set for interest rate cuts later in year.
Buoyed by these encouraging numbers and the spate of interest rate cuts across the globe as well as the state of the US economy things appear to be bright for possible rate cuts at least by September 2024. Unless, there is any major shift on the inflation front in the US and cause interest rates to stay high in the near future. For, any delay on rate cuts could increase chances of a slowdown as well as recession in the USA.
Therefore, expecting interest rate cuts in the second half of the year, gold swiftly scaled its previous peak of around $2,448 per ounce and spectacularly rose a new all-time high of $2,484 per ounce on 13th July boosted in part by that single bullet fired at Donald Trump. However, in spite of Israeli bombing of Yemen gold steeply fell to below $2,400 per ounce mark after Trump warned the US Fed chief on any rate before the November elections.
Then, easing of geo-political tensions or rather no fresh disturbances across the globe saw the gold price give way and decline rapidly to below $2,400 per ounce despite a brief recovery over $2,420 per ounce on 24th July 2024. The Federal Open Market Committee (FOMC) meeting on 30-31 July, 2024 could well precipitate matters on the interest rate front. The US Fed could even spring a surprise by a rate cut for the first time since March 2020.
One of the biggest events during the ongoing month was the Indian Budget on 23rd July 2024. It was not only a domestic event but viewed with interest globally. Now, almost all trade bodies without any exception before every Union Budget make a fervent representation/demand/plea to the Union Finance Minister to cut import duty on gold as well as silver. Not surprisingly, this plea has not been entertained by the Finance Ministry almost every time.
Even when it was cut, the final outcome was made revenue-neutral by levying another duty or cess. However, this time the FM sprung a surprise by cutting basic import plus cess on gold and silver to 6% from 15% and on platinum to 6.4%. So far, no additional cess has been levied and it seems that import duty has indeed been reduced without any hidden rise in cess or any other levy on gold and silver.
It is well known that the RBI has in the last couple of years increased its gold reserves to around 822 tonnes by March end 2024. Is the government seeing RBI’s wisdom in increasing its gold reserves and therefore encouraging its citizens to add gold to their investment portfolio? For, successive governments have always tried to curb consumption of gold as it viewed gold as a dead asset. Has the government changed its stance or is there more to the reduction in import duty on gold, silver and platinum?
Perhaps, the mandarins of North Block have realised that high import duty not only encourages smuggling, but it also pushes a section of the trade underground and hurt the economy far more than just loss due to duty reduction. Whatever may be compulsions to reduce the import duty on precious metals it is great news for investors in gold. Even though dealers and some big retailers have been saddled with high-cost inventory held prior to the duty reduction. It could well be that the reduction could be to help run the IIBX more transparently or help in negotiating future FTAs with Europe, UK, etc. However, the hidden fear within the industry is that GST on gold and silver could be increased from 3% to 12%, thereby making it revenue-neutral to the exchequer at large.
But, if things remain the same with no increase in GST, one could see a surge in demand for gold from investors as well as consumers of jewellery. However, a rise in GST on gold cannot be ruled out. For, by reducing the basic import duty from 10% to 5% and AIDC (agricultural Infrastructural & development cess from 5% to 1%, the FM has sought target several birds in a singular swift move.
In the first instance, lowering of customs duty to 6% (including the cess) removes the incentive for smuggling almost totally. At the same time it also tackles the growing menace of platinum alloy imports to a great extent. Now, import of platinum alloy with only 2% platinum and the rest being gold was an anomaly that remained as the platinum price was 2.5 times of gold when this was permitted well before the turn of the century. Currently, with the gold price being more than twice that of platinum, the situation has reversed and needs urgent rectification. The import duty cut addresses that issue as well. Not only that, this could regularise imports from UAE under CEPA as well. It could also incentivise acceleration towards more of India’s gold imports through the IIBX and bringing greater transparency of gold and silver imports into the country.
Then, with most imports of gold and silver becoming official through the official channels (less of smuggling), it would be very difficult for retailers as there would be no real incentive to sell gold and silver jewellery, coins, articles, etc., by avoiding GST. So, even if GST were to be increased by even 9% to make the whole exercise revenue-neutral for the exchequer, the retailers and others in the gems & jewellery industry would have hardly any room to manoeuvre to avoid GST. It remains to be seen if the FM tinkers with GST rates to negate the loss to the exchequer due to reduction in import duty or if the GST increase on gold and silver left unchanged or show only a marginal rise.
Meanwhile, gold, silver and the PGMs were seemingly spiralled out of control since late Wednesday and Thursday in the current week (24th-25th July) as gold from around $2,420 per ounce to below $2,360 per ounce, silver too declined below $27.60 per ounce. Currently, gold is around $2,369 per ounce and silver around $27.68 per ounce (morning of Friday, 26th July, 2024). Platinum is struggling around $932-$942 per ounce while palladium is languishing in the $891-931 per ounce region. Some reports suggest a global meltdown led by Chinese traders who offloaded riskier assets causing a sell-off in gold. Gold bugs/bulls are a trifle worried of the Chinese as, just over a month ago, The Peoples Bank of China (PBOC) had then put a pause in its purchases of gold. Adding to the gold bugs/bulls worry is that PBOC has not yet resumed their gold purchases.
Finally, gold eagerly awaits the US Fed to announce its roadmap for interest rate cuts over the near to medium term. US economic data is being scrutinised for clues on inflation and the ultimate rate cut decision. It is no longer if, but when? A recent report from the World Gold Council on impact of US elections on gold can best be summed up briefly. US elections generally do not affect gold and are neutral to anyone coming to power. Geo-political tensions have far greater effect on gold than US elections. A caveat though; the Trump administration is perceived to be toxic, unpredictable and inconsistent than any other administration, be it Democrat or Republican! That is only likely to benefit gold. Donald Trump wants no interest rate cuts till after the presidential elections in November. Does he have locus standi in this case? Will Jerome Powell oblige or make the interest rate cut as is his wont? Or will Powell announce a surprise in the FOMC meeting on 30-31 July and bite the bullet and announce a rate cut? Or will there be a double rate cut in September? Fingers crossed!