Gold has always had a special place within the Indian financial system. Gold not only serves as a store of wealth for investors, but it also holds a special place within the culture of India. Gold plays a major role in weddings, festivals, and long-term wealth creation. However, when investors invest in physical gold, they end up paying a premium over the spot prices. Several factors influence these premiums on physical gold over spot prices.
Investors need to be aware of these underlying factors to make informed decisions when investing in physical gold. Here are three critical factors that influence the premium on physical gold.
Factors driving the premiums on Gold prices
For an investor, it is important to be aware of these factors, as the amount of the premium can have a significant impact on the gold price that is paid for buying physical gold. The price that is ultimately paid for buying physical gold in India depends on:
Import duties & tax on Gold
The major reason for the premium charged on physical gold over spot prices in India is the imposition of tax. India has limited production of its own gold. Therefore, to meet the high demand for gold, India imports a large quantity of gold. Consequently, the government imposes an import duty on the imported gold.
India reduced the import duty on gold from 15% to 6% in 2024. This is the lowest duty over the last 10 years. In addition to the import duty, investors have to pay 3% Goods and Services Tax (GST) while purchasing physical gold, which includes gold jewellery, gold coins, or gold bars.
This leads to the gold price rising above the spot gold price. Therefore, the actual gold purchase cost that investors have to pay to purchase physical gold from gold jewellery stores is higher than the gold rates prevailing in the market as displayed online, as the online gold rates do not include any additional costs such as taxes and charges while displaying the gold rates. Instead, they only include the gold spot rates.
This is more clearly visible in bullion markets with high bullion volumes, such as Mumbai, where the jewellers add a premium to the current gold rate in Mumbai to arrive at the retail price of gold for buying physical gold.
Local demand and supply dynamics
The second big factor that influences the premiums that are charged on physical gold buying is the demand and supply of gold in the local markets. India is one of the biggest consumers of gold in the world, especially during the festival and wedding seasons.
During peak demand times such as Diwali, Dhanteras, and weddings, the prices of gold may rise as sellers, in an attempt to fulfil the demand, may end up paying a higher price for the gold, which is then reflected in the price that is charged to the buyers in the form of a premium on the gold spot price.
Similarly, there may also be supply disruptions, and as a result, a higher premium may be charged by the sellers on physical gold.
Currency fluctuations and economic factors
Another major factor that contributes to the premiums charged for physical gold is the depreciation of the Indian rupee against the US dollar. Gold is being traded in the global market against the US dollar. Therefore, this means that the fluctuations in the exchange rates have a direct impact on the gold prices in India.
If the Indian rupee depreciates against the US dollar, it means that it becomes costly to import gold. Therefore, this cost has to be transferred to the buyers by increasing the price of gold in India, which in turn increases the gold price charged for physical gold.
Additionally, other factors such as geopolitical tensions, central bank policies, and inflation expectations also boost the price of gold. For example, in times of geopolitical tensions or high inflation, the investment in physical gold increases. Therefore, this rise in demand results in an additional premium charged for physical gold due to the increased demand and limited supply.
Conclusion
Gold is one of the favourite investment options among investors in India and acts as an insurance against inflation and economic uncertainty. However, there is a premium that is charged on physical gold buying due to the above factors, which are not taken into account by most buyers.
Import duties and taxes, currency fluctuations, and local demand-supply dynamics play an important role in determining the price that is paid by the buyer for buying physical gold. These additional factors result in a much higher final cost of purchase for physical gold than the gold spot prices.
For investors who like to buy gold, it is important to track not only gold spot prices, but also the factors that affect the premiums in order to time their physical gold purchases. By understanding these hidden factors, investors can make better decisions to control the cost of investment in physical gold.