Here is why gold and silver ETFs jump over 6% after government hikes import duty

Gold and silver prices are back into focus, not because of safe haven demand, but due to an artificial rise in the domestic prices. The government hiked the import duty on gold and silver overnight to arrest the fall of the rupee against the US dollar. As gold imports form a major part of our import bill, lower imports would help control the current account deficit and thus stop the currency depreciation.

The impact also boosted the prices of gold and silver ETFs; this was largely due to the price discovery mechanism, as newer gold will become costlier on import. Here’s why gold and silver ETFs jumped over 6% on Wednesday.

ETF pricing

The domestic gold and silver ETF prices are based on the domestic bullion prices, which are a result of (International prices* Exchange rate)+ Import Duty + GST. After the latest hike in gold and silver import duty, the domestic gold and silver prices jumped over 6% on Wednesday morning. Since ETF prices are derived from the current value of gold in vaults, their net asset value must match the latest domestic gold price as well. Hence, the ETF prices jump in order to match the new net asset value.

Gold and Silver ETFs

Why are gold and silver ETFs trading at a discount to NAVs?

As soon as the government announced an import duty hike, the AMCs updated their holding with the new import duty prices. While the traders and investors held back from buying the ETFs at nearly 10% higher prices, we see the lag between ETFs' current market prices and net asset values. Any institutional buying interest at current market prices would automatically fill the gap between the current market price and indicative net asset values, as the liquidity remains thin in the current market scenario where the prices jumped artificially.