After months of consolidation and volatile swings driven by the Middle East war and tariff-related uncertainty, gold and silver prices returned to an explosive one-day rally on Wednesday, one the markets had not seen in a while.
Gold and silver futures on the MCX surged nearly 6% each, with gold jumping around Rs 9,600 and silver soaring nearly Rs 17,000 after the Centre sharply increased customs duty on imports of gold, silver and other precious metals.
Under the new structure, the effective import duty on gold and silver has been raised to 15% from 6% earlier. The government imposed a 10% basic customs duty along with a 5% Agriculture Infrastructure and Development Cess (AIDC), sharply increasing the landed cost of imported bullion almost overnight.
But despite the eye-popping rally, this may not mark the beginning of a fresh runaway bull market in precious metals. Here’s why.
When import duties rise, imported bullion becomes more expensive, causing domestic prices to trade at a wider premium compared to international COMEX and LBMA prices. As a result, MCX futures contracts quickly adjust to reflect the higher landed cost of imports, explained Nirpendra Yadav, Commodity Analyst at Bonanza.
Ponmud R, CEO of Enrich Money, said the immediate spike in domestic bullion prices was largely a mechanical reaction to the higher import burden. With the government raising the basic customs duty from 5% to 10% while retaining the 5% AIDC, domestic gold and silver prices instantly moved 4%-6% higher even though global bullion markets had not witnessed a comparable breakout. However, he cautioned that such rallies historically tend to cool off over time.
“The reason is simple. Import duty can temporarily increase local prices, but it cannot permanently change global bullion fundamentals. Gold’s long-term direction is still driven by U.S. Federal Reserve policy, inflation expectations, interest rate outlook, dollar strength, central bank buying and geopolitical risks,” Ponmud R said.
He added that if the U.S. dollar remains strong or if the Federal Reserve delays rate cuts further, global gold prices could soften, which may eventually pull Indian bullion prices lower once markets fully absorb the revised tariff structure.
Gold prices globally are influenced by a complex mix of macroeconomic trends, geopolitical developments and domestic demand conditions. One of the biggest drivers remains U.S. monetary policy, as expectations around Federal Reserve rate cuts or hikes directly shape investor appetite for gold. Lower interest rates typically support bullion because gold does not generate fixed returns like bonds.
Inflation trends, crude oil prices and movements in the U.S. dollar also play a major role. Gold generally performs well during periods of elevated inflation, a weaker dollar or rising geopolitical tensions, as investors flock toward safe-haven assets during uncertainty.
“For prospective buyers of physical gold, the equation changes meaningfully. Buying physical gold today means paying at the new, higher import parity, with customs duty at 15% and GST at 3% on the value of the metal,” Anindya Banerjee, Head of Commodity and Currency Research at Kotak Securities, told ETMarkets.
Banerjee said the higher tax structure significantly alters the breakeven horizon for fresh buyers. Investors purchasing gold at current levels would now require either higher international gold prices or further rupee depreciation just to recover the elevated entry cost before generating meaningful returns.
For shorter-term investors, this becomes an important consideration. Long-term investors, however, may view the higher tax incidence as a one-time entry cost that becomes less relevant over a multi-year holding period.
At the same time, analysts believe the duty hike could gradually accelerate investor interest in regulated digital alternatives such as Gold ETFs and Gold EGRs, where liquidity, transparency and lower physical handling costs may appear more attractive compared to traditional physical ownership.
So where are gold prices headed next?
Ponmud R believes volatility is likely to remain elevated in the near term. He said if international spot gold fails to sustain key breakout levels globally, Indian bullion prices could retrace part of the tariff-led rally once the market fully adjusts to the higher duty regime.
The broader medium-term trend for gold still remains positive because of ongoing global uncertainty. However, analysts do not expect the current pace of gains to sustain indefinitely.
For now, the sharp rally appears more like a temporary policy-driven price shock than the beginning of an unlimited bull run. Once markets digest the revised tariff structure and demand stabilises, gold and silver prices are likely to realign with broader global trends unless geopolitical tensions or inflation risks escalate significantly further.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)
