India's Gold Discount: A Tale of Government Policies and Currency

The Indian government's decision to double customs duty on imported gold has sent shockwaves through the market, causing a steep discount in domestic prices.

The monsoon season, which is typically a key driver of gold demand in India, is expected to be one of the weakest since 2009. However, data suggests that government policies have played a much larger role in moving gold prices than weather conditions.

In 2013, India hiked duties on imported gold and added new import restrictions, causing domestic gold to trade at a premium of over $150 an ounce. Similarly, in 2016, a nationwide jewelers' strike and demonetization efforts led to a significant drop in gold demand.

The current discount is largely driven by the weak rupee, which has lost over 7% against the dollar this year. When combined with the new 15% import duty, Indian buyers are facing a domestic price that is up nearly 20% on the year.