Premise / Expected: The ratio of international gold price converted to rupees to an Indian Index or ETF that tracks gold should remain constant.
Actual Observation: Indian gold indices and ETFs are not keeping pace with international gold prices. There is a significant and growing divergence between the two.
What is the reason for this divergence?
What is the quantum of divergence?
It accumulates. Since September 2007, international spot gold has risen by 905% and GOLDBEES for example has risen by 777%.
MCXGOLDEX data is available only form 2016. Since that time, these are the rises:
MCXGOLDEX 183%
GOLDBEES 265%
International Spot Gold (in INR) 322%
Also see
Although the gold ETF/price of gold in India, in general, do move in tandem with the international rates, it will never be a like to like match, mainly due to India specific factors like taxes (customs duty & GST) and local demand and supply dynamics.
An example of this would be how Gold prices fell only in India, when the govt slashed the customs duty rates from 15% to 6%.
And not to forget that ETFs have expenses (mangement fee/transportation & storage costs) and tracking errors, this will to some extent eat into the returns, especially when returns are compared across a longer time frame.
The divergence between gold prices in India and international markets arises from a combination of factors, including import duties, local demand, currency exchange rates, and government policies. These factors create a unique pricing dynamic in the Indian market compared to global trends.
In essence, the gold price in India is not simply a reflection of the global price, but a result of the interplay between all the above factors, which can create a unique pricing structure in the Indian market.
Events like duty cut etc should not produce an ongoing ratio divergence on a month-on-month basis. They should produce a one-time step change in the chart at the time of the event and thereafter the ratio should remain constant. If you see the first two images, they represent the ratio. The ratio is rising month-on-month.
Index should not have tracking error, also index performing worse than ETF by this degree and both underperforming international price is strange.
This is not a minor error. 183% vs 322% in a span of 8.4 years is a lot. Unless there is a better explanation, it means Indians are losing out a lot by investing in Indian ETFs / Indices. This is a robust case for physical gold, parking your money outside India or even leaving India (sadly).
+1 @priyankp - First of all, thank you for this simple ratio trick to visualise -
OANDA:XAUUSD*FX_IDC:USDINR/NSE:GOLDBEES
I have been banging my head on this feeling that there is something wrong for a while now but haven’t been able to put a number/quantum on it properly. This does exactly that.
There are even differences between GOLDBEES and SGBs but let’s analyse GOLDBEES and International GOLD in USD with help of this ratio. Clearly, import duty increase 2013 and import duty cut 2024 affects this ratio and should result in it making new fair value range.
But if what you said above is true (and I know its right), can you or someone explain - Why back in 2014 - 16 (as per first diagram) this ratio again sort of came back to fair value range after the initial drop? It should have stayed lower and constant (as you said) … isn’t it?
Adding to it - to help understand this better - check the same chart -
I would argue that there is a fair value range which seems to be +/- 3% for this ratio that gets set after change to import duty (2013, 2024 - case in point). And seems we are still in the new fair value range. What is unexplainable is why the ratio got back to fair value range back in 2014-16 when it should have stayed lower? And perhaps there lies some market dynamic which is not being priced in that is giving rise to this clear divergence.
I guess that’s how compounding works in general. Gains, gaps, tracking error—all of this compounds over time, and after a sufficiently long time of 20-30 years, the gap would be quite high.
Look at how there is a demand for direct mutual funds rather than regular ones because regular ones charge you 0.5 or 1% more, and over a period of 30-40 years, it really adds up a lot. It could show you a gap of 20-30% between direct and regular funds.
At least SGBs, if held till maturity, are sovereign guaranteed to ibjarates. Even with custom duty cuts, it should still net you more than what it is currently trading at. Seems to be trading atleast $500 less:
(SGBAPR28I*28.34952)/USDINR