Precious metals gold and silver are experiencing unprecedented premium levels over international benchmarks in India, driven by widespread market speculation about potential customs duty increases in the upcoming Union Budget scheduled for February 1. The dramatic premium surge has created significant market disruptions and trading anomalies across both commodity exchanges and exchange-traded funds.

Premium Surge Reaches Abnormal Levels

The current premium spike represents a sharp departure from normal market conditions, with silver premiums exceeding ₹30,000 per kg and gold premiums reaching 3-4% above international rates. This marks a significant deviation from the typical minimal spread between Multi Commodity Exchange (MCX) and COMEX prices, signaling widespread market anxiety about possible policy changes.

"The premium in the Indian market is abnormally high this time because the market is expecting there may be a duty hike in the Budget. That's why the premium is increasing," explained Manoj Kumar Jain, Director and Head of Commodity and Currency Research at Prithvi Finmart.

Market Performance and Price Movements

The speculation has translated into substantial price movements across various trading platforms. The following table illustrates the significant gains recorded:

The ETF segment has shown particularly pronounced gains, with some gold ETFs recording nearly double-digit increases, reflecting heightened investor interest and speculation.

Technical Disruptions in Arbitrage Trading

The abnormal premiums are creating significant technical challenges for international arbitrage traders. These traders typically maintain long positions on COMEX while shorting MCX contracts to profit from price differentials. However, the widening spread is now causing substantial losses for these market participants.

"International traders also do arbitrage between COMEX and MCX. Normally international traders are long on COMEX, short on MCX. Now as the price is going up, the spread is increasing and they are incurring losses. So there is a technical reason as well for this premium," Jain explained.

Policy Speculation and Market Rationale

Market speculation centers on whether the government might reverse its July 2024 decision to reduce customs duty on gold and silver from 15% to 6%. The original duty reduction was designed to support the gems and jewellery sector while curbing smuggling activities.

Current market concerns focus on the relationship between rising gold prices and rupee depreciation. "Now rising gold prices are directly impacting rupee depreciation. The government may hike duty to protect rupee depreciation," Jain noted. This concern has gained prominence as the rupee recently plunged 67 paise to close at an all-time low of 91.64 against the US dollar.

Investment Recommendations and Outlook

Despite short-term volatility, analysts maintain a positive long-term outlook for precious metals. HDFC Securities noted that "based on the fundamentals and technical setup, gold and silver's long-term bullish trend seems intact and still has the potential to deliver extraordinary returns in the year 2026."

However, the brokerage cautioned that potential duty reductions could create downward pressure on domestic prices. Given current elevated premiums, particularly for silver, experts are recommending cautious positioning.

"Given the sharp rise in prices we have told clients to avoid silver. Better to have gold. Those investors having riskier assets in their portfolio, they must allocate more to gold," Jain advised. HDFC Securities recommended investors allocate up to 10% of their portfolio to precious metals, suggesting ETFs as the preferred investment vehicle.

Anindya Banerjee, Senior VP and Head of Commodity Research at Kotak Securities, believes the current surge in precious metals represents a fundamental shift in global markets, driven more by structural monetary changes than temporary geopolitical tensions. In a detailed analysis, Banerjee outlined why gold and silver continue to outperform traditional assets and shared specific price targets for investors.

Structural Drivers Behind Precious Metals Rally

Banerjee emphasized that the current rally in gold and silver stems from structural rather than transitory factors. "Commodities are increasingly behaving like an alternative form of currency," he explained, attributing the surge to a global monetary reset where hard assets appreciate as fiat currencies, particularly the US dollar, face steady debasement relative to finite real assets.

This structural shift explains the outperformance of precious metals across most asset classes over both one and five-year periods. The expert noted that gold, silver, copper, and platinum are gaining value not due to surging global growth or demand, but because of their finite nature compared to increasingly debased paper currencies.

Price Targets and Investment Strategy

Banerjee provided specific price targets for both precious metals, with gold currently trading around $4,700 per ounce and approaching the earlier target of $5,000. His analysis suggests potential for gold to reach $5,500 over time, supported by upcoming US fiscal policies and Federal Reserve pressure.

For silver, Banerjee sees even stronger potential, projecting possible gains of 60-70% this year with medium-term targets of $160-180 per ounce. However, he cautioned about silver's higher volatility compared to gold.

Recommended Allocation and Entry Strategy

To balance risk and opportunity, Banerjee recommends a 60% gold and 40% silver allocation for investors looking to capitalize on precious metals' potential while managing volatility. He advocates combining lump-sum and systematic investment plan (SIP) approaches to optimize entry timing.

The expert suggests this dual strategy helps investors avoid missing rallies due to correction fears while allowing them to benefit from periodic pullbacks. For immediate entry points, he identified specific levels:

Domestic Premium Dynamics

A significant development highlighted by Banerjee is the structural change in global silver markets, where domestic prices now trade at premiums of 8-10% over global benchmarks. This represents a departure from traditional pricing mechanisms where LBMA prices formed the benchmark.

The premium persists due to several factors:

• Physical silver no longer moving freely from Western vaults to Asian markets
• COMEX and LBMA inventories at record lows
• Aggressive competition for physical silver in Asian markets
• Sharp rise in India's silver imports over the past five years
• Increased speculative and retail participation

Market Outlook and Risk Factors

Banerjee expects short-term corrections of five to eight days as normal market behavior, but believes prolonged consolidation would require major triggers such as sharp global equity market corrections. As long as global equities continue rising on liquidity expansion, gold and silver should remain supported.

Regarding crude oil, he identified Iran as the most significant geopolitical risk, with potential price spikes toward $75-80 per barrel in case of escalation. However, he expects such rallies to be unsustainable due to weak global demand growth and strong non-OPEC supply from North and South America.