Why Physical Gold costs more than Gold Spot Price in India (2023)?

When you go out to buy physical gold (like jewellery for your wife, gold coins as investments, or gold bars or bricks if you are rich), then you will notice that the physical gold costs more than the gold spot price.

That is, the price of gold you get in the physical market is costlier than what you see online or on exchanges.

So why is physical gold costlier?

Let’s see why

First, to remove any confusion, let me clarify.

  • When I say Gold Spot Price, then it is the gold price that you see on your screens (online exchanges, etc.) and it is in a way, the cost of theoretical fine gold. This price is determined by the demand-supply of gold futures contracts and volumes of such contracts in the global and Indian gold markets and futures exchanges. Gold futures contract trading ‘price discovery’ determines fluctuations in gold spot prices in different currencies around the world, including the most widely tracked US dollar gold spot price.
  • Now when I say the Physical Gold Price, then it is what you get in your jewellery store when you go to buy physical gold in any form. You can also check the historical gold prices in India if you are a bit curious about how physical gold prices have moved in India in the last 50+ years!

With that clear, let’s see why physical gold costs more.

I am adapting the explanation provided in this link (which is quite simple and explains it well) to show you the reason for this.

Here are a few steps to arrive at the reason –

  • Convert international gold (in USD) to Indian Rupees (in INR). In early December 2022, gold is trading at USD 1797 per oz (troy ounce). Now 1 troy ounce is 31.1034768 grams. So in the international markets, you get 31.1034768 grams of gold for $1797. Now using the latest USD-INR exchange rates ($1=Rs 81.4), we get that the price of gold in international markets, but in the Indian Rupee is Rs 47,028 per 10 grams.
  • Next, the local price of gold in India increased due to a 12.5% customs duty and a 2.5% agriculture infrastructure and development cess on Gold imports in India. So, after taxes, the price of 10 grams of gold in India comes to Rs. 54,083. This is also the price on Indian commodity exchanges that you will see for Gold contracts.
  • Now to arrive at the spot price. Generally, the spot price of gold is 2.5% to 4% above the landed price of gold in India. This is due to additional costs incurred for transport and storage of gold, etc.
  • The actual spot price of gold in India will vary from one city to another by a few hundred Rupees. If you are curious why Gold Rates are different in different cities in India, then the reason is factors like differences in transportation costs, city-level gold demand due to which bulk pricing of gold in the region might vary, and prices being set by local jewellery bodies or associations. But don’t worry too much about questions like which city in India has the cheapest gold rate because prices change daily and a city selling gold at the lowest rate today may not be the cheapest one tomorrow. So it won’t matter much anyways as gold isn’t bought or sold in huge quantities anyways.

So that is how you arrive at the final price of physical gold which, after so many additions as explained above, goes higher than the spot price in international markets that we started with.

Finally, the jewellers or refiners themselves will add a layer of making charges and then, GST is also there (mostly). This obviously depends on the brand, etc. A pan-India brand will charge more and your local, friendly neighbourhood jeweller will charge lesser.

That’s it. Hope this helps explain why your physical gold prices are always above the gold spot prices on the exchanges. If you buy physical gold, then this difference in price will always affect you. But if you buy Gold ETFs or Gold Bonds in India, then this is not of any concern to you mostly.

While there is a case for having some gold as a part of your long-term investments (read how much gold to invest in a portfolio), please remember that gold jewellery is less of an investment. If you are looking for investment in gold, best to go for SGB, Gold ETFs and if in physical, then gold coins. Nothing else.

I am often asked by investors why one cant buy gold at the spot price. The reason is what I detailed above and now you too know why physical gold costs more than spot gold price in India (2023).

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