Spot Exchange Of Gold: Solution For Efficient Gold Ecosystem In India

• India is the world’s second largest gold consumer with an annual demand of nearly 1,000 tonnes, but it lacks many key elements of an efficient gold ecosystem.
• The gold market here is plagued by fragmentation, with prices varying significantly across channels and locations. The quality of gold also varies widely.
• Jewellery rather than gold bars, gold coins, or gold-linked financial products, still dominates retail demand.
• Large jewellers and traders mostly import refined gold from international markets, such as Dubai, causing loss of economic value and jobs in India.
• As the global gold market continues to shift from the West to the East, many Asian countries, such as Turkey, China, Singapore, and the UAE, have set up global-scale physical infrastructure for refining, storage, transport, trading and financing of gold to cater to the spurt in demand in the region.
• Gold exchanges and related infrastructure set up by these countries appear to have greatly enhanced the efficiency of their gold markets by way of efficient price discovery; quality assurance; active retail participation; use of gold bars and gold coins; and gold-linked financial products instead of jewellery for investment purposes; greater integration with financial markets through gold leasing and lending; and acting as a channel for gold recycling.
• Given the global scale market demand in India, there is a viability of establishing a spot gold exchange for trading in gold for buying and selling standardized quality gold in India.

Analysis:

• There are some interesting fact about gold in India. First, large players procure gold directly from miners and traders in overseas gold hubs, often at a discount to the benchmark London Bullion Market prices. Second, medium and small jewellers mostly depend on large players for supply of gold and face significant cost disadvantage. Third, resellers are a significant source of gold for jewellers and refiners; however, there is no transparency in the activities associated with reselling of gold into the market. Against this backdrop, participants largely felt that a national-level spot exchange would benefit stakeholders through transparency in pricing and standardization. Most of the small jewellers are keen to source gold through a gold exchange and, perhaps surprisingly, so are some large players.
• Participants in the Indian gold market feel the need for a domestic and an international exchange which would allow two-way trading in physical gold and also provide derivative products for hedging.
• The Exchange could also include gold vaulting facilities set up by experienced promoters, logistic arrangements to achieve next day delivery across the 21 major locations in India, and mechanisms for quality assurance and standardization of gold.
• this exchange would be economically feasible if it drew a minimum trade quantity of about 100 tonnes a year, which appears quite feasible, given the annual demand of about 1,000 tonnes in India and that there are many segments of the gold market that are underserved by the existing market structure.
• The Exchange should offer a wide range of contracts to meet the needs of the gold industry, such as: (a) domestic spot gold contracts, (b) global spot gold contracts denominated in US dollars based on delivery outside the domestic tariff area; (c) dore swap contract; and (d) gold lending and borrowing mechanism (GLBM).
• Within the constraints of capital control regulations, both the domestic and global contracts on the Exchange must be open to the widest range of participants.
• All domestic entities and foreign portfolio investors could be allowed to trade in domestic contracts.
• Participation in global contracts would be open to all foreign participants and to domestic players that are allowed to trade or hedge in global markets in accordance with foreign exchange management act (FEMA) and resident individuals within the $250,000 limit under the Liberalized Remittance Scheme for investment outside India.
• An Exchange in India would help much to create a vibrant gold ecosystem matching India’s large share of global gold consumption, leading to efficient price discovery, assurance in the quality of gold, active retail participation, greater integration with financial markets, and greater gold recycling. It would also boost the gold monetization efforts of the centre through transparency and standardization of the gold market.

By: Vishal