A gold spot exchange in India, which would introduce a mechanism to ensure safe and transparent gold transactions, has been a demand of the industry for a long time. The Securities and Exchange Board of India (SEBI) has approved the launch of such an exchange, and with NSE, BSE and MCX working towards it, India is now on its way to set up a regulated and standardized spot gold trading architecture. is on. ,
With an annual gold demand of 800–900 tonnes, India is the world’s second largest consumer after China, accounting for 11%–12% of total global gold consumption. However, unlike other major gold market centers such as China and Turkey, the country lacks a spot exchange for physical gold. Gold is important to India’s economy and culture, but there is no mechanism to standardize its price. The country’s gold ecosystem is beset by challenges such as lack of quality assurance, price manipulation and high market fragmentation. A gold exchange can fix these issues.
A gold exchange allows spot trading of physical gold represented by Electronic Gold Receipts (EGR). Investors who intend to trade on the gold exchange should deposit the physical gold with a SEBI accredited vault manager and get the EGR in return. EGR trading platforms resemble equity shares of a company with potential denominations designed as tradable quantities by stock exchanges to ensure optimum trading and consumption. The deliverable quantity, that is, the quantity that can be deposited or withdrawn from the safes, will initially range from 100 grams to 1 kg with 995 purity or 999 purity.
Since EGRs have a permanent validity, they can be kept for as long as you wish. Further, since the physical gold deposited in the safes is accompanied by a package list/certificate issued by the refiner, which is approved by LBMA, BIS and similar accreditation agencies, the quality and weight is expected to be as per the standard and declaration . , Trades will be settled like other securities. The investor can withdraw gold after surrendering the EGR.
The system provides high liquidity, except that the EGR cannot be converted until the gold stored in the vault reaches the deliverable quantity. Investors will have to pay vault charges, conversion charges, GST on EGR conversion and other costs. However, these costs are expected to be more than offset by the potential benefits of the new mechanism.
Currently, the price of gold in India varies from city to city, and different bullion associations charge different fees. There is no easy way to ascertain the weight and purity of gold. Big traders buy gold directly from miners and foreign gold hubs like Dubai. Medium and small jewelers are often forced to rely on the big players, causing them to lose in price. This system is inefficient and increases the cost for the jewelers as well as the customers.
This is where the spot market comes into play. It uses real-time demand-supply data to determine the price of gold. A gold spot exchange would establish a transparent regulatory framework for trading in gold receipts, allowing traders and retail buyers to benefit from uniform, market-determined prices and quality standardisation. Since it is regulated by SEBI, the platform inspires confidence among investors.
India is heavily dependent on gold imports. According to the World Gold Council (WGC), in 2016-2020, imports contributed 86% of India’s gold supply, 13% of recycling and only 1% of mining. India is home to the world’s largest gold reserves, with an estimated 25,000 tonnes of the yellow metal deposited in homes, lockers and trusts. Once the gold exchange comes, this idle gold can be brought into the financial system. Monetization and recycling of gold will reduce the country’s gold imports and improve its balance of payments.
The spot exchange is expected to benefit individual investors, banks, refiners, bullion traders, jewelers and retailers. In terms of price standardisation, liquidity and physical delivery of gold, EGR will have several advantages over other gold investment options in India including Digital Gold, Gold ETFs, Gold Mutual Funds and Sovereign Gold Bonds. Currently, investors who wish to hedge their positions have to use complex financial instruments such as futures contracts. Having a spot exchange, investors can only buy or sell gold to protect their positions. Along with providing liquidity, the mechanism offers the benefits of arbitrage.
A strong network of vaults, a clear regulatory architecture, tax incentives, and multi-stakeholder collaboration, as highlighted by the Blueprint (2019) of the WGC and the Industry Steering Committee, are prerequisites for the success of the proposed gold exchange.
Ramkumar K, Head of Business and Operations at CDSL.
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