Photo courtesy Jingming Pan on Unsplash.
The Securities and Exchange Board of India (SEBI) has approved the framework that allows bourses to set up a gold exchange in India.
Households in India are estimated to have around 24,000 to 25,000 tons of gold and the Reserve Bank of India (RBI) has gold reserves of 705 tons. India is the world’s second-largest consumer of gold, only behind China and in volume terms India imports around 800-900 tons of gold annually.
During ancient times the people in the West wanted Indian goods like textiles, spices, and jewelry but Indians were not interested in much of their produce and preferred gold and silver as means of payment. Romans used Indian spices and luxuries and cleared the payments in precious metals which depleted their reserves of precious metals. Pliny the Elder called India the ‘sink of world’s gold.
The new generation of people has developed a love for stocks and cryptocurrency but the love of Indians for gold is still well entrenched from ancient times. People have always believed in the value of gold, which can be used to tide over financial emergencies. In the past women looked after households and gold gifted to them by their parents, relatives and husband were the saving they could depend on. Other than weddings people also purchased gold during the festive seasons.
The government is trying to bring the unused gold lying in the households into the productive economy to the advantage of the household investors as well as the nation. There have been gold monetization schemes, gold bonds, and now the introduction of the gold stock exchange.
The gold market in India is highly fragmented with prices being different at many locations with varying quality. Jewelry is in much demand as compared to gold coins or gold bars. Traders and large jewelers import refined gold from markets abroad causing job loss opportunities in the country. In the last few years, the global gold market has started to shift from the West to Asian countries such as China, Singapore, and UAE and these countries have set up good infrastructure for refining, storage, trading, and financing thereby increasing the efficiency of their markets due to efficient price discovery and quality assurance.
Till now India allowed trading only in Gold futures and Gold ETFs, unlike many other countries that have spot exchanges for physical trading in gold. People in India were following the London bullion market prices and now the concept of a gold exchange would move India from being a price taker to being a price setter. The setting of this exchange will bring transparent and efficient spot price discovery, standardization in quality, active participation by retail investors, gold recycling, and better integration with the financial markets.
How can a person trade on the gold exchange?
The instrument to be traded on the exchange is termed “Electronic Gold Receipt’ (EGR) and will help in having a transparent price discovery mechanism. It will have characteristics similar to those of stocks in terms of trading, clearing, and settlement. The participants can be banks, vaults, retailers, wholesalers, importers, and exporters. EGRs will be available in Demat form and could be converted to physical form whenever required. Trading enabled on the stock exchanges would be in 5gm, 10 gm, 50 gm, 100 gm, and 1 kg of EGR. The trading in smaller denominations is likely to attract retail investors and the clearing would follow a T + 1 settlement cycle.
The SEBI registered stock exchanges would be able to provide a Gold exchange platform. There would be ‘Vault Managers’ which would be SEBI regulated entities having a minimum net worth of Rs 50 crore. They would be responsible for accepting gold deposits, storing them, and converting them to EGRs. The trades executed would be settled by the clearing corporation by transferring EGRs and funds to the buyers and sellers.
The EGR holder would be able to hold the EGR as long as he wished and in case they want to convert it to the gold they can do so by surrendering the instrument with the vault manager. So the EGR will be fungible both ways and gold could be converted to EGRs and even the EGRs could be converted to gold. EGRs would be traded like a share on the stock exchange with real-time quotes. At present, the states have different gold prices. Over a period of time, there would be uniform gold pricing in the country.
The sovereign gold bonds by the government offer an interest rate of 2.5% but they have low liquidity and this could work in favor of the gold exchange. Existing inefficiencies in the gold market will be reduced. The platform will be transparent and will act as a bridge between the spot market and the futures market of gold. Both the payment and purity would be guaranteed.
The people today follow the London bullion market prices but the creation of the gold exchange could transform India from a price taker to a price setter and in the long run help the households to use their gold more productively.