The Hindu Business Line : A ‘Spot’ for gold

It is common knowledge that India is the world’s largest importer of gold — nearly 800 tonnes representing a third of the annual global output, valued at over $10 billion (Rs 40,000 crore). It is also the largest consumer of gold jewellery and the biggest market for scrap gold. With such credentials, India ought to be playing a decisive role in setting global price benchmarks for the precious metal. However, its impact on the world market prices is secondary.

None of the trading markets has the level of underlying interest that India has; yet, the country is a ‘price-taker’ and not a price-setter. Gold prices are largely determined in London and New York and our market merely follows them.

The gold trading community has been demanding policies and systems that would make India the epicentre of world trade. Without going into the polemics of whether a seemingly unproductive asset with strong speculative interest such as gold should receive priority over other more grim issues (such as poverty and unemployment), it must be stated that there are several hurdles India needs to overcome to be able to catch the world’s attention. No doubt, the last three-four years have seen introduction of futures trading and, more recently, Gold ETF (Exchange-Traded-Fund). Further reforms are called for, especially in the areas of physical trade, financial services and infrastructure. Although relatively more free than, say, 10 years ago, gold trade is still beset with restrictions. For instance, only designated agencies and entities are allowed to import the precious metal. The importer base — especially of ‘large actual users’ — needs to be expanded. There is very little, if any, inter-bank business in gold.

We need policies that would allow an OTC (over-the-counter) market to develop. Assaying, storage, transportation and insurance are issues of concern for investors. Varying taxes across the country need to be rationalised. Importantly, while imports are liberal, exports are not. For the gold market to develop on healthy lines, two-way free trade is necessary. But this is easier said than done. Because gold is both a commodity and a currency, an unregulated market runs the risk of being exploited. The possibility of ‘money laundering’ is real. The development of a healthy and transparent spot market therefore is imperative. This can be achieved through an electronic platform with national reach. For the spot exchange to succeed (without turning into a casino dominated by speculators), it is imperative that delivery be made compulsory.

As spot or ready delivery trading is outside the purview of the Forward Contracts (Regulation) Act — and, thereby, the Forward Markets Commission — a strong regulator is necessary to gain the confidence of market participants. Importantly, as gold is a hedge against inflation, the combination of an appreciating rupee and low inflation (at around 3 per cent now) may prove to be a dampener.

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