Getting the glitter back - A national gold policy needed

Hareesh V | | Updated on: Apr 20, 2018

The Centre’s plan to brand gold as an asset class could transform the domestic gold industry. The government has been implementing schemes to bring structural changes in the industry to utilise our enormous gold reserves in a productively.

Introduction of gold monetisation scheme, sovereign gold bonds and issuing Indian gold coins were such initiatives, but failed to grab considerable attention from investors.

In the last Budget, the Finance Minister announced that re-branding of the existing Gold Monetisation Scheme and policies for making gold as an asset class is under consideration.

Challenges for investors

Gold Spot Exchange and Gold Board to manage the challenges faced by the gold industry are also in the pipeline. India’s fascination with gold is centuries-old. People consider gold as the most substantial asset in their wealth portfolio. It is the second top imported commodity in to the country after crude oil and we are the second top consumer of the yellow metal globally. Indian gold investors had to face challenges last year apart from the various global developments.

While lack of a regulated trading environment and presence of a number of local markets resulting in concerns over transparency in pricing and price distortions across the value chain cropped up, changing tax regime and tighter regulation around jewellery transactions has a huge bearing on bullion market as well as investors.

Another challenge for the industry is higher import duty of ten per cent making domestic gold costlier, attracting illegal imports to the country. Prevailing multiple challenges such as lack of quality assurance, price transparency, liquidity and regulatory issues on the gold ecosystem are raising the need for reforming the spot gold market.

Gold inflows

Gold imports into the country are estimated at about 800-900 tonnes a year and reportedly households hold around 22,000 tonnes of gold, the country is unable to realise its potential due to the aforesaid reasons.

Moreover, concerns over quality make Indian gold less attractive in the global markets as well. Unfortunately, Indian gold market continues to be a pricetaker with little influence in global market despite being the second top consumer of the metal.

Due to inappropriate price discovery mechanism and lack of standard invoicing system, domestic gold prices vary in different local markets. A gold spot exchange, to facilitate participants trade gold with immediate cash settlement and policies on gold trade, can play a pivotal role in transforming Indian gold industry.

It is likely to allow all stakeholders — retailers, wholesalers, importers, exporters, scrap dealers — to the platform and thereby enabling transparent price discovery mechanism and standardisation of physical delivery across the country. It can also lead to enhancing quality and formalisation of the market. Setting up of a national gold policy is likely to connect all the stakeholders of the value chain effectively and assist to create a healthy and efficient gold ecosystem in the country.

A better investment bet

Apart from its traditionally known characteristic of a hedge against inflation and an asset to protect during financial distress, gold acts as an exceptional source of diversification to an individual’s investment portfolio. Gold’s peculiar nature of low correlation with other assets typically assists investors to efficiently manage risks by protecting from unexpected negative events.

It also acts as a currency hedge, especially against the dollar. Studies have shown that using gold as a portfolio optimiser one can reduce volatility without compromising on expected return. For better portfolio diversification, gold is an ideal investment.

Though gold is considered as part commodity, part luxury and as a financial asset, its price does not always behave like commodities or at par with other assets. Gold has underperformed for the past several months. The lacklustre undertone in prices was due to overwhelming changes triggered across its key fundamentals. The bearish tinge in prices was accentuated by a strong dollar and demand concerns from top consumers.

The World Gold Council data showed that global gold demand in 2017 dropped by 7 per cent to 4,072 tonnes compared to 4,362 tonnes in 2016.

The writer is Head - Commodity Research at Geojit Financial Services. Views are personal.

Published on April 20, 2018
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