Gold & Silver

Time for reform: A spot exchange is just what the gold market needs

V Hareesh | Updated on August 17, 2019 Published on August 17, 2019

Spot gold has crossed the psychological level of $1,500 an ounce in the international market, its highest level since May 2013. Whereas, domestic futures surged to an all-time high of ₹38,125 per 10 grams. Debilitated business confidence in advanced economies have rendered support to the metal.

Feeble global outlook, tensions between Iran and the West and policy easing expectations from central banks lifted gold’s safe haven demand. The tariff clash between the world’s two large economies and its probable impact on the health of emerging markets weighed on market sentiment, prompting investors to bet on gold.

Gold in the global market has meandered in a tight range of $1,050-$1,380 for the past five years, but it broke out from the multi-year long cycle. The lacklustre undertone in the previous years was owing to overwhelming changes triggered across its key fundamentals.

Unlike the global prices, gold rates in India shot up to record highs. Higher taxes and weak rupee made gold expensive for domestic buyers. India is the second largest consumer of gold and it is the second most imported commodity in the country. High imports had widened the current account deficit (CAD) earlier and the government had hiked gold’s import duty to 10 per cent in 2013. In the last budget, the duty was revised to 12.5 per cent. In addition, gold attracts 3 per cent GST.

The decision to hike duty is likely to strengthen the domestic scrap market. It may, however, also push imports through illegal channels.

As per the World Gold Council’s statistics, Indian households have piled up around 24,000-25,000 tonnes of gold worth more than 40 per cent of GDP. An active scarp market can reduce gold imports , like in non-essential items, and strengthen the entire gold ecosystem.

Smuggling danger

Meanwhile, increased price differences compared to other markets would boost gold smuggling. As per data, imports were muted for the last many months and one reason for this could be transactions via unorganised channels.

The changing tax regime and high domestic prices have a huge bearing on the gold industry. Since the market in India is unorganised, the ability of the industry to emerge as a world class supplier is hampered. The dependency on import of raw material, a competitive international market and the currency volatility too impact the the sector.

Due to absence of a regulated trading environment and lack of standard invoicing pattern, there is no unified pricing and quality assurance mechanism across the value chain. In India, spot gold prices are determined by various jewellery associations which make prices vary from place to place.

These challenges in the ecosystem raise the need for reforming the Indian spot gold market. A comprehensive policy on gold can effectively manage these challenges. Setting up of a spot exchanges and creation of Gold Board to regulate the vast domestic market can bring in more transparency in trades .

The existing challenges like enabling transparent price discovery and standardisation of physical delivery across the country can be properly managed by spot exchanges. Ensuring participation of all stakeholders in the ecosystem, including retailers, wholesalers, importers and exporters, would lead to transparency in physical trades as well.

Gold a steady performer

India’s fascination towards gold is centuries old. Historically, it has been an important investment avenue and is associated with wealth, power and prestige. Gold prices in India had seen a steep rise since 2003. Prices gained about 560 per cent without major correction or severe volatility. A week Indian currency and stable jewellery demand had given firm support to prices. The Indian gold demand largely pertained to making of jewellery and as a traditional gifting commodity. Its high liquidity, availability at smaller denominations, capital appreciation, mobility and acceptability among poor and rich across religions and geographies make it popular.

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

Published on August 17, 2019
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