In need of a fix

| Updated on January 24, 2018 Published on March 29, 2015

The arbitrary process of determining India’s spot gold prices needs an overhaul

As the curtain comes down on the century-old London gold fix, the spotlight is now on the opaque and random manner in which Indian spot gold prices continue to be determined. Gold prices in London, where the bulk of the world’s trades in the yellow metal happen, were being fixed by an exclusive club of dealers. Following an investigation into allegations of price rigging by this group, the dangers of price-fixing in this manner was brought home to the regulators. The London gold fix has, therefore, been replaced by a new benchmark — the London gold price — set by an independent provider, the ICE Benchmark Administration. The participating banks will now bid through an online electronic platform where orders will be matched in a transparent manner. The new system will ensure an audit trail that will make it easy for regulators to track the fixing process.

The gold price fixing process in India, however, remains as archaic and arbitrary as ever. Despite being the largest market for gold in the world, the country doesn’t have a benchmark for gold in rupees. Gold prices in the country are fixed by the Indian Bullion Jewellers’ Association — a body representing bullion dealers in Mumbai. The price is based on calls made to the members of the association twice a day that reveals the quantities and the price at which members want to buy and sell gold. This informally discovered price is unfortunately the price at which consumers across the country buy and sell gold and is touted to be the official price of gold in the country.

In the absence of a reliable spot price, some large bullion dealers in the country use the gold futures contract price to set a price for their gold. This turns on its head the practice that the price of the underlying determines the value of a future contract. Around 75-100 tonnes of scrap gold is traded in the country every year. India can follow the Chinese model, where the Chinese central bank has set up an exchange for trading physical gold. The Shanghai Gold Exchange also oversees the delivery, clearing and settlement, and storage of gold. Such an exchange will enable gold to circulate better within the country and help in arriving at a reliable price for spot gold. The suggestion in the KUB Rao Committee report on setting up a bullion corporation of India that facilitates trades in physical gold and sets up an effective mechanism for price discovery, and mobilises gold that lies with households, is another viable alternative. Since setting up an exchange or a bullion corporation will take a few years, a formula for fixing gold prices based on quotes given by nominated agencies that are allowed by the Reserve Bank of India to import gold, can be arrived at in the interim.

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Published on March 29, 2015
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