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| E-buying of metals to benefit households |
| Kunal Bose / Jul 13, 2010, 00:00 IST |
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There is India and there is also the unlamented Bharat. That only a few from the latter are privileged to have demat accounts to trade in shares and other financial instruments goes without saying. In any case, the two depositories among them have fewer than 17-million demat account holders. What may, however, be of some satisfaction to them is that not only they but Indians in general have remained beyond the pale of commodity trading.
Commodity exchanges and products on offer, particularly futures, allow price discovery and risk management in a finely structured way. The platform of such exchanges also comes good for straightforward trading and jobbing. No doubt they are playing an important role in promoting trade in commodities and cutting out unbridled speculation which in the past caused ruin to many. At the same time, even though commodities – non-perishable agri-products and precious and non-precious metals – lend themselves well to investment by individuals for wealth preservation and also appreciation, no exchange platform or products were available till recently for them to operate.
Individuals irrespective of their financial strength have now found the holy grail in National Spot Exchange (NSE), a joint venture between Financial Technologies India and Nafed, which through its e-series is promoting savings and investment by retail investors in commodities in demat form. The challenge now for the exchange is to effectively broadcast benefits of e-series nationally, non-metro centres in particular so that people of any means come to know of the virtually risk-free investment in chosen commodities. The exchange would do well to remember that it is never easy to make converts of the uninitiated. Perhaps it will do well to take a leaf out of ITC’s e-choupal book.
The underlying philosophy of e-series investment products being to make some contribution to financial inclusion, the exchange must work hard to see that what is on offer becomes “accessible as also affordable” to all. For example, whatever commodity the exchange puts on its electronic trading platform, the investment unit should be small enough to promote its affordability. In a thoughtful initiative, it is allowing retail investors to buy gold and silver, the first two commodities brought into the fold of e-series, in denomination of 1 gram and 100 grams, respectively and multiples thereof.
Both gold and silver are seeing considerable value appreciation with their appeal as safe haven investment going up in the midst of fragile economic recovery in the west and possibility of yet another wave of recession. In fact gold at over Rs 19,000 per 10 gm and silver going for over Rs 29,000 a kg, the ordinary Indians can only covet the two precious metals but don’t really afford them any more. The caveat here is till the Spot Exchange launched E-gold and E-silver and facilitated accumulation of the two precious metals bit by bit using the electronic route.
The love for gold here both as adornment and insurance against misfortune visiting families is part of lore. More recently, the wealthy Indians have discovered safe haven in gold like their peers elsewhere. For much of the recorded history of the world, India has remained the leading buyer of gold. The Roman historian Pliny the Elder regretted 1,800 years ago that Rome was being drained of gold by India. Not surprising therefore, that private holdings of gold in this country are anything between 25,000 tonnes and 50,000 tonnes (the higher amount is an estimate by former RBI Deputy Governor SS Tarapore). However, gold with RBI constitutes a small portion of the country’s foreign exchange reserve.
Since it has been de rigueur for Indian families to own gold, a good portion of the metal as private holdings is there in small towns and villages. But now because of very high prices, many families have now stopped buying gold and therefore, not participating in further building of private holdings. Unlike in developed countries, gold ETF’s appeal remains limited here. In any case, liquidation of ETF units will not bring gold for investors but get them cash. Moreover, compared to gold ETF, e-gold is nearly 10 times cost effective in terms of custodial charges.
Explaining the benefits of e-series for common households, the Exchange CEO Anjani Sinha says gold under this scheme can be purchased in small units at chosen regular intervals and kept safely in the exchange-nominated vault at nominal charges. As gold here can be bought electronically, it can also be sold electronically. Physical delivery of gold can also be taken any time. The same process is followed for silver too. Sinha is nursing the hope and rightly so that e-series investment products will “usher in a revolution in cash segment trading in commodities.”
The exchange’s move to bring non-precious metals like copper, nickel, steel and aluminium and some chosen non-perishable agro commodities within the e-series fold is to be welcomed as this will offer so many more investment options to retail investors. But the fate of the “revolution” will be decided by the quality of investor education.
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