Gold exchanges promise pricing transparency

Economic Affairs Secretary Shaktikanta Das recently floated the idea of a gold exchange, asking stakeholders for their proposals. In a week the India Bullion and Jewellers Association (IBJA) had tied up with the Bombay Stock Exchange (BSE) to announce a gold exchange and the National Commodities and Derivatives Exchange said it, too, could offer a platform for bullion trading.

Indians households and temple trusts are estimated to be holding 22,000 tonnes of gold, which at today's price works out to Rs 55.66 lakh crore. More households buy gold than invest in equities. Assets affecting a big population need a transparent mechanism for price discovery, and a gold exchange appears to be an idea whose time has come.

India's gold trade is highly opaque. Furnishing PAN numbers, which has been made mandatory for purchases above Rs 5 lakh, is not helping much because dealers sell gold in cash and split bills to show purchases below Rs 5 lakh. The gold exchange is meant for the physical bullion market where price is discovered in registered electronic trades and payments are made through banks. Most of these aspects are missing in India at present. With the emergence of big jewellery chains by listed companies, a part of the trade is registered, but the imposition of a 10 per cent duty has promoted illegal imports that add to the black market in bullion. This is the reason the government's idea is finding takers. The BSE is ready to own 30 per cent equity in a gold exchange to be set up with the IBJA, for which the bourse will provide technology and the trading platform. As spot trading is not regulated in India, the gold exchange will remain self-regulated.

Ashish Kumar Chauhan, MD & CEO of BSE, says the exchange has appointed consultants to prepare a detailed proposal which would be submitted to the government.

Anyone can set up a gold exchange because there are no rules yet. Eventually though, gold exchanges will need to be regulated because it involves risks that could affect trading. "Gold exchanges will improve price transparency and improve gold-related infrastructure in India and bring over-the-counter trades on the exchange's platform," says Somasundaram PR, India managing director of the World Gold Council. The WGC and the Federation of Indian Chambers of Commerce and Industry had in a report recommended setting up a Bullion Corporation to formulate and implement an overall gold policy, including infrastructure for a monetisation programme and a gold exchange. The government has implemented many of the report's suggestions.

If gold is traded on an exchange, it will reduce the potential for arbitrage and aid standardisation, argue FICCI and the WCG. An exchange will improve price discovery and assess supply and demand better. It will also involve building strong vaults, which will benefit the country's gold infrastructure, the lack of which is coming in the way of the gold monetisation scheme.

Gold is now traded in India on commodity exchanges in the futures and forward segments. Gold exchange traded funds are bought and sold on stock exchanges, but they are quite different. The Multi Commodities Exchange's gold futures are widely used for hedging, with delivery on settlement of the contract, but the MCX is not for spot delivery. A few jewellers have portals listing bullion prices at which they commit themselves to buying and selling. These prices change in real time based on international prices and local demand and supply. But these are not exchanges, nor are their prices determined transparently.

If there is an exchange, bullion sold during the day will be settled in the evening, payment credited and the metal delivered according to set norms. The current physical market rule is delivery against cash. Prices differ across cities because of taxes and transport cost from the point of import.

The NCDEX claims it already has the required infrastructure and contracts for virtual spot trading in gold. Says Samir Shah, MD and CEO of NCDEX, "Our recently launched Gold Now is a virtual gold exchange through our transferable specific delivery gold forward contracts, with electronic gold accounting through COMTRACK, backed by a refining ecosystem that matches international standards."

The biggest bugbear for a gold exchange though is black money. Even legally imported gold is sold in cash and buyers can convert it into an unaccounted asset. Yet Mohit Kamboj, president of IBJA, feels "if all trades of bankers, bullion merchants and jewellers are routed through this exchange, transparency can be achieved. The gold exchange can generate a database for the government."