India’s long history and decades-long connection with the gold makes it one of the world’s largest consumer of the yellow metal. Despite the fact that the entire revolution of India’s ecosystem revolves around the gold, till date there was no spot market for the precious yellow metal in India. Policymakers have been, for long, trying to create an investment option in gold in digital form and finally comes up with Electronic Gold exchange.
Introducing Gold Exchange
Gold exchange is an electronic exchange, built on the structure similar to the stock exchange, which allow parties to trade in gold in digital form, represented by Electronic gold receipts.
Stock exchange board of India (SEBI) has cleared a proposal for setting up a gold exchange wherein the yellow metal will be traded in the form of EGRs, which will be notified as securities.
How Gold Exchange will work
The Gold Exchange framework will have ‘Vault Managers’ – SEBI-regulated entities with a minimum net worth of Rs50 crore – that will accept gold deposits, convert physical gold into EGRs and withdrawal of gold as well. Investors intending to convert their gold into EGRs will have to take their gold to vault manager. The vault manager will assay the gold and issue the electronic gold receipt which will be tradable. If any of the investors want their gold back in physical form have to surrender their EGR to the vault manager and take the physical gold.
Why India need gold exchange or EGRs?
India is the second largest importer of gold in the world, which together with China account for almost 50% of the world’s gold consumption. Evidently, India has an ambivalent relationship with gold – it is prized, both as an adornment and as an investment.
1. Significant import volumes:
India is largely dependent on imports for meeting the domestic demand because of its relatively low volume of domestic production. This lopsided demand vs. production makes India the largest importer of gold – The large volumes of gold imports affect the balance of payments and therefore becoming a liability of the country. It expected that movement of gold within the market on need basis shall take an upper hand over import on need basis
2. Gold, an idle form of Investment in India :
The World Gold Council in its Report titled ‘Why India Needs Gold Policy’, stated that “demand for gold remains strong and enduring, whatever the macro-economic, fiscal or political circumstances. An overwhelming majority of respondents said they would buy gold in good times and in bad”. A fitting example supporting the same would be the rising prices of the gold during the first wave of COVID-19 – while economies around the globe were falling, the price of gold saw a continuous rise as more and more people wanted to deploy their funds in the ‘safe’ gold. Investment in gold by millions of individuals is the idlest form of investment – thus becoming a liability of the country, despite being a valuable possession for an individual. This is exactly why there is a need to move gold within the domestic market becomes important – because it will not only imparts liquidity but also brings along the benefit of arbitrage.
3.Disparity in Domestic Prices & Better Price Discovery :
In the physical market, different locations have different prices. Thus, the prices were not uniform. The concept of Electronic gold exchange, if successful, could lead to better discovery of spot price of gold in India.
Given such appetite and potential for a sound gold exchange, India was in need of gold exchange from a long span of time. Dedicated spot exchange for gold will prove to be effective from macro perspective.