India’s long history and social connect with gold makes it one of the world’s largest consumers of the yellow metal. This has also led to a vibrant market for gold jewellery, employing around 500,000 craftsmen. While an entire ecosystem has developed in the country around gold, including a vibrant derivatives market, an element still missing in the gold ecosystem is an electronic spot exchange.
The idea of setting up a spot bullion exchange in India is indeed noble, given that India is the world’s largest consumer of gold. As the global gold market continues to shift from the West to the East, many Asian countries, such as Turkey, China, Singapore, and the UAE, have created excellent infrastructure for refining, storage, transport, trading, and financing of gold to meet the spurt in gold demand in the region.
This infrastructure has greatly enhanced the efficiency of the gold markets in these countries and brought about efficient price discovery, quality assurance, active retail participation, and use of gold-linked financial products instead of jewellery for investments. Under the circumstances, it is high time for India to have a robust online spot gold exchange.
Merits of a spot exchange Price Discovery: As in the case in the derivatives market, there is increased information flow leading to efficient price discovery in an exchange-traded spot market too. Benefits of online spot platform Rule-based trading Anonymous trading Defined quality parameters Counter-party guarantee Remote market access Reference benchmark prices
A gold spot exchange would enable widespread dissemination of spot prices, leading to transparency and a benchmark price. An exchange-traded market could also address the problem of fragmented physical markets.
The case for India Gold Fix
An online platform for gold could be utilised for creating an ‘India Gold Fix’ that would serve as a reference benchmark price to Indian stakeholders. In its absence, stakeholders often refer to the London-based LBMA Gold Fix. However, an important factor for the success and acceptability of ‘India Gold Fix’ would depend on the presence of a right mix of participants from across the value chain, such as jewellers, importers, wholesalers, and institutional players.
Lessons from international experiences
Internationally, the presence of a vibrant spot market with a derivatives market has led to product innovation and left a deep impact on the commodity value chain.
China: Shanghai Gold Exchange (SGE) offers gold leasing solutions along with gold spot trading. The availability of multiple products like spot, derivatives, and deferred delivery on the SGE platform has contributed enormously to its growth. UAE: The Dubai Multi Commodity Centre (DMCC) and the Dubai Gold and Commodities Exchange (DGCX) provide gold derivative and spot platforms. Innovation on these platforms include the DMCC Tradeflow, a trade finance product; regional gold options trading; a Shariah-compliant hedge fund product; and the Dubai Good Delivery Standard, an international standard for 1 kg gold bars of .995 purity. Turkey: Borsa Istanbul Precious Metal Market (BIPMM) within Borsa Istanbul is one of the most successful gold trading platforms. Market-makers and banks are not only permitted to trade, but gold held at the exchange is even allowed as part of banks’ SLR requirements.
Thus, the success of gold spot exchanges globally emphasizes the need for an existing liquid platform in India, with the participation of diverse stakeholders offering multiple products.
This is a partnered post.