By Hareesh V
To help farmers and industries hedge their risk in commodity transactions, finance ministry is considering several steps to synchronise spot and derivative markets. According to reports, the government appointed committee on gold policy has submitted its report.
The centre’s plan to brand gold as an asset class could transform the domestic gold industry. The government has been implementing schemes to bring structural changes in the industry to utilise our enormous gold reserves in a productive manner.
Introduction of Gold Monetisation Scheme, Sovereign Gold Bonds and issuing Indian gold coins were such initiatives, but failed to grab considerable attention from investors. In the last budget, the Finance Minister had announced that rebranding of the existing Gold Monetisation Scheme and policies for making gold as an asset class are under consideration.
Gold Spot Exchange and Gold Board to manage the challenges faced by the gold industry are also in the pipeline. India’s fascination with gold is centuries old. People consider gold as the most substantial asset in their wealth portfolio. It is the second top imported commodity in the country after crude oil and we are the second top consumer of this yellow metal globally. Indian gold investors have had to face challenges during the last 4 to 5 years due to unattractive returns.
While lack of a regulated trading environment and presence of a number of local markets resulted in concerns over transparency in pricing and price distortion across the value chain. The changing tax regime and tighter regulations around jewellery transactions have had a huge bearing on the bullion market as well as on the investors.
Another challenge for the industry is high import duty of 10 percent, making domestic gold costlier, attracting illegal imports to the country. Prevailing multiple challenges such as lack of quality assurance, price transparency, liquidity and regulatory issues on the gold ecosystem call for reforming the spot gold market.
Gold imports into the country are estimated at around 800-900 tonnes a year and reportedly households hold around 22,000 tonnes of gold, but the country is unable to realise its potential due to the aforesaid reasons.
Moreover, concerns over quality make Indian gold less attractive in the global markets as well. Unfortunately, Indian gold market continues to be a price taker with little influence in the global market despite being the second top consumer of the metal.
There are two factors that influence the gold pricing in India i.e., the quality of gold (24 karat, 18 karat etc.) and the type of metal used to mix with gold. Domestic gold prices are affected by local demand, supply and various other domestic factors. Though gold rates are published in most newspapers and jewellery association’s websites, gold rates can sometimes vary from jeweller to jeweller.
Due to the inappropriate price discovery mechanism and lack of standard invoicing system, domestic gold prices vary in different local markets. A gold spot exchange, that facilitate participants to trade gold with immediate cash settlement and policies on gold trade, can play a pivotal role in transforming the Indian gold industry. It is likely to allow all stakeholders, retailers, wholesalers, importers, exporters, scrap dealers etc. to the platform, thereby enabling transparent price discovery and standardisation of physical delivery across the country. It can also lead to enhancing quality and formalisation of the market. A national gold policy is likely to connect all the stakeholders of the value chain effectively and assist to create a healthy and efficient gold ecosystem in the country.
Apart from its traditionally known characteristic of being a hedge against inflation and an asset to protect during financial distress, gold acts as an exceptional source of diversification to an individual’s investment portfolio. Gold’s peculiar nature of low correlation with other assets typically assist investors to efficiently manage risks through protection from unexpected negative events.
It also acts as a currency hedge, especially against the dollar. Studies have shown that by using gold as a portfolio optimiser, one can reduce volatility without compromising on the expected returns. For better portfolio diversification, gold is an ideal investment.
Yet gold is considered as part commodity, part luxury and as a financial asset. Its price does not always behave like prices of other commodities or at par with other assets. Gold has under performed for the past several months.
The lackluster undertone in prices was due to the overwhelming changes triggered across its key fundamentals. The bearish tinge in prices was accentuated by a strong dollar and demand concerns from top consumers. Spot gold prices in the international market are currently placed at $ 1285 an ounce. Prices corrected by more than 5 percent since its recent peak of $1365 an ounce. In domestic futures market, prices are hovering near its multi-month high levels due to weak domestic currency.
Though the guidelines for the spot exchange is not yet finalised, reports says BSE and the Indian Bullion Jewellers Association have discussed setting up a spot gold exchange. MCX, the largest commodity exchange in India, is also planning to set up spot exchange on gold. Spot exchanges for metals and energy are also in the radar of the Government.