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All that glitters

All that glitters
India is one of the largest importers and consumers of gold in the world with 90 <g data-gr-id="68">per cent</g> of the country’s physical demands for the metal, being met from imported gold bars. However, a majority of this gold is bought by people in India as a savings measure and often kept stored away in their lockers at home or elsewhere to be used in their hour of need. Prime Minister Narendra Modi’s government highlighted the “Make in India” and the need for reducing dependence on gold imports while making efficient use of the stored up gold by bringing it into the economy with the benefits going to both owners and the nation.

National Commodity & Derivatives Exchange Limited (NCDEX), a leading national commodity exchange, announced recently the launch of Mumbai as a “Delivery Centre” for the national gold market through its “Gold Now” platform that was introduced last month. This platform, which is aligned with the “Make in India” campaign, is the first transparent and convenient online market for buying and selling gold, and will accept the yellow metal recycled in exchange-approved refineries as “Good Delivery”. GOLD NOW – Mumbai, which is expected to reduce the dependence on imports, will be available for the trade from July 27, 2015.

The NCDEX “GOLD NOW” is establishing an online, vendor-neutral and organised national level physical market for gold in the country, a regulated market with counter-party risk management and compensation guarantee and Indian Gold Standard for refined gold produced in the country. The two “GOLD NOW” Forwards Contracts of NCDEX include: GOLD NOW – INDIA GOLD, and GOLD NOW – LBMA with trading locations in six cities across the country initially including Mumbai, Ahmadabad, Delhi, Hyderabad, Kochi and Chennai.

Samir Shah, MD and CEO, NCDEX, while noting that this is the first time such a system is being started to take gold out of households and make it a vibrant part of India’s economy, said the Gold Now national marketplace is an endeavour towards creating an ecosystem that is at par with  international standards. “With the launch of this platform in Mumbai, we are hopeful it will help the local bullion and jewellery industry improve its efficiencies,” he said.

The Gold Now platform provides an impetus to the domestic recycling industry. After a year-long exhaustive and meticulous accreditation process which was designed and conducted by three leading experts of international repute, the exchange has approved four domestic refineries –  as “Good Delivery” on the “Gold Now” platform – where they are expected to satisfy the stringent financial, technical and customer due diligence standards established by the Exchange. Gold now offers bullion in one kg and 100 grams forward contracts for six centres with the daily delivery facility through T+1 and T+2 settlement system. In addition to Mumbai, Hyderabad, Ahmadabad, Chennai and Delhi, delivery is also expected to be available in Jaipur shortly.

Approximately 20,000 tons of gold is estimated to be lying with Indian households, temples and trusts while, If mobilised effectively, could create a domestic supply of gold while reducing dependence on imports, in line with the government’s proposed Gold Monetisation Scheme.

Speaking at the launch event “India Gold – Unlocking Potential,” Rishi <g data-gr-id="62">Nathany</g>, Chief Financial Segment, NCDEX, said: “The year 2014-2015 witnessed tremendous activity in the commodity market and lots of transactional efficiencies was expected to creep into this market including options for index futures. Despite the present monsoon causing commodity prices to be hiked, the good news was that NCDEX had been awarded for the most innovations and the biggest news presently being the warehousing system which we have revamped.”

“NCDEX is the first exchange for having a regulated forward feeding platform to buy or sell with anyone nationally”, he added.

Describing the Indian jewellery sector as being totally worth around Rs 4.5 lakh crores, Sanjeev Agarwal, CEO, Gitanjali Exports, said: “This launch is a historical moment and holds great potential for commodity exchange, besides also being a place where people can go to with their gold. There are over 3.5 lakh jewellers in India out of which many say they do not understand hedging. Now it is a wake-up call for them as they can educate themselves as to how to cover their prices when they are often staring at losses.”

“Highlighting transparency” as being very important alongside noting that if the pricing is right, then people’s faith in the Indian gold industry will be strengthened, Manish Jain, Managing Director, RL Jewels, said, while congratulating NCDEX on its launch of its Gold Now platform: “Pricing, Premium, Purity and Supply Chain are the factors whose variables depend on its supply partners today. Modi’s Make in India initiative is <g data-gr-id="63">highlighting</g> formation of job skills and we are encouraging this.”

Pradeep Nagori, Senior Vice President, Edelweiss Commodities said: “the past one to two years had witnessed huge regulatory changes taking place with the focus on the gold market and stoppage of gold import. However, one good thing that had emerged was the strong concentration on promoting local gold channelisation – of which an estimated 30 tons to 40 tons was lying in private holdings. This had led to tax incentive schemes coming out to set up good gold refineries in the country over the past few years, though the need of the hour was to get these newly-set up refineries accreditation to world regulatory standards in order to achieve the goals of the Central government schemes faster.”
He added: “as part of India’s aspirations to make Indian gold to world standards – the present NCDEX launch in Mumbai is the first such step in bringing the market gold from households”

Naveen Mathur, Associate Director – Commodities & Currencies; Angel Broking, while announcing that CPAI were co-hosts along with the NCDEX of the platform launch in Mumbai said: “the CPAI’s 250 members were supporting this <g data-gr-id="54">initiative, beside</g> him also representing the Risk Management Committee in this Association”.

Vivek Jalan, Senior Vice President, NCDEX, while speaking about the “GOLD NOW” product said: “We have launched innovative products in the non-agricultural sector of gold hedge products including ‘Gold Hedge Contracts’ worth Rs 38,000 crores. There is also a ‘Futures Contract’ in which there is no need to do gold or currency hedge”.

He said that the government and the Reserve Bank of India restrictions led to supply squeeze for imported gold bars in 2013. The NCDEX had come out with its formula in which premiums have started from January 12, 2015, and these details could be viewed on the NCDEX website while providing details about Gold Hedge, Gold Delivery and Gold Forward.

Gold and its international connect
India – despite being the world’s largest consumer of gold and <g data-gr-id="104">biggest</g> exporter of gold jewellery – remains a price taker and follows the international markets for its pricing in <g data-gr-id="105">domestic</g> market. Domestic price of gold in India is, thus, derived from the international gold price, rupee-dollar exchange rate and domestic market conditions, which includes customs duty, domestic premium etc. for physical market players with considerable exposure to international price risks, the single most important factor that ensures their ability to effectively hedge risks by trading in domestic futures is transparency in domestic pricing. However, since 2013, domestic market conditions and government policy interventions have distorted the rupee price of gold, resulting in drastic de-coupling of domestic market from international gold market, resulting in non-transparent price discovery and imperfect hedging.

A survey of physical market participants throughout India carried out by NCDEX for seeking feedback from key stakeholders on their participation in the compulsory delivery contracts in gold revealed that: Derivation of Spot Price/Final settlement Price (FSP) was not in sync with current market prices. 

Currently, the final settlement price of compulsory delivery contracts in Indian exchanges is derived through spot price polling. However, the spot market price of gold is shrouded in a cloud of mystery and opacity which does not allow market participants to back-calculate the domestic spot price for gold in the country. Given the international linkages, effect of exchange rates and impact of domestic factors like customs duties and premium  on the spot price of gold, transparency in the calculation of final settlement price is utmost important in ensuring efficient hedging and price risk management. NCDEX’s newest offering GOLD FUTURES is an attempt to discover a composite spot price for gold in the country by <g data-gr-id="106">simplifying</g> methodology used in the calculation of FSP in a transparent manner. 

India’s gold market, not organised
Even with huge gold imports and large size of gold industry, India’s gold market is not efficiently organised – due to bulk of local gold trade being bilateral with no transparent mechanism for efficient price discovery and counter-party risk management. Absence of a nation-wide physical market for buying/selling gold means that participants including small jewelers and <g data-gr-id="135">rretail</g> buyers rely on informal gold price quotes disseminated by large bullion dealers for daily rupee price of gold in the country. These large traders in turn base their prices on the dollar rate at which the nominated agencies, mainly banks, have supplied gold to them and on the payable customs duty and rupee-dollar exchange rate.

Physical market investors of gold in India currently face the following challenges: gold is inherent to our cultural and religious ceremonies and all sections of society buy gold as jewellery or investment, but absence of a neutral, transparent and regulated <g data-gr-id="134">nation-wide</g> marketplace puts the gold investors to disadvantage as there are no “two-way reasonable” quotes available at any point in a year. Also, about 400 tonnes of scrap gold enters the system through domestic smelters yearly and constitutes investment demand but does not lead to an appropriate price discovery as recycled gold is not considered as “good delivery.” Lastly, there is no domestic (Indian) standard for gold supplied from local refineries in the country.

Gold is a sign of prosperity in India
Gold occupies an important place in the Indian economy and its possession has always been considered a sign of prosperity. With domestic gold production close to negligible and demand being met by imports, enabling India to become self-sufficient in gold by generating domestic supply channels is therefore extremely crucial. However, effective <g data-gr-id="168">monetisation</g> of gold and creation of its domestic supply calls for an appropriate policy response in both regulatory and monetary spheres. Change in the Government <g data-gr-id="165">perception therefore</g> becomes a pre-requisite for achieving this goal. Both India and China accounted for 54 <g data-gr-id="169">per cent</g> of consumer gold demand in 2014. But a high level of gold imports has been a drag on India’s current account whose deficit equaled 4.7 <g data-gr-id="170">per cent</g> of GDP in 2012-2013 – due to which the RBI was forced to impose restriction on imports of gold. Several solutions like “Gold Deposit Scheme (GDS), Gold Exchange-Traded Funds (ETFs) and <g data-gr-id="162">possibility</g> of setting up a bullion trading corporation have been suggested and even implemented. While the Gold Deposit Scheme has met with limited success, Gold TEFs have actually exacerbated the problem of growing dependency on gold imports. 

The RBI introduced the Gold deposit Scheme in 1999 to bring privately-held gold into circulation. A 2014 survey by FICCI showed that consumers are willing to part with their gold if provided  with the right kind of incentives in the form of properly-structured savings and investment products. It also showed that attachment to ancestral gold is not as rigid as it is perceived to be. Other ways to achieve self-sufficiency in gold include: gold certificates, India branded gold coins that are minted by recycling gold (commencement of work in developing the Indian gold coin as announced in this year’s Budget is a step in this direction. Banks could also devise ways to spread awareness on the benefits of depositing gold so as to mop up the ‘under the pillow’ stock currently lying with Indian households and put it to use. 
Dominick Rodrigues

Dominick Rodrigues

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