India needs its own gold exchange similar to Shanghai Gold Exchange

Aug 12, 2016 - 11:13 AM GMT

India needs to establish its own spot gold exchange similar to that of China’s Shanghai Gold Exchange, Somasundaram PR of the World Gold Council said in an interview here in Agra.

The World Gold Council has previously called on the industry to establish its own exchange in a policy document nearly two years ago, but Somasundaram, managing director of the World Gold Council in India, has once again called on the industry to unite around one exchange that could ultimately be the country’s saving grace at a time of huge change.

“We as the World Gold Council believe this is absolutely one of the core developments that is required to properly catalyse this market both from the point of view of compliance and transparency, and from the point of view of consumer interest,” he said. “We are more than convinced that a gold exchange with proper working facility is the way to go,” he added.

Privately, the Government has told both the WGC and various members of the industry in a meeting in December 2015 relating to gold policy that they [the government] are leaving it to the trade to come up with the proposals itself.

Quoting officials, Somasundaram said “We are leaving it for the trade to come and tell us whether you need a gold exchange.”

The Bombay Stock Exchange and Indian Bullion Jewellers Association [IBJA] have already signed a memorandum of understanding to establish a spot physical exchange, but have yet to get the formal backing of the World Gold Council, as it has not got any involvement from the state and currently lacks a genuine framework.

“The idea is sold, but we don’t want to rush into a solution where ultimately nobody benefits,” he said. “We are happy somebody is doing something – they are asking us to get involved and of course we bless it but we don’t want four exchanges in the country, others want to do it, MCX, for example,” he said.

“We want to make sure it has a character of its own, even if it takes some time, so we can get the right partners, it needs infrastructure and consumer confidence, consumer confidence comes from infrastructure, which includes everything, sourcing, melting, good delivery, he added.

The buying and selling of gold in India currently takes place through many channels, both formal and informal. Prices can often vary throughout the different channels – where one participant may quote a premium over London spot for 1kg bars of $15-16, others can quote upwards of $25.  The country also has a problem with under-carratages, as large amounts of supply come from non-LBMA recognised refineries.  

The government is also cracking down on the cash-economy that fuels the likes of the black market – Somasundaram says that 12.5 percent of annual GDP is cash-only and only one percent of the population is compliant with the country’s tax system.  The gold trade in the country also exacerbates the trade deficit, due to the large amounts of bullion being imported, with over 20,000 tonnes of metal held domestically at present according to some estimates.

A gold exchange could at least solve gold’s involvement with that, he says, particularly as large amounts of India’s annual gold consumption comes from the agricultural industry who use gold as an alternative to conventional banking.

Asked whether he thinks that the government should establish the exchange, Somasundaram disagreed – “We don’t think that the state banks are ready to run it, they are too little staffed because of the huge stress in the banking system,” he said.

“It has got to be some quasi-government like a couple of existing exchanges, some of these other associations, the people who have influence on gold, they should be brought together, there could also be some foreign partners perhaps.”

“But it can’t be completely private, India has had a bad experience with the national spot exchange limited, so we have to tread very carefully, but this is exactly what happens when somebody starts without a regulatory framework.”

MCX offers gold trading on its exchange but there is currently no platform for physical trade.

The World Gold Council is set to release a second Gold Policy document in November expanding on elements like the exchange.

(Editing by Martin Hayes)