🏆 India v/s UK: Gold Edition
India is done being a gold buyer. Now it wants to be a gold price setter. For us that means cheaper gold and an easy way to trade it. Here's how.
India absolutely loves gold!
Diwali? Buy gold. Dhanteras? Gold. Marriage? Gold. An idol in the temple? Gold. Time of crisis? Can’t trust anything or anyone? Gold!
Despite being the second largest consumers of gold in the world, we still depend on others to set the price of gold for us.
However, this could change very soon. Thanks to our very own gold exchange and a brand new way to trade gold: Electronic Gold Receipts.
Wondering how they are going to change the nazara (view) of the gold market? ReadOn!
🤔 How Does Gold Pricing Work?
Currently, the price of gold is mainly set by the London Bullion Metal Exchange and depends on multiple factors like demand and supply.
But why the LBMA and why not us or China which is the biggest consumer of gold?
LBMA has set up infrastructure and systems in place due to which most gold is traded through it.
It did so by standardising gold bars, maintaining a list for refiners and smelters who can produce these bars and optimised processes by listening to gold suppliers and consumers.
India on the other hand, had no standardised quality assurance till last year, when we finally made it mandatory for most jewellers to only sell hallmarked jewellery.
Plus, even though we are a huge consumer of gold we don't necessarily use it for trading and investment. Much of our gold is either lying idle in lockers or looking pretty around our hands and necks.
So, we have now launched our very own gold exchange. Wait, how is this going to change anything?
⚡The Impact of the Gold Exchange
First, let's talk about what the gold exchange will do.
Before the gold exchange came into existence, very few banks and institutions could import gold to India.
And India needs gold imports. Because back in 2020, we only mined 1.6 tonnes of gold. And our demand for gold is 750 whopping tonnes.
So, jewellers had to depend on these institutions for their gold supplies. This often led to a lot of price disparity, with different bullion associations charging different rates. Often gold rates differed from state to state as well because of this.
Now, because most major jewellers will be able to import gold directly at pre-set international prices, it will help set a standard price for gold. Plus, with no middleman now involved in the buying of gold, it could become cheaper for us.
Moreover, the exchange will also standardise the quality of gold, by allowing gold of only a certain purity to be traded.
So, no more impure gold and no more price disparities. Win-win, right?
But how does this help us become the price-setter in the world?
For that, we have the Electronic Gold Receipts.
🤓 What are Electronic Gold Receipts?
If you've ever bought and sold gold you know it involves a lot of hassle. But what if it could be made infinitely easier? Just like buying stocks on the stock market?
That's what EGRs are set to do.
They are basically like share certificates but for physical gold stored in the vaults maintained by the gold exchange.
So, you can deposit your gold at a designated delivery centre handled by the exchange and they will give you an EGR after verifying the quality. You can then trade these EGRs like you trade shares.
Easy-peasy, right?
And now even the BSE has allowed trading of EGRs making it simpler and easier for people to trade gold this way.
Okay, ReadOn, sounds interesting but again, how will this help us become price-setters?
Like we already said, we buy a lot of gold. But till now this buying and selling was mostly informal and not centralised. With this exchange and the BSE launching EGRs most purchases will be formalised and centralized. Plus, with the ease that EGRs provide more people could now trade the gold which is lying in their lockers. This increased volume of sales and trades could give India a say in setting gold prices. Because ultimately it is the demand and supply of gold that determines what the price should be.
But things are rarely so simple.
We are hoping that the EGRs will increase gold trading but that hope is based on a lot of optimism and theory.
The ground reality is a little bit different.
You see, EGRs come with a lot of fees and taxes. First there is the transaction charge on every EGR transaction. Then because your gold needs to be stored safely, there are storage and handling charges.
So, most people may not opt for this route and just buy digital gold through other means and call it a day.
Secondly, we need people to verify and store the gold that we submit. These people are called vault managers. And though dealing with gold all day sounds like a great job, not many people are willing to do it.
Because to be eligible you need a Rs. 50 crore net worth and need to comply with a lot of regulations.
So, unless these problems are solved, EGR trade is not going to pick up, bringing us back to square one.
Now, the question is will the gold exchange and SEBI be able to solve these problems and boost EGR trade. And even if they do, will we be able to become price setters of gold some day?
⚡In a line: India wants to set gold prices but this may be a more difficult task than we may have imagined.
💡Quick question: Will EGRs be able to boost gold trade?
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