A gold spot exchange for India: Delivering Structural Reforms

With an annual demand of approximately 800-900 tonnes, World Gold Council recognizes a need to reform the gold trading market in India.

Recently, World Gold Council released a report on ‘A Gold Spot Exchange for India: Delivering Structural Reforms’, that outlines a vision for a gold spot exchange and its associated ecosystem, identifies key design elements, lists critical success factors (based on global examples), recognises potential benefits for entities across the value chain, the economy as a whole and sets forth a roadmap for multi-stakeholder collaboration to ensure successful design and launch of the exchange.

A gold spot exchange enables market participants to buy and sell physical gold with immediate settlement of gold and cash. Though India currently has several commodity exchanges, they operate as futures exchanges which are primarily used to hedge against gold price risk and take proprietary positions on gold price movement. A spot exchange, on the other hand, focuses on price discovery and hence, provides the entire ecosystem around physical deliveries.

In order to be able to deliver on the vision, the proposed exchange needs to meet international best practices and also be completely trusted by the market. A spot exchange, encompassing a broad ecosystem for efficient physical trading of gold, can play a significant role in reforming the gold market in India. The spot exchange provides a robust ecosystem around trading and delivery. Specifically, the exchange would provide a central venue for trading, a well-connected network of delivery locations where each location would be serviced by one or more vault operators and a central counterparty to clear and settle trades.

Several countries such as the UK, China, Turkey, the UAE, Russia and Singapore have fully functional spot exchanges. However, Turkey and China, in particular, have a similar culture and consumption pattern to India. They also faced similar challenges around price, quality and monetisation. Early in their struggles, these markets introduced gold spot exchanges and have since witnessed significant growth and improvement.

The spot exchange can accrue significant benefits to market participants. While bullion market participants will benefit directly, scrap dealers, gold doré importers and end consumers will receive indirect benefits. However, the exchange may also create some short-term challenges for those participants who currently do not adhere to delivery and compliance standards. The following table provides an assessment of the value proposition of the exchange for each participant segment.

While the exchange will bring some benefits immediately, the key benefits to the Indian economy will accrue over time as the exchange evolves from being a wholesale/ institutional and domestically focused to enabling retail and offshore participation. Overall, there are four key benefits for the Indian economy. The Indian market has long aspired to introduce a credible India reference price. The spot exchange is the most appropriate mechanism for realising this objective.

Indian households hold ~22,500 tonnes of gold. While banks’ widespread network and trust factor are essential to facilitate retail investors to bring their gold to formal financial channels, the spot exchange can be a key enabler for the success of these efforts. The exchange can provide strong impetus to gold monetisation schemes by facilitating price transparency at the time of both sale and purchase of gold. In addition, the exchange can also help enable banks to design and offer innovative gold linked products through the ecosystem provided by the exchange. Monetisation of household gold will increase the circulation of gold in the Indian economy thereby stabilising the impact of gold imports on India’s current account deficit.

An organised domestic gold market, along with establishment of India reference price, will increase India’s influence in global gold market. Moreover, given the volume of gold imported into India, opening up India’s gold market to offshore units can potentially create a strong case for India to emerge as a global hub for gold trading.