India is one of the largest consumer and importer of gold, making up around 25 per cent (975 tonnes in 2013) of global gold demand (3,864 tonnes). In spite of this, the country still does not have a major say in deciding international gold prices.
Prices in the domestic market are broadly international prices converted to rupees at prevailing currency rates plus taxes, since we import most of our requirements. India still does not have a physical market for gold at the national level.
Internationally, US and UK are major trading hubs for the $20-trillion precious metals market. In UK, London Bullion Market Association (LBMA) conducts gold fix with its five members, who are all banks.
These banks are market makers. They have good exposure to gold on behalf of their clients or their own proprietary positions.
This happens twice a day and are called A.M (10:30 am London time) and P.M (3:00 pm) fix. This rate is used as a benchmark for trading. It is also used by large gold owners like refiners to value their inventories.
Recently, the LBMA came under scrutiny by UK Financial Conduct Authority (FCA) over the process of fixing gold prices. There are allegations that the participant members have an upper hand over fixing the prices and therefore, there are more chances of manipulation/insider trading.
One of the members, Deutsche Bank, said that in January it was pulling out of the process for setting gold and silver benchmarks as part of a wider move to scale back its involvement in commodities trading.
There is an increasing need to make the trading more transparent and diverse. India should play a leading role and try to become a major trading hub for precious metals.
In India, the demand for gold has continuously increased but the major use is in the form of jewellery. However, its use as an investment option is on rise.
With financialisation of commodities, there is increasing need for a reference prices, including in gold. Indian financial institutions can use the abundant gold stored in India as a financial instrument. This can be a win-win situation for investors and the Government.
For the investors, they can earn interest from the non-income yielding gold stored in their lockers. For the Government, this can release some amount of gold in circulation and can reduce imports.
A Mumbai gold fix once or twice a day can be a good option as starting step towards the financialisation of gold. India already has an Ahmedabad fix, but the price of gold changes in other States due to local taxes.
Absence of uniform tax structure leads to disparity in prices across the nation. Mumbai contributes around 6.16 per cent of India’s GDP. Mumbai is also the hub for RBI and hosts head offices of many banks. Since Mumbai is the commercial capital of the country, a Mumbai Gold Fix can serve a better purpose. The fix can be used by jewellers to quote gold prices to their customers.
Indian should push Mumbai as major commodity trading centre on lines of Singapore and Dubai.
A Mumbai Fix can serve as a reference point for settlement of the financial gold instruments. Commodity exchanges can also use the price for their settlements.
The Government and the trading community can come together and form a transparent price discovery mechanism for this.
(The writer is Executive Director, ADMISI Commodities Pvt. Ltd. Views are personal.)