Bullion Traders Stir To Form Futures Exchange

Mumbai, October 27: | Updated: Oct 28 2002, 05:30am hrs
Bullion traders here have stirred to form a gold futures exchange in the country for which they have approached the government and the Reserve Bank of India (RBI) to free the precious metal from the regulatory maze.

In this direction the bullion traders intend to set up a new association separate from the Bombay Bullion Association (BBA) that had earlier made attempts to set up a bullion futures exchange but had to drop the proposal following the spat with the Monopolies and Restrictive Practices Act including the methodology adopted to arrive at the daily bullion rates.

China To Unveil Gold Exchange On Oct 30
Our Commodities Bureau
Mumbai, October 27: China is expected to formally announce the launch of its first ever gold exchange in Shanghai on Wednesday October 30. The exchange had begun pilot runs in November 2001 with some 108 members. The exchange has begun experimental trading since October 16, reports indicate quoting officials at the Shanghai Gold Exchange. There were actual deliveries, the officials indicated. Among the exchange members is Chinas biggest gold mining and refining firm Shandong Zhaojin Group which produces 1.4 mn oz of gold annually, accounting for one-seventh of the countrys total annual output in gold.
India is the worlds largest buyer of bullion (gold and silver) and its annual import bill is the second largest after crude oil imports. Annually, India imports around 550-600 tonne of gold, a large part of which is imported through some 20 entities permitted by the RBI to trade in gold.

However, there is a total absence of hedging mechanism for both the suppliers (the permitted entities) as also the users (the traders, jewellery makers and exporters), leaving them at the mercy of price fluctuations in the international market. At best, the RBI recently allowed the permitted bullion banks to price their gold sold within 11 days according to the regulation of the Forward Contract (Regulation) Act, 1952.

The metal is not freed of the other regulatory maze including the FCR Act which prevents forward and futures trading in gold/silver/platinum. Also, both the RBI and the Forward Markets Commission (FMC), the commodity futures regulator, have been debating whether or not to allow forward trading in gold and if so, who would be the controlling authority.

Even the Tarapore Committee in its report on capital account convertibility has recommended to open up the bullion sector as first step to full convertibility.

In absence of any formal hedging/speculating facility in the country, a large number of deals are being transacted daily (especially from the bullion trading community) on the London and the New York Mercantile Exchange (NYMEX) through the illegal havala route. Even the daily rates of gold and silver are on indicative as these are available through an adhoc pricing fixed by a handful of bullion traders in each region/state.

It is at this juncture a section of bullion traders here have forwarded a letter to the ministry of Consumer Affairs, Food And Public Distribution, (Department Of Consumer Affairs), requesting for the release of bullion (gold and silver) from the purview of regulation by applying section 15 of the Forward Contract Regulation Act 1952.

According to the communication, it is important to service the common man with a transparent pricing and proper hedging and delivery system. In this direction India needs to develop a full-fledged precious metals bourse. According to bullion analyst Bhargav Vaidya, if allowed, the bullion exchange would initiate the process of formally getting spot rates that could be benchmarked for forward trading among the permitted banks and entities. This would then pave the way for futures trading in gold and help India gain its rightful place in international bullion market.

Further, the communication states the creation of a bullion bourse will ensure the following: 1) Standardisation of quality; 2) transparent pricing; 3) easy accessibility to all citizens; 4) easy liquidity; 5) creation of paper gold/silver market.

The proposed new association would be formed with the following objectives:

a) Participation of diverse interests -manufacturers, processors, exporters, importers, traders;

b) Online system of trading; efficient clearing, settlement and guarantee systems;

c) Delivery of underlying commodity backed by a receipt system;

d) System of well organised and capitalised brokerage houses; e) Real-time price and trade information dissemination; f) Transparency in operations and decision making; g) Reliable, effective and impartial management and h) Investment support from investors, even institutional investors.

It is estimated that Indians hold around 12,000 to 25,000 tonne of gold. This would easily make it the largest hoarding in private hands. In Indian context this amount would be larger then entire banking systems deposit. Further, silver is poor mans gold in India. It thus has same importance for a common man. In this context importance of bullion cannot be undermined, the note says.

Indias history of bullion buying and consumption should have made the country the largest trading centre in the world and made India the most important player in global bullion market. As a corollary, we may consider Saudi Arabia controls less then 10 per cent of world oil production yet it has a considerable influence on world oil market.