The proposed gold exchange will open competition across modes in which the metal is transacted
The Securities and Exchange Board of India (SEBI) has added a breath of freshness to the commodity market by floating the idea of having a new gold spot exchange. Simply put, buyers and sellers deal with the electronic gold receipt that is issued once the metal is put in the vault. The depository helps in this process and the clearing house clears the trade. When delivery is required, the EGR (electronic gold receipt) is exchanged, and the physical metal can be taken with all the requisite duties/taxes being paid. This is probably the best move as it can also be used in the future for other commodities.
One of the driving ideas is the need for India to become a price-setter as it is the second largest consumer. That won’t be easy, since gold is imported and hence the price will be set outside the country. But for anyone wanting to buy gold as an investment or for consumption, it can be done with ease and transparency on the exchange. Anyone can buy, trade or invest through the EGR without physically dealing with the metal. Hence, it helps consumers. SEBI has elicited views on whether this should be allowed on existing stock exchanges or new exchanges be created? This will not matter as the product is well-defined.
But a thought here is that currently three avenues already there for dealing with gold without holding the metal. The first is the ETF (exchange traded fund) run by various mutual funds where the AUM is around `13,000 crore. Here, one buys the units and can technically convert to gold as the fund has to maintain reserves proportionate to the size of the corpus. But, usually, holders are there for the upside gain and will move in and out based on price movements.
The second is the futures exchange, where the MCX (Multi Commodity Exchange) has amazing trading volumes. Here, traders take advantage of the futures price movement and use the platform as a means of investment. Here, too, one does not have to hold the metal, but can transact on the exchange and make money, although delivery is possible. The futures prices on COMEX (belongs to NYMEX) serves as the basis of prices everywhere in the world and hence the advantage of trading has been leveraged well. The MCX had bullion trading volumes of `29 lakh crore in FY20 and `35.11 lakh crore in nine months of FY22.
The third is the sovereign gold bond that is managed by RBI for the government. One can buy gold equivalent of bonds at the prevailing price and hold the bond for the fixed time period of eight years. An interest of 2.5% is paid on these bonds and one can exit after five years or trade in demat form. There is, however, no option to get the metal as the idea was to give the benefit of the price movement without adding to demand for gold. Currently, the total outstanding bonds are worth around `26,000 crore, which is the equivalent of around 68 tonnes. This is good for an investor who has a fixed tenure in mind.
The interesting issue here is that when there are already three options for getting the benefit of the price of gold, will a gold exchange work in terms of attracting investors? There are, of course, different levels of expertise involved when dealing in the futures market while an ETF looks after the money with its knowledge. The sovereign gold bond is a vanilla product where one gets the value as well as interest. Futures trading requires individuals to be adept at derivative trading. The distinguishing factor will finally be the cost involved in moving in and out of the transaction as the underlying price will tend to converge as markets will arbitrage to equalise prices.
Interestingly, one can also buy gold coins from banks, which is the fourth option for those who just want to hold gold. The new gold exchange will hence add another dimension and open competition across modes. Stock/commodity exchanges can ideally have two platforms for spot and futures and make things seamless. In fact, they already have spot exchanges where this product can be added. Surely, there are interesting times ahead.