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Committee Forming to Establish Indian Spot Gold Exchange

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The World Gold Council has announced plans to form a committee that will help set up India’s first physical gold exchange. Officials say they hope to have the exchange up and running in 12 to 18 months.

The committee will not actually set up the exchange, but will provide guidance. WGC Indian operations managing director PR Somasundaram told Bloomberg the council is in the process of creating an industry committee of jewelry trade associations, dealers, miners, regulators, foreign and Indian banks, and eventually some consumers.

Indians have a love affair with gold. The country ranks as the second largest consumer of the yellow metal in the world. It’s not just a luxury. Even the poor buy gold in India. The yellow metal is interwoven into the country’s marriage ceremonies, and cultural and religious rites. Indians also value gold as a store of wealth, especially in poor rural regions. According to the World Gold Council, Indian households hold over 22,500 tons of gold.

Two-thirds of India’s gold demand comes from these areas, where the vast majority of people live outside the official tax system.  Owning gold provides a vital economic lifeline, especially for Indian women. It allows them to gain access to cash, and even goods and services, during difficult times.

The exchange would allow retail investors to bring their physical gold to formal financial channels and make it easier to monetize it. According to the WGC report, a physical exchange would enable jewelers, retailers, refiners and banks to trade over a regulated platform.

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.”

Only China consumes more gold than India. But officials say despite the size of the Indian market and its significant global position, it can’t realize its full potential. Officials say a formal exchange will boost transparency and streamline bullion trading. The goal is to ensure standardization, facilitate better price discovery, bring unorganized players into the formal sector, and to give consumers better access to supply. According to the WGC report, “Given the broad push for greater transparency and appetite for reform, the time is opportune to introduce structural reforms.”

How average Indians will view a formal exchange remains to be seen, especially in rural areas. Large segments of the Indian economy operate underground. The government has aggressively pushed stop it.

Many Indians thwarted a government policy to bring the underground economy out of the shadows by converting their “black money” into gold.  Last fall, the Indian government announced a surprise demonetization policy meant to drive so-called black money out of the shadows, declaring current 1,000 and 500 rupee notes would no longer be valid. The suddenly worthless notes made up 86% of the currency in circulation in the country at the time. The move made virtually all of the cash in India valueless. In that environment, it’s pretty clear why Indians would want to hold on to their physical gold and avoid any kind of formal system.

Regardless, gold will continue to be an important part of the Indian economy, whether formally, underground or both.

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