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India Working Toward Establishing a Spot-Gold Exchange

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In an effort to bring order to India’s gold market, the government has partnered with the World Gold Council to create a physical spot-gold exchange. According to Bloomberg, it could be up and running as soon as next year.

The move toward an India spot-gold exchange is part of a broader bullion industry self-regulation effort gaining steam in one of the world’s leading gold markets. Last month, three committees formed – one to study a gold trade code, one to formulate good delivery rules, and a third to explore a spot exchange. The committees were born out of a meeting that included business chambers, the World Gold Council, banks, the Indian Bullion and Jewellers Association (Ibja), and the India Gold Policy Centre at IIM-Ahmedabad.

According to Bloomberg, establishing the spot exchange faces some challenges, including the fact that state governments in India oversee gold-related matters, not the central government. Lack of vault space and reliable receipts for metal also pose hurdles.

World Gold Council in India managing director P.R. Somasundaram announced the plan for a spot-gold exchange during an interview in London. He said it would bring more order and structure to the market, “which is what the government would love.” But he said the exchange would not necessarily look like what we see in London, with bullion banks backing liquidity. “It’s going to be very different,” he said.

Gold demand has rebounded in India this year. Gold imports in the first quarter increased 106% over Q1 2016.  It appears strong first quarter demand carried over into the new quarter. Indians bought 23 tons of gold in a single day during the Akshay Tritiya festival in April.

Just how much impact a spot-exchange would have in India where much of the gold market operates underground in rural areas remains to be seen. The government has been trying for several years to bring India’s gold holdings into the light using a variety of schemes including gold monetization, a sovereign gold bond scheme, and the creation of an Indian gold coin. Officials estimate Indians hold around 15,000 tons of gold – mostly in the form of jewelry. In the government’s eyes, this gold is “lying idle.”  But so far, the government has had little success getting Indians to part with their gold.

An Economic Time of India report revealed that most Indians don’t even know about these government programs – or won’t admit they do. In a survey of 1,000 people, only five said they were aware of these schemes. One has to wonder if they would be successful even if people knew about them. Indians value gold and they tend to hold on to it – as evidenced by the 15,000 tons held by everyday people across the country. They recognize gold as a way to protect their wealth. As we reported recently, many Indians have thwarted a government policy to bring the underground economy out of the shadows by converting their “black money” into gold.

The Indian government will certainly continue to try to formalize and control the Indian gold market, but it seems unlikely it will ever be able to overcome the Indian people’s desire to buy and hold physical gold.

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