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Regulatory Changes in India Could Boost Gold Market

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Last week, there was some significant news out of India that could further boost the country’s gold market.

The Indian government will now allow banks to engage in gold bullion business – including holding, buying, selling, hedging and leveraging the yellow metal. Under current rules, banks can only serve as a consignment or channeling agent in the import of gold bullion for jeweler and exporters.

The loosening of regulations could increase a gold market that already ranks as the second-largest in the world behind only China.

World Gold Council India managing director PR Somasundaram said the move would almost certainly boost the gold trade in India.

Allowing bullion banking will be a main step towards developing gold infrastructure in India and establishing gold as an asset class. Once bullion banking is allowed, banks can handle bullion risk, hold gold account, hedge and take active part in the proposed gold spot exchange.”

Somasundaram said the regulation change would augment a proposed Indian spot-gold exchange and support better price discovery in the Indian market. Other analysts said it would increase the availability of gold.

Indians traditionally have a strong affinity for gold. While you may think of gold as a luxury item, many Indians view it as a necessity. In the Asian nation, buying gold is not just for the rich. In fact, a recent survey shows that possessing the yellow metal is a universal phenomenon across all income classes in India.

The yellow metal is interwoven into the country’s marriage ceremonies and cultural rites. Indians also value gold as a store of wealth, especially in poor rural regions. Two-thirds of India’s gold demand comes from these areas, where the vast majority of people live outside the official tax system. This explains why even the poor buy gold in India.

One in every two households in India purchased gold within the last five years. Overall, 87% of households in the country own some amount of the yellow metal. Even households at the lowest income levels in India own some gold. According to the survey, more than 75% of families in the bottom 10% had managed to buy gold.

If anything, these numbers likely understate gold ownership – especially among the poor. An official involved in the survey who did not want to be identified told LiveMint that survey respondents are often hesitant to admit to purchasing gold. This comes as no surprise considering gold is a major part of India’s vast underground economy.

Indian gold demand already has a significant impact on the global gold market. As banks take advantage of regulatory changes and enter the gold business, it could boost demand for the yellow metal in India even higher.

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