Spot gold exchange - New Investment Avenue for Indians?
- 22 Apr
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By floating the concept of establishing a new gold spot exchange, the Securities and Exchange Board of India (SEBI) has breathed new life into the commodities market. Simply defined, buyers and sellers transact through the electronic gold receipt given after storing the metal in the vault. The depository facilitates this procedure while the clearinghouse completes the transaction.
Exchanging with EGR
You receive the EGR (electronic gold receipt) for the real metal during the exchange, which includes all applicable tariffs and taxes. EGR is formed originally when actual gold is placed with Vault Managers after being assured of its purity.
They are transferred to the beneficiary's Demat account. Since EGRS holds everlasting validity, you can retain EGRs indefinitely. Ultimately, an EGR holder may return the EGRs and get the underlying metal from the vaults.
Keep in mind the following:
1. You can only convert when you have collected 50g of EGR.
2. Storage fees will be greater than those charged by banks.
3. Trading in EGR in order to attract brokerage firms and STT
4. Conversion of EGR to gold is subject to a GST.
This is arguably the best way to proceed since it could also be used for other assets in the future.
Going Beyond World’s Second-Biggest Consumer
One of the motivating factors lies in the requirement for India to become a price-setter, given its position as the world's second-biggest consumer. That won't seem easy as you source the gold. Hence, the determination of the price goes outside your premises. However, anybody interested in purchasing gold as an asset or for personal use may do so quickly and transparently on the market. Without directly interacting with the metal, anybody may buy, sell, or invest via the EGR. As a result, it benefits customers.
SEBI has sought feedback on whether it should allow it on current stock exchanges or if they could introduce any new exchanges establishment required. Nevertheless, this would not look helpful as you have a well-defined commodity.
Interacting With Gold
However, a consideration herein is that there are now three paths for interacting with gold without owning the metal.
The first is an Exchange Traded Fund (ETF) taken care of by multiple mutual funds and has an AUM of around Rs. 13,000 crores. Here, one purchases units and may potentially convert them to gold since you need the fund to keep reserves equivalent to its size. However, holders are often in it for the upside potential and will migrate in and out in response to market swings.
The second is the futures exchange, dominated by the MCX (Multi Commodity Exchange). Traders take advantage of the futures price fluctuation and invest via the platform. Again, you should not keep the gold but rather trade in the marketplace and profit.
COMEX (belongs to NYMEX) futures prices serve as the foundation for pricing around the globe, and therefore the benefit of trading has been amplified. The MCX traded bullion worth Rs 29 lakh crore in FY20 and Rs 35.11 lakh crore in the first nine months of FY22.
Sovereign Gold Bond
The third is the government's sovereign gold bond, which the RBI handles. One may purchase gold equivalent bonds at current market prices and keep them for eight years. These bonds pay 2.5 percent interest, and you can sell them after five years or trade them in demat form.
There is, unfortunately, no option to purchase the metal since the purpose was to gain from any movement in the price without increasing the fold demand. The entire amount of outstanding bonds is around Rs. 26,000 crore, or approximately 68 tonnes. This is advantageous for investors with a definite duration in mind.
Is Trading Gold with the Market Helpful?
The intriguing question here is whether a gold exchange would succeed in recruiting investors since there are already three ways to gain from the gold price. Naturally, you need varying degrees of experience while trading in the futures market.
On the other hand, an ETF manages the money with its expertise. The sovereign gold bond is a standard commodity that provides both value and interest, and individuals who trade futures must be proficient in derivatives trading. Finally, the differentiating feature will be the cost of entering and exiting the transaction since the underlying pricing will begin to converge due to market arbitrage.
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