FOCUS - India should establish its own gold exchange - World Gold Council

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Ian Walkerian.walker@fastmarkets.comPhysicals Reporter+44 (0) 20 7337 2145

London 09/12/2014 - India should consider establishing its own gold exchange and in turn create a domestic pricing structure for gold derived from the London fix, the World Gold Council suggested

"A dedicated institution focused on gold trading… would reduce the potential for arbitrage and aid standardisation," the WGC said in a report on Tuesday.

The buying and selling of gold in India currently takes place through many channels, both formal and informal.

Prices can often vary throughout the different channels - where one participant may quote a premium over London spot for 1kg bars of $15-16, others can quote upwards of $25.

"Fixing the price of gold through an Indian Gold Exchange would address pricing issues," the WGC added. "An exchange would also improve price transparency and assess gold supply and demand."

Creating an exchange would involve the construction of a series of vault facilities, much like the 49 facilities that service the Shanghai Gold Exchange, established in 2002.

Policymakers have long tried to wean the Indian public off its addition to gold to counteract the country's ballooning current account deficit (CAD).

India's CAD widened to $10.1 billion in the second fiscal quarter of this year, the Reserve Bank of India said on Monday, with the surge in gold imports cited as a contributing factor.

The country recently removed the rule that made it mandatory to export 20 percent of all gold imported into the country, although a 10-percent import duty remains in place.

"While some such measures can deliver short-term results, their long-term impact is open to question," the WGC said. "A fully functioning mobilised gold market requires a robust infrastructure, backed by a synthesised approach from government."

The development of a more effective economic policy to gold might include incentivising banks to use gold collected as deposits or collateral, it added.

Turkey, one of the world's top five consumers of gold, initially allowed banks to hold 10 percent of its liquidity reserves as gold, a figure that now stands at 30 percent.

Turkish banks in less than two years have around 300 tonnes of gold monetised as well as several gold-related products in the market, using this metal to meet reserve requirements.

"If India allowed its banks to use gold as part of their liquidity reserves, similar outcomes can be expected," the WGC said.

"At present, financial products linked to gold have been poorly marketed. Many consumers are unaware of them and they are poorly understood. If banks were able to include gold in their reserve calculations, they would be financially incentivised to innovate, market and explain gold-based products," it added.

Since consumers can only sell gold at jewellery stores, banks would need to become part of a recognised channel for the repurchase of gold, the WGC said.

"Allowing banks to repurchase gold is clearly an essential step in the monetisation process," it said.


(Editing by Mark Shaw)



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