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| June 10, 2024

The Ultimate Guide to Gold Exchanges in India

Gold has long symbolised wealth and prestige, and owning gold jewellery is an esteemed tradition in many cultures. However, there may come a time when you wish to exchange or sell your gold jewellery for various reasons, such as financial needs or the desire to upgrade your collection. India's domestic market faces several challenges, including high fragmentation and low pricing transparency.

Table of Content

  1. Gold Exchanges From SEBI
  2. How will the Gold Exchange Work?
  3. What are the Benefits of the Gold Exchange?

To understand the effects of a Gold Exchange budget and its potential benefits for both the gold industry and the country, it is essential to first understand the current scenario and the specifics of the gold financial instrument proposed by the Indian Government.

Gold Exchanges From SEBI

In the 2021 Union Budget, Finance Minister Nirmala Sitharaman declared that the Securities and Exchange Board of India (SEBI) would be entrusted with the task of regulating gold exchanges. Consequently, SEBI has given its approval to a framework that will enable spot trading of gold within the country.

Currently, India only permits trading in gold futures. By establishing gold exchanges for spot gold prices, India will enter the ranks of nations such as the United Kingdom, China, and Turkey, which already have functioning gold exchanges.

How will the Gold Exchange Work?

The gold exchange will enable the trading of gold through an instrument called an Electronic Gold Receipt (EGR). EGR represents the physical gold stored in registered vaults. The trading, clearing, and settlement characteristics of EGRs will be comparable to other securities, such as stocks.

Investors have the option to convert their physical gold holdings into Electronic Gold Receipts. Since EGRs have perpetual validity, individuals can hold them for as long as they desire. They also have the ability to convert their EGRs back into physical gold by surrendering the receipts. The Clearing Corporation will be responsible for settling the trades executed on stock exchanges by transferring EGRs and funds to the respective buyers and sellers.

In addition to retail investors, various entities such as banks, foreign portfolio investors, jewellers, and bullion traders will also be able to participate in trading on the gold exchange.

Any recognised stock exchange, whether existing or new, has the opportunity to introduce trading in EGRs within a separate segment. With the approval of SEBI, stock exchanges can determine the denomination for EGR trading (for example, 5 grams, 10 grams, 50 grams, 1 kilogram, etc.) and establish the process for converting EGRs into physical gold.

Suggested Read: What Is Gold Etfs: Investment Process, Features And Benefits

What are the Benefits of the Gold Exchange?

The establishment of a gold exchange in India has been in progress for several years. As one of the world's leading consumers and importers of gold, India has a significant presence in the global gold loan market. However, despite its prominent position, India has not played a crucial role in determining global gold prices. Experts believe that the creation of a gold exchange will empower India to become a price-setter in the global commodity space, rather than merely being a price-taker.

According to SEBI, the gold exchange is expected to bring about several benefits, including efficient and transparent domestic spot price discovery, assurance in the quality of gold, promotion of India's good delivery standard with active retail participation, greater integration with financial markets, and the augmentation of gold recycling within the country.

For investors, trading on the gold exchange will provide assurances regarding the purity of the metal, liquidity, and transparency of pricing, among other advantages. Looking for a gold loan with a lower interest rate? Compare offers from top lenders to save more.

The gold exchange should provide a diverse range of contracts to cater to the requirements of the gold loan industry. These contracts include:

  • 1. Domestic Spot Gold Contract
  • 2. Global Spot Gold Contract, which is denominated in US dollars and based on delivery outside the Domestic Tariff Area (DTA)
  • 3. Dore Swap Contract
  • 4. Gold loan Lending and Borrowing Mechanism (GLBM)

As India's gold consumption continues to grow, it is more likely to impact the price of bullion in the global market and cause price fluctuations. When it comes to the gold loan amount you receive will depend on current market rates and the weight of your gold. In the future, India is expected to become a key player in determining gold price movements and directions. This development will undoubtedly create significant opportunities for the Indian market in the long run.

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