Here is why gold may glitter again in India
New Delhi-India (Dec 2) While equity markets are watching every move of the government with an electron microscope in search of reform measures, there is a lot of activity going on in the commodity space, especially the gold market.
After a series of gold schemes launched by the Prime Minister about a month ago, there are now talks of having a gold exchange in the country. The earlier schemes were meant to utilise the gold hoarded in households and trusts and at the same time encourage the use of gold in electronic form rather than physical form as a means of saving instrument.
A gold exchange will take the same idea two steps forward. First, it will ensure a fair and transparent rate between suppliers and consumer. Second, it will be the first point of sourcing rather than looking for imports as is the practice in the current scenario.
India is not the first country toying with the idea of a gold exchange; Turkey and China have done it earlier. The impact of how gold exchange has helped transform the gold market in these countries will help us understand the possible impact in India.
Turkey is the fourth largest consumer of gold in the world. Like Indians, Turks love for gold is legendary. The country imports nearly 181 tonnes of gold every year accounting for nearly 6% of global consumer demand. World Gold Council (WGC) estimates that 3,500 tonne of ‘under the pillow’ gold has been accumulated by Turks over the years.
A WGC report says that gold plays an important role in weddings and other aspects of religious life. In the jewellery fabrication industry, it is a medium of exchange and a unit of account: in the Grand Bazaar – the heart of Turkey’s gold market – rents are often priced in gold. There are even gold-dispensing ATMs on the streets of Istanbul.
Unlike India, Turkey has an active gold mining industry. Gold production has increased in almost every year since 2001, growing from 2 tonnes to nearly 33.5 tonnes presently. Turkey’s Ministry of Energy & Natural Resources estimate gold reserves to be 840 tonnes, while resources could be as high as 6,500 tonnes. In comparison, India barely produces 1.5 tonne of gold with consumption of upward of 800 tonne.
Istanbul Gold Exchange in Turkey has helped improve gold infrastructure significantly there. Gold is a thriving industry in Turkey with gold fabrication, consumption and recycling adding nearly $4 billion to Turkey’s economy. The value chain supports 5,000 gold fabricators, 35,000 retail outlets and employs about 250,000 people.
Turkey’s gold reserve stands at nearly 500 tonnes roughly at the same level as India. A large part of this goes to government’s effort in managing to put the ‘under the pillow’ to use. About 250 tonnes of gold has been put into constructive use following government schemes, which are similar to those launched in India recently.
The country's commercial banks introduced gold-related banking products in 2012 in an attempt to draw gold stored in Turkish consumer's hands into the banking system. Of the 250 tonne, nearly 210 are from saving instrument like gold bond which would have otherwise gone into hoarding of gold and the remaining is from personal savings that have been put to use.
As for China, which is the top consumer of gold in the world, transformation of the gold industry took place only after monopoly of People’s Bank of China (PBoC) was lifted and Shanghai Gold Exchange was set up in 2002. Since then, China’s share of global private sector demand of gold has been increasing from less than seven per cent to over 25%.
Gold exchanges have played an important part in the development in both Turkey and China. With renewed interest by the government in this sector, the same can hold true for India markets, the second largest consumer of gold in the world.