Spot Gold Exchange – New Investment Avenue for Indians?

The Securities and Exchange Board of India approved guidelines for spot gold exchanges at its board meeting on September 28. The benefits of such an exchange, according to a statement from Sebi, would include efficient price discovery, liquidity and quality assurance of gold. There are also plans to create a national price structure for gold.

Despite being the second largest consumer of gold in the world, India currently only allows trading in gold futures.

The new gold exchange will compete with gold sovereign bonds (SGBs), gold ETFs and digital gold.

Let’s first see how the gold exchange would work:

Instruments representing gold that will be traded on an exchange will be called Electronic Gold Receipts (EGR). Any recognized exchange is allowed to initiate EGR trading in a separate segment. The EGR is initially created when physical gold is deposited with the vault managers after ensuring the quality of the gold. They are credited to the beneficiary’s mortgage account. EGRs can be kept for as long as expected, as they are valid forever.

And finally, an EGR holder can take the underlying gold out of the vaults by handing over the EGRs.

Now, what should investors keep in mind about gold exchanges? We spoke to independent market analyst Ambareesh Baliga to understand (please listen to the podcast to learn more).

Things to keep in mind:

1. Conversion authorized only after accumulation of 50 g of EGR

2. Higher storage costs than bank lockers

3. Negotiate EGR to attract brokerage, STT

4. GST on the conversion of EGR into physical gold

We also spoke to Sudheesh Nambiath, head of the India Gold Policy Center at IIM Ahmedabad. He explained the implications of the new systems and how EGR compares to other gold instruments. He said this about gold trading:

  • Pending request
  • Promotes compliance among market players
  • Improves price transparency
  • Retailers can use the platform to accumulate gold
  • Digital Gold Suppliers Can Use EGR As Gold Support
  • Creates confidence among investors as it is regulated by Sebi
  • Cannot make a direct comparison with SGB
  • EGRs can have a similar tax structure to ETFs
  • EGRs will have better liquidity than ETFs

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