All that Glitters

Investing in Gold Market the right way

-penned by Apoorva Grewal and Rajdeep Sil

India’s love for gold is no secret. But do you know how much we love it? According to some estimates, India has a stock of about 23,000-24,000 tonnes of gold which lies unused with the households and religious institutions throughout the nation. In value terms, based on the 2015 average price, it was worth $800 billion.

To put this into context, tech giant Apple’s market capitalisation at the same time was around $600 billion, and two of India’s largest listed companies, Reliance Industries and Tata Consultancy Services, were quoted at around $100 billion each. 

Thus, to monetise this unutilized gold the Government introduced the Gold Monetisation Scheme (GMS) in the Union Budget, 2015. The gold accumulated under the GMS was to be used productively and profitably, by banks through the Gold (Metal) Loan (GML), a low interest rate financial product for meeting inventory financing needs of the borrower. This would be a win-win situation for all. As the depositors’ wealth is secured by the bank, the bank is able to profitably use the gold deposits and the MSME dominated industry may benefit from the low interest bearing GML.

Fig 1:  Per Capita Consumption of Gold(gram) in the year 2016

India’s gold market is characterized by low per capita consumption, huge idle stock and savings primarily in the physical form.

Having mentioned earlier that India has a stock of over 23000 tonnes of gold in households and religious institutions, how is it that the per capita consumption is a meagre 0.51 gram in India?

The difference between consumption patterns in India and other countries is two-fold. First, per capita consumption of gold in most countries is channelled through financial products. Second, unlike other countries, every household in India buys gold, and mostly, in its physical form which primarily lies unused and never comes into circulation in the market.

  • Existing Gold Investment Instruments:

The relationship between gold prices and stock markets is inverse. More often than not, the gold prices would drop when the stock markets perform well and vice versa. When the stock markets collapse, the demand for gold increases as more and more investors would be looking at safer options.

The ‘golden question’ here is – how does one invest in gold to derive financial value? Two of existing Gold financial instruments are:

Gold ETF (Exchange Traded Funds) and Gold Mutual Funds.

1. Gold ETF: Gold ETFs are similar to buying an equivalent sum of physical gold but without the hassles of having to store the physical gold. Best suited for investors who have the required time and skillset to trade. Owning one unit of gold ETF is equal to owning 1 gram of gold. Thus, the minimum investment amount in gold ETF would depend on the prevailing price of gold in the market

2. Gold Mutual Funds: Gold funds are open-ended funds which invest in units of a Gold Exchange Traded Fund (ETF). The primary aim of gold funds is to create wealth by making use of the potential of gold as a commodity. Best suited for investors who are relatively amateur in investment and those who do not have enough have time to conduct extensive research.

Fig 2: Rising trend of Gold Prices over the years

The graph in Fig 2 shows the appreciation in value Gold as an investment asset has received. Moreover, the steep rise is observed especially during the time when the stock market was facing a bear run, thus further strengthens the argument that, it is essential to include Gold instruments in the portfolio to hedge against the risks that the unpredictable movement of the stock market can bring with itself.

  • SEBI Approved Gold Exchange

As per SEBI’s recent consultation paper, there is a new investment avenue by which investment in Gold can be made. SEBI has proposed setting up a spot exchange where gold can be traded like other commodities, currencies, and securities, for immediate delivery in the form of electronic gold receipts or EGR. Let’s dive deep into what it is and how it could benefit the entire gold market in India.

Following the announcement made in Union Budget 2021-22 which declared SEBI as the regulator for gold exchange in India, EGR is a proposed instrument in the form of an e-receipt that represents physical gold in vaults of denominations (proposed) 1 kilogram, 100-gram, 50 gram, 5 and 10 gram, allowed to be traded on any recognised stock exchange in a separate segment. The physical gold would be assured for quality and deposited with Vault Managers. EGRs will be made fungible and interoperability between vault managers will be allowed. The beneficiary can use his Demat account for trading in EGRs, withdraw the underlying gold any time by surrendering EGRs or even carry the same perpetually. The trading of gold would be carried out in three phases: conversion into EGRs from the physical gold, trading of the e-receipts and again conversion of the e-receipts into physical metal.

The vault manager, a body created in India with a net worth over INR 50 Cr, would be registered as SEBI intermediaries and follow the draft norms that are proposed in this framework. The obligations of the vault manager include accepting deposits, storage and safekeeping of gold, creation as well as withdrawal of EGR, grievance redressal and periodic reconciliation of physical gold with the records of depository.

In the global markets, the London OTC market has been the leading gold trading centre, apart from the US futures market. China set up the Shanghai Gold Exchange in 2002. Encompassing the entire ecosystem of gold trading in India, these guidelines could also put India, the second largest consumer of gold in the world, on the map as a price-setter by making these transactions efficient and transparent in terms of spot price discovery. Although our annual consumption of gold lies somewhere between 800-900 tonnes, currently, the gold markets in India have split price discovery mechanisms and there is no uniformity. So, this would lead to a standardised pricing structure. It would also strengthen the value chain based on trust in SEBI regulation, provide quality assurance, lower costs, and infuse liquidity in the system as it becomes a single stop destination for both derivatives and spot trading.

India is a leading producer and consumer of gold, diamonds, silver, iron ore, rubber, tea, cotton, spices, rice and wheat, and hence, the success of a spot exchange for gold could pave the way for other commodity exchanges in India along the lines of the Shanghai Gold Exchange, Dalian Commodity Exchange (soybean, egg and iron ore), and the Tokyo Commodity Exchange (rubber), etc., where we could envision India in a position to set prices for these as well.

Now that we have covered what EGRs are and what this could mean for India’s gold market, let’s compare them with the existing trading instruments for gold in India.

  • COMPARISON:
 Physical GoldGold ETF/MFGold EGR
SafetyLowHighHigh
LiquidityModerateHighHigh
ROILowHighHigh
STT*NoNoYes
GSTYesNoNo
LTCG** TaxNo20%10%

*STT – Securities Transaction Tax

* LTCG – Long Term Capital Gains

  • CONCLUSION:

Since the gold prices and stock markets follow an inverse relationship. More often than not, the gold prices would drop when the stock markets perform well and vice versa. When the stock markets collapse, the demand for gold increases as more and more investors would be looking at safer options. This automatically skews up the gold price, and it is evident in the past as gold prices have skyrocketed at times of economic crisis or recession.

Thus the intention of this article is to spread awareness about the importance and the avenues of investing in Gold, from two angles:

1. Including Gold in the investment portfolio is very essential since it hedges the risk posed due to the fall in stock prices.

2. The fact that it is important to invest in Gold Instruments rather than physical gold needs to be understood by the people to be able to reap significant monetary benefits in the long run.

Aishwarya | Ayush | Bhavya | Jayati | Shivika | Varshita

Apoorva | Jeevan | Priyank | Rajdeep | Sakshi | Shelly | Varnika

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