Futures trading in Gold in India was carried out till 1962 mainly via Bombay Bullion Association , but as the Gold Control Act came into force this trading was debarred for around 41 long years. On 29th August 2003, National Multi-Commodity Exchange of India Ltd; got the permission to once again carry out this trend of futures trading in Gold.
  

For centuries, gold has meant wealth, prestige, and power, and its rarity and natural beauty have made it precious to men and women alike.  Owing gold has long been a safeguard against disaster.  Many times when paper money has failed, men have turned to gold as the one true source of monetary wealth.
 

Today is no different.  While there have been fluctuations in every market and decided downturns in some, the expectation in that gold will hold its own.  There is a limited amount of gold in the world, so investing in gold is still a good way to plan for the future.

DEMAND & HOLDING PATTERN

The Consumer demand for Gold is more than 3400 tonnes per year making it whopping $40 billion worth. More than 80% of the Gold consumed is in the form of jewellery, which is generally predominated by females. The Indian demand to the tune of 800 tonnes per year is making it the largest market for Gold followed by USA, Middle East and China. About 80% of the Physical Gold is consumed in the form of jewellery while bars and coins occupy not higher than 10% of the Gold consumed. If we include jewellery ownership, then India is the largest repository of gold in terms of total gold within the national boundaries.

Gold Demand and Supply in India

Pattern of Gold Demand

Regarding pattern of demand, there are no authentic estimates, the available evidence shows that about 80% is for jewellery fabrication for domestic demand, and 15% is for investor-demand (which is relatively elastic to Gold-prices, Real Estate prices, Financial Markets, Tax-policies, etc.). Barely 5 % is for industrial uses.
 

The demand for Gold jewellery is rooted in societal preference for a variety of reasons - religious, ritualistic, a preferred form of wealth for women, and as a hedge against inflation. It will be difficult to prioritize them but it may be reasonable to conclude that it is a combined effect, and to treat any major part as exclusively a store of value or hedging instrument would be unrealistic. It would not be realistic to assume that it is only the affluent that creates demand for Gold. There is reason to believe that a part of investment demand for Gold assets is out of black money.  Rural India continues to absorb more than 70% of the Gold consumed in India and it has its own role to fuel the barter economy of the Agriculture community. 

The yellow metal used to play an important role in marriage and religious festivals in India. In the Hindu, Jain and Sikh community, where women did not inherit landed property whereas Gold and Silver jewellery was, and still is, a major component of the gifts given to a woman at the time of marriage. The changeover hands of Gold at the time of marriage are from few grams to kgs. In the average middle class population, the average gifts estimated would not be less than 100 gms per marriage and even at conservative estimates of 50 grams are met through either new purchases or by re-conversion of existing jewellery, making the Gold market to the whopping size of 500 tonnes on an average ten millions marriage per annum.

The existing social and cultural system continues to cause net Gold buyer market and the Government Policies have to take note of the root cause of Gold demand, which lies in the social and cultural system of India.

The Gold also occupies a significant position in the temple system where Gold is used to prepare idol and devotees offer Gold in the temple. These temples are run in trust and Gold with the trust rarely comes into re-circulation.
 

PATTERN OF GOLD SUPPLY

Indian Gold holding, which are predominantly private, is estimated to be in the range of 10000-13000 tonnes. One fourth of world Gold production is consumed in India and more than 60% of Indian consumption is met through imports.

The domestic production of the gold is very limited which is around 9 tonnes in 2002 (broken into 2.940 tonnes from mines and Birla Copper 6.203 tonnes) resulting more dependence on the imported Gold. The availability of recycled Gold is price sensitive and as such the dominance of the Gold supply through import is in existence. The fabricated old Gold scraps is price elastic and was estimated to be near 450 tonnes in 2002 rose almost more than 40% compared to the previous year because of rise in gold price by more than 15%.

Quantity and Channel of Imports

The annual consumption of Gold, which was estimated at 65 tonnes in 1982, has increased to more than 700 tonnes in late 90’s. Although it is likely that, with prosperity and enlightenment, there may be deceleration in demand, particularly in urban areas, it would be made good by growing demand on account of prosperity in rural areas. In the near future, therefore, the annual demand will continue to be over 600 tonnes per year.
 

Price Differences between Local and International market.

The strong domestic demand for Gold and the restrictive policy stance are reflected in the higher price of Gold in the domestic market compared to that in the international market both at official exchange rate and at "hawala" exchange rate. During the 19-year period from 1977-78 to 1995-96, the average spread between Mumbai and London market prices (Mumbai price less London price in rupee terms) of Gold has been positive, except for a brief period during 1980-81 when the international Gold price zoomed for a brief period following the oil crisis, persistent weakening of dollar resulting in flight of dollar resources into Gold, and accelerating world-wide inflationary trends. The average spread was as high as 41.3 per cent during 1986-91. In the post-liberalization period, with changes in exchange rate regime and some relaxations on import regime of Gold, the average spread between domestic and international prices has come down from 53.1 per cent in 1991 to 20.6 per cent in 1993, 20.1 per cent in 1994, 19.9 per cent in 1995. The spread continued to move towards southward territory and reached almost below 7% with introduction of OGL in Oct’97 and removing SIL.
 

The current spread is as low as 3% and is calculated as shown in following table:
 

So the consumer pays only Rs 162 per 10 gms against the Landed cost of Rs.5,498/- per 10 gm and which is below 3% of total cost.
 

Indian Govt. Policy towards Gold

Bullion Imports and exports were banned under Foreign Exchange Regulation Act, 1973. Control over Gold production was assumed by the Mysore Government in November 1956. The official Gold stocks of the RBI were revalued in the same year. The proportional reserve system was replaced by the minimum reserve system, for the purposes of note issue.

In a major effort to mobilize the vast Gold reserves in the country, an issue of 15-year Gold Bonds at 6-1/2per cent was made in November 1962. The bonds were issued in exchange for Gold, Gold coin, and Gold ornaments. Subscriptions to those bonds were total of 16.30 tonnes. The issue of Gold bonds was accompanied by exhortations to the public to refrain from buying Gold and to surrender their holdings to the Government. The RBI also advised commercial banks to consider recalling loans made against the security of Gold. Forward trading in Gold was banned in November 1962.

The diversion of savings into the bullion market was sought to be controlled by the promulgation of Gold Control Rules in January 1963. The Rules prohibited manufacturing of Gold ornaments of more than 14-carat purity. Individual Gold holdings had to be declared. In July 1963, refineries were prohibited from manufacturing Gold of more than 14-carat purity. Control over internal trade and distribution of Gold by the Government was fully established in 1964.

A second attempt to garner Gold was made in March, 1965 when a new series of 7 per cent Gold Bonds 1980 was issued. Opportunity was given to holders of unaccounted Gold to convert it into these bonds. The quantity raised was 6.1 tonnes. A third series of Gold bonds designated as National Defense Gold Bonds, 1980 at 6.5 per cent was issued in October 1965. Unlike the earlier two issues, which were repayable in Rupees (the value of Gold being calculated at international prices), these bonds were redeemable in Gold of standard purity at maturity. The quantity raised at 13.7 tonnes.

Strict Gold control remained in force till November 1966, when the rules were amended, lifting the ban on manufacturing of ornaments of more than 14 carat purity. The amendments also placed ceilings on individual holdings and extended control over refineries and dealers. In September 1968, the Gold (Control) Act, 1968 was passed, establishing the scheme of Gold control on a permanent statutory footing. Except for some minor modifications incorporated in the Act in 1969, 1972 and 1973, the structure of the Act did not undergo any change.

The Voluntary Disclosure of Income and Wealth (Amendment) Ordinance, 1975 granted immunity from confiscation, penalty and prosecution under the Gold (Control) Act, 1968, to all disclosures of wealth and income in the form of Gold within the stipulated period.

In 1978-1979, there was a major shift in policy by the Central Government. This was reflected by the budget. The government strongly disapproved smuggling operations, considered to be a consequence of the difference between the domestic and international Gold prices. The Government that year undertook Gold auctions, which were construed as an anti-inflationary measures to raise resources to bridge the budget deficit, which then was around Rs. 10.5 billion. It was also felt that sale of Gold from stocks held by the Government would curb smuggling to some extent. The Reserve Bank of India was chosen as the Government's agent in the sales operation. However, these auctions came in for criticism as it was concluded that this was not a practical proposition to either check smuggling or curtail domestic prices. The Government thus discontinued the official auctions in October 1978. Liberalization brought major changes in the regulations governing the purchase and ownership of Gold. Prior to 1991, Gold was allowed to be held only in the form of jewellery. This has been repealed and holding of Gold bars and coins is also permitted now. Under the NRI baggage rules, an NRI is entitled to bring in India 5 kilogram of Gold every six months by paying a nominal duty of Rs 220 per 10 gms. Import of plain Gold is now allowed on Special Import Licenses for sale to the domestic market. Under the SIL (Special Import License), exporters were allocated a percentage of their export earning to fund their imports. These licenses were traded and generally commanded at a premium of 8 -12 percent depending upon demand and supply. It is estimated that around 75% of the total SIL issued was used for importing Gold and silver while 15% for EPCG and surrendering 10% for miscellaneous imports. Imports of Gold under SIL rose from 18.4 tonnes in 1994 to 42 tonnes in 1996. The removal of SIL requirement was done with import of Gold under OGL by nominated agency in later part of 1997.

The importance of Gold as was recognized by committee on CAC (Capital Account Convertibility).

The committee which identified Gold related issues with Capital Account Convertibility had given most precise and action oriented recommendation:

PHASE I: The main recommendation was to permit banks and FIs on  fulfilling certain well defined criteria to be allowed to operate freely in the domestic and international market . The said entities would be allowed to offer Gold related saving and loan products to the customers.

PHASE II: Steps to be taken by the Government and the RBI for developing a well regulated market in India for Gold and Gold derivatives including forward trading for resident and non resident.

The Phase I recommendations were acted upon quickly. In July 1997, the RBI came out with a policy statement laying down criteria for authorizing commercial banks to join the ranks of a few state enterprises like MMTC, STC, HHEC and PEC  as nominated agencies for importing Gold, silver and platinum. Initially, the nominated agencies were permitted to import Gold for export purposes only. Later in the year, they were allowed also to supply Gold by way of sale and lease for domestic use under a form of restricted "Open General Licence (OGL)" terms.

The Phase II recommendations which were to be taken up for implementation in 1998-99 could not find themselves in time boundary but the process has started now for implementation.  The Government had launched a Gold deposit scheme in 1999 to utilize the idle Gold and simultaneously give a return to the Gold owners and reduce the country's reliance on imports.  Under the scheme, RBI permitted commercial banks to accept interest bearing Gold term deposit from public against physical deposit of Gold. An interesting feature of this scheme is that the deposit receipts are negotiable and are intended for trading in the secondary market. The idea here was to introduce paper Gold, which would satisfy the investment demands of those who seek to acquire Gold as an inflation hedge, or those who simply intend to go long on Gold. It was hoped that this would depress the import demand for physical Gold.

Another policy shift that became apparent in the late 1990s involved the de­linking of Gold from the government's Anti-Black Money policy. The new fiscal stance with regard to black money centered on rationalization of the Income Tax structure and the creation of incentives for revealing unaccounted wealth.
  

Melting & Refining Assaying Facility in India

At present, Gold is mainly refined in Bombay where a few refineries like the India Government Mint and National refinery are active. Some private refineries are also operating elsewhere with limited capacity. As none of the refineries is LBMA recognized, there is a need to upgrade and also increase the refining capacity. The standardization of the refining process at the refineries can be entrusted with the India Government Mint. Establishment of new refineries in the private sector with modern technology could be considered for which assistance of reputed foreign refineries could be sought.

Representative of Gold Trade Cycle
 

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