Gold: India looking to follow China in liberating the gold market

THIS IS FURTHER GOOD NEWS FOR THE GOLD MARKET
China pushes for gold; India follows suit
Hot on China’s heels, India’s Central bank is mulling over a proposal to allow banks to trade in gold. If cleared, the move will only strengthen the validity of the bull case in gold.

Author: Shivom Seth
Posted:  Monday , 09 Aug 2010
MUMBAI  –  Mineweb

Hot on the heels of moves in China to expand the gold market in the country, several Indian bans have submitted a proposal to the Reserve Bank of India (RBI), India’s central bank, to permit them to trade in gold in the domestic market and also hedge their requirements.

These banks hope to take advantage of the current bout of bargain-hunting taking place in the country as investors take advantage of lower prices.

At present, banks are only allowed to buy gold. India’s central bank has permitted certain banks to import bullion on consignment basis for domestic jewellers and exporters but they do not stock gold. And, while a couple of the nominated banks authorised to import gold, sell gold coins at a premium of 10% to 15% over the market rate but, they are not permitted to buy back the gold they sell. Among their proposals, Indian banks have asked for permission to invest in gold exchange traded funds a move which is hoped will boost the trading of gold in demat and securitised forms.

Incidentally, banks and agencies such as the MMTC (Mines and Metals Trading Corporation) account for nearly 80% of the country’s gold imports.

Asian tiger

China’s central bank has said that it will allow its banks to import and export more gold as part of a programme to push forward the development of the country’s market in the precious metal. China is already one of the largest gold producers in the world and a leading consumer.
According to reports, China’s central bank is also ruminating over allowing second-tier institutions such as the Minsheng Banking Corp and China Merchants Bank to team up with four major state banks, including Bank of China, to hedge bullion positions in the overseas markets.
In a bid to increase the competitiveness of its domestic financial markets and broaden investment channels for ordinary customers, China’s central bank is also looking at allowing foreign suppliers to provide gold bullion directly to the Shanghai Gold Exchange.
Analysts have reportedly pointed out that China is keen that more of its banks trade with overseas counterparts, in a move that will reduce their reliance on the Shanghai Gold Exchange for hedging.
At the exchange, trading volumes have risen by more than half during the first six months of this year. HSBC and Standard Chartered are among five banks that are members of the Shanghai Gold Exchange.
For the full year 2009, India managed to import just over 35 tonnes, far below the 400 tonnes the country imported in 2008. China’s purchases in 2009, on the other hand, equalled 11% of global gold demand.
During the last quarter of 2009, however, demand for the precious metal increased 84% in India. The country already accounts for over 20% of the world’s gold demand.
Similarly, in the first quarter of 2010, India was termed the strongest performing market by the World Gold Council, as total consumer demand surged 698% to 193.5 tonnes. Indian jewellery demand rose 291% to 147.5 tonnes during the same period, the Council said.
World Gold Council’s investment managing director, Marcus Grubb, told reporters recently that the full-year gold demand in India was expected to be stronger than in 2009.

Reasons galore

Some bankers have noted that one of the major reasons why gold imports to India have been plunging in recent months is because Indian banks hold a lot of carry-over gold stocks. “Many consumers have stopped buying gold jewellery and are instead concentrating on imitation jewellery. Gold’s high price in the last four months is another factor that has kept some of them away, leading to a further slump in imports,” said an official with Mumbai-based Indian Bank, which is one of the 20 banks allowed to import gold. The bank’s proposal in 2008, to launch gold bullion trading, was stymied due to the disapproval of the Central bank.
A Bombay Bullion Association report noted that gold imports have fallen this year, from 34 tonnes in January to 13.8 tonnes in June, with the trend broken only in April, when the country imported 34.2 tonnes. The spurt in April was to meet additional demand during the Akshya Trithiya festival, considered an auspicious occasion to buy gold.
An executive of the Punjab & Sind Bank said:  “Gold is a popular investment vehicle in India, as well as being a traditional option for gifts. There is a lot of demand. In the present scenario, gold provides an excellent hedge against inflation, a source of liquidity and a form of savings as well,” the executive, who declined to be named, pointed out. The bank is also awaiting clearance from the RBI, and is eager to trade in gold.
It may be recalled that gold had stormed to record highs following news that India’s central bank had bought 200 tonnes of the metal from the IMF in October last. The Indian purchase had ensured that the RBI became the world’s 10th largest central-bank gold holder. It was the biggest single central-bank purchase in at least 30 years over such a short period, according to Timothy Green, author of The Ages of Gold.
“India did not buy that gold to sell it. It wanted to own it and keep it,” said the head of global markets at IndusInd Bank, another bank permitted by the Reserve Bank of India to import gold. “If banks are allowed to trade in gold, the move will only strengthen the validity of the bull case in gold,” the official added.
Citing the example of China, the official said, in its bid to overtake India as the world’s top consumer, Beijing has allowed more domestic banks to export and import bullion. China has reportedly increased its official gold holdings by more than 400 tonnes in the past few years to 1,054 tonnes.
“Beijing is keen to focus on bringing more gold into the country to satisfy domestic demand, but will not stir up global prices through official purchases,” the banker added. Other than banks, a few nominated government agencies and premier trading houses have also been allowed to import gold. With more banks in India now eager to step up to the plate, trading in the yellow metal could soon be a possibility.

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