Call to set up bullion spot, forward markets

India needs a spot and forward market for bullion trading for the success of the recently established bullion futures market in the country.

According to bullion market experts, India needs to evolve its own gold benchmark price. For that purpose, setting up of a bullion exchange in line with the Shanghai Gold Exchange in China will make the country a leading bullion pricing destination.

In a recent meeting with the Reserve Bank of India (RBI), it was suggested by one of the leading commodities exchange that it is now the turn of the world's largest gold consumer to take the lead in fixing prices that will be followed by global suppliers.

This, however, can be done only if the product is traded on a formal exchange.

It has been mooted that the Bombay Bullion Association (BBA) may be granted permission to set up such a spot and forward exchange.

The bullion exchange will help the local industry to hedge their risks and jewellers would then be able to concentrate on making money from designs and labour (free from gold price risk and, therefore, free from malpractices regarding purity).

The exchange would help in establishing a regular, safe and cheap supply system for bullion. By setting up a bullion exchange, India can cut on the intermediary transportation cost and become a hub for gold supplies in the entire south Asian region, where demand for gold continues as in the earlier years.

As India can also get gold directly from suppliers, it can grab the global gold market focus from Dubai.

This will also help India earn some additional revenue and importance. Development of such markets would drive speculators away from physical bullion, thereby benefiting the trade.

This could also reduce the pressure on foreign exchange resources. It will serve the entire trade by allowing easy liquidity for gold in paper or physical form. It could also provide the ideal platform for hedging any gold price risk.

The issues to be addressed while setting up a bullion exchange would include a transparent system of trading, sound business practices and robust clearing mechanisms.

Institutions such as the BBA should be involved in setting up guidelines for trade and ensuring smooth overall functioning.

The bullion exchange would function in lines similar to the recently opened Shanghai Bullion Exchange in China.

Overseas bullion markets are supply-driven, while India's market is demand-driven. Earlier, as suppliers controlled the market, they along with bullion banks and hedge funds set gold prices.

Therefore lent gold, lease rates and the like that contributed to prices fixed by the London Bullion Market Association (LBMA) were important and were followed throughout the world.

With gold supplies increasing substantially, equations in the global market have changed from being primarily a suppliers' market to a buyers' one.