The yellow metal can glitter some more

With the electronic gold receipts' launch, the gold market will be infused with transparency in spot transactions, enabling India to emerge as price setter, eliminating existing market inefficiencies

Warren Buffet once said, “Gold is a way of going long on fear”. 
 

Gold is still a scarce but liquid asset, ranking at levels comparable to many global stock mar-kets as well as currency spreads. It has generated long-term positive returns in both good times and bad. In recent times, the gold market narrative has been driven by the contrasting effects of persistently high inflation and central banks raising interest rates in response.
 

Over the last two years, central bank purchases have more than doubled, led by China, Turkey, and India. Traditionally, when gold prices dip, they stock up. As compared to 450 tonnes of gold in 2021, their purchases rose to 1,135.7 tonnes in 2022. A typical practice prevalent among gold-buying investors is to buy when prices are 7-8 per cent higher than the highest price in the short term.  
 

When real interest rates go down, gold starts performing. It should now rally between Rs 54,000 as the lowest and Rs 70,000 as the highest in a horizon of six to eight months, primarily because inflation won’t disappear in a hurry and, as a result, other investments will not give substantial yields.
 

• The long-term: The outlook is for a rally to the $2,400/Oz level; but this will take time as the US Federal Reserve normalises monetary policy
   
• Medium-term: A close above $1,830/Oz, implying that gold has hit a low, and is on course to test the $2,000/Oz mark
   
• Short-term: $1,830/Oz levels can hold and then move into the 1,980s or thereabouts by the end of this month.

India is the second-largest consumer of gold globally, with annual gold demand at approximately 800-900 tonnes, and holds an important position in the global markets. Despite that, we have remained a price-taker in the global markets, and do not play any significant role in influencing price-setting for the commodity.
 

With the launch of electronic gold receipts (EGR), the gold market will be infused with transparency in spot transactions, enabling India to emerge as the price setter, and elimi-nate existing market inefficiencies.
 

EGRs can be defined as depository gold receipts that can be traded on the stock exchanges. Under this form of gold, the trading exchange holds the underlying value of the receipt in physical gold in a vault. That means investors buy the gold in dematerialised form and are given gold receipts instead of physical gold.
 

The process is similar to the physical form of equity shares. Electronic gold trading in India has so far been through gold derivatives or gold exchange-traded funds on the designated stock exchanges. EGR is the first spot physical gold exchange trading product.

The Securities and Exchange Board of India (Sebi) has specified that EGRs will cater to all market participants. That means, on the exchange, individual investors and commercial participants along the value chain — like importers, banks, refiners, bullion traders, jewellery manufacturers and retailers — can buy and sell the yellow metal. They are similar to stocks and are traded and held in demat accounts.
 

The EGR platform will lead to greater assurance in the quality of gold supplied, efficient price discovery, and transparency in transacting. This will create a vibrant gold ecosystem in India by enabling the actual fungibility of gold.
 

Sebi is trying to format the taxation issues related to the product with the government and it was expected to form part of the Union Budget 2023, where a reprieve from GST on bullion purchases would be announced for wider acceptance and immediate scalability of the EGRs.
 

However, the Budget fell short on this count. The announcement about capital gains — conversion of physical gold into digital would be free of capital gains tax — is welcome, mainly to create a transparent policy. However, without other policy support, such as waiver of GST, the security transaction tax and/or other fees, EGRs will remain unappealing in the immediate future. 

The writer is co-founder, Dvara SmartGold