Spot gold exchange - New investment avenue for Indians?

The Securities and Exchange Board of India approved guidelines for spot gold exchanges at its board meeting on September 28th. The benefits of such an exchange, according to a Sebi statement, would include efficient price discovery, liquidity, and assurance in the quality of gold. It is also expected to create a national pricing structure for gold. 

Despite being the world’s second-biggest gold consumer, India currently allows trading only in gold futures.

The new gold exchange will compete with Sovereign Gold Bonds (SGBs), Gold ETFs and Digital Gold.

Firstly, let us see how the gold exchange would work:

The instruments representing gold that will be traded on the exchange will be called Electronic Gold Receipts (EGR). Any recognised stock exchange is allowed to launch trading in EGRs in a separate segment. EGR is initially created when physical gold is deposited with Vault Managers after assuring the quality of the gold. They are credited to the demat account of the beneficiary. EGRs can be held for as long as intended since they carry perpetual validity. And finally, an EGR holder can withdraw the underlying gold from the vaults by surrendering the EGRs. 

Now what should investors keep in mind about gold exchanges? We spoke to independent market analyst Ambareesh Baliga to understand (please listen to the podcast for more).

Things to keep in mind: 

1. Conversion permitted only after 50 g of EGR is accumulated

2. Storage charges to be higher than bank lockers

3. Trading in EGR to attract brokerage, STT

4. GST on conversion of EGR to physical gold

We also spoke to Sudheesh Nambiath, head of India Gold Policy Centre at IIM Ahmedabad. He explained the implications of the new systems and how EGRs compare with other gold instruments. He said this about the gold exchanges: