India is one of the world’s largest gold consumers, second only to China. According to IMF statistics, India accounts for almost a fifth of global demand in gold and this number is increasing. So what does this mean for the bullion market? The Indian Government has announced plans to launch an International Bullion Exchange (IIBX) that will operate as a marketplace for spot trading of gold and enable participants to trade in futures contracts on the same platform. Does this mean something special or will it have little impact? Let us have a look…
Understanding the Indian Bullion Exchange Market
Before we discuss the IIBX announcement and its implications, let us take a look at the Indian bullion market. Currently, there are two large gold exchange-traded funds (ETF) available in the Indian market. These are the Gold ETF, managed by SBI Mutual Fund, and the Gold ETF, managed by Reliance Mutual Fund. The SBI Mutual Fund’s Gold ETF has assets under management (AUM) worth INR 6 billion, whereas the Reliance Mutual Fund Gold ETF has AUM worth INR 10 billion. These two Gold ETFs have seen a total of INR 56 billion worth of investments since their launch in 2013.
However, these Gold ETFs are only available to investors in the stock market and there is no spot trading or futures trading available in these ETFs. This is one of the reasons that the Indian Government is looking to launch an International Bullion Exchange. Another reason is that the Indian Government is keen to provide the opportunity to investors outside the stock market to trade in gold and silver.
The Indian Government is also seeking to reduce the demand for gold in the local market by providing this option to investors.
IIBX: The Bullion Platform
The IIBX will be an electronic commodity trading platform where investors can trade in gold, silver, and other precious metals. This will be a purely spot trading platform with no futures trading available. The IIBX will also provide a digital wallet service along with the existing paper certificates. This will be a single-window facility for all participants in the gold trade in terms of trading, settlement, and custody.
The IIBX will be a joint venture between the Indian Government and Singapore-based Bullion Star, a major player in the gold and silver spot trading industry. The IIBX will be operational in the first quarter of 2020 and will be available to investors throughout the country. The Indian Government has announced that the IIBX will be a non-profit platform and will be providing trading services at no cost. The Government will be footing the bill for the IIBX operation and this will be done from the taxes paid by the gold industry.
Why is the Indian Government introducing an International Bullion Exchange?
As we have discussed above, one of the reasons behind the Government’s decision to launch an International Bullion Exchange is the absence of futures trading in the Gold ETFs available in the Indian market. The other reason is that the Government is keen to provide the opportunity to investors outside the stock market to trade in gold and silver.
Apart from this, the Indian Government is also seeking to reduce the demand for gold in the local market by providing this option to investors. This is important because a significant portion of the Indian gold trade is done through the black market. An International Bullion Exchange will help the Indian Government crack down on the black market and bring this trade under the ambit of taxation.
Pros of IIBX
Indian investors will finally get the opportunity to trade in gold and silver through an organized marketplace provided by the IIBX. This will provide the Indian investors with a better way to manage their exposure to precious metals.
The existing Gold ETFs are only open to investors in the stock market and do not offer any advantages over a physical investment in gold. Investors can also reduce their tax outgo by investing in physical gold and can claim a lower taxable amount.
Another advantage of having an International Bullion Exchange is that it will provide the Indian Government with a better way to crack down on the black market for gold. This will have a positive impact on the Indian economy as a large chunk of the black money from the gold trade is usually routed to other countries.
Cons of IIBX
It is important to note that the Indian Government has decided to launch an International Bullion Exchange despite the fact that the Gold ETFs are doing well in the Indian market. This raises a suspicion that the Government is keen to control the demand for gold in the local market.
The other downside of the IIBX is that it will not be available to all investors. This is mainly because the physical gold trading through the IIBX will be charged a 10% service tax.
On the other hand, trading in Gold ETFs is completely tax free. It is also important to note that the IIBX will only facilitate the spot trading of gold, not the futures trading. This means that investors will only be able to buy and sell gold in the physical form, not in the paper form.
Conclusion
The Indian Government is looking to launch an International Bullion Exchange (IIBX) that will operate as a marketplace for spot trading of gold and enable participants to trade in futures contracts on the same platform.
The IIBX will be a non-profit platform and will be providing trading services at no cost. This is a good initiative from the Government since the existing Gold ETFs only offer speculative trading and do not have any physical investment. The only drawback is that the physical gold trading through the IIBX will be charged a 10% service tax.
