Gold News

India's Fragmented Gold Market

How Gold Prices have slowly been unified across the world's No.1 source of demand...

HISTORICALLY, the gold market in India – now the world's largest consumer market –has remained fragmented and unorganized, writes Rutam Vora for Commodity Online in Mumbai.

Price disparity is a major concern, the distance between major trading centers playing a key role in price differentiation for Gold Bullion and jewelry. But with electronic exchanges rapidly taking shape, and the number of participants in professional Gold Trading seen rising, the price disparity within India has started wearing away.

Having faced price disparity in the domestic retail gold market, India is now successfully implementing uniform prices in the entire nation. Mumbai remains the most costly place to Buy Gold from, however.

In a bid to create a one-country, one-price mechanism for gold pricing in India, the exchanges have been successful in quoting uniform prices to different participants. The Indian Bullion Market Association (IBMA), jointly promoted by National Spot Exchange Ltd (NSEL) and bullion trade organizations across the country, had taken the task to announce a uniform benchmark price twice during the day. And the difference, if any, will only be due to varying taxes levied by the different state governments, as put by Suresh Hundia, president of the Bombay Bullion Association (BBA):

"The Gold Prices are almost uniform across the country. Only thing is Mumbai is a bit costlier than any other place in India, and that is due to high local taxes."

India's leading electronic spot exchange, NSEL is at the forefront of bringing uniformity in commodity prices by setting up electronic spot platforms across the country. This platform reflects uniform Spot Gold prices for trading across the country.

The result is similar to that enabled by the London Bullion Market Association, whose largest members agree and publish the global reference price twice every day, first at 10:30am London time and then at 3pm – known as the London Gold Fix.

India's gold retail market has been fragmented and grossly unorganized. Considering this fact, price deviation between two different locations was obvious. However, with the formation of IBMA, price uniformity has become possible. The association also approves local refineries' gold output, and certifies whether the metal produced can be traded on the NSEL.

India imports around 400 tonnes of gold annually, which constitutes the major part of the country's total consumption. Local Gold Prices are therefore pegged to international prices, led by London's Fix, and to the value of the Rupee against the US Dollar – in which global prices are typically quoted.

But the question arises, when India remains the No.1 consumer of gold, why its demand has no say in price determination in the international market. India has simply remained a price taker as far as Gold Prices are concerned.

The BBA's Hundia has a different argument on the issue:

"Five years back it was a time when India looked at overseas prices to determine its local Gold Prices. But today the time is such that there won't be much movement in the international ticker boards till Indian exchange MCX opens in the morning. However the New York Mercantile Exchange (NYMEX) still seems to be ruling the game."

Indeed, according to Hundia, India's Gold Prices are determined by purely demand and supply factors.

India consumes about 25% of global Gold Mining output every year. For wholesalers, Gold Prices are now almost uniform across the country, thanks to electronic exchanges and ticker boards. But the question still persists for consumers:

How far do these exchange-driven prices reach, and how many people actually followthe prices quoted by the exchange? And still there are differences, even though marginal, among prices quoted by exchanges themselves.

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Commodity Online is a leading online, print and content provider of news, information and research reports on the commodities sector. With offices in Mumbai, New Delhi, Ahmedabad, Cochin, Bangalore and Dubai, it also powers content in the SME sector, as well as the insurance and banking industries.

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