Soon, India will have its gold trading platform.
If you’ve been following the news lately, you’ll know that SEBI – India’s capital markets regulator – has come up with a new proposal to set up a national exchange for buying and selling gold. The idea is that this will help reduce the chances of black money being generated by gold transactions.
First of all, some people believe that gold prices are an index for fiat currencies. Many of us who follow gold closely think that it is a perfect measure for price levels in general. And as such, this new gold exchange will help the government keep a close eye on how fiat currencies are moving.
The fact that India is such a massive market for gold means that the exchange will also provide the government with eye-opening insight into what is going on internationally. It will give them the ability to track gold demand globally and will allow them to estimate whether or not it’s likely that gold prices may move higher or lower in the coming months and years.
Keeping all of this in mind, we thought that we’d take a closer look at how SEBI’s gold exchange plan might work out. It’s still far too early to tell, but there are some concerns, and we thought we should go over there and give you a better idea of what might be happening.
The new trading platform will allow anyone to sell gold. But there are a few concerns here. It may turn out to be a very bad idea if the government does not plan on being very careful about how trades that involve cash or old jewelry are handled, leading to risk in the gold market. If this is not done correctly, then that will only lead to further issues. It might even drive up corruption in the same way that the current system does. We already know that gold demand in India is quite high, but we don’t know how much of this demand comes from black money.
The risk of setting up a new trading exchange for gold is that such an exchange will not get any business and will close down in the best-case scenario, making the risk management process easier. This is something like what happened with the failed gold trading site GoldMoney.com. It suddenly closed down in 2015 after accumulating losses of $102 million and leaving matters worse for its investors, losing precious capital and credibility. A low volume of trade on such a platform has also been mentioned as a major drawback to setting up such an exchange.
Despite gold EFT risks and considering the risk analytics, SEBI has seen the need to set up a new exchange given the increasing demand for gold, especially in India, where retail investors are interested in buying more gold.
Submitted By: Siri, Member of Student Risk Club (SRC)