Bringing more uniformity to Indian gold prices could boost local demand as it should bring transparency to a market in which there have historically been bouts of uncertainty over regional price variations - and also in which the issues of purity and weight have been issues in the past. LONDON - The authorities over the Indian gold market have launched an initiative designed partially to streamline the Indian gold market, unify pricing systems and to create a local price discovery mechanism through the formation of the Indian Bullion Market Association, thereby creating the mechanism for the determination of an Indian benchmark price. The intention is to announce a price twice daily, with the only regional difference in prices across the country to be a function of the different gold taxes imposed by the different regions within the country. These twice daily prices will be derived from the trade flows going through the spot electronic platform that was launched by NSEL on 18th May and which trades spot gold and silver contracts (gold in one kilo and 100-grammes, and silver in 30-kilo bars). This contract is geared specifically to the local industry, with dealers designated as sellers and jewellers designated as the buyers. The NSEL is also to set up a process for the approval of local refineries and domestic brands of gold and silver bars in order to approve them as good delivery for the NSEL platform. It will take time before a wholly uniform price national price benchmark can be established, however, as it will have to wait or the implementation of the Goods and Services Tax, which is due by March 2011. The IBMA was launched at the end of May by the National Spot Exchange Ltd., which is a subsidiary of Multi Commodity Exchange Limited and the IBMA comprises local bullion dealers and jewellers, with the NSEL holding a 51% stake in the organisation and the balance in the hands of bullion dealers and jewellery merchants. The Managing Director and CEO of NSEL made the point about the significance of India to the bullion market when he said at the launch that "We depend on the international market for the benchmark price, which is based on London AM/PM price fixing. India imports around 25 per cent of the world's gold production, still it does not exert any significant impact in discovery of gold prices. With the creation of IBMA, we will be able to create a benchmark Indian spot price for bullion". One of the key points about this is that the Indian gold market, which is massively important to the gold market as a whole (typically comprising over 20% of world demand - although in the first quarter of this year India had to cede top slot in the jewellery sector to China as massive local scrap sales had undermined an already weakened jewellery demand) is widely geographically diverse. There are a number of different import centres in different states, charging different import levies. Uniformity of VAT, introduced last year, has helped the situation. There have also been issues in the past over purity of gold products and some jewellers have been alleged to have sold underweight items in order to preserve their margins. This is by no means prevalent, but it has been raised on occasion as a reason why younger consumers might be prepared to look at alternative outlets for their discretionary spending. Furthermore there are massive regional differences in demand patterns, due to the wide variations in income sources. In this year's Gold Survey, for example, GFMS Ltd. describes India's varied tapestry . The urban and rural areas of southern India consumed over 200 tonnes of jewellery, bars and coins in 2008, including Kerala, which was dependent on non-resident Indian remittance and cash crop production while Tamil Nadu derives a good part of its revenues from the IT sector, which started to be hit in the second half of the year. The western states of Gujarat and Maharashtra are estimated to have absorbed over 120 tonnes before the stock market downturn started to have an effect late in the year. Northern demand is a function of agricultural performance and held up relatively well last year. With the demand for gold in India so important to the market, and stemming from such a wide variety of driving factors, any increased transparency must be beneficial. How soon it will be possible to determine a tangible benefit of these changes is impossible to say, but the NSEL wants to strengthen India's role in the market and believes that improving regulation and price setting is an important step forward.

Source