The Hindu Business Line : 'India has potential to influence gold prices'

DESPITE being the world's biggest importer of gold and biggest consumer of gold jewellery and also the largest scrap market for old gold jewellery, India has only a largely secondary impact on world gold prices.

For India to become a world bullion trading superpower, certain hurdles have to be overcome, according to Mr Kamal Naqvi, precious metals analyst with Barclays Capital.

Speaking on international implications of a modern Indian bullion market at the recently-concluded India Gold Convention 2004 here, the expert pointed out that India was already a market factor helping to guide world prices; however, this was largely restricted to price-responsive import demand.

Some of the factors seen as hurdles in the way of the country becoming a major force in global bullion market are that gold tends not to be in an internationally marketable form; that legislation considers gold as a `commodity' and not a `currency'; and that there is no clear benchmark price.

A liquid and dependable inter-bank market was needed, Mr Naqvi observed adding that risk management systems need to be proved. Although futures trading in gold has begun in a couple of nationwide exchanges, international knowledge and recognition of these exchanges remained low, while larger trading volumes and clear price relationships were required, he said.

Indians are estimated to hold 15,000 tonnes-20,000 tonnes of gold. "This is the obvious pool of liquidity to drive trading volumes. The potential for active spot buying and selling is clear," he remarked adding that the major change would be growth in derivatives and lending.

Suggesting that the implications were potentially enormous, Mr Naqvi observed that at the least, the `benchmark' India price would be watched and with development, India could become self-sufficient in gold. When market factors allowed, India can even be a net exporter.

The potential strength of the Indian market is that none of the major gold trading markets has the level of underlying interest in gold as India. As the trend in global bullion trading volumes remains worrying, a clear opportunity for India to fill the potential liquidity gap is opening.

However, for becoming a bullion superpower, major structural reforms must be undertaken, he asserted adding that India has the potential to become, like China in many industrial metals, the dominant influence on gold prices.