E-gold as an Effective and Innovative Investment Option An Analysis

E-gold as an Effective and Innovative Investment Option An Analysis Suganth Subramanian* Dr. K. Mohan ** ABSTRACT The digital innovations in the financial sector specifically banking and capital markets (e-banking, online trading, depositories, commodity trading to name a few) elevated the banks to get more closer to customers and conduct business beyond international standards. This article seeks to understand the intricacies of e-gold (Electronic Gold) and how it can meet or exceed the safety and investment standards of buying physical gold or Exchange Traded Funds (ETF s) or in the form of jewellery. The story of gold is as rich and complex as the metal itself. It is seen as a safe investment and sometimes sacred too. The depository concept (otherwise called Demat) brought in a new way of conducting business in the capital market and went on to become a pride for the Indian financial system. E-series gold also uses depository as the fundamental basis and is currently in infancy stages. While volumes are growing, there is an urgent need to educate the investing community given that India is the No.1 gold market globally. Support from regulatory authorities by strengthening rules will build investor confidence in this concept. Keywords: Commodity, Investment, Dematerialization, Gold I. INTRODUCTION This paper attempts to bring out the concept of electronic gold and how it can benefit the vast section of students and investor community. Gold is a much sought after commodity in the international market and is looked as a hedge instrument against the fluctuating securities markets. A larger section of the investment community also identifies gold as an effective investment to protect against inflation as well. Fact of the day is banks extend safe keeping facilities (i.e. locker) to customers who maintain multiple relationships viz. Fixed Deposit, Savings / Current account with them. II. WHY INVEST IN GOLD? Gold s most inherent quality is its ability to stabilize a portfolio and protect it against market fluctuations. One can invest in gold by buying coins, bars, jewellery. Over the last few years there is an interesting gold investment option i.e. Gold Exchange Traded Funds (ETF s). While the ETF is fairly a recent entrant in the market, the remaining is time tested and the investment community s faith in it is beyond any doubt. Historically, gold prices have shown better stability even during periods of crisis, as compared to other investment types. Most wealth managers/ financial advisors advise investing in gold as a compulsory choice, since gold creates a robust * Senior Executive (Director-Products), Cognizant Technologies Ltd., Singapore ** Professor & Head, Department of International Business, School of Management, Pondicherry University, Pondicherry -14. www.cpmr.org.in CPMR-IJT: International Journal of Technology 33

portfolio that withstands market fluctuations. A living example is the Indian Republic when foreign exchange reserves in 1991 had depleted to a large extent with reserves enough to last for roughly 3 weeks of essential imports. The Indian government pledged 67 tonnes of gold as collateral to secure an emergency loan of USD 2.2 Billion from the International Monetary Fund and thus subverted a major economic crisis of defaulting on external balance of payment obligations. What happened subsequently is history. Today India is a global market and multinationals queue up to set up businesses in India. On the retail front, almost every Indian has a little of gold. Since ages, gold is considered as a traditionally auspicious gift for any occasion. While gold business is shining very brightly, reality of the day is much of the retail gold in India lies idle in various banks safety lockers, in one s home and to some extent pledged with funding entities (Banks, Financial houses, and pawn brokers). Banks and financial houses are delighted to disburse loans with gold as a collateral given the minimal risk and liquidity involved in it. III. INTERNATIONAL GOLD DEMAND India and China are often assumed to be congruent drivers of gold demand and price. The rapid rise and fall of the Indian Rupee in 2011 and resulting gold price swings had a strong impact on gold buying in the domestic market. Birth of new age Digitized Gold / Electronic Gold IV. DEPOSITORY CONCEPT While India had a booming capital market the paper based settlement of securities led to a chain of problems like bad delivery, loss of certificates, title transfer delayed considerably. Leading financial institutions and banks came together to support an institution called National Securities Depository Limited (NSDL) under the Depository Act of 1996. The objective was to set up a global standard to manage securities in a dematerialized form in the Indian capital market. Technology was the key tool to promote this concept into the retailer outlook. It was a huge mindset change for the investor who had to be convinced with a statement of securities instead of a physical certificate. In the depository system, securities are held in depository accounts that are very similar to holding money in bank accounts. The securities issuers, transfer agents and investors witnessed the huge benefit in this and today almost all the securities are traded in dematerialized form only. This shift had the complete support of the regulatory agencies. In exactly the same manner, E-Commodity as Investment products is taking shape today where precious metals like Gold, Silver, Copper, Zinc, Lead and Nickel are available in dematerialized form for purchases and sales. V. COMMODITY MARKET For the benefit of the commodity traders to give them wider access to the pricing market and for investors who want to diversify their portfolio beyond Equities, www.cpmr.org.in CPMR-IJT: International Journal of Technology 34

Bonds, and real estate, Commodity Exchange was set up in the country. Similair to The Chicago Board of Trade (CBOT) established in 1848 (world s oldest futures and options exchange), 3 commodity exchanges were setup in India. Multi Commodity Exchange of India Ltd (MCX) and National Commodity & Derivatives Exchange Ltd (NCDEX) are the 2 biggest exchanges and compete against each other for market share. Key products of Cereals and Pulses, Spices, Plantation products, Oil and Oil Seeds, Metals and Energy are actively traded in these exchanges. VI. ELECTRONIC GOLD / E- GOLD Both these concepts (Dematerialization & Gold trading) have come together to form a new product called Electronic Gold / e-gold. The problems of physical gold were very similar to what was prevalent during the physical paper settlement of securities. Given the high cost of investment in physical gold, problems around safekeeping and buying / selling were higher with the customers losing out. VII. BASIC CHARACTERISTICS OF E-GOLD 1. Gold balances held in dematerialized form as against safe keeping them in bank lockers or at home 2. Invest in e-gold gives the comfort of easy liquidity, safety and low cost. 3. Pledging is a very simple and transparent process. This could potentially create a new market for Gold financing. 4. Transparent pricing and seamless entry and exit to investors during trading hours 5. No purity issue and storage risk 6. No storage charges to investors for buying e-gold 7. Standard buying and selling prices across the country 8. Systematic investment is possible for retail investors VIII. E-GOLD HOW IT DIFFERS? Table 1 Gold Investment products A comparison Parameter E-series gold Exchange Trade Funds Gold bars / Coins Jewellery Buying/Selling Demat form Demat form Physical form Physical form Convenience of trading, High High Low - involves Low - involves storage and selling physical movement physical movement Resale Easy at transparent market Easy at transparent market Difficult or not Difficult or possible at prices like an equity prices like an equity possible deep discounts Safekeeping Safe kept by Safe kept by Onus on the Onus on the the Exchange the Fund House investor investor Expenses to maintain NIL varies High High these assets Day to day Managed by the Managed by the Managed by Managed by monitoring investor directly Fund house investor investor Pricing Linked to India Linked to International Varies from Varies from jeweller Gold pricing gold pricing bank to bank to jeweller Pledging as Easy Easy Difficult or Difficult. Funding agencies collateral not possible will incur costs on the storage, monitoring and selling Purity concern Does not exist as everything Does not exist as Exists Exists in demat form everything in demat form Conversion facility Easy As per the fund Possible and wastage Wastage will houses policy will be incurred be incurred Ownership Owned by the Owned by the Owned by Owned by account holder Fund house investor investor Source: Compiled by author www.cpmr.org.in CPMR-IJT: International Journal of Technology 35

In India, National Spot Exchange Limited (NSEL) has introduced E-Series products in commodities. Retail Investors can now Buy / Sell precious metals (Gold, Silver, and Copper etc) in a fashion very similar to that of equities. One of the biggest advantages is that one can buy in small denominations. An investor needs to open an account for buying / selling these E-Series products and the process to open & trade is very similar to that of equities. VIII. WHY DIGITAL GOLD? Source: Compiled by author IX. PAPER METAL CONVERSION INTO PHYSICAL GOLD The biggest USP s of this product are the facility to withdraw physical gold against surrender of the E-series units. At present there are 2 methods in which the redemption can be done: 1. The Exchange directly provides the option of withdrawing gold against surrendering their e-series balances. The conversion can be done in the denominations as specified by the Exchange. At present 8gms is the minimum quantity that can be redeemed in physical gold and it is bound to be revised to lower denominations once market demand picks up. The Exchange has appointed specific delivery centres throughout the country from whom the delivery can be taken. At present there are minimum charges for this delivery process. 2. The Exchange has tied up with leading retail jewellery shops who will accept these e-series units against buying of jewellery from them. For the jeweller it s a very transparent process who is assured on the quality of gold, reduce wastages to a large extent and most important winning more customers. The customer is the biggest winner in this process. X. E-SERIES GOLD TRADING STATISTICS JAN 2012 Table 2 e-series gold trading statistics for the period January 2012 Date Commodity Open(Rs) High(Rs) Low(Rs) Close(Rs) PCP (Rs) Volume Value Symbol (grams) (In Lakhs) 2-Jan-12 E-GOLD 2789 2789 2758.5 2777.6 2789 128926 3583.89 3-Jan-12 E-GOLD 2780 2820 2780 2816.2 2777.6 1035791 29067.53 4-Jan-12 E-GOLD 2816.2 2830.9 2800.1 2828.9 2816.2 789797 22196.11 5-Jan-12 E-GOLD 2828.9 2833 2800 2822.2 2828.9 787657 22212.03 6-Jan-12 E-GOLD 2828 2840 2814 2817.5 2822.2 751370 21262.66 7-Jan-12 E-GOLD 0 0 0 2817.5 2817.5 0 0 9-Jan-12 E-GOLD 2817.5 2821.9 2758.1 2808.5 2817.5 790246 22224.43 10-Jan-12 E-GOLD 2808.5 2808.5 2790 2800 2808.5 420021 11764.23 11-Jan-12 E-GOLD 2840 2840 2805 2810.1 2800 549301 15433.56 12-Jan-12 E-GOLD 2818 2828.8 2810 2813.3 2810.1 678128 19127.12 13-Jan-12 E-GOLD 2813.3 2813.3 2785.1 2791.1 2813.3 508583 14225.82 www.cpmr.org.in CPMR-IJT: International Journal of Technology 36

14-Jan-12 E-GOLD 0 0 0 2791.1 2791.1 0 0 16-Jan-12 E-GOLD 2795 2804.6 2791.7 2799.5 2791.1 361822 10118.52 17-Jan-12 E-GOLD 2788.1 2825 2788.1 2808.4 2799.5 822962 23169.5 18-Jan-12 E-GOLD 2802.9 2805.6 2785.3 2799.1 2808.4 726067 20303.26 19-Jan-12 E-GOLD 2780 2810 2780 2791.1 2799.1 933904 26210.35 20-Jan-12 E-GOLD 2770.1 2812 2770.1 2802.3 2791.1 966556 26985.93 21-Jan-12 E-GOLD 0 0 0 2802.3 2802.3 0 0 23-Jan-12 E-GOLD 2790 2834.9 2790 2814.1 2802.3 714198 20122.27 24-Jan-12 E-GOLD 2844 2844 2795 2795.7 2814.1 732680 20584.39 25-Jan-12 E-GOLD 2800 2807 2780 2787.6 2795.7 796585 22257.41 27-Jan-12 E-GOLD 2820 2865 2820 2860.6 2787.6 516629 14701.29 28-Jan-12 E-GOLD 0 0 0 2860.6 2860.6 0 0 30-Jan-12 E-GOLD 2850 2879.9 2848 2875.5 2860.6 642700 18391.63 31-Jan-12 E-GOLD 2865 2890 2865 2878.9 2875.5 924234 26628.61 Source: http://www.nationalspotexchange.com/sitepages/marketmaster/bhavcopy/commoditywise Table 3 e-series statistics across products- Jan 2012 S No. Investment Turnover Number Trade Volume Product (in Rs Cr.) of Trades (in lots) 1. e-gold 4105.71 15752 14578157 2. e-copper 6036.97 19354 120223486 3. e-silver 5824.64 28750 10642354 4. e-lead 2886.36 11672 192431209 5. e-zinc 2338.93 10507 168913625 6. e-nickel 995.72 9943 7387025 Source: http://www.nationalspotexchange.com/ resource_centre.htm?m=8/factsheet- January 2012 XI. SUMMARY This paper discusses at a high level about the benefits of e-gold in the Indian market with intent to educate students, investors and keep them updated about the level of innovation happening in the market and how technology is being effectively used. NSEL is on an aggressive marketing campaign to increase awareness of this product amongst the investor community. The hesitation from the investor is quite understandable since it s a complete mindset change. It is a fact that this hesitation is common across all investor classes including High Net worth Individuals and Non- Resident Indians. The recent regulation from RBI that Non-Banking finance companies which are engaged in giving loan against physical gold will not be allowed to lend more than 60% loan-to-value, has created quite a stir in the credit market. A few regulations from RBI around the e-series products combined with the banking sector s support favouring e-series funding over physical gold could potentially make the e-series products a huge success just restricted to gold. Given that gold is deeply embedded in the Indian society as a status symbol and often displayed as a heritage and traditional value, for the investor to get a Statement of Account accepted in the same manner will be a unique achievement. Such new products may become part of Portfolio / Wealth management services and hence definitely a niche area for students and investors to consider. XII. REFERENCES [1] ASSOCHAM (2011), Moving up the Business Value Chain, Emerging role of commodity and currency markets, Ernst & Young www.cpmr.org.in CPMR-IJT: International Journal of Technology 37

[2] National Spot Exchange (2012), E-Series Investment product in commodities [3] National Stock Exchange handbook (2012), Smart way to invest in Gold [4] Shobhana Chadha (2011), Is e-gold better than ETF? Economic Times Bureau [5] A collection of articles from various Investment journals about wealth management, mostly from the 2012. [6] February 07, 2012 <https://nsdl.co.in/about/ legal.php> [7] February 09, 2012 <http:// www.nationalspotexchange.com/ resource_centre.htm?m=8> [8] February 20, 2012 <http://www.gold.org/ jewellery/markets/china/> [9] March 12, 2012 < http:// www.nationalspotexchange.com/ eseries. htm?m=3> www.cpmr.org.in CPMR-IJT: International Journal of Technology 38