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India is one of the largest buyers of gold putting buyers subject to the vagaries of speculative market cycles. In a move to allow hedging of this risk the India market regulator moved to allow commodity exchanges to start trading options in 2017. As this market grows how much will it affect gold contracts?

Indian bridal jewelryLifting The Veil On Indian Gold Demand

On Oct. 17, the country’s largest commodity trading platform, Multi Commodity Exchange, launched the first gold options contract for December and January expiries. The potential is huge when you look at just how big equity options are in India. Equity options record a turnover that is around five times that of the futures on the NSE. In 2018 MCX competitors are launching their own products.

There are a number of factors at play here, there is the traditional demand for gold coupled with the speculative demand for gold. With the improving wealth of India being attracted to the rise of commoditiy prices in 2017 and through 2018 there is a potentially a huge new player in town.

The World Gold Council (WGC) released a report titled "India's gold market: evolution and innovation" it is instructive reading given the move to more mature markets in India.

The three largest gold demand drivers in India are Weddings (24%), birthdays (15%) and religious festivals (12%). The base for gold lies in the Hindu and Indian cultures. With that comes price awareness and with that options fill a void. With that gold knowledge opportunities in other commodities are also opening up.

That being said the WGC report found that annual gold consumption trends in India over the 25-year-period from 1990 to 2015 are primarily driven by two major factors that impact gold prices:

  1. A  rise in income drives up gold rates
  2. A rise in prices drives down demand.

What is important is which dominates demand

"For a 1% increase in income per capita gold demand, rises by 1%. For a 1% increase in prices, gold demand falls (only) by 0.5%". WGC found

Basically demand responds more to income than it does to price. Gold demand increased from around 700 tonnes in 2000 to around 1000 tonnes in 2010, "despite a 137% increase in the rupee gold price was outweighed by the 78% increase in per capita income"

The World Gold Council estimated that average demand in India for gold would go up to 850 or 950 tonnes per annum by 2020, with two-thirds of this demand coming from the rural market. How will that be affected by option availability?

With this huge rural demand and the move to open up commodity markets in India it on January 14 the National Commodity and Derivatives Exchange will launch the ‘guar seed options’ contract. This will be the first agri-commodity option to trade on any Indian exchange. One suspects that this will continue as India's incomes and awareness increases. A potential price driver adding to option volume.

Back to gold and the difficlutlies of predicting its future price I draw your attention to Nathan (NM) Rothschild, the Victorian era banking and bullion magnate who said

 "I know of only two men who really understand the value of gold, an obscure clerk in the basement vault of the Banque de France and one of the directors of the Bank of England. Unfortunately, they disagree."

Source: World Gold Council. TradersCommunity

From a Sunburnt Country ....

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