Hello people!! Ever wondered how is the rate of yellow metal i.e. Gold fixed. Well, this sounds very interesting, isn’t it? Indians consider gold auspicious, making it an integral part of their lives. An Indian celebration without gold is dull and lackluster, with gold adding zing and shine in our festivities. Purchasing gold is a time honored tradition in India, a tradition which continues irrespective of gold prices. We, as a country are more than happy to shell out the rates commanded by gold, but have we ever wondered how gold rates are determined? Today, through this blog post, Bhagat Jewellers will try to satisfy all those curious minds.

The gold prices in India, or in any other country for that matter are dependent on variety of factors, the prominent ones being the International prices of the metal, Exchange Rates Conversion, Demand & Supply of the metal and so on. Thus, it becomes very important to first understand how the international price of Gold is fixed.

So when and where it all started?

London is home to the international prices of various metals such as Gold, Silver, Platinum and Palladium. The gold, silver, platinum and palladium price auctions take place in London on a daily basis. All of these prices are internationally regarded as the pricing mechanism for a variety of precious metal transactions and products. The London Gold Fixing is the setting of the price of gold that used to be held on the premises of Nathan Mayer Rothschild & Sons by the members of the London Gold Market Fixing Ltd. It was on September 12th, 1919, at 11:00 AM when the five principal gold bullion traders and refiners of the day (N M Rothschild & Sons, Mocatta & Goldsmid, Pixley & Abell, Samuel Montagu & Co. and Sharps Wilkins) performed the first London gold fixing, and thus became the original five founding members. In due course of time, some players left the business while other members were included in this.

And what's the current scenario of the International price setting?

However, in 2004, Nathan Mayer Rothschild left the precious metals business in London and sold its place on the fixing to Barclays. From that time onwards, the fixing has taken place via a dedicated conference line. The current participants in the fixing are Barclays, The Bank of China, Goldman Sachs, HSBC USA, JPMorgan Chase, Morgan Stanley, Société Générale, Standard Chartered, ScotiaMocatta (Scotia Bank), Toronto-Dominion Bank and UBS. The benchmark is still determined twice each business day of the London Bullion market.  It is designed to fix a price for settling contracts between members of the London bullion market, but the gold fixing informally provides a recognized rate that is used as a benchmark for pricing the majority of gold products and derivatives throughout the world's markets. The gold fix is for per troy ounce of gold and is conducted in the United States Dollar (USD), the Pound Sterling (GBP) and the Euro (EUR) daily at 10:30 AM and 03:00 PM London time.

What is the process of setting the International Gold Price?

The participating banks are the market makers. They may have gold orders on their own behalf, their clients’ behalf or frequently some of each. The participating banks generally have a preset value in their minds at which they agree to buy/sell the metal. The buy order is fulfilled if the price is lower or equal to this preset value. Similarly, the sell order is fulfilled if the price if higher or equal to this preset value. The lead participant will begin the fixing process by proposing a price near the current gold spot price. The participants then simulate the result of trading at that price. First, each bank looks at its buy/sell orders and determines how many are eligible to trade at that price. The bank then states a single value, the net amount (in ounces) of gold they wish to buy or sell. After each bank provides this value, they determine if the overall net amount is 0. If it turns out to be 0, all transactions succeed and the gold price is said to be fixed. Otherwise, the chair must change the proposed price. If the amount of gold the banks proposed to buy is higher than the amount proposed for sale, he must raise the price. That will decrease the number of proposed purchases, mainly because of these increased prices. At the same time, it increases the number of proposed sales, as more people will be willing to sell the metal at a higher price. Thus, the law of demand and supply holds true here.

Conversely, if the amount proposed for sale is higher, he must lower the price. This will have the exact opposite effects from above, increasing the number of proposed purchases and decreasing the number of proposed sales.

This process continues till the overall net amount turns out to be 0 and then the price of the metal is said to be fixed. Thus, this is how the international price of gold is fixed by the London Bullion Market Association (LBMA).

Who determines Gold prices in India?

Gold prices in India are determined largely through an informal process, as there is no “kingmaker” as such in the Indian gold industry. International prices do have a bearing on gold rates in India, though the rates might not be the exact same as they are internationally. The Indian Bullion Jewellers Association or the IBJA as it is known plays a key role in determining day to day gold rates in the country. IBJA members include the biggest gold dealers in the country, who have a collective hand in establishing prices. These members account for almost the entire legal gold sold and purchased in India, and come from all corners of this diverse nation. Gold in India is primarily imported by banks, who in turn supply this imported gold to bullion dealers across India. Banks supply this gold to dealers after adding their fee to it, which already makes them a bit higher than the rate at which gold was imported.

The IBJA then gets into the act of determining prices by speaking to the ten biggest gold dealers in the country. These dealers give their respective ‘buy’ and ‘sell’ quotes, depending on the rate at which they purchased gold. IBJA then takes the average of these ‘buy’ and ‘sell’ quotes and determines the gold rate for a particular day based on this average. This average rate is adjusted for local taxes and a rate fixed accordingly.

Dealers generally arrive at their ‘buy’ and ‘sell’ rates by taking the international cost of gold and multiplying/adjusting it to the exchange value of the Rupee and adding any import duties and taxes such as VAT. Dealers ensure that they add their margin to the rates they give, keeping in mind their requirements. This procedure ensures that gold rates in India are on par with international trends and customers can purchase gold without any worry of being cheated with regard to gold rates.

Lets understand this with an Example

So, let’s say if London Bullion MarketAssociation (LBMA) fixes the Gold price to be $1350 an ounce, where an ounce of Gold is equivalent to approx. 31.10 grams. Thus, it means that the price of 1 gram of gold would be $1350/31.10 = $43.41. Now, we will need to convert this to INR. For this we would require the exchange rate for converting USD into INR. Let’s say the exchange rate for today is 66.74, i.e. 1USD = 66.74 INR. Thus, the price of 1 gram of gold in INR comes out to be Rs. 2,897. In India, we generally mention gold rates in form of 10 grams. Thus, the gold rate for 10 grams comes out to be Rs. 28,970. To this, we will need to add 10% import duty which comes out to be Rs. 2,897. Thus, after adding import duty, the gold price per 10 grams comes out to be Rs. 31,867. VAT is also to be added later which can vary from state to state and when this is turned into jewellery ornaments, then the making charges are also included in the retail price by the retailer.

Then what does MCX Gold rates imply?

Multi Commodity Exchange of India Ltd. (MCX) is an independent commodity exchange based in Mumbai, India and was established in 2003. It is India’s largest commodity futures exchange with 88% market share in quarter ended June 30th, 2016. MCX offers trading in varied commodity futures contracts across segments including bullion, industrial metals, energy and agricultural commodities.  A future contract is a legal agreement, generally made on the trading floor of a futures exchange, to buy or sell a particular commodity or financial instrument at a predetermined price at a specified time in the future. Thus MCX deals with futures contracts and gold can be traded without having the commodity in hand. MCX calculates the Gold rates in a similar way as that the IBJA does. MCX price is dependent on International price, USD to INR rate conversion, Troy Ounce to Grams conversion and Supply and Demand for Gold in MCX trading. But these are basically for gold future contracts trading. It gives a future outlook of price trends and is used as a benchmark by many. The physical market rates for gold are generally higher than the MCX gold price as local taxes and margin of profits are added to this to determine the price for the physical market. However, off late, we have seen that the price for physical market is lower than the MCX Gold rate. Only explanation being offered is excessive quantity of gold being up for sale in markets throughout the country. There is another theory of a large amount of smuggled gold having entered the market and an oversupply due to it has led to rates falling. The recent imposition of import duty on yellow metal may have led to spurt in smuggling.

We hope this blog post might have helped many of those curious minds who wanted to understand the theory of price setting of Gold. Please follow this space and like our Facebook page so that we can keep you updated about such things on a regular basis.