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The Exchange Contribution to the Physical Bullion and Jewellery Industry

Shivanshu Mehta, Head Bullion, MCX

MCX has been playing a significant role in the development of Bullion market ecosystem by providing efficient price risk management and hedging instruments addressing the varied requirements of different stakeholders, benchmark pricing, expanding the outreach and participant base, launch of new products such as indices etc.,

Providing Benchmark Prices

MCX Bullion contract prices have emerged as a domestic price benchmark of the country. For instance, pricing in gold and jewellery markets are done on MCX (+/-) basis across locations, they are acknowledged as a reference price for majority of the physical gold transactions.

MCX gold prices reflect and in build the international gold price, USD-INR rate, import duty changes, and prevailing premium/discount, thus acting as a natural hedge against these movements.

MCX gold prices have also maintained a strong correlation with international benchmarks as well as with domestic physical market prices, This enables all major value-chain participants to hedge their price risk efficiently by having healthy risk management practices and books of account.

Integrating Smaller Jewellers into the Mainstream

MCX has integrated rural, urban and global markets, facilitated efficient price discovery, increased awareness about quality standards, instilled price transparency besides providing convenience and assurance of delivery.

Starting 1st April 2015 till date, MCX has conducted 281+ awareness programs with apex bullion and jewellery associations like India Bullion and Jewellery Association (IBJA), All India Gems and Jewellery Domestic Council (GJC), Bullion Federation of India (BFI) and other national and regional associations.

Physical participants, such as jewellers, are able to lock in their input prices or hedge their inventories using MCX gold derivatives. For instance, when a jeweller buys gold at a fixed price, he faces the risk of a price fall by the time he sells the jewellery, to hedge against which he could sell MCX Gold futures, thereby creating an offset hedge.

Efficient Delivery Mechanism

MCX has observed deliveries of more than 105 tons of Gold and over 3020 tons of silver till date, demonstrating the acceptance of MCX platform by physical market stakeholders.

Before the unification of tax structure via GST, traders and value chain participants would find it commercially unviable to take delivery from the exchange and transport it to centres of demand. However, post GST, traders and jewellers alike take delivery on MCX and transport to the respective manufacturing centres .

 

Keeping the same in mind, the Exchange is setting up delivery centres across multiple locations in India considering factors like cities of import, manufacturing centres etc. like Kochi, Bangalore, Chennai, Kolkota, Hyderabad, Mumbai, Delhi etc. just to name a few.

 

India’s jewellery industry is at a transformational stage. Traditional and largely unorganized jewellery businesses are slowly making way for corporate players. Policy reforms such as demonetization and GST and related compliances have only accentuated this shift.

 

At the same time, jewellers are also feeling the heat of large volatility in gold prices. During FY 2018 till date the annualized price volatility in gold had been over 8%. This means that a jewellery firm with a gold stock of Rs.100 crores is exposed to a price risk of Rs.8 crores, enough to put its business planning process in jeopardy. While small jewellers look towards various effective hedging options available, some big jewellers take to metal loans to hedge the risks arising from gold price uncertainty, but only with partial effect.

Simultaneously, with increased focus on stricter lending norms, many banks have tightened the gold metal loan eligibility criteria and have increased collateral requirements. Smaller jewellers are feeling most threatened with the transformation as they are devoid of better margins and connectivity to the larger world of financing.

Providing Efficient Risk Management Tools

In such a scenario, MCX has launched a product that meets the risk management needs of even the smallest of jewellers. Gold options were launched on 17th October 2017 and Silver options on 24th May 2018.

Options provide tangible strategic benefits to jewellers, which many other types of risk management instruments are not able to. They offer the buyer an insurance against adverse price movement, but allow for gains even if prices move on the favourable side as the maximum loss for the options buyer is the extent of premium paid.

Besides, as MCX now offers both options and futures in gold, with the former devolving in to the latter on expiry, a wide array of effective hedging strategies can be created using combinations of futures and options. These combinations can give the hedger the leverage of futures with safety of options, a strategic benefit not available earlier.

Above all, thanks to their low transaction cost and high hedging effectiveness, options provide better cash-flow management to hedgers. Single payment of premium also enables a jeweller to improve his cash flow management with no issue of cash outflows in case the hedge goes against the jeweller.

Other strategies used by physical hedgers are mentioned below.

 

Producer/Bullion Dealer Hedging

Gold Producers sell above the money Calls at Premiums (Ceiling) & buy protective Puts below the money; (to create Floor price): achieving low/zero cost Collar - hedge against fall in expected price of future production/inventory.  This is a Costless Collar Strategy which enables hedgers to reduce their cost of hedging gold inventory resulting in greater cost efficiencies.

Flexible Pricing Schemes: Options help Jewellers create flexible pricing strategies for their customers with minimal/zero risk. The benefit of choosing the lowest price of the festive season during the tenor of such schemes, passes to the customers. To hedge themselves from a risk of higher purchase prices, Jewellers utilize Put options. Given the above, both financial as well as physical industry participants have been using options actively.

A snapshot of the performance metrics

Performance Parameters

Gold

(FY 2018-19 till date)

Silver

(FY 2018-19 till date)

Peak Turnover in Crs.

7,458.08

202.02

Average Turnover InCrs.

708.02

33.36

Average Open Interest in Kgs.

1,803

30,330

 

Source: MCX

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Conclusion

Thus, MCX has been contributing in a number of ways for the development of physical bullion and jewellery industry. The exchange has not only been fulfilling the functions of price discovery and risk management opportunities but has been facilitating the overall development of bullion market ecosystem in terms of creating awareness about quality, improving quality standards among the stakeholders. 

 

Disclaimer: Views are personal and not the views of the publisher.