Introduction to Session 3: The Experience in Other Bullion ... · Gold Exchange in Shanghai (the SGE). Step Two: The licensing system for gold manufacturing, wholesaling, and retailing,

The LBMA Indian Bullion Market Forum – New Delhi, 30-31 January 2003 Page 43

Introduction to Session 3: The Experience in Other Bullion Markets

Martin Stokes, Vice President, JP Morgan Chase

I believe that this session of the seminar has the potential to be one of the most useful ones from a practical perspective. We have five eminent speakers who are enthusiastically looking forward to sharing with you the structures of their local bullion markets and how elements of those markets might be helpful and applicable in the Indian context.

There is of course a very long history of gold and silver trading in India, but a whole generation of traders have grown up without practical working knowledge of the systems commonly used in other countries and market places. This is not to say that these systems are better or worse, merely that they have been proven to work well in their local contexts.

These marketplaces have developed over time in ways which are unique to local needs, and they range from London, which saw the beginnings of formal gold activity in the late 17th century to Shanghai, which celebrated the establishment of a gold exchange only a couple of months ago.

Today, we are not attempting to present you with a “beauty contest” of the different overseas markets – rather we would like to examine various elements within the structures of those markets and see whether any of them can be usefully applied in the Indian context. We hope that looking at both the pros and cons of all possible structures will enable the Indian market and its regulators to move forward in a constructive way. Therefore rather than just give a detailed description of how bullion markets operate in their local areas, I have asked our panellists to consider what elements of their markets may be applicable or relevant in the Indian market – while there have been several false dawns here over the years, I do feel that the time is now very ripe for some positive initiatives as the market moves along the path to deregulation.

Before I ask our speakers to step up, I have a few personal comments that I’d like to give you. I admit that though I’ve been in the bullion market for many years, I don’t have too much personal experience of the Indian market – though I’m sure that many, many tonnes of gold that I’ve sold have ended up here. As far as I can see, for much of the last 40 years, there have been ongoing efforts by the Indian authorities to reduce the consumption, and in particular, the inflow of gold.

In general, of course, history tells us that if something is restricted then people will want more of it, and if they cannot obtain it through legal channels, they will often resort to illegal ones. The government clearly recognised this when it abandoned gold control and then moved to legalise imports in a number of stages over the past decade.

In my view, and at current prices, if there is sufficient courage to make the jump to an open but transparently documented system of import and, just as importantly, export, then there is unlikely to be a rush of buying – in fact, there may be a greater interest in selling!

Now, India's foreign exchange reserves of over $60 billion now give the authorities a much firmer footing from which to launch a dynamic initiative to approach the issue of gold imports.

I do however see several questions that need to be addressed relating to the issue of further liberalisation on the bullion business. I am aware that we have something of a Gordian knot in the complexity of the Indian market, but now is the time to address the issues with a sharp sword.

Firstly, there is the question of import duty and local taxes on bullion in bar form. If at all possible, I would like to see a flat rate tax policy across the country for investment gold.


The European union has introduced a zero rated system for investment gold and a vat system for fabricated jewellery. I believe that the Chinese market may well adopt a very similar system. Is it impossible for India to consider such a format?

Secondly and on a quite separate issue there is the use of gold and silver even in the form of jewellery as a means of concealing and transferring wealth. But this is a societal problem related to general taxation and it would not seem very likely that a further liberalisation of the bullion market would result in more gold and silver being used in this way. As history has proved, even back in the old Mughal times it was almost impossible to tax private gold holdings. Thirdly comes the problem of hallmarking and fineness.

I am sure that if a vegetable seller is found guilty of using a set of incorrect weight scales, then it’s a serious offence. In the jewellery context, while I’m looking at this from a European perspective, I see incorrect hallmarking as being a similar issue. As the consumer becomes better educated, he – or more probably she – will surely become more cautious. One of the basic laws of economics, Gresham’s law, states that bad money will eventually drive out good money. If the consumer loses faith in the product then the collapse in demand will be frightening – especially as this may be in conjunction with changing and developing investment patterns as the population becomes more sophisticated.

I believe that this issue must be addressed – and that there’s scope for a small number of regional, locally recognised refineries. Such refineries would enable a more efficient system of both recycling and possible export of gold back to the international market in times of liquidation.

Now it gives me great pleasure to introduce Roland Wang, the first of our speakers. Roland works for the World Gold Council and lives in Beijing. He has been instrumental in assisting the Shanghai Gold Exchange to become successfully established – and I know from accompanying him in Shanghai earlier this week that he has an excellent grasp of all of the local Chinese issues.

Our second speaker today is Ayman Shahin from Dubai. During our LBMA Conference in Dubai three years ago, I met with Sheikh Mohammed, the effective ruler, and I was not entirely surprised to hear of his recent initiative to establish Dubai as a more important regional centre for both bullion and FX trading. I look forward very much to Ayman’s presentation.

I have had the pleasure of knowing Bob Takai for many years. He spent several years in London for Sumitomo Corporation and in the early 90s he was an active LBMA Management Committee member. He is going to speak today about the Japanese market – and I don’t think there’s a better man in the world to give us that perspective.

In some ways, the liberalisation of gold trading in Turkey provides a case study rather similar to the Indian one. Until the mid 1990s gold import was controlled completely by the central bank, then the Istanbul Gold Exchange was founded and they took over the responsibility for supervising what is becoming a more and more important marketplace with growing fabrication demand. Midhat Seref is the current president of the Istanbul Gold Exchange and I look forward to his presentation.

I have known Peter Fava since I had all my hair and his was a different colour. He has had extensive experience in the London market and is a former LBMA chairman. ■


The Liberalisation of the Gold Bullion Market in China:

“Crouching Tiger and Hidden Dragon” or “Hero”?

Roland Wang

Country Manager, WGC – China

Ladies and gentlemen, distinguished guests: good morning! It is, indeed, a great pleasure for me to talk to you about the liberalisation of the gold bullion market in China. I remember visiting New Delhi in 1996 when India was about to open up its own domestic gold market. Five years of growth later, India has become the largest gold consumption market in the world.

At the World Gold Council’s 2002 annual meeting in Melbourne last April, I made a presentation explaining the evolution of China’s gold market liberalisation process and outlining the specific measures WGC had proposed in order to drive the market reform process. At the time of our meeting, the Shanghai Gold Exchange (SGE) had not yet officially opened, and I therefore characterised the stage of the gold market in China as “at the dawn of a new era” and the ascendancy potential of China’s gold market as a “Crouching Tiger and Hidden Dragon”.

Today, just three months after the SGE’s official opening on October 30, 2002, I would like to share with you the progress of the bullion market liberalisation in China, and update you on current and future developments. Suffice it to say that we at the World Gold Council, expect that China’s gold market will no longer be characterised as a “Hidden Dragon.” My presentation today will focus on the following four sections:

- Evolution of the bullion market liberalisation in China - Current market situation - Development plans and policy indications - Prospect and potential for a modern day “gold rush”.

Evolution of Bullion Market Liberalisation in China My colleague, Albert Cheng, who will speak tomorrow, and I have been intimately involved in deregulatory efforts ever since we set up our offices in Beijing seven years ago. Over these years, the Council continually informed the local regulatory authorities about the latest developments in the international gold markets and sought to assist them in formulating and implementing market-oriented reform policies. At the same time, we also helped local gold enterprises to prepare for the transition to a market-oriented system.

With its strong annual GDP growth (of approximately 8% during 2002), large foreign currency reserves, (over US$268.6 billion at the end of 2002) and 20 years of industry development, China has emerged as one of the key potential gold consumption and production countries. Major Breakthroughs Since 2001 We have been very excited to witness that, over the past two years, the Council’s fundamental ideas of gold market liberalisation have already been incorporated in the “Outline of the 10th Five-Year Plan for National Economic and Social Development in China”, which was approved in March 2001 by the People’s Congress and listed as one of the Seven Strategic Priorities of the People’s Bank of China for the next five years.

The main principles of the gold market reform are very similar to the “Three-Step Process” outlined in WGC’s reform reports produced between 1999 and 2002. They are:

The Liberalisation of Gold Bullion Markets in China Roland Wang


Step One: End the gold monopoly system, remove price controls, and establish a membership-based Gold Exchange in Shanghai (the SGE).

Step Two: The licensing system for gold manufacturing, wholesaling, and retailing, is to be gradually abolished, starting off first with the retail sector. The gold bullion market will then be open to individuals.

Step Three: Concurrent with the progress of foreign exchange reforms, the import/export controls on gold will be gradually lifted.

Since 2001, a series of new gold-related policies have been announced:

On April 27, 2001 the governor of the PBOC, Mr. Dai Xianglong, for the first time, publicly announced the plan to remove the antiquated “Monopoly Purchase and Allocation” policy as well as the launch of Shanghai Gold Exchange.

On June 11, 2001 the PBOC instituted a weekly quotation system for domestic gold purchases and allocation prices, and thereby a gradual process to synchronise domestic gold prices to the prevailing international prices got underway. This represents a first, but quite positive step towards establishing a market-oriented gold price system through the gold exchange.

On August 1, 2001 the State Price Bureau-imposed domestic gold jewellery retail price control was abolished. Retailers are now free to set their gold jewellery prices according to the exchange price and product quality, and not determine price solely by the gold content, as in the past. This will undoubtedly encourage new and innovative jewellery designs, increase retailer profit margins, expand jewellery product lines, and help establish gold jewellery brand names in the long term.

Effective November 1, 2001 the licensing system for local retail, wholesale, and manufacturing of gold products was abolished. However, wholly-owned foreign retail jewellery business is not allowed for the time being.

On November 28, 2001, the Shanghai Gold Exchange began its simulated operations.

On October 30, 2002 the SGE officially opened. Initially, 108 members started trading gold bullion through the exchange. The PBOC ceased its 50 year-old allocation system, but will retain its purchasing channel for low-purity gold (gold that could not meet the trading standard on the exchange) for the time being, as new purchasing channels through exchange members have not yet been well established.

The Current Market Situation The official opening of the Shanghai Gold Exchange (SGE) on October 30, 2002 marked a new era for China’s gold circulation system. It marked the successful transition from the monopoly gold purchase and allocation system (through China’s central bank) to the market-oriented gold purchase and selling system, via the SGE. Local gold traders are now free to buy and sell gold bullion at the SGE (through the SGE members) without any limits or quotas, as previously.

However, according to the current Gold Management Regulation issued in 1983, individuals are still prohibited from trading gold bullion, and no local commercial banks or other financial institutions are yet allowed to handle gold trading for individuals as a savings or investment vehicle.

The trading volume on the SGE has reached over 20 tonnes by the end of 2002, after the exchange had been open for just two months! The detailed information and trading rules of the SGE can be obtained from the SGE’s own website, www.sge.com. At present, the SGE only trades physical gold bullion and has not integrated its trading with the international gold market. This situation has limited the initial trading volumes and price matching activities. However, the SGE has recently extended the trading hours until 15:30 daily and it also plans to develop new products such as “Deferred” services and trading for smaller bars.



Development Plan and Policy Indications

First of all, allow me to make this clear again – the gold investment market is not yet open in China, officially.

However, such trading and products are clearly stated in the reform plan, to come about as the “third stage”, after the SGE’s opening.

Some policies and technical issues are currently being reviewed:

1. Revise the current Gold Management Regulation to open the gold bullion investment market.

2. A new set of policies to clarify the new gold investment including:

a. Allowing selected domestic commercial banks to provide retail gold products to individuals, with two-way trading (sell/buy-back) during market hours, and based on the SGE price.

b. Establish an efficient channel to connect and integrate the SGE with the international gold markets, in order to bring the local gold prices in line with international prices, provide sufficient liquidity and supply, and allow local commercial banks/trading houses to hedge their price risks. (Currently, gold import/export is still controlled by the PBOC).

The new policies are on their way to become reality, soon. What will be the possible processes and trading channels for gold investment products? Based on various sources of information, we are able to draw a pretty clear picture, indicated by this flow chart:

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Flow Chart of Trading Channels for Gold Investment Product in China

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1. Some SGE members (not all, but the majority, possibly starting with the four largest state-owned domestic commercial banks, namely: Industrial and Commercial Bank of China (ICBC), Agriculture Bank of China, Bank of China (BOC) and China Construction Bank buy gold from the exchange or import through consignment plan. SGE starts to trade various sizes of gold bars.

2. Commercial banks offer both physical gold and gold accounts through their retail outlets nationwide. For gold account trading, no physical gold is required for delivery. Prices will be in local currency per gram, and based on SGE prices.

3. Those same approved banks can import/export gold and hedge their price risk and positions through SGE, or international gold markets.



The aforementioned commercial banks have prepared and established the necessary systems and products to start gold retail business since 2002. Although some of them may focus on physical and others on gold account business, they all plan to start their activities right after the PBOC issues the new policy to open the gold bullion investment market. The Prospect and Potential for Untapped Gold Investment Market in China You may be wondering just how large this new gold market could be. Let me try to give you some idea of it, predicated on our joint efforts to develop it successfully:

China’s annual GDP growth is over 8% (as seen in 2002) with over US$268 billion of foreign reserves. Per capita GDP reached $1000 per year recently.

It has been reported that private financial assets stood at about RMB10 trillion (US$1.208 trillion), however, most of this pool has been sitting idle (earning little, or no interest) in banks. Of these funds, individual bank deposits totalled RMB8.47 trillion at the end of 2002 (about US$1 trillion) and foreign currency bank savings deposits (mainly in US dollar) reached over US$81.1 billion, plus about RMB1 trillion (US$120.8 billion) cash in residents’ hands. Hence, in China, the pool of individual bank savings is called “Crouching Tiger” (since you don’t know when and where it might jump out). How to lure this “tiger” to come out and “consume” is one of the major challenges faced by the Chinese government as well as the gold bullion trade.

What does this mean to gold as a retail investment product? It might mean a huge market potential – or, a “Hidden Dragon”. Why?

The bank deposit interest rate in China was cut several times since this year, down to only less than 2% on average. These rates plus a 20% tax rate on interest income, are a big disincentive to saving. Nevertheless, bank deposits funds are still growing. About 31% of this money is parked in short-term or flexible accounts, and “ready” to spend. It shows that consumers could not find better investment products (especially given the poor stock and bond market performance over the past two years, during which more than 80% of private investors in China lost money in them)!

Another interesting phenomenon in China was the “Hot Sales” for gold bars since mid-December last year. As I mentioned earlier, although the official channel for gold investment products is not yet open, some local trade (refiners, jewellery manufacturers and retailers) already took their initiatives to start selling so-called “investment” gold bars since about December 18, 2002. The weight of these bars varies from 10 gr. to 1 kilo, and their selling price fluctuates as well, based on the SGE spot price. However, even these trailblazing retailers could not promise the buy-back of bars under current policy controls. Selling price rose from RMB92/g to 96/g within one week

Prospects of China’s Gold Market

• Large private financial assets: US$1.208

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in concert with the soaring international gold price (now rose to RMB99/g), a “gold rush” for the “little yellow fish” (a term for small gold bars 50 years ago) still occurred in major cities like Beijing and Shanghai (pictures showing crowds of buyers lined up at gold bar counters appeared on local media). More than 1.2 tonnes was sold within a one-month period (up to mid-January.).

If only 0.1% of the current total private bank savings pool might turn toward investing and saving in gold bullion, it would mean US$942 million – at least 100 tonnes of gold – would be consumed!

Conclusion – the “Hidden Dragon” Will Become the “Hero”. I believe I have given you an optimistic picture of the future prospects for China’s gold investment market. But we, the Council – and all of us here – still have a lot of work left to do, such as properly educating the Chinese gold trade and the Chinese consumer about the role of gold as an investment product. We also need to conduct effective promotion and channel expansion, in order to make gold investment products easier to trade, along with lowering their premiums. Consumers appear to be quite eager for such developments. Let us not disappoint them.

I would now like to give you a quote from the speech by Mr. Dai Xianglong, former governor of the PBOC, at SGE’s opening ceremony last October: “The set-up of the Shanghai Gold Exchange completes the establishment of financial product markets in China, encompassing currency, securities, foreign exchange, insurance and gold. This will help Shanghai to become an international financial centre in the future… The Shanghai Gold Exchange would not only provide physical trading, but also speed up the introduction of other investment-related products”.

A new Hollywood-financed Chinese film, “Hero” was just launched worldwide. We expect that the Chinese bullion market will become the new “Hero” to replace the “Hidden Dragon” from this year forward! ■



A View From Dubai

Ayman Shahin

Senior Vice President, Treasury, ARY Traders

I will first give you an overview of what we think about the Dubai gold market at this time. In general, we have a very positive position – the current market is strong and the outlook for the future, in our view, is promising. And that goes for both the bullion trade and the jewellery side of the business. Looking first at the bullion side, immediately following India’s deregulation of direct imports, volumes dropped sharply in Dubai. The industry had to regroup. And it has done so with marked success. In fact, annual volumes in Dubai today are well above that low point, in the region of 90 metric tonnes higher. How did this turnaround happen? Businesses realised that if they were to recapture some of the market share it had previously enjoyed they would have to restructure, to find new ways to add value. So the Dubai trade invested in areas such as refining, manufacturing and minting facilities. And it went back to the basics of all business, putting the customer first and capitalising on long standing relationships built up with its Indian counterparts, addressing their needs through better service. Dubai had one major advantage, of course – its proximity to India. We could respond faster to customer demand than anywhere else. This geographical advantage was boosted by the expansion of the Emirates Airlines network. Emirates now flies direct to several cities in India which has cut delivery times to major market centres on the sub-continent even further. And its network also connects Dubai directly with the main producing countries like South Africa and Australia. New routes are being introduced in the next 18 to 24 months, including direct flights to Sydney, to Moscow and to New York. The relationship between Emirates Cargo/Transguard and our industry is close and we continue to work together to enhance Dubai’s competitiveness. Indeed, we see the growth of the Emirates network globally as a potentially significant factor in reducing our costs both of sourcing gold and of exporting it to consuming nations. Looking forward, we feel that the development of the DMCC will further improve Dubai’s competitiveness by bringing many synergies to work. The most important of those synergies is scale – everything under one roof, from warehousing, refining and manufacturing to bullion banking, fabrication of jewellery and shipping. And then there are the incentives that reward companies that set up at the DMCC with, for example, a tax-free honeymoon of 50 years. Now let us look at the jewellery side. The deregulation of India’s gold import market did us a real favour in Dubai even if it caused some initial pain and anguish, because it made us recognise the power and nature of consumerism. And consumerism, ladies and gentlemen, is very much alive and well in Dubai. The result has been an extraordinary expansion of our jewellery market in both volume and variety in recent years. Many companies now have multiple branches, opening retail outlets in every new mall built in Dubai. We have seen the rapid introduction of 18 carat gold products. We have kept pace with changing tastes and demands and with changes in culture among traditional communities and markets where demand for diamond jewellery in particular has mushroomed. Then there has been the expansion of the tourist market bringing demand from visitors to Dubai for jewellery of yet more different designs. The unthinkable has actually happened. Five years ago we never thought we would see 18 carat and diamond jewellery in Dubai’s traditional gold souk. Today we do – and in every shop in that market. Dubai has truly become the regional jewellery centre from the consumer’s perspective. And continues to justify its title as ‘the City of Gold’.

A View From Dubai Ayman Shahin


While the industry has done much to help itself by being quick on its feet, swiftly meeting new and changing patterns in market requirements, we owe much, too, to the municipality of Dubai and the Dubai Gold and Jewellery Group who have been working together to build consumer confidence in their purchases in Dubai. Firstly, the Dubai municipality introduced hallmarking of jewellery products, giving consumers assurance about the purity of the gold in the products they purchase. And this has proved to be no mere public relations exercise since the law is being rigorously enforced through a policy of random checking of jewellery stores to make sure that they were ‘selling what they’re telling’. And a store that fails the municipality’s laboratory examination can be heavily penalised, including the forced closure of the shop. The risks are simply not worth running from the retailer’s point of view. Recently, the municipality took another step forward with the introduction of BAREEQ, which is a certificate issued only to stores that comply with defined good jewellery trading practice. The government is determined that our industry should operate at the highest quality and ethical standards. Looking ahead, we believe the jewellery market is set for further major growth over the next five years due largely to the city’s focus on building its tourism industry. The ‘City of Gold’ is part of that larger strategy. I would now like to turn to the issue of deregulation of the Indian market. And let me say right up front – we at ARY are very much in favour of deregulation. India’s move to allow the direct import of gold re-energised the Dubai market. It made us take our gold industry to a higher level. The Dubai market is now healthier and more diversified than it ever was. The old saying is true – what doesn’t kill you makes you stronger. As I have said, deregulation compelled Dubai’s trading houses to utilise relationships with our Indian counterparts more fully – and to our marked benefit. We gained greater visibility in the Indian market as a result. We had to plan ahead, to fully anticipate change and to capitalise on Dubai’s geographical position, close to India and therefore with short supply lines. We hope India will take the deregulation process forward. At ARY, we suggest that allowing the export of gold bullion or scrap is the next natural step. It’s our view that this could be very beneficial to the Indian gold industry by increasing the volume of trade and effectively reducing the reliance on speculation – and, incidentally, on selling below international market prices – to try to generate profits. In addition, allowing traders to export gold from India could be a strong balancing force in the world marketplace by adding a further degree of transparency to the global picture of supply and demand. We’re of the opinion that this would help reduce excessive short-term volatility of gold prices. That could be hugely beneficial to the physical gold trade, which of course, constitutes the major part of the gold trade business in India. At ARY, we see deregulation of the export of gold from India as a win/win situation. One direct win for India’s gold industry and one that India’s gold industry shares as it is for the whole international gold market place. In summary, we see a bright future for the gold industry in Dubai, especially as the government continues to support businesses with its pro-entrepreneurship policies. And as for the Indian market, we look forward to the day when licences will be issued to export gold bullion, just as they are issued for its import today. ■


Precious Metals Trading in Japan

Bob H Takai, Deputy General Manager

Commodity Business Dept., Sumitomo Corporation

Thank you Martin, ladies and gentlemen. It is my great honour and pleasure to speak at the first LBMA gold seminar in Asia.

I would like to discuss how and why the Japanese precious metals market has grown since it was deregulated about 25 years ago with the hope that our footsteps will be a good reference for your market evolution here in India.

The History of the Japanese Precious Metals Market

Gold trading was under government control for just over 100 years, from 1867, when Tokugawa Shogun returned the reins of power to the Meiji Emperor, until the outset of modern Japan. Until the import ban was lifted, the price of gold was set by the central bank at around 600 yen/gram for a long time.

In February of 1973, the government abandoned the fixed rate of 360 yen to the dollar to float the currency in the free market. Then two months later in April, the import restriction on gold was lifted to kick-start the private trading of gold. In 1978, the gold export ban was lifted to make the yellow metal a completely free commodity for anyone to trade.

There have not been any restrictions at all on other precious metals like silver and platinum. Therefore, for instance in PGMs, international trade with the Russians and the South Africans has a much longer history than gold. This is one of the reasons why platinum jewellery was favoured over gold by the Japanese.

The trade liberalisation of 1978 gave birth to the gold consignment business in Japan. Swiss banks and English bullion houses shipped tonnes of 99.99 gold kilo bars as consignment stock into the vaults of their Japanese customers. Consignment business served the Japanese well, freeing us from price exposure as well as enabling immediate access to the metal whenever demand arose. This period coincided with the opening of Hong Kong offices by many Western banks and traders, in order to capture Japanese business.

1982 was an epoch-making year for the gold business in Japan. The Government of Japan gave permission to commercial banks and security companies to sell gold bars and coins to retail customers through their nationwide network of shops and branches.

The marketing of gold bars by banks to their clients has certainly raised the profile of gold investment, which had long been regarded as a professional investment item for expert investors only.

In the same year, the first official gold futures exchange was born in Japan. The Tokyo Gold Futures Exchange, the forerunner of Tocom, started to trade 1 kilo gold futures contracts in February 1982.

In 1983 three Japanese bullion traders and the Hong Kong office of a British bank formed a professional wholesale market called 'Loco Tokyo gold market'. The 3 Japanese houses included Tanaka, Mitsubishi Metals, and Sumitomo Corporation, with the overseas bullion dealer being NM Rothschild (Hong Kong). Traders started to make markets with each other for 50 kilos per price to transform the domestic physical gold market from a one-way to a two-way market.

In 1984 Sumitomo Corporation became the first Japanese market maker in loco London gold and silver. Other trading houses followed shortly afterwards, helping to contribute to market liquidity in the Asian time zone. What enabled us to participate in international bullion trading was the growing liquidity in the futures exchange.

Precious Metals Trading in Japan Bob Takai


In November of that year, Tokyo Commodity Exchange for Industry (Tocom) was born through the merger of 3 existing exchanges, the Tokyo Textile Exchange, Tokyo Rubber Exchange and Tokyo Gold Futures Exchange. Tocom provided enough liquidity for trading houses to hedge their exposure arising from loco London dealing activities. Silver and platinum futures contracts were also listed in Tocom in 1984.

1986 was the year that Japan bought more than 600 mt of physical gold from overseas. More than a third of that gold was used to mint commemorative bullion coins to celebrate the 60th anniversary of Emperor Hirohito’s reign. Japan was experiencing the so-called Gold Boom fuelled by the rising Nikkei index, which hit the all-time high of 38,915 yen in December 1989.

1990s – Falling Physical Gold Demand and Prospering Futures Exchange

The 1990s are often called the “lost decade” in Japan. The burst of the so-called “ Bubble Economy” has depressed the physical demand in gold, on the contrary, the futures trading on Tocom has prospered throughout the decade. I will come back to the futures market later on.

Gold demand has fallen sharply in the late 90s to a record low of only 43 metric tonnes in 2001, a mere one-fifteenth of the peak recorded 15 years earlier. The gold jewellery industry was hit hard too, with its total size shrinking from a peak of 24 billion dollars to only six billion dollars.

However, there is some good news too in the ‘90s. The new style of gold investment has become very popular among the Japanese public.

The Gold Accumulation Plan has captured the minds of many potential gold investors. The system enables you to accumulate your gold savings on an average basis whereby you buy more gold when the price is low and less when the price is high. When your savings reach a certain level, you can either sell to take your profits, or you can convert your balance into either gold jewellery or coins. The nation-wide gold balance today is believed to be around 250 to 300 mt. An interest-bearing gold savings product was also introduced in the late ‘90s, where investors can receive a gold lease rate of about 1% p.a. for their deposit.

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Tokyo Commodity Exchange

In stark contrast to the shrinking physical market, the futures trading on Tocom has experienced significant growth during the 1990s. Before showing you the bar charts, let me go through the general outline of the Tokyo Commodity Exchange.

The Tocom is a non-profit membership organisation given the statutory powers by the Commodity Exchange Law of 1950, regulated by the Ministry of Economy, Trade and Industry. The Exchange lists precious metals, energy products, and industrial materials like aluminium and rubber. The Tocom has 120 General Members, 44 Associate Members and 68 Broker Members.

In precious metals, gold, silver, platinum and palladium futures contracts are traded in Japanese yen for up to 11 months forward. Weight units are 1 kilo in 99.99 gold, 60 kilos in 99.99 silver, half a kilo in 99.9 platinum and 999.5 palladium. Trading is all screen based. The morning session lasts from 9 until 11am Tokyo time, and the afternoon session is from 12:30 till 3:30 pm. It is possible for you to follow the Tocom afternoon session from your office in Delhi or Mumbai.

There has been a tremendous growth in trade volume on Tocom over the last 19 years. Last year, Tocom traded just over 20,000 mt of gold, which is about 85 mt per day, equivalent to Japanese annual imports in recent years.

On silver, the picture is more sporadic than gold, as they traded about 56,000 mt last year, which is about 230 mt per day. Annual Japanese imports are about 800 mt, so you can see that the Tocom silver contract is not as active as gold and platinum.

Next, let’s look at the platinum market which is the most successful contract in the history of Japanese futures industry. In 1985 when the contract was launched, the annual trade volume was a mere 430 mt, which had skyrocketed to 9,240 mt, more than 20-fold, by 1998. Last year it was slightly down to about 7,200 mt. This, I believe, was a consequence of the jump in the popularity of the TOCOM gold contract. Daily trade volume was 30 mt, which compares with an annual import figure of 50 mt.

Lastly palladium, which had a notorious hiccup about three years ago. As you can see in the graph on the following page, the contract was successful until around four or five years ago, when it recorded the highest trade volume of 9,140 mt. This is about 38 mt daily, compared with 78 mt of physical imports in the same year. The contract tumbled in February 2000, when the price experienced an explosive rise from US$ 440/oz to US$ 815/oz triggered by suspension of Russian exports. Having faced possible default by several broker-members who were caught short very badly and its negative impact on the international market, the Tocom Board decided to freeze the price until the end of that year at 2,363 yen/gram, which was approx. US$ 700/oz. The market reopened in the following year, but liquidity hasn’t recovered so far in spite of the fact that Russian shipments normalised in 2002.

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etail Price Ave Yen/g)

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Conclusion: Japanese Experience in Market Development

I have just covered, very quickly, how the market has developed in Japan from the 70s to the 90s. From my experience, I believe the following 3 phases are important to the successful market creation in precious metals.

Phase 1 – Lifting of import/export restriction: Physical market grows

In the first phase, you need to lift the import/export restrictions to create a healthy physical market domestically.

Phase 2 – Opening of an official futures exchange: Hedging market develops

In the second phase, well regulated futures exchange need to be established by government initiatives. This creates domestic hedging market for physical traders, investors and end-users.

Phase 3 – Emergence of an Interbank OTC market: Liquidity increases

In the third phase, professional trading community need to take initiative to quote bid and offer two-way prices among themselves to generate liquidity in professional market.

Last phase – Synergy among:

Industrial/Investment physical demand Liquid OTC market (loco London) Active futures exchange (Tocom)

In the last phase, inter-action among industrial and investment physical customers market, loco London professional market and active futures market will work together to form a very liquid market place.

I hope that the Japanese example will be useful in your context, and my speech succeeds in forming a bridge between the two very important markets here in India and in Japan. ■

2003/7/3

Annual Turnover of TOCOM Palladium

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The Experience of the Istanbul Gold Exchange

Midhat Seref,

President and Chairman of the Board, The Istanbul Gold Exchange

I would like to thank the LBMA for inviting me to participate in this forum and for the opportunity to give you some insight about the liberalisation process of the Turkish gold market. In addition, I would like to express how happy I am to be here for the first time in a country that has made great contributions to all aspects of world history and culture. My presentation trip will firstly cover a brief look at the general situation of the Turkish gold sector. Secondly, I will give an outline of the liberalisation of the Turkish gold market. Then I will touch on the problems in our gold market. And finally I will conclude by making some humble suggestions for the Indian gold market. Of course you can be sure that this trip will take up to six or seven minutes. Thank you in advance for your patience. Turkey is a country where gold has had a long history. Prior to Turkey’s opening up to world markets, gold was one of the main forms of investment and today, it continues to be highly valued amongst most of the population of my country. Turkey has an important place in the world’s precious metals sector. The global financial services industry has been changing so fast that Turkey is forced to keep up with those changes without loosing any precious time. When we look at the share of Turkey’s gold imports in world production, we may note that Turkey imports on average 150 tonnes of gold annually and has long been among the top ten gold importing countries in the world. By the end of the 2001, the size of the gold economy was around US$ 1.5 billion and it employed over 220,000 people. The number of gold jewellery manufacturing units was around 5,000, in addition to 30,000 goldsmiths and gold merchants. According to World Gold Council figures, Turkey ranked fifth in the global ranking for gold demand in 2001 with 159 tonnes, corresponding to a 5% share in total demand. While official imports were 103,485 kilograms in 2001 and 128,905 kg in 2002, a 25% rise has been achieved on a yearly basis. Turkey can be considered a prime example of liberalisation in the global precious metals sector. The liberalisation process has been ongoing since 1980 and has been taken further than merely removing most trade and fiscal restrictions. Before 1980, when importing gold was prohibited, smuggled gold volumes into the country reached 80 tonnes a year. The stages of liberalisation of the Turkish gold market have been: Stage I: Foreign Exchange Control and Ignored Gold Trade in Turkey (1924 - 1960) Gold has assumed different roles at different stages of the economic development in Turkey. After the establishment of the Republic in 1923 and until 1960, the government needed to accumulate gold reserves for the Central Bank of Turkey. During this period, the government maintained strict control over foreign exchange and foreign trade, and the gold trade was largely ignored. Stage II: Gold Smuggling (1960 – 1980) From 1960 to 1980, attention was focused on the flows of gold in and out of the country. The government’s efforts during this period were centred on controlling gold smuggling. The law on the “Protection of the Value of Turkish Currency” was enacted to accomplish this aim. The Ministry of Finance was authorised to set, limit and prohibit when needed the export and the import of precious metals, gems and products of gems in 1962. During this period, the price difference between international market and domestic market was around US$12/ounce. Stage III: Creating An Official Market For Turkey (1980 – 1990) In 1980, together with general policy change on liberalisation and globalisation, the foreign exchange market and a number of commodity markets were deregulated. In 1985, the central bank was given responsibility for importing gold against the Turkish Lira.

The Experience of the Istanbul Gold Exchange Midhat Seref


Thus an official market was created for the first time. In 1989, a two-way wholesale market was initiated for gold against foreign exchange, in which the banks, financial institutions and newly authorised gold dealers participated. The transaction fee was between 3 – 5 ‰ (between three - five to thousandth) in the market. The central bank remained the sole importer, but acted just as a broker, maintaining no positions, so the Turkish gold market was completely linked to the world gold market. During this period, the average price difference between the international and domestic markets decreased to US$7.65/ounce. Stage IV: Delegating the Market to Its Participants (1990-2002) In 1993, further liberalisation decisions were made. These ended the central bank’s monopoly, and allowed gold bullion imports and exports by authorised market participants on a declaration basis. In 1992, the average price difference between the international and domestic markets decreased to US$1.28/ounce. Implementation of these measures took place with the opening of the Istanbul Gold Exchange (IGE) on July 26, 1995. After the IGE was set up, the price difference between the international market and domestic market decreased still further to US$0.72 /ounce. During the beginning stages, there was only a Spot Gold Market within the IGE. The Gold Futures and Options Market opened in 1997 – the first derivatives market in the Turkish financial system. In 1999, the IGE decided to enlarge its entity from a Gold Exchange to a Precious Metals Exchange, and to achieve this, launched the Spot Silver and Platinum Markets. Another new establishment in 1999 was the addition of non-standard gold transactions, namely 14-, 18- and 22-karats, within the Cash Gold Market.

The Precious Metals Lending Market opened on March 24, 2000 with the purpose of providing credit with more reasonable rates to the gold sector. The legal framework for gold bonds was issued on 26 December 2001. Finally, with the objective of having precious metals investment funds actively operated by the markets and instruments of the IGE, some amendments were implemented by a decree of the Capital Market’s Board, which covered the legal framework for precious metals investment funds. By December 2002, the Exchange Market housed 55 members. The membership structure of the exchange consists of: 19 banks, 22 authorised institutions, eight precious metals brokerage companies, three securities brokerage companies, one producer and distributor company, one precious metals refinery and one non-resident company. Through the IGE, the sector is fully connected to the global precious metals market.

TRANSACTIONS Buyer Seller

Precious MetalsLending Market

Exchange Expert

Lender BorrowerCertificate

Market Member Market Member

Margin

Order Order

Serial Number

CertificatePrecious Metals

Clearing HouseRepayment of precious metals at the end of the maturity

Precious Metals Lending Market

Serial Number

secret code and phone

The Experience of the Istanbul Gold Exchange Midhat Seref


Stage VI: From a Government Institution To a Public Company (2003 +) Very recently, in January 2003, the government announced that a number of large state enterprises, including the Istanbul Gold Exchange, would be privatised. The liberalisation of the Turkish precious metals sector is not yet complete. In order for it to develop further; some of regulations still need to be altered. Some of the current tax regulations are still a problem for the sector. We have discovered that some unproductive taxes are leading to illegal and unreported activities in the market. With the objectives of solving the tax problems related to the gold market and aiming to improve the IGE’s markets actively and effectively, we prepared some suggestions as law amendment drafts and submitted them to the Ministry of Finance. Some of the main issues that we are trying to deal with are as follows:

• Exemption from banking and insurance transactions tax for exchange members. These tax exemptions will reduce transaction costs and therefore, by reducing raw material costs we will be able to increase the comparative advantages of the Turkish jewellery manufacturing sector. With the objectives of operating the markets and instruments of the IGE actively, a draft related to the relevant Law was prepared. Along with the draft, exemption from banking and insurance transaction tax in all markets of the IGE (including the Spot Foreign Exchange Market, which is expected to open shortly) is suggested for Exchange members. In the same draft, exemption from Value Added Tax for non-standard gold, doré bars and the precious gems market which may be opened in IGE is suggested (currently it is 18% for dore bars and 26% for precious gems).

• There is no tax relief for stock appreciation from inflation in the gold sector –traders and fabricators are subject to income taxes based on inflated price changes. To abolish this unjust implementation, a draft pertaining to the Tax Law was prepared and submitted to the Ministry of Finance.

• Considering the demand from our members and the precious metals sector for gold standards, aiming at improving the IGE’s markets and instruments, a draft decree related to the decree entitled Gold Standards and Refineries for Gold to be Processed in the Precious Metals Exchange was prepared and submitted to the Undersecretariat of Treasury. According to the draft, gold to be purchased and sold in the Exchange would be between one gram and fifteen kilos in order to provide a flexible range.

Finally, I would like to make some suggestions for the Indian gold market based on our experience: • All aspects of the legal framework pertaining to market should be made before establishing an

organised market. In particular, the tax issues of the sector (including jewellers) must be considered an integral part of the liberalisation process.

• A precious metals exchange should be established with the purpose of providing liberalised market conditions. This will certainly decrease the cost of world gold prices for the sector’s global competitiveness. For my country, the value added as a result of liberalisation was almost US$ 35 million, based on an annual import average of 100 tonnes. With the establishment of the Istanbul Gold Exchange, US$1,800,000 value added was provided yearly to the economy. To sum up, over a period of seven years, liberalisation and the IGE have contributed at least an added value of US$ 264,000,000 to the Turkish economy.

• The decision to establish an exchange should be made after deciding whether the exchange will be a government institution or a public company owned by the sector or investors. That will depend on knowing who is more active, more dominant and has the required resources in the economy or the degree of willingness and the ability of the gold sector’s structure to achieve this goal. ■



London – The Bullion Market’s Engine Room

Peter Fava, Deputy Managing Director, Precious Metals

HSBC Bank USA London Branch

If you allow me an indulgence, I would like to start with a little history of the London Gold Market. I would like to set the stage by explaining how we started, because I think it is relevant to all over the counter (OTC) markets such as the Indian gold market. London started trading gold within an organised market framework at the beginning of the 20th century. Starting with the first gold fixing in 1919, the market developed quite slowly, trading spot almost exclusively until the late 1960’s. At that time, the exclusive bullion banks employed dealers from the London Metal Exchange; the knowledge gained from the forward markets in base metals was adapted for use in the gold market. A clearing system between the fixing members had started along FX lines fairly early on. Customer’s balances were transferred between the fixing members in much the same way as they are today. Accounts were held mainly for the Swiss banks, whose customers bought gold as an investment on the Gold Fixing and needed a Loco London account. Together with the clearing, a good delivery list was accepted between the vault holders. The basics of an OTC bullion market were established, but with the price stuck at $35/oz, there was not much for the investor to get excited about. The USA finally abandoned the gold standard and allowed US citizens to buy gold and the price started to fly, eventually reaching $850/oz on 21 January 1980. The story since then is well known, but price volatility has remained high and that is always good for traders. The next move was when gold producers started hedging their production by selling gold several years forward. These forward purchases by the bullion banks resulted in their having to sell into the spot market, as this was the only place they could hedge. This spot sale against a forward purchase meant that the bullion banks had to borrow gold. This is where the central banks came in as lenders of their reserves, with considerable support from the Bank of England acting as their clearer in London. The framework for an international bullion market based on London was now in place. The eventual establishment of the LBMA in 1987 became the driving force for other gold markets, as common practices within London were adopted by the rest of the world. These included the Good Delivery List, the “Loco London Clearing” and the adoption of standard documentation (e.g. IBMA, ISDA and the un/allocated accounts agreements). I said earlier that this little history lesson had some relevance to most markets around the world. I certainly think it has great relevance to India. India is at the stage where the majority of business conducted is the purchase and sale of spot gold. If developments follow the same track as London, the next step should be the further development of both the forward and lending markets. Having an unfixed market is a step towards a forward market, but unfortunately this still leaves a large margin for price risk, which a jewellery manufacturer may want to avoid. The London bullion banks already provide large consignment stocks to banks in India. This ready supply of spot gold has removed the squeezes on the market that used to occur when supplies ran short in the relevant centre. I understand that gold loans are permitted in the export special zones and to some extent in the domestic market, but further development is required if the domestic manufacturers are also to be given the tools to make jewellery with total price protection. What the manufacturer needs is to be able to borrow gold from the time he starts making the jewellery until he has sold that jewellery and repurchased gold to cover his loan. In the interim he needs to be free of variation margin calls because the price of gold has risen. This is a tall order for most banks, as the loan margin is invariably cash based. What the manufacturer needs is to be able to provide gold as collateral! In other words, to use his finished jewellery as collateral against his gold loan. The cash margin call will come at a time when the gold price has risen sharply. At the same time, jewellery demand will have disappeared, leaving the manufacturer in a very difficult cash-flow position.

London – The Bullion Market’s Engine Room Peter Fava


A large number of administrative hurdles have to be crossed in order to be able to put this in place in most commercial banks, but it is possible. In addition to the loan market, the consumer needs to be able to buy and sell gold forward in order to take full advantage of the market’s price movements. This requires an active forward market or a futures exchange. In London we have managed very well without an exchange as our own forward market is very deep and trades on the basis of 50/100,000 ounces at a price. We have to accept, however, that there are credit constraints in India that would make a fully margined futures exchange a more viable option. Unfortunately the existing exchanges are mostly open outside the Indian time zone and a local alternative would be preferable. The next step in London’s development was the use of derivatives. The option market has now become very sophisticated, but the basic tools remain just as useful today. Premiums look very expensive, but they must be compared with the price movement (or volatility) over the period. A zero-cost option is also a valuable tool for a jewellery manufacturer who has a need to buy gold, either at a lower price than currently available or at a higher price if the market were to explode. Although there are many variations of derivatives based on options and forwards, there is one other tool I would like to bring to your attention – the Interest Rate Swap (IRS). The IRS is an exchange of interest periods allowing one party to borrow long-term gold and simultaneously lend short-term gold, in other words, to borrow fixed and lend floating. It was originally used to reduce credit exposure for long-term borrowers who were able to borrow short-term but did not have the ability to borrow two or three years.

By doing an interest rate swap, they are able to convert their short-term borrowings into long-term. This is possible because all payments, both principal and interest are netted on each rollover. This reduces the credit exposure from 100% for an outright loan to approximately 10% for an IRS. A jewellery manufacturer could lock in a very low rate of interest at current rates to cover his borrowings for the next three years. The London bullion market has been the engine room of the gold market for nearly 100 years. We have shown the way we have developed from a very restricted spot market to a largely self-regulated mature OTC market. We buy physical metal from mines, bring it to a refinery and convert it into TT bars for supply to India, Dubai and the Far East. London now looks forward to further developments here in India, which I am sure will follow the path London took, but over a very much shorter timescale. ■

1

Interest Rate Swap (IRS)

2% Start

Payment:

3mth3mth0.5%

6mth3mth0.8%

9mth3mth1.0%

1 year3 mth0.5%

15mthetcetc

18 mth…etc …..etc

Zero* -1.5% -1.2% -1.0% -1.5%

Jewellery manufacturer borrows gold for 2 years at 2%.He lends 3-month gold every three months for 2 years.The principal amount cancels* out / all interest is netted


Session 3 Summary

Martin Stokes Vice President, JP Morgan Chase

So to summarise some of the most pertinent points, well-structured and well-regulated bullion markets share the following advantages:

Participants all have full confidence in the product. If the contract offered is 995 or 9999 quality, then that is what you will get – and you will have recourse in case of complaint. For example, the London market is justly proud of its Good Delivery List and our recent proactive monitoring initiative will make refineries even more conscious of their responsibilities.

There is a level playing field between buyers and sellers – futures exchanges apply margin rules transparently and fairly to all traders. Perhaps more importantly benchmarks whether for spot, forwards or futures are fully documented, transparent and broadcast to all participants. If you don’t have such benchmarks, there is little hope for full public confidence in the market and no hope for derivative products.

The authorities – both regulators and tax officers have transparent audit trails which allow them to apply rules fairly. In my view, it’s important for such a body, whether a board of governors for an exchange or a management committee – after consultation with and agreement from their official regulators, to have the ability to amend rules either as a process of evolution or in times of extreme market stress. This power certainly gives great responsibility to act fairly and provides significant credibility.

A clearly constituted exchange or trade body that obviously represents all participants provides a prime point of contact for the authorities. It can also be a focused lobby group that is a unified voice for constructive change to rules and regulation.

Market participants are happy to pay a reasonable annual fee if they see that they are getting value for money – both in terms of efficient structure, market pr and occasional social events. Of course, the group has to be run democratically and transparently – no taxation without representation!

You will see, for example, that the LBMA has been quite active over the years in publishing market standard documentation to save expensive bilateral legal time. In fact one of my thoughts from this seminar is that the LBMA should consider a standard consignment agreement for bullion in India and other markets. I am aware that some institutions consider legal documentation to be an area of competition, but in my view lawyers have enough control of our lives and a market standard should be helpful. As a market, we should make it easier for all the players to transact business as efficiently and safely as possible. I’ll raise the idea at the next Management Committee meeting.

Importantly, such a constituted group also provides a first point of contact for the media. When I was LBMA chairman, I used to dread calls from the press, but at least I could give them the facts and ensure that they weren’t writing uninformed gibberish about the market.

I now open the floor for questions. I don’t think I’ve ever seen a panel with such wide global experience in the bullion business – and I would encourage you to take what is an almost unique opportunity to profit from their experience. ■



Session 3: Experience in Other Bullion Markets

Questions and Answers

Q – Paul Walker, GFMS: The panel has been espousing the virtues of liberalising the market, urging various measures to open up the Indian market. Is there a downside to any of these measures, for example, for domestic jewellery manufacturers and others involved in the domestic markets, or would it be purely positive for everyone involved?

A – Martin Stokes: I’m not quite sure that this question is for this particular panel. My view is that transparency does have initial discomforts for jewellers in so far as some may be selling material, which is not necessarily of the caratage they claim, but perhaps that’s too harsh a judgement.

Does anybody want to comment on Paul’s question please?

A – B. Takai: The downside of market liberalisation can be seen in the example of the Japanese case. The market was liberalised in the 1980s, to an almost complete extent. Because of the economic boom of the late 1980s and the subsequent collapse of the market in every segment of the economy, during the early 1990s, the Japanese jewellery industry collapsed. The main reason for that collapse was the gold loans to the jewellery industry, as not enough companies had proper risk management systems. Therefore, excessive gold loans were provided to the jewellery industry, mainly to small companies and a lot of them went under. It resulted in a lot of money being lost – well over $100 million were lost because of the gold loans to the jewellery industry. That is a clear example of the downside of liberalisation.

A – S. Murray: There is another potential downside to liberalisation, which is that it can be a two-edged sword. The process doesn’t usually involve just the bullion market being liberalised, but also other financial markets. This can mean that investors will have access not only to bullion in all its shapes, forms and derivative varieties but also to sophisticated financial products, some of which allow domestic risks (such as fluctuations in the value of the local currency) to be hedged. On the other hand, it is probably fair to say that the benefits of a well-regulated and liberalised market for bullion (for industrial users, fabricators and investors) will more than compensate for any downside risk in the form of a possible diversion of investment and savings into other investment products.

Q: In the last three months, you have only transacted around 25 tonnes on the Shanghai Exchange. What are the hurdles that you are facing with implementation?

A – Roland Wang: First of all, the exchange right now is only trading in physical gold and second, trading is confined to local members. The hurdles at present mean that you can only buy gold from local mines, and also the buyers are mainly jewellery manufacturers, so the usage of gold is limited. And supply sources are limited.

So that’s why the SGE is planning to act, bringing in more new products such as deferred services. It also is encouraging the government to open up to investment products, so that people can have the opportunity to buy gold bars and to transact both types of trading. At present, local consumers can buy gold bars from retailers for adornment – as ornaments rather than as an investment, so they cannot sell these back. It’s one-way trading, as I mentioned previously.

The market is closed. It is not open to the international market yet because there are some final technical policy controls for imports and exports. The final review will be between the central bank and other import and export authorities. Once import and export controls are lifted, it will help trading on the gold exchange to have better prices, and also will provide another source of supplies to the local market. In the past three months, we have seen that demand outstrips supply and the local buyers have had some difficulties to buy enough gold from the marketplace.

Session 3 – Questions and Answers


Q: There has been a lot of talk about gold as an investment option, but over the last ten years, gold prices have gone up and down. Now that the sudden spike has come, gold looks like one of the most attractive investment items. However, all of the central banks are strategically or methodically offloading their own gold. So, if the world’s most sophisticated investors – the guardians of people’s wealth, the central banks – are selling gold, why should I buy it?

A – M. Stokes: I’m not sure that we’re actually picking one side of the market or the other, and certainly, traders on the panel here are happy for prices to be lower or higher as long as they are moving. A personal observation is that some central banks have a very large percentage of their net reserves in gold and they’re seeking to reduce those percentages. The Banque de France, for example, has probably more than 50% of its reserves in gold at the moment – not that I see them as an immediate seller, but it gives you some indication of their position. I also see this as a sort of privatisation. If governments or countries are selling shares in nationalised companies, then it’s not necessarily a bad thing for individuals to buy them. Does anybody else want to comment on that?

A – P. Fava: Yes, I think it’s a continuation of the rebalancing of reserves, which got out of hand during the period of the gold standard. Switzerland was in that position. I think other central banks will follow. I think the Washington Agreement will be extended and probably for a very considerable period of time, maybe another 25 years. But they should stick to the agreement, and be sensible about how they sell – not panicking and unnecessarily pushing the price down to $255, when the gold could have been sold at $300 on a level playing field basis, without any overt announcements, but done the same way that foreign exchange reserves would be covered. They could have sold a lot better, and gold would be in a healthier position than it is now.

But central banks must be allowed to do what they want to do, in the same way that we must be allowed to do what we want to do. You must be able to buy gold whenever you want to and sell it whenever you want to, and that’s how it should be all around the world.

Q – K. Naqvi: The support of the authorities in such reform processes is critically important. Particularly in India, it’s crucial that the reform processes that we’re discussing here have, as Stewart mentioned before, someone to champion them, ideally at least one of the following: the RBI, Commerce Ministry, FMC and so on. I was just wondering how the various markets represented here have motivated their relevant authorities to accept the sort of reforms that are being talked about, and what they saw that they were getting out of it for them?

A – R. Wang: We have taken several initiatives. First of all, we organised all of our renowned economists to conduct a reform report and list the rationale for reforms, whether the timing is right, and whether it would be good for the country to open up the gold market. This was followed by a second report, with input from international professionals, which tried to get a consensus among the authorities and the trade on what would be best for the country and trade and, if the market should be opened, what would be the best way to do it.

The second lesson from our experiences in deregulation in China is that you’d better identify the key authority in the process. It’s very hard to deal with, let’s say, more than five ministries at the same time for the same issue. In China the central bank is the key player in terms of the gold deregulation process, but whenever you touch upon the opening of the market, other ministries also want to get involved. I think it’s better to deal with one key player and also provide full support to the key players in the authorities.

I didn’t mention in detail about the VAT issues in the gold exchange opening process. It didn’t open officially after the simulated operations because VAT is controlled by the tax bureau rather than the central bank. Although the central bank initiated the reform process, and it was approved by the People’s Congress, the overall reform plan didn’t touch upon the tax issues. So, the tax authority planned to levy VAT on top of gold trading.

In the past there was no VAT because gold was controlled by the central bank, and was a state asset, so there was no need to charge VAT. But once the market opened, gold was considered a commodity, and as with every other traded commodity, VAT must be levied.

Session 3 – Questions and Answers


So, we needed traders to take the initiative to discuss this with the authorities and to provide support. We actually invited experts from London to have meetings with the central bank and the tax bureau to introduce them to and explain the LBMA’s Black Box arrangements. The current VAT policies carried by the tax authorities in China for the gold exchange and gold trading are basically a copy of the Black Box arrangements.

Q – M Stokes: Do we have any comment on that from the Turkish experience, as to which authorities you’re engaged with?

A – M. Seref: Ours is a young case, with the liberalisation process starting in 1995. We were lucky in that we didn’t have any problems on the political front because each government that was in power believed that this sector should be encouraged and that they should be provided certain privileges.

The difficulty was discovering what the actual problems were. We carried out feasibility studies, and then it became a matter of cost benefit for the government, for the economy, and for the brokers. At present, we seem to be working in a positive way.

Q – Albert Cheng, World Gold Council: This question is for Midhat Seref – in the space of seven years since the establishment of the Istanbul Gold Exchange, you have introduced a lot of new products after spot trading – futures, derivatives and all sorts of options. There are so many products; is there enough liquidity to support them all, since you’ve introduced so many?

A – M. Seref: Let me be frank. There is depth in the spot market, but there are problems with the other products that we opened, especially, as I mentioned during my presentation, the inflationary impact on accounting and taxation is not solved. So, for the moment I have a very shallow derivative market, for example in futures, but we are trying to solve that situation.

Q – Abhishek Breja, James Martin & Company: I’m curious to know how companies in countries like China ensure that their old gold scrap supply to the international market is acceptable. Are they establishing their own assaying and hallmarking facilities, or, are they collaborating with international assaying and hallmarking facilities and, if so, how are they doing that?

A – R. Wang: In China, jewellery hallmarking is tightly regulated and there is a national standard for all the gold jewellery sold in the market. In the past, every piece of gold jewellery had to be assayed by the authorised national or public companies or institutions. There is a very clear recorded national standard for gold jewellery – defining clearly what is 24 carat, 18 carat and so on. Violations of that policy are strictly punished. Hallmarking is not a problem in China.

A – M. Stokes: There are LBMA recognised refineries in China, two for gold and four for silver.

A – R. Wang: As I mentioned, official members of the gold exchange include local refineries, two of which are LBMA Good Delivery refiners. The other nine members are local refineries, and they have learnt from the LBMA’s Good Delivery system and have adopted this into the local system. They ask the assay testing institutions to provide technological control for this.

Q: Is Chinese hallmarked jewellery acceptable in the international market?

A – R. Wang: As China is a 24-carat jewellery market, hallmarking is of a local standard. I don’t think other countries accept the local hallmarking standard, but Chinese jewellery is exported to most markets in the world. ■


Documents

Introduction to Session 3: The Experience in Other Bullion ... · Gold Exchange in Shanghai (the SGE). Step Two: The licensing system for gold manufacturing, wholesaling, and retailing,