Indian Gold Book:Indian Gold Book - Gold Bars Worldwide

PRICING AND PROFITABILITY
GOLD BULLION
BANK IMPORTERS
The Gold Cells of authorised bank importers are obliged to absorb all overheads and the direct costs incurred when buying
gold bars (from international suppliers) and selling them (to secondary tier dealers). Overheads include administrative and
insurance costs and, in some cases, the cost of consignment stocks that move slowly.
To cover these costs, and to generate a profit, a Gold Cell generally relies on 3 - 5 sources of income.
Small gross mark-up
Banks normally apply a small percentage or rupee amount to the actual cost of the bullion (delivered to a location in India)
at the time it is purchased from an international supplier.
The actual cost takes into account the US dollar gold price quoted by the international supplier (that supplied the consignment
stock), the bar mark-up per ounce charged by the supplier (inclusive of the refiner’s fabrication charge and the cost
of insured delivery to the required city in India), the US$/rupee exchange rate, Customs duty, State sales taxes and other
taxes.
The bank’s gross mark-up on the actual cost of an imported TT bar is currently low, at around 0.1% (Rs 15 per oz - about
US$ 0.32), although it can vary according to the size of the transaction and the prevailing level of TT supply and demand.
Since the introduction of the OGL Scheme in 1997, the bank’s mark-up on imported TT bars has fallen significantly. In 1997,
it was around 0.6% (about Rs 90 per oz - US$ 2).
Rupee exchange rates
The opportunity to convert US dollars into rupees in-house enables banks to generate a small amount of incremental income.
Typically, a few paise per US dollar.
Interest earned on advance payments
As most secondary tier dealers are obliged to lodge large cash deposits and/or make payment in full before delivery, the
bank can earn interest on those funds until obliged to pay international suppliers.
Movements in the gold price
Although the Gold Cells of most banks are permitted to take some risk on movements in the gold price, almost all do not.
On rare occasions, in a rapidly rising gold price scenario and anticipated demand is “guaranteed”, a small risk might be
undertaken by some.
Gold loans
Income is also derived if the bank offers gold loans to jewellery exporters (and, if it is part of the Gold Deposit Scheme, to
domestic fabricators and retailers).
For example, one bank requires a cash deposit (110%), a bank guarantee (110%) or other securities to 100% value of the
gold plus 10% cash, plus an annualised interest payment ranging from 7.5% to 10.5%, plus handling charges.
Addendum
International refiners that supply TT bars indirectly (via international dealers) have seen their margins on TT bars fall
substantially, from around US$ 1.25 - 1.50 per ounce in the early 1990s to less than 70 cents in 2002.
BULLION DEALERS
Secondary tier dealers
The relatively few domestic dealers that buy TT bars in bulk from bank importers normally place an accumulated order on
behalf of several subsidiary customers (e.g. lower tier dealers and large jewellery businesses) in order to eliminate or reduce
their exposure to an unexpected fall in the rupee gold price. When acting on behalf of others, their margins tend to be
small, usually less than Rs 50 per ounce. When buying on their own account, their profit or loss is dependent on
movements in the standard bullion price.
Lower tier dealers
Tertiary and lower tier dealers may also reduce their risk by acting on behalf of others. However, in the absence of a
hedging facility, both large and smaller dealers (and their customers) are exposed to unexpected falls in the gold price. Their
profit or loss is dependent on movements in the standard bullion price, and sometimes the prevailing price of unofficial
imports of TT bars.
For this reason, most lower tier dealers (and their customers) tend to buy TT bars in small quantities, often on a daily basis.
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AN INTRODUCTION TO THE INDIAN GOLD MARKET