Digital Gold Is In Its Infancy

As a joint venture between PAMP SA and MMTC, MMTC-PAMP has come a long way. What are the key milestones of the JV? Are you satisfied with the growth?

MMTC-PAMP is internationally recognized as an industry leader for bringing global standards of excellence to the Indian precious metals industry. As India’s leading innovator in the precious metals industry, we are focused on developing critically required physical and digital infrastructure for the country.

We are one of the only refineries in Asia to be simultaneously LBMA-accredited, which means that our metal is accepted by central banks worldwide, as well as being certified for both Responsible Gold, and for Social Accountability practices. This means that all our operating practices, from where we source our metal, to who we sell it to, conform to Responsible practices ensuring that we do not support either gray or black-market activities.

In terms of infrastructure, we are one of Asia’s largest refiners, and provide over 50% of the refined output in India. We deliver world class quality minted coins and have pioneered digital gold and organized recycling for Indian customers and Jewellers. Last year, we set up India’s first Precious Metals Assaying and Training Institute in collaboration with WGC India to provide much needed skill-development to the unorganized gold and jewellery sector.

MMTC-PAMP has created a nation-wide network of outlets. What is the purpose of these centers?

These outlets are designed to be a one-stop solution for all things gold and are mostly situated in the heart of jeweler markets in 10 different cities across the country. The first purpose is to serve as recycling centers for the gold scrap generated by jewellers. Secondly, these outlets are Government authorized Collection and Purity Testing Centers for Gold Monetization Scheme (GMS). MMTC-PAMP has arrangements with leading private and public banks to accept gold from a bank’s customer, test it, certify it and store this gold in its vault (on behalf of the bank). Lastly, it is a purity verification center for the retail customer to test the purity of their own gold holdings.

Tell us more about Gold Monetization Scheme and your participation in that. How can we make it more successful?

Gold Monetization Scheme (GMS) is a government initiative that was launched in 2015 to be able to tap into the unutilized portion of the estimated 25000 tonnes of Gold lying with Indian households and institutions (worth over $1 trillion at current prices). The scheme was launched to bring this gold into domestic circulation in order to reduce the current account deficit. However, due to lack of awareness and poor user experience (minimum size of deposit/limited availability of deposit points/illiquidity of GMS deposit) response has been limited with around 20 tonnes gathered systemwide. Good execution can gather 100 tons per year ($4 billion).

We are working closely with Banks, various industry bodies and the government to introduce more features in the scheme that will make it attractive for the end consumer to participate. The experience needs to be friction-free and have adequate incentives for all parts of the ecosystem while achieving the overarching goal of getting domestic gold into circulation to reduce imports.

Your company recently entered the digital gold space. What is the size of your digital gold business in India? How many customers have transacted in digital gold through your distributors?

Our goal has always been aimed at increasing innovation in gold in India, with an eye to formalize practices and cater to changing demographic profiles. We launched a new category, Digital Gold in 2016. Digital gold is nothing but the ability to buy and store gold using digital medium, rather than purchasing in person or over the phone, and as such caters to the convenience customers increasingly look for today.

So far, 65 million accounts have been created, through the initiative of five leading platforms – Paytm, Phonepe, Motilal Oswal, Google Pay and HDFC Securities. In addition, there have been the successful entry of other digital gold providers, who while competing with us, ensure that there is a robust market driven eco-system.

Over 5 tonnes of Gold has been transacted through these platforms, and we think the total size of this segment is approximately 80 million accounts with a total transaction of 6-7 tonnes. While we are pleased with the progress we have made in developing digital gold infrastructure for India, we recognize that digital gold is in its infancy. So, we will continue to work with members of the ecosystem and policy makers to grow this category in a robust and sustainable manner.

What macro headwinds will enable growth in this area?

It is important to recognize that Gold is perhaps unique in its impact on both the gray market and in the current account deficit (CAD). Attempts to reduce CAD via increasing customs duty and taxation are often met with an immediate positive impact on the gray market via increased smuggling. This leads to a dual headwind for organized sector players both by reducing the size of the official market, and by increasing the presence of the unofficial market.

In the short term, as the government continues to tighten policies and controls in the economy and in the gold sector, we expect to see some turbulence, but we are hopeful that the stringent safeguards put in by the government will be able to curb this significant headwind.

Second, within the industry itself, as there are more safeguards on KYC, cash usage and tracking of asset flows, we expect a reduction of the gray market. We in turn expect this to lead the Indian consumer to become more quality conscious and demand responsible, ethical sourcing as well as transparency and convenience.

What other forms of gold can be purchased?

Gold cannot be purchased easily today. Currently the most common way of purchasing gold is jewellery where one must pay a making charge, and also a melting charge when one looks to liquidate the asset. This is also because of limited financial penetration that can be seen in the 1:3 ratio of bank branches to jewellery shops across India. Jewellery is generally bought in 14K, 18K or 22K and has an effective making charge ranging from 10 – 25% over the price of metal.

As the financial markets mature, gold ETFs are also growing. Similarly, the sovereign gold bond scheme of the government is another attractive way of owning gold as an asset. Both these channels cater to the financial investor who is already familiar with investments in funds and bonds.

Retail customers today can also access Digital Gold, which is a convenient way to buy, store and sell 24k (999.9 purity) physical gold through digital platforms. For every rupee of gold bought on these digital platforms, an equivalent quantity of gold is physically stored in vaults.

In the current business scenario, the price of Gold and Silver has been fluctuating and causing refineries to shut down. What are the challenges being faced in the industry and how has your company been able to meet those challenges thus far?

A commonly raised concern is that gold in India trades at a discount to global prices, driven by the gray market. Industry bodies have noted that in such a situation, refiners do not have a choice but to shut down shop, and wait for the markets to recover.  For most refiners, a simple import-refine-sell model is not enough to survive in this landscape, and even the most efficient refiners require deep pockets of liquidity in order to stay afloat. As a result, we have seen several refineries being shut down over the years.

Has the Gold industry changed after demonetization and GST?

GST has helped in easy mobility of Gold across the country, cut down redundant paper work and forced a segment of the industry to enter the formal organised sector. The liquidity crunch after demonetization also had a temporary effect on the smaller informal sector. It has resulted in a degree of consolidation within the refinery segment also.