a project report on commodity market with special reference to gold at karvy stock exchange

A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD

S.NO Table of Contents Page

No

1 Executive Summary 1-4

2 Company Profile

History

Overview

About Karvy Group

Stock Broking Services

About Karvy Commodities Broking Limited

KARVY Advantage

Organization Chart

5-14

3 Introduction to commodity market

15-25

4 Research Methodology

26-29

5 Indian Commodity Futures Market Introduction Commodity trading contracts Future market mechanisms Participants in futures market & trading procedure Limitations of commodity future market

30-46

6Gold Commodity Future Market Introduction

Gold in Indian Scenario

World Markets

47-60

BABASAB PATIL PROJECT REPORT OF FINANCE


Gold an Independent Asset

Turning to demand

What makes Gold Special?

Fixing of spot gold prices

Sources Of Gold For The Goldsmiths

7Investor Awareness And Their Perception

Investment

Aware

Investment in commodity future

Future investment and services expectation

61-65

8 Impact of Spot Gold Market on Future Gold Market 66-69

9 Factors Affecting Future Gold Market 70-78

10 FINDINGS 79-80

11 SUGGESTIONS 81

12 CONCLUSION 82

13 BIBLIOGRAPHY 83

Executive Summary



Investing in various types of assets is an interesting activity that

attracts people from all walks of life. Investors who are having extra

cash could invest it in securities like shares or any other assets like

gold, which comes under commodity futures market. Commodity

Futures are contracts to buy specific quantity of a particular

commodity at a future date. It is similar to the index futures and stock

futures but the underlying happens to be commodities instead of

stocks.

Now days, the commodity market is in growth stage and the

Karvy Finapolis Belgaum; working as a broking firm wants to

expand and for extensive reach thinking of establishing branches in

various cities of Karnataka.

I have taken the commodity futures, to study and analyze, as it is the

emerging trend in the market, at Karvy Finapolis Belgaum, I have

taken Gold as the commodity to study the Impact of present gold price

on future gold market and its trading mechanism.

Title: “Study of Commodity Market with Special Reference to

Gold.” at KARVY Finapolis Belgaum

Objectives:

To study the mechanism of commodity market.

To study the spot gold market.

To study whether the goldsmiths of Belgaum city aware of

commodity market and their perception.



To analyses the impact of spot gold market on future gold

market.

To study the factors such as economic factors of US, world

political and other factors affect on future market.

Research methodology:

SAMPLE SIZE: 100 random sample size

SAMPLE TYPE: Simple random sampling

SAMPLE AREA: Belgaum city

TOOL USED FOR ANALYSES:

1. Graphical Representation of Analysis:

Pie charts

Line Chart

2. SPSS

3. Correlation

SOURCES OF DATA COLLECTION:

Primary Data-

Questionnaire

Observation and personal discussion with gold

traders.

Secondary data-

Information collected from different websites likes

Gold World, MCX etc.

From various text books, journals, magazines, news

papers and booklets from company.



LIMITATION OF THE STUDY:

Spot prices are varying from shop to shop.

Commission has not included spot prices of the

commodity.

Study of awareness and perception of the investor is

only based on sample size.

The study of awareness is limited to Belgaum city.

Findings:

There is positive correlation between both market traders

can easily predict the future prices of the commodities and

hedge their positions.

Most of the respondents are interested in investing in

equity (i.e. 49%) when compared to the other investment

alternatives because they feel investing in equity will provide

more returns to them.

82% of Investors are aware about commodity future

market.

67% of Investors have not invested as they have a

perception that it is risky and they even do not have much

knowledge about trading mechanism.

For gold price fluctuation main reasons are

Dollar depreciation / appreciation

World distress

Increase in money supply

Inflation



Suggestions:

Both the markets are positively correlated the traders have

knowledge about the commodity demand and supply and their

price fluctuations. So Karvy can approach these traders and they

can easily convince them so these people are the targeted

customers for Karvy.

More Awareness program has to be conducted by Karvy

consultants so that already aware investor takes the challenge to

invest in this commodity future market. Because since this was

new to the market and also risky but gives good return. so it can

be done through by giving advertisements in local channels,

News papers, by sending E-mail to present customers etc

From survey it is found that most of the potential customers are

concerned about the genuine information and moderate

brokerage so Karvy can look upon this. If it can give good

information and charge moderate brokerage it will help to

attract more and more customers.

Conclusion

Capital market is already matured and reached at high level, every

investor interested to invest but not in commodity Future Market due

to lack of awareness. As per Data analysis most of the investors do not

have much idea of commodity market in Belgaum they are required to

be given awareness training and knowledge with the help of workshops

and seminars, as investors are willing to know more about commodity

market. There exists a high degree of positive correlation between



Spot Commodity Market and Commodity Future Market. If an amount

of small change in the spot gold market prices has the direct impact on

the future prices of gold in commodity market.

COMPAN PROFILE

The birth of Karvy was on a modest scale in 1981. It began with

the vision and enterprise of a small group of practicing Chartered

Accountants who founded the flagship company …Karvy Consultants

Limited. We started with consulting and financial accounting

automation, and carved inroads into the field of registry and share

accounting by 1985. Since then, we have utilized our experience and

superlative expertise to go from strength to strength…to better our

services, to provide new ones, to innovate, diversify and in the

process, evolved Karvy as one of India’s premier integrated financial

service enterprise.

Thus over the last 20 years Karvy has traveled the success route,

towards building a reputation as an integrated financial services

provider, offering a wide spectrum of services. And we have made this

journey by taking the route of quality service, path breaking

innovations in service, versatility in service and finally…totality in

service.

Our highly qualified manpower, cutting-edge technology,

comprehensive infrastructure and total customer-focus has secured for

us the position of an emerging financial services giant enjoying the

confidence and support of an enviable clientele across diverse fields in

the financial world.

Our values and vision of attaining total competence in our

servicing has served as the building block for creating a great financial

enterprise, which stands solid on our fortresses of financial strength -

our various companies.



With the experience of years of holistic financial servicing behind

us and years of complete expertise in the industry to look forward to,

we have now emerged as a premier integrated financial services

provider.

And today, we can look with pride at the fruits of our mastery

and experience – comprehensive financial services that are

competently segregated to service and manage a diverse range of

customer requirements.

Overview:

KARVY, is a premier integrated financial services provider, and ranked

among the top five in the country in all its business segments, services

over 16 million individual investors in various capacities, and provides

investor services to over 300 corporate, comprising the who is who of

Corporate India. KARVY covers the entire spectrum of financial services

such as Stock broking, Depository Participants, Distribution of financial

products - mutual funds, bonds, fixed deposit, equities, Insurance

Broking, Commodities Broking, Personal Finance Advisory Services,

Merchant Banking & Corporate Finance, placement of equity, IPO,

among others. Karvy has a professional management team and ranks

among the best in technology, operations and research of various

industrial segments.

Value and Vision of Karvy Stock Broking Ltd:

“Our values and vision of attaining total competence in our servicing

has served as the building block for creating a great financial

enterprise, which stands solid on our fortress of financial strength – our

various companies”.



About KARVY Group

Karvy has traveled the success route, towards building a

reputation as an integrated financial services provider, offering a wide

spectrum of services for over 20 years.

Karvy, a name long committed to service at its best. A fame

acquired through the range of corporate and retail services including

mutual funds, fixed income, equity investments, insurance ……… to

name a few. Our values and vision of attaining total competence in our

servicing has served as a building block for creating a great financial

enterprise.

The birth of Karvy was on a modest scale in the year 1982. It

began with the vision and enterprise of a small group of practicing

Chartered Accountants based in Hyderabad, who founded Karvy. We

started with consulting and financial accounting automation, and then

carved inroads into the field of Registry and Share Transfers.

Since then, we have utilized our quality experience and

superlative expertise to go from strength to strength to provide better

and new services to the investors. And today, we can look with pride at

the fruits of our experience into comprehensive financial services

provider in the Country.



KARVY Group companies are:

Karvy Consultants Limited

Karvy Stock Broking Limited

Karvy Investor Services Limited

Karvy Computershare Private Limited

Karvy Global Services Limited

Karvy Comtrade Limited

Karvy Insurance Broking Private Limited

Karvy Mutual Fund Services

Karvy Securities Limited

Stock Broking Services:

It is an undisputed fact that the stock market is unpredictable

and yet enjoys a high success rate as a wealth management and

wealth accumulation option. The difference between unpredictability

and a safety anchor in the market is provided by in-depth knowledge of

market functioning and changing trends, planning with foresight and



choosing one & rescue’s options with care. This is what we provide in

our Stock Broking services.

We offer services that are beyond just a medium for buying and

selling stocks and shares. Instead we provide services, which are multi

dimensional and multi-focused in their scope. There are several

advantages in utilizing our Stock Broking services, which are the

reasons why it is one of the best in the country.

We offer trading on a vast platform; National Stock Exchange,

Bombay Stock Exchange and Hyderabad Stock Exchange. More

importantly, we make trading safe to the maximum possible extent, by

accounting for several risk factors and planning accordingly. We are

assisted in this task by our in-depth research, constant feedback and

sound advisory facilities. Our highly skilled research team, comprising

of technical analysts as well as fundamental specialists, secure result-

oriented information on market trends, market analysis and market

predictions. This crucial information is given as a constant feedback to

our customers, through daily reports delivered thrice daily ; The Pre-

session Report, where market scenario for the day is predicted, The

Mid-session Report, timed to arrive during lunch break , where the

market forecast for the rest of the day is given and The Post-session

Report, the final report for the day, where the market and the report

itself is reviewed. To add to this repository of information, we publish a

monthly magazine. The Finapolis, which analyzes the latest stock

market trends and takes a close look at the various investment

options, and products available in the market, while a weekly report,

called Karvy Bazaar Baatein keeps you more informed on the

immediate trends in the stock market. In addition, our specific industry

reports give comprehensive information on various industries. Besides

this, we also offer special portfolio analysis packages that provide daily



technical advice on scripts for successful portfolio management and

provide customized advisory services to help you make the right

financial moves that are specifically suited to your portfolio.

Our Stock Broking services are widely networked across India,

with the number of our trading terminals providing retail stock broking

facilities. Our services have increasingly offered customer oriented

convenience, which we provide to a spectrum of investors, high-net

worth or otherwise, with equal dedication and competence.

About Karvy Commodities Broking Limited:

Commodities market, contrary to the beliefs of many people, has

been in existence in India through the ages. However the recent

attempt by the Government to permit Multi-commodity National levels

exchanges has indeed given it, a shot in the arm. As a result two

exchanges Multi Commodity Exchange (MCX) and National Commodity

and derivatives Exchange (NCDEX) have come into being. These

exchanges, by virtue of their high profile promoters and stakeholders,

bundle in themselves, online trading facilities, robust surveillance

measures and a hassle-free settlement system. The futures contracts

available on a wide spectrum of commodities like Gold, Silver, Cotton,

Steel, Soya oil, Soya beans, Wheat, Sugar, Channa etc., provide

excellent opportunities for hedging the risks of the farmers, importers,

exporters, traders and large scale consumers. They also make open an

avenue for quality investments in precious metals. The commodities

market, as the movements of the stock market or debt market do not

affect it provides tremendous opportunities for better diversification of

risk. Realizing this fact, even mutual funds are contemplating of



entering into this market.

Karvy Commodities Broking Limited is another venture of the

prestigious Karvy group. With our well established presence in the

multifarious facets of the modern Financial services industry from

stock broking to registry services, it is indeed a pleasure for us to make

foray into the commodities derivatives market which opens yet

another door for us to deliver our service to our beloved customers and

the investor public at large.

With the high quality infrastructure already in place and a committed

Government providing continuous impetus, it is the responsibility of us,

the intermediaries to deliver these benefits at the doorsteps of our

esteemed customers. With our expertise in financial services,

existence across the lengths and breadths of the country and an

enviable technological edge, we are all set to bring to you, the

pleasure of investing in this burgeoning market, which can touch upon

the lives of a vast majority of the population from the farmer to the

corporate alike. We are confident that the commodity futures can be a

good value addition to your portfolio.

The company provides investment, advisory and brokerage

services in Indian Commodities Markets. And most importantly, we

offer a wide reach through our branch network of over 225 branches

located across 180 cities.



KARVY Advantage:

Trade from anywhere in India Karvy, with its network of branches

across the length and breadth of the country, is always within your

reach, no matter where you are. This gives you the facility to trade

from anywhere in India.

Reliable research

Karvy has a dedicated team of research analysts who work round the

clock to provide the best research newsletters and advices. We reach

your desk daily, weekly and monthly.

Personalized Services

Karvy, with its wide array of personalized services from registry to

stock broking takes the pleasure of adding one more service,

commodities broking with the same personal touch

State of Infrastructure

The strong IT backbone of Karvy helps us to provide customized direct

services through our back office system, nation-wide connectivity and

website.



Round the clock operations in commodities trading

Indian commodities market, unlike stock market keeps awake till 11 in

the night and Karvy is all poised to offer round the clock services

through its dedicated team of professionals.

The account opening forms are available at our branch offices and

with our business associates. You are requested to kindly contact a

branch nearby your area and complete the account opening formalities

for commodities trading at the branches.

Also you can take a print out and fill out a simple account opening

form from our website and complete the necessary documentation as

per the checklist enclosed in the form. The form after duly filled up

may be deposited at the nearest Karvy Branch or Associate along with

a cheque/DD favoring “Karvy Commodities Broking Private Limited”

payable at Hyderabad towards initial margin. Please remember the

Member-Client agreement has to be executed on a non-judicial stamp

paper, as per the applicable by the ‘Stamp Duty Act’ of the relevant

state.

Deposit Initial Margin:

You need to deposit an initial upfront margin as specified by the

exchange (usually between 5-10% of the contract value).The

cheque/DD should be in favour of “Karvy Commodities Broking Private

Limited”

Mark to Market Margin:

In addition to initial margin, you also need to keep a mark to

market margin for taking care of the adverse price movements, if any.

Achievements



Among the top 5 stock brokers in India (4% of NSE volumes)

India's No. 1 Registrar & Securities Transfer Agents

Among the to top 3 Depository Participants

Largest Network of Branches & Business Associates

ISO 9002 certified operations by DNV

Among top 10 Investment bankers

Largest Distributor of Financial Products

Adjudged as one of the top 50 IT uses in India by MIS Asia

Full Fledged IT driven operations

Organization Chart

Managing Director

Chief Managing Director

Vice-President Vice-President Vice-President Vice-President



Karvy Karvy Karvy Karvy Securities Ltd. Stock Broking Ltd Consultants Ltd. Investors Services Ltd.

Deputy Deputy Deputy Deputy

General General General General

Manager Manager Manager Manager

Senior Manager Senior Manager Senior Manager SenoirManager

Branch Manager

Number of Team Leaders

N number of Executives

Introduction to commodity market

Ever since the drawn of civilization, commodity trading has

become an integral part of mankind. The first and foremost reason is

that commodity represents the fundamental elements of lifestyle of

human beings. In the early days, people used to exchange goods for

goods, which was called as ‘Barter System’. With the advancement of

civilization, trading system has gone through various changes and has

now entered into an era of Future trading besides existence physical



trading across the world. The history of Commodity Future trading can

be traced back to 1688 with the introduction of Future trading in rice in

Japan. This was followed by an increased participation in commodity

derivatives, especially in Futures, in the industrialized countries like

America and Britain. All the countries opened the avenue for

introduction of Future trading in commodities in 19th century. Major

commodity Future trading platforms opened in the world are Chicago

Board of Trade (NYBOT) and New York Mercantile Exchange (NYMEX).

A Commodity derivative is a contract which derives its value

from an underlying commodity. The main purpose of Future market is

to provide a mechanism for successfully managing the price risk

associated with commodities. Future markets provide a platform for

buyers and sellers to trade in a huge number of diverse commodities

such as agricultural products, metals and energy. These markets are

not only meant for hedgers, speculators and arbitrages, but also for

retail investors who want to trade in booming commodity market.

Indian scenario

The commodity derivatives markets in India are as old as those

of the US. The origin of commodity derivatives markets in India can be

traced back to 1875, when Bombay Cotton Trade Association Ltd., was

set up to start trading in cotton Futures. Subsequent to this, many

other associations have started Future trading in commodities at

different places. For example, the Futures trading in oilseeds started in

1900 at Bombay, raw jute and jute products in 1912 in Calcutta, wheat



in Hapur in 1913, bullion in Bombay in 1920. However, in 1939, the

Option trading in cotton was banned by the government of Bombay to

restrict the speculative activity in the cotton market. in subsequent

years, forward trading in various commodities like oilseeds, food

grains, vegetable oil, sugar cloth were also prohibited.

India’s commodity exchanges have come a long way since their

opening up in the early twenty first century. In India, three national

level exchanges namely Multi Commodity Exchange of India (MCEX),

National Commodity and Derivatives Exchange (NCDEX) and National

Multi Commodity Exchanges are operating to cater to the needs of

Indian investors. Apart from these national level exchanges, nearly 20

regional exchanges are in operation, to deal with specified

commodities in that region.

Present Scenario

Over the last 20 years, the prices of commodities have generally

been bearish. Even as recently as 2002-03, the outlook on the recovery

in the global economy and world trade was generally subdued due to

depressed equity markets, weakening US dollar and geopolitical

concerns. Commodity market across the world was impacted by these

developments. However, of late, the scenario has completely changed



as the global economy recovered from its slump aided by the boom in

the US markets and increased demand from developing economies like

India and China. In the global investment market, the newly hailed,

attractive, asset class is commodities. So, investors are being attracted

to this new booming market for investment.

Meaning of commodity derivative market

FCRA Forward Contracts (Regulation) Act, 1952 defines “goods”

as “every kind of movable property other than actionable claims,

money and securities”. Futures’ trading is organized in such goods or

commodities as are permitted by the Central Government. At present,

all goods and products of agricultural (including plantation), mineral

and fossil origin are allowed for futures trading under the auspices of

the commodity exchanges recognized under the FCRA.

A commodity derivative is a contract which derives its value from

an underlying commodity. The main purpose of future market is to

provide a mechanism for successfully managing the price risks

associated with commodities. Future market provides a platform for

buyer and seller to trade in a huge number of diverse commodities

such as agriculture products, metals and energy. These markets are



not only meant for hedgers, speculators and arbitrages, but also for

retail investors who want to trade in booming commodity market.

Commodity derivatives market trade contracts for which the

underlying asset is commodity. It can be an agricultural commodity like

wheat, soybeans, rapeseed, cotton, etc or precious metals like gold,

silver, etc.

Difference between Commodity and Financial derivatives

The basic concept of a derivative contract remains the same

whether the underlying happens to be a commodity or a financial

asset. However there are some features which are very peculiar to

commodity derivative markets. In the case of financial derivatives,

most of these contracts are cash settled. Even in the case of physical

settlement, financial assets are not bulky and do not need special

facility for storage. Due to the bulky nature of the underlying assets,

physical settlement in commodity derivatives creates the need for

warehousing. Similarly, the concept of varying quality of asset does not

really exist as far as financial underlings’ are concerned. However in

the case of commodities, the quality of the asset underlying a contract

can vary at times.

Why are Commodity Derivatives Required

India is among the top-5 producers of most of the commodities,

in addition to being a major consumer of bullion and energy products.



Agriculture contributes about 22% to the GDP of the Indian economy. It

employees around 57% of the labor force on a total of 163 million

hectares of land. Agriculture sector is an important factor in achieving

a GDP growth of 8-10%. All this indicates that India can be promoted

as a major center for trading of commodity derivatives.

It is unfortunate that the policies of FMC during the most of

1950s to 1980s suppressed the very markets it was supposed to

encourage and nurture to grow with times. It was a mistake other

emerging economies of the world would want to avoid. However, it is

not in India alone that derivatives were suspected of creating too much

speculation that would be to the detriment of the healthy growth of the

markets and the farmers. Such suspicions might normally arise due to

a misunderstanding of the characteristics and role of derivative

product.

It is important to understand why commodity derivatives are

required and the role they can play in risk management. It is common

knowledge that prices of commodities, metals, shares and currencies

fluctuate over time. The possibility of adverse price changes in future

creates risk for businesses. Derivatives are used to reduce or eliminate

price risk arising from unforeseen price changes. A derivative is a

financial contract whose price depends on, or is derived from, the price

of another asset.



Spread trade in commodities

In Future trading, a spread trade refers to the act of buying one

commodity or Futures contract and selling a related one, in an attempt

to profit from the price difference between the two. Basically, it is an

act of entering long (buying) as well as short (selling) position

simultaneously in an attempt to make profit.

There can be three types of spread one can enter in Commodity

Derivative Market.

1. A spread can be established between different months of the

same commodity (called an inter delivery spread).

2. Between the same related commodities, usually for the same

month (inter commodity spread).

3. Between the same or related commodities traded on two

different exchanges (inter market spread).

Spread trading can be done at the market price or at desired difference

level between the commodities. For example, Buy one contract of

February of December Gold and at the same time sell one contract of

February Gold when the February Gold contract is 100 points higher

than the December contract.

In this case first and foremost thing that need to be observed is the

liquidity present in both the contracts. The benefits that can be arrived

from entering in spread trading is the lower margin requirement,

because these strategies normally carry less risk. Spreads are usually

less volatile and prices move less quickly, which can be good for

beginners who may be intimated by the speed and price fluctuations of

a single outright trade in Future Market.



Myths on commodities trading

In recent past, we notice that the regulators banned trading in few

commodities, thereby creating misconception in the minds of traders

about the commodities market. Hence, the following is an attempt to

demystify the common myths prevailing among the investors.

1) Commodity market is too complex to understand:

Commodities markets are not complex as the product dealt in are

natural and therefore cannot be artificially manipulated. The demand

and supply also depends upon economic factors. It is easier to

understand commodities as in our daily life we are familiar with

commodities, we know the ruling prices of these commodities in the

market, while in stocks, we are not fully aware about internal affairs of

the company.

2) Only farmers are interested In trading and also only they

should be trading:

It is in correct to say that farmers would use this market. Actually, the

farmers only use the commodity future prices as a tool to decide which

crop to grow and to what extent and some large formers would use

this market to hedge their risk through an intermediary. These

intermediaries would normally be the same commission agents who

help formers to sell their crop in cash market. Apart from farmer,

others related to commodity trading either directly or indirectly can

participate in trading to hedge their price risk.



3) Commodity markets are operating to serve the needs of

speculators and not of the real investors:

Commodities markets existence serves for price discovery and

price risk management. Through this platform everybody related to

commodities can find better price discovery mechanism. Producers

and consumers of the commodity can minimize their price risk by way

of hedging. However, speculators constitute only one dimension the

market. they can work only because someone is hedging their risk in

the market. this market provides the price signals to producers as well

as consumers to meet their long term requirement. These price signals

are not available to users unless there is a commodity futures

exchange and in its absence, the markets have price fluctuations. Price

stabilization comes from the price discovery process when market

participants react positively to the information available to decide a

price.

4) Large membership is required to run commodity

exchanges:

It is a misconception that to be a successful commodity exchange it

needs large number of members. Success of any commodity exchange

depends upon good and well-spread brokerage houses and there

penetration levels. Once the commodity futures trading is well

established, then the services will be broadened to many

intermediaries with separate trading rights and have few members

with separate trading rights and have few members with clearing

rights like banks.

5) Commodities are only cash settled contracts:

Unlike equity market, commodities traded through exchanges are

deliverable on expiry. To facilitate smooth delivery process, the



Forward Markets Commission (FMC) has categorized the delivery

mechanism into three dimensions viz., compulsory delivery contracts,

sellers’ option contracts. On expiry of the contracts, the open positions

will be either settled by delivery or cash depending upon sellers and

buyers. Since the delivery process takes long time to materialize and

one has to keep track of all the delivery process transactions, nobody

wants to take burden of delivery handling process.

Note:

Compulsory delivery option- it is an option where on the expiry of

contract of a particular commodity, all the open outstanding positions

are closed out by way of delivery. Heavy penalties are levied in case of

default in delivery.

Seller option – it is an option where the sellers has right to deliver the

particular commodity on the expiry of the contract. In this option seller

has to give his intention 5 working days prior to the expiry of the

contract. The client who has not delivery intention and having open

position at the expiry of the contract has to bear a stipulated penalty.

Both Option/Intention Matching – in both the option contract the

delivery happens only case of where the intention from buyer as well

as seller received for a prescribed commodity to the extent of matched

quantity. These contracts are generally cash selected and there is no

penalty for open position.

6) The quality of produce stored in godown is guaranteed by

depository/warehouse:

Quality of produce is stored in exchange designated warehouse is not

guaranteed by anyone until the standards in warehousing

management improve to ensure preservation of the quality of goods

stored. If the quality is not assured no benefit accrues to the user.

Therefore, the exchange should provide a system, whereby the seller



must ensure quality certification before tendering delivery and the

buyer must have option to recheck the at the time of collecting

delivery and in case of any discrepancies compare to the contract

specifications, they should have an option to reject it. Worldwide no

demat delivery is operational in commodity.

7) Commodity future markets are more risky and so it is not

advisable to trade in commodities:

While scrip price can go down even by 30-40 percent in a single

trading session, it cannot happen in commodity futures price is based

on the intrinsic value of the commodity. For instance, a scrip future can

go down from Rs.4000 to Rs.2800 in a trading session, but Gold Feb

2004 contract would normally not come down from Rs.10300 to

Rs.8400 in a single trading session, because the inherent value of the

gold would not fall so drastically. Therefore it would volatile than

stocks.

What can commodity market offer?

If you are an investor, commodities futures represent a good form of

investment because of the following reasons..

High Leverage – The margins in the commodity futures market

are less than the F&O section of the equity market.

Less Manipulations - Commodities markets, as they are

governed by international price movements are less prone to rigging or

price manipulations.

Diversification – The returns from commodities market are free

from the direct influence of the equity and debt market, which means

that they are capable of being used as effective hedging instruments



providing better diversification. If you are an importer or an exporter,

commodities futures can help you in the following ways…

Hedge against price fluctuations – Wide fluctuations in the

prices of import or export products can directly affect your bottom-line

as the price at which you import/export is fixed before-hand.

Commodity futures help you to procure or sell the commodities at a

price decided months before the actual transaction, thereby ironing

out any change in prices that happen subsequently.

If you are a producer of a commodity, futures can help you as follows:

Lock-in the price for your produce – If you are a farmer,

there is every chance that the price of your produce may come down

drastically at the time of harvest. By taking positions in commodity

futures you can effectively lock-in the price at which you wish to sell

your produce

Assured demand – Any glut in the market can make you wait

unendingly for a buyer. Selling commodity futures contract can give

you assured demand at the time of harvest. If you are a large scale

consumer of a product, here is how this market can help you.

Control your cost – If you are an industrialist, the raw material

cost dictates the final price of your output. Any sudden rise in the price

of raw materials can compel you to pass on the hike to your customers

and make your products unattractive in the market. By buying

commodity futures, you can fix the price of your raw material.

Ensure continuous supply – Any shortfall in the supply of raw

materials can stall your production and make you default on your sale

obligations. You can avoid this risk by buying a commodity futures

contract by which you are assured of supply of a fixed quantity of

materials at a pre-decided price at the appointed time.



Research Methodology

TOPIC:

“ Study of Commodity Market with Special Reference

to Gold.” at KARVY Finapolis Belgaum for fulfillment of requirement of

MBA IVth semester in Institute of Management Education and research.

It was an opportunity to learn the practical aspects of the firm.

OBJECTIVES:

To study the mechanism of commodity market.

To study the spot gold market.

To study whether the goldsmiths of Belgaum city aware of

commodity market and their perception.

To analyses the impact of spot gold market on future gold

market.

To study the factors such as economic factors of US, world

political and other factors affect on future market.



SAMPLE SIZE:

The sample size is consisting of goldsmiths and gold

traders of Belgaum city. 100 random sample sizes have taken to

identify the awareness level of gold commodity market in Belgaum city

and to know the spot gold market.

SAMPLE TYPE:

Simple random sampling is adopted to select

respondent.

SAMPLE AREA:

Belgaum City

DURATION OF PROJECT:

1st Phase - December to January

2nd Phase - January to April (weekly two days)

TOOL USED FOR ANALYSES:

1. Graphical Representation of Analysis:

a. Pie charts



b. Line Chart

2. SPSS

3. Correlation coefficient: It measures the intensity or the

magnitude of linear relationship between two variables.

N∑XY-(∑X) (∑Y)

Correlation(r) = [N∑X2 –(∑X)2]1/2[N∑Y2 –(∑Y)2]1/2

Probability Error: It is an old measure of testing the reliability of an

observed value of correlation coefficient in so far as it depends upon

the condition of the random sampling.

Probable Error = 0.6745* (1-r2) √n

Rules:

If, PE *6 > r then correlation is not significant.

If, PE < r then correlation is significant.

In other situation, nothing can be concluding with certainty.

DATA COLLECTION APPROACH:



Primary data is important data for successful research. It has

collected through questionnaire and personal discussion with brokers

and gold traders. And also secondary data which act like key for

successful research is collected from MCX, Gold World website and

articles in newspapers such as Business Line, Economic Standards.

Spot prices were collected from business line news paper and confirm

it from gold smith and future prices were collected from MCX.

SOURCES OF DATA COLLECTION:

Primary and secondary data are collected from following sources…

Primary Data-

Questionnaire

Observation and personal discussion with gold traders.

Secondary data-

Information collected from different websites likes Gold World,

MCX etc.

From various text books, journals, magazines, news papers and

booklets from company.

LIMITATION OF THE STUDY:

Spot prices are varying from shop to shop.

Commission has not included spot prices of the commodity.

Study of awareness and perception of the investor is only based

on sample size.

The study of awareness is limited to Belgaum city.



INDIAN COMMODITY FUTURES MARKET

India has a long history of commodity futures market, extending

over 125 years. Still, such trading was interrupted suddenly since the

mid seventies in the fond hope of ushering in an elusive socialistic

pattern of society. As the country embarked on economic liberalization

policies and signed the GATT agreement in the early nineties, the

government realized the need for futures trading to strengthen the

competitiveness of Indian agriculture and the commodity trade and

industry. Futures trading began to be permitted in several

commodities, and the ushering in of the 21st century saw the

emergence of new ‘National Commodity Exchanges’ with countrywide

reach for trading in almost all primary commodities and their products.

There have been over 20 exchanges existing for commodities all

over the country. However these exchanges are commodity specific

and have a strong regional focus. The Government, in order to make

the commodities market more transparent and efficient, accorded

approval for setting up of national level multi commodity exchanges.

Accordingly two widest exchanges are there which deal in a wide

variety of commodities and which allow nation-wide trading. They are:



1) National Commodity & Derivatives Exchange (NCDEX)

2) Multi Commodity Exchange of India (MCX)

3) National Multi Commodity Exchange (NMCX)

1) National Commodity & Derivatives Exchange (NCDEX):

NCDEX is a public limited company incorporated on April 23,

2003 under the Companies Act, 1956. NCDEX is a technology driven

commodity exchange with an independent Board of Directors and

professionals not having any vested interest in commodity markets. It

is committed to provide a world-class commodity exchange platform

for market participants to trade in a wide spectrum of commodity

derivatives driven by best global practices, professionalism and

transparency.



Forward Market Commission regulates NCDEX in respect of

futures trading in commodities. Besides, NCDEX is subjected to various

laws of the land like the Companies Act, Stamp Act, Contracts Act,

Forward Commission (Regulation) Act and various other legislations,

which impinge on its working. NCDEX is located in Mumbai and to start

with would offer facilities in about 40 cities throughout India. The reach

will gradually be expanded to other cities.

2) Multi Commodity Exchange of India (MCX):

Multi Commodity Exchange of India Limited (MCX), is an

Exchange with a mandate for setting up a nationwide, online multi-

commodity marketplace, offering unlimited growth opportunities to

commodities market participants. As a true neutral market, MCX has

taken several initiatives to usher in a new-generation commodities

futures market in the process, become the country's premier

Exchange. MCX has started operations from November 10, 2003.

Statutory framework for regulating commodity futures

Commodity futures contracts and the commodity exchanges

organizing trading in such contracts are regulated by the Government

of India under the Forward Contracts (Regulation) Act, 1952 (FCRA),

and the Rules framed there under. The nodal agency for such

regulation is the Forward Markets Commission (FMC), situated at

Mumbai, which functions under the aegis of the Ministry of Consumer

Affairs, Food & Public Distribution of the Central Government.

Forward Markets Commission (FMC)



Forward Markets Commission (FMC) headquartered at Mumbai is

a regulatory authority, which is overseen by the Ministry of Consumer

Affairs and Public Distribution, Govt. of India. It is a statutory body set

up in 1953 under the Forward Contracts (Regulation) Act, 1952.

"The Act Provides that the Commission shall consist of not less

then two but not exceeding four members appointed by the Central

Government out of them being nominated by the Central Government

to be the Chairman thereof. Currently Commission comprises three

members among whom Dr. Kewal Ram, IES, is acting as Chairman and

Smt. Padma Swaminathan, CSS and Dr. (Smt.) Jayashree Gupta, CSS,

are the Members of the Commission."

The functions of the Forward Markets Commission are as follows:

To advise the Central Government in respect of the recognition

or the withdrawal of recognition from any association or in

respect of any other matter arising out of the administration of

the Forward Contracts (Regulation) Act 1952.

To keep forward markets under observation and to take such

action in relation to them, as it may consider necessary, in

exercise of the powers assigned to it by or under the Act.

To collect and whenever the Commission thinks it necessary, to

publish information regarding the trading conditions in respect of

goods to which any of the provisions of the act is made

applicable, including information regarding supply, demand and



prices, and to submit to the Central Government, periodical

reports on the working of forward markets relating to such

goods;

To make recommendations generally with a view to improving

the organization and working of forward markets;

To undertake the inspection of the accounts and other

documents of any recognized association or registered

association or any member of such association whenever it

considerers it necessary.

Commodities selected in Phase I

Bullion

Gold

Silver

AFGRI commodities

Soya bean

Soya oil

Rapeseed/Mustard

Seed Rapeseed/

Mustard Seed Oil

Crude Palm oil

RBD Palmolein

0 Commodities introduced in Phase II

Rubber

Jute



Pepper

Chana (Gram)

Guar

Wheat

COMMODITY TRADING CONTRACTS

All the commodities are not suitable for futures trading & for

being suitable for futures trading the market for commodity should be

competitive, i.e., there should be large demand for and supply of the

commodity no individual or group of persons acting in concert should

be in a position to influence the demand or supply, and consequently

the price substantially. There should be fluctuations in price. The

commodity should have long shelf life and be capable of

standardization and gradation.

A commodity futures contract is essentially a financial

instrument. Following the absence of futures trading in commodities

for nearly four decades, the new generation of commodity producers,

processors, market functionaries, financial organizations, broking

agencies and investors at large are, unfortunately, unaware at present

of the economic utility, the operational techniques and the financial

advantages of such trading. Commodity future market involves

particularly different types of forward contracts.



Forward contracts

FCRA defines forward contract as "a contract for the delivery of

goods and which not a ready delivery contract is".

All contracts in commodities providing for delivery of goods

and/or payment of price after 11 days from the date of the contract are

"forward" contracts. Forward contracts are of three types –

1) Specific Delivery & Ready Delivery Contracts

2) Futures Contracts

3) Option Contracts

Specific Delivery/Ready Delivery contracts:

Specific delivery contracts provide for the actual delivery of

specific quantities and types of goods during a specified future period,

and in which the names of both the buyer and the seller are

mentioned.

Under the Act, a ready delivery contract is one, which provides

for the delivery of goods and the payment of price therefore, either

immediately or within such period not exceeding 11 days after the

date of the contract, subject to such conditions as may be prescribed

by the Central Government. Already delivery contract is required by

law to be fulfilled by giving and taking the physical delivery of goods.

In market parlance, the ready delivery contracts are commonly known

as "spot" or "cash" contracts.

Futures Contract:

A commodity futures contract is essentially a financial

instrument. Following the absence of futures trading in commodities



for nearly four decades, the new generation of commodity producers,

processors, market functionaries, financial organizations, broking

agencies and investors at large are, unfortunately, unaware at present

of the economic utility, the operational techniques and the financial

advantages of such trading.

A futures contract is a legally binding agreement between two

parties to buy or sell in the future, on a designated exchange, a

specific quantity of a commodity at a specific price. The buyer and

seller of a futures contract agree now on a price for a product to be

delivered, or paid, for at a set time in the future, known as the

"settlement date." Although actual delivery of the commodity can take

place in fulfillment of the contract, most futures contracts are actually

closed out or "offset" prior to delivery.

A commodity futures contract is a tradable standardized

contract, the terms of which are set in advance by the commodity

exchange organizing trading in it.

The futures contract is for a specified variety of a commodity,

known as the "basis”, though quite a few other similar varieties, both

inferior and superior, are allowed to be deliverable or tender-able for

delivery against the specified futures contract.

The parties to the contract are required to negotiate only the

quantity to be bought and sold, and the price. The Exchange prescribes

everything else. Because of the standardized nature of the futures

contract, it can be traded with ease at a moment’s notice.

Option Contract:

An option on a commodity futures contract is a legally binding

agreement between two parties that gives the buyer, who pays a

market determined price known as a "premium," the right (but not the

obligation), within a specific time period, to exercise his option.



Exercise of the option will result in the person being deemed to have

entered into a futures contract at a specified price known as the "strike

price." In some cases, an option may confer the right to buy or sell the

underlying asset directly, and these options are known as options on

the physical asset.

Commodity future trading contracts rarely are for the actual or

physical delivery allowed to be settled otherwise than by issuing or

giving deliveries. Therefore, speculators use these futures contracts to

benefit from changes in prices and are hardly interested in either

taking or receiving deliveries of goods.

FUTURE MARKET MECHANISMS

1) Price Discovery through Future Market:

In an active futures market, the demand for information by

traders is enormous. Futures exchanges tend to become collection

centers for statistics on supplies, transportation, storage, purchases,

exports, imports, currency values, interest rates, and other pertinent

information. These data, which are compiled and distributed

throughout the exchange community on a continuous basis, are

immediately reflected in the trading pits as traders digest the new

information and adjust their bids and offers accordingly. As a result of

active buying and selling of futures contracts, the market determines

the best estimate of today and tomorrow's prices for the underlying

commodity. In effect, prices are discovered at futures exchanges.

Prices determined via this open and competitive process are

considered to be accurate reflections of the supply and demand for a



commodity, and for this reason they are widely used as today's best

estimate of tomorrow's cash market prices for a standardized quantity

of a commodity.

Price discovery is the process of arriving at a figure at which one

person will buy and another will sell a futures contract for a specific

expiration date. In an active futures market, the process of price

discovery continues from the market's opening until its close. Futures

contracts are standardized as to quantity, quality, and location so

buyers and sellers only bargain over price. Because of this

standardization, commercial interests are better able to compute local

cash prices. In many commodities, futures prices have earned a role as

key reference prices for those who produce, process, and merchandise

the commodity.

2) Transferring Risk: Hedging through future market

Commodity production and marketing involve sizable price risks,

and risk represents a cost that affects the value of a commodity. While

there is no way to eliminate uncertainty, futures markets provide a

competitive way for commodity producers, merchandisers, processors,

and others who may own the actual commodity to transfer some price

risk to speculators who will willingly assume such risk in hopes of

making a profit.

The process of hedging involves the concurrent use of both cash

and futures markets. Since futures and cash prices tend to move



together (that is, parallel to each other), and at contract expiration

converge to one price, it is possible for a cotton merchant, for

example, to hedge an unsold inventory of cotton with a sale of an

equivalent amount of futures contracts. Since the merchant owns the

commodity, he would have a loss if prices fell. To hedge, the merchant

would sell futures contracts. Now if prices drop, the cash market loss

will be at least partially offset by a gain on the futures contract. When

the merchant sells his inventory at the lower cash market price, he will

simultaneously lift his hedge by buying back his futures contracts at

the lower price. The gain on his futures contracts should roughly equal

the merchant's loss in the cash market.

Here are three examples of how hedging helps the cash market

work better:

1) Hedging stretches the marketing period. For instance, a livestock

feeder does not have to wait until his cattle are ready to market

before he can sell them. The futures market permits him to sell

futures contracts to establish the approximate sale price at any

time between the time he buys his calves for feeding and the

time the fed cattle are ready to market, some four to six months

later. He can take advantage of good prices even though the

cattle are not ready for market.



2) Hedging protects inventory values. A merchandiser with a large,

unsold inventory can sell futures contracts that will protect the

value of the inventory, even if the price of the commodity drops.

3) Hedging permits forward pricing of products. A jewelry

manufacturer can determine the cost for gold, silver or platinum

by buying a futures contract, translate that to a price for the

finished products, and make forward sales to stores at firm

prices. Having made the forward sales, the manufacturer can use

its capital to acquire only as much gold, silver, or platinum as

may be needed to make the products that will fill its orders.

These are just a few ways that commodity owners use futures

markets. It requires skill and knowledge acquired that comes only by

study and experience.

PARTICIPANTS IN FUTURES MARKET & TRADING

PROCEDURE

The Futures market participants comprise of:

Farmers

Traders

Producers

Processors

Exporters

Importers

Industries associated with commodities.



The futures market is used for hedging the price risk and for

trading or arbitrage. Brokers of all commodity exchanges, who are

located all across the country, serve the futures market users directly

through their own branch offices' network or through the network of

their franchisees or sub-brokers.

Procedure for Individual investor to start trading in Commodity

Futures Market can be as follows:

Selection of Broker:

A trustworthy, reliable, efficient, effective & innovative broker,

having membership to any of the Exchange like MCX / NCDEX etc.

would be in Investor’s interest. Broker should be such that recognizes

investors’ needs & aspirations & work as a dedicated team to deliver

highly effective & customized solutions to investors risk management

needs.

Information about Self:

After selecting a broker, investor will be asked to provide

information that is personal & financial. A member client agreement

should be signed between the broker & investor. Investor should give

photographs, bank details & should possess normal DMAT Account or

broker opens that account for him/her. If trading is intended with

delivery of commodities then Commodity DMAT Account is been

opened.

Depositing the Margin:



In order to trade futures contracts, investor has to deposit

margins in cash with broker. There are two types of margins, namely;

initial margin & mark to market margin.

i) Initial Margin-

Initial Margin is set by the exchanges on basis of volatility in the

particular commodity & is a percentage of the contract.

ii) Mark to market Margin-

At the end of the day, the contract is marked to market; meaning

trader’s account is credited or debited based on the profit/ loss made

during the session. On this profit or loss there broker can charge

margin that is nothing but mark to market margin.

Intraday Trading:

Then as per individual investors wish he can buy or sell

commodities online. Just he has to specify which commodity & what

price is he going to buy or sell. Electronic terminals are used for this

trading at various broking offices that provides the same information

countrywide. This trading process is called as, “Intraday Trading”.

Benefit of this online trading is that it provides a secure,

transparent, fast and user-friendly system. It leads to better price

discovery of commodities like Bullion, Metals and Agro products by

bringing large number of Buyers and Sellers on a common National

and International platform.

Clearing Trades on Commodity ExchangeAll trades on Commodity Exchange are supported by an initial

margin. At the End-of day Commodity Exchange does mark-to-market



of all the open positions. This activity results into final position of all

members in respect to booked losses or losses on open positions.

Members make the shortfalls good by way of pay-ins to Commodity

Exchange by next day and the members in profit on such positions are

given the necessary credits. These payments are processed

electronically through a countrywide network of clearing banks.

Settlement of the Contract and Delivery

A contract has a life cycle of two months. At Commodity

Exchange, 5 days before the expiry of a contract, the contract enters

into a tender period. At the start of the tender period, both the parties

must state their intentions to give or receive delivery, based on which

the parties are supposed to act or bear the penal charges for any

failure in doing so. Those who do not express their intention to give or

receive delivery at the beginning of tender period are required to

square-up their open positions before the expiry of the contract. In

case they do not their positions are closed out at 'due date rate'. The

links to the physical market through the delivery process ensures

maintenance of uniformity between spot and futures prices.

Tendering Delivery to a Buyer by Exchange Seller

Sellers intimate the exchange at the beginning of the tender

period and get the delivery quality certified from empanelled quality

certification agencies. They also submit the documents to the

Exchange with the details of the warehouse within the city, chosen as

a delivery center.



Sellers are free to use any warehouse, as they are responsible

for the goods until the buyer picks up the delivery, which is a practice

followed in the commodities market globally.

Seller would receive the money from the exchange against the

goods delivered, which happens when the buyer has confirmed its

satisfaction over quality and picked up the deliveries within stipulated

time.

Receiving Delivery of Commodities by Buyer

Buyers intending to take delivery will receive it, if there are

sellers willing warehouse at the designated delivery centers on the

designated delivery days.

There are commission agents who help the brokers with handling

of the delivery, logistic support, and associated quality certification

through to give delivery. The Buyer will have to make the payment

within three days after the delivery is allotted. The buyer will take

actual delivery from the empanelled agencies and associated billings

due to tax implications. This support is required as the buyer may be in

a different city than the place where the delivery is being received.

Utility of Physical Delivery of Commodity to Client of Buyer

The client of a buyer may use this delivery for his

consumption in the industry, or for exports, or he may sell in the spot

market or may sell in futures market in the subsequent contract, if he

is a regular trader. Generally, the commodities available in the physical



form are consumed by the industry and, rarely, commodities, are

stored in the warehouse for a longer period.

Percentage of Delivery in the Futures Market

Though, Exchanges have specified the deliverable grades in the

contract specifications, which are notified before commencement of

trading in a contract. The seller is required to submit the quality

certification issued by empanelled quality certification agencies, like,

SGS, Geo Chem. etc. Thus, quality of a commodity is ensured, the

percentage is delivery in such market is fairly low. Generally, the

futures markets all over the world are used for hedging where actual

delivery percentage is about 1% any user in the commodities

ecosystem unlike the physical spot or forward market does not use

these markets for regular consumption.

LIMITATIONS OF COMMODITY FUTURE MARKET

Commodity market is very difficult to predict. Commodity prices

depend upon region, monsoon, transportation cost, demand-

supply theory, import/ export policies & Global market trends.



So commodity market experience volatility that cannot be

predicted easily.

Without knowing the spot market for commodities it is very

difficult to play with Future market. In capital market it depends

upon Companies performance, decisions, long run plans,

mergers, etc. there are definite regions to move up & down in

the market, but in the case of Commodity market there are so

many regions for the market movement, it is like a game of luck

to the investor.

Customer has to deposit the margin amount that is based on

volatility of commodity plus brokerage that is deducted from

total losses made. So if at all there is a loss, the total loss

amount will be very huge. In this aspect it is very risky market.

Commodity market not yet developed in India so it is less

reliable.

Commodity market gives high return but with multiplier of high

risk.

Gold commodity Future MarketIntroduction



Gold is a unique asset based on few basic characteristics. First, it

is primarily a monetary asset, and partly a commodity. As much as two

thirds of gold’s total accumulated holdings relate to “store of value”

considerations. Holdings in this category include the central bank

reserves, private investments, and high-cartage jewelry bought

primarily in developing countries as a vehicle for savings. Thus, gold is

primarily a monetary asset. Less than one third of gold’s total

accumulated holdings can be considered a commodity, the jewelry

bought in Western markets for adornment, and gold used in industry.

The distinction between gold and commodities is important. Gold

has maintained its value in after-inflation terms over the long run,

while commodities have declined.

Some analysts like to think of gold as a “currency without a

country’. It is an internationally recognized asset that is not dependent

upon any government’s promise to pay. This is an important feature

when comparing gold to conventional diversifiers like T-bills or bonds,

which unlike gold, do have counter-party risk.

Gold in Indian Scenario:



Gold is valued in India as a savings and investment vehicle and

is the second preferred investment behind bank deposits. India is the

world’s largest consumer of gold in jewelry (much of which is

purchased as investment). The hoarding tendency is well ingrained in

Indian society, not least because inheritance laws in the middle of the

twentieth century lent a great desirability to anonymity. Indian people

are renowned for saving for the future and the financial savings ratio is

strong, with a ratio of financial assets-to-GDP of 93%.

Gold’s circulates within the system and roughly 30% of gold

jewelry fabrication is from recycled pieces. India is typically also the

largest purchaser of coins and bars for investment (>80tpa), although

last year it had to concede first place to Japan in the wake of the heavy

buying in the first quarter due to fears for the stability of the Japanese

banking system. In 1998-2001 inclusive, annual Indian demand for

gold in jewelry exceeded 600 tons; in 2002, however, due to rising and

volatile prices and a poor monsoon season, this dropped back to 490

tons, and coin and bar demand dropped to 67 tons. Indian jewelry off

take is sensitive to price increases and even more so to volatility,

although this decline in tonnage since 1998 is also due in part to

increasing competition from white and brown goods and alternative

investment vehicles, but is also a reflection of the increase in price.

The Indian bride’s “Streedhan”, the wealth she takes with her when

she marries and which remains hers, is still gold, however (thus giving

gold an important role in the “empowerment” of women in India).



The distinction between gold and commodities is important. Gold

has maintained its value in after-inflation terms over the long run,

while commodities have declined.

Some analysts like to think of gold as a “currency without a

country’. It is an internationally recognized asset that is not dependent

upon any government’s promise to pay. This is an important feature

when comparing gold to conventional diversifiers like T-bills or bonds,

which unlike gold, do have counter-party risk.



World Markets

Today's gold market is a round-the-world, round-the-clock

business, played out largely on dealers' trading screens. The core of

the business, however, remains in the key markets of London, as the

great clearing house, New York as the home of futures trading, Zurich

as physical turntable, Istanbul, Dubai, Singapore and Hong Kong as

doorways to important consuming regions and Tokyo where the

Commodity Exchange (TOCOM) sets the mood of Japan. Even Paris still

has a small market, a reminder of the days when the French were

great hoarders, while Mumbai has increasing importance under India's

liberalized gold regime that permits official imports through local

markets.



Gold an Independent Asset

It’s not difficult to understand why the gold price moves

independently from the economic cycle when one considers the

diversity of its demand and supply base, the ultimate determinants of

price movements.

There are three sources of gold supply: mine production, official

sector sales and scrap or recycled gold. Mine production is by far the

largest element, accounting for 70% of total supply last year. Changes

in annual mine supply bear no relation to changes in US or even global

GDP growth. The upward trend in mine production that was underway

in the late 1980s was not arrested by 1990 recession (the US economy

suffered an outright contraction, while world GDP growth slowed to

1.6% from 2.9% the previous year). Nor was the downtrend in mining



output that began in 2001 reversed by the sharp acceleration in world

growth.

Mine production is influenced by very specific factors, such as

the level of exploration spending, the success or otherwise in

discovering new gold deposits and the cost of extraction (some new

discoveries may not be economically viable). Lead times in gold mining

are often very long. It can take years to re-open a closed mine, let

alone find and mine new reserves.

The decision to build a mine shaft (and often an entire

infrastructure) is a long term one that will often see business cycles

comes and goes. Central bank decisions to buy or sell gold (they

remain net sellers) are also usually strategic in nature, rather than

reactive to the economic cycle. The decision to buy or sell gold is often

made years in advance and then carried out over a period of years. In

Switzerland, for example, the proposition to sell gold (the first gold

sales programmed) was first recommended by a group of experts in

1997. However, the actual sales programmed did not commence until

May 2000, with the sales then taking place over a period of five years.

Scrap supply is influenced by many factors, perhaps the most

important being price and price volatility, but recessions and periods of

economic distress have also had an impact. The most dramatic

example is when Korea was pushed into recession during the 1998

Asian currency crisis; its scrap supply increased by almost 200 tonnes

as the government bought gold from the local populace in exchange

for won-denominated bonds. It then sold the gold on the international

market in order to raise the dollars necessary to avoid defaulting on its

external debt.



Similarly, in Indonesia the 1998 recession saw scrap supply

increase by 72 tonnes in the first quarter of the year, in this instance

purely for independent reasons rather than at the behest of the

government.

Turning to demand

Conventional wisdom argues that recessions are bad for

commodity prices. The reasoning goes that as consumer and business

confidence falls, demand for goods and services is cut back and hence

the materials used in the production of those goods or in the provision

of services (many of which are commodities) declines, thereby

depressing their price.

The argument is logical. However, a few points are worth bearing

in mind with respect to gold. Demand for gold as an intermediate good

is relatively small in comparison to many other commodities. Last year,

just 14% of gold demand came from the industrial sector (mainly

electronics). This is in stark contrast to base metals and even other

precious metals, where the vast majority of demand comes from

industry. As a result, gold is much less vulnerable to the vagaries of

the economic cycle. That said, demand for gold in electronics is likely

to fall if the economy falls into recession as consumer spending on

non-essential electronics goods declines. A US recession would

undoubtedly have negative implications for gold jewelry demand in

America, as consumer spending slows. However, this negative

implication could be at least partially offset by the higher share of gold

jewelry in the retail market that gold jewelry has enjoyed in recent

years. Moreover, gold is much less vulnerable than other jewelry

materials, such as diamonds or platinum, to a US recession as far more

demand for gold comes from outside of the US – 70% of diamond



jewelry demand comes from the US market, compared with just 10%

for gold.

India is in fact the single largest consumer of gold jewellery in

the world in tonnage terms. Last year, Indian households bought 558

tonnes of gold jewelry, more than double their US counterparts (Chart

7). Chinese consumers rank second, having bought 331 tonnes. US

consumers are third in tonnage terms, although US demand remains

highest in retail value terms due to its higher trade margins. The

extent to which worldwide gold jewelry demand suffers from a US

recession will depend partly on the spill-over effects to other countries.

If proponents of “decoupling” prove to be correct (they argue that

emerging market economies are now strong enough domestically to

withstand a US slowdown) then worldwide jewelry demand need not

fare badly.

The final source of demand comes from investors. Investors buy

gold for many reasons. Chief among these are gold’s inflation and

dollar-hedging properties, both of which have been proven over long

periods of time. How a recession affects investment demand would

depend, in part, on how inflation and the dollar react.

The brewing recession has so far been positive for gold on both

fronts. The dollar has continued its downward trajectory, while inflation

has (unusually) headed higher. US consumer prices increased at an

annual rate of 4.0% in February this year, up from 2.4% just a year

earlier. If these trends continue, investment demand for gold as an

inflation and dollar hedge is likely to remain strong. And if the

recession deepens concerns over the health of the US banking sector,

demand for gold as a safe haven asset is also likely to remain robust.

In summary, statistical analysis suggests there is no relationship

between changes in US GDP growth and changes in the gold price. This



reflects gold’s unique and diverse demand and supply base, which as

for any freely-traded good ultimately determine the price.

Consequently, a US recession does not have negative implications for

the gold price. The only element of demand likely to be affected by a

recession is investment demand, but that in turn will depend on the

“type” of recession. So far, the brewing recession has been positive for

gold, as it has been accompanied by a rise in inflation and a falling

dollar, which has boosted demand for gold as a dollar and inflation

hedge.

Largest Gold Belts:

The famous Witwatersrand in South Africa - the world's largest

gold belt.

The Tian Shan Gold Belt - the second largest belt in the world.

Largest Gold Producing Country in the World

South Africa

Australia

United States

Important world market:

London is the biggest and the oldest gold market in the world.

Mumbai is India’s liberalized gold regime.

New York is the home of gold future trading.

Istanbul, Dubai, Singapore and Hong Kong are doorways to

important consuming regions.



What makes Gold Special?

• Timeless and Very Timely Investment: For thousands of years,

gold has been prized for its rarity, its beauty, and above all, for its

unique characteristics as a store of value. Nations may rise and fall,

currencies come and go, but gold endures. In today’s uncertain

climate, many investors turn to gold because it is an important and

secure asset that can be tapped at any time, under virtually any

circumstances. But there is another side to gold that is equally

important, and that is its day-to-day performance as a stabilizing

influence for investment portfolios. These advantages are currently

attracting considerable attention from financial professionals and

sophisticated investors worldwide.

• Gold is an effective diversifier: Diversification helps protect your

portfolio against fluctuations in the value of any one-asset class. Gold

is an ideal diversifier, because the economic forces that determine the

price of gold are different from, and in many cases opposed to, the

forces that influence most financial assets.

• Gold is the ideal gift: In many cultures, gold serves as a family

treasure or a wealth transfer vehicle that is passed on from generation

to generation. Gold bullion coins make excellent gifts for birthdays,

graduations, weddings, holidays and other occasions. They are



appreciated as much for their intrinsic value as for their mystical

appeal and beauty. And because gold is available in a wide range of

sizes and denominations, you don’t need to be wealthy to give the gift

of gold.

• Gold is highly liquid: Gold can be readily bought or sold 24 hours a

day, in large denominations and at narrow spreads. This cannot be said

of most other investments, including stocks of the world’s largest

corporations. Gold is also more liquid than many alternative assets

such as venture capital, real estate, and timberland. Gold proved to be

the most effective means of raising cash during the 1987 stock market

crash, and again during the 1997/98 Asian debt crisis. So holding a

portion of your portfolio in gold can be invaluable in moments when

cash is essential, whether for margin calls or other needs.

• Gold responds when you need it most: Recent independent

studies have revealed that traditional diversifiers often fall during

times of market stress or instability. On these occasions, most asset

classes (including traditional diversifiers such as bonds and alternative

assets) all move together in the same direction. There is no

“cushioning” effect of a diversified portfolio — leaving investors

disappointed. However, a small allocation of gold has been proven to

significantly improve the consistency of portfolio performance, during

both stable and unstable financial periods. Greater consistency of

performance leads to a desirable outcome — an investor whose

expectations are met.

What makes Gold different from other commodities?

The flow demand of commodities is driven primarily by

exogenous variables that are subject to the business cycle, such as



GDP or absorption. Consequently, one would expect that a sudden

unanticipated increase in the demand for a given commodity that is

not met by an immediate increase in supply should, all else being

equal, drive the price of the commodity upwards. However, it is our

contention that, in the case of gold, buffer stocks can be supplied with

perfect elasticity. If this argument holds true, no such upward price

pressure will be observed in the gold market in the presence of a

positive demand shock.

The existence of a sophisticated liquid market in gold has, over

the past 15 years, provided a mechanism for gold held by central

banks and other major institutions to come back to the market.

Although the demand for gold as an industrial input or as a final

product (jewelry) differs across regions, it is argued that the core driver

of the real price of gold is stock equilibrium rather than flow

equilibrium. This is not to say that exogenous shifts in flow demand will

have no influence at all on the price of gold, but rather that the large

supply of inventory is likely to dampen any resultant spikes in price.

The extent of this to dampening effect depends on the gestation lag

within which liquid inventories can be converted in industrial inputs. In

the gold industry such time lags are typically very short.

Gold has three crucial attributes that, combined, set it apart from

other commodities: firstly, assayed gold is homogeneous; secondly,

gold is indestructible and fungible; and thirdly, the inventory of

aboveground stocks is astronomically large relative to changes in flow

demand. One consequence of these attributes is a dramatic reduction

in gestation lags, given low search costs and the well-developed

leasing market. One would expect that the time required convert

bullion into producer inventory is short, relative to other commodities

which may be less liquid and less homogenous than gold and may



require longer time scales to extract and be converted into usable

producer inventory, making them more vulnerable to cyclical price

volatility. Of course, because of the variability of demand, the price

responsiveness of each commodity will depend in part on

precautionary inventory holding.

Fixing of spot gold prices:

spot price

41 41.0 41.0 41.0

59 59.0 59.0 100.0

100 100.0 100.0

Investors

Daily TradingBases/Future Market

Total

ValidFrequency Percent Valid Percent

CumulativePercent



Interpretation: In all 100 sample size 59 respondents are gold smiths. All are fix the price according to daily bases, which are displays in TV time to time. In a day in spot market three times price is changes.

Sources Of Gold For The Goldsmiths:


41 41.0 41.0 41.0

5 5.0 5.0 46.0

54 54.0 54.0 100.0

100 100.0 100.0

Investors

Local supplier

Wholesaler

Total


CumulativePercent

spot price

59.0%

41.0%

Daily Trading Bases/

Investors


commodities

54.0%

5.0%

41.0%

Wholesaler

Local supplier

Investors

Interpretation:

Above Pie chart shows that out of 100 sample size, 54%

of respondents get gold from wholesalers, 5% are from local suppliers

and remaining are investors. So most of them get the gold from

wholesalers.

To study whether the goldsmiths of Belgaum city

aware of commodity market and their perception.

Where do you prefer to invest?



invest

9 9.0 9.0 9.0

10 10.0 10.0 19.0

49 49.0 49.0 68.0

28 28.0 28.0 96.0

4 4.0 4.0 100.0

100 100.0 100.0

Gold

Bank/Fixed Deposit

Equity

Mutual Funds

Real Estate

Total


CumulativePercent

invest

4.0%

28.0%

49.0%

10.0%

9.0%

Real Estate

Mutual Funds

Equity

Bank/Fixed Deposit

Gold

Interpretation:

The Graph clearly shows that most of the respondents are interested

in investing in equity (49%) when compared to the other investment

alternatives because they feel investing in equity will provide more

returns to them.

Are you aware about commodity market?



aware

82 82.0 82.0 82.0

18 18.0 18.0 100.0

100 100.0 100.0

Yes

No

Total


CumulativePercent

aware

18.0%

82.0%

No

Yes

Interpretation:

The above pie chart describes that 82% of the investors (goldsmiths or

gold traders) are aware about the Commodity Future market and 18%

of them are not aware about Commodity Future Market. So there is a

need to create awareness about the commodity future market and its

benefits. There is a lot of potential is there to create customer and

influence them to invest in Commodity Future market.

Have you invested in commodity future market?



commodity

17 17.0 17.0 17.0

16 16.0 16.0 33.0

67 67.0 67.0 100.0

100 100.0 100.0

Not aware

Yes

No

Total


CumulativePercent

commodity

67.0%

16.0%

17.0%

No

Yes

Not aware

Interpretation:

The pie chart shows that, even though the investors are aware about

commodity future market only 16% of them have actually invested in

this market where as the remaining have not invested because among

them 17% are not aware and remaining 67% investors have not

invested as they have a perception that it is risky and they even do not

have much knowledge about trading mechanism.



In future do you want to trade in commodity future

market?

future

16 16.0 16.0 16.0

61 61.0 61.0 77.0

23 23.0 23.0 100.0

100 100.0 100.0

Investors

Yes

No

Total


CumulativePercent

future

23.0%

61.0%

16.0%

No

Yes

Investors

Interpretation:

The above pie chart represents that, the investors who have not yet

invested in the commodity future market, out of them 61% of the

investors are interested to invest in the coming future.



What type of services does you except from your

broker?

service you expect from your broker

69 69.0 69.0 69.0

13 13.0 13.0 82.0

13 13.0 13.0 95.0

5 5.0 5.0 100.0

100 100.0 100.0

Genuine Information

Moderate Brokerage

Good Service

Recommendation

Total


CumulativePercent

service you expect from your broker

5.0%

13.0%

13.0%

69.0%

Recommendation

Good Service

Moderate Brokerage

Genuine Information

Interpretation:

The graph shows that, the investors expect that the brokers should

provide them the genuine information regarding the market. Also they

want moderate brokerage and good services from the brokers.



To analyses the impact of spot gold market

on future gold market.

My Fourth objective is to identify the impact of Spot gold

commodity market on Gold Commodity Future market, means how the

prices prevailing in the commodities affect the Commodity Future

Market. The following table and chart shows the Correlation between

these two markets.

Correlation(r) = N∑XY-(∑X) (∑Y)

[N∑X2 –(∑X)2]1/2[N∑Y2 –(∑Y)2]1/2

= 38874931920 – 196804*196634.8

(38901987218 – 38731833159)1/2 (38850684629 – 38665248316)1/2


DATESPOT PRICE

FUTURE PRICE

10-16 Dec 2007 10207.29 10253.8617-23 Dec 2007 10270 10281.8624-30 Dec 2007 10577.86 10477.4331,1-6 Jan 2008 10729.14 10841.437-13 Jan 2008 10902.14 11229.4314-20 Jan 2008 11291.43 11310.1421-27 Jan 2008 11434.43 11477.7128-31 jan,1-3 Feb 2008 11582.71 11681.294-10 Feb 2008 11609.43 11577.5711-17 Feb 2008 11677.43 1160018-24 Feb 2008 12024.71 11960.2925-29 Feb,1-2 Mar 2008 12320.29 122713-9 mar 2008 12735.29 1270010-16 Mar 2008 12895.29 12863.2917-23 Mar 2008 12503.14 12435.4324-30 Mar 2008 12149.57 1214431,1-5 Apr 2008 11724.67 11699.33


= 0.9931 Probable Error = 0.6745*(1-r2)/√n = 0.6745*(1- 0.99312)/ √17 = 0.00224 6*probable error = 0.0135

Spot & future price

0

2000

4000

6000

8000

10000

12000

14000

Date

Pri

ces

spot price future price

Interpretation:

Hence, Correlation is 0.9931 Probable Error is 0.00224

Above correlation calculation shows the correlation value 0.9931 of

spot and Future prices of commodity Gold and the probable error

0.00224. Hence the six time of probable error i.e. 0.0135 is less than

the correlation. Therefore, the prices prevailing in both the market are

highly correlated. This means, the future prices will very much

following the trend of Spot commodity market price. In fact the future

prices will reflect the spot prices very closely.



Correlation between Spot Gold Price and Dollar Rate

DATESPOT PRICE $ RATE % Changes in prices

10-16 Dec 2007 10207 39.41 Spot $ rate17-23 Dec 2007 10270 39.6 0.0061441 0.0047524-30 Dec 2007 10578 39.45 0.0299764 -0.0038231,1-6 Jan 2008 10729 38.69 0.0143021 -0.019197-13 Jan 2008 10902 39.32 0.0161243 0.0162114-20 Jan 2008 11291 39.33 0.0357073 0.0003321-27 Jan 2008 11434 39.47 0.0126645 0.0035628-31 Jan,1-3 Feb 2008 11583 39.41 0.0129684 -0.001564-10 Feb 2008 11609 39.6 0.0023064 0.0049711-17 Feb 2008 11677 40.02 0.0058573 0.010518-24 Feb 2008 12025 40 0.0297399 -0.0006125-29 feb,1-2 Mar 2008 12320 39.89 0.0245803 -0.002613-9 Mar 2008 12735 40.45 0.0336843 0.0138910-16 Mar 2008 12895 40.44 0.0125635 -3.5E-0517-23 Mar 2008 12503 40.52 -0.0304098 0.0019424-30 Mar 2008 12150 40.15 -0.0282786 -0.0091331,1-5 Apr 2008 11725 40 -0.0349728 -0.00372

Correlation (r) of Spot Gold Prices and Dollar Rate is 0.2042

Probable error is 0.1659



Spot Gold Prices & Dollar Rate

-0.04

-0.03

-0.02

-0.01

0

0.01

0.02

0.03

0.04

Date

% o

f Cha

nge

in R

ate

% of Change in Spot prices % of changes in $ Rate

Interpretation:

As, P.E. is not more than r (correlation), according to rule three

nothing can be conclude with certainty. It means that correlation

between spot gold price and $ rate is neither significant nor certainty.

But analyzing above chart and correlation (0.2042), it can be

concluded that correlation between dollar and spot gold price is not so

much significant. It means if one price increases other will be

decrease. For example, in the week of 24 to 30 December and 14 to

20th January Gold price increases and dollar rate decreases.



To study the factors such as economic

factors of US, world political and other factors affect

on future market.

NEWS OF BILLION

Walter De Wet Standard Bank, LondonThe current global economic environment remains bullish for

gold, but should ensure that volatile conditions remain. We see the US

economy coming under increased pressure during the first half of

2008. As a result credit spreads should widen further. Combined with

sovereign and political risk on the rise in certain countries, we should

see support for gold in 2008H1. The US dollar’s woes are linked to US

interest rates declining. The Fed is set to continue easing rates, while

the ECB seems unperturbed by slowing economic growth, and is

unlikely to cut rates for now. Although jewelry demand in major

centers showed a decline towards end-2007, this must be a continuous

trend before any real price impact will be seen. The new futures

contract that started trading on the Shanghai Futures exchange is

bound to renew interest in gold as an investment in China. We do

believe this impact could be large. Continued portfolio diversification

via commodity investment vehicles should provide support to the

metal on the downside.

There are three factors that play a dominating role as the driving

force of precious metals prices. The price of crude oil serves as a good

proxy for inflation fears. The next major fundamental factor is the US

dollar exchange rate, as metals are priced in this currency. Here, either

the US dollar index or the EUR/USD exchange rate has the closest

correlation. And finally, precious metals are not necessarily a safe

haven. If investors risk appetite drops due to crisis in financial markets,



precious metals are often sold to cover losses. The US stock market

provides a good indication of risk aversion.

Crude oil started the year with a bang as it traded at $100/bbl for

the first time. However, much of the price increase is based on

speculation rather than the underlying supply and demand balance. In

2008, demand is expected to expand less than the consensus view due

to a slowdown of G7 economies. In China as well, GDP growth is likely

to be lower than last year. By the end of this year, Brent is predicted to

be trading at $70/bbl.

Thus, one of the main fundamentals suggests a significant

correction rather than a continuation of the upward trend of precious

metals in 2008. However, this does not contradict our forecast. In the

first half of the year, other factors will be superimposed on the effect of

falling oil prices. The correlation between gold and crude oil has been

greater over the last eight years than that between gold and the

EUR/USD exchange rate, but there are also phases in which the

correlation is rather less close. These periods include the beginning of

the year, when different seasonal patterns can lead to a divergence.

While crude oil often eases over the winter, demand from the jewelry

industry means that gold and silver prices tend to rise until the end of

the first quarter. Although jewelry demand may not be quite as great

as expected in view of the high current prices, it should support the

prices of gold and silver. In the case of platinum it appears that jewelry

demand in China is falling, whereas in gold it remains strong despite

price rises. Demand from financial investors is far more important than

demand from the jewelry industry for the development of precious

metal prices. It is often said that investors buy gold as a hedge against

rising inflation. However, empirical experience does not bear this out.

US inflation has no significant effect on the gold price. Demand from



financial investors is largely determined by the US dollar’s

performance in the currency markets.

Since the sub prime mortgage crisis broke out, what has driven

the dollar’s weakness is the expectation that the Fed will cut interest

rates so that the dollar becomes less attractive relative to other

currencies. Following the recent weak US economic data and the rise in

the unemployment rate to 5%, our US economists anticipate that the

Fed will start lowering interest rates more aggressively, cutting the Fed

funds rate during the first half of the year in four steps of 25bp each to

3.25%.This means that the Fed Funds target rate is well below the ECB

refinancing rate.

The US dollar is expected to weaken against the Euro to 1.53 in

Q2, but in H2 the tables will be turned. US GDP growth should pick up

again as early as Q2 and further accelerate after the summer, so that

the market will no longer expect further interest rate cuts. In the Euro

zone on the other hand weaker growth is expected, so that the ECB

should reduce the refinancing rate by 25bp.The US dollar is likely to

appreciate against the Euro to 1.43. Precious metals will then face a

headwind from falling oil prices and a firmer dollar. They will not be

able to withstand this pressure and prices should ease significantly.

Silver is likely to perform better than gold in H1 but to perform worse

in H2. Due to production problems in South Africa and the demand

pattern of the automobile industry, platinum is expected to hold better

than palladium.

Davis, David Credit Suisse Standard Securities Johannesburg

Upward pressure on the gold price is likely being driven by the

US economic environment, rising oil and commodity prices and a

change in the dynamics surrounding supply and demand. These



combined factors have resulted in a weakening of the US dollar, which

in turn has driven gold higher. The economic environment in the US

was recently jolted by sub prime mortgage losses, the tightening of the

credit market and the lowering of interest rates. Higher oil prices will

likely result in inflationary pressures, which in turn will put upward

pressure on gold.

Turning to supply-and-demand fundamentals, over the longer

term, our studies indicate that global gold production (primary supply)

will begin to decline as the diminishing number of new reserves fails to

compensate for dying mines. The decline in production will likely be

accelerated should the gold mining industry continue to incur

significant year-on-year inflation rates which are not offset by similar

or significantly higher gold price increases.

Geopolitical tensions, which generally lead to higher gold prices

and price volatility, have heightened with the political turmoil in

Pakistan after the assassination of Benazir Bhutto and the cross border

operations of Turkish troops to hunt down Kurdish separatists in Iraq.

Tensions are also ever-present between the US and Iran and the US

and North Korea. Given this longer-term scenario, we believe the

supply-demand imbalance going forward will begin to accelerate at an

ever-increasing pace into a net deficit, which in turn will likely put

significant upward pressure on the gold price.

Suki Cooper Barclays Capital, LondonIn our view, gold prices are set to post positive gains for the

seventh consecutive year on an annual average basis. Following a

significant swing into deficit last year, the market fundamentals remain

tightly balanced and external drivers remain positive. Even with the

dollar stabilizing at its recent lower levels, investment demand remains

strong. Gold prices were buoyed by investor interest and this is likely

to remain the key price determinant this year. External factors such as



higher inflation expectations, broader economic concerns, geopolitical

tensions and Fed rate easing are likely to drive prices higher. On a

fundamental basis mine supply remains constrained and physical and

investment demand should emerge upon price dips providing a price

floor.

Fifteen Fundamental Reasons for bullish run of Gold

1. Global Currency Debasement:

The US dollar is fundamentally & technically very weak and should fall

dramatically. However, other countries are very reluctant to see their

currencies appreciate and are resisting the fall of the US dollar. Thus,

we are in the early stages of a massive global currency debasement,

which will see tangibles, and most particularly gold, rise significantly in

price.

2. Investment Demand for Gold is Accelerating:

When the crowd recognizes what is unfolding, they will seek an

alternative to paper currencies and financial assets and this will create

an enormous investment demand for gold. To facilitate this demand, a

number of new vehicles like Central Gold Trust and gold Exchange

Traded Funds (Elf's) are being created.

3. Alarming Financial Deterioration in the US:

In the space of two years, the federal government budget surplus has

been transformed into a yawning deficit, which will persist as far as the

eye can see. At the same time, the current account deficit has reached

levels which have portended currency collapse in virtually every other

instance in history.

4. Negative Real Interest Rates in Reserve Currency (US

dollar):



To combat the deteriorating financial conditions in the US, interest

rates have been dropped to rock bottom levels, real interest rates are

now negative and, according to statements from the Fed spokesmen,

are expected to remain so for some time. There has been a very strong

historical relationship between negative real interest rates and

stronger gold prices.

5. Dramatic Increases in Money Supply in the US and Other

Nations:

US authorities are terrified about the prospects for deflation given the

unprecedented debt burden at all levels of society in the US. Fed

Governor Ben Bernanke is on record as saying the Fed has a printing

press and will use it to combat deflation if necessary. Other nations are

following in the US's footsteps and global money supply is accelerating.

This is very gold friendly.

6. Existence of a Huge and Growing Gap between Mine Supply

and Traditional Demand:

Gold mine supply is roughly 2500 tonnes per annum and traditional

demand (jewellery, industrial users, etc.) has exceeded this by a

considerable margin for a number of years. Some of this gap has been

filled by recycled scrap but central bank gold has been the primary

source of above-ground supply.

7. Mine Supply is anticipated to Decline in the next Three to

Four Years:

Even if traditional demand continues to erode due to ongoing

worldwide economic weakness, the supply demand imbalance is

expected to persist due to a decline in mine supply. Mine supply will



contract in the next several years, irrespective of gold prices, due to a

dearth of exploration in the post Bre-X era, a shift away from high

grading which was necessary for survival in the sub-economic gold

price environment of the past five years and the natural exhaustion of

existing mines.

8. Large Short Positions:

To fill the gap between mine supply and demand, central bank gold

has been mobilized primarily through the leasing mechanism, which

facilitated producer hedging and financial speculation. Strong evidence

suggests that between 10,000 and 16,000 tonnes (30- 50% of all

central bank gold) is currently in the market. This is owed to the

central banks by the bullion banks, which are the counter party in the

transactions.

9. Low Interest Rates Discourage Hedging:

Rates are low and falling. With low rates, there isn't sufficient contango

to create higher prices in the out years. Thus there is little incentive to

hedge, and gold producers are not only hedging, they are reducing

their existing hedge positions, thus removing gold from the market.

10. Rising Gold Prices and Low Interest Rates Discourage

Financial Speculation on the Short Side:

When gold prices were continuously falling and financial speculators

could access central bank gold at a minimal leasing rate (0.5 - 1% per

annum), sell it and reinvest the proceeds in a high yielding bond or

Treasury bill, the trade was viewed as a lay up. Everyone did it and



now there are numerous stale short positions. However, these trades

now make no sense with a rising gold price and declining interest

rates.

11. The Central Banks are nearing an Inflection Point when

they will be Reluctant to provide more Gold to the Market:

The central banks have supplied too much already via the leasing

mechanism. In addition, Far Eastern central banks who are

accumulating enormous quantities of US dollars are rumored to be

buyers of gold to diversify away from the US dollar.

12. Gold is Increasing in Popularity:

Gold is seen in a much more positive light in countries beginning to

come to the forefront on the world scene. Prominent developing

countries such as China, India and Russia have been accumulating

gold. In fact, China with its 1.3 billion people recently established a

National Gold Exchange and relaxed control over the asset. Demand in

China is expected to rise sharply and could reach 500 tonnes in the

next few years.

13. Gold as Money is Gaining Credence:

Islamic nations are investigating a currency backed by gold (the Gold

Diner), the new President of Argentina proposed, during his campaign,

a gold backed peso as an antidote for the financial catastrophe which

his country has experienced and Russia is talking about a fully

convertible currency with gold backing.

14. Rising Geopolitical Tensions:

The weakening conditions in the Middle East, the US occupation of

Iraq, the nuclear ambitions of North Korea and the growing conflict



between the US and China due to China's refusal to allow its currency

to appreciate against the US dollar headline the geopolitical issues,

which could explode at anytime. A fearful public has a tendency to

gravitate towards gold.

15. Limited Size of the Total Gold Market Provides Tremendous

Leverage:

All the physical gold in existence is worth somewhat more than $1

trillion US dollars while the value of all the publicly traded gold

companies in the world is less than $100 billion US dollars. When the

fundamentals ultimately encourage a strong flow of capital towards

gold and gold equities, the trillions upon trillions worth of paper money

could propel both to unfathomably high levels.

Conclusion:

The dollar is in an irreversible death spiral, crude oil prices have

topped +$100/barrel, and the stability of societies around the world

are becoming more and more fragile by the day as political and

religious factions continue to furiously battle. These fundamentals are

compounded by an approaching recession triggered by the housing

and credit crisis building in the United States. So Foreign investors are

going to think twice about putting their money into US stocks

especially with the dollar entrenched in a long term bear market.

As Gold and silver are also commodities and when paper markets

and governments are performing well, precious metals like gold and

silver go back to their status as commodities. What we are seeing now,

however, because of the lower dollar and investor flows because of

safe haven type of purchasing, everyone looking to precious metals,



and investors are moving into the precious metals to protect their

hard-earned savings. So gold is becoming money again.

I think gold prices may move from $1000 to $2000 (i.e. around

Rs13000 to Rs.22000) an ounce in a matter of six to eight months,

depending on how the issues with the dollar pan out from here.

Findings

In India MCX is trading in bullion market.

Goldsmiths get their raw material from wholesale dealers.

They fix the prices on daily trading bases.

Hence there is positive correlation between both market

traders can easily predict the future prices of the commodities

and hedge their positions.

Correlation between spot gold price and dollar rate is

0.2048 & probable error is 0.1659. So it would not be concluded

that both spot gold prices and dollar rates are highly correlated

or not.



Most of the respondents are interested in investing in

equity (i.e. 49%) when compared to the other investment

alternatives because they feel investing in equity will provide

more returns to them.

Now commodity future market is not new to the investors

as almost 82% of respondents are aware about commodity

future market out of them only 16% have actually invested.

67% of Investors have not invested as they have a

perception that it is risky and they even do not have much

knowledge about trading mechanism.

The investors who have not yet invested in the commodity

future market, out of them 61% of the investors are interested to

invest in the coming future. The investors expect that the

brokers should provide them the genuine information regarding

the market. Also they want moderate brokerage and good

services from the brokers.

For gold price fluctuation main reasons are

Dollar depreciation / appreciation

World distress

Increase in money supply



Inflation

SUGGESTIONS

Both Spot Gold & Future Gold Markets are positively correlated

the traders have knowledge about the commodity demand and

supply and their price fluctuations. So Karvy can approach these

traders and they can easily convince them so these people are

the targeted customers for Karvy.

More Awareness program has to be conducted by Karvy

consultants so that already aware investor takes the challenge to

invest in this commodity future market. Because since this was



new to the market and also risky but gives good return. so it can

be done through by giving advertisements in local channels,

News papers, by sending E-mail to present customers etc

From survey it is found that most of the potential customers are

concerned about the genuine information and moderate

brokerage so Karvy can look upon this. If it can give good

information and charge moderate brokerage it will help to

attract more and more customers.

As correlation between spot gold rate and dollar rate is not high,

investor can hedge their risk by investing in gold future and

dollar. So they get benefit of diversification.

The best opportunities for investors to protect themselves

against the coming financial reckoning are with precious metals

and mining stocks.

CONCLUSION

Capital market is already matured and reached at high level,

every investor interested to invest but not in commodity Future Market

due to lack of awareness. As per Data analysis most of the investors do

not have much idea of commodity market in Belgaum they are

required to be given awareness training and knowledge with the help

of workshops and seminars, as investors are willing to know more

about commodity market i.e. 61% of the respondents are willing to

invest in the market The Karvy Consultancy and other Brokers should



take major steps to give fare knowledge about the commodity market

and its operations to the public. Compared to Capital market

Commodity market is less risky (minimum margin, easy to hold, no

manipulation & fraud), maximum profitability. Commodity market is in

growing stage.

As in my study it is found that, there exists a high degree of

positive correlation between Spot Commodity Market and Commodity

Future Market. If an amount of small change in the spot gold market

prices has the direct impact on the future prices of gold in commodity

market. So Traders can take more advantage of this. Because they can

predict the future prices, depending upon the present demand and

Supply in the spot market. As they also get benefits of diversification,

means in case of uncertainty in gold market they can invest in dollar

i.e. forex market. It helps to all such as Individual investors and gold

traders. There is a maximum hours of trading that is from 10am to

11.55 pm. It is better for working class people to deal at evening.

"In the absence of the gold standard, there is no

way to protect savings from confiscation through inflation.

There is no safe store of value."
