commoditymarket on gold.doc

7/29/2019 Commoditymarket on gold.doc

1/85

Title:Study of Commodity Market with Special Reference to

Gold. at Company name.

S.NO Table of Contents Page

No

1 Introduction 1-4

2

Company Profile

History

Overview

About company

Stock Broking Services

About company Commodities Broking Limited

company 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

6

Gold Commodity Future Market Introduction

Gold in Indian Scenario47-60


2/85

World Markets

Gold an Independent Asset

Turning to demand

What makes Gold Special?

Fixing of spot gold prices

Sources Of Gold For The Goldsmiths

7

Investor 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


3/85

INTRODUCTION.

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 particularcommodity 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

Company name; working as a broking firm wants to expand and for

extensive reach thinking of establishing branches in various cities of

Karnataka.I have taken thecommodity futures, to study and analyze, as it is the

emerging trend in the market, at Company name, I have taken Gold

as the commodity to study the Impact of present gold price on future

gold market and its trading mechanism.


4/85

NEED OF STUDY

To investing in various types of assets is an interesting activity that attracts

people from all walks of life.

The Commodity Futures are contracts to buy specific quantity of a particularcommodity at a future date. It is similar to the index futures and stock futures but

the underlying happens to be commodities instead of stocks.

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

future gold market and its trading mechanism.

The positive correlation between both market traders can easily predict the future

prices of the commodities and hedge their positions.

Every investor interested to invest but not in commodity Future Market due to

lack of awareness.


5/85

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.


6/85

Research methodology:

SAMPLE SIZE: 100 random sample size

SAMPLE TYPE: Simple random sampling

SAMPLE AREA: Karimnagar

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.

NXY-(X) (Y)

Correlation(r) =


7/85

[NX2 (X)2]1/2[NY2 (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)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.


8/85

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 strengthto better our

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

process, evolved Karvy as one of Indias 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 finallytotality in

service.

Our highly qualified manpower, cutting-edge technology,

comprehensive infrastructure and total customer-focus has secured forus the position of an emerging financial services giant enjoying the

confidence and support of an enviable clientele across diverse fields in

the financial world.


9/85

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 providesinvestor 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:


10/85

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 toname 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


11/85

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


12/85

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 & rescues 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 amonthly 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


13/85

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


14/85

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 agood value addition to your portfolio.

The company provides investment, advisory and brokerage

services in Indian Commodities Markets. And most importantly, we


15/85

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 theclock 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.


16/85

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.


17/85

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


18/85

Karvy Karvy Karvy KarvySecurities Ltd. Stock Broking Ltd Consultants Ltd. Investors ServicesLtd.

Deputy Deputy Deputy Deputy

General General General General

Manager Manager Manager Manager

Senior Manager Senior Manager Senior ManagerSenoirManager

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


19/85

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., wasset 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


20/85

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.

Indias 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 todepressed 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


21/85

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 forbuyer 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.


22/85

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 Financialderivatives

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


23/85

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.


24/85

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 ofa single outright trade in Future Market.


25/85

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:


26/85

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 therepenetration 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


27/85

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


28/85

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


29/85

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.


30/85

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)


31/85

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.


32/85

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 ConsumerAffairs, 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 setup 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


33/85

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


34/85

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


35/85

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 consequentlythe 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


36/85

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 knownas "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, brokingagencies and investors at large are, unfortunately, unaware at present

of the economic utility, the operational techniques and the financial

advantages of such trading.


37/85

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 moments 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.


38/85

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 newinformation 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


39/85

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


40/85

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 thetime 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


41/85

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 oftheir franchisees or sub-brokers.

Procedure for Individual investor to start trading in Commodity

Futures Market can be as follows:


42/85

Selection of Broker:

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

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

would be in Investors 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

traders 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.


43/85

Intraday Trading:

Then as per individual investors wish he can buy or sell

commodities online. Just he has to specify which commodity & whatprice 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 pricediscovery 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 Exchange

All 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 allmembers 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


44/85

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


45/85

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.


46/85

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.


47/85

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 golds total accumulated holdings relate to store of valueconsiderations. 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 golds 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 governments promise to pay. This is an important feature


48/85

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

worlds 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%.

Golds 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


49/85

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 brides 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 governments 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.


50/85

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, Zurichas 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


51/85

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

liberalized gold regime that permits official imports through local

markets.


52/85

Gold an Independent Asset

Its 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.


53/85

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 oftenmade 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


54/85

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 bearingin 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.


55/85

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 golds 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 inflationhas (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 golds 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


56/85

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 Indias liberalized gold regime.

New York is the home of gold future trading.

Istanbul, Dubai, Singapore and Hong Kong are doorways to

important consuming regions.


57/85

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 todays 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


58/85

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

sizes and denominations, you dont 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 worlds 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 whencash 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


59/85

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 driverof 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 convertbullion 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


60/85

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 Trading

Bases/Future Market

Total

Valid

Frequency Percent Valid Percent

Cumulative

Percent

spot price

59.0%

41.0%

Daily Trading Bases/

Investors


61/85

Interpretation:

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

Sources Of Gold For The Goldsmiths:

commodities

54.0%

5.0%

41.0%

Wholesaler

Local supplier

Investors

Interpretation:

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

Valid


Cumulative

Percent


62/85

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 Karimnagar 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 96.04 4.0 4.0 100.0

100 100.0 100.0

Gold

Bank/Fixed Deposit

Equity

Mutual FundsReal Estate

Total

Valid


Cumulative

Percent


63/85

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

Valid


Cumulative

Percent


64/85

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

ValidFrequency Percent Valid Percent

Cumulative

Percent


65/85

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

ValidFrequency Percent Valid Percent

Cumulative

Percent


66/85

future

23.0%

61.0%

16.0%

No

Yes

Investors

Interpretation:

Theabove 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

Valid


Cumulative

Percent


67/85

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


68/85

Market. The following table and chart shows the Correlation between

these two markets.

Correlation(r) = NXY-(X) (Y)

DATESPOTPRICE

FUTUREPRICE

10-16 Dec 2011 30207.29 10253.8617-23 Dec 2011 30270 10281.8624-30 Dec 2011 30577.86 10477.4331,1-6 Jan 2012 30729.14 10841.437-13 Jan 2012 3

commoditymarket on gold.doc

Documents