INTRODUCTION

The greatest early surge in gold refining was followed the first voyage of Columbus. From

1492 to 1600 central and south America and Caribbean Island were contributed significant quantities

of gold to world commerce. So the Commodity Futures trading have a long history. The first future

market appeared in 1875. But the new standardized from of trading is an attractive package for all

the people who earn money through speculation by trading in to FUTURES. It is becoming an

alternative for the other investment opportunities. The amounts of investment in commodities were

increasing year by year.

Commodity is a consumer good various commodities are used in our daily life. Like wheat is

used for our breakfast bread, cotton is for fabrication, gold is used for jewellery by humans,

petroleum products are used for different purposes.

Commodities futures trading have evolved from the need for ensuring continuous supply of

seasonal agricultural crops. In Japan the history of organized commodity derivatives in India goes

back to the nineteenth century when Cotton Trade Association started futures trading in 1875,

about a decade after they started in Chicago. Over the time datives market developed in several

commodities in India. Following Cotton, derivatives trading started in oilseed in Bombay (1900), raw

jute and jute goods in Calcutta (1912), Wheat in Hapur (1913) and Bullion in Bombay

(1920).Commodities futures trading have evolved, merchants stored rice in warehouse for future

use. In order to raise case warehouse holders sold receipts against the stored rice. These were

known as rice tickets.

Eventually such rice tickets became accepted as a kind of general commercial currency Rules

came into being, to standardize the trading in rice tickets. The futures contract, as we know it

today, evolved as farmers (sellers) and dealers (buyers) began to commit to future exchanges of

grain for cash. For instance, the farmer would agree with the dealer on a price to deliver to him

5,000 bushels of wheat at the end of June. The bargain suited both parties. The farmer knew how

much he would be paid for his wheat, and the dealer knew his costs in advance. The two parties

may have exchanged a written contract to this effect and even a small amount of money

representing a “Guarantee.”

[2]

Such contracts became common and were even used as collateral for bank loans. They also

began to change hands before the delivery date. If the dealer decided he didn’t want the wheat, he

would sell the contract to someone who did. Or, the farmer who didn’t want to deliver his wheat

might pass his obligation on to another farmer. The price would go up and down depending on

what was happening in the wheat market. If bad weather had come, the people who had

contracted to sell wheat would hold more valuable contracts because the supply would be lower; if

the harvest were bigger than expected, the seller’s contract would become less valuable. It wasn’t

long before people who had no intention of ever buying or selling wheat began trading the

contracts. They were speculators, hoping to buy low and sell high or sell high and buy low.

In the early 20th century, advanced communication & transportation, centralized

warehouses built in the principal markets, to distribute goods more economically, paved the way to

expanded interstate and international trade. Agricultural commodities were the most commonly

traded, but it led to the fact that a market can flourish for any underlying a long as there is an active

pool of buyers and sellers.

In the last 25 years, derivatives have become increasingly important in the world of trading.

Futures and Options are now traded actively on many exchanges.

[3]

NEED FOR THE STUDY

Today is the era of fast changing technology and business opportunities under the impact of

liberalization, privatization and globalization? Advanced communication technology has rendered

flexible business ideas surpassing time, place and utility constraints. This has lead to idea based

businesses and markets like commodity markets, futures And options markets which are virtual in

nature.

Though the initiation of such markets was towards benefiting the primary suppliers or end

users I the form of stabilized higher prices or guaranteed minimum price or guaranteed supplies,

now-a-days such markets serve the purpose of speculators who participate in trading towards

gaining profits through intelligent time tested investment programs which are fundamentally based

on some sound steadfast scientific and mathematical models and analysis like technical analysis,

fundamental analysis and soon.

Under this context commodities market has its own significance and vital role to play in the

economy. Though it is new to India it has profound impact on economy and society both positive and

negative. Commodities ranging from coffee seeds to pepper, palm oil ; gold to platinum; coal to iron

& steel are being traded in these markets by all types of players like hedgers, speculators,

manufacturers and so on. Directly or indirectly each and every individual is being affected by this

through steep hike in prices of commodities like gold and so on. Even government and other

regulating no say in this respect.

The system is highly complicated and has enduring impact on economy and society. Under

this context it highly essential for business students, scholars and economists to explore the ground

realities of such markets and understand the mechanism, systems and implications for the society and

economy. The topic being latest AND needs the specific and committed attention of the researchers

for profound understanding and exploration.

[4]

SCOPE OF THE STUDY

a) The study will help to identify how the commodity trading in stock market.

b) The study will help to identify gold trading in stock market.

c) The study will help to identify changes in gold prices regarding certain time period.

d) The study will help to the commodity investors on the investment exactly on gold.

OBJECTIVES OF THE STUDY

Primary objectives:

a. The study is to serve as an educational material for first time investors entering into a

commodity market.

b. To analyze commodity market and understand the clearance & settlement mechanism.

c. To suggest the optimus pvt ltd

d. To know the investment pattern of commodity traders and people

Secondary objectives:

a. To review the mechanism of rise and fall of gold prices.

b. To forecast the future position of commodity market in India.

c. To understand the socio, political and cultural implications behind the market.

d. To understand the psychological and market sentiment issues related to the commodity

market with respect gold trading.

[5]

RESEARCH METHODOLOGY

Fundamental to the success of any research project is sound research design. A research

design purely and simplify the work or plan of a study that guides the collection and analysis of the

data.

The study is based on only secondary sources of data

Secondary data:

Secondary data basically comprise company manuals, records, exchange broachers, web

sites, and news records. After the collection of data from the primary and secondary sources was

consolidated, tabulated, analysis technically interpreted and presented in the report. For the purpose

of analyzing the data statistical tools like graphs, tables and percentage methods have been

adequately utilized.

On the basis of information generated from these historical trends historical trend analysis

and statistical projection, conclusions have been drawn and suitable suggestions / recommendations

made.

LIMITATIONS OF THE STUDY

The title itself is a big ocean. One can’t forecast the measure of the commodity market.

The time period is limited to a span of only 45 days, so analysis is based only on the efforts

of the duration

The study covers only fundamental related to MCX operations. It does not cover the hole of

commodity market.

The data is based on study at Vijayawada branch.

The reliability of the study depends upon the information furnished by the officials.

[6]

HISTORY OF GOLD: -

Since ancient times, gold has always been an important asset and a value store. Gold was

used as an exchange medium even before the Roman Empire existed. The gold was also used for

currency by Chinese and Hindu cultures. This shows that the gold was used not only by the western

cultures but the eastern cultures also.

Great Britain started the suit by adopting a gold-backed paper currency and the rest of the

industrialized world followed this. The United States also started using gold in its currency and by

the end of 1933; the United States Dollar was equal to 1/20th of an ounce of gold. Gold backed up

the United States Dollar under an agreement known as the Bretton Woods agreement. Under this

agreement, a specific value of gold tied the Dollar and also the other global currencies. This specific

value was $35/oz of gold from 1934 to 1968. That made it illegal for the citizens of the US to own

gold so that the level of gold and subsequently the value of dollar could be protected.

When the Gold Standard was evocated, it became a popular investment medium, and it led to

risen gold prices to $800/oz from $35/oz. Since then, no matter whatever happened, be it famines,

floods or even world wars, gold’s importance as an investment medium hasn’t changed at all. Since

17th century, London has been the center of gold trading. It was because the gold was brought to

London for refining and distribution purposes. Meanwhile, it began a method for disseminating the

price of Gold known as the "Fix" in 1919 as the center of distribution.

The price, at which the most buy and sell orders, of the members or Fixing Seat Holder's,

match, or balance, is known as the Fix. A large volume of physical Gold can be bought or sold at a

single, clearly posted price, the fix. The fix is a benchmark price for many transactions worldwide,

whether for mines, fabricators or central banks, because it is undisputed prices at which all six of the

largest Gold trading houses are willing do business.

[7]

Gold:

Gold is the oldest precious metal known to man and for thousands of years it has been valued

as a global currency, a commodity, an investment and simply an object of beauty.

Gold is a precious metal that has been valued by people since ancient times. People use gold

for coins, jewelry, ornaments, and many industrial purposes. Until recently, gold reserves formed the

basis of world monetary systems. Gold is a very soft metal when it is pure (24 Kt. is pure gold). Gold

is the most malleable (hammerable) and ductile (able to be made into wire) metal. Gold is usually

alloyed (mixed with other metals, often silver and copper) to make it less expensive and harder. The

scientific abbreviation of gold is Au.

Major Characteristics :

Gold is unique as it is both a commodity and a monetary asset.

Its stability and high value makes it virtually indestructible and ensures that it is almost

always recovered and recycled.

The economic sense as the stock of gold remains essentially constant while ownership shifts

from one party to another.

Although gold mine production is relatively inelastic, recycled gold (or scrap) ensures there is

a potential source of easily traded supply when needed, and this helps to stabilize gold price.

Economic forces that determine the price of gold are different from, and in many cases

opposed to the forces that influence most financial assets.

Reasons of popularity of gold:

Large population of India lives in villages. Many of them, in recent past, were too

poor to have proper living arrangements. These poor people had negligible assets.

They wanted to keep it in their physical possession all the times, because they had not even

residences to keep it.

[8]

Hence, wearable gold Jewelry was the only option for them. Floods and droughts were continual

phenomenon of their lives. Those forced many villagers to flee to safer places. It was easy to carry

gold Jewelry while fleeing in distress.

They used to sell or mortgage it while in crisis and purchase it in good times.

Approximately ten million marriages occur in India every year. India has a tradition of gifting gold in

the marriages. Rich, middle and poor all classes bestow gold in form of Jewelry upon their

daughters. Rich and middle classes also have a trend of presenting gold Jewelry to the near

relatives of the bride and the groom in marriages. These marriages require about one thousand five

hundred tons of gold every year. It is evident that gold demand in India cannot easily go down.

Agriculture is the base of Indian economy. Gold Jewelry is popular among farmers too. Gold jewelry

sales spurt after a bumper crop. There are many religious, social and cultural festivals in India.

Affluent people generally present gold ornaments in these festivals to females in their family.

Melting & refining assaying facility in India:

At present, gold is mainly refined in Bombay where a few refineries like the India

Government Mint and National refinery are active. Some private refineries are also operating

elsewhere with limited capacity. As none of the refineries is LBMA recognized, there is a need to

upgrade and also increase the refining capacity.

Market Moving Factors :

Indian gold prices are highly correlated with international prices. However, the fluctuations in

the INR-US Dollar impact domestic gold prices and have to be closely followed.

The global prices are driven by a host of factors with macro-economic factors like strength of

the economy, rising importance of emerging markets, currency movements, interest rates

being major influencing factors.

Supply-demand is a major influencer, amid rising global investor demand and almost stable

supplies.

[9]

Shifts in official gold reserves, reports of sales/purchases by central banks act as major price

influencing factors, whenever such reports surface.

The investment in gold is influenced by comparative returns from other markets like stock

markets, real estate other commodities like crude oil.

Domestically, demand and consequently prices to some extent are influenced by seasonal

factors like marriages. The rural demand is influenced by monsoon, agricultural output and

health of the rural economy.

Price trends and factors that influence prices:

Indian gold prices follow more or less the international price trends. However, the

strong domestic demand for gold and the restrictive policy stance are reflected in the higher price of

gold in the domestic market compared to that in the international market at the available exchange

rate. Since the demand for gold is closely tied to the production of jewelry, gold prices tend to

increase during the time of year when demand for jewellery is greatest. Christmas, Mothers Day and

Valentine Day are all major shopping seasons and hence the demand for metals tends to be strong a

few months ahead of these holidays. Also, the summer wedding season sees a large increase in the

demand for metals, so price strength in March and April is not uncommon. On the other hand in

November, December, January and February prices tend to decline and jewelers tend to have holiday

inventory to unwind.

Indian Standard:

Scope:

This standard specifies eight grades of gold, used in the manufacture of jewellery/artifacts of gold,

based on their gold content. This standard also specifies the guidelines for marking of purity and

other details on tested jewellery/artifacts.

[10]

Requirements:

The fine or standard gold used for the manufacture of jewellery shall have the fineness as

agreed to between the purchased and the manufacturer subject to a minimum of fineness as given in

4.1 without any negative tolerance. Solders used for the manufacture of gold jewellery/artifacts shall

be of the same fineness (or caratage) as that of the jewellery/article and shall conform to the

requirements as specified in IS 3095. However in case of 23 carat jewellery/artifacts where it is not

possible to use solder of the same caratage, solders of immediate next lower caratage may be used

provided the overall purity of the jewellery as declared conforms to the respective grade of fineness.

For 9, 14, 18, 21 and 22 carat jewellery/artifacts solders shall be of the same caratage as the

jewellery article. Solder compositions other than specified in IS 3095 may also be used provided

their gold content is same as the respective grade as specified for the standard solder and they are

free from cadmium. Solders of a fineness less than the standard fineness of article shall not be used

for strengthening, weighing or filing.

Marking:

The gold, gold alloys, jewellery/artifacts shall be stamped with the Standard Mark in this case

known as the “Hallmark” by BIS recognized assaying and hallmarking centers only which comprises

of the following:

As say center’s symbol;

The purity mark along with purity/fineness grade (indicating caratage shall not be mandatory); and

Year of marking denoted by a letter symbol (as defined by BIS): Hallmarking – The use of Hallmark

is governed by the provisions of the Bureau of Indian Standard Act, 1986 and Rules and Regulations

made their under.

The details of conditions under which the license for the use of the Standard Mark may be granted to

jewelers/jewellery manufacturers may be obtained from Bureau of Indian Standards. NOTE-

Jewellers/ Sponsorer’s logo on each article shall be marked before offering the lot to BIS recognized

Assaying and Hallmarking Centre for Hallmarking.

[11]

Bureau of Indian Standards:

BIS is a statutory institution established under the Bureau of Indian Standards Act,

1986 to promote harmonious development of the activities of standardization, marking and quality

certification of goods and attending to connected matters in the country.

Carat:

A Carat (Karat in USA and Germany) was originally a unit of mass (weight) based on the

Carob seed or bean used by ancient merchants in the Middle East. The Carob seed is from the Carob

or locust bean tree. The carat is still used as such for the weight of gem stones (1 carat is about 200

mg). For gold, it has come to be used for measuring the purity of gold where pure gold is defined as

24 carats. How and when this change occurred is not clear.

This latter had a mass of about 4.54 grammes, so the Siliqua was approximately equivalent in

value to the mass of 1 Keration or Siliqua Graeca of gold, i.e. the value of 1/24th of a Solidus is

about 1 Keration of gold, i.e. 1 carat. If we take national gold reserves, then most gold is owned by

the USA followed by Germany and the IMF. If we include jewellery ownership, then India is the

largest repository of gold in terms of total gold within the national boundaries. In terms of personal

ownership, it is not known who owns the most, but is possibly a member of a ruling royal family in

the East.

The most widely used alloys for jewellery in Europe are 18 and 14 carat, although 9 carat is

popular in Britain. Portugal has a unique designation of 19.2 carats. In the United States 14 carat

predominates, with some 10 carat. In the Middle East, India and South East Asia, jewellery is

traditionally 22 carat (sometimes even 23 carat). In China, Hong Kong and some other parts of Asia,

"chuk kam" or pure gold jewellery of 990 fineness (almost 24 carat) is popular. In many countries

the law requires that every item of gold jewellery is clearly stamped with its caratage. This is often

controlled through hallmarking, a system which originated in London at Goldsmiths' Hall in the 14th

century.

Today it is compulsory in such countries as Britain, France, the Netherlands, Morocco,

Egypt, and Bahrain. Where there is no compulsory marking manufacturers themselves usually stamp

the jewellery both with their own individual identifying ark and the caratage or fineness.

[12]

Production:

Traditionally South Africa has been the largest producers of gold in the world accounting for

almost 80% of all non-communist output in 1970. Although it retained its position as the single

largest gold producing country, its share had fallen to around 17% by 1999 because of high costs of

mining and reduced resources. In contrast other countries like US, Australia, Canada and China have

increased their output exponentially with output from developing countries like Peru and other Latin

American countries also increasing impressively.

Production of gold in India:

Mining and production of gold in India is negligible, now placed around 2 tonnes (mainly from the

Kolar gold mines in Karnataka) as against a total world production of about 2,272 tonnes in 1995.

Gold holdings in India are estimated to be in the range of 10000-13000 Tons

and are predominantly private.

India’s gold consumption is 25% of world’s total gold production.

India has a very limited gold production of around 9 tonnes in 2002The domestic production of the

gold is very limited which is around 9 tonnes in 2002 including 2.940 tonnes from mines and 6.203

tonnes from Birla Copper

More than 60% of Indian consumption is met through imports

The availability of recycled Gold is price sensitive and the fabricated old Gold scraps is price elastic

and was estimated to be near 450 tonnes in 2002 rose almost more than 40%.

Global and domestic demand-supply dynamics:

The demand for gold may be categorized under two heads - consumption demand and

investment demand. Consumption of gold differs according to type, namely industrial applications

and jewellery. The special feature of gold used in industrial and dental applications is that some of it

cannot be salvaged and thus is truly consumed.

[13]

This is unlike consumption in the form of jewellery, which remains as stock and can

reappear at future time in market in another form. Consumer demand accounts for almost 90% of

total gold demand and the demand for jewelry forms 89% of consumer demand.

In markets with poorly developed financial systems, inaccessible or insecure banks, or where

trust in the government is low, gold is attractive as a store of value. If gold is held primarily as an

investment asset, it does not need to be held in physical form. The investor could hold gold-linked

paper assets or could lend out the physical gold on the market attaining a higher return in addition to

savings on the storage costs. Japan has the highest investment demand for gold followed closely by

India. These two countries together account for over 50% of total world demand of gold for retail

investment. Investment demand can be split broadly into two, private and public sector holdings.

There are several ways in which investors can invest in gold either directly or through a variety of

investment products, each of which lends it to specific investor preferences:

Coins and small bars

Gold accounts: allocated and unallocated

Gold certificates and pool accounts

Gold Accumulation Plan

Gold backed bonds and structured notes

Gold futures and options

Gold-oriented funds

Global Supply Demand Scenario :

The total above ground stocks of gold is estimated to be around 1,63,000 tonnes by Gold Fields

Minerals Services (GFMS) as on end of 2008

Out of this total stock, 51% is estimated to be present as jewellery, 18% as official reserves, 17%

held as investment, 12% used for industrial purposes and 2% is unaccounted for.

[14]

Jewellery accounts for almost two-thirds of annual gold demand with investment and industry being

the other main drivers. The total annual global demand for gold has averaged 3530 tonnes in the last

three years (2005 - 2008). However, it is expected to dip slightly in 2009, owing to the sharp rise in

prices.

Five countries, viz., India, China, USA, Turkey, Saudi Arabia and UAE account for above 60% of

gold demand, with each market driven by a different set of socio-economic and cultural factors.

HISTORY OF GOLD IN INDIA:

Gold comes second after bank deposits when it comes to the preference for investment in

India and considered a savings and investment vehicle. India is the world's largest consumer of gold

in jewelry as investment. Prior to 1962, India was the world's largest gold market and the main

trading center was Bombay. In 1962, the government enacted the Gold Control Act, which

prohibited the citizens of India from holding pure gold bars and coins due to loss of reserves during

the indo-china war. It was declared that the old holdings in pure gold had to be compulsorily

converted into jewelry. Pure gold bars and coins were to be dealt only by licensed dealers. A large

unofficial market sprung up which dealt in cash only as a consequence of this legislation that

adversely affected the official gold market. This also made way for smuggling and black marketing,

which comprised of many jewelers and bullion traders. In 1990, India was on a verge of default of

external liabilities as it had a major foreign exchange problem. It had to give up the concept of

controlling and licensing as it led to nothing more than corruption and shortages. As a result, the

Indian government pledged 40 tons from their gold reserves with the Bank of England. India had to

adopt the concept of liberalization. The government abolished the 1962 Gold Control Act in 1992

and liberalized the import of gold in India for a duty payment of Rs.250 per 10 grams. The

government made up for the foreign exchange problem by allowing free imports and earning the

taxes. This step expanded the gold market and it also waved off the unofficial trade i.e. smuggling

and black marketing. This makes India the most price-sensitive market for gold in the world.

Gold comes second after bank deposits when it comes to the preference for investment in

India and considered a savings and investment vehicle. India is the world's largest consumer of gold

in jewelry as investment. The commercial banks were authorized to import gold from jewelers and

exporters for sale or loan in 1997 by the RBI.

[15]

In India 13 banks are involved in the imports of gold currently. As a result the difference in

international and domestic prices is reduced from 57% during 1986 to 1991 to 8.5 percent in 2001. In

Indian society the gold hoarding tendency is well ingrained. Monsoon, harvest and marriage season

dictates the domestic consumption. Indian jewelry is highly volatile and sensitive.

Stock market and a wide range of consumer goods are providing competition to gold in cities.

As compared to the rest of the world, facilities for refining, assaying, making them into standard bars

in India, are insignificant, both qualitatively and quantitatively.

Indians normally buy about 25 per cent of the world's gold, purchasing around 700 - 750

tons of gold every year. However, the sharp price increase in 2008 and 2009 has impacted demand

with total demand in 2008 dipping to 660 tons. It is further expected to shrink in 2009 with demand

in first three quarters of 2009 totaling only around 265 tons against 553.5 tons in the same period of

the previous year. As India's domestic primary production of gold is very less, at around 2-3 tons a

year, the country imports most of its domestic requirement. Thus, India is also the largest importer of

the yellow metal and has averaged imports of around 600 tons a year. However, 2008 imports dipped

to around 400 tons of gold and it is further expected to dip to around 200-220 tons in 2009 owing to

high prices. India's gold demand is firmly embedded in cultural and religious traditions. It is also

valued in India as a savings and investment vehicle and is the second preferred investment after bank

deposits. Gold hoarding tendency is well engrained in the Indian society and unofficial stocks held

by Indians is estimated to be well above 15,000 tons, which is around 9% of the total global gold

stocks. Domestic consumption is dictated by monsoon, harvest and marriage season. Indian jewelers

off take is sensitive to price increases and even more so to volatility. In the cities gold is facing

competition from the stock market and a wide range of consumer goods. Facilities for refining,

assaying, making them into standard bars, coins in India, as compared to the rest of the world, are

insignificant, both qualitatively and quantitatively. In July 1997 the RBI authorized the commercial

banks to import gold for sale or loan to jewelers and exporters. At present, 13 banks are active in the

import of gold. This reduced the disparity between international and domestic prices of gold from 57

percent during 1986 to 1991 to 8.5 percent in 2001.

[16]

History of Commodity Market in India:

The history of organized commodity derivatives in India goes back to the nineteenth century

when Cotton Trade Association started futures trading in 1875, about a decade after they started in

Chicago. Over the time datives market developed in several commodities in India. Following Cotton,

derivatives trading started in oilseed in Bombay (1900), raw jute and jute goods in Calcutta (1912),

Wheat in Hapur (1913) and Bullion in Bombay (1920).

However many feared that derivatives fuelled unnecessary speculation and were

detrimental to the healthy functioning of the market for the underlying commodities, resulting in to

banning of commodity options trading and cash settlement of commodities futures after

independence in 1952.

The parliament passed the Forward Contracts (Regulation) Act, 1952, which regulated

contracts in Commodities all over the India. The act prohibited options trading in Goods along with

cash settlement of forward trades, rendering a crushing blow to the commodity derivatives market.

Under the act only those associations/exchanges, which are granted reorganization from the

Government, are allowed to organize forward trading in regulated commodities. The act envisages

three tire regulations:

Exchange which organizes forward trading in commodities can regulate trading on day-to-

day basis;

Forward Markets Commission provides regulatory oversight under the powers delegated to

it by the central Government.

The Central Government- Department of Consumer Affairs, Ministry of Consumer Affairs,

Food and Public Distribution- is the ultimate regulatory authority.

The commodities future market remained dismantled and remained dormant for about four

decades until the new millennium when the Government, in a complete change in a policy, started

actively encouraging commodity market. After Liberalization and Globalization in 1990, the

Government set up a committee (1993) to examine the role of futures trading.

[17]

The Committee (headed by Prof. K.N. Kabra) recommended allowing futures trading in 17

commodity groups. It also recommended strengthening Forward Markets Commission, and certain

amendments to Forward Contracts (Regulation) Act 1952, particularly allowing option trading in

goods and registration of brokers with Forward Markets Commission.

The Government accepted most of these recommendations and futures’ trading was

permitted in all recommended commodities. It is timely decision since internationally the

commodity cycle is on upswing and the next decade being touched as the decade of Commodities.

Commodity exchange in India plays an important role where the prices of any commodity are not

fixed, in an organized way. Earlier only the buyer of produce and its seller in the market judged

upon the prices. Others never had a say.

Today, commodity exchanges are purely speculative in nature. Before discovering the price,

they reach to the producers, end-users, and even the retail investors, at a grassroots level. It brings

a price transparency and risk management in the vital market. A big difference between a typical

auction, where a single auctioneer announces the bids and the Exchange is that people are not only

competing to buy but also to sell. By Exchange rules and by law, no one can bid under a higher bid,

and no one can offer to sell higher than someone else’s lower offer. That keeps the market as

efficient as possible, and keeps the traders on their toes to make sure no one gets the purchase or

sale before they do.

Since 2002, the commodities future market in India has experienced an unexpected boom in

terms of modern exchanges, number of commodities allowed for derivatives trading as well as the

value of futures trading in commodities, which crossed $ 1 trillion mark in 2006. Since 1952 till 2002

commodity datives market was virtually non- existent, except some negligible activities on OTC

basis.

In 2002-03, Prime Minister, Shri. A. B. Vajpayee, in his Independence Day address to the

nation on 15th August 2002, demonstrated its commitment to revive the Indian agriculture sector

and commodity futures markets. The GOI in that very year took two steps that gave a fillip to the

commodity markets.

[18]

The first one was setting up of nation wide multi commodity exchanges and the second one

was expansion of list of commodities permitted for trading under (FC(R) A).

Commodity Exchanges:

Commodity exchanges are the  exchanges where the trading of futures and forwards take

place, basically commodity exchange  are trading  in future contacts on those  commodities  which

have some  regional  relevance it is  not going  to be as easy  as a share  of a company  to get  listed 

in a different exchange.

Commodity exchanges in India are expected to contribute significantly in the strengthening

Indian economy to face the challenges of globalization. The Commodity Exchange makes

commodity money available to all as a medium of exchange, store of wealth and unit of account. As

long as the commodity exchange does not provide credit or interest, it is easily established and

avoids banking regulations. As a barter exchange mechanism, there is no fiduciary responsibility.

With the value India commodity economy being around Rs.3,00,000 crore a year.

In India there are 25 recognized future exchanges, of which there are three national level

multi-commodity exchanges. After a gap of almost three decades, Government of India has allowed

forward transactions in commodities through Online Commodity Exchanges, a modification of

traditional business known as Adhat and Vayda Vyapar to facilitate better risk coverage and

delivery of commodities. The three exchanges are: National Commodity & Derivatives Exchange

Limited (NCDEX) Mumbai, Multi Commodity Exchange of India Limited (MCX) Mumbai and National

Multi-Commodity Exchange of India Limited (NMCEIL) Ahmadabad. There are other regional

commodity exchanges situated in different parts of India.

[19]

Commodity Export Scenario:

India masters the global castor oil trade with its castor seed and oil products. The yearly

export of commercial castor oil from India turns out to be around 2-2.4 lakh tons. India is known to

be the fifth largest producer of aluminum in the globe. Indian aluminium has export potential as its

production far exceeds its domestic demand.

The export market for Indian organic agricultural products in agricultural products is expanding

rapidly. India’s organic tea is world- famous for its taste and flavor. Tea, coffee, spices, rice, wheat,

pulses, oil seeds, fruits and vegetables, cashew nut , cotton, herbal products are the major organic

products being exported from India.

Thus, the commodity market in India is growing rapidly with huge export potential. Though it is

temporarily lagging behind the service sector in the matter of exports, it is sure to catch up within a

few years.

History of derivatives markets in gold:

Gold futures trading debuted at the Winnipeg Commodity Exchange (Comex) in Canada in

November 1972. Delivery was also available in gold certificates issued by Bank of Nova Scotia and

the Canadian Imperial Bank of Commerce. The gold contracts became so popular that by 1974 there

was as many as 10, 00,000 contracts floating in the market. The futures trading in gold started in

other countries too. This included the following:

The London gold futures exchange started operations in the early 1980s.The Sydney futures

exchange in Australia began functioning with a contract in 1978. This exchange had a relationship

with the Comex where participants could take open positions in one exchange and liquidate them in

the other.

The Singapore International Monetary Exchange (Simex) was set up in 1983 by way of an

alliance between the Gold Exchange of Singapore and the International Monetary Market (TMM) of

Chicago.

[20]

The Tokyo Commodity Exchange (Tocom), which launched a contract in 1982, was one of the few

commodity exchanges to successfully launch gold futures. Trading volume on the Tocom peaked

with seven million contracts.

On December 31, 1974, the Commodity Exchange, the Chicago Board of Trade, the Chicago

Mercantile Exchange and the Mid-America Commodity Exchange introduced gold futures contracts.

The Chinese exchange, Shanghai Gold Exchange was officially opened on 30 October 2002.

Mumbai's first multi-commodity exchange, the National Commodities and Derivatives Exchange,

NCDEX launched in 2003 by a consortium of ICICI Bank Limited, Life Insurance Corporation,

National Bank for Agriculture and Rural Development and National Stock Exchange of India

Limited, introduces gold futures contracts. Gold has a very active derivative market compared with

other commodities. Gold accounts for 45 per cent of the world’s commercial banks commodity

derivatives portfolio.

Major trading centers of gold:

London (clearing house)

New York (home of futures trading)

Zurich (physical turntable)

Istanbul, Dubai, Singapore and Hong Kong (doorways to important consuming regions)

Tokyo Hong Kong Gold Market, Zurich Gold Market, London Gold Market and New York Market

are the 24-hour gold markets.

In India, gold is traded in Mumbai and Ahmadabad. It is also traded in three of India’s major

commodity exchanges namely

National Commodity & Derivatives Exchange ltd,

Multi Commodity Exchange of India ltd and

National Multi Commodity Exchange of India ltd. Mumbai (India's liberalized gold regime)

[21]

Uses of Gold:

1. Electronics and Telecommunications

a. Computers/Semiconductors

b. Power chairs

c. Spacecraft

d. Telephones

e. Telephone Wall Jacks

f. TVs and VCRs

2. Lasers and Optics

a. Astronomy

b. Copy Machines

c. Photo CDs

d. Satellites

e. Security Systems

3. Medicine and Health

a. Dentistry

b. Eye Surgery

c. Rheumatoid Arthritis Treatment

d. Thermometer

e. Research[22]

4. Industry and Aviation

a. Airbags

b. Aircraft Engines

c. Aircraft Windows

d. Engine Systems

e. Fire Bunker Gear

f. Food- Freshness Sensors

g. Protection of Air Force One

[23]

HISTORY OF OPTIMUS COMMODITY FUTURES (P) LTD

Optimus is one of the leading and fast growing commodity brokers and occupied its place in

the good books of investors. At Optimus we believe in Research... Reliability.... Responsibility. We

are led by experienced professionals with deep domain knowledge on Commodity derivatives. Being

a member of MCX, we facilitate online trading on various commodities like Bullion, Energies, Non

ferrous metals, Pulses, grains, Spices, Edible oils and others.

We started our journey in 2003 at Vijayawada and spread our wings to many places by

establishing nearly 40 franchises in India. We are very strong in designing risk management

strategies by taking advantages of spreading, hedging and Arbitraging. It’s been 3 years since futures

trading re-emerged in India.

A daily average turnover of nearly 20,000 crores is recorded in India at a growth rate of

600%. This attracts every investor and they need a right broker to serve their purpose. We are here to

bridge the gap and make our clients know perfect before they start trading.

We consider every client of ours as an individual while many brokerage firms consider as

numbers.

Our vision is to churn the advantages of commodity futures trading and justify the

investments of all our clients.

We look forward to see you in the trading family of Optimus.

Company services

[24]

Technical & Fundamental support:

At Optimus, we believe in service and support. Analysis is said to be the major support

expected by every trader and investor when it comes to Commodity trading. Analysis is two types,

Technical and Fundamental. We have a separate team of Analysts to support our valuable Clients. A

team of fundamental Analyst at our office observes various developments in all domestic and

international commodities. They watch the ratio of supply, demand. Weather, Government policies

etc., and update the same to our clients.

The other set of Analysts observe the markets by reading graphical representations of various

commodities and design the trading strategies to share with our clients throughout the day. To assist

our clients in terms of technical analysis we use various state of the art soft wares for better

productivity. In other words, every trade executed at Optimus does have logic behind it (either

technical or fundamental).

Awareness programs:

Optimus believes that knowledge is power. Online trading in Commodity futures is growing

by leaps and bounds in India at the rate of 500% per annum. Still it is observed that only 20% of the

traders and investors know about Commodity futures. Optimus is one company that stands first in

terms of creating awareness among market players. Any prospect who walks into the Optimus will

be trained and gains knowledge before they start trading. At the same time we conduct seminars and

public awareness programs to support all our business associates.

Risk Management:

Our operation executives from back office keep our clients updated with their account status

during the trading hours and also at the end of the day. They help our clients in terms of calculating

margins, limits and trading exposures. Since we have user friendly back offices software's, it is very

clear for the clients to understand their account status on a daily basis.

Analyst support:

[25]

Optimus is the first company to introduce Analyst Assisted Accounts service (AAA) service.

Every account we get is assisted by a dedicated financial Analyst. What we observe from the market

is every trader executes orders by taking different opinions from different people and finally it

becomes a dish prepared by the too many cooks. But when we trade with the support of a dedicated

financial Analyst, the result would be the different. Our F.A's choose the combination of different

Commodities and prepare Strategies on intraday, short term and medium term basis.

Technology support:

We offer online and offline accounts to our clients as per their convenience. Our clients can

trade from any place of their choice. The connectivity methods we offer are internet based, point to

point, CDMA technology and V-SAT, Where ever you are, you can connect to us. Our Technical

executives assist our clients and business associates and help them choose the best mode of

connectivity.

Advantages

Education

Seminars

Fundamental Analysis

Technical Analysis

Global commodities

SMS Service

Commodity Library

Analysts Assisted Account Service

Competitive Brokerage.

COMPANY INFORMATION[26]

NAME: OPTIMUS COMMODITY FUTURES (P) LTD

MEMBERSHIP:

Commodity Derivatives:

National Commodity & Derivatives Exchange Ltd.

Multi Commodity Exchange of India Ltd.

Overview of Optimus Services:

Optimus business solutions was developed for active traders (with moderate to advanced

trading experience) looking for investments based on technical analysis. Optimus supplies sample

hypothetical portfolios and buy-sell recommendations within these investments that clients can

follow or adopt at their discretion

. An optimus financial analyst initially evaluates your financial status, experience, and risk tolerance.

Afterwards, a sample trading plan will be presented that contains suggestions regarding initial

allocation and investment distribution.

The client is solely responsible for scrutinizing any recommendations made by optimus before

carefully integrating any recommendations into their personal financial plan according to advice and

goals created by the client and their financial planning professionals.

Optimus philosophy on investment in the commodity derivative markets is technically

driven. They believe an investor can capitalize by entering and exiting the markets in anticipation of

a repetition of past market and price patterns. They believe that consistent entry and exit rules with

active risk management will result in successful investment growth.

Optimus goal is to provide their clients with a profitable, yet basic trading system.

Optimus business solutions believes that an average individual investor can efficiently manage 4 to 8

active positions in their trading account with clear guidance. Optimus strives to provide precise

commodity picks with comprehensive support.

[27]

Optimus Financial Analyst’s keep every trader updated by sending SMS at regular

intervals (For every half an hour during trading hours). In spite of busy schedules their clients get the

market information and messenger alerts, if they are online.

MULTI COMMODITY EXCHANGE (MCX)

Introduction

Headquartered in Mumbai, Multi Commodity Exchange of India Ltd (MCX) is a state-of-the-

art electronic commodity futures exchange. The demutualised Exchange set up by Financial

Technologies (India) Ltd (FTIL) has permanent recognition from the Government of India to

facilitate online trading, and clearing and settlement operations for commodity futures across the

country. Having started operations in November 2003, today, MCX holds a market share of over

80% of the Indian commodity futures market, and has more than 2000 registered members operating

through over 100,000 trader work stations, across India. The Exchange has also emerged as the sixth

largest and amongst the fastest growing commodity futures exchange in the world, in terms of the

number of contracts traded in 2009. The turnover of the exchange for the fiscal year 2009 was US$

1.24 trillion.

MCX offers more than 40 commodities across various segments such as bullion, ferrous and

non-ferrous metals, and a number of agri-commodities on its platform. The Exchange is the world's

largest exchange in Silver, the second largest in Gold, Copper and Natural Gas and the third largest

in Crude Oil futures, with respect to the number of futures contracts traded. MCX has also set up in

joint venture the MCX Stock Exchange. Earlier spin-offs from the company include the National

Spot Exchange, an electronic spot exchange for bullion and agricultural commodities, and National

Bulk Handling Corporation (NBHC) India's largest collateral management company which provides

bulk storage and handling of agricultural products.

MCX has been certified to three ISO standards including ISO 9001:2000 Quality

Management System standard, ISO 14001:2004 Environmental Management System standard and

ISO 27001:2005 Information Security Management System standard. The Exchange’s platform

enables anonymous trades, leading to efficient price discovery. Moreover, for globally-traded

commodities, MCX’s platform enables domestic participants to trade in Indian currency.

[28]

The Exchange strives to be at the forefront of developments in the commodities futures

industry and has forged strategic alliances with various leading International Exchanges, including

Euro next-LIFFE, London Metal Exchange (LME), New York Mercantile Exchange, Shanghai

Futures Exchange (SHFE), Sydney Futures Exchange, The Agricultural Futures Exchange of

Thailand (AFET), among others. For MCX, staying connected to the grassroots is imperative.

Its domestic alliances aid in improving ethical standards and providing services and facilities

for overall improvement of the commodity futures market.  

It is regulated by the Forward Markets Commission.

MCX is India's No. 1 commodity exchange with 83% market share in 2009

The exchange's main competitor is National Commodity & Derivatives Exchange Ltd

Globally, MCX ranks no. 1 in silver, no. 2 in natural gas, no. 3 in crude oil and gold in futures

trading

The highest traded item is gold.

MCX has several strategic alliances with leading exchanges across the globe

As of early 2010, the normal daily turnover of MCX was about US$ 6 to 8 billion

MCX now reaches out to about 800 cities and towns in India with the help of about 126,000 trading

terminals

MCX COMDEX is India's first and only composite commodity futures price index.

Key shareholders:

Key shareholders Promoted by FTIL, MCX enjoys the confidence of blue chips in the Indian

and international financial sectors. MCX's broad-based strategic equity partners include NYSE Euro

next, State Bank of India and its associates (SBI), National Bank for Agriculture and Rural

Development (NABARD), National Stock Exchange of India Ltd (NSE), SBI Life Insurance Co Ltd,

Bank of India (BOI) , Bank of Baroda (BOB), Union Bank of India, Corporation Bank, Canara Bank,

HDFC Bank, Fid Fund (Mauritius) Ltd. - an affiliate of Fidelity International, ICICI Ventures,

IL&FS, Kotak Group, Citi Group and Merrill Lynch.

[29]

Technology:

MCX's ability to use and apply technology efficiently is a key factor in the development of its

business. The Exchange's technology framework is designed to provide high availability for all

critical components, which guarantees continuous availability of trading facilities. The robust

technology infrastructure of the Exchange, along with its with rapid customization and deployment

capabilities enables it to operate efficiently with fast order routing, immediate trade execution, trade

reporting, real-time risk management, market surveillance and market data dissemination.

The On-line trading system of the Exchange is accessible to its members through multiple

mediums of connectivity such as VSAT, Terrestrial Leased Circuits (Point to Point and Multi

Protocol Label Switching (MPLS)), Integrated Services Digital Network (ISDN) and Internet. The

Computer to Computer Link (CTCL) facility of the Exchange enables members to expand their

business set up, using either the Trading front-end software procured from Exchange empanelled

CTCL vendors or by using Exchange approved CTCL software developed in-house. MCX provides

market information to various financial information service agencies on a real-time basis. The

Exchange has interfaces with banks for settlements and collateral management.

The system and processes of the Exchange are designed to safe guard market integrity and to

enhance transparency in operations. As a part of its Business Continuity Plan (BCP), the Exchange

maintains a Disaster Recovery Site (DRS). Data is backed up from the primary site to the DRS on a

real time basis using the replication technology. With its rich experience in providing integrated

solutions to global financial markets and implementing mission critical transaction technologies,

MCX's technology service provider, FTIL, enables the Exchange to implement new products and

services quickly and efficiently.

Vision:

We envision a unified Indian commodity market that is driven by market forces and

continually provides a level playfield for all stakeholders ranging from the primary producer to the

end-consumer; corrects historical aberrations in the system; leverages technology to achieve

exceptional efficiencies and ultimately lead to a common world market. We also envision a brand

image for MCX that identifies it as the Exchange of Choice not only by direct participants in the

commodity ecosystem but also by the general public.

[30]

Mission:

MCX shall accomplish the above vision by relentlessly endeavoring to enhance awareness

and understanding of exchange-enabled trade in commodity derivatives. The Exchange will continue

to minimize the adverse effects of price volatilities; providing commodity ecosystem participants

with neutral, secure and transparent trade mechanisms; formulating quality parameters and trade

regulations in conjunction with the regulatory authority. Moreover, it will continue to enforce a zero-

tolerance policy toward unethical trade practices-attempted or real-by any participant/s; and invest in

the all-round development of the commodity ecosystem.  

COMMODITIES TRADED ON THE EXCHANGE ( MCX DIVISION):

Bullion

Gold ,Gold Guinea, Gold HNI, Gold M, Platinum, Silver, Silver HNI, Silver M

Metals

Aluminium, Copper ,Lead, Lead Mini, Mild Steel, Ingot, Billets, Nickel, Tin, Zinc, Zinc Mini

E nergy

ATF, Brent Crude Oil, Crude Oil, Electricity Monthly & Weekly, Gasoline ,Heating Oil , Imported

Thermal Coal, Natural Gas.

Oil & Oil Seeds

Crude Palm Oil, Kapasia Khalli, Refined Soya Oil, Soya Bean.

Others

Almond ,Guar Seed ,Melted Menthol Flakes, Mentha Oil ,Potato (Agra) ,Potato (Tarkeshwar), Sugar

M

Pulses --Chana

Fiber --Kapas

[31]

Weather

Carbon(CER) ,Carbon (CFI)

Cereals

Barley ,Wheat ,Maize-Feed / Industrial Grade.

Plantations --Rubber

Spices

Cardamon, Coriander ,Turmeric.

Trading @ MCX:

The Trader Work Station (TWS) is the application through which members access the trading

platform, place orders and execute trades. The TWS offers a multitude of user friendly trading

features which include commodity price ticker, market watch screen displaying best buy, best sell,

last traded price, volume for the day, open interest etc., top gainer and loser contracts, net position,

on-line backup facility etc.

Trading system:

The best five buy and sell orders for every contract available for trading are visible to the

market and orders are matched based on price time priority logic. Orders can be placed with time

conditions and/ or price conditions.

Time related Conditions:

DAY order- A Day order is valid for the day on which it is entered. If the order is not matched during

the day, the order gets cancelled automatically at the end of the trading day.

[32]

GTC -A Good Till Cancelled (GTC) order is an order that remains in the system until the expiry of

the respective contract in which it is entered or until when the same is cancelled by the member.

GTD - A Good Till Date (GTD) order is valid till the date specified by the member. After the

specified date the unexecuted orders get automatically cancelled by the system.

IOC - An Immediate or Cancel (IOC) order allows a member to execute the orders as soon as the

same is placed in the market, failing which the order will get cancelled immediately.

Price Conditions:

Limit Order – The order wherein the price is to be specified while placing the same.

Market Order – The order at the best available price at the time of placing the same.

Margins:

MCX follows a comprehensive and stringent margining system for all future contracts traded

on the Exchange platform. Actual margining and position monitoring is done on an on-line basis. For

the purpose of computing and levying the margins, MCX uses SPAN® (Standard Portfolio Analysis

of Risk) system which follows a risk-based and portfolio-based approach. The Initial Margin

requirement is based on a worst-case loss scenario of portfolio at client level to cover VaR (value at

Risk) over a one day horizon, subject to a minimum Base Margin defined by FMC for the respective

commodity. The SPAN Risk Parameter File (RPF) is generated by the Exchange periodically at pre-

defined timings and RPF files so generated are provided to the members using the FTP service and

on the Exchange website.

In addition to SPAN margins, MCX levies Additional margins and/ or Special margins whenever

deemed necessary considering the volatility and price movement in the commodities. Such margins

are also levied as per the directions of FMC

Tender Period margins and Delivery Period Margins are levied on contracts nearing expiry to ensure

non default in commodity delivery.

[33]

Trade Timings

Special Session:

Monday to Saturday: 9:45 a.m. to 9:59 a.m.

Special Session (order cancellation session) is held to cancel the pending orders prior to opening of

market.

Normal Session:

Monday through Friday: 10:00 a.m. to 11:30 p.m. (up to 11:55 p.m. on account of day light savings

typically between every November and March of the following year).

Saturdays: 10:00 a.m. to 2:00 p.m.

Agri-commodities are available for futures trading up to 5:00 p.m. whereas non agri-commodities

(bullions, metals, energy products) are available up to 11:30 pm / 11.55pm.

[34]

Fundamental Analysis:

Fundamental analysis is the study of the factors that affect supply and demand of any

particular asset class. Gathering and interpreting information pertaining to demand and supply of

commodities is important in understanding commodity price behavior. To gain a better

understanding of the demand-supply dynamics, we need to know the laws of demand and supply and

how these factors affect the final price. General economic principle says demand and supply

determine price. This is true for the commodity market too. But factors affecting demand and supply

are diverse and independent, having different origin. Therefore, prices of commodity fluctuate so

often that it becomes difficult to determine the exact price at a particular point of time. Since

commodity price, for which a future trading is done, is volatile and changes on real-time basis, it is

important for traders of futures market to know where price is likely to head sometime down the line.

Traders, speculators, hedgers all anticipate price movements and take appropriate position in the

market.

Fundamental analysis of any commodity involves knowing the following facts:

Production and consumption

Import and export

Distance between consuming centre and producing centre

Cost of transportation

Means of transportation

Usual trade practice

Cultivation period

Impact of weather and technology on crop cultivation

Value chain of the commodity and influence of stakeholders at different levels in value chain

Taxation, such as sales tax, import tax, export tax, custom duty, octroi

Import and export regulations

Inflation

[35]

Foreign currency exchange rate

Government interference &Presence of organized institutions

Law of Demand:

The key components of this economic theory are consumer behavior, and how individual

consumer responses are reflected in the market place. Understanding what factors have affected

demand in the past will help to develop expectations about demand in the future and the impact on

market price. Thus, demand is a relationship between price and quantity, with all other factors

remaining constant. Demand is represented chartically as a downward sloping curve.

Generally the relationship between price and quantity is negative. This means that the higher

is the price level the lower will be the quantity demanded and, conversely, the lower the price the

higher will be the quantity demanded. Market demand is the sum of the demands of all individuals

within the marketplace. Market demand will be affected by other variables in addition to price, such

as various value added services including handling, packaging, location, quality control, and

financing. Thus the demand for an agricultural commodity is typically derived from the demand for

finished product. Ultimately the market value for any good or service is determined by its value to

the consumer. It is important to understand that a free market economy is driven not by producers but

by consumers. Higher prices can lead to higher profits, which provide you with the incentive and the

means to expand production of those goods and services that consumers value the most.

[36]

On the other hand, when consumers are unwilling to buy what is offered at the current price,

the seller will have to lower the price ultimately resulting in lower profits. Losses reduce the

producer’s incentive to produce things that have weak demand, which will ultimately force

production cuts as farmers lose more and more money.

This is the discipline of the marketplace. Those who produce things that consumers are

willing and able to buy are rewarded. Those who produce things that consumers don’t want or can’t

buy are penalized. Farmers must produce for the markets. They cannot expect to find or create a

profitable market for whatever they choose to produce.

Law of Supply

Supply is another important component of fundamental commodity market analysis. An

understanding of the factors affecting supply in the past will help with the development of supply

expectations in the future and the impact upon market price. The law of supply can be

approached from two different contexts. The first is that it represents the sum total of production plus

carryover stocks. The other context for supply describes the behavior of producers. The total supply

is the sum of the individual quantities of product that each farmer brings to the market. Market

supply is represented by an upward sloping curve with price on the vertical axis and quantity on the

horizontal axis.

[37]

An increase in price in most instances will result in farmers wanting to increase the quantity

of a given product they will bring to the market, therefore the relationship between the price and

supply is positive. Market supply will be affected by other variables in addition to the price. Factors

that have been identified as important in determining supply behavior include; the number of firms

producing the product, technology, the price of inputs, the price of other commodities which could

be produced, and the weather. Lower prices are the market’s signal to farmers that they have

produced too much of something or that it is something consumers do not want.

How Supply And Demand Determine Prices Of Commodities:

The interaction of supply and demand determines price. An exchange of goods or services

will occur whenever buyers and sellers can agree on a price. When an exchange occurs, the agreed

upon price is called the "equilibrium price" This can be chartically illustrated as follows.

Supply and demand are said to be in balance or “equilibrium” when both buyers and sellers

are willing to exchange the quantity "Q" at the price "P". At any price below P, the quantity

demanded is greater than the quantity supplied. In this situation consumers would be anxious to

acquire the commodity, which the producer is unwilling to supply resulting in a product shortage.

Consumers would have to pay a higher price in order to get the product they want; while producers

would demand a higher price in order to bring more products on to the market. The end result is a

rise in prices to the point P, where supply and demand is once again in balance.

[38]

Conversely, if prices rise above P, there would be surplus quantity and the market would be

in surplus - too much supply relative to demand. Producers would have to lower their prices in order

to clear the market of excess supplies. Consumers would be induced by the lower prices to increase

their purchases. Prices will fall until supply and demand are again in equilibrium at point P.

When either demand or supply changes, the equilibrium price will change. For example, good

weather normally increases the supply of pulses and grains, with more products being made available

over a range of prices. With no increase in the quantity of product demanded, there will be

movement along the demand curve to a new equilibrium price in order to clear the excess supplies

off the market. Consumers will buy more but only at a lower price. Likewise a shift in demand due to

changing consumer preferences will also influence the market price. With no reduction in supply, the

effect on price results from a movement along the supply curve to a lower equilibrium price where

supply and demand is once again in balance. Changes in supply and demand can be short run or

long run in nature. Weather tends to influence market prices generally in the short run. Similarly,

other factors include changes in consumer preferences, technology, etc. More and more use of

technology results in reducing the costs of production on a per unit basis, which in turn results in

shift of the supply curve rapidly.

At the same time if total demand does not increase sufficiently to absorb the excess goods

produced at lower costs, the long run impact of technology on the market place will be to lower

prices. The rapidly shifting supply curve coupled with a slower moving demand curve has generally

contributed to lower prices for agricultural output when compared to prices for industrial products.

TECHNICAL ANALYSIS

Technical analysis involves using quasi-statistical techniques and formal statistics to identify

the trend and pattern of time series data. Usually price data is put on chart and inference is made out

based on some principles that are called indicators. Technical Analysis involves forecasting of future

financial price movements based on the study of the behaviour of historical price movements.

Technical analysis does not result in absolute predictions about the future. Instead, it helps

anticipating what is "likely" to happen to prices over time.

[39]

A wide variety of charts and tools are used to show price over time. Technical analysis is

based on patterns of historical price movement. Combining fundamental and technical analysis will

give us a better understanding of the market forces that are affecting the price movements in

financial markets.

Technical analyst uses following information for charting purpose

Open, High, Low and Closing price

Open Interest

Volume

A few indicators are listed below that a technical analyst often uses in analysis:

Trend lines

Support and Resistance

Moving Average

Divergence

Moving Average Convergence Divergence

Elliot wave pattern

Candlestick chart pattern

There are mainly three types of chart, which is popular amongst analyst.

Candlestick

Bar Chart

Line Chart

[40]

Types of Charts

Line Chart:

These are simple charts showing the closing prices of each period and connecting them as a single

line.

Bar Chart:

The bar chart is one of the most popular types of charts used in technical analysis. It shows the intra-

day movements of the market. Each bar represents one period showing the Open, High Low and

Close for the day. The vertical bar drawn connects the high and the low of the contract during the

day and thus represents the “range” of movement of the price during the day.

The Trend Line:

The trend line is the simplest of all technical tools available and is the most up- to- date indicator by

including the most recent price action and giving a clear path for the market to follow. It can be

applied to any type of chart, whether it is a line chart, bar chart or a candlestick chart.

Some basic rules on trend line applications:

a) Trend lines should touch at least two points (highs or lows) and possibly be confirmed by a third

point.

b) The breaking of a trend line is the best signal that the market has changed direction.

[41]

c) The longer the trend line stays intact and the more times the trend line is tested, it signifies the

strength of the underlying trend

The steepness of a trend line has a major significance. The trend line being too steep is generally not

a favorable sign. It can indicate that the trend is rising too fast and cannot be held at the increasing

rate. If the trend line is flat, the up trend or downtrend is generally thought to be weak with the

general uncertainty of a trend less market. The 45-degree line is the most preferred. It is generally

felt that the market is in balance with price and time rising and falling together. A trend line close to

the above 45 degree angle signifies a more stable trend where prices are moving at the desirable /

best speed.

SUPPORT AND RESISTANCE LEVELS

Support and Resistance Levels are price levels at which movement should stop and reverse

direction. The Support level acts as a floor whereas the Resistance level acts as a ceiling to future

price movements.

Support - A price level below the current market price, at which buying interest should be able to

overcome selling pressure and thus keep the price from going any lower.

Resistance - A price level above the current market price, at which selling pressure should be strong

enough to overcome buying pressure and thus keep the price from going any higher when a stock

price reaches a support/resistance level. It can either act as a reversal point: in other words, when a

stock price drops to a support level, it will go back up.

On the other hand, the levels may reverse roles once they are penetrated. For example, when the

market price falls below a support level, that former support level will then become a resistance level

when the market later trades back up to that level.

Candlestick Charts

Method of drawing stock (or commodity) charts which originated in Japan. Requires the presence of

Open, High, Low and Close price data to be drawn. There are two basic types of candles, the white

body and the black body. As with regular bar charts, a vertical line is used to indicate the periods

(normally daily) high to low.

[42]

When prices close higher than they opened a white rectangle is drawn on top of the high-low line. A

down day is drawn in black. The combination of several candles results in patterns, which give

insight into future price activity.

Patterns In Candlestick Charting

Doji:

A Doji is one of the more important candlesticks and is formed when a session’s open and close are

the same or almost the same. If the market is trading sideways, the doji is neutral. However a doji

that emerges after a large rally or sell-off has a greater chance of signaling a reversal. At such times,

a doji provides hint of tops and bottoms. A doji is not a reversal signal but only points

to a market at crossroads or in transition. Dojis that appear close to supports or resistances will more

often than not hint a correction if not reversal.

[43]

Bullish Harami:

This formation acts a warning to the Bears, on an impending change of trend. If the next day closes

higher, then this will confirm a change of trend. It is a bullish signal where the first day is a long

black candlestick and the second day is a white candlestick where the body is completely engulfed

by the black body of the first day.

Bearish Harami:

This pattern signals reversal of the uptrend. The first day is a long white candlestick The second

day2nd day is a black candlestick where the body is completely engulfed by the white body of the

first day The sudden change displayed by the second day’s small black candle indicates a change of

trend. Bulls may be satisfied with the indication of lower prices in the following days.

[44]

Popular Charting Patterns:

Rises to a peak and then declines, again,

Rises above the former peak and declines, followed by

A final rise which is more than the second peak and declines. The first and third peaks are shoulders,

and the second peak forms the head. This pattern is considered a very bearish indicator.

Double Bottom:

This pattern resembles a "W" and occurs when a stock price drops to a similar price level twice

within a few weeks or months. When the price passes the highest point in the handle, it indicates the

time to buy in a perfect double bottom; the second decline should normally go slightly lower than the

first decline. The middle point of the "W" should not go into new high ground.

Moving Averages

The market does not rise or fall in a straight line. The up moves and down moves are

interrupted by counted moves. Quite often, these counter moves are quite volatile making it difficult

for the analyst to guage the underlying trend of the market. In such situations, one way to guage the

underlying trend is to smooth the data which can be done with the help of moving averages. The

moving average system of share trading is also known as the trend following system as here the

analyst would be trading along the trend after it has been established.

The moving average is probably the simplest, and most versatile indicator in technical analysis. It

can be used with the price (high, close, etc) and can also be applied to other indicators, helping to

smooth out volatility. As the name implies, the Moving Average is the average of a given amount of

data. For example, a 9-day average of closing prices is calculated by adding the last 9 closes and

dividing by 9. The result is noted on a chart. The next day the same calculations are performed with

the new result being connected (using a solid or dotted line) to the previous days. And so forth.

Variations of the Simple Moving Average are the Weighted and Exponential moving averages.

[45]

Bollinger Bands:

Trading bands can be plotted above and below a simple moving average of a particular

asset’s prices over a continuous period of time. The standard deviation of closing prices for a period

equal to the moving average employed is used to determine the bandwidth. This causes the bands to

tighten in quiet markets and loosen in volatile markets. The bands can be used to determine

overbought and oversold levels, locate reversal areas, project targets for market moves, and

determine appropriate stop levels.

RSI - Relative Strength Index:

This indicator is often used to identify price tops and bottoms by keying on specific levels

(usually "30" and "70") on the RSI chart, which is scaled from 0-100. It can also help in detecting

support and resistance levels. It may be noted that failure swings above 70 or below 30 can warn of

coming reversals.

The formula for calculating the RSI is:

• RSI=100-(100/1-RS)

• RS= average of x day’s up closes divided by average of x day’s down closes

MACD (Moving Average Convergence / Divergence ):

The MACD is used to determine overbought or oversold conditions in the market. Written for

stocks and stock indices, MACD can be used for commodities as well. The MACD line is the

difference between the long and short exponential moving averages of the chosen item. The signal

line is an exponential moving average of the MACD line.

[46]

Elliott Wave:

Elliott wave theory goes beyond traditional charting techniques by providing an overall view

of market movement that helps explain why and where certain chart patterns develop.

The three major aspects of wave analysis are pattern, time and ratio. The basic Elliott pattern

consists of a 5 wave up trend followed by a three-wave correction. Each "leg" of a wave in turn

consists of smaller waves. Elliott waves can be used to successfully define where the market

currently is in relation to "the big picture".

[47]

TABLE 5.1:

TABLE SHOWS GOLD TRADING PRICES DURING 2006-2011

Year Open

(10 Grams

of Gold in

rupees)

High

(10 Grams

of Gold in

rupees)

Low

(10 Grams

of Gold in

rupees)

Close

(10 Grams

of Gold in

rupees)

Range=

high

Price-low

price in

rupees.

2006-07 7634 11300 7627 9430 3673

2007-08 9405 10875 8703 10845 2172

2008-09 10791 14450 10788 13646 3662

2009-10 13700 18294 14234 17700 4060

2010-11 16754 20871 16028 20728 4843

[48]

Chart 5.1

CHART SHOWS GOLD TRADING PRICES DURING 2006-2011

Interpretation:

This chart shows how much the gold prices change year by year. In 2006 10 ten grams of

gold prices opened with 7634 rupees and closed at 9430 rupees. And the year 2007-08 the gold

prices are opened at 9493 rupees and closed at 10845, and the next year 2008-09 the gold prices are

opened at 11743 and closed at 13646 rupees. In 2009-10 the gold prices are opened at 14403 and

closed at 16686 rupees. In 2010-11 the gold prices are opened at 16376 rupees and closed at 20728

rupees.

[49]

TABLE 5.2:

TABLE SHOWS GOLD TRADING PRICES DURING 2006-2007

Open High Low Close Range=high

Price-low

price in

rupees

7634 8180 7627 8166 553

8139 8234 7808 8112 426

8105 8648 7841 8382 807

8410 10099 8350 9808 1749

9906 11300 9906 10019 1394

9959 9974 9050 9353 924

9344 10322 9320 9714 1002

9725 10022 9328 9554 694

9568 9710 8673 8859 1037

8860 9332 8320 9223 1012

9244 9625 9240 9611 385

9610 9660 9156 9430 504

[50]

Chart 5.2:-

CHART SHOWS GOLD TRADING PRICES DURING 2006-2007

Interpretation:

This chart shows the Gold prices during 2006-2007, It is better for investor to

buy and sell gold whose best prices are RS.8703.00 and Rs.10950.00, so if an investor

who follows this can get Margin is Rs.2247.00

[51]

TABLE 5.3:

TABLE SHOWS GOLD TRADING PRICES DURING 2007-2008:

Open High Low Close

Range=high

Price-low

price in

rupees

9405 9490 8974 9423 516

9446 9898 9325 9628 573

9648 9703 9196 9339 507

9261 9902 9230 9578 672

9520 9663 8976 9050 687

9052 9200 8764 8831 436

8819 9072 8703 8846 369

8826 8960 8774 8935 156

8934 9544 8831 9530 713

9450 10390 9200 10390 1190

10300 10950 10230 10447 720

10477 10875 10210 10845 665

[52]

Chart 5.3:

CHART SHOWS GOLD TRADING PRICES DURING 2007-2008:

Interpretation:

This chart shows the Gold prices during 2007-2008, It can also see that

chart Gold prices opened with Rs.9405, and closed at Rs.10845. It is better for

investor to buy and sell gold whose best prices are RS.8703 and Rs.10950, so if an

investor who follows this can get Margin is Rs.2247.

[53]

TABLE 5.4:

TABLE SHOWS GOLD TRADING PRICES DURING 2008-2009

[54]

Open High Low Close

Range=

high

Price-low

price in

rupees

10791 11975 10788 11743 1187

11945 12549 11415 12438 1134

12545 13506 11885 11929 1621

11900 12313 11395 11424 918

11403 13032 11205 12206 1827

12195 12996 12012 12879 884

12880 13764 12284 12618 1480

12610 12810 11661 12203 1149

12201 13792 11572 13611 2220

13680 14450 11401 11962 3049

11962 13288 11630 13172 1658

13105 13825 11981 13646 1844

Chart 5.4

CHART SHOWS GOLD TRADING PRICES DURING 2008-2009

Interpretation:

This chart shows the Gold prices during 2008-2009 ,It can also see that chart

Gold prices opened withRs.10791, and closed at Rs.13346. It is better for investor to

buy and sell gold whose best prices are Rs.10788 and Rs.14450, so if an investor who

follows this can get Margin is Rs.3662.00.

[55]

TABLE 5.5:

TABLE SHOWS GOLD TRADING PRICES DURING 2009-2010

Open High Low Close

Range=

high

Price-low

price in

rupees

13700 14427 12767 14403 1660

14350 16040 13915 15504 2125

15525 15968 14640 15132 1328

15115 15244 14381 14500 863

14500 15040 14287 14909 753

14527 14953 14234 14505 719

14482 15211 14408 14818 803

14770 15160 14691 15136 469

15118 16005 15077 15668 928

15672 16066 15514 15957 552

15985 18047 15985 17614 2062

17668 18294 16447 16686 1847

[56]

Chart5.5:

CHART SHOWS GOLD TRADING PRICES DURING 2009-2010

Interpretation:

This chart shows the Gold prices during 2009-2010, It can also see that

chart Gold prices opened with Rs.13700, and closed at Rs.16686. It is better for

investor to buy and sell gold whose best prices are RS.12767 and Rs.18294, so if an

investor who follows this can get Margin is Rs.5527.

[57]

TABLE 5.6:

TABLE SHOWS GOLD TRADING PRICES DURING 2010-2011

Open High Low Close

Range=

high

Price-low

price in

rupees

16754 17180 16287 16376 893

16329 16959 16028 16866 931

16892 17151 16295 16436 856

16428 17140 16409 17125 731

17139 18648 17102 18385 1546

18392 19332 18151 19231 1181

19114 19142 18032 18090 1110

18095 18852 17995 18996 857

19006 19254 18421 19339 833

19324 20105 19221 20092 884

20112 20721 20018 20648 703

20636 20871 20574 20728 297

[58]

Chart 5.6

CHART SHOWS GOLD TRADING PRICES DURING 2010-2011

Interpretation:

This year opened with Rs.16754 and closed on 31 December with Rs.20728. It is

better for investor to buy and sell gold whose best prices are RS.16028 and Rs.20871,

so if an investor who follows this can get Margin is Rs.4843.

[59]

FINDINGS

1. It is found that Commodities prices are less volatile when compared to stock market.

2. The price movement of the gold is depended on the movement of dollar. Gold and dollar

have inverse relation.

3. Today gold prices float freely in accordance with supply and demand responding quickly to

political and economical events.

4. It is found that many of the individual have sought to posses gold as insurance against the

day-to-day uncertainties of paper money.

5. It is found that investor’s need less money to participate in this market.

6. It is found that COMEX traded volume exceeds 40000 contracts daily or 120 tons. This is

about 17 times as much god as is produced worldwide on typical a day.

[60]

SUGGESTIONS

1. The growth of the commodity market is at a pace and there is possibility of expansion if

future guidelines are issued such that issued details reach the general public.

2. It is suggested to bring awareness among the public about the gold features.

3. The Optimus Commodity Futures have lot of growth potential. So it is suggested that the

company need to have many more strategies to gain public interest.

4. Us dollar rate has great influence on commodities like gold, silver, crude oil.

5. It is suggested that government of Indian has to bring liberal policies regarding this

commodity market.

6. The information system in India is not effective. So it is suggested that the commodity market

has to improve its information system.

[61]

BIBILOGRAPHY

The study material collected from the following sources.

BOOKS

Indian Financial Market (Tata Mac-Graw hill).

Commodity Trading Advisors: Risk, Performance Analysis, and Selection

 edited by Greg N. Gregoriou, Vassilios Karavas, François-Serge Lhabitant, Fabrice Douglas Rouah

Commodity Markets  By Chatnani (Tata Mac-Graw hill).

WEB SITES

www.gold.org

www. Financialexpress .com

www.google.com

www.wikipedia.com

www.investopedia.com

www.optimus.com

www.nymex.com

www.indexmundi.com

www.bloomberg.com

[62]