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

30,747 views
30,246 views

Published on

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

Published in: Business, Economy & Finance
1 Comment
22 Likes
Statistics
Notes
  • Hi sir plz call me 9923931111
       Reply 
    Are you sure you want to  Yes  No
    Your message goes here
No Downloads
Views
Total views
30,747
On SlideShare
0
From Embeds
0
Number of Embeds
16
Actions
Shares
0
Downloads
2,020
Comments
1
Likes
22
Embeds 0
No embeds

No notes for slide

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

  1. 1. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLDS.NO Table of Contents Page No1 Executive Summary 1-4 Company Profile2 • History 5-14 • Overview • About Karvy Group • Stock Broking Services • About Karvy Commodities Broking Limited • KARVY Advantage • Organization Chart Introduction to commodity market3 15-25 Research Methodology4 26-295 Indian Commodity Futures Market 30-46 • Introduction • Commodity trading contracts • Future market mechanisms • Participants in futures market & trading procedure • Limitations of commodity future market Gold Commodity Future Market Introduction6 • Gold in Indian Scenario 47-60 • World Markets • Gold an Independent Asset BABASAB PATIL PROJECT REPORT OF FINANCE
  2. 2. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD • Turning to demand • What makes Gold Special? • Fixing of spot gold prices • Sources Of Gold For The Goldsmiths Investor Awareness And Their Perception7 61-65 • Investment • Aware • Investment in commodity future • Future investment and services expectation8 Impact of Spot Gold Market on Future Gold Market 66-699 Factors Affecting Future Gold Market 70-7810 FINDINGS 79-8011 SUGGESTIONS 8112 CONCLUSION 8213 BIBLIOGRAPHY 83Executive Summary BABASAB PATIL PROJECT REPORT OF FINANCE
  3. 3. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD Investing in various types of assets is an interesting activity thatattracts people from all walks of life. Investors who are having extra cashcould invest it in securities like shares or any other assets like gold,which comes under commodity futures market. Commodity Futures arecontracts to buy specific quantity of a particular commodity at a futuredate. It is similar to the index futures and stock futures but theunderlying happens to be commodities instead of stocks. Now days, the commodity market is in growth stage and the KarvyFinapolis Belgaum; working as a broking firm wants to expand and forextensive reach thinking of establishing branches in various cities ofKarnataka.I have taken the commodity futures, to study and analyze, as it is theemerging trend in the market, at Karvy Finapolis Belgaum, I havetaken Gold as the commodity to study the Impact of present gold priceon future gold market and its trading mechanism.Title: “Study of Commodity Market with Special Reference toGold.” at KARVY Finapolis BelgaumObjectives: • 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. BABASAB PATIL PROJECT REPORT OF FINANCE
  4. 4. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD • To study the factors such as economic factors of US, world political and other factors affect on future market.Research methodology:  SAMPLE SIZE: 100 random sample size  SAMPLE TYPE: Simple random sampling  SAMPLE AREA: Belgaum city  TOOL USED FOR ANALYSES: 1. Graphical Representation of Analysis: Pie charts Line Chart 2. SPSS 3. Correlation  SOURCES OF DATA COLLECTION: Primary Data- • Questionnaire • Observation and personal discussion with gold traders. Secondary data- • Information collected from different websites likes Gold World, MCX etc. • From various text books, journals, magazines, news papers and booklets from company.  LIMITATION OF THE STUDY:  Spot prices are varying from shop to shop. BABASAB PATIL PROJECT REPORT OF FINANCE
  5. 5. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD  Commission has not included spot prices of the commodity.  Study of awareness and perception of the investor is only based on sample size.  The study of awareness is limited to Belgaum city.Findings:• There is positive correlation between both market traders can easily predict the future prices of the commodities and hedge their positions.• Most of the respondents are interested in investing in equity (i.e. 49%) when compared to the other investment alternatives because they feel investing in equity will provide more returns to them.• 82% of Investors are aware about commodity future market.• 67% of Investors have not invested as they have a perception that it is risky and they even do not have much knowledge about trading mechanism.• For gold price fluctuation main reasons are • Dollar depreciation / appreciation • World distress • Increase in money supply • Inflation BABASAB PATIL PROJECT REPORT OF FINANCE
  6. 6. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLDSuggestions:  Both the markets are positively correlated the traders have knowledge about the commodity demand and supply and their price fluctuations. So Karvy can approach these traders and they can easily convince them so these people are the targeted customers for Karvy.  More Awareness program has to be conducted by Karvy consultants so that already aware investor takes the challenge to invest in this commodity future market. Because since this was new to the market and also risky but gives good return. so it can be done through by giving advertisements in local channels, News papers, by sending E-mail to present customers etc  From survey it is found that most of the potential customers are concerned about the genuine information and moderate brokerage so Karvy can look upon this. If it can give good information and charge moderate brokerage it will help to attract more and more customers.ConclusionCapital market is already matured and reached at high level, everyinvestor interested to invest but not in commodity Future Market due tolack of awareness. As per Data analysis most of the investors do not havemuch idea of commodity market in Belgaum they are required to begiven awareness training and knowledge with the help of workshops andseminars, as investors are willing to know more about commoditymarket. There exists a high degree of positive correlation between SpotCommodity Market and Commodity Future Market. If an amount ofsmall change in the spot gold market prices has the direct impact on thefuture prices of gold in commodity market. BABASAB PATIL PROJECT REPORT OF FINANCE
  7. 7. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLDCOMPAN PROFILE The birth of Karvy was on a modest scale in 1981. It began withthe vision and enterprise of a small group of practicing CharteredAccountants who founded the flagship company …Karvy ConsultantsLimited. We started with consulting and financial accountingautomation, and carved inroads into the field of registry and shareaccounting by 1985. Since then, we have utilized our experience andsuperlative expertise to go from strength to strength…to better ourservices, to provide new ones, to innovate, diversify and in the process,evolved Karvy as one of India’s premier integrated financial serviceenterprise. Thus over the last 20 years Karvy has traveled the success route,towards building a reputation as an integrated financial servicesprovider, offering a wide spectrum of services. And we have made thisjourney by taking the route of quality service, path breaking innovationsin service, versatility in service and finally…totality in service.Our highly qualified manpower, cutting-edge technology, comprehensiveinfrastructure and total customer-focus has secured for us the positionof an emerging financial services giant enjoying the confidence andsupport of an enviable clientele across diverse fields in the financialworld. Our values and vision of attaining total competence in ourservicing has served as the building block for creating a great financialenterprise, which stands solid on our fortresses of financial strength -our various companies. BABASAB PATIL PROJECT REPORT OF FINANCE
  8. 8. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD With the experience of years of holistic financial servicing behindus and years of complete expertise in the industry to look forward to, wehave now emerged as a premier integrated financial services provider. And today, we can look with pride at the fruits of our mastery andexperience – comprehensive financial services that are competentlysegregated to service and manage a diverse range of customerrequirements.Overview:KARVY, is a premier integrated financial services provider, and rankedamong the top five in the country in all its business segments, servicesover 16 million individual investors in various capacities, and providesinvestor services to over 300 corporate, comprising the who is who ofCorporate India. KARVY covers the entire spectrum of financial servicessuch as Stock broking, Depository Participants, Distribution of financialproducts - mutual funds, bonds, fixed deposit, equities, InsuranceBroking, Commodities Broking, Personal Finance Advisory Services,Merchant Banking & Corporate Finance, placement of equity, IPO,among others. Karvy has a professional management team and ranksamong the best in technology, operations and research of variousindustrial segments.Value and Vision of Karvy Stock Broking Ltd:“Our values and vision of attaining total competence in our servicing hasserved as the building block for creating a great financial enterprise,which stands solid on our fortress of financial strength – our variouscompanies”. BABASAB PATIL PROJECT REPORT OF FINANCE
  9. 9. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD About KARVY Group Karvy has traveled the success route, towards building areputation as an integrated financial services provider, offering a widespectrum of services for over 20 years. Karvy, a name long committed to service at its best. A fameacquired through the range of corporate and retail services includingmutual funds, fixed income, equity investments, insurance ……… toname a few. Our values and vision of attaining total competence in ourservicing has served as a building block for creating a great financialenterprise. The birth of Karvy was on a modest scale in the year 1982. Itbegan with the vision and enterprise of a small group of practicingChartered Accountants based in Hyderabad, who founded Karvy. Westarted with consulting and financial accounting automation, and thencarved inroads into the field of Registry and Share Transfers. Since then, we have utilized our quality experience and superlativeexpertise to go from strength to strength to provide better and newservices to the investors. And today, we can look with pride at the fruitsof our experience into comprehensive financial services provider in theCountry. BABASAB PATIL PROJECT REPORT OF FINANCE
  10. 10. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLDKARVY 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 LimitedStock Broking Services: It is an undisputed fact that the stock market is unpredictable andyet enjoys a high success rate as a wealth management and wealthaccumulation option. The difference between unpredictability and asafety anchor in the market is provided by in-depth knowledge of marketfunctioning and changing trends, planning with foresight and choosingone & rescue’s options with care. This is what we provide in our StockBroking services. BABASAB PATIL PROJECT REPORT OF FINANCE
  11. 11. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD We offer services that are beyond just a medium for buying andselling stocks and shares. Instead we provide services, which are multidimensional and multi-focused in their scope. There are severaladvantages in utilizing our Stock Broking services, which are the reasonswhy 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. Moreimportantly, we make trading safe to the maximum possible extent, byaccounting for several risk factors and planning accordingly. We areassisted in this task by our in-depth research, constant feedback andsound advisory facilities. Our highly skilled research team, comprising oftechnical analysts as well as fundamental specialists, secure result-oriented information on market trends, market analysis and marketpredictions. This crucial information is given as a constant feedback toour 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 marketforecast for the rest of the day is given and The Post-session Report, thefinal report for the day, where the market and the report itself isreviewed. To add to this repository of information, we publish a monthlymagazine. The Finapolis, which analyzes the latest stock market trendsand takes a close look at the various investment options, and productsavailable in the market, while a weekly report, called Karvy BazaarBaatein keeps you more informed on the immediate trends in the stockmarket. In addition, our specific industry reports give comprehensiveinformation on various industries. Besides this, we also offer specialportfolio analysis packages that provide daily technical advice on scriptsfor successful portfolio management and provide customized advisory BABASAB PATIL PROJECT REPORT OF FINANCE
  12. 12. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLDservices to help you make the right financial moves that are specificallysuited to your portfolio. Our Stock Broking services are widely networked across India,with the number of our trading terminals providing retail stock brokingfacilities. Our services have increasingly offered customer orientedconvenience, which we provide to a spectrum of investors, high-net worthor otherwise, with equal dedication and competence.About Karvy Commodities Broking Limited: Commodities market, contrary to the beliefs of many people, hasbeen in existence in India through the ages. However the recent attemptby the Government to permit Multi-commodity National levels exchangeshas indeed given it, a shot in the arm. As a result two exchanges MultiCommodity Exchange (MCX) and National Commodity and derivativesExchange (NCDEX) have come into being. These exchanges, by virtue oftheir high profile promoters and stakeholders, bundle in themselves,online trading facilities, robust surveillance measures and a hassle-freesettlement system. The futures contracts available on a wide spectrum ofcommodities like Gold, Silver, Cotton, Steel, Soya oil, Soya beans, Wheat,Sugar, Channa etc., provide excellent opportunities for hedging the risksof the farmers, importers, exporters, traders and large scale consumers.They also make open an avenue for quality investments in preciousmetals. The commodities market, as the movements of the stock marketor debt market do not affect it provides tremendous opportunities forbetter diversification of risk. Realizing this fact, even mutual funds arecontemplating of entering into this market. BABASAB PATIL PROJECT REPORT OF FINANCE
  13. 13. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD Karvy Commodities Broking Limited is another venture of theprestigious Karvy group. With our well established presence in themultifarious facets of the modern Financial services industry from stockbroking to registry services, it is indeed a pleasure for us to make forayinto the commodities derivatives market which opens yet another doorfor us to deliver our service to our beloved customers and the investorpublic at large.With the high quality infrastructure already in place and a committedGovernment providing continuous impetus, it is the responsibility of us,the intermediaries to deliver these benefits at the doorsteps of ouresteemed customers. With our expertise in financial services, existenceacross the lengths and breadths of the country and an enviabletechnological edge, we are all set to bring to you, the pleasure ofinvesting in this burgeoning market, which can touch upon the lives of avast majority of the population from the farmer to the corporate alike. Weare confident that the commodity futures can be a good value addition toyour portfolio. The company provides investment, advisory and brokerage servicesin Indian Commodities Markets. And most importantly, we offer a widereach through our branch network of over 225 branches located across180 cities. BABASAB PATIL PROJECT REPORT OF FINANCE
  14. 14. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLDKARVY Advantage:Trade from anywhere in India Karvy, with its network of branches acrossthe length and breadth of the country, is always within your reach, nomatter where you are. This gives you the facility to trade from anywherein India.Reliable researchKarvy has a dedicated team of research analysts who work round theclock to provide the best research newsletters and advices. We reachyour desk daily, weekly and monthly.Personalized ServicesKarvy, with its wide array of personalized services from registry to stockbroking takes the pleasure of adding one more service, commoditiesbroking with the same personal touchState of InfrastructureThe strong IT backbone of Karvy helps us to provide customized directservices through our back office system, nation-wide connectivity andwebsite.Round the clock operations in commodities trading BABASAB PATIL PROJECT REPORT OF FINANCE
  15. 15. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLDIndian commodities market, unlike stock market keeps awake till 11 inthe night and Karvy is all poised to offer round the clock servicesthrough its dedicated team of professionals. The account opening forms are available at our branch offices andwith our business associates. You are requested to kindly contact abranch nearby your area and complete the account opening formalitiesfor commodities trading at the branches. Also you can take a print out and fill out a simple account openingform from our website and complete the necessary documentation as perthe checklist enclosed in the form. The form after duly filled up may bedeposited at the nearest Karvy Branch or Associate along with acheque/DD favoring “Karvy Commodities Broking Private Limited”payable at Hyderabad towards initial margin. Please remember theMember-Client agreement has to be executed on a non-judicial stamppaper, 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 theexchange (usually between 5-10% of the contract value).The cheque/DDshould 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 tomarket margin for taking care of the adverse price movements, if any.Achievements • Among the top 5 stock brokers in India (4% of NSE volumes) • Indias No. 1 Registrar & Securities Transfer Agents BABASAB PATIL PROJECT REPORT OF FINANCE
  16. 16. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD • 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 DirectorVice-President Vice-President Vice-President Vice-President BABASAB PATIL PROJECT REPORT OF FINANCE
  17. 17. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLDKarvy Karvy Karvy Karvy Securities Ltd. Stock Broking Ltd Consultants Ltd. Investors Services Ltd.Deputy Deputy Deputy DeputyGeneral General General GeneralManager Manager Manager Manager Senior Manager Senior Manager Senior Manager SenoirManager Branch Manager Number of Team Leaders N number of ExecutivesIntroduction to commodity market Ever since the drawn of civilization, commodity trading has becomean integral part of mankind. The first and foremost reason is thatcommodity represents the fundamental elements of lifestyle of humanbeings. In the early days, people used to exchange goods for goods,which was called as ‘Barter System’. With the advancement ofcivilization, trading system has gone through various changes and hasnow entered into an era of Future trading besides existence physical BABASAB PATIL PROJECT REPORT OF FINANCE
  18. 18. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLDtrading across the world. The history of Commodity Future trading canbe traced back to 1688 with the introduction of Future trading in rice inJapan. This was followed by an increased participation in commodityderivatives, especially in Futures, in the industrialized countries likeAmerica and Britain. All the countries opened the avenue forintroduction of Future trading in commodities in 19th century. Majorcommodity Future trading platforms opened in the world are ChicagoBoard of Trade (NYBOT) and New York Mercantile Exchange (NYMEX). A Commodity derivative is a contract which derives its value froman underlying commodity. The main purpose of Future market is toprovide a mechanism for successfully managing the price risk associatedwith commodities. Future markets provide a platform for buyers andsellers to trade in a huge number of diverse commodities such asagricultural products, metals and energy. These markets are not onlymeant for hedgers, speculators and arbitrages, but also for retailinvestors who want to trade in booming commodity market.Indian scenario The commodity derivatives markets in India are as old as those ofthe US. The origin of commodity derivatives markets in India can betraced back to 1875, when Bombay Cotton Trade Association Ltd., wasset up to start trading in cotton Futures. Subsequent to this, many otherassociations have started Future trading in commodities at differentplaces. For example, the Futures trading in oilseeds started in 1900 atBombay, raw jute and jute products in 1912 in Calcutta, wheat in Hapur BABASAB PATIL PROJECT REPORT OF FINANCE
  19. 19. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLDin 1913, bullion in Bombay in 1920. However, in 1939, the Optiontrading in cotton was banned by the government of Bombay to restrictthe speculative activity in the cotton market. in subsequent years,forward trading in various commodities like oilseeds, food grains,vegetable oil, sugar cloth were also prohibited. India’s commodity exchanges have come a long way since theiropening up in the early twenty first century. In India, three national levelexchanges namely Multi Commodity Exchange of India (MCEX), NationalCommodity and Derivatives Exchange (NCDEX) and National MultiCommodity Exchanges are operating to cater to the needs of Indianinvestors. Apart from these national level exchanges, nearly 20 regionalexchanges are in operation, to deal with specified commodities in thatregion.Present Scenario Over the last 20 years, the prices of commodities have generallybeen bearish. Even as recently as 2002-03, the outlook on the recoveryin the global economy and world trade was generally subdued due todepressed equity markets, weakening US dollar and geopoliticalconcerns. Commodity market across the world was impacted by thesedevelopments. However, of late, the scenario has completely changed as BABASAB PATIL PROJECT REPORT OF FINANCE
  20. 20. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLDthe global economy recovered from its slump aided by the boom in theUS markets and increased demand from developing economies like Indiaand China. In the global investment market, the newly hailed, attractive,asset class is commodities. So, investors are being attracted to this newbooming 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 andsecurities”. Futures’ trading is organized in such goods or commoditiesas are permitted by the Central Government. At present, all goods andproducts of agricultural (including plantation), mineral and fossil originare allowed for futures trading under the auspices of the commodityexchanges recognized under the FCRA. A commodity derivative is a contract which derives its value froman underlying commodity. The main purpose of future market is toprovide a mechanism for successfully managing the price risksassociated with commodities. Future market provides a platform forbuyer and seller to trade in a huge number of diverse commodities suchas agriculture products, metals and energy. These markets are not only BABASAB PATIL PROJECT REPORT OF FINANCE
  21. 21. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLDmeant for hedgers, speculators and arbitrages, but also for retailinvestors who want to trade in booming commodity market. Commodity derivatives market trade contracts for which theunderlying asset is commodity. It can be an agricultural commodity likewheat, soybeans, rapeseed, cotton, etc or precious metals like gold,silver, etc.Difference between Commodity and Financial derivatives The basic concept of a derivative contract remains the samewhether the underlying happens to be a commodity or a financial asset.However there are some features which are very peculiar to commodityderivative markets. In the case of financial derivatives, most of thesecontracts 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 incommodity derivatives creates the need for warehousing. Similarly, theconcept of varying quality of asset does not really exist as far as financialunderlings’ are concerned. However in the case of commodities, thequality 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, inaddition to being a major consumer of bullion and energy products.Agriculture contributes about 22% to the GDP of the Indian economy. Itemployees around 57% of the labor force on a total of 163 million BABASAB PATIL PROJECT REPORT OF FINANCE
  22. 22. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLDhectares of land. Agriculture sector is an important factor in achieving aGDP growth of 8-10%. All this indicates that India can be promoted as amajor center for trading of commodity derivatives. It is unfortunate that the policies of FMC during the most of 1950sto 1980s suppressed the very markets it was supposed to encourage andnurture to grow with times. It was a mistake other emerging economiesof the world would want to avoid. However, it is not in India alone thatderivatives were suspected of creating too much speculation that wouldbe to the detriment of the healthy growth of the markets and the farmers.Such suspicions might normally arise due to a misunderstanding of thecharacteristics and role of derivative product. It is important to understand why commodity derivatives arerequired and the role they can play in risk management. It is commonknowledge that prices of commodities, metals, shares and currenciesfluctuate over time. The possibility of adverse price changes in futurecreates risk for businesses. Derivatives are used to reduce or eliminateprice risk arising from unforeseen price changes. A derivative is afinancial contract whose price depends on, or is derived from, the price ofanother asset. BABASAB PATIL PROJECT REPORT OF FINANCE
  23. 23. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLDSpread trade in commoditiesIn Future trading, a spread trade refers to the act of buying onecommodity or Futures contract and selling a related one, in an attemptto profit from the price difference between the two. Basically, it is an actof entering long (buying) as well as short (selling) position simultaneouslyin an attempt to make profit.There can be three types of spread one can enter in CommodityDerivative Market.1. A spread can be established between different months of the samecommodity (called an inter delivery spread).2. Between the same related commodities, usually for the samemonth (inter commodity spread).3. Between the same or related commodities traded on two differentexchanges (inter market spread).Spread trading can be done at the market price or at desired differencelevel between the commodities. For example, Buy one contract ofFebruary of December Gold and at the same time sell one contract ofFebruary Gold when the February Gold contract is 100 points higherthan the December contract.In this case first and foremost thing that need to be observed is theliquidity present in both the contracts. The benefits that can be arrivedfrom entering in spread trading is the lower margin requirement, becausethese strategies normally carry less risk. Spreads are usually less volatileand prices move less quickly, which can be good for beginners who maybe intimated by the speed and price fluctuations of a single outrighttrade in Future Market. BABASAB PATIL PROJECT REPORT OF FINANCE
  24. 24. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLDMyths on commodities tradingIn recent past, we notice that the regulators banned trading in fewcommodities, thereby creating misconception in the minds of tradersabout the commodities market. Hence, the following is an attempt todemystify 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 arenatural and therefore cannot be artificially manipulated. The demandand supply also depends upon economic factors. It is easier tounderstand commodities as in our daily life we are familiar withcommodities, we know the ruling prices of these commodities in themarket, while in stocks, we are not fully aware about internal affairs ofthe company.2) Only farmers are interested In trading and also only theyshould be trading:It is in correct to say that farmers would use this market. Actually, thefarmers only use the commodity future prices as a tool to decide whichcrop to grow and to what extent and some large formers would use thismarket to hedge their risk through an intermediary. These intermediarieswould normally be the same commission agents who help formers to selltheir crop in cash market. Apart from farmer, others related tocommodity trading either directly or indirectly can participate in tradingto hedge their price risk. BABASAB PATIL PROJECT REPORT OF FINANCE
  25. 25. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD3) Commodity markets are operating to serve the needs ofspeculators and not of the real investors: Commodities markets existence serves for price discovery and pricerisk management. Through this platform everybody related tocommodities can find better price discovery mechanism. Producers andconsumers of the commodity can minimize their price risk by way ofhedging. 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 consumersto meet their long term requirement. These price signals are not availableto users unless there is a commodity futures exchange and in itsabsence, the markets have price fluctuations. Price stabilization comesfrom the price discovery process when market participants reactpositively 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 itneeds large number of members. Success of any commodity exchangedepends upon good and well-spread brokerage houses and therepenetration levels. Once the commodity futures trading is wellestablished, then the services will be broadened to many intermediarieswith separate trading rights and have few members with separate tradingrights and have few members with clearing rights like banks.5) Commodities are only cash settled contracts: Unlike equity market, commodities traded through exchanges aredeliverable on expiry. To facilitate smooth delivery process, the ForwardMarkets Commission (FMC) has categorized the delivery mechanism intothree dimensions viz., compulsory delivery contracts, sellers’ optioncontracts. On expiry of the contracts, the open positions will be either BABASAB PATIL PROJECT REPORT OF FINANCE
  26. 26. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLDsettled by delivery or cash depending upon sellers and buyers. Since thedelivery process takes long time to materialize and one has to keep trackof all the delivery process transactions, nobody wants to take burden ofdelivery handling process.Note:Compulsory delivery option- it is an option where on the expiry ofcontract of a particular commodity, all the open outstanding positionsare closed out by way of delivery. Heavy penalties are levied in case ofdefault in delivery.Seller option – it is an option where the sellers has right to deliver theparticular commodity on the expiry of the contract. In this option sellerhas to give his intention 5 working days prior to the expiry of thecontract. The client who has not delivery intention and having openposition at the expiry of the contract has to bear a stipulated penalty.Both Option/Intention Matching – in both the option contract thedelivery happens only case of where the intention from buyer as well asseller received for a prescribed commodity to the extent of matchedquantity. These contracts are generally cash selected and there is nopenalty for open position.6) The quality of produce stored in godown is guaranteed bydepository/warehouse:Quality of produce is stored in exchange designated warehouse is notguaranteed by anyone until the standards in warehousing managementimprove to ensure preservation of the quality of goods stored. If thequality is not assured no benefit accrues to the user. Therefore, theexchange should provide a system, whereby the seller must ensurequality certification before tendering delivery and the buyer must haveoption to recheck the at the time of collecting delivery and in case of anydiscrepancies compare to the contract specifications, they should have BABASAB PATIL PROJECT REPORT OF FINANCE
  27. 27. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLDan option to reject it. Worldwide no demat delivery is operational incommodity.7) Commodity future markets are more risky and so it is notadvisable to trade in commodities:While scrip price can go down even by 30-40 percent in a single tradingsession, it cannot happen in commodity futures price is based on theintrinsic value of the commodity. For instance, a scrip future can godown from Rs.4000 to Rs.2800 in a trading session, but Gold Feb 2004contract would normally not come down from Rs.10300 to Rs.8400 in asingle trading session, because the inherent value of the gold would notfall so drastically. Therefore it would volatile than stocks.What can commodity market offer?If you are an investor, commodities futures represent a good form ofinvestment because of the following reasons..• High Leverage – The margins in the commodity futures marketare less than the F&O section of the equity market.• Less Manipulations - Commodities markets, as they are governedby international price movements are less prone to rigging or pricemanipulations.• Diversification – The returns from commodities market are freefrom the direct influence of the equity and debt market, which meansthat they are capable of being used as effective hedging instrumentsproviding 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 theprices of import or export products can directly affect your bottom-line asthe price at which you import/export is fixed before-hand. Commodity BABASAB PATIL PROJECT REPORT OF FINANCE
  28. 28. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLDfutures help you to procure or sell the commodities at a price decidedmonths before the actual transaction, thereby ironing out any change inprices 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 isevery chance that the price of your produce may come down drasticallyat the time of harvest. By taking positions in commodity futures you caneffectively lock-in the price at which you wish to sell your produce• Assured demand – Any glut in the market can make you waitunendingly for a buyer. Selling commodity futures contract can give youassured demand at the time of harvest. If you are a large scale consumerof a product, here is how this market can help you.• Control your cost – If you are an industrialist, the raw materialcost dictates the final price of your output. Any sudden rise in the priceof raw materials can compel you to pass on the hike to your customersand make your products unattractive in the market. By buyingcommodity futures, you can fix the price of your raw material.• Ensure continuous supply – Any shortfall in the supply of rawmaterials can stall your production and make you default on your saleobligations. You can avoid this risk by buying a commodity futurescontract by which you are assured of supply of a fixed quantity ofmaterials at a pre-decided price at the appointed time. BABASAB PATIL PROJECT REPORT OF FINANCE
  29. 29. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD Research MethodologyTOPIC: “ Study of Commodity Market with Special Reference toGold.” at KARVY Finapolis Belgaum for fulfillment of requirement ofMBA IVth semester in Institute of Management Education and research.It was an opportunity to learn the practical aspects of the firm.OBJECTIVES: • To study the mechanism of commodity market. • To study the spot gold market. • To study whether the goldsmiths of Belgaum city aware of commodity market and their perception. • To analyses the impact of spot gold market on future gold market. • To study the factors such as economic factors of US, world political and other factors affect on future market. BABASAB PATIL PROJECT REPORT OF FINANCE
  30. 30. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLDSAMPLE SIZE: The sample size is consisting of goldsmiths and gold tradersof Belgaum city. 100 random sample sizes have taken to identify theawareness level of gold commodity market in Belgaum city and to knowthe spot gold market.SAMPLE TYPE: Simple random sampling is adopted to select respondent.SAMPLE AREA: Belgaum CityDURATION OF PROJECT: 1st Phase - December to January 2nd Phase - January to April (weekly two days)TOOL USED FOR ANALYSES: 1. Graphical Representation of Analysis: a. Pie charts b. Line Chart 2. SPSS 3. Correlation coefficient: It measures the intensity or the magnitude of linear relationship between two variables. BABASAB PATIL PROJECT REPORT OF FINANCE
  31. 31. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD N∑XY-(∑X) (∑Y)Correlation(r) = [N∑X2 –(∑X)2]1/2[N∑Y2 –(∑Y)2]1/2Probability Error: It is an old measure of testing the reliability of anobserved value of correlation coefficient in so far as it depends upon thecondition of the random sampling.Probable Error = 0.6745* (1-r2) √nRules: If, PE *6 > r then correlation is not significant. If, PE < r then correlation is significant. In other situation, nothing can be concluding with certainty.DATA COLLECTION APPROACH: Primary data is important data for successful research. It hascollected through questionnaire and personal discussion with brokersand gold traders. And also secondary data which act like key forsuccessful research is collected from MCX, Gold World website andarticles in newspapers such as Business Line, Economic Standards. Spotprices were collected from business line news paper and confirm it fromgold smith and future prices were collected from MCX. BABASAB PATIL PROJECT REPORT OF FINANCE
  32. 32. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLDSOURCES OF DATA COLLECTION:Primary and secondary data are collected from following sources…Primary Data- • Questionnaire • Observation and personal discussion with gold traders.Secondary data- • Information collected from different websites likes Gold World, MCX etc. • From various text books, journals, magazines, news papers and booklets from company.LIMITATION OF THE STUDY: • Spot prices are varying from shop to shop. • Commission has not included spot prices of the commodity. • Study of awareness and perception of the investor is only based on sample size. • The study of awareness is limited to Belgaum city. BABASAB PATIL PROJECT REPORT OF FINANCE
  33. 33. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLDINDIAN COMMODITY FUTURES MARKET India has a long history of commodity futures market, extendingover 125 years. Still, such trading was interrupted suddenly since themid seventies in the fond hope of ushering in an elusive socialisticpattern of society. As the country embarked on economic liberalizationpolicies and signed the GATT agreement in the early nineties, thegovernment realized the need for futures trading to strengthen thecompetitiveness of Indian agriculture and the commodity trade andindustry. 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 inalmost all primary commodities and their products. There have been over 20 exchanges existing for commodities allover the country. However these exchanges are commodity specific andhave a strong regional focus. The Government, in order to make thecommodities market more transparent and efficient, accorded approvalfor setting up of national level multi commodity exchanges. Accordinglytwo widest exchanges are there which deal in a wide variety ofcommodities 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) BABASAB PATIL PROJECT REPORT OF FINANCE
  34. 34. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD1) National Commodity & Derivatives Exchange (NCDEX): NCDEX is a public limited company incorporated on April 23, 2003under the Companies Act, 1956. NCDEX is a technology drivencommodity exchange with an independent Board of Directors andprofessionals not having any vested interest in commodity markets. It iscommitted to provide a world-class commodity exchange platform formarket participants to trade in a wide spectrum of commodity derivativesdriven by best global practices, professionalism and transparency. Forward Market Commission regulates NCDEX in respect offutures trading in commodities. Besides, NCDEX is subjected to variouslaws 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 startwith would offer facilities in about 40 cities throughout India. The reachwill gradually be expanded to other cities. BABASAB PATIL PROJECT REPORT OF FINANCE
  35. 35. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD2) Multi Commodity Exchange of India (MCX): Multi Commodity Exchange of India Limited (MCX), is an Exchangewith a mandate for setting up a nationwide, online multi-commoditymarketplace, offering unlimited growth opportunities to commoditiesmarket participants. As a true neutral market, MCX has taken severalinitiatives to usher in a new-generation commodities futures market inthe process, become the countrys premier Exchange. MCX has startedoperations from November 10, 2003.Statutory framework for regulating commodity futures Commodity futures contracts and the commodity exchangesorganizing trading in such contracts are regulated by the Government ofIndia under the Forward Contracts (Regulation) Act, 1952 (FCRA), andthe Rules framed there under. The nodal agency for such regulation isthe Forward Markets Commission (FMC), situated at Mumbai, whichfunctions under the aegis of the Ministry of Consumer Affairs, Food &Public Distribution of the Central Government.Forward Markets Commission (FMC) Forward Markets Commission (FMC) headquartered at Mumbai isa regulatory authority, which is overseen by the Ministry of ConsumerAffairs and Public Distribution, Govt. of India. It is a statutory body setup in 1953 under the Forward Contracts (Regulation) Act, 1952. BABASAB PATIL PROJECT REPORT OF FINANCE
  36. 36. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD "The Act Provides that the Commission shall consist of not lessthen two but not exceeding four members appointed by the CentralGovernment out of them being nominated by the Central Government tobe the Chairman thereof. Currently Commission comprises threemembers among whom Dr. Kewal Ram, IES, is acting as Chairman andSmt. 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; BABASAB PATIL PROJECT REPORT OF FINANCE
  37. 37. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD  To undertake the inspection of the accounts and other documents of any recognized association or registered association or any member of such association whenever it considerers it necessary.Commodities selected in Phase I Bullion  Gold  SilverAFGRI commodities  Soya bean  Soya oil  Rapeseed/Mustard  Seed Rapeseed/  Mustard Seed Oil  Crude Palm oil  RBD Palmolein0 Commodities introduced in Phase II ∗ Rubber ∗ Jute ∗ Pepper ∗ Chana (Gram) ∗ Guar ∗ Wheat BABASAB PATIL PROJECT REPORT OF FINANCE
  38. 38. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLDCOMMODITY TRADING CONTRACTS All the commodities are not suitable for futures trading & for beingsuitable for futures trading the market for commodity should becompetitive, i.e., there should be large demand for and supply of thecommodity no individual or group of persons acting in concert should bein a position to influence the demand or supply, and consequently theprice substantially. There should be fluctuations in price. The commodityshould have long shelf life and be capable of standardization andgradation. A commodity futures contract is essentially a financialinstrument. Following the absence of futures trading in commodities fornearly four decades, the new generation of commodity producers,processors, market functionaries, financial organizations, brokingagencies and investors at large are, unfortunately, unaware at present ofthe economic utility, the operational techniques and the financialadvantages of such trading. Commodity future market involvesparticularly different types of forward contracts.Forward contracts FCRA defines forward contract as "a contract for the delivery ofgoods and which not a ready delivery contract is". All contracts in commodities providing for delivery of goods and/orpayment of price after 11 days from the date of the contract are "forward"contracts. Forward contracts are of three types –1) Specific Delivery & Ready Delivery Contracts BABASAB PATIL PROJECT REPORT OF FINANCE
  39. 39. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD2) Futures Contracts3) Option ContractsSpecific Delivery/Ready Delivery contracts: Specific delivery contracts provide for the actual delivery of specificquantities and types of goods during a specified future period, and inwhich the names of both the buyer and the seller are mentioned. Under the Act, a ready delivery contract is one, which provides forthe delivery of goods and the payment of price therefore, eitherimmediately or within such period not exceeding 11 days after the date ofthe contract, subject to such conditions as may be prescribed by theCentral Government. Already delivery contract is required by law to befulfilled by giving and taking the physical delivery of goods. In marketparlance, the ready delivery contracts are commonly known as "spot" or"cash" contracts.Futures Contract: A commodity futures contract is essentially a financial instrument.Following the absence of futures trading in commodities for nearly fourdecades, the new generation of commodity producers, processors, marketfunctionaries, financial organizations, broking agencies and investors atlarge are, unfortunately, unaware at present of the economic utility, theoperational techniques and the financial advantages of such trading. A futures contract is a legally binding agreement between twoparties to buy or sell in the future, on a designated exchange, a specificquantity of a commodity at a specific price. The buyer and seller of afutures contract agree now on a price for a product to be delivered, orpaid, for at a set time in the future, known as the "settlement date." BABASAB PATIL PROJECT REPORT OF FINANCE
  40. 40. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLDAlthough actual delivery of the commodity can take place in fulfillment ofthe 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 exchangeorganizing 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, bothinferior and superior, are allowed to be deliverable or tender-able fordelivery against the specified futures contract. The parties to the contract are required to negotiate only thequantity to be bought and sold, and the price. The Exchange prescribeseverything else. Because of the standardized nature of the futurescontract, it can be traded with ease at a moment’s notice.Option Contract: An option on a commodity futures contract is a legally bindingagreement between two parties that gives the buyer, who pays a marketdetermined price known as a "premium," the right (but not theobligation), within a specific time period, to exercise his option. Exerciseof the option will result in the person being deemed to have entered intoa futures contract at a specified price known as the "strike price." Insome cases, an option may confer the right to buy or sell the underlyingasset directly, and these options are known as options on the physicalasset. Commodity future trading contracts rarely are for the actual orphysical delivery allowed to be settled otherwise than by issuing or givingdeliveries. Therefore, speculators use these futures contracts to benefitfrom changes in prices and are hardly interested in either taking orreceiving deliveries of goods. BABASAB PATIL PROJECT REPORT OF FINANCE
  41. 41. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLDFUTURE MARKET MECHANISMS1) Price Discovery through Future Market: In an active futures market, the demand for information by tradersis enormous. Futures exchanges tend to become collection centers forstatistics on supplies, transportation, storage, purchases, exports,imports, currency values, interest rates, and other pertinent information.These data, which are compiled and distributed throughout the exchangecommunity on a continuous basis, are immediately reflected in thetrading pits as traders digest the new information and adjust their bidsand offers accordingly. As a result of active buying and selling of futurescontracts, the market determines the best estimate of today andtomorrows prices for the underlying commodity. In effect, prices arediscovered at futures exchanges. Prices determined via this open andcompetitive process are considered to be accurate reflections of thesupply and demand for a commodity, and for this reason they are widelyused as todays best estimate of tomorrows cash market prices for astandardized quantity of a commodity. Price discovery is the process of arriving at a figure at which oneperson will buy and another will sell a futures contract for a specificexpiration date. In an active futures market, the process of pricediscovery continues from the markets opening until its close. Futurescontracts are standardized as to quantity, quality, and location so buyersand sellers only bargain over price. Because of this standardization,commercial interests are better able to compute local cash prices. In BABASAB PATIL PROJECT REPORT OF FINANCE
  42. 42. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLDmany commodities, futures prices have earned a role as key referenceprices 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. Whilethere is no way to eliminate uncertainty, futures markets provide acompetitive way for commodity producers, merchandisers, processors,and others who may own the actual commodity to transfer some pricerisk to speculators who will willingly assume such risk in hopes ofmaking a profit. The process of hedging involves the concurrent use of both cashand futures markets. Since futures and cash prices tend to movetogether (that is, parallel to each other), and at contract expirationconverge to one price, it is possible for a cotton merchant, for example, tohedge an unsold inventory of cotton with a sale of an equivalent amountof futures contracts. Since the merchant owns the commodity, he wouldhave a loss if prices fell. To hedge, the merchant would sell futurescontracts. Now if prices drop, the cash market loss will be at leastpartially offset by a gain on the futures contract. When the merchantsells his inventory at the lower cash market price, he will simultaneouslylift his hedge by buying back his futures contracts at the lower price. Thegain on his futures contracts should roughly equal the merchants loss inthe cash market. BABASAB PATIL PROJECT REPORT OF FINANCE
  43. 43. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD Here are three examples of how hedging helps the cash marketwork better: 1) Hedging stretches the marketing period. For instance, a livestock feeder does not have to wait until his cattle are ready to market before he can sell them. The futures market permits him to sell futures contracts to establish the approximate sale price at any time between the time he buys his calves for feeding and the time the fed cattle are ready to market, some four to six months later. He can take advantage of good prices even though the cattle are not ready for market. 2) Hedging protects inventory values. A merchandiser with a large, unsold inventory can sell futures contracts that will protect the value of the inventory, even if the price of the commodity drops. 3) Hedging permits forward pricing of products. A jewelry manufacturer can determine the cost for gold, silver or platinum by buying a futures contract, translate that to a price for the finished products, and make forward sales to stores at firm prices. Having made the forward sales, the manufacturer can use its capital to acquire only as much gold, silver, or platinum as may be needed to make the products that will fill its orders. BABASAB PATIL PROJECT REPORT OF FINANCE
  44. 44. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD These are just a few ways that commodity owners use futuresmarkets. It requires skill and knowledge acquired that comes only bystudy 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 fortrading or arbitrage. Brokers of all commodity exchanges, who arelocated all across the country, serve the futures market users directlythrough their own branch offices network or through the network oftheir franchisees or sub-brokers.Procedure for Individual investor to start trading in CommodityFutures Market can be as follows:Selection of Broker: A trustworthy, reliable, efficient, effective & innovative broker,having membership to any of the Exchange like MCX / NCDEX etc. BABASAB PATIL PROJECT REPORT OF FINANCE
  45. 45. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLDwould be in Investor’s interest. Broker should be such that recognizesinvestors’ needs & aspirations & work as a dedicated team to deliverhighly effective & customized solutions to investors risk managementneeds.Information about Self: After selecting a broker, investor will be asked to provideinformation that is personal & financial. A member client agreementshould be signed between the broker & investor. Investor should givephotographs, bank details & should possess normal DMAT Account orbroker opens that account for him/her. If trading is intended withdelivery of commodities then Commodity DMAT Account is been opened.Depositing the Margin: In order to trade futures contracts, investor has to deposit marginsin cash with broker. There are two types of margins, namely; initialmargin & mark to market margin. i) Initial Margin- Initial Margin is set by the exchanges on basis of volatility in theparticular commodity & is a percentage of the contract. ii) Mark to market Margin- At the end of the day, the contract is marked to market; meaningtrader’s account is credited or debited based on the profit/ loss madeduring the session. On this profit or loss there broker can charge marginthat is nothing but mark to market margin.Intraday Trading: BABASAB PATIL PROJECT REPORT OF FINANCE
  46. 46. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD Then as per individual investors wish he can buy or sellcommodities online. Just he has to specify which commodity & whatprice is he going to buy or sell. Electronic terminals are used for thistrading at various broking offices that provides the same informationcountrywide. 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 bybringing large number of Buyers and Sellers on a common National andInternational platform.Clearing Trades on Commodity Exchange All trades on Commodity Exchange are supported by an initialmargin. At the End-of day Commodity Exchange does mark-to-market ofall 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 CommodityExchange by next day and the members in profit on such positions aregiven the necessary credits. These payments are processed electronicallythrough 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 tenderperiod. At the start of the tender period, both the parties must state theirintentions to give or receive delivery, based on which the parties aresupposed to act or bear the penal charges for any failure in doing so.Those who do not express their intention to give or receive delivery at the BABASAB PATIL PROJECT REPORT OF FINANCE
  47. 47. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLDbeginning of tender period are required to square-up their open positionsbefore the expiry of the contract. In case they do not their positions areclosed out at due date rate. The links to the physical market throughthe delivery process ensures maintenance of uniformity between spotand futures prices.Tendering Delivery to a Buyer by Exchange Seller Sellers intimate the exchange at the beginning of the tender periodand get the delivery quality certified from empanelled quality certificationagencies. They also submit the documents to the Exchange with thedetails of the warehouse within the city, chosen as a delivery center. Sellers are free to use any warehouse, as they are responsible forthe goods until the buyer picks up the delivery, which is a practicefollowed in the commodities market globally. Seller would receive the money from the exchange against thegoods delivered, which happens when the buyer has confirmed itssatisfaction over quality and picked up the deliveries within stipulatedtime.Receiving Delivery of Commodities by Buyer Buyers intending to take delivery will receive it, if there are sellerswilling warehouse at the designated delivery centers on the designateddelivery days. There are commission agents who help the brokers with handlingof the delivery, logistic support, and associated quality certificationthrough to give delivery. The Buyer will have to make the payment withinthree days after the delivery is allotted. The buyer will take actual BABASAB PATIL PROJECT REPORT OF FINANCE
  48. 48. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLDdelivery from the empanelled agencies and associated billings due to taximplications. This support is required as the buyer may be in a differentcity 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 hisconsumption in the industry, or for exports, or he may sell in the spotmarket or may sell in futures market in the subsequent contract, if he isa regular trader. Generally, the commodities available in the physicalform are consumed by the industry and, rarely, commodities, are storedin the warehouse for a longer period.Percentage of Delivery in the Futures Market Though, Exchanges have specified the deliverable grades in thecontract specifications, which are notified before commencement oftrading in a contract. The seller is required to submit the qualitycertification issued by empanelled quality certification agencies, like,SGS, Geo Chem. etc. Thus, quality of a commodity is ensured, thepercentage is delivery in such market is fairly low. Generally, the futuresmarkets all over the world are used for hedging where actual deliverypercentage is about 1% any user in the commodities ecosystem unlikethe physical spot or forward market does not use these markets forregular consumption. BABASAB PATIL PROJECT REPORT OF FINANCE
  49. 49. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD LIMITATIONS OF COMMODITY FUTURE MARKET• Commodity market is very difficult to predict. Commodity prices depend upon region, monsoon, transportation cost, demand- supply theory, import/ export policies & Global market trends. So commodity market experience volatility that cannot be predicted easily.• Without knowing the spot market for commodities it is very difficult to play with Future market. In capital market it depends upon Companies performance, decisions, long run plans, mergers, etc. there are definite regions to move up & down in the market, but in the case of Commodity market there are so many regions for the market movement, it is like a game of luck to the investor.• Customer has to deposit the margin amount that is based on volatility of commodity plus brokerage that is deducted from total losses made. So if at all there is a loss, the total loss amount will be very huge. In this aspect it is very risky market.• Commodity market not yet developed in India so it is less reliable. BABASAB PATIL PROJECT REPORT OF FINANCE
  50. 50. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD• 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, itis primarily a monetary asset, and partly a commodity. As much as twothirds of gold’s total accumulated holdings relate to “store of value”considerations. Holdings in this category include the central bankreserves, private investments, and high-cartage jewelry bought primarilyin developing countries as a vehicle for savings. Thus, gold is primarily amonetary asset. Less than one third of gold’s total accumulated holdingscan be considered a commodity, the jewelry bought in Western marketsfor adornment, and gold used in industry. The distinction between gold and commodities is important. Goldhas maintained its value in after-inflation terms over the long run, whilecommodities have declined. Some analysts like to think of gold as a “currency without acountry’. It is an internationally recognized asset that is not dependentupon any government’s promise to pay. This is an important featurewhen comparing gold to conventional diversifiers like T-bills or bonds,which unlike gold, do have counter-party risk. BABASAB PATIL PROJECT REPORT OF FINANCE
  51. 51. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD Gold in Indian Scenario: Gold is valued in India as a savings and investment vehicle and isthe second preferred investment behind bank deposits. India is theworld’s largest consumer of gold in jewelry (much of which is purchasedas investment). The hoarding tendency is well ingrained in Indiansociety, not least because inheritance laws in the middle of the twentiethcentury lent a great desirability to anonymity. Indian people arerenowned for saving for the future and the financial savings ratio isstrong, with a ratio of financial assets-to-GDP of 93%. Gold’s circulates within the system and roughly 30% of goldjewelry fabrication is from recycled pieces. India is typically also thelargest purchaser of coins and bars for investment (>80tpa), althoughlast year it had to concede first place to Japan in the wake of the heavybuying in the first quarter due to fears for the stability of the Japanesebanking system. In 1998-2001 inclusive, annual Indian demand for goldin jewelry exceeded 600 tons; in 2002, however, due to rising and volatileprices and a poor monsoon season, this dropped back to 490 tons, andcoin and bar demand dropped to 67 tons. Indian jewelry off take issensitive to price increases and even more so to volatility, although this BABASAB PATIL PROJECT REPORT OF FINANCE
  52. 52. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLDdecline in tonnage since 1998 is also due in part to increasingcompetition from white and brown goods and alternative investmentvehicles, but is also a reflection of the increase in price. The Indianbride’s “Streedhan”, the wealth she takes with her when she marries andwhich remains hers, is still gold, however (thus giving gold an importantrole in the “empowerment” of women in India). The distinction between gold and commodities is important. Goldhas maintained its value in after-inflation terms over the long run, whilecommodities have declined. Some analysts like to think of gold as a “currency without acountry’. It is an internationally recognized asset that is not dependentupon any government’s promise to pay. This is an important featurewhen comparing gold to conventional diversifiers like T-bills or bonds,which unlike gold, do have counter-party risk. BABASAB PATIL PROJECT REPORT OF FINANCE
  53. 53. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLDWorld Markets Todays gold market is a round-the-world, round-the-clockbusiness, played out largely on dealers trading screens. The core of thebusiness, however, remains in the key markets of London, as the greatclearing house, New York as the home of futures trading, Zurich asphysical turntable, Istanbul, Dubai, Singapore and Hong Kong asdoorways to important consuming regions and Tokyo where theCommodity Exchange (TOCOM) sets the mood of Japan. Even Paris stillhas a small market, a reminder of the days when the French were great BABASAB PATIL PROJECT REPORT OF FINANCE
  54. 54. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLDhoarders, while Mumbai has increasing importance under Indiasliberalized gold regime that permits official imports through localmarkets. BABASAB PATIL PROJECT REPORT OF FINANCE
  55. 55. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLDGold an Independent Asset It’s not difficult to understand why the gold price movesindependently from the economic cycle when one considers the diversityof its demand and supply base, the ultimate determinants of pricemovements. There are three sources of gold supply: mine production, officialsector sales and scrap or recycled gold. Mine production is by far thelargest element, accounting for 70% of total supply last year. Changes inannual mine supply bear no relation to changes in US or even globalGDP growth. The upward trend in mine production that was underway inthe late 1980s was not arrested by 1990 recession (the US economysuffered an outright contraction, while world GDP growth slowed to 1.6%from 2.9% the previous year). Nor was the downtrend in mining outputthat began in 2001 reversed by the sharp acceleration in world growth. BABASAB PATIL PROJECT REPORT OF FINANCE
  56. 56. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD Mine production is influenced by very specific factors, such as thelevel of exploration spending, the success or otherwise in discovering newgold deposits and the cost of extraction (some new discoveries may notbe economically viable). Lead times in gold mining are often very long. Itcan take years to re-open a closed mine, let alone find and mine newreserves. The decision to build a mine shaft (and often an entireinfrastructure) is a long term one that will often see business cyclescomes and goes. Central bank decisions to buy or sell gold (they remainnet sellers) are also usually strategic in nature, rather than reactive tothe economic cycle. The decision to buy or sell gold is often made yearsin 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, theactual sales programmed did not commence until May 2000, with thesales then taking place over a period of five years. Scrap supply is influenced by many factors, perhaps the mostimportant being price and price volatility, but recessions and periods ofeconomic distress have also had an impact. The most dramatic exampleis when Korea was pushed into recession during the 1998 Asiancurrency crisis; its scrap supply increased by almost 200 tonnes as thegovernment bought gold from the local populace in exchange for won-denominated bonds. It then sold the gold on the international market inorder to raise the dollars necessary to avoid defaulting on its externaldebt. Similarly, in Indonesia the 1998 recession saw scrap supplyincrease by 72 tonnes in the first quarter of the year, in this instance BABASAB PATIL PROJECT REPORT OF FINANCE
  57. 57. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLDpurely for independent reasons rather than at the behest of thegovernment.Turning to demand Conventional wisdom argues that recessions are bad forcommodity prices. The reasoning goes that as consumer and businessconfidence falls, demand for goods and services is cut back and hencethe materials used in the production of those goods or in the provision ofservices (many of which are commodities) declines, thereby depressingtheir price. The argument is logical. However, a few points are worth bearingin mind with respect to gold. Demand for gold as an intermediate good isrelatively small in comparison to many other commodities. Last year, just14% 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, goldis 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 intorecession as consumer spending on non-essential electronics goodsdeclines. A US recession would undoubtedly have negative implicationsfor gold jewelry demand in America, as consumer spending slows.However, this negative implication could be at least partially offset by thehigher share of gold jewelry in the retail market that gold jewelry hasenjoyed in recent years. Moreover, gold is much less vulnerable thanother jewelry materials, such as diamonds or platinum, to a US recessionas far more demand for gold comes from outside of the US – 70% ofdiamond jewelry demand comes from the US market, compared with just10% for gold. BABASAB PATIL PROJECT REPORT OF FINANCE
  58. 58. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD India is in fact the single largest consumer of gold jewellery in theworld in tonnage terms. Last year, Indian households bought 558 tonnesof gold jewelry, more than double their US counterparts (Chart 7).Chinese consumers rank second, having bought 331 tonnes. USconsumers are third in tonnage terms, although US demand remainshighest in retail value terms due to its higher trade margins. The extentto which worldwide gold jewelry demand suffers from a US recession willdepend partly on the spill-over effects to other countries. If proponents of“decoupling” prove to be correct (they argue that emerging marketeconomies are now strong enough domestically to withstand a USslowdown) then worldwide jewelry demand need not fare badly. The final source of demand comes from investors. Investors buygold for many reasons. Chief among these are gold’s inflation and dollar-hedging properties, both of which have been proven over long periods oftime. 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 bothfronts. The dollar has continued its downward trajectory, while inflationhas (unusually) headed higher. US consumer prices increased at anannual rate of 4.0% in February this year, up from 2.4% just a yearearlier. If these trends continue, investment demand for gold as aninflation and dollar hedge is likely to remain strong. And if the recessiondeepens concerns over the health of the US banking sector, demand forgold as a safe haven asset is also likely to remain robust. In summary, statistical analysis suggests there is no relationshipbetween changes in US GDP growth and changes in the gold price. Thisreflects gold’s unique and diverse demand and supply base, which as forany freely-traded good ultimately determine the price. Consequently, aUS recession does not have negative implications for the gold price. Theonly element of demand likely to be affected by a recession is investment BABASAB PATIL PROJECT REPORT OF FINANCE
  59. 59. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLDdemand, but that in turn will depend on the “type” of recession. So far,the brewing recession has been positive for gold, as it has beenaccompanied by a rise in inflation and a falling dollar, which has boosteddemand for gold as a dollar and inflation hedge.Largest Gold Belts:• The famous Witwatersrand in South Africa - the worlds largestgold belt.• The Tian Shan Gold Belt - the second largest belt in the world.Largest Gold Producing Country in the World • South Africa • Australia • United StatesImportant world market: • London is the biggest and the oldest gold market in the world. • Mumbai is India’s liberalized gold regime. • New York is the home of gold future trading. • Istanbul, Dubai, Singapore and Hong Kong are doorways to important consuming regions. BABASAB PATIL PROJECT REPORT OF FINANCE
  60. 60. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLDWhat makes Gold Special?• Timeless and Very Timely Investment: For thousands of years, goldhas been prized for its rarity, its beauty, and above all, for its uniquecharacteristics as a store of value. Nations may rise and fall, currenciescome and go, but gold endures. In today’s uncertain climate, manyinvestors turn to gold because it is an important and secure asset thatcan be tapped at any time, under virtually any circumstances. But thereis 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 fromfinancial professionals and sophisticated investors worldwide.• Gold is an effective diversifier: Diversification helps protect yourportfolio against fluctuations in the value of any one-asset class. Gold isan ideal diversifier, because the economic forces that determine the priceof gold are different from, and in many cases opposed to, the forces thatinfluence most financial assets.• Gold is the ideal gift: In many cultures, gold serves as a familytreasure or a wealth transfer vehicle that is passed on from generation togeneration. Gold bullion coins make excellent gifts for birthdays,graduations, weddings, holidays and other occasions. They areappreciated as much for their intrinsic value as for their mystical appealand beauty. And because gold is available in a wide range of sizes anddenominations, you don’t need to be wealthy to give the gift of gold.• Gold is highly liquid: Gold can be readily bought or sold 24 hours aday, in large denominations and at narrow spreads. This cannot be saidof most other investments, including stocks of the world’s largest BABASAB PATIL PROJECT REPORT OF FINANCE
  61. 61. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLDcorporations. Gold is also more liquid than many alternative assets suchas venture capital, real estate, and timberland. Gold proved to be themost effective means of raising cash during the 1987 stock market crash,and again during the 1997/98 Asian debt crisis. So holding a portion ofyour portfolio in gold can be invaluable in moments when cash isessential, whether for margin calls or other needs.• Gold responds when you need it most: Recent independent studieshave revealed that traditional diversifiers often fall during times ofmarket 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 ofa diversified portfolio — leaving investors disappointed. However, a smallallocation of gold has been proven to significantly improve theconsistency of portfolio performance, during both stable and unstablefinancial periods. Greater consistency of performance leads to a desirableoutcome — an investor whose expectations are met.What makes Gold different from other commodities? The flow demand of commodities is driven primarily by exogenousvariables that are subject to the business cycle, such as GDP orabsorption. Consequently, one would expect that a sudden unanticipatedincrease in the demand for a given commodity that is not met by animmediate increase in supply should, all else being equal, drive the priceof the commodity upwards. However, it is our contention that, in thecase of gold, buffer stocks can be supplied with perfect elasticity. If thisargument holds true, no such upward price pressure will be observed inthe gold market in the presence of a positive demand shock. BABASAB PATIL PROJECT REPORT OF FINANCE
  62. 62. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD The existence of a sophisticated liquid market in gold has, over thepast 15 years, provided a mechanism for gold held by central banks andother major institutions to come back to the market. Although thedemand for gold as an industrial input or as a final product (jewelry)differs across regions, it is argued that the core driver of the real price ofgold is stock equilibrium rather than flow equilibrium. This is not to saythat exogenous shifts in flow demand will have no influence at all on theprice of gold, but rather that the large supply of inventory is likely todampen any resultant spikes in price. The extent of this to dampeningeffect depends on the gestation lag within which liquid inventories can beconverted in industrial inputs. In the gold industry such time lags aretypically very short. Gold has three crucial attributes that, combined, set it apart fromother commodities: firstly, assayed gold is homogeneous; secondly, goldis indestructible and fungible; and thirdly, the inventory of abovegroundstocks is astronomically large relative to changes in flow demand. Oneconsequence of these attributes is a dramatic reduction in gestation lags,given low search costs and the well-developed leasing market. One wouldexpect that the time required convert bullion into producer inventory isshort, relative to other commodities which may be less liquid and lesshomogenous than gold and may require longer time scales to extract andbe converted into usable producer inventory, making them morevulnerable to cyclical price volatility. Of course, because of the variabilityof demand, the price responsiveness of each commodity will depend inpart on precautionary inventory holding. BABASAB PATIL PROJECT REPORT OF FINANCE
  63. 63. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLDFixing of spot gold prices: spot price Cumulative Frequency Percent Valid Percent Percent Valid Investors 41 41.0 41.0 41.0 Daily Trading 59 59.0 59.0 100.0 Bases/Future Market Total 100 100.0 100.0 spot price Investors 41.0% Daily Trading Bases/ 59.0%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. BABASAB PATIL PROJECT REPORT OF FINANCE
  64. 64. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLDSources Of Gold For The Goldsmiths: Cumulative Frequency Percent Valid Percent Percent Valid Investors 41 41.0 41.0 41.0 Local supplier 5 5.0 5.0 46.0 Wholesaler 54 54.0 54.0 100.0 Total 100 100.0 100.0 commodities Investors 41.0% Wholesaler 54.0% Local supplier 5.0%Interpretation: Above Pie chart shows that out of 100 sample size, 54% ofrespondents get gold from wholesalers, 5% are from local suppliers andremaining are investors. So most of them get the gold from wholesalers. BABASAB PATIL PROJECT REPORT OF FINANCE
  65. 65. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD • To study whether the goldsmiths of Belgaum city aware of commodity market and their perception. ♦ Where do you prefer to invest? invest Cumulative Frequency Percent Valid Percent Percent Valid Gold 9 9.0 9.0 9.0 Bank/Fixed Deposit 10 10.0 10.0 19.0 Equity 49 49.0 49.0 68.0 Mutual Funds 28 28.0 28.0 96.0 Real Estate 4 4.0 4.0 100.0 Total 100 100.0 100.0 invest Real Estate 4.0% Mutual Funds 28.0% Gold 9.0% Bank/Fixed Deposit 10.0% Equity 49.0%Interpretation: BABASAB PATIL PROJECT REPORT OF FINANCE
  66. 66. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLDThe Graph clearly shows that most of the respondents are interested ininvesting in equity (49%) when compared to the other investmentalternatives because they feel investing in equity will provide morereturns to them. ♦ Are you aware about commodity market? aware Cumulative Frequency Percent Valid Percent Percent Valid Yes 82 82.0 82.0 82.0 No 18 18.0 18.0 100.0 Total 100 100.0 100.0 aware No 18.0% Yes 82.0%Interpretation:The above pie chart describes that 82% of the investors (goldsmiths orgold traders) are aware about the Commodity Future market and 18% ofthem are not aware about Commodity Future Market. So there is a needto create awareness about the commodity future market and its benefits. BABASAB PATIL PROJECT REPORT OF FINANCE

×