Gold the Seed of Desire
Welcome to a world! That is so limited that it can be contained in a web, measuring 24
inches on each side, yet it is so immense that it enrolls each one of us. A world in which
generations of men and women have fought for died for and slaved for. It is a world of
generations of infinite possibilities of its own.
Gold, the yellow metal, has captured man’s interest everywhere and at all times. As a
symbol of perfection, immorality and prosperity, gold is the substance that myths and
legends are made of.
Gold is a very ductile and malleable, precious metal that is resistant to air and water
corrosion. It is a precious metal that is very soft when pure (24 Kt.). Gold is the most
malleable (hammer able) and ductile (able to be made into wire) metal. Gold is alloyed
(mixed with other metals, usually silver and copper) to make it less expensive and harder.
The purity of gold jewelry is measured in karats.
Traditionally a major market for gold, India has once again retained its position as the
largest market for the yellow metal. The Geneva based World Gold Council, the
marketing arm of the gold mining industry, also identifies India as the fastest growing
market for this precious metal. Unlike the Westerners who invest largely in stocks and
other options, Indians believe in gold as an all time safe investment. For one, gold gives
the security against any financial crisis because of its easy liquidity. Besides the
investment angle, what makes Indians duck the globe trend is the traditional values
attached to the yellow metal. Gold, in Hindu culture is considered auspicious and is
symbolic of Goddess Lakshmi (Goddess of wealth).
1 GURU NANAK KHALSA COLLEGE
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. 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. Since
then, no matter whatever happened, be it famines, floods or even world wars, gold’s
importance as a savings and investment medium hasn’t changed at all in the economy.
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, matched, or balances, 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.
2 GURU NANAK KHALSA COLLEGE
Indian History of Gold
It is interesting to trace this fascination for gold. The Satapatha Brahmana, an ancient
Hindu text describes as the seed of Agni, the God of Fire. Gold came to be called
Hiranya, derived from the root Hri meaning imperishable. The Dharmashastra, another
ancient Indian text says. “This universe was enveloped in darkness. He (the Lord)
desiring to produce various creatures from his own body, first created the waters and in
the deposited a seed. This seed became a golden egg, resplendent as the sun, in which He
himself was born as Brahma.” Brahma is therefore called Hiranyagarbha or born of gold.
Gold is seen to be the reference point in mythology whenever the highest form of prayer,
perfection or beauty is described. The Goddess Lakshmi, symbolizes fertility,
productiveness and prosperity, is said to have been bathed by elephants that carried pure
water in golden vessels. Urvashi, believed to be one of the most beautiful women in
Hindu mythology, is supposed to have complexion of golden hue. The golden colored
deer plays an important role in the famous Indian epic, ‘The Ramayana.’
It is said that lord Shiva taunted his wife Parvati saying her skin was dark. So offended
was Parvati that she performed penance to gain access to Lord Brahma, the creator in
Hindu pantheon. Lord Brahma granted her the boon she was seeking. Parvati was reborn
as Gauri, or the woman with golden colored skin.
It is not only the Hindu tradition that extols gold. In the Bible, there is a mention of a
river flowing out of the Garden of Eden.” And a river went out of Eden, parted and
became into four heads. The name of the first is Pison, that is which compasses the whole
land of Havilah, where there is gold.” The Islamis religion describes the fifth heaven to
be made of gold. The Buddha is often portrayed in gold and Buddhist ceremonial objects
are made of gold. Astrologically, Jupiter represents gold.
3 GURU NANAK KHALSA COLLEGE
The value of gold has been appreciated in daily life too. The Rig Veda, India’s most
ancient text, (dated approximately to 1500 B.C.) says the giver of gold receives a life of
light and glory. And to receive or buy is to welcome Lakshmi. That is why during Diwali
time, gold is almost invariably bought. On this festival, it is Goddess Lakshmi who is
Arthashastra, a third century A.D text, lays down the various rules to be followed by
goldsmiths and the different kinds of alloys that can be made with it. By the fifth century,
ornaments were exquisitely fashioned and Kalidasa, a famous Sanskrit poet, describes
when and how each ornament should be worn. The evidences and designs of ancient
Indian jewellery are also found in sculptures.
4 GURU NANAK KHALSA COLLEGE
Properties of Gold
Gold is one of the most precious metals in the world. It is present in the rivers, seas and
the earths crust and trace amounts are present in plants and animals. It is, however,
difficult and expensive to extract. In modern mining operations approximately 3 tonnes
of ore are needed to extract one ounce (31.1 gms) of gold. The many desirable qualities
found in gold, along with its scarcity, have made it the most popular metal for use in
Gold in its Purest State
• Has a melting point of 1945 degrees Fahrenheit (1063 degrees celcius). When
alloyed (chemically combined) with other base metals the melting temperature of
the resulting alloy is changed. 18K yellow gold has a melting point of 1675
degrees Fahrenheit and 14K yellow gold has a melting point of about 1550
• Has a specific gravity of 19.33. it is relatively heavy compared to most metals,
such as silver (SG 10.7) or iron (SG 7.8). a notable exception is platinum (SG
21.4). It is more malleable than any other metal and can be hammered into foil so
thin that it is almost transparent.
• Has a unique ductility property allowing it to be drawn into wire so fine it can
barely be seen.
• Is deep yellow in colour. Its great reflectivity properties help keep its brightness
and colour from fading with time.
5 GURU NANAK KHALSA COLLEGE
• Will not rust, tarnish or corrode. Gold jewellery recovered from ancient Egyptian
tombs is in the same state as when placed there over 4000 years ago.
• Is softer than most other metals. On the Mohs scale of hardness (which is a
measure of a gemstone or mineral’s resistance to scratching), gold has a hardness
value of 2 to 2.5. Diamond has a value of 10. Pure gold may be easily be
scratched. Fortunately, gold becomes harder when alloyed with other base metals.
• It is estimated that only 125,000 tons of gold have been mined the world over
since the beginning of time.
Within the human body too the colour of gold is celebrated. The human body, according
to Ayurveda, is believed to have many charkas or nodal points of operation. The heart
chakra is said to be golden yellow and so the colour itself is regarded as inspiring divine
Gold’s immunity to rust made physicians feel it had properties to cure diseases. Chakra’s
medical treatise mentions the use of gold in medicine. The jawahar mohra of Unani
medicine uses gold as one of the components of special medicines as do the many other
Ayurvedic and Tibetan medicines. The thanga baspam is one such medicine that is
supposed to lengthen the life span and act as an aphrodisiac. Gold has been used to fill
the cavities in teeth since ancient times. In India, thanga rekha or a fine golden thread is
often served with betel leaf after a sumptuous dinner or heavy lunch.
Use of gold in medicine often led to the association of certain magical properties with the
metal. Gold earrings are said to improve eyesight while those suffering from mumps
believe that if they wear a gold chain their problem will vanish. In fact, the ailment itself
is called “ponnuku vingi” or swelling caused by lack of gold.
6 GURU NANAK KHALSA COLLEGE
A. Importance in the Economy
Gold also performs a major role in contributing to the world economy, as it earns
around $400 billion throughout the globe. Now India has its upper hand in this
industry as more that 20% of the total money earned is so from India i.e. its
exports, and the sales within the country.
This is so because India is the biggest market in the world for consumer product
as well as products of this field and keep it in mind those even foreign companies
make the Indian market a target for its products. Moreover, another reason for its
higher earnings are that customers in India prefer quality gold i.e. either 22ct or
23ct, whereas in most of the foreign countries the ornaments are the contents of
18ct or 14ct gold. Thus we can see how important this industry is for us.
B. Value in an Economy
In a world where paper currencies come and go, where paper money can be
depreciated 25% to 30% overnight, any single nation or borrower cannot
manipulate the price of gold. On the contrary, gold is the foundation of today’s
world monetary system. No other substance on earth embodies the unique
characteristics of gold. Its yellow luster and beauty are unsurpassed. Since the
earliest days of man, it has been admired, molded, shaped, and worn as a symbol
of wealth and good taste. The romance and lure of gold is enhanced by its historic
use as a storehouse of wealth. Gold’s value is intrinsic. Its value is a measure of
the true wealth and the stability of national currencies the world over.
7 GURU NANAK KHALSA COLLEGE
Throughout history, every paper currency has become totally worthless over time,
yet gold remains. The precious metal gold cannot be created, destroyed, or
altered. It forever remains one of the most liquid investments with no geographic
boundaries. Gold is bought, sold, traded, and stored in most parts of the free world
with complete privacy.
C. Pricing of Gold
Like other precious metals, gold is measured by troy weight and by grams. When
it is alloyed with other metals the term carat or karat is used to indicate the
amount of gold present, with 24 carats being pure gold and lower ratings
proportionally less. The purity of a gold bar can also be expressed as a decimal
figure ranging from 0 to 1, known as the millesimal fineness, such as 0.995.
The price of gold is determined on the open market, but a procedure known as the
Gold Fixing in London, originating in 1919, provides a twice-daily benchmark
figure to the industry. Historically gold was used to back currency in an economic
system known as the gold standard a certain weight of gold was given the name of
a unit of currency. For a long period, the United States government set the value
of the US dollar so that one troy ounce was equal to $20.67 ($664.56/kg), but in
1934 the dollar was revalued to $35.00 per troy ounce ($1125.27/kg). By 1961 it
was becoming hard to maintain this price, and a pool of US and European banks
agreed to manipulate the market to prevent further currency devaluation against
increased gold demand.
On 17 March 1968, economic circumstances caused the collapse of the gold pool,
and a two-tiered pricing scheme was established whereby gold was still used to
settle international accounts at the old $35.00 per troy ounce ($1.13/g) but the
price of gold on the private market was allowed to fluctuate; this two-tiered
pricing system was abandoned in 1975 when the price of gold was left to find its
8 GURU NANAK KHALSA COLLEGE
D. Factors Influencing Gold Prices
Today, like all investments and commodities, the price of gold is ultimately
driven by supply and demand, including hoarding and dis-hoarding. Unlike most
other commodities, the hoarding and dis-hoarding plays a much bigger role in
affecting the price, since almost all the gold ever mined still exists and is
potentially able to come on to the market at the right price. Given the huge
quantity of above ground hoarded gold, compared to the annual production, the
price of gold is mainly affected by changes in sentiment, rather than changes in
annual production or gold jewelry demand. Central banks and the International
Monetary Fund play an important role in the gold price.
It used to be said that ‘Gold is the world's frightened bunny’. Whenever crisis
threatened, the demand for physical gold increased.
• Bank failures
When dollars were fully convertible into gold, both were regarded as money.
However, most people preferred to carry around the paper dollars issued by their
bank rather than the somewhat heavier and less divisible gold coins. If people
feared their bank would fail, a bank run might have been the result.
Paper currencies pose a risk of being inflated, possibly to the point of
hyperinflation. Historically, currencies have lost their value in this way over time.
In times of inflation, people seek to protect their savings by purchasing liquid,
tangible assets that are valued for some other purpose. Gold is in this respect a
good candidate, and producing more is far more difficult than issuing new fiat
currency, and does not rely on any particular government's health.
9 GURU NANAK KHALSA COLLEGE
• War, invasion, looting
In times of national crisis, people fear that their assets may be seized, and the
currency may become worthless. They see gold as a solid asset which will always
buy bread or transportation. Thus in times of great uncertainty, particularly when
war is feared, the demand for gold rises.
According to the World Gold Council, annual gold production over the last few
years has been close to 2,500 tonnes. However, the effects of official gold sales
(500 tonnes), scrap sales (850 tonnes), and producer hedging activities take the
annual gold supply to around 3,500 tonnes.
About 3,000 tonnes goes into jewellry or industrial/dental production, and around
500 tonnes goes to retail investors and exchange traded gold funds. For the last
few years, the official sector sales of around 500 tonnes have been taken up by
retail investors and gold funds.
• Supply and Demand
Some investors consider that supply and demand factors are less relevant than
with other commodities since most of the gold ever mined is still above ground
and available for sale at a price. However, supply and demand do play a role.
According to the World Gold Council, gold demand rose 29% in the first half of
2005. The increase came mainly from the launch of a gold exchange-traded fund,
but also from jewelry. Gold demand was at an all time record. Demand from the
electronics industry is rising by 11% a year, jewelry by 19%, and industrial and
dental by 21%.
10 GURU NANAK KHALSA COLLEGE
E. Price Difference between Local and International market
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. During the 19 year period from 1977-78 to 1995-96, the
average spread between Mumbai and London market prices (Mumbai price less
than London price in rupee terms) of gold has been positive, except for a brief
period during 1980-91 when the international gold price zoomed for a brief period
following the oil crisis, persistent weakening of dollar resulting in flight of dollar
resources into gold, and accelerating world-wide inflationary trends. The average
spread was as high as 41.3% during 1986-91. In the post-liberalisation period,
with changes in exchange rate regime and some relaxations on import regime of
gold, the average spread between domestic and international prices has come
down from 53.1% in 1991 to 20.6% in 1993, 20.1% in 1994, 19.9% in 1995. The
current spread is as low as 3% and is calculated as shown in the following table:
A1 International prices of Gold at International market $350 per ounce
A2 CIP Premium to import in India $0.75 per ounce
A3 Exchange Rate Rs.47 per USD
A4 Cost of Gold landed in India (350+0.75)*47 Rs. 17096 per ounce
A5 At conversion 32.15674 Rs. 5498 per gms
B Add: Indian Cost
B1 Service charges being charged by banks 0.10% Rs. 5.50/10 gms
B2 Custom Duty Rs.100/10 gms
B3 Sales Tax 1% on (5498+5.50+100) Rs.56/10 gms
B4 Total of added cost at Indian soil Rs. 161.50/10 gms
C Market Price (wholesale) in India Rs.5660/10 gms
Exhibit 1: Current International prices vis-a-vis local prices
11 GURU NANAK KHALSA COLLEGE
Structure of Gold Market
It consists of central banks, bullion banks (International banks with specialist skill in
bullion trading such as J P Morgan, Goldman Sachs, Deutsche Bank, Chase Manhattan,
Citigroup), mining companies and investors.
The central banks lend gold to bullion banks at an interest rate known as the lease rate.
Bullion banks, the financial intermediary, in turn sell the gold in the spot market to
different segments of the market, such as jewelers and fabricators, and the resultant cash
proceeds are used for investment. At the same time, bullion banks or their customers run
a price risk, as there is an obligation to return the physical gold back to the central banks
after the lease period. For this, they go long in the gold forward market.
The counter-party in this deal is generally a gold-mining company, investor or speculator
(hedge fund, for instance), which want to gain from contango. In fact, the gold forward
premium has a close link with the gold lease and the money market rates.
The gold forward rate is almost same as the difference between the dollar rate (Libor) and
the gold lease rate. And as long the difference between the two is positive, there is a
spread or contango; if the difference is negative, there is backwardation, that is, spot gold
is in demand. Gold being the second largest component of central bank reserves (32,000-
35,000 tonnes), having an intrinsic value link to the dollar and is often kept in a safe band
by well-orchestrated efforts of central banks.
12 GURU NANAK KHALSA COLLEGE
World Gold Industry
Gold is primarily a monetary asset and partly a commodity. South Africa is the world's
largest gold producer followed by US and Australia.
Gold is beginning to trend upwards, and has been in a bull market now for almost two
years. Gold at $410 is up 61% from its low of $255 in July '99 to Nov’03 now.
• World Gold Markets
Physical - London, Zurich, Istanbul, Dubai, Singapore, Hong Kong & Mumbai
Futures - NYMEX in New York, TOCOM in Tokyo
London as the great clearing house
New York as the home of futures trading
Zurich as a physical turntable
Istanbul, Dubai, Singapore and Hong Kong as doorways to important
Tokyo where TOCOM sets the mood of Japan
Mumbai under India's liberalized gold regime
• Gold producing countries
- South Africa - Ghana
13 GURU NANAK KHALSA COLLEGE
- United States - Brazil
- Australia - Chile
- China - Philippines
- Canada - Mali
- Russia - Mexico
- Indonesia - Argentina
- Peru - Kyrgyzstan
- Uzbekistan - Zimbabwe
The largest producer of Gold is South Africa. It accounts for an estimated 16.5 million
ounces of Gold annually in the next 3 years; and produces almost 20 percent of the
world’s bullion. The second largest producer of gold is United States. It produces about
12.5% of the world’s Gold supply. Due to the expansion US Mining operations, and
because of the reduced profitability due to the low price of Gold, reduction in mine
production is expected by 9% by the US during the next three years. The third largest
producer of gold is Australia.
Nearly 45% of the world Gold supply was produced by the top three producing nations.
Latin America (Mexico, Peru, Chile and Brazil) and the Far East producers are expected
to increase production in the next three years.
Though these countries add up to a very small share in world’s total supply, their
production increase will counteract some of the production cuts made.
India in World Gold Industry
(Rounded figures) India (in tons) World (in tons) % Share
14 GURU NANAK KHALSA COLLEGE
Total stock 13000 145000 9
Central Bank Holdings 400 28000 1.4
Annual Production 2 2600 0.08
Annual Recycling 100-300 1100-1200 13
Annual Demand 800 3700 22
Annual Imports 600
Annual Exports 60
Exhibit 2: India in the world Gold Industry
Indian Gold Market
• Gold is valued in India as a savings and investment vehicle and is the second
preferred investment after bank deposits.
• India is the world's largest consumer of gold in jewellery as investment.
• In July 1997 the RBI authorized the commercial banks to import gold for sale or
loan to jewellers and exporters. At present, 13 banks are active in the import of
• This reduced the disparity between international and domestic prices of gold from
57 percent during 1986 to 1991 to 8.5 percent in 2001.
• Domestic consumption is dictated by monsoon, harvest and marriage season.
Indian jewellery off take is sensitive to price increases and even more so to
• In the cities gold is facing competition from the stock market and a wide range of
• Facilities for refining, assaying, making them into standard bars in India, as
compared to the rest of the world, are insignificant, both qualitatively and
15 GURU NANAK KHALSA COLLEGE
Production and Consumption
A) How Much is Being Produced?
The geographical breakdown of major global producers (in tones) is as
South Africa 428.3
United States of America 353.0
Exhibit 3: Production of Gold
B) How Much is Being Consumed?
Gold is not really 'consumed' in the sense that it doesn't get used up, but its demand runs
at about 3800 tonnes per year - notably faster than it is being mined (2,600 tonnes).
Gold demand is very much harder to evaluate than production, because while production
is concentrated in a relatively small number of mines demand is distributed throughout
16 GURU NANAK KHALSA COLLEGE
the world. This makes it difficult for anyone to build a statistically accurate picture.
Some of the difficulties are as follows :-
• Many buyers of gold are deliberately secretive.
• In particular the recycling of scrap does not lend itself to measurement because
recycling can utilize scrap supply and meet a demand without going anywhere
near a statistician.
• Unallocated gold is difficult to measure because it is often notional. So all figures
that report gold demand should be reviewed skeptically.
However, undeniably by far gold's major demand comes from jewellery manufacture.
The main other demand comes from retail investment - i.e. from gold's use as a private
reserve asset. The amount used in industry, e.g. in electronics and dental surgery
combines to a further 340 tonnes.
The geographical breakdown of demand illustrates its jewellery based nature. Because of
its importance in Indian marriage ceremonies India leads the table. The USA is second
because of the broad affordability of gold jewellery for a large section of the world's
Then comes China, SE Asia, Europe, Saudi Arabia, the Gulf States, Korea, Egypt,
Turkey, Pakistan and lastly Japan.
C) How is the Production Shortfall Made Up?
There is a supply side shortage of gold bullion. Average annual demand over 5 years is
about 3800 tones and mined supply is a bit less than 2600 tones.
With less than 2,600 tones supplied from the mines a further 15% [600 tones] of annual
demand is met from scrap jewellery and bullion and the remaining significant shortage of
17 GURU NANAK KHALSA COLLEGE
almost 20% [about 800 tones] is being met by sales of central bank gold reserves. More
details of the reasoning behind central bank sales follow in the section on gold trading.
Much of the selling is done in relative secret but some of the central banks publish
• Germany - sold 12 tons of gold in 2001, as commemorative gold coins.
• Holland declared a policy of selling 300 tones over 5 years from 1999. The Dutch
do not advertise their sales in the market as they happen. They have sold 100
tones in year 1. 27 tones in year 2. 9 tones in year 3, and 33 tones in year 4 (so
• Portugal sold 15 tones in December 2002 and 30 tones in February 2003,
apparently as a result of options taken out in 1997/8.
• Switzerland plans to sell 1300 tones. They have sold annual amounts of 120, 220
and 283 tones, project a further 283 tones in 2003 and will cease selling after
• The UK has sold 395 tones in a public auction programme, which finished in
D) Production of Gold in India
• Gold holdings in India are estimated to be in the range of 10000-13000 tonnes and
are predominantly private.
• India’s gold consumption is 25% of world’s total gold production.
18 GURU NANAK KHALSA COLLEGE
• India has a very limited gold production of around 9 tonnes in 2002.The domestic
production of the gold is very limited .
• More than 60% of Indian consumption is met through imports.
E) Consumption of Gold in India
Rural India continues to absorb more than 70% of the gold consumed in India and it has
its own role to fuel the barter economy of the agriculture community. The yellow metal
used to play an important role in marriage and religious festivals in India. Gold also
occupies a significant position in the temple system where gold is used to prepare idol
and devotees offer gold in the temple. The existing social and cultural system continues
to cause net gold buyer market and the Government policies have to take note of the root
cause of gold demand, which lies in the social and cultural system of India. The annual
consumption of gold, which was estimated at 65 tonnes in 1982, has increased to more
than 700 tonnes in late 90s. Although it is likely that, with prosperity and enlightenment,
there may be deceleration in demand, particularly in urban areas, it would be made good
by growing demand on account of prosperity in rural areas.
India is one of the largest consumers of gold but hardly produces any of the gold it
consumes. Though millions of Indians live in poverty, India continues to be largest
consumer of gold (25% of world demand). It is not just a symbol of luxury but is bought
on religious occasion like marriages, Diwali (Hindu new year), Eid, Christmas etc. most
of the gold in India is imported which has supported smugglers for years together due to
high import duties. At one time India had the highest hoarding of gold and Mahmud of
Ghazni looted the temples and shipped much of the gold to Middle East.
Gold Demand and Supply
19 GURU NANAK KHALSA COLLEGE
Above ground stocks
Supply flows 5 year
Demand flows 5 year
Exhibit 4: Gold Demand and Supply
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. 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 for jewellery forms 89% of consumer demand.
In markets with poorly developed financial systems, inaccessible or insecure banks, of
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.
20 GURU NANAK KHALSA COLLEGE
These two countries together account for over 50% of total world demand of gold for
retail investment. Investment demand can split broadly into two, private and public sector
There are several ways in which investors can invest in gold either directly or through a
variety of investment products like coins. Bars, gold accounts, certificates etc. which are
discussed in detail in the next chapter.
The consumer demand for gold is more
than 3400 tonnes per year making it
whooping $40 billion worth. More than
80% of gold consumed is in the form of
jewellery, which is generally predominated
Exhibit 5: Gold Fabricated Demand Breakdown
The Indian demand to the tune of 800 tonnes per year is making it the largest market for
gold followed by USA, Middle East and China. About 80% of the physical gold is
consumed in the form of jewellery while bars and coins occupy not higher than 10% of
the gold consumed.
If jewellery ownership is included, then India is the largest repository of gold in terms of
total gold within the national boundaries.
21 GURU NANAK KHALSA COLLEGE
Regarding pattern of demand, there are no authorities estimates, the available evidence
shows that about 80% is for jewellery fabrication for domestic demand, and 10% is for
investor demand (which is relatively elastic to gold-prices, real estate prices, financial
markets, tax –policies, etc.) and rest for industrial applications and dental use.
The demand for jewellery is rooted in societal preferences for a variety of reasons-
religious, ritualistic, a preferred form of wealth for women, and as a hedge against
inflation. It will be difficult to prioritize them but it may be reasonable to conclude that it
is a combined effect, and to treat any major part as exclusively a store of value or hedging
instrument would be unrealistic. It would not be realistic to assume that it is only the
affluent that creates demand for gold. There is a reason to believe that a part of
investment demand for gold asset is out of black money.
Indian gold holding, which are predominantly private, is estimated to be in the range of
10000-13000 tones. One fourth of gold production is consumed in India and more than
60% of Indian consumption is met through imports. The domestic production of gold is
very limited resulting more dependence on imported gold. The availability of recycled
gold is price sensitive and as such the dominance of the gold supply through import is in
existence. The fabricated old gold scraps are price elastic.
Trading in Gold
Trading in gold is a part of commodity trading.
22 GURU NANAK KHALSA COLLEGE
A) Commodity Trading
In the days gone by commodity trading was more unorganized, as all traders were
required to a commonplace and call out bids. It all seemed like a network of noisy
numbers flying from one end to another. Nonetheless, in spite of such an environment, no
one ever complained about missing bids. However, there were a few stray incidents that
might have occurred in the area of errors.
In those days the buyer would study the quantity of annual produce of the commodities
and the sellers would calculate the approximate demands. There was speculation and
dictating of terms. This was primarily because there was no research and techniques of
trading speculation. It was like going to any other market and bargaining for what is
needed to be purchased and sold. However, commodity trading has seen a radical change
with it shifting to an organized set up in the form of the commodity exchanges. Actually
futures commodity trading was banned for over forty years in this country because of
varied reasons. And when this ban was lifted a couple of years ago no one could imagine
the volume of trading it has invited.
Presently, the accumulative commodities derivatives trade value is estimated to have
reached the equivalence of 66% of the gross domestic product (GDP). The experts claim
that if this upward trend continues then the trade value could equal the GDP in times to
come, which is considered a positive trend for the economy. While there is immense
positivity surrounding the future of commodity trading, there are a couple of negatives
that need to be kept in check. Some experts claim that a rapid and almost revolutionary
climb in the volumes of commodity trading can lead to a major correction phase, causing
it to crash. Another doubt that experts see gleaming is the number of commodities which
are being traded, which has crossed over one hundred, in too short a period.
Well, nonetheless the regulatory bodies under the aegis of the government would have to
keep a keen watch on the commodity trading to avoid any kin of untoward incident that
could create havoc in the economic status of the nation.
23 GURU NANAK KHALSA COLLEGE
Commodity Exchanges in India
The Forward Market Commission (FMC), is the regulatory body set up under the
Forward Contracts (Regulation) Act, 1952, to monitor forward trading in various
commodities. Forward Markets Commission (FMC) regulates the trading of
commodity derivatives on the NCDEX. Forward Markets Commission provides
regulatory oversight in order to ensure financial integrity (i.e. to prevent
systematic risk of default by one major operator of ground of operators), market
integrity (i.e. to ensure that futures prices are truly aligned with the prospective
demand and supply conditions) and to protect and promote interest of
National commodity and Derivatives Exchange Limited (NCDEX) is a
professionally managed online multi commodity exchange promoted by ICICI
Bank Limited (ICICI Bank), Life Insurance Corporation of India (LIC), National
bank for Agricultural and Rural Development (NABARD) and National Stock
Exchange of India Limited (NSE). NCDEX is the only commodity exchange in
the country promoted by national level institutions. This unique parentage enables
it to offer a bouquet of benefits, which are currently in short supply in the
commodity markets. The four institutional promoters of NCDEX are prominent
payers in their respective fields and bring with them institutional building
experience, trust, nationwide reach, technology and risk management skills.
NCDEX is located in Mumbai and offers facilities to its members in about 91
cities throughout India. NCDEX is regulated by Forward Market Commission in
respect of futures trading in commodities. It is committed to provide a world-class
commodity exchange platform for market participants to trade in a wide spectrum
24 GURU NANAK KHALSA COLLEGE
of commodity derivatives driven by best global practices, professionalism and
transparency. NCDEX currently facilitates trading of ten commodities- gold,
silver, soy bean, refined soy bean oil, rapeseed-mustard seed, expeller rapeseed-
mustard seed oil, RDB palmolein, crude palm oil and cotton- medium and long
MCX, an independent and de-mutulized multi commodity exchange, has
permanent recognition from Government of India for facilitating online trading,
clearing and settlement operations for commodity futures markets across the
country. Key shareholders of MCX are Financial Technologies (India) Ltd., State
Bank of India, NABARD, NSE, HDFC Bank, State Bank of Indore, State Bank of
Hyderabad, State Bank of Saurashtra, SBI Life Insurance Co. Ltd., Union Bank of
India, Bank of India, bank of Baroda, Canara Bank, Corporation Bank.
Headquartered in Mumbai, MCX is led by an expert management team with deep
domain knowledge of the commodity futures markets.
MCX offers futures trading in the following commodity categories: agric
commodities, bullion, metal-ferrous and non-ferrous, pulses, oils and oilseeds,
energy plantations, spices and other soft commodities. MCX has built strategic
alliances with some of the largest players incommodities eco-system, namely,
Bombay Bullion association, Bombay Metal Exchange, Solvent Extractors
Association of India, Pulses Importers Association, Shetkari Sangathana, United
Planters Association of India and Pepper and Spice Trade Association. The vision
of MCX is to revolutionize the Indian commodity markets by empowering the
market participants through innovative product offerings and business rules so
that the benefits of futures markets can be fully realized.
This can be achieved by offering unparalleled efficiencies, unlimited growth and
infinite opportunities to all the market participants. Gold Trading consists of OTC
transactions in spot, forward and options and other exotic derivatives together
25 GURU NANAK KHALSA COLLEGE
with exchange traded futures and options. OTC markets operate on a 24-hour
basis around the world.
B) Spot and Futures Trading
Futures are financial instruments based on a physical underlying (commodity, equities
etc.). A futures contract is an agreement between two parties to buy or sell an asset at a
certain time in the future for a certain price. Market participants are able to buy and sell a
certain commodity at a pre-determined price at a later date as specified by the Exchange.
For example, if a person wants to buy 10 gms of gold after three months when the price
today is say, Rs 6000 per 10 gms (spot prices) and Rs 6050 after three months (futures
prices). He enters into a contract through a member of NCDEX to buy gold. On the due
date if the price in the spot market is say, Rs 6100, then he still has to pay only Rs 6050,
and has hence hedged himself against the price risk.
Spot price is the price in the cash market (where one buys and sells goods ‘on the spot’
just as we make purchases from a shop by paying cash) while future prices are prices of
the same commodity at a future date. Therefore, if the spot price of gold is Rs 6000/10
gms today, the 1-month future price would be Rs 6050, while the 2-month future price
would be Rs 6100. The difference between spot and futures prices is the costs of carry i.e.
interest cost, storing, insurance etc. Normally futures prices are higher than spot prices.
The exception is when the futures prices are lower than the spot price, which is called
‘backwardation’. This situation is more common in case of agriculture commodities
where due to the arrival of crop on certain future dates, the future prices would be lower
than the current spot price.
C) Exchange Traded Funds
26 GURU NANAK KHALSA COLLEGE
The exchange-traded markets are essentially only derivative markets and are similar to
equity derivatives in their working. I.e. everything is standardized and a person can
purchase a contract by paying only a percentage of the contract value.
A person can also go short on these exchanges. Also, even though there is a provision for
delivery most of the contracts are squared-off before expiry and are settled in cash. As a
result, one can see an active participation by people who are not associated with the
Investment in Gold
27 GURU NANAK KHALSA COLLEGE
A) Gold as a Financial Asset
Gold and other precious metals are assets that are both tangible and liquid (i.e. easily
traded), unlike real estate which is tangible but not liquid, or company shares and bonds
which are liquid but not tangible.
Considering its high density and high value per unit mass, storing and transporting gold is
very easy. Gold also does not corrode. Historically, it was also very easy to verify that an
offered coin had the density of gold through the use of Archimedes' principle. Today,
however, some metals are denser than gold yet cheaper. While some think gold deserves
special treatment based on its cultural value and use as money, others consider gold a
commodity, like copper or lead.
B) Buying Gold
1. Buying physical gold
Some people, sometimes referred to as gold bugs, buy gold which they retain in their
physical possession in the belief that should the monetary and financial system
collapse, gold would still be considered valuable.
Other reasons for doing so include the ease of hiding the gold from others, such as
family members or tax authorities.
2. Buying gold for the gold price
28 GURU NANAK KHALSA COLLEGE
Some people buy gold not in their physical possession, but stored for them by a
bank, through a gold exchange-traded fund, or in the form of a gold certificate;
their motivations also apply to those who hold gold physically.
Some asset allocation strategies use exposure to gold as a form of diversification,
though the inclusion of gold in portfolios has largely been abandoned since the
1980s . Gold may be included in portfolios as an insurance against unforeseen
calamities which may affect the price of other investments negatively.
Gold is sometimes treated as the fifth world currency, along with the US dollar,
euro, Japanese Yen, and the pound sterling. It is therefore bought in a process
analogous to currency speculation: when it is expected that the dollar declines
against other currencies, buying gold or other currency before the decline and
selling it afterwards could realize a profit. Additionally speculators attempt to
make a profit by predicting the gold price, detecting market trends they believe
will show them the future price direction.
For centuries gold has remained a store of value. Some people believe that by
buying gold, they will be most likely to maintain their wealth in the long term,
protecting them against inflation and decline in the value of fiat money. These
individuals believe that certain events (e.g. war or economic crisis), may have a
negative influence on the value of their other investments, but the opposite effect
on the value of gold.
C) Methods of Investing
29 GURU NANAK KHALSA COLLEGE
Jewellery has two advantages and many big disadvantages.
9.1 Gold Jewellery and Coins
The advantages are:-
• It is the form of gold, which gives some benefit from ownership, namely the
enjoyment of being worn.
• It is very easy to buy.
The disadvantages are:-
• The acquisition costs are very, very high. Retail jewellery is often marked up
by 300% or more in the shops. (Note that insurance valuations are a fantasy
based on replacement cost at retail. No piece can be sold at this value.)
• The real value of jewellery is in the gemstones, the design and the
craftsmanship. These greatly outrank the value of the gold.
• All pieces are different and their values are subjective. If you don't have
experience you probably won't know a fair value - which for practitioners is
part of the fun.
30 GURU NANAK KHALSA COLLEGE
• It is by far and away the most easily stolen form of gold.
Jewellery is a profitable business for those who buy at wholesale and sell at retail. It also
works for people who have a good feel for fashion, and the time to trawl through
catalogues finding stuff which maybe they can re-sell. But it's a poor way of investing in
If - nevertheless - you choose to invest in gold through jewellery the best advice must be
to avoid the retail mark-ups as far as possible by buying at auction, where buying
premiums (the fee paid to the auction room) is typically 10 - 15%. Alternatively seek out
parts of the world like Dubai where it is possible to buy gold not too far from its bullion
value. There machine made chains are sometimes sold as little as 20% above bullion
2. Bullion Coins and Small Bars
Bullion is defined as gold or silver, as
well as other precious metals that are
in the solid form being a biscuit, slab
9.1 Gold Coins and Biscuits
Gold is considered a primary asset with high appreciation value and ready convertibility
at any given point. In India, marriages are fixed in accordance to the gold the bride takes
to her in-laws home. People from every stature of Indian society invest in bullion. They
31 GURU NANAK KHALSA COLLEGE
prefer this over property as in times of a crisis it is not all that simple to convert property
to liquid cash, but the bullion can be sold within a couple of hours, and the recipient
would be cash-rich, almost instantly.
• Coins and bars are generally a liquid market, so you can find sellers and buyers
when you need them.
• They are relatively accessible to smaller investors. Coins in particular can be
bought with modest amounts of money.
• Coins are mostly recognizable, which makes them exchangeable for goods in
some circumstances. This monetary characteristic makes them attractive to
people who want to take possession of gold as a means of surviving a
catastrophe. It doesn't work always as they hope.
• Genuine coins have the added endorsement of a government mint, which provides
a level of guarantee.
• The local custody problem is often the case that when gold becomes really
valuable gold coin usage is made illegal by governments, or is so heavily taxed
and constrained that it is nonsense to use them 'above the counter'.
• There are fakes, and these are usually only spotted by dealers, although there are
tools which might help the less experienced. Dealers rate themselves at spotting
fake coins from their surface, but because bars are generally bigger than coins
they can be 'drilled out'. This obviously illegal activity leaves the serial numbered
bar skin behind and fills the interior with an alternate, like lead.
32 GURU NANAK KHALSA COLLEGE
• Next to most types of investment the difference between buying and selling price
is significant. On the face of it this can cost 7%, but the reality is usually worse.
Demand tends to come in waves, with the market producing a surfeit of buyers or
a surfeit of sellers at any given time. With a wide spread to play with the dealer
will shade high when most customers are buyers, and low when they are sellers.
3. Gold Mining Shares
Shares in gold mines are a popular way of investing in gold. These do not represent gold
at all, but rather are shares in gold mining companies. If the gold price rises, the profits of
the gold mining company could be expected to rise and as a result the share price may
rise. However, there are many factors to take into account and it is not always the case
that a share price will raise when the gold price increases.
• The advantage of investing in a gold mine's shares is that its value is much more
sensitive to the price of gold than even a gold bar.
• This is because gold mines are valued on the basis of their anticipated cash flows
through the life of the mine, and these depend on the reserves, and on the
relationship between production costs and the anticipated value of the gold
• Of course the flip side means that these gold shares would fall four times as
quickly on a falling bullion price.
• The quantity of a mine's reserves is never accurately known. Reserves (and their
poor relative 'resources') are assessed by miners' core drilling programs, which
sample a prospective gold seam to measure gold concentrations in the rock. The
amounts discovered in chemical analysis are extrapolated over a wider area to
33 GURU NANAK KHALSA COLLEGE
identify the likely reserve amount overall, but there is no guarantee it will be
found in mining. Consequently there is a risk that recorded reserves do not reflect
• There can also be unforeseen engineering problems in extracting ore. These can
increase the production costs, and only small percentage increases can eat into the
• Another issue is that the costs of the mine can be borne in a different currency -
the trading currency of the output. Exchange rate movements can greatly affect
mine profitability by creating currency translation adjustments - both profits and
• Perhaps the greatest variable is shareholder sentiment. Because of the wide
attraction of gold shares in good gold markets the shares tend to greatly
outperform not only gold, but also any reasonable valuation of the mine's future
cash-flow. Investors are often not familiar with the yield numbers they should
expect on a mine compared with - say - a supermarket, because whereas there is
no reason that using a supermarket will wear it out, the mine certainly will be
worthless within a few years, once its ore is gone. So the return on a mine must
pay back both the original investment and provide some profit during its life.
Corporate culture is another problem. These days many companies (not just
mining companies) are run more for the benefit of their managers than their
shareholders. Many managers don't like paying dividends because it diminishes
the cash pile remaining for staff salaries and new corporate adventures - like
exploration or takeover activity. Very few mining companies could be accurately
described as vehicles for the straightforward exploitation of underground ores in
the interest of shareholders.
Gold shares are potentially risky but simultaneously an exciting investment. They tend to
be reasonably correlated to gold prices but typically much more volatile, and subject to
many variations, which are independent of bullion market forces.
There are far too many of them to keep track of, and anyway individual analysis is well
beyond the scope of this site. Mining shares might be considered an appropriate gold
34 GURU NANAK KHALSA COLLEGE
vehicle investment for sums from $5,000 range upwards, but investors should remember
the gearing and invest appropriately less than they would in bullion. Buying and selling
costs vary from market to market.
4. Gold Backed Securities
These are a relatively new innovation. They aim to combine the benefits of physical gold
bullion with the liquidity and infrastructure of traditional securities market. To create a
gold backed security a company is set up which has the right to issue a paper instrument
which can only be issued in direct proportion to gold deposited in a vault. The securities
are then traded on a normal stock exchange, or by a broadly equivalent market
The price of those securities actually reflects only supply and demand for the shares
themselves in the relevant market for the securities, but this will tend to shadow bullion
because there is usually a right of redemption, allowing them to be surrendered in return
for the gold, which backs them. There will be a fee for redemption, which is fixed, and
relatively high to prevent lots of nuisance redemptions, but it allows market professionals
to leave a bid on the exchange consistently near the value of the gold.
Advantages of Gold Backed Securities –
• Gold backed securities are close to owning bars in a vault. The bars should be
stored on a proper allocated basis, which means they are not lent or made subject
to any form of derivative transaction.
• Being quoted on stock markets there is an accessible market for relatively small
investments - certainly more accessible than true bullion.
35 GURU NANAK KHALSA COLLEGE
• The dealing spreads are considerably lower than coins and small bars. Typically
they are 0.5%.
• The custody problem is resolved. A professional vault is used to store the gold,
and this is statistically much safer than any form of private storage.
Disadvantages of Gold Backed Securities –
• There is a degree of intermediation in the ownership of the gold. Although the
shares confer a right on the gold it is neither owned by the investor nor in his
possession. Technically the gold is owned by the trustees whose duty it is to
defend the entitlement of the beneficiaries under the trust.
• Although the dealing spreads are smaller the brokers in a stock exchange tend to
remunerate themselves with commissions - absent when you trade direct with a
gold dealer. Commission levels vary widely from stock market to stock market,
and from broker to broker.
• Some stock exchanges impose extra charges on each transaction.
• Some of the advantages of private investment in shares - like tax shelters - are not
applicable to securities whose purpose is to act as asset stores.
Gold backed securities have a lot to recommend them. The security of gold is more solid
than the margin based security, which underpins futures. They do not incur the periodic
volatility inherent in futures.
36 GURU NANAK KHALSA COLLEGE
The custody charges, although still quite high, are generally lower than other forms of
custody available to medium sized investors and the transaction costs are no worse than
with other stock market investments. These are innovations which appear to encourage
private gold ownership, and with a good degree of security - but a little too much cost.
5. Gold accounts
There are two types of gold accounts: allocated and unallocated.
Holding gold in an allocated account is rather like keeping it in a safety deposit box.
Specific bars (or coins, where appropriate), which are numbered and identified by
hallmark, weight, and fineness, are allocated to each particular investor, who has to pay
the custodian for storage and insurance.
Many investors prefer to hold gold in unallocated accounts, which are conceptually
similar to foreign exchange accounts. Unless investors take delivery of their gold (usually
within two working days), they do not have specific bars ascribed to them. An advantage
of unallocated accounts is that investors do not incur storage and insurance charges.
However, they are exposed to the credit-worthiness of the bank or dealer providing the
service in the same way that they would be if they had any other type of account.
Eg: Gold Pool Accounts
Gold pool accounts allow the customer to buy a gold liability from the account provider.
Effectively the customer pays cash, and the supplier treats him as a creditor for bullion,
which may or may not have been actually bought. Pool accounts are synonymous with
37 GURU NANAK KHALSA COLLEGE
The advantages of Gold Accounts–
• They are easily accessible.
• They have relatively low dealing costs - there is usually no commission and the
spreads are fairly tight - at about 1% and sometimes less.
The disadvantages of Gold Accounts -
• Unallocated gold grants very substantial unsecured credit to the account provider
and places the bullion 'owner' at material credit risk. The owner is benefiting
from a promise, and unlike the bank's promise to repay there is no assurance
underlying the promise that the provider is competent to operate in much the same
way as a bank.
• In spite of the apparent attractions of unallocated gold [pool] accounts it is
extremely hard for any serious investor to recommend them - because of the
unquantifiable risks. The customer's investment rests as a liability on the
provider's balance sheet and there is no obligation on the provider to buy the
gold. If there were unscrupulous individuals in the gold industry, their natural
service would be offering gold pool accounts. That way they can take customers'
money and put it to work for their own profit, without even paying interest.
A common misconception about unallocated pool accounts is that there is a physical pile
of gold in a bank - or some such place - which 'belongs' to the customers even if it does
not actually have their name on it. This is not true.
38 GURU NANAK KHALSA COLLEGE
The legal ownership of the gold in an unallocated account rests with the provider, even
where there is such a pile, which in quantity perfectly matches the liabilities to gold
6. Gold Exchange-Traded Fund
Gold exchange-traded funds (GETFs) are special types of exchange-traded funds
(ETFs) tracking the price of gold. Gold exchange-traded funds are traded on the major
stock exchanges including London, Paris and New York.
The idea of a gold ETF was first officially conceptualized by Benchmark Asset
Management Company in India when they filed a proposal with the SEBI in May 2002.
However it did not receive regulatory approval and was only launched later in March
2007. The first gold exchange-traded fund actually launched was in March 2003 on the
Australian Stock Exchange under Gold Bullion Securities (ticker symbol "GOLD"). Gold
Bullion Securities (GBS) are fully backed by gold which is both deposited and insured.
GBS was launched to give financial institutions and private investors the ability to own
gold and gain exposure to the price, without the inconvenience of storing physical bars.
39 GURU NANAK KHALSA COLLEGE
Typically a commission of 0.4% is charged for trading in gold ETFs and an annual
storage fee is charged. The annual expenses of the fund such as storage, insurance, and
management fees are charged by selling a small amount of gold represented by each
certificate, so the amount of gold in each certificate will gradually decline over time. In
some countries, gold ETFs represent a way to avoid the sales tax or the VAT which
would apply to physical gold coins and bars.
Investing in Gold with ETF
For the smart investor, gold can do more than just glitter. It can be portfolio diversifier,
offering the potential for protection in tough financial times. It can also be a speculative
tool, offering an opportunity to make profits by outguessing the metals markets. In the
past, people hoarded bars, coins and other forms of gold as a hedge - in case other less
tangible assets such as currency or stocks were to lose much of their value. Today,
exchange-traded funds offer a simpler way to gain the same kind of exposure, without
figuring out how to store and protect your gold holdings.
A popular form of gold ETF holds the physical metal in vaults. As more assets are
invested, the fund buys more gold. Occasionally, some of the metal is sold to cover fund
expenses. The first U.S. ETF of this type was the street TRACKS Gold Trust (GLD -
Cramer's Take - Stockpickr), which made its debut in 2004. The iShares Comex Gold
Trust (IAU - Cramer's Take - Stockpickr) also invests in bullion.
Many investors like the fact that physical gold ETFs are a "pure play" that invests directly
in the metal. They also give you the opportunity to short the metal if you think its value is
going down. However, some analysts worry ETFs invite people to trade in and out of
gold on a whim, making the market more volatile. Also, these shares probably aren't
going to be attractive to so-called "doomsday" investors, who want to have gold on hand
in the event of a global catastrophe.
40 GURU NANAK KHALSA COLLEGE
Other ETFs, such as Deutsche Bank's Power Shares DB Gold (DGL - Cramer's Take -
Stockpickr), gain exposure to gold through the futures market. Because these funds hold
a combination of contracts and cash (usually parked in treasury bills until needed), they
are able to generate some interest income to offset expenses. Gains from gold futures
may also be taxed at a lower rate than trades involving bullion.
However, futures-based gold ETFs can run into trouble when they are forced to roll into
new contracts that are more expensive than the ones that are expiring. This is called
Finally, some gold ETFs invest in the stocks of gold mining companies. Market Vectors
Gold Miners (GDX - Cramer's Take - Stockpickr) takes this approach. Due to operating
leverage, returns on gold miners can actually outpace returns on the metal itself when
gold is going up.
On the other hand, gold mining ETFs expose you to all sorts of things other than gold,
including the broader equities market. If the returns gold mining stocks are not closely
correlated to the price of gold, then ETFs invested in them lose value.
Reliance MF to offer Gold Exchange Traded Fund (RGETF)
24 March 2006
Mumbai: Reliance Capital Asset Management Ltd has filed offer documents of a
planned open-ended gold exchange traded fund (ETF) with the Securities Exchange
Board of India (SEBI).
Reliance Mutual Fund has launched a Gold Exchange Traded Fund - Reliance Gold
Exchange Traded Fund. This open-ended fund will track domestic prices of gold through
investments in physical gold. The fund will be initially available for subscription from
October 15, 2007 to November 1, 2007.
41 GURU NANAK KHALSA COLLEGE
The fund aims to provide returns that closely correspond to the return provided by the
price of gold through investment in physical gold. The performance of the scheme may
differ from that of domestic price of gold due to expense and other related factors.
An investor can buy/sell units of RGETF on a continuous basis on the National Stock
Exchange and/or other recognised stock exchanges where units are listed and traded like
any other publicly traded securities at market prices which may be close to the actual
NAV of the scheme.
Around 90-100 per cent of investments would be allocated to physical gold and gold
related instruments. Debt and money market component in the portfolio would be upto 10
The fund, to be called Reliance Gold Exchange Traded Fund, proposes to invest at least
90 per cent of its assets in gold and related instruments and the rest in debt and money
market instruments, the company said in its offer documents filed with SEBI.
Retail investors can invest a minimum of Rs5,000 in the gold-based fund, it added.
Benchmark Mutual Fund launched the country's first exchange-traded gold fund, paving
way for investors to invest and trade in the yellow metal just like in any other equity
But the scheme may not attract many investors as it is mandatory for the investor to have
a demat account for investing in the ETF. Also, on redemption, the repayment is done in
cash and there is no physical delivery of gold.
To overcome the problem of limited number of demat account holders in the country,
fund houses are tying up with depository participants (DPs) and offering demat account
services to investors, said officials.
India accounts for 23 per cent of the world's jewellery demand and around 35 per cent of
global investment in gold comes from the country.
42 GURU NANAK KHALSA COLLEGE
However, a large number of investors put their money in gold, not only to see value of
their investment grow, but also to use the metal for making ornaments later.
Mutual Fund Name : Reliance Gold Exchange Traded Fund
Mutual Fund Family : Reliance Mutual Fund
Open Ended : Exchange Traded Fund (ETF)
The investment objective is to seek to provide returns that closely correspond to returns
provided by price of gold through investment in physical Gold (and Gold related
as permitted by Regulators from time to time). However, the performance of the scheme
differ from that of the domestic prices of Gold due to expenses and or other related
Minimum Investment : Rs 5000
Incremental Investment : Rs 1
Systematic Investment Plan (SIP) allowed : No
NRI Investment : Yes
43 GURU NANAK KHALSA COLLEGE
7. E- Gold
The basis of e-gold is that international debts, and even some domestic debts, can be paid
more efficiently in gold than in foreign currencies, which have to be converted back into
host currency through the bank. So wherever a supplier and a customer both have an e-
gold account they can transfer ownership of gold between themselves across the internet,
and this constitutes payment.
To get started you use your own currency to buy grams of gold. Real gold is delivered
into a depository, and is credited to your own e-gold account.
You then get a secure internet identity, and thereafter you can instruct your e-gold
provider to debit your e-gold account in favour of your supplier - another account holder
in the system. Whatever you have bought from them is delivered to you independently.
It is primarily a payments system, but it doubles as a route for owning and storing gold.
44 GURU NANAK KHALSA COLLEGE
D) Types of Gold Investor
Investors may buy gold as an investment because they are either one of, or a combination
of, the following:
1. Asset Allocator
Traditional asset allocation strategists used to recommend exposure to gold on the
grounds of diversification. Although the inclusion of gold in portfolios has largely
been abandoned since the 1980s, it is once again being considered by some asset
Physical gold can be anonymous, if the bullion has no serial numbers or its ownership
is not recorded anywhere. Cacheurs seek to hide part of their wealth from their wives,
family, tax authorities, creditors, extortionists, kidnappers, blackmailers, police,
invaders or others. The density of gold allows them to store a large value in a very
small space, without fear of depreciation or erosion over a long period of time. A
metric tonne of gold (1,000 kg) would be equivalent to a cube of side 37.27cm (1 ft
2⅔ in), or roughly the size of a basketball. This small cube would contain 32,150 troy
ounces, and be worth about $21,000,000 (late April 2006).
45 GURU NANAK KHALSA COLLEGE
3. Currency Speculator
Since the main gold market is priced in US dollars, speculators who believe the dollar
will decline may buy gold. They think that if the dollar declines, the gold price will
remain constant in other currencies, thus rising in terms of the U.S. dollar. Gold may
also be bought if they feel that a different currency will decline, since they expect the
dollar price to be stable, but the foreign currency price to rise.
4. Gold Bug
Gold bugs, in the traditional sense, believe in, fear, or even hope for the Second Great
Depression or Armageddon, and believe that by holding gold they will survive and
Krugerrands are a popular way to invest in gold because their gold content is exactly
one troy ounce each.
Some investors respect gold as a long-term store of value, and seek no profit, other
than to maintain their purchasing power. By buying gold and hanging on for the long
term, they believe they can keep their wealth intact.
6. Inflation hedger
For centuries gold has remained a store of value. It has performed this function best in
times of high inflation. Investors thus buy gold to protect themselves against a rise in
inflation and a decline in the value of fiat money.
46 GURU NANAK KHALSA COLLEGE
Libertarians may use privately issued digital gold currency, in preference to fiat
currency, for reasons such as lack of trust in fractional-reserve banking or monetary
8. Portfolio hedger
Similar to asset allocators, except the purpose of the investment is as an insurance
against unforeseen calamities which may affect the price of other investments
negatively. Portfolios that contain gold are better able to withstand market surprises
than those that do not.
Some recent independent studies have suggested that traditional diversifiers, such as
bonds, property and hedge funds, often fail to stand up to market stress and may sell
off with equities in times of uncertainty. Even a small allocation of gold to a portfolio
significantly improves its performance during unstable periods. These individuals
believe that certain events, if they occur (e.g. war or economic crisis), may have a
negative influence on the value of their other investments, but the opposite effect on
the value of their gold.
Speculators attempt to make a profit by predicting the gold price. They may think that
macroeconomics are affecting the demand for gold, or believe they have detected a
market trend showing them the future price direction.
47 GURU NANAK KHALSA COLLEGE
E) Investment Strategies
1. Fundamental analysis
Investors may base their investment decisions on fundamental analysis. These
investors analyse the macroeconomic situation, which includes international
economic indicators, such as GDP growth rates, inflation, interest rates, productivity,
and energy prices. They would also analyse the total global gold supply versus
demand. Over 2005 the World Gold Council estimated total global gold supply to be
3,859 tonnes and demand to be 3,754 tonnes, giving a surplus of 105 tonnes.
2. Technical analysis
Investors may base their investment decisions solely on, or partly on, technical
analysis. Typically this involves analysing past price patterns and market trends, in
order to speculate on the future price. Some investors try to predict the future gold
price by tracking the ratio between the Dow Jones 30 and the gold price. The
Dow/gold ratio has fluctuated from a low of 1.0 in 1980 (i.e. the Dow and gold price
were the same) to a high of 43.7 in 1999 (i.e. the Dow was 43.7 times the gold price).
48 GURU NANAK KHALSA COLLEGE
3. Using leverage
Bullish investors may choose to leverage their position by borrowing money against
their existing gold assets and then purchasing more gold on account with the loaned
funds. In order to keep the cost of debt to a minimum, these individuals would
normally seek a loan in the currency with the lowest LIBOR, which as of April 2006
was the Japanese yen. This technique is referred to as a "yen-gold carry trade".
Leverage is also an integral part of buying gold derivatives. Leverage may increase
investment gains but also increases risk, as if the gold price decreases the investor
may be subject to a margin call.
F) Why Invest in Gold?
1. Gold is a hedge against inflation:
Gold has historically proved to be a good hedge against inflation. Gold is a commodity
the price of which is determined by various factors apart from its demand and supply.
Also, it is a commodity that is priced in US Dollars as against our local currency (the
price of gold is determined in international markets; domestic prices track the
international price very closely). What becomes apparent is that the factors that affect the
price of gold are rather different from factors that affect other assets like say domestic
fixed deposits. And therefore, if inflation in India were to dent the value of the Rupee,
and consequently your wealth, it will have no impact on the price of gold (other factors
remaining the same) thereby lending support to your wealth. In fact, in times of inflation,
the smart money tends to move to gold, thereby driving up its price.
2. Governments will make our money worth less to pay off their record debts:
49 GURU NANAK KHALSA COLLEGE
Governments can print money to pay off their debts. But they can’t create gold. The
supply of paper money can be infinite. But the supply of gold is extremely limited. And
it’s difficult to extract.
3. Precious metals do well in major international conflicts.
The price of gold was fixed during World War I and World War II. But silver, for
example, rose by over 100% in both world wars. Gold has risen for the duration of the
War on Terrorism.
4. It is liquid and can be easily converted into hard currency.
Gold and other precious metals are assets that are both tangible and liquid (i.e. easily
traded), unlike real estate which is tangible but not liquid, or company shares and bonds
which are liquid but not tangible.
5. It has ornamental value (especially for Indians).
Other reasons why people buy gold are:
• In many countries gold remains an integral part of social and religious
customs, besides being the basic form of saving. Shakespeare called it ‘the
• Superstition about the healing powers of gold persists. Ayurvedic medicine in
India recommends gold powder and pills for many ailments.
• Gold is indestructible. It does not tarnish and is also not corroded by acid –
except by a mixture of nitric and hydrochloric acids.
• Gold has aesthetic appeal. Its beauty recommends it for ornament making
above all other metals.
50 GURU NANAK KHALSA COLLEGE
• Gold is so malleable that one ounce of the metal can be beaten into a sheet
covering nearly a hundred square feet.
• Gold is so ductile that one ounce of it can be drawn into fifty miles of thin
• Gold is an excellent conductor of electricity; a microscopic circuit of liquid
gold ‘printed’ on a ceramic strip saves miles of wiring in a computer.
• Gold is so highly valued that a single smuggler can carry gold worth Rs. 50
lakh underneath his shirt.
• Gold is so dense that all the 90,000 tonnes estimated to have been mined
through history could be transported by one single modern super tanker.
• Finally, gold is scam-free. So far, there have been no Mundra-type or Mehta-
type scams in gold.
Thus, the lure of this yellow metal continues. On the other hand, it is interesting to note
that apart from its aesthetic appeal gold has no intrinsic value. You cannot eat it, drink it,
or even smell it. This aspect of gold compelled Henry Ford, the founder of Ford Motors,
to conclude that ‘gold is the most useless thing in the world’.
G) Disadvantages of investing in gold:
51 GURU NANAK KHALSA COLLEGE
• It does not provide regular current income like in the case of debentures, which
pay interest (gold bonds did not take off and lending of gold for a fee is not a
viable option for retail investors).
• It does not offer any tax advantages e.g. investment in a infrastructure bond
entitles one to certain tax advantages.
• There is a possibility of being cheated with respect to the purity of the metal.
• There is a storage cost involved in preserving gold.
• The long-term returns from gold may be lower than those from investment in
H) The Gold Deposit Scheme in India
In an attempt to mobilize the idle gold savings in households across the country, the
Government announced a Gold Deposit Scheme. According to its terms, the banks were
allowed to accept physical deposits of gold, and issue interest bearing certificates in
return, which can be reclaimed for gold on maturity. The value of the gold deposited and
the interest earned on it is exempt from wealth tax. Further, any capital gains made on
these gold bonds through trading or at redemption will be exempt from capital gains tax.
The returns are around 3% per annum. Certain banks, like the State Bank of India, also
offer benefits like rupee loans of up to 90% of the gold deposit, with the interest rate
linked to the Prime Lending Rate.
52 GURU NANAK KHALSA COLLEGE
The salient features of the SBI's gold deposit scheme are:
• Interest bearing certificates will be issued against gold deposits. Interest rate is
likely to be about 3.5 % per annum.
• Certificates will be redeemable in gold or rupee equivalent on maturity, at the
discretion of the depositor.
• Minimum deposit – 200 grams of gold.
• Certificates will be transferable by endorsement and delivery.
• No capital gains tax, wealth tax or income tax on the deposits.
• Maturity – 3 to 7 years
• Premature redemption in gold will be permitted after the minimum lock-in of 1
• SBI will give rupee loans against the certificates.
The State Bank of India (SBI) will sell the gold collected under the scheme in the local
market and thereby reduce India's dependence on imported gold. The Central Bank will
provide a forward cover to SBI at a cost. This cost plus the interest on the certificate will
more or less equal the SBI's rupee borrowing rate. In other words this is an attempt by the
government to convert physical gold into paper gold backed by the Indian Central Bank.
Disadvantages of Gold Deposit Scheme:
Making or accepting a gold deposit is not as simple as it sounds. Nearly all the gold held
by Indian households is in the form of jewelry. Jewelry deposited under the GDS would
be melted down and refined to pure gold bars. Since jewelry is a value added product, its
purchase price is 25% to 100% more than the value of gold content. Under the said
scheme this value addition would be lost. At the time of accepting the deposit, the Bank
will have to test the purity and issue the certificate based upon the exact gold content.
53 GURU NANAK KHALSA COLLEGE
Thereafter, the Bank will have to melt this jewelry and refine it to pure gold bars. In
addition to losing the value addition, the depositor of jewelry will have to bear the cost of
testing the purity and the cost of refining. This effectively means that only scrap jewelry
would be available for deposit. This leads us to an important question, that is, what is
the availability of scrap jewelry? Poor people do not scrap jewelry as they can get it
polished very economically.
After polishing, the jewelry recovers its lost shine and is as good as new. Very rich
people do exchange their old-fashioned jewelry with the latest designs.. In any case not
many households will have 200 grams of scrap jewelry.
News paper Article:
Gold bonds, unfair failure
THE Gold Deposit Scheme (now offered by four public sector banks) has collected a
mere 4,742 kg of the yellow metal and the scheme, dubbed a failure, appears headed for
the dustbin, at least for the present due to lukewarm investor response.
However, lukewarm investor response appears only to be the symptom and not the
disease. The Gold Deposit Scheme, which ought to have received top priority from both
54 GURU NANAK KHALSA COLLEGE
the government and the banks, did not receive the attention that it deserved. For example,
the waiver of stamp duty which is perhaps essential to improve the return on the scheme
was denied to the Gold Deposit Scheme by the Government.
More important, the economics of the product was itself not been designed to attract
investors. The coupon rate on the product has to change in accordance with the
movement in the price of gold. However, while gold prices in India have started inching
upwards steadily since the fourth quarter of 1999 and are up by a fairly large percentage
in that period, the coupon rates on gold deposit scheme have not been revised upwards.
In short, the investor response has been poor because the economics of the scheme was
quite poor and ranged against the investor. At the end of the day, the Gold Deposit
Scheme is a product that needs to be marketed. At a time when innovative financial
products are being successfully marketed by mutual funds, private sector banks and
financial institutions, with out proper marketing gold deposits are not likely to attract the
attention of the investor.
Also, given the tax benefits accorded to Gold Deposit Scheme, it can be structured
attractively to attract the high net worth investor. A return of 7 per cent, post-tax, would
work out to 10.7 per cent pre-tax for a high net worth investor. For a virtually risk-free
investment and an illiquid asset, this would be quite an attractive return.
I) Tax Implications
Since there is no income as such from holding gold, there is no liability for income tax.
But bullion and jewellery are subject to capital gains tax and wealth tax, without any
While determining the value of gold ornaments for the purpose of wealth tax, making
charges should be ignored, unless the ornaments are studded with precious stones. The
value of gold contained in the ornaments can be reduced by 15% to 20% because the
dealer invariably deducts 15% of the ruling rate of standard gold when ornaments are
sold in the open market.
55 GURU NANAK KHALSA COLLEGE
J) The Prospects for Gold
Many investors have forgotten that when gold price went up during the late 1970s it was
just trying to catch up with prices of other things which had already gone up. In 1970,
when the price of gold was $35 an ounce (due to the gold standard then followed in USA)
it was unquestionably undervalued. When gold hit $850 an ounce in January 1980 it was
again, unquestionably, overvalued. If the increase in gold price had kept the same pace in
1980s and 1990s as it did in 1970s, it would have become $20,000 an ounce by 2000.
With a number of Central Banks selling off huge chunks of their gold reserves, the
international price of gold has come down in the last few years.
Timothy Green, a well-known gold expert, reminds us of a historical truth: ‘The great
strength of gold throughout history has not been that you make money by holding it, but
rather you do not lose. That ought to remain its best credential’. A research study on gold
established a remarkable consistency in the purchasing power of gold over four centuries.
Its purchasing power in the mid-twentieth century was found to be nearly the same as in
the middle of the seventeenth century.
You can safely invest in gold. But take care to keep your jewellery in bank lockers. You
can also raise loans on gold for your other portfolio investments. If the Indian economy
continues to be liberalised and unshackled fast, several new options may emerge for
investors to invest in gold bars, gold coins, gold funds, gold mining companies and gold
options. It will also lead to the eventual equalisation of domestic and international prices
K) Should you invest?
Most experts agree investments in gold–physical or demat should be staggered, and for
the long term. Though the long-term returns may be lower than those from investment in
56 GURU NANAK KHALSA COLLEGE
equity or debt, gold offers a cushion against inflation. Historically, gold has fared well
when equity and debt have done badly. Over a three-five-year period, you can expect a
15-25 per cent return.
In terms of volatility, an NCDEX survey found that gold volatility was 12-18 per cent
compared to the Sensex volatility of 25-30 per cent. Analysts suggest that pricing would
take support at Rs 6,500 per 10 gm. The logic of what moves up shall come down makes
a move beyond $500 unsustainable. Moreover, hedge funds would like to book profits
over $500 to book the attractive returns made during the rally in gold prices.
The best time to invest is between June and August, when prices come down by about
10-20 per cent. The peak-buying season begins in August-September and demand winds
up by early June.
Higher disposable incomes coupled with the steady increase in demand for gold makes it
a good investment, especially if you want to beat inflation.
Gold Jewellery Market of India
57 GURU NANAK KHALSA COLLEGE
10.1 Gold Bracelet 10.2 Gold Bangles
10.3 Gold Necklace 10.4 Gold Earrings
‘All that glitters is India’s Gold’
Welcome to India’s glitzy gold market in the millennium—a market where the World
Gold Council believes that jewellery demand increased from 208 tons in 1991 to 586
tonnes in 2002. This jewellery is sold across 300,000 outlets across the country. At any
given time in the day, Jhaveri Bazar, Mumbai is a hub of activity. Shops displaying gold,
silver and assorted jewellery stand side by side on street after street, crowded by
thousands of goldsmiths, retailers, and mostly women customers.
The scene is repeated at Dariba Kalan, Delhi’s gold hub and many more places across the
country. During festivals and the marriage season, shops open at 8 am and stay open till
10 pm. Many of these stores offer an exchange scheme in which old, worn-out 21 and 22-
carat ornaments can be bartered away for new jewellery of same carat and weight.
58 GURU NANAK KHALSA COLLEGE
A) The Gold Jewellery Market
India is a leading player in the global jewellery market. The jewellery industry occupies
an important position in the Indian economy. It is a leading foreign exchange earner, as
well as one of the fastest growing industries in the country. The two major segments of
the sector in India are gold jewellery and diamonds.
Gold jewellery forms around 80 per cent of the Indian jewellery market, with the balance
comprising fabricated studded jewellery that includes diamond studded as well as
gemstone studded jewellery. The largest consumer of gold worldwide, India is also the
leading diamond cutting nation. The Indian gems and jewellery industry is competitive in
the world market due to its low cost of production and the availability of skilled labour.
The Indian gems and jewellery sector is largely unorganised at present. There are over
15,000 players across the country in the gold processing industry, of which only about 80
players have a turnover of over $4.15 million (Rs 200 million).
There are about 450,000 goldsmiths spread throughout the country. India was one of the
first countries to start making fine jewellery from minerals and metals and even today,
most of the jewellery made in India is hand made. The industry is dominated by family
jewellers, who constitute nearly 96 per cent of the market. Organised players such as Tata
with its Tanishq brand, have, however, been growing steadily to carve a 4 per cent market
B) Jewellery Manufacturing
India has well-established capabilities in making hand-made jewellery in traditional as
well as modern designs. Indian hand-made jewellery has always had a large ethnic
demand in various countries with sizeable Indian immigrant populations such as the
Middle East, South-East Asian countries, the USA and Canada. In recent times, India has
also developed capabilities in machine-made jewellery. With imported or domestic
59 GURU NANAK KHALSA COLLEGE
processed studding, Indian machine made jewellery is expected to generate demand from
non-ethnic jewellery markets as well.
The current consumption of gold in India is estimated at over 900 tonnes, used mostly in
20 / 22 carat jewellery. Nearly 95 per cent of gold is used to manufacture gold jewellery
for the domestic markets and the remaining 5 per cent is exported. Gold consumption in
India is primarily aimed at investment.
The Indian jewellery market is one of the largest in the world, with a market size of $13
billion. It is second only to the US market of $ 40 billion and is followed by China at $11
billion. The gold jewellery market is growing at 15 per cent per annum. The emergence
of branded jewellery is a new trend that is shaping the Indian jewellery market. Branded
jewellery is a relatively new concept in the sector, and has positioned itself on the quality,
reliability and wearability factors. The branded jewellery market in India is estimated at
$111.6 million per annum. Trends also show that traditional handcrafted jewellery is
slowly giving way to machine made jewellery.
C) The Distribution channel in Gold Industry
• Pure gold supplier: Only when new gold is required in business this person is
60 GURU NANAK KHALSA COLLEGE
and along with that has to keep a proper control on the workers. Not only this, this
person has to stay in touch with the current trends and the demands in the market
so that the production and the designs can be up to mark and hence there is no
wastage in the form of stocks.
• Wholesaler: This is one of he most critical link in the industry and is a helping
hand to the manufacturer. Since it is not possible for a manufacturer to reach
everywhere and cater to the needs along with the production, it becomes very
important that a wholesaler can play this role let the manufacturer concentrate on
the production aspect.
61 GURU NANAK KHALSA COLLEGE
The wholesalers are of two types:
Buying on approval basis from the manufacturers and then selling in the market.
Buys it from different manufacturers on a large scale
• Retailer: This person is in direct contact with the end consumer and he knows
what are the tastes and preferences of the customer. He plays an important role in
the transformation of the information from the customers to the manufacturer. The
wholesaler usually trades with the retailer; sometimes even the manufacturer
comes in direct contact with the manufacturer, wholesaler and retailer are all in
the queue to provide their service 99% of the customers buy their ornaments from
retail shops, rest 1% buys it either from the wholesaler or directly from the
manufacturer. But this strategy is wrong because the middleman is the wholesaler
and instead of he being chucked it is the small retailer who is suffering.
Uses of Gold
A) Current uses of Gold
62 GURU NANAK KHALSA COLLEGE
Industrial and dental uses account for around 11% of gold demand, or an annual average
of just less than 400 tonnes from 2001 to 2005 inclusive. The sector accounts for a
slightly higher proportion of stocks since in practice only part of industrial demand can
be recuperated as scrap.
Over half of industrial and dental demand – around 7% of total demand - is the use of
gold in electronic components due to its high thermal and electrical conductivity and its
outstanding resistance to corrosion. The share of electronics in total gold demand has
grown over the past decade but it also fluctuates according to global GDP and the
fortunes of the electronic industry. With the arrival of industrial civilisation the use of
gold has increased, phenomenally. Its virtues of malleability, ductility, reflectivity,
resistance to corrosion and unparalleled ability as a thermal and electrical conductor
mean it is used in a wide variety of industrial applications
The prime use is in electronics; everything from pocket calculators to computers,
washing machines to televisions uses some quantity of gold. A simple telephone typically
contains 33 gold-plated contacts. The contact points in switches, relays, and connectors
are plated with a thin layer of gold. The layer is very thin; sometimes as thin as one
thousandth of a millimeter and sometimes even thinner, but this thin layer ensures rapid
dissipation of heat and guarantees freedom from oxidation or tarnishing at extreme low or
high temperature, thus providing an atomically clean metal surface with an electrical
contact resistance close to zero.
Very little gold is used in these contacts, but the usage of electronics is increasing, so put
together, the consumption of gold is on the rise. A today more than one hundred tonne of
gold is used in this application alone.
63 GURU NANAK KHALSA COLLEGE
11.1 Industrial Uses of Gold
Most gold manufacturing of electronic components occurs in North America, Western
Europe or East Asia. This last region is gaining market share as companies relocate
factories there to take advantage of the lower cost base. For future industrial demand, it is
clearly important that next generation electronic devices and consumer goods continue to
use gold within component parts. Technically, there are good reasons why this is likely to
be the case, and with consumer demand for advanced electrical goods likely to grow, this
could well have a positive effect on gold demand in this area.
Gold’s medical use has a long history; its biocompatibility, resistance to bacterial
colonisation and to corrosion as well as its malleability mean that it can be used
successfully inside the human body. Today various biomedical applications include the
use of gold wires in heart transplants and gold-plated stents to support weak blood
vessels. Its best-known and most widespread use, however, is in dentistry. Dental use
currently accounts for just under 2% of gold demand, a share which is essentially stable.
Japan, USA and Germany are the three leading countries manufacturing dental alloys.
Gold is also used in a number of other industrial and decorative purposes such as gold
plating and coating and in gold thread (such as jari in India). Various techniques are used
to enable gold to be used in decorative finishes. Other applications take advantages of
gold’s reflectivity of heat and lasers and its optical properties. Overall these uses of gold
account for 2-3% of total demand.
A small share of the amount of scrap gold generated each year comes from reclaimed
industrial gold, primarily from electronics use.
B) New uses of Gold
64 GURU NANAK KHALSA COLLEGE
Research over the last decade has uncovered a number of possible new practical uses for
gold some of which appear to have substantial potential in increasing the industrial use of
the metal. This includes the use of gold as a catalyst including catalysts in fuel cells,
chemical processing and controlling pollution.
A number of companies are known to be developing industrial catalysts based on gold
and this could lead to important new demand for the metal. In the rapidly developing
field of nanotechnology there are many possible uses including improved LCD displays
using gold nanorods, for example in mobile phones and laptops. The use of gold in
coated superconductors could also create significant new industrial demand for gold.
Case Study on ICICI Bank
(Retail gold investment)
About ICICI Bank
ICICI Bank was originally promoted in 1994 by ICICI Limited, an Indian financial
institution, and was its wholly owned subsidiary.
ICICI Bank is India's second-largest bank. ICICI Bank has a network of about 614
branches and extension counters and over 2,200 ATMs.
65 GURU NANAK KHALSA COLLEGE
ICICI Bank offers a wide range of banking products and financial services to corporate
and retail customers through a variety of delivery channels and through its specialized
subsidiaries and affiliates in the areas of investment banking, life and non-life insurance,
venture capital and asset management.
ICICI Bank set up its international banking group in fiscal 2002 to cater to the cross
border needs of clients and leverage on its domestic banking strengths to offer products
ICICI Bank Pure Gold
Gold has been traditionally the most favored form of investment for Indians. In fact,
India, even today is amongst the highest consumers of Gold in the world. However, the
66 GURU NANAK KHALSA COLLEGE
Gold market remains largely unorganized with reliability and convenience remaining the
key issues for gold buyers in the country.
ICICI Bank is selling ICICI gold coins, at 140 branches all over India, which are the first
retail gold investment products to be sold by a local Indian bank. ICICI Bank with its
‘Pure Gold’ offer attempts to bridge the gap between the need of the customers for
buying gold and availability of an organized avenue to satisfy that need, by taking care of
the two key components – Reliability and Convenience.
24 Carat ICICI Bank Pure Gold is imported from Switzerland. The gold is made by
PAMP Refinery Switzerland and is imported from there. PAMP is one of the most
reputed and known refineries. This Gold carries a 99.99% Assay Certification, signifying
highest level of purity, as per international standards. The gold is packed in tamper -
proof blister packs that are see through at the manufacturing stage itself to prevent any
damage/ theft during transit.
ICICI Bank Pure Gold is competitively priced based on daily prices in the international
bullion market. The rates change on daily basis.
Gold Coins and Bars
After launching the coin product, ICICI Bank received the most number of enquiries for
1 gm and 2 gm. denominations. Gold coins are is available in 2.5 gram, 5 gram, 8 gram,
10 gram 20 gram and 50 gram categories.
67 GURU NANAK KHALSA COLLEGE
These coins are available in all the branches of ICICI Bank and can be bought from these
branches. These coins are available in different types like Ganesha coin, Laxmi coin,
heart shaped coins etc.
Gold bars are available in ½ a kg or 1 kg. The customers have to place an order in order
to buy the gold bars. They are not readily available in the branches. They are brought
once the order is placed.
Who Can Buy Gold?
Both ICICI Bank Customers and non-ICICI Bank customers are eligible to buy gold.
However, ICICI Bank customers can issue a cheque from their savings account or
provide a debit mandate towards purchase of gold. But, ICICI Bank does not buy the gold
sold by them.
• Visit the Pure gold counter and inform the mode of payment.
• Fill in the Gold Deposit Slip. The Gold Deposit slip will have a Specific Gold
Coin account number pre printed on it.
• Tick the weight(s) that you want and based on daily price deliver the cash/DD to
68 GURU NANAK KHALSA COLLEGE
• Cashier will acknowledge the receipt and give the acknowledgment to you and
send other part of the slip to the front desk for issuance of coins.
• Produce the acknowledgment slip at the front desk on the basis of which the gold
coins will be delivered to you.
ICICI Bank has many promotional offers throughout the year in order to increase their
sale of gold (Family vacations, buy one get one free). They advertise in the newspapers
and radio on various occasions like Diwali, Rakshabandhan and Parsi New Year. The
average sale on a daily basis varies completely. The sale is more during festivals and that
is the time when ICICI advertises more and give promotional offers.
ICICI Bank is very happy with the sales of gold coins across their branch network. They
are very keen on offering many more gold related investment products, which will help
the Indian investor, buy gold in a more cost efficient & convenient manner.
Why Gold is Preferred as an Investment
The performance of Gold bullion is often compared to stocks. They are fundamentally
different asset classes: gold is a store of value whereas stocks are a return on value (i.e.
growth plus dividends). Stocks and bonds perform best in a stable political climate with
strong property rights and little turmoil.. Since 1800, stocks have consistently gained
value in comparison to gold due in part to the stability of the American political system.
This appreciation has been cyclical with long periods of stock out performance followed
by long periods of gold out performance. The Dow Industrials bottomed out a ratio of 1:1
with gold during 1980 (the end of the 1970s bear market) and proceeded to post gains
throughout the 1980s and 1990s. The ratio peaked on January 14th, 2000 a value of 41.3
and has fallen sharply since. William Anton III wrote in the 2004 issue of Jefferson Coin
69 GURU NANAK KHALSA COLLEGE
and Bullion "...downward movement in the Dow/gold ratio is unlikely to stop precisely at
the mean trend line. The extreme distension of the 90s will likely overshoot to the
opposite extreme in the current cycle."
Technical analysis for stocks
As with stocks, gold investors may base their investment decision partly on, or solely on,
technical analysis. Typically this involves analyzing chart patterns, moving averages,
market trends and/or the economic cycle, in order to speculate on the future price.
Money value for gold
Historically increases in the supply of paper money or fiat currency through increased
money supply would cause the demand for gold to increase. There was a time when gold
was money and vice versa. If citizens felt that there may be insufficient gold to cover the
paper money in circulation, they would queue up at the bank to change their paper
currency back into gold.
However, since the gold standard was ended on August 15, 1971, governments have been
free to print as much money as they choose, without fear that their populations will come
knocking on the central bank's door demanding to change their paper money back into
In January 1959 US M3 money supply was $288.8 billion, and the official gold reserves
of the United States was then 17,335.1 tones, or 557,336,000 ounces (there are 32,150.7
troy ounces in a tone). That means that in 1959, there was $518 in circulation for every
ounce of gold reserves held by the USA. Although the actual ration of dollars to gold was
$518 per ounce, the actual price, as fixed under the gold standard, was only $35 an ounce.
By August 2005, the US M3 money supply had risen to $9,873.9 billion, whilst at the
same time the Official Gold Holdings of the United States had fallen to just 8,133.5
tonnes, or 261.50 million Troy Ounces. This means that today, in 2005, there are $37,831
in circulation for every troy ounce of gold held by the United States.
70 GURU NANAK KHALSA COLLEGE
However, this increase of 75 times in the ratio of central bank gold holdings to debt does
not allow for the fact that the gold standard was abandoned in 1971 and gold holdings
have been deliberately and considerably reduced. Another far less dramatic way of
looking at the same figures is this: In 1959 US government debt valued in gold was 8
billion Troy ounces; in 2005 US government debt was 20 billion ounces gold - an
increase of only 2.5 times.
The above numbers show the falling influence of gold in today's monetary system. Gold
bugs believe, or hope, that one day gold's importance will return as the printing of paper
money gets out of control and before we end in a hyper-inflationary fiat money collapse.
The US Federal Reserve ceased publishing M3 data on 23 March 2006, with the last
published data indicating a year-on-year growth rate of 8.23%. Central banks may see
this as a reason to limit further increases in their reserves of dollars, and thus alternatives
such as gold or the euro might be considered.
"There are about three hundred economists in the world who are against gold, and
they think that gold is a barbarous relic - and they might be right. Unfortunately,
there are three billion inhabitants of the world who believe in gold."
There are many savings and investment options available in India. Although they are not
provided in a much organized fashion, they can, nonetheless, be made available. Several
factors are considered here: why India needs to provide gold as an investment option,
71 GURU NANAK KHALSA COLLEGE
what the prevailing concerns in the market in India are, and finally, what can be done to
develop this marketplace.
Gold is a unique risk-return matrix, a safe-haven asset, an efficient diversifier against
inflation, against falls in the equity market, and against badly performing fixed securities.
Gold is highly liquid – in India, it is possible to sell gold in the middle of the night at any
of the 300,000 jewellery shops. During the 1987 crash and the 1997 Asian crisis, selling
gold proved to be the most effective way of raising cash. Gold is a currency that has no
borders and does not need to be honored by any governmental obligations. Gold is a
reserve asset – it is a defense against domestic currency fluctuations, providing the means
to tackle a debt crisis, preserving confidence in the economy, and providing a private
investment portfolio, which among the Indian public is now estimated at 10,000 to
15,000 tones. Finally, gold can act as a stabilizing factor to manage India’s external
Why is it so crucial for those living in rural and semi-urban parts of India to have access
to gold as an investment option? The majority of people living in these areas lack
knowledge of the financial markets and fail to understand them. Studies, such as that
conducted by SEBI (Security Exchange Board of India), reveal that gold, either in
primary or in jewellery form, still remain the second most preferred option among the
Indian public after deposits in the banks. There were 850 tones of gold consumed in India
last year, and it is estimated that there are 13,000 tones of gold in private hands, which is
currently not part of the mainstream economy. Gold is chiefly held for its safety and
liquidity. Demand for gold is seasonal, bought mainly during various festivals like
Diwali, Pongal and for occasions such as marriages and birthdays. And yet, the majority
of the gold purchased in India is done on an impulsive basis, driven by demand for these
72 GURU NANAK KHALSA COLLEGE
Very little gold is purchased for investment purposes. There are a number of reasons for
this. Liquidity is one – it is very difficult to exercise large volume sales of physical gold
in certain urban and rural areas without taking a hit on prices. Secondly, there are not
many players involved in either the sales or purchases of gold as an investment product.
Although India is still the largest consumer of physical gold, there is no benchmark price
at any given point of time or on any given date. For instance, we would not know exactly
how much 100gms of gold, 12gms of gold or 10gms of gold would cost in Delhi, or how
much it would be worth if one wanted to sell the same amount of gold in Mumbai or in
Agra or in Jaipur. Therefore, a benchmark price needs to be established.
India does not have trading systems in place. It does have two exchanges dealing in
equities and with some minor changes; gold could trade on those exchanges. Regarding
settlement, all investment gold has to be traded in physical form at the present time.
Banks should be brought into the system, thereby obviating the need for any person
wishing to trade in gold from holding the gold physically themselves. It should be made
as convenient as buying shares, where a few telephone calls are made, and the process is
carried out with the push of a few buttons.
There are some other options available to the Indian public – jewellery, For example,
which is more a mix of an aesthetic purchase and an investment purchase. In the case of
jewellery, quality is not guaranteed, and the aesthetic value takes away some of the
investment quality of the product. Gold coins, though they are of assured quality, have a
Ten tola bars have an assured quality but are still not marketed as an investment product
basically banks are selling these bars through wholesale traders. And in physical gold,
storage and handling are major issues. Schemes that were launched in the post-1997
reforms by the Reserve Bank of India require little work to modify their existing structure
to make them viable and available. With further modification, in this case, they can be
made tradable on the stock exchange.
73 GURU NANAK KHALSA COLLEGE
Despite being the major consumer of gold, India has absolutely no role to play in the
international functioning of this market other than the physical side. At present, as banks
can only export gold, there is no exit option for the gold that comes into India.
Options should include exporting gold bullion to overseas refineries, and banks should be
able to lend money against gold. The existing duty and sales tax structure needs to be
rationalized. More importantly, a benchmark for the price of gold should be developed.
The Indian Bullion
Association can take
having a benchmark
price setting out
buy and sell rates.
with the steady
increase in demand for
gold makes it a good
74 GURU NANAK KHALSA COLLEGE
80 GURU NANAK KHALSA COLLEGE
The whole project is with the courtesy of the following books, periodicals, newspaper
articles and sites:
• The Economic Times
• Business Standard
• Jewellery Market Of India
81 GURU NANAK KHALSA COLLEGE