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final project on commodity trade

final project on commodity trade

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  • 1. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD S.NO Table of Contents Page No 1 Executive Summary 1-4 2 Company Profile • History • Overview • About Karvy Group • Stock Broking Services • About Karvy Commodities Broking Limited • KARVY Advantage • Organization Chart 5-14 3 Introduction to commodity market 15-25 4 Research Methodology 26-29 5 Indian Commodity Futures Market • Introduction • Commodity trading contracts • Future market mechanisms • Participants in futures market & trading procedure • Limitations of commodity future market 30-46 6 Gold Commodity Future Market Introduction • Gold in Indian Scenario • World Markets • Gold an Independent Asset 47-60
  • 2. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD • Turning to demand • What makes Gold Special? • Fixing of spot gold prices • Sources Of Gold For The Goldsmiths 7 Investor Awareness And Their Perception • Investment • Aware • Investment in commodity future • Future investment and services expectation 61-65 8 Impact of Spot Gold Market on Future Gold Market 66-69 9 Factors Affecting Future Gold Market 70-78 10 FINDINGS 79-80 11 SUGGESTIONS 81 12 CONCLUSION 82 13 BIBLIOGRAPHY 83 Executive Summary
  • 3. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD Investing in various types of assets is an interesting activity that attracts people from all walks of life. Investors who are having extra cash could invest it in securities like shares or any other assets like gold, which comes under commodity futures market. Commodity Futures are contracts to buy specific quantity of a particular commodity at a future date. It is similar to the index futures and stock futures but the underlying happens to be commodities instead of stocks. Now days, the commodity market is in growth stage and the Karvy Finapolis Belgaum; working as a broking firm wants to expand and for extensive reach thinking of establishing branches in various cities of Karnataka. I have taken the commodity futures, to study and analyze, as it is the emerging trend in the market, at Karvy Finapolis Belgaum, I have taken Gold as the commodity to study the Impact of present gold price on future gold market and its trading mechanism. Title: “Study of Commodity Market with Special Reference to Gold.” at KARVY Finapolis Belgaum Objectives: • To study the mechanism of commodity market. • To study the spot gold market. • To study whether the goldsmiths of Belgaum city aware of commodity market and their perception. • To analyses the impact of spot gold market on future gold market.
  • 4. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD • To study the factors such as economic factors of US, world political and other factors affect on future market. Research methodology:  SAMPLE SIZE: 100 random sample size  SAMPLE TYPE: Simple random sampling  SAMPLE AREA: Belgaum city  TOOL USED FOR ANALYSES: 1. Graphical Representation of Analysis: Pie charts Line Chart 2. SPSS 3. Correlation  SOURCES OF DATA COLLECTION: Primary Data- • Questionnaire • Observation and personal discussion with gold traders. Secondary data- • Information collected from different websites likes Gold World, MCX etc. • From various text books, journals, magazines, news papers and booklets from company.  LIMITATION OF THE STUDY:  Spot prices are varying from shop to shop.
  • 5. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD  Commission has not included spot prices of the commodity.  Study of awareness and perception of the investor is only based on sample size.  The study of awareness is limited to Belgaum city. Findings: • There is positive correlation between both market traders can easily predict the future prices of the commodities and hedge their positions. • Most of the respondents are interested in investing in equity (i.e. 49%) when compared to the other investment alternatives because they feel investing in equity will provide more returns to them. • 82% of Investors are aware about commodity future market. • 67% of Investors have not invested as they have a perception that it is risky and they even do not have much knowledge about trading mechanism. • For gold price fluctuation main reasons are • Dollar depreciation / appreciation • World distress • Increase in money supply • Inflation
  • 6. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD Suggestions:  Both the markets are positively correlated the traders have knowledge about the commodity demand and supply and their price fluctuations. So Karvy can approach these traders and they can easily convince them so these people are the targeted customers for Karvy.  More Awareness program has to be conducted by Karvy consultants so that already aware investor takes the challenge to invest in this commodity future market. Because since this was new to the market and also risky but gives good return. so it can be done through by giving advertisements in local channels, News papers, by sending E-mail to present customers etc  From survey it is found that most of the potential customers are concerned about the genuine information and moderate brokerage so Karvy can look upon this. If it can give good information and charge moderate brokerage it will help to attract more and more customers. Conclusion Capital market is already matured and reached at high level, every investor interested to invest but not in commodity Future Market due to lack of awareness. As per Data analysis most of the investors do not have much idea of commodity market in Belgaum they are required to be given awareness training and knowledge with the help of workshops and seminars, as investors are willing to know more about commodity market. There exists a high degree of positive correlation between Spot Commodity Market and Commodity Future Market. If an amount of small change in the spot gold market prices has the direct impact on the future prices of gold in commodity market.
  • 7. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD COMPAN PROFILE The birth of Karvy was on a modest scale in 1981. It began with the vision and enterprise of a small group of practicing Chartered Accountants who founded the flagship company …Karvy Consultants Limited. We started with consulting and financial accounting automation, and carved inroads into the field of registry and share accounting by 1985. Since then, we have utilized our experience and superlative expertise to go from strength to strength…to better our services, to provide new ones, to innovate, diversify and in the process, evolved Karvy as one of India’s premier integrated financial service enterprise. Thus over the last 20 years Karvy has traveled the success route, towards building a reputation as an integrated financial services provider, offering a wide spectrum of services. And we have made this journey by taking the route of quality service, path breaking innovations in service, versatility in service and finally…totality in service. Our highly qualified manpower, cutting-edge technology, comprehensive infrastructure and total customer-focus has secured for us the position of an emerging financial services giant enjoying the confidence and support of an enviable clientele across diverse fields in the financial world. Our values and vision of attaining total competence in our servicing has served as the building block for creating a great financial enterprise, which stands solid on our fortresses of financial strength - our various companies.
  • 8. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD With the experience of years of holistic financial servicing behind us and years of complete expertise in the industry to look forward to, we have now emerged as a premier integrated financial services provider. And today, we can look with pride at the fruits of our mastery and experience – comprehensive financial services that are competently segregated to service and manage a diverse range of customer requirements. Overview: KARVY, is a premier integrated financial services provider, and ranked among the top five in the country in all its business segments, services over 16 million individual investors in various capacities, and provides investor services to over 300 corporate, comprising the who is who of Corporate India. KARVY covers the entire spectrum of financial services such as Stock broking, Depository Participants, Distribution of financial products - mutual funds, bonds, fixed deposit, equities, Insurance Broking, Commodities Broking, Personal Finance Advisory Services, Merchant Banking & Corporate Finance, placement of equity, IPO, among others. Karvy has a professional management team and ranks among the best in technology, operations and research of various industrial segments. Value and Vision of Karvy Stock Broking Ltd: “Our values and vision of attaining total competence in our servicing has served as the building block for creating a great financial enterprise, which stands solid on our fortress of financial strength – our various companies”.
  • 9. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD About KARVY Group Karvy has traveled the success route, towards building a reputation as an integrated financial services provider, offering a wide spectrum of services for over 20 years. Karvy, a name long committed to service at its best. A fame acquired through the range of corporate and retail services including mutual funds, fixed income, equity investments, insurance ……… to name a few. Our values and vision of attaining total competence in our servicing has served as a building block for creating a great financial enterprise. The birth of Karvy was on a modest scale in the year 1982. It began with the vision and enterprise of a small group of practicing Chartered Accountants based in Hyderabad, who founded Karvy. We started with consulting and financial accounting automation, and then carved inroads into the field of Registry and Share Transfers. Since then, we have utilized our quality experience and superlative expertise to go from strength to strength to provide better and new services to the investors. And today, we can look with pride at the fruits of our experience into comprehensive financial services provider in the Country.
  • 10. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD KARVY Group companies are:  Karvy Consultants Limited  Karvy Stock Broking Limited  Karvy Investor Services Limited  Karvy Computershare Private Limited  Karvy Global Services Limited  Karvy Comtrade Limited  Karvy Insurance Broking Private Limited  Karvy Mutual Fund Services  Karvy Securities Limited Stock Broking Services: It is an undisputed fact that the stock market is unpredictable and yet enjoys a high success rate as a wealth management and wealth accumulation option. The difference between unpredictability and a safety anchor in the market is provided by in-depth knowledge of market functioning and changing trends, planning with foresight and choosing one & rescue’s options with care. This is what we provide in our Stock Broking services.
  • 11. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD We offer services that are beyond just a medium for buying and selling stocks and shares. Instead we provide services, which are multi dimensional and multi-focused in their scope. There are several advantages in utilizing our Stock Broking services, which are the reasons why it is one of the best in the country. We offer trading on a vast platform; National Stock Exchange, Bombay Stock Exchange and Hyderabad Stock Exchange. More importantly, we make trading safe to the maximum possible extent, by accounting for several risk factors and planning accordingly. We are assisted in this task by our in-depth research, constant feedback and sound advisory facilities. Our highly skilled research team, comprising of technical analysts as well as fundamental specialists, secure result- oriented information on market trends, market analysis and market predictions. This crucial information is given as a constant feedback to our customers, through daily reports delivered thrice daily ; The Pre- session Report, where market scenario for the day is predicted, The Mid- session Report, timed to arrive during lunch break , where the market forecast for the rest of the day is given and The Post-session Report, the final report for the day, where the market and the report itself is reviewed. To add to this repository of information, we publish a monthly magazine. The Finapolis, which analyzes the latest stock market trends and takes a close look at the various investment options, and products available in the market, while a weekly report, called Karvy Bazaar Baatein keeps you more informed on the immediate trends in the stock market. In addition, our specific industry reports give comprehensive information on various industries. Besides this, we also offer special portfolio analysis packages that provide daily technical advice on scripts for successful portfolio management and provide customized advisory
  • 12. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD services to help you make the right financial moves that are specifically suited to your portfolio. Our Stock Broking services are widely networked across India, with the number of our trading terminals providing retail stock broking facilities. Our services have increasingly offered customer oriented convenience, which we provide to a spectrum of investors, high-net worth or otherwise, with equal dedication and competence. About Karvy Commodities Broking Limited: Commodities market, contrary to the beliefs of many people, has been in existence in India through the ages. However the recent attempt by the Government to permit Multi-commodity National levels exchanges has indeed given it, a shot in the arm. As a result two exchanges Multi Commodity Exchange (MCX) and National Commodity and derivatives Exchange (NCDEX) have come into being. These exchanges, by virtue of their high profile promoters and stakeholders, bundle in themselves, online trading facilities, robust surveillance measures and a hassle-free settlement system. The futures contracts available on a wide spectrum of commodities like Gold, Silver, Cotton, Steel, Soya oil, Soya beans, Wheat, Sugar, Channa etc., provide excellent opportunities for hedging the risks of the farmers, importers, exporters, traders and large scale consumers. They also make open an avenue for quality investments in precious metals. The commodities market, as the movements of the stock market or debt market do not affect it provides tremendous opportunities for better diversification of risk. Realizing this fact, even mutual funds are contemplating of entering into this market.
  • 13. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD Karvy Commodities Broking Limited is another venture of the prestigious Karvy group. With our well established presence in the multifarious facets of the modern Financial services industry from stock broking to registry services, it is indeed a pleasure for us to make foray into the commodities derivatives market which opens yet another door for us to deliver our service to our beloved customers and the investor public at large. With the high quality infrastructure already in place and a committed Government providing continuous impetus, it is the responsibility of us, the intermediaries to deliver these benefits at the doorsteps of our esteemed customers. With our expertise in financial services, existence across the lengths and breadths of the country and an enviable technological edge, we are all set to bring to you, the pleasure of investing in this burgeoning market, which can touch upon the lives of a vast majority of the population from the farmer to the corporate alike. We are confident that the commodity futures can be a good value addition to your portfolio. The company provides investment, advisory and brokerage services in Indian Commodities Markets. And most importantly, we offer a wide reach through our branch network of over 225 branches located across 180 cities.
  • 14. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD KARVY Advantage: Trade from anywhere in India Karvy, with its network of branches across the length and breadth of the country, is always within your reach, no matter where you are. This gives you the facility to trade from anywhere in India. Reliable research Karvy has a dedicated team of research analysts who work round the clock to provide the best research newsletters and advices. We reach your desk daily, weekly and monthly. Personalized Services Karvy, with its wide array of personalized services from registry to stock broking takes the pleasure of adding one more service, commodities broking with the same personal touch State of Infrastructure The strong IT backbone of Karvy helps us to provide customized direct services through our back office system, nation-wide connectivity and website. Round the clock operations in commodities trading
  • 15. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD Indian commodities market, unlike stock market keeps awake till 11 in the night and Karvy is all poised to offer round the clock services through its dedicated team of professionals. The account opening forms are available at our branch offices and with our business associates. You are requested to kindly contact a branch nearby your area and complete the account opening formalities for commodities trading at the branches. Also you can take a print out and fill out a simple account opening form from our website and complete the necessary documentation as per the checklist enclosed in the form. The form after duly filled up may be deposited at the nearest Karvy Branch or Associate along with a cheque/DD favoring “Karvy Commodities Broking Private Limited” payable at Hyderabad towards initial margin. Please remember the Member-Client agreement has to be executed on a non-judicial stamp paper, as per the applicable by the ‘Stamp Duty Act’ of the relevant state. Deposit Initial Margin: You need to deposit an initial upfront margin as specified by the exchange (usually between 5-10% of the contract value).The cheque/DD should be in favour of “Karvy Commodities Broking Private Limited” Mark to Market Margin: In addition to initial margin, you also need to keep a mark to market margin for taking care of the adverse price movements, if any. Achievements • Among the top 5 stock brokers in India (4% of NSE volumes) • India's No. 1 Registrar & Securities Transfer Agents
  • 16. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD • Among the to top 3 Depository Participants • Largest Network of Branches & Business Associates • ISO 9002 certified operations by DNV • Among top 10 Investment bankers • Largest Distributor of Financial Products • Adjudged as one of the top 50 IT uses in India by MIS Asia • Full Fledged IT driven operations Organization Chart Managing Director Chief Managing Director Vice-President Vice-President Vice-President Vice-President
  • 17. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD Karvy Karvy Karvy Karvy Securities Ltd. Stock Broking Ltd Consultants Ltd. Investors Services Ltd. Deputy Deputy Deputy Deputy General General General General Manager Manager Manager Manager Senior Manager Senior Manager Senior Manager SenoirManager Branch Manager Number of Team Leaders N number of Executives Introduction to commodity market Ever since the drawn of civilization, commodity trading has become an integral part of mankind. The first and foremost reason is that commodity represents the fundamental elements of lifestyle of human beings. In the early days, people used to exchange goods for goods, which was called as ‘Barter System’. With the advancement of civilization, trading system has gone through various changes and has now entered into an era of Future trading besides existence physical trading across
  • 18. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD the world. The history of Commodity Future trading can be traced back to 1688 with the introduction of Future trading in rice in Japan. This was followed by an increased participation in commodity derivatives, especially in Futures, in the industrialized countries like America and Britain. All the countries opened the avenue for introduction of Future trading in commodities in 19th century. Major commodity Future trading platforms opened in the world are Chicago Board of Trade (NYBOT) and New York Mercantile Exchange (NYMEX). A Commodity derivative is a contract which derives its value from an underlying commodity. The main purpose of Future market is to provide a mechanism for successfully managing the price risk associated with commodities. Future markets provide a platform for buyers and sellers to trade in a huge number of diverse commodities such as agricultural products, metals and energy. These markets are not only meant for hedgers, speculators and arbitrages, but also for retail investors who want to trade in booming commodity market. Indian scenario The commodity derivatives markets in India are as old as those of the US. The origin of commodity derivatives markets in India can be traced back to 1875, when Bombay Cotton Trade Association Ltd., was set up to start trading in cotton Futures. Subsequent to this, many other associations have started Future trading in commodities at different places. For example, the Futures trading in oilseeds started in 1900 at Bombay, raw jute and jute products in 1912 in Calcutta, wheat in Hapur
  • 19. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD in 1913, bullion in Bombay in 1920. However, in 1939, the Option trading in cotton was banned by the government of Bombay to restrict the speculative activity in the cotton market. in subsequent years, forward trading in various commodities like oilseeds, food grains, vegetable oil, sugar cloth were also prohibited. India’s commodity exchanges have come a long way since their opening up in the early twenty first century. In India, three national level exchanges namely Multi Commodity Exchange of India (MCEX), National Commodity and Derivatives Exchange (NCDEX) and National Multi Commodity Exchanges are operating to cater to the needs of Indian investors. Apart from these national level exchanges, nearly 20 regional exchanges are in operation, to deal with specified commodities in that region. Present Scenario Over the last 20 years, the prices of commodities have generally been bearish. Even as recently as 2002-03, the outlook on the recovery in the global economy and world trade was generally subdued due to depressed equity markets, weakening US dollar and geopolitical concerns. Commodity market across the world was impacted by these developments. However, of late, the scenario has completely changed as
  • 20. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD the global economy recovered from its slump aided by the boom in the US markets and increased demand from developing economies like India and China. In the global investment market, the newly hailed, attractive, asset class is commodities. So, investors are being attracted to this new booming market for investment. Meaning of commodity derivative market FCRA Forward Contracts (Regulation) Act, 1952 defines “goods” as “every kind of movable property other than actionable claims, money and securities”. Futures’ trading is organized in such goods or commodities as are permitted by the Central Government. At present, all goods and products of agricultural (including plantation), mineral and fossil origin are allowed for futures trading under the auspices of the commodity exchanges recognized under the FCRA. A commodity derivative is a contract which derives its value from an underlying commodity. The main purpose of future market is to provide a mechanism for successfully managing the price risks associated with commodities. Future market provides a platform for buyer and seller to trade in a huge number of diverse commodities such as agriculture products, metals and energy. These markets are not only
  • 21. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD meant for hedgers, speculators and arbitrages, but also for retail investors who want to trade in booming commodity market. Commodity derivatives market trade contracts for which the underlying asset is commodity. It can be an agricultural commodity like wheat, soybeans, rapeseed, cotton, etc or precious metals like gold, silver, etc. Difference between Commodity and Financial derivatives The basic concept of a derivative contract remains the same whether the underlying happens to be a commodity or a financial asset. However there are some features which are very peculiar to commodity derivative markets. In the case of financial derivatives, most of these contracts are cash settled. Even in the case of physical settlement, financial assets are not bulky and do not need special facility for storage. Due to the bulky nature of the underlying assets, physical settlement in commodity derivatives creates the need for warehousing. Similarly, the concept of varying quality of asset does not really exist as far as financial underlings’ are concerned. However in the case of commodities, the quality of the asset underlying a contract can vary at times. Why are Commodity Derivatives Required India is among the top-5 producers of most of the commodities, in addition to being a major consumer of bullion and energy products. Agriculture contributes about 22% to the GDP of the Indian economy. It employees around 57% of the labor force on a total of 163 million
  • 22. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD hectares of land. Agriculture sector is an important factor in achieving a GDP growth of 8-10%. All this indicates that India can be promoted as a major center for trading of commodity derivatives. It is unfortunate that the policies of FMC during the most of 1950s to 1980s suppressed the very markets it was supposed to encourage and nurture to grow with times. It was a mistake other emerging economies of the world would want to avoid. However, it is not in India alone that derivatives were suspected of creating too much speculation that would be to the detriment of the healthy growth of the markets and the farmers. Such suspicions might normally arise due to a misunderstanding of the characteristics and role of derivative product. It is important to understand why commodity derivatives are required and the role they can play in risk management. It is common knowledge that prices of commodities, metals, shares and currencies fluctuate over time. The possibility of adverse price changes in future creates risk for businesses. Derivatives are used to reduce or eliminate price risk arising from unforeseen price changes. A derivative is a financial contract whose price depends on, or is derived from, the price of another asset.
  • 23. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD Spread trade in commodities In Future trading, a spread trade refers to the act of buying one commodity or Futures contract and selling a related one, in an attempt to profit from the price difference between the two. Basically, it is an act of entering long (buying) as well as short (selling) position simultaneously in an attempt to make profit. There can be three types of spread one can enter in Commodity Derivative Market. 1. A spread can be established between different months of the same commodity (called an inter delivery spread). 2. Between the same related commodities, usually for the same month (inter commodity spread). 3. Between the same or related commodities traded on two different exchanges (inter market spread). Spread trading can be done at the market price or at desired difference level between the commodities. For example, Buy one contract of February of December Gold and at the same time sell one contract of February Gold when the February Gold contract is 100 points higher than the December contract. In this case first and foremost thing that need to be observed is the liquidity present in both the contracts. The benefits that can be arrived from entering in spread trading is the lower margin requirement, because these strategies normally carry less risk. Spreads are usually less volatile and prices move less quickly, which can be good for beginners who may be intimated by the speed and price fluctuations of a single outright trade in Future Market.
  • 24. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD Myths on commodities trading In recent past, we notice that the regulators banned trading in few commodities, thereby creating misconception in the minds of traders about the commodities market. Hence, the following is an attempt to demystify the common myths prevailing among the investors. 1) Commodity market is too complex to understand: Commodities markets are not complex as the product dealt in are natural and therefore cannot be artificially manipulated. The demand and supply also depends upon economic factors. It is easier to understand commodities as in our daily life we are familiar with commodities, we know the ruling prices of these commodities in the market, while in stocks, we are not fully aware about internal affairs of the company. 2) Only farmers are interested In trading and also only they should be trading: It is in correct to say that farmers would use this market. Actually, the farmers only use the commodity future prices as a tool to decide which crop to grow and to what extent and some large formers would use this market to hedge their risk through an intermediary. These intermediaries would normally be the same commission agents who help formers to sell their crop in cash market. Apart from farmer, others related to commodity trading either directly or indirectly can participate in trading to hedge their price risk.
  • 25. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD 3) Commodity markets are operating to serve the needs of speculators and not of the real investors: Commodities markets existence serves for price discovery and price risk management. Through this platform everybody related to commodities can find better price discovery mechanism. Producers and consumers of the commodity can minimize their price risk by way of hedging. However, speculators constitute only one dimension the market. they can work only because someone is hedging their risk in the market. this market provides the price signals to producers as well as consumers to meet their long term requirement. These price signals are not available to users unless there is a commodity futures exchange and in its absence, the markets have price fluctuations. Price stabilization comes from the price discovery process when market participants react positively to the information available to decide a price. 4) Large membership is required to run commodity exchanges: It is a misconception that to be a successful commodity exchange it needs large number of members. Success of any commodity exchange depends upon good and well-spread brokerage houses and there penetration levels. Once the commodity futures trading is well established, then the services will be broadened to many intermediaries with separate trading rights and have few members with separate trading rights and have few members with clearing rights like banks. 5) Commodities are only cash settled contracts: Unlike equity market, commodities traded through exchanges are deliverable on expiry. To facilitate smooth delivery process, the Forward Markets Commission (FMC) has categorized the delivery mechanism into three dimensions viz., compulsory delivery contracts, sellers’ option contracts. On expiry of the contracts, the open positions will be either
  • 26. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD settled by delivery or cash depending upon sellers and buyers. Since the delivery process takes long time to materialize and one has to keep track of all the delivery process transactions, nobody wants to take burden of delivery handling process. Note: Compulsory delivery option- it is an option where on the expiry of contract of a particular commodity, all the open outstanding positions are closed out by way of delivery. Heavy penalties are levied in case of default in delivery. Seller option – it is an option where the sellers has right to deliver the particular commodity on the expiry of the contract. In this option seller has to give his intention 5 working days prior to the expiry of the contract. The client who has not delivery intention and having open position at the expiry of the contract has to bear a stipulated penalty. Both Option/Intention Matching – in both the option contract the delivery happens only case of where the intention from buyer as well as seller received for a prescribed commodity to the extent of matched quantity. These contracts are generally cash selected and there is no penalty for open position. 6) The quality of produce stored in godown is guaranteed by depository/warehouse: Quality of produce is stored in exchange designated warehouse is not guaranteed by anyone until the standards in warehousing management improve to ensure preservation of the quality of goods stored. If the quality is not assured no benefit accrues to the user. Therefore, the exchange should provide a system, whereby the seller must ensure quality certification before tendering delivery and the buyer must have option to recheck the at the time of collecting delivery and in case of any discrepancies compare to the contract specifications, they should have
  • 27. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD an option to reject it. Worldwide no demat delivery is operational in commodity. 7) Commodity future markets are more risky and so it is not advisable to trade in commodities: While scrip price can go down even by 30-40 percent in a single trading session, it cannot happen in commodity futures price is based on the intrinsic value of the commodity. For instance, a scrip future can go down from Rs.4000 to Rs.2800 in a trading session, but Gold Feb 2004 contract would normally not come down from Rs.10300 to Rs.8400 in a single trading session, because the inherent value of the gold would not fall so drastically. Therefore it would volatile than stocks. What can commodity market offer? If you are an investor, commodities futures represent a good form of investment because of the following reasons.. • High Leverage – The margins in the commodity futures market are less than the F&O section of the equity market. • Less Manipulations - Commodities markets, as they are governed by international price movements are less prone to rigging or price manipulations. • Diversification – The returns from commodities market are free from the direct influence of the equity and debt market, which means that they are capable of being used as effective hedging instruments providing better diversification. If you are an importer or an exporter, commodities futures can help you in the following ways… • Hedge against price fluctuations – Wide fluctuations in the prices of import or export products can directly affect your bottom-line as the price at which you import/export is fixed before-hand. Commodity
  • 28. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD futures help you to procure or sell the commodities at a price decided months before the actual transaction, thereby ironing out any change in prices that happen subsequently. If you are a producer of a commodity, futures can help you as follows: • Lock-in the price for your produce – If you are a farmer, there is every chance that the price of your produce may come down drastically at the time of harvest. By taking positions in commodity futures you can effectively lock-in the price at which you wish to sell your produce • Assured demand – Any glut in the market can make you wait unendingly for a buyer. Selling commodity futures contract can give you assured demand at the time of harvest. If you are a large scale consumer of a product, here is how this market can help you. • Control your cost – If you are an industrialist, the raw material cost dictates the final price of your output. Any sudden rise in the price of raw materials can compel you to pass on the hike to your customers and make your products unattractive in the market. By buying commodity futures, you can fix the price of your raw material. • Ensure continuous supply – Any shortfall in the supply of raw materials can stall your production and make you default on your sale obligations. You can avoid this risk by buying a commodity futures contract by which you are assured of supply of a fixed quantity of materials at a pre-decided price at the appointed time.
  • 29. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD Research Methodology TOPIC: “ Study of Commodity Market with Special Reference to Gold.” at KARVY Finapolis Belgaum for fulfillment of requirement of MBA IVth semester in Institute of Management Education and research. It was an opportunity to learn the practical aspects of the firm. OBJECTIVES: • To study the mechanism of commodity market. • To study the spot gold market. • To study whether the goldsmiths of Belgaum city aware of commodity market and their perception. • To analyses the impact of spot gold market on future gold market. • To study the factors such as economic factors of US, world political and other factors affect on future market.
  • 30. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD SAMPLE SIZE: The sample size is consisting of goldsmiths and gold traders of Belgaum city. 100 random sample sizes have taken to identify the awareness level of gold commodity market in Belgaum city and to know the spot gold market. SAMPLE TYPE: Simple random sampling is adopted to select respondent. SAMPLE AREA: Belgaum City DURATION OF PROJECT: 1st Phase - December to January 2nd Phase - January to April (weekly two days) TOOL USED FOR ANALYSES: 1. Graphical Representation of Analysis: a. Pie charts b. Line Chart 2. SPSS 3. Correlation coefficient: It measures the intensity or the magnitude of linear relationship between two variables.
  • 31. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD N∑XY-(∑X) (∑Y) Correlation(r) = [N∑X2 –(∑X)2 ]1/2 [N∑Y2 –(∑Y)2 ]1/2 Probability Error: It is an old measure of testing the reliability of an observed value of correlation coefficient in so far as it depends upon the condition of the random sampling. Probable Error = 0.6745* (1-r2 ) √n Rules: If, PE *6 > r then correlation is not significant. If, PE < r then correlation is significant. In other situation, nothing can be concluding with certainty. DATA COLLECTION APPROACH: Primary data is important data for successful research. It has collected through questionnaire and personal discussion with brokers and gold traders. And also secondary data which act like key for successful research is collected from MCX, Gold World website and articles in newspapers such as Business Line, Economic Standards. Spot prices were collected from business line news paper and confirm it from gold smith and future prices were collected from MCX.
  • 32. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD SOURCES OF DATA COLLECTION: Primary and secondary data are collected from following sources… Primary Data- • Questionnaire • Observation and personal discussion with gold traders. Secondary data- • Information collected from different websites likes Gold World, MCX etc. • From various text books, journals, magazines, news papers and booklets from company. LIMITATION OF THE STUDY: • Spot prices are varying from shop to shop. • Commission has not included spot prices of the commodity. • Study of awareness and perception of the investor is only based on sample size. • The study of awareness is limited to Belgaum city.
  • 33. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD INDIAN COMMODITY FUTURES MARKET India has a long history of commodity futures market, extending over 125 years. Still, such trading was interrupted suddenly since the mid seventies in the fond hope of ushering in an elusive socialistic pattern of society. As the country embarked on economic liberalization policies and signed the GATT agreement in the early nineties, the government realized the need for futures trading to strengthen the competitiveness of Indian agriculture and the commodity trade and industry. Futures trading began to be permitted in several commodities, and the ushering in of the 21st century saw the emergence of new ‘National Commodity Exchanges’ with countrywide reach for trading in almost all primary commodities and their products. There have been over 20 exchanges existing for commodities all over the country. However these exchanges are commodity specific and have a strong regional focus. The Government, in order to make the commodities market more transparent and efficient, accorded approval for setting up of national level multi commodity exchanges. Accordingly two widest exchanges are there which deal in a wide variety of commodities and which allow nation-wide trading. They are: 1) National Commodity & Derivatives Exchange (NCDEX) 2) Multi Commodity Exchange of India (MCX) 3) National Multi Commodity Exchange (NMCX)
  • 34. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD 1) National Commodity & Derivatives Exchange (NCDEX): NCDEX is a public limited company incorporated on April 23, 2003 under the Companies Act, 1956. NCDEX is a technology driven commodity exchange with an independent Board of Directors and professionals not having any vested interest in commodity markets. It is committed to provide a world-class commodity exchange platform for market participants to trade in a wide spectrum of commodity derivatives driven by best global practices, professionalism and transparency. Forward Market Commission regulates NCDEX in respect of futures trading in commodities. Besides, NCDEX is subjected to various laws of the land like the Companies Act, Stamp Act, Contracts Act, Forward Commission (Regulation) Act and various other legislations, which impinge on its working. NCDEX is located in Mumbai and to start with would offer facilities in about 40 cities throughout India. The reach will gradually be expanded to other cities.
  • 35. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD 2) Multi Commodity Exchange of India (MCX): Multi Commodity Exchange of India Limited (MCX), is an Exchange with a mandate for setting up a nationwide, online multi-commodity marketplace, offering unlimited growth opportunities to commodities market participants. As a true neutral market, MCX has taken several initiatives to usher in a new-generation commodities futures market in the process, become the country's premier Exchange. MCX has started operations from November 10, 2003. Statutory framework for regulating commodity futures Commodity futures contracts and the commodity exchanges organizing trading in such contracts are regulated by the Government of India under the Forward Contracts (Regulation) Act, 1952 (FCRA), and the Rules framed there under. The nodal agency for such regulation is the Forward Markets Commission (FMC), situated at Mumbai, which functions under the aegis of the Ministry of Consumer Affairs, Food & Public Distribution of the Central Government. Forward Markets Commission (FMC) Forward Markets Commission (FMC) headquartered at Mumbai is a regulatory authority, which is overseen by the Ministry of Consumer Affairs and Public Distribution, Govt. of India. It is a statutory body set up in 1953 under the Forward Contracts (Regulation) Act, 1952.
  • 36. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD "The Act Provides that the Commission shall consist of not less then two but not exceeding four members appointed by the Central Government out of them being nominated by the Central Government to be the Chairman thereof. Currently Commission comprises three members among whom Dr. Kewal Ram, IES, is acting as Chairman and Smt. Padma Swaminathan, CSS and Dr. (Smt.) Jayashree Gupta, CSS, are the Members of the Commission." The functions of the Forward Markets Commission are as follows:  To advise the Central Government in respect of the recognition or the withdrawal of recognition from any association or in respect of any other matter arising out of the administration of the Forward Contracts (Regulation) Act 1952.  To keep forward markets under observation and to take such action in relation to them, as it may consider necessary, in exercise of the powers assigned to it by or under the Act.  To collect and whenever the Commission thinks it necessary, to publish information regarding the trading conditions in respect of goods to which any of the provisions of the act is made applicable, including information regarding supply, demand and prices, and to submit to the Central Government, periodical reports on the working of forward markets relating to such goods;  To make recommendations generally with a view to improving the organization and working of forward markets;
  • 37. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD  To undertake the inspection of the accounts and other documents of any recognized association or registered association or any member of such association whenever it considerers it necessary. Commodities selected in Phase I Bullion  Gold  Silver AFGRI commodities  Soya bean  Soya oil  Rapeseed/Mustard  Seed Rapeseed/  Mustard Seed Oil  Crude Palm oil  RBD Palmolein 0 Commodities introduced in Phase II ∗ Rubber ∗ Jute ∗ Pepper ∗ Chana (Gram) ∗ Guar ∗ Wheat
  • 38. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD COMMODITY TRADING CONTRACTS All the commodities are not suitable for futures trading & for being suitable for futures trading the market for commodity should be competitive, i.e., there should be large demand for and supply of the commodity no individual or group of persons acting in concert should be in a position to influence the demand or supply, and consequently the price substantially. There should be fluctuations in price. The commodity should have long shelf life and be capable of standardization and gradation. A commodity futures contract is essentially a financial instrument. Following the absence of futures trading in commodities for nearly four decades, the new generation of commodity producers, processors, market functionaries, financial organizations, broking agencies and investors at large are, unfortunately, unaware at present of the economic utility, the operational techniques and the financial advantages of such trading. Commodity future market involves particularly different types of forward contracts. Forward contracts FCRA defines forward contract as "a contract for the delivery of goods and which not a ready delivery contract is". All contracts in commodities providing for delivery of goods and/or payment of price after 11 days from the date of the contract are "forward" contracts. Forward contracts are of three types – 1) Specific Delivery & Ready Delivery Contracts
  • 39. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD 2) Futures Contracts 3) Option Contracts Specific Delivery/Ready Delivery contracts: Specific delivery contracts provide for the actual delivery of specific quantities and types of goods during a specified future period, and in which the names of both the buyer and the seller are mentioned. Under the Act, a ready delivery contract is one, which provides for the delivery of goods and the payment of price therefore, either immediately or within such period not exceeding 11 days after the date of the contract, subject to such conditions as may be prescribed by the Central Government. Already delivery contract is required by law to be fulfilled by giving and taking the physical delivery of goods. In market parlance, the ready delivery contracts are commonly known as "spot" or "cash" contracts. Futures Contract: A commodity futures contract is essentially a financial instrument. Following the absence of futures trading in commodities for nearly four decades, the new generation of commodity producers, processors, market functionaries, financial organizations, broking agencies and investors at large are, unfortunately, unaware at present of the economic utility, the operational techniques and the financial advantages of such trading. A futures contract is a legally binding agreement between two parties to buy or sell in the future, on a designated exchange, a specific quantity of a commodity at a specific price. The buyer and seller of a futures contract agree now on a price for a product to be delivered, or paid, for at a set time in the future, known as the "settlement date."
  • 40. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD Although actual delivery of the commodity can take place in fulfillment of the contract, most futures contracts are actually closed out or "offset" prior to delivery. A commodity futures contract is a tradable standardized contract, the terms of which are set in advance by the commodity exchange organizing trading in it. The futures contract is for a specified variety of a commodity, known as the "basis”, though quite a few other similar varieties, both inferior and superior, are allowed to be deliverable or tender-able for delivery against the specified futures contract. The parties to the contract are required to negotiate only the quantity to be bought and sold, and the price. The Exchange prescribes everything else. Because of the standardized nature of the futures contract, it can be traded with ease at a moment’s notice. Option Contract: An option on a commodity futures contract is a legally binding agreement between two parties that gives the buyer, who pays a market determined price known as a "premium," the right (but not the obligation), within a specific time period, to exercise his option. Exercise of the option will result in the person being deemed to have entered into a futures contract at a specified price known as the "strike price." In some cases, an option may confer the right to buy or sell the underlying asset directly, and these options are known as options on the physical asset. Commodity future trading contracts rarely are for the actual or physical delivery allowed to be settled otherwise than by issuing or giving deliveries. Therefore, speculators use these futures contracts to benefit from changes in prices and are hardly interested in either taking or receiving deliveries of goods.
  • 41. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD FUTURE MARKET MECHANISMS 1) Price Discovery through Future Market: In an active futures market, the demand for information by traders is enormous. Futures exchanges tend to become collection centers for statistics on supplies, transportation, storage, purchases, exports, imports, currency values, interest rates, and other pertinent information. These data, which are compiled and distributed throughout the exchange community on a continuous basis, are immediately reflected in the trading pits as traders digest the new information and adjust their bids and offers accordingly. As a result of active buying and selling of futures contracts, the market determines the best estimate of today and tomorrow's prices for the underlying commodity. In effect, prices are discovered at futures exchanges. Prices determined via this open and competitive process are considered to be accurate reflections of the supply and demand for a commodity, and for this reason they are widely used as today's best estimate of tomorrow's cash market prices for a standardized quantity of a commodity. Price discovery is the process of arriving at a figure at which one person will buy and another will sell a futures contract for a specific expiration date. In an active futures market, the process of price discovery continues from the market's opening until its close. Futures contracts are standardized as to quantity, quality, and location so buyers and sellers only bargain over price. Because of this standardization, commercial interests are better able to compute local cash prices. In
  • 42. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD many commodities, futures prices have earned a role as key reference prices for those who produce, process, and merchandise the commodity. 2) Transferring Risk: Hedging through future market Commodity production and marketing involve sizable price risks, and risk represents a cost that affects the value of a commodity. While there is no way to eliminate uncertainty, futures markets provide a competitive way for commodity producers, merchandisers, processors, and others who may own the actual commodity to transfer some price risk to speculators who will willingly assume such risk in hopes of making a profit. The process of hedging involves the concurrent use of both cash and futures markets. Since futures and cash prices tend to move together (that is, parallel to each other), and at contract expiration converge to one price, it is possible for a cotton merchant, for example, to hedge an unsold inventory of cotton with a sale of an equivalent amount of futures contracts. Since the merchant owns the commodity, he would have a loss if prices fell. To hedge, the merchant would sell futures contracts. Now if prices drop, the cash market loss will be at least partially offset by a gain on the futures contract. When the merchant sells his inventory at the lower cash market price, he will simultaneously lift his hedge by buying back his futures contracts at the lower price. The gain on his futures contracts should roughly equal the merchant's loss in the cash market.
  • 43. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD Here are three examples of how hedging helps the cash market work better: 1) Hedging stretches the marketing period. For instance, a livestock feeder does not have to wait until his cattle are ready to market before he can sell them. The futures market permits him to sell futures contracts to establish the approximate sale price at any time between the time he buys his calves for feeding and the time the fed cattle are ready to market, some four to six months later. He can take advantage of good prices even though the cattle are not ready for market. 2) Hedging protects inventory values. A merchandiser with a large, unsold inventory can sell futures contracts that will protect the value of the inventory, even if the price of the commodity drops. 3) Hedging permits forward pricing of products. A jewelry manufacturer can determine the cost for gold, silver or platinum by buying a futures contract, translate that to a price for the finished products, and make forward sales to stores at firm prices. Having made the forward sales, the manufacturer can use its capital to acquire only as much gold, silver, or platinum as may be needed to make the products that will fill its orders.
  • 44. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD These are just a few ways that commodity owners use futures markets. It requires skill and knowledge acquired that comes only by study and experience. PARTICIPANTS IN FUTURES MARKET & TRADING PROCEDURE The Futures market participants comprise of:  Farmers  Traders  Producers  Processors  Exporters  Importers  Industries associated with commodities. The futures market is used for hedging the price risk and for trading or arbitrage. Brokers of all commodity exchanges, who are located all across the country, serve the futures market users directly through their own branch offices' network or through the network of their franchisees or sub-brokers. Procedure for Individual investor to start trading in Commodity Futures Market can be as follows: Selection of Broker: A trustworthy, reliable, efficient, effective & innovative broker, having membership to any of the Exchange like MCX / NCDEX etc.
  • 45. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD would be in Investor’s interest. Broker should be such that recognizes investors’ needs & aspirations & work as a dedicated team to deliver highly effective & customized solutions to investors risk management needs. Information about Self: After selecting a broker, investor will be asked to provide information that is personal & financial. A member client agreement should be signed between the broker & investor. Investor should give photographs, bank details & should possess normal DMAT Account or broker opens that account for him/her. If trading is intended with delivery of commodities then Commodity DMAT Account is been opened. Depositing the Margin: In order to trade futures contracts, investor has to deposit margins in cash with broker. There are two types of margins, namely; initial margin & mark to market margin. i) Initial Margin- Initial Margin is set by the exchanges on basis of volatility in the particular commodity & is a percentage of the contract. ii) Mark to market Margin- At the end of the day, the contract is marked to market; meaning trader’s account is credited or debited based on the profit/ loss made during the session. On this profit or loss there broker can charge margin that is nothing but mark to market margin. Intraday Trading:
  • 46. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD Then as per individual investors wish he can buy or sell commodities online. Just he has to specify which commodity & what price is he going to buy or sell. Electronic terminals are used for this trading at various broking offices that provides the same information countrywide. This trading process is called as, “Intraday Trading”. Benefit of this online trading is that it provides a secure, transparent, fast and user-friendly system. It leads to better price discovery of commodities like Bullion, Metals and Agro products by bringing large number of Buyers and Sellers on a common National and International platform. Clearing Trades on Commodity Exchange All trades on Commodity Exchange are supported by an initial margin. At the End-of day Commodity Exchange does mark-to-market of all the open positions. This activity results into final position of all members in respect to booked losses or losses on open positions. Members make the shortfalls good by way of pay-ins to Commodity Exchange by next day and the members in profit on such positions are given the necessary credits. These payments are processed electronically through a countrywide network of clearing banks. Settlement of the Contract and Delivery A contract has a life cycle of two months. At Commodity Exchange, 5 days before the expiry of a contract, the contract enters into a tender period. At the start of the tender period, both the parties must state their intentions to give or receive delivery, based on which the parties are supposed to act or bear the penal charges for any failure in doing so. Those who do not express their intention to give or receive delivery at the
  • 47. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD beginning of tender period are required to square-up their open positions before the expiry of the contract. In case they do not their positions are closed out at 'due date rate'. The links to the physical market through the delivery process ensures maintenance of uniformity between spot and futures prices. Tendering Delivery to a Buyer by Exchange Seller Sellers intimate the exchange at the beginning of the tender period and get the delivery quality certified from empanelled quality certification agencies. They also submit the documents to the Exchange with the details of the warehouse within the city, chosen as a delivery center. Sellers are free to use any warehouse, as they are responsible for the goods until the buyer picks up the delivery, which is a practice followed in the commodities market globally. Seller would receive the money from the exchange against the goods delivered, which happens when the buyer has confirmed its satisfaction over quality and picked up the deliveries within stipulated time. Receiving Delivery of Commodities by Buyer Buyers intending to take delivery will receive it, if there are sellers willing warehouse at the designated delivery centers on the designated delivery days. There are commission agents who help the brokers with handling of the delivery, logistic support, and associated quality certification through to give delivery. The Buyer will have to make the payment within three days after the delivery is allotted. The buyer will take actual
  • 48. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD delivery from the empanelled agencies and associated billings due to tax implications. This support is required as the buyer may be in a different city than the place where the delivery is being received. Utility of Physical Delivery of Commodity to Client of Buyer The client of a buyer may use this delivery for his consumption in the industry, or for exports, or he may sell in the spot market or may sell in futures market in the subsequent contract, if he is a regular trader. Generally, the commodities available in the physical form are consumed by the industry and, rarely, commodities, are stored in the warehouse for a longer period. Percentage of Delivery in the Futures Market Though, Exchanges have specified the deliverable grades in the contract specifications, which are notified before commencement of trading in a contract. The seller is required to submit the quality certification issued by empanelled quality certification agencies, like, SGS, Geo Chem. etc. Thus, quality of a commodity is ensured, the percentage is delivery in such market is fairly low. Generally, the futures markets all over the world are used for hedging where actual delivery percentage is about 1% any user in the commodities ecosystem unlike the physical spot or forward market does not use these markets for regular consumption.
  • 49. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD LIMITATIONS OF COMMODITY FUTURE MARKET • Commodity market is very difficult to predict. Commodity prices depend upon region, monsoon, transportation cost, demand- supply theory, import/ export policies & Global market trends. So commodity market experience volatility that cannot be predicted easily. • Without knowing the spot market for commodities it is very difficult to play with Future market. In capital market it depends upon Companies performance, decisions, long run plans, mergers, etc. there are definite regions to move up & down in the market, but in the case of Commodity market there are so many regions for the market movement, it is like a game of luck to the investor. • Customer has to deposit the margin amount that is based on volatility of commodity plus brokerage that is deducted from total losses made. So if at all there is a loss, the total loss amount will be very huge. In this aspect it is very risky market. • Commodity market not yet developed in India so it is less reliable.
  • 50. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD • Commodity market gives high return but with multiplier of high risk. Gold commodity Future Market Introduction Gold is a unique asset based on few basic characteristics. First, it is primarily a monetary asset, and partly a commodity. As much as two thirds of gold’s total accumulated holdings relate to “store of value” considerations. Holdings in this category include the central bank reserves, private investments, and high-cartage jewelry bought primarily in developing countries as a vehicle for savings. Thus, gold is primarily a monetary asset. Less than one third of gold’s total accumulated holdings can be considered a commodity, the jewelry bought in Western markets for adornment, and gold used in industry. The distinction between gold and commodities is important. Gold has maintained its value in after-inflation terms over the long run, while commodities have declined. Some analysts like to think of gold as a “currency without a country’. It is an internationally recognized asset that is not dependent upon any government’s promise to pay. This is an important feature when comparing gold to conventional diversifiers like T-bills or bonds, which unlike gold, do have counter-party risk.
  • 51. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD Gold in Indian Scenario: Gold is valued in India as a savings and investment vehicle and is the second preferred investment behind bank deposits. India is the world’s largest consumer of gold in jewelry (much of which is purchased as investment). The hoarding tendency is well ingrained in Indian society, not least because inheritance laws in the middle of the twentieth century lent a great desirability to anonymity. Indian people are renowned for saving for the future and the financial savings ratio is strong, with a ratio of financial assets-to-GDP of 93%. Gold’s circulates within the system and roughly 30% of gold jewelry fabrication is from recycled pieces. India is typically also the largest purchaser of coins and bars for investment (>80tpa), although last year it had to concede first place to Japan in the wake of the heavy buying in the first quarter due to fears for the stability of the Japanese banking system. In 1998-2001 inclusive, annual Indian demand for gold in jewelry exceeded 600 tons; in 2002, however, due to rising and volatile prices and a poor monsoon season, this dropped back to 490 tons, and coin and bar demand dropped to 67 tons. Indian jewelry off take is sensitive to price increases and even more so to volatility, although this
  • 52. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD decline in tonnage since 1998 is also due in part to increasing competition from white and brown goods and alternative investment vehicles, but is also a reflection of the increase in price. The Indian bride’s “Streedhan”, the wealth she takes with her when she marries and which remains hers, is still gold, however (thus giving gold an important role in the “empowerment” of women in India). The distinction between gold and commodities is important. Gold has maintained its value in after-inflation terms over the long run, while commodities have declined. Some analysts like to think of gold as a “currency without a country’. It is an internationally recognized asset that is not dependent upon any government’s promise to pay. This is an important feature when comparing gold to conventional diversifiers like T-bills or bonds, which unlike gold, do have counter-party risk.
  • 53. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD World Markets Today's gold market is a round-the-world, round-the-clock business, played out largely on dealers' trading screens. The core of the business, however, remains in the key markets of London, as the great clearing house, New York as the home of futures trading, Zurich as physical turntable, Istanbul, Dubai, Singapore and Hong Kong as doorways to important consuming regions and Tokyo where the Commodity Exchange (TOCOM) sets the mood of Japan. Even Paris still has a small market, a reminder of the days when the French were great
  • 54. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD hoarders, while Mumbai has increasing importance under India's liberalized gold regime that permits official imports through local markets.
  • 55. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD Gold an Independent Asset It’s not difficult to understand why the gold price moves independently from the economic cycle when one considers the diversity of its demand and supply base, the ultimate determinants of price movements. There are three sources of gold supply: mine production, official sector sales and scrap or recycled gold. Mine production is by far the largest element, accounting for 70% of total supply last year. Changes in annual mine supply bear no relation to changes in US or even global GDP growth. The upward trend in mine production that was underway in the late 1980s was not arrested by 1990 recession (the US economy suffered an outright contraction, while world GDP growth slowed to 1.6% from 2.9% the previous year). Nor was the downtrend in mining output that began in 2001 reversed by the sharp acceleration in world growth.
  • 56. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD Mine production is influenced by very specific factors, such as the level of exploration spending, the success or otherwise in discovering new gold deposits and the cost of extraction (some new discoveries may not be economically viable). Lead times in gold mining are often very long. It can take years to re-open a closed mine, let alone find and mine new reserves. The decision to build a mine shaft (and often an entire infrastructure) is a long term one that will often see business cycles comes and goes. Central bank decisions to buy or sell gold (they remain net sellers) are also usually strategic in nature, rather than reactive to the economic cycle. The decision to buy or sell gold is often made years in advance and then carried out over a period of years. In Switzerland, for example, the proposition to sell gold (the first gold sales programmed) was first recommended by a group of experts in 1997. However, the actual sales programmed did not commence until May 2000, with the sales then taking place over a period of five years. Scrap supply is influenced by many factors, perhaps the most important being price and price volatility, but recessions and periods of economic distress have also had an impact. The most dramatic example is when Korea was pushed into recession during the 1998 Asian currency crisis; its scrap supply increased by almost 200 tonnes as the government bought gold from the local populace in exchange for won- denominated bonds. It then sold the gold on the international market in order to raise the dollars necessary to avoid defaulting on its external debt. Similarly, in Indonesia the 1998 recession saw scrap supply increase by 72 tonnes in the first quarter of the year, in this instance
  • 57. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD purely for independent reasons rather than at the behest of the government. Turning to demand Conventional wisdom argues that recessions are bad for commodity prices. The reasoning goes that as consumer and business confidence falls, demand for goods and services is cut back and hence the materials used in the production of those goods or in the provision of services (many of which are commodities) declines, thereby depressing their price. The argument is logical. However, a few points are worth bearing in mind with respect to gold. Demand for gold as an intermediate good is relatively small in comparison to many other commodities. Last year, just 14% of gold demand came from the industrial sector (mainly electronics). This is in stark contrast to base metals and even other precious metals, where the vast majority of demand comes from industry. As a result, gold is much less vulnerable to the vagaries of the economic cycle. That said, demand for gold in electronics is likely to fall if the economy falls into recession as consumer spending on non-essential electronics goods declines. A US recession would undoubtedly have negative implications for gold jewelry demand in America, as consumer spending slows. However, this negative implication could be at least partially offset by the higher share of gold jewelry in the retail market that gold jewelry has enjoyed in recent years. Moreover, gold is much less vulnerable than other jewelry materials, such as diamonds or platinum, to a US recession as far more demand for gold comes from outside of the US – 70% of diamond jewelry demand comes from the US market, compared with just 10% for gold.
  • 58. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD India is in fact the single largest consumer of gold jewellery in the world in tonnage terms. Last year, Indian households bought 558 tonnes of gold jewelry, more than double their US counterparts (Chart 7). Chinese consumers rank second, having bought 331 tonnes. US consumers are third in tonnage terms, although US demand remains highest in retail value terms due to its higher trade margins. The extent to which worldwide gold jewelry demand suffers from a US recession will depend partly on the spill-over effects to other countries. If proponents of “decoupling” prove to be correct (they argue that emerging market economies are now strong enough domestically to withstand a US slowdown) then worldwide jewelry demand need not fare badly. The final source of demand comes from investors. Investors buy gold for many reasons. Chief among these are gold’s inflation and dollar- hedging properties, both of which have been proven over long periods of time. How a recession affects investment demand would depend, in part, on how inflation and the dollar react. The brewing recession has so far been positive for gold on both fronts. The dollar has continued its downward trajectory, while inflation has (unusually) headed higher. US consumer prices increased at an annual rate of 4.0% in February this year, up from 2.4% just a year earlier. If these trends continue, investment demand for gold as an inflation and dollar hedge is likely to remain strong. And if the recession deepens concerns over the health of the US banking sector, demand for gold as a safe haven asset is also likely to remain robust. In summary, statistical analysis suggests there is no relationship between changes in US GDP growth and changes in the gold price. This reflects gold’s unique and diverse demand and supply base, which as for any freely-traded good ultimately determine the price. Consequently, a US recession does not have negative implications for the gold price. The only element of demand likely to be affected by a recession is investment
  • 59. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD demand, but that in turn will depend on the “type” of recession. So far, the brewing recession has been positive for gold, as it has been accompanied by a rise in inflation and a falling dollar, which has boosted demand for gold as a dollar and inflation hedge. Largest Gold Belts: • The famous Witwatersrand in South Africa - the world's largest gold belt. • The Tian Shan Gold Belt - the second largest belt in the world. Largest Gold Producing Country in the World • South Africa • Australia • United States Important world market: • London is the biggest and the oldest gold market in the world. • Mumbai is India’s liberalized gold regime. • New York is the home of gold future trading. • Istanbul, Dubai, Singapore and Hong Kong are doorways to important consuming regions.
  • 60. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD What makes Gold Special? • Timeless and Very Timely Investment: For thousands of years, gold has been prized for its rarity, its beauty, and above all, for its unique characteristics as a store of value. Nations may rise and fall, currencies come and go, but gold endures. In today’s uncertain climate, many investors turn to gold because it is an important and secure asset that can be tapped at any time, under virtually any circumstances. But there is another side to gold that is equally important, and that is its day-to- day performance as a stabilizing influence for investment portfolios. These advantages are currently attracting considerable attention from financial professionals and sophisticated investors worldwide. • Gold is an effective diversifier: Diversification helps protect your portfolio against fluctuations in the value of any one-asset class. Gold is an ideal diversifier, because the economic forces that determine the price of gold are different from, and in many cases opposed to, the forces that influence most financial assets. • Gold is the ideal gift: In many cultures, gold serves as a family treasure or a wealth transfer vehicle that is passed on from generation to generation. Gold bullion coins make excellent gifts for birthdays, graduations, weddings, holidays and other occasions. They are appreciated as much for their intrinsic value as for their mystical appeal and beauty. And because gold is available in a wide range of sizes and denominations, you don’t need to be wealthy to give the gift of gold. • Gold is highly liquid: Gold can be readily bought or sold 24 hours a day, in large denominations and at narrow spreads. This cannot be said of most other investments, including stocks of the world’s largest
  • 61. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD corporations. Gold is also more liquid than many alternative assets such as venture capital, real estate, and timberland. Gold proved to be the most effective means of raising cash during the 1987 stock market crash, and again during the 1997/98 Asian debt crisis. So holding a portion of your portfolio in gold can be invaluable in moments when cash is essential, whether for margin calls or other needs. • Gold responds when you need it most: Recent independent studies have revealed that traditional diversifiers often fall during times of market stress or instability. On these occasions, most asset classes (including traditional diversifiers such as bonds and alternative assets) all move together in the same direction. There is no “cushioning” effect of a diversified portfolio — leaving investors disappointed. However, a small allocation of gold has been proven to significantly improve the consistency of portfolio performance, during both stable and unstable financial periods. Greater consistency of performance leads to a desirable outcome — an investor whose expectations are met. What makes Gold different from other commodities? The flow demand of commodities is driven primarily by exogenous variables that are subject to the business cycle, such as GDP or absorption. Consequently, one would expect that a sudden unanticipated increase in the demand for a given commodity that is not met by an immediate increase in supply should, all else being equal, drive the price of the commodity upwards. However, it is our contention that, in the case of gold, buffer stocks can be supplied with perfect elasticity. If this argument holds true, no such upward price pressure will be observed in the gold market in the presence of a positive demand shock.
  • 62. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD The existence of a sophisticated liquid market in gold has, over the past 15 years, provided a mechanism for gold held by central banks and other major institutions to come back to the market. Although the demand for gold as an industrial input or as a final product (jewelry) differs across regions, it is argued that the core driver of the real price of gold is stock equilibrium rather than flow equilibrium. This is not to say that exogenous shifts in flow demand will have no influence at all on the price of gold, but rather that the large supply of inventory is likely to dampen any resultant spikes in price. The extent of this to dampening effect depends on the gestation lag within which liquid inventories can be converted in industrial inputs. In the gold industry such time lags are typically very short. Gold has three crucial attributes that, combined, set it apart from other commodities: firstly, assayed gold is homogeneous; secondly, gold is indestructible and fungible; and thirdly, the inventory of aboveground stocks is astronomically large relative to changes in flow demand. One consequence of these attributes is a dramatic reduction in gestation lags, given low search costs and the well-developed leasing market. One would expect that the time required convert bullion into producer inventory is short, relative to other commodities which may be less liquid and less homogenous than gold and may require longer time scales to extract and be converted into usable producer inventory, making them more vulnerable to cyclical price volatility. Of course, because of the variability of demand, the price responsiveness of each commodity will depend in part on precautionary inventory holding.
  • 63. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD Fixing of spot gold prices: spot price 41 41.0 41.0 41.0 59 59.0 59.0 100.0 100 100.0 100.0 Investors Daily Trading Bases/Future Market Total Valid Frequency Percent Valid Percent Cumulative Percent Interpretation: In all 100 sample size 59 respondents are gold smiths. All are fix the price according to daily bases, which are displays in TV time to time. In a day in spot market three times price is changes. spot price 59.0% 41.0% Daily Trading Bases/ Investors
  • 64. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD Sources Of Gold For The Goldsmiths: commodities 54.0% 5.0% 41.0% Wholesaler Local supplier Investors Interpretation: Above Pie chart shows that out of 100 sample size, 54% of respondents get gold from wholesalers, 5% are from local suppliers and remaining are investors. So most of them get the gold from wholesalers. 41 41.0 41.0 41.0 5 5.0 5.0 46.0 54 54.0 54.0 100.0 100 100.0 100.0 Investors Local supplier Wholesaler Total Valid Frequency Percent Valid Percent Cumulative Percent
  • 65. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD • To study whether the goldsmiths of Belgaum city aware of commodity market and their perception. ♦ Where do you prefer to invest? invest 9 9.0 9.0 9.0 10 10.0 10.0 19.0 49 49.0 49.0 68.0 28 28.0 28.0 96.0 4 4.0 4.0 100.0 100 100.0 100.0 Gold Bank/Fixed Deposit Equity Mutual Funds Real Estate Total Valid Frequency Percent Valid Percent Cumulative Percent invest 4.0% 28.0% 49.0% 10.0% 9.0% Real Estate Mutual Funds Equity Bank/Fixed Deposit Gold Interpretation:
  • 66. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD The Graph clearly shows that most of the respondents are interested in investing in equity (49%) when compared to the other investment alternatives because they feel investing in equity will provide more returns to them. ♦ Are you aware about commodity market? aware 82 82.0 82.0 82.0 18 18.0 18.0 100.0 100 100.0 100.0 Yes No Total Valid Frequency Percent Valid Percent Cumulative Percent aware 18.0% 82.0% No Yes Interpretation: The above pie chart describes that 82% of the investors (goldsmiths or gold traders) are aware about the Commodity Future market and 18% of them are not aware about Commodity Future Market. So there is a need to create awareness about the commodity future market and its benefits.
  • 67. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD There is a lot of potential is there to create customer and influence them to invest in Commodity Future market. ♦ Have you invested in commodity future market? commodity 17 17.0 17.0 17.0 16 16.0 16.0 33.0 67 67.0 67.0 100.0 100 100.0 100.0 Not aware Yes No Total Valid Frequency Percent Valid Percent Cumulative Percent commodity 67.0% 16.0% 17.0% No Yes Not aw are Interpretation: The pie chart shows that, even though the investors are aware about commodity future market only 16% of them have actually invested in this
  • 68. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD market where as the remaining have not invested because among them 17% are not aware and remaining 67% investors have not invested as they have a perception that it is risky and they even do not have much knowledge about trading mechanism. ♦ In future do you want to trade in commodity future market? future 16 16.0 16.0 16.0 61 61.0 61.0 77.0 23 23.0 23.0 100.0 100 100.0 100.0 Investors Yes No Total Valid Frequency Percent Valid Percent Cumulative Percent future 23.0% 61.0% 16.0% No Yes Investors Interpretation:
  • 69. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD The above pie chart represents that, the investors who have not yet invested in the commodity future market, out of them 61% of the investors are interested to invest in the coming future. ♦ What type of services does you except from your broker? service you expect from your broker 69 69.0 69.0 69.0 13 13.0 13.0 82.0 13 13.0 13.0 95.0 5 5.0 5.0 100.0 100 100.0 100.0 Genuine Information Moderate Brokerage Good Service Recommendation Total Valid Frequency Percent Valid Percent Cumulative Percent service you expect from your broker 5.0% 13.0% 13.0% 69.0% Recommendation Good Service Moderate Brokerage Genuine Information
  • 70. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD Interpretation: The graph shows that, the investors expect that the brokers should provide them the genuine information regarding the market. Also they want moderate brokerage and good services from the brokers. • To analyses the impact of spot gold market on future gold market. My Fourth objective is to identify the impact of Spot gold commodity market on Gold Commodity Future market, means how the prices prevailing in the commodities affect the Commodity Future Market. The following table and chart shows the Correlation between these two markets. DATE SPOT PRICE FUTURE PRICE 10-16 Dec 2007 10207.29 10253.86 17-23 Dec 2007 10270 10281.86 24-30 Dec 2007 10577.86 10477.43 31,1-6 Jan 2008 10729.14 10841.43 7-13 Jan 2008 10902.14 11229.43 14-20 Jan 2008 11291.43 11310.14 21-27 Jan 2008 11434.43 11477.71 28-31 jan,1-3 Feb 2008 11582.71 11681.29 4-10 Feb 2008 11609.43 11577.57 11-17 Feb 2008 11677.43 11600 18-24 Feb 2008 12024.71 11960.29 25-29 Feb,1-2 Mar 2008 12320.29 12271 3-9 mar 2008 12735.29 12700 10-16 Mar 2008 12895.29 12863.29 17-23 Mar 2008 12503.14 12435.43 24-30 Mar 2008 12149.57 12144 31,1-5 Apr 2008 11724.67 11699.33
  • 71. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD Correlation(r) = N∑XY-(∑X) (∑Y) [N∑X2 –(∑X)2 ]1/2 [N∑Y2 –(∑Y)2 ]1/2 = 38874931920 – 196804*196634.8 (38901987218 – 38731833159)1/2 (38850684629 – 38665248316)1/2 = 0.9931 Probable Error = 0.6745*(1-r2 )/√n = 0.6745*(1- 0.99312 )/ √17 = 0.00224 6*probable error = 0.0135
  • 72. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD Spot & future price 0 2000 4000 6000 8000 10000 12000 14000 10-16 dec 07 17-23 dec 07 24-30 dec 07 31,1-6 jan 08 7-13 jan 08 14-20 jan 08 21-27 jan 08 28-31jan,1-3feb 08 4-10 feb 08 11-17 feb 08 18-24 feb 08 25-29feb,1-2m ar08 3-9 m ar08 10-16 m ar08 17-23 m ar08 24-30 m ar08 31,1-5 apr08 Date Prices spot price future price Interpretation: Hence,  Correlation is 0.9931  Probable Error is 0.00224 Above correlation calculation shows the correlation value 0.9931 of spot and Future prices of commodity Gold and the probable error 0.00224. Hence the six time of probable error i.e. 0.0135 is less than the correlation. Therefore, the prices prevailing in both the market are highly correlated. This means, the future prices will very much following the trend of Spot commodity market price. In fact the future prices will reflect the spot prices very closely. Correlation between Spot Gold Price and Dollar Rate DATE SPOT $ % Changes in prices
  • 73. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD PRICE RATE 10-16 Dec 2007 10207 39.41 Spot $ rate 17-23 Dec 2007 10270 39.6 0.0061441 0.00475 24-30 Dec 2007 10578 39.45 0.0299764 -0.00382 31,1-6 Jan 2008 10729 38.69 0.0143021 -0.01919 7-13 Jan 2008 10902 39.32 0.0161243 0.01621 14-20 Jan 2008 11291 39.33 0.0357073 0.00033 21-27 Jan 2008 11434 39.47 0.0126645 0.00356 28-31 Jan,1-3 Feb 2008 11583 39.41 0.0129684 -0.00156 4-10 Feb 2008 11609 39.6 0.0023064 0.00497 11-17 Feb 2008 11677 40.02 0.0058573 0.0105 18-24 Feb 2008 12025 40 0.0297399 -0.00061 25-29 feb,1-2 Mar 2008 12320 39.89 0.0245803 -0.00261 3-9 Mar 2008 12735 40.45 0.0336843 0.01389 10-16 Mar 2008 12895 40.44 0.0125635 -3.5E-05 17-23 Mar 2008 12503 40.52 -0.0304098 0.00194 24-30 Mar 2008 12150 40.15 -0.0282786 -0.00913 31,1-5 Apr 2008 11725 40 -0.0349728 -0.00372 Correlation (r) of Spot Gold Prices and Dollar Rate is 0.2042 Probable error is 0.1659
  • 74. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD Spot Gold Prices & Dollar Rate -0.04 -0.03 -0.02 -0.01 0 0.01 0.02 0.03 0.04 17-23dec0724-30 dec0731,1-6 jan087-13 jan 0814-20 jan 0821-27 jan08 28-31jan,1-3feb084-10 feb 0811-17 feb0818-24 feb 08 25-29feb,1-2mar083-9m ar0810-16 m ar0817-23 m ar0824-30 m ar0831,1-5apr08 Date %ofChangeinRate % of Change in Spot prices % of changes in $ Rate Interpretation: As, P.E. is not more than r (correlation), according to rule three nothing can be conclude with certainty. It means that correlation between spot gold price and $ rate is neither significant nor certainty. But analyzing above chart and correlation (0.2042), it can be concluded that correlation between dollar and spot gold price is not so much significant. It means if one price increases other will be decrease. For example, in the week of 24 to 30 December and 14 to 20th January Gold price increases and dollar rate decreases.
  • 75. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD • To study the factors such as economic factors of US, world political and other factors affect on future market. NEWS OF BILLION  Walter De Wet Standard Bank, London The current global economic environment remains bullish for gold, but should ensure that volatile conditions remain. We see the US economy coming under increased pressure during the first half of 2008. As a result credit spreads should widen further. Combined with sovereign and political risk on the rise in certain countries, we should see support for gold in 2008H1. The US dollar’s woes are linked to US interest rates declining. The Fed is set to continue easing rates, while the ECB seems unperturbed by slowing economic growth, and is unlikely to cut rates for now. Although jewelry demand in major centers showed a decline towards end-2007, this must be a continuous trend before any real price impact will be seen. The new futures contract that started trading on the Shanghai Futures exchange is bound to renew interest in gold as an investment in China. We do believe this impact could be large. Continued portfolio diversification via commodity investment vehicles should provide support to the metal on the downside. There are three factors that play a dominating role as the driving force of precious metals prices. The price of crude oil serves as a good proxy for inflation fears. The next major fundamental factor is the US dollar exchange rate, as metals are priced in this currency. Here, either the US dollar index or the EUR/USD exchange rate has the closest correlation. And finally, precious metals are not necessarily a safe haven. If investors risk appetite drops due to crisis in financial markets,
  • 76. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD precious metals are often sold to cover losses. The US stock market provides a good indication of risk aversion. Crude oil started the year with a bang as it traded at $100/bbl for the first time. However, much of the price increase is based on speculation rather than the underlying supply and demand balance. In 2008, demand is expected to expand less than the consensus view due to a slowdown of G7 economies. In China as well, GDP growth is likely to be lower than last year. By the end of this year, Brent is predicted to be trading at $70/bbl. Thus, one of the main fundamentals suggests a significant correction rather than a continuation of the upward trend of precious metals in 2008. However, this does not contradict our forecast. In the first half of the year, other factors will be superimposed on the effect of falling oil prices. The correlation between gold and crude oil has been greater over the last eight years than that between gold and the EUR/USD exchange rate, but there are also phases in which the correlation is rather less close. These periods include the beginning of the year, when different seasonal patterns can lead to a divergence. While crude oil often eases over the winter, demand from the jewelry industry means that gold and silver prices tend to rise until the end of the first quarter. Although jewelry demand may not be quite as great as expected in view of the high current prices, it should support the prices of gold and silver. In the case of platinum it appears that jewelry demand in China is falling, whereas in gold it remains strong despite price rises. Demand from financial investors is far more important than demand from the jewelry industry for the development of precious metal prices. It is often said that investors buy gold as a hedge against rising inflation. However, empirical experience does not bear this out. US inflation has no significant effect on the gold price. Demand from financial investors is
  • 77. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD largely determined by the US dollar’s performance in the currency markets. Since the sub prime mortgage crisis broke out, what has driven the dollar’s weakness is the expectation that the Fed will cut interest rates so that the dollar becomes less attractive relative to other currencies. Following the recent weak US economic data and the rise in the unemployment rate to 5%, our US economists anticipate that the Fed will start lowering interest rates more aggressively, cutting the Fed funds rate during the first half of the year in four steps of 25bp each to 3.25%.This means that the Fed Funds target rate is well below the ECB refinancing rate. The US dollar is expected to weaken against the Euro to 1.53 in Q2, but in H2 the tables will be turned. US GDP growth should pick up again as early as Q2 and further accelerate after the summer, so that the market will no longer expect further interest rate cuts. In the Euro zone on the other hand weaker growth is expected, so that the ECB should reduce the refinancing rate by 25bp.The US dollar is likely to appreciate against the Euro to 1.43. Precious metals will then face a headwind from falling oil prices and a firmer dollar. They will not be able to withstand this pressure and prices should ease significantly. Silver is likely to perform better than gold in H1 but to perform worse in H2. Due to production problems in South Africa and the demand pattern of the automobile industry, platinum is expected to hold better than palladium.  Davis, David Credit Suisse Standard Securities Johannesburg Upward pressure on the gold price is likely being driven by the US economic environment, rising oil and commodity prices and a change in the dynamics surrounding supply and demand. These combined factors have resulted in a weakening of the US dollar, which in turn has driven
  • 78. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD gold higher. The economic environment in the US was recently jolted by sub prime mortgage losses, the tightening of the credit market and the lowering of interest rates. Higher oil prices will likely result in inflationary pressures, which in turn will put upward pressure on gold. Turning to supply-and-demand fundamentals, over the longer term, our studies indicate that global gold production (primary supply) will begin to decline as the diminishing number of new reserves fails to compensate for dying mines. The decline in production will likely be accelerated should the gold mining industry continue to incur significant year-on-year inflation rates which are not offset by similar or significantly higher gold price increases. Geopolitical tensions, which generally lead to higher gold prices and price volatility, have heightened with the political turmoil in Pakistan after the assassination of Benazir Bhutto and the cross border operations of Turkish troops to hunt down Kurdish separatists in Iraq. Tensions are also ever-present between the US and Iran and the US and North Korea. Given this longer-term scenario, we believe the supply- demand imbalance going forward will begin to accelerate at an ever- increasing pace into a net deficit, which in turn will likely put significant upward pressure on the gold price.  Suki Cooper Barclays Capital, London In our view, gold prices are set to post positive gains for the seventh consecutive year on an annual average basis. Following a significant swing into deficit last year, the market fundamentals remain tightly balanced and external drivers remain positive. Even with the dollar stabilizing at its recent lower levels, investment demand remains strong. Gold prices were buoyed by investor interest and this is likely to remain the key price determinant this year. External factors such as higher inflation expectations, broader economic concerns, geopolitical tensions and Fed rate easing are likely to drive prices higher. On a
  • 79. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD fundamental basis mine supply remains constrained and physical and investment demand should emerge upon price dips providing a price floor. Fifteen Fundamental Reasons for bullish run of Gold 1. Global Currency Debasement: The US dollar is fundamentally & technically very weak and should fall dramatically. However, other countries are very reluctant to see their currencies appreciate and are resisting the fall of the US dollar. Thus, we are in the early stages of a massive global currency debasement, which will see tangibles, and most particularly gold, rise significantly in price. 2. Investment Demand for Gold is Accelerating: When the crowd recognizes what is unfolding, they will seek an alternative to paper currencies and financial assets and this will create an enormous investment demand for gold. To facilitate this demand, a number of new vehicles like Central Gold Trust and gold Exchange Traded Funds (Elf's) are being created. 3. Alarming Financial Deterioration in the US: In the space of two years, the federal government budget surplus has been transformed into a yawning deficit, which will persist as far as the eye can see. At the same time, the current account deficit has reached levels which have portended currency collapse in virtually every other instance in history. 4. Negative Real Interest Rates in Reserve Currency (US dollar): To combat the deteriorating financial conditions in the US, interest rates have been dropped to rock bottom levels, real interest rates are now negative and, according to statements from the Fed spokesmen, are expected to remain so for some time. There has been a very strong
  • 80. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD historical relationship between negative real interest rates and stronger gold prices. 5. Dramatic Increases in Money Supply in the US and Other Nations: US authorities are terrified about the prospects for deflation given the unprecedented debt burden at all levels of society in the US. Fed Governor Ben Bernanke is on record as saying the Fed has a printing press and will use it to combat deflation if necessary. Other nations are following in the US's footsteps and global money supply is accelerating. This is very gold friendly. 6. Existence of a Huge and Growing Gap between Mine Supply and Traditional Demand: Gold mine supply is roughly 2500 tonnes per annum and traditional demand (jewellery, industrial users, etc.) has exceeded this by a considerable margin for a number of years. Some of this gap has been filled by recycled scrap but central bank gold has been the primary source of above-ground supply. 7. Mine Supply is anticipated to Decline in the next Three to Four Years: Even if traditional demand continues to erode due to ongoing worldwide economic weakness, the supply demand imbalance is expected to persist due to a decline in mine supply. Mine supply will contract in the next several years, irrespective of gold prices, due to a dearth of exploration in the post Bre-X era, a shift away from high grading which was necessary for survival in the sub-economic gold price environment of the past five years and the natural exhaustion of existing mines.
  • 81. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD 8. Large Short Positions: To fill the gap between mine supply and demand, central bank gold has been mobilized primarily through the leasing mechanism, which facilitated producer hedging and financial speculation. Strong evidence suggests that between 10,000 and 16,000 tonnes (30- 50% of all central bank gold) is currently in the market. This is owed to the central banks by the bullion banks, which are the counter party in the transactions. 9. Low Interest Rates Discourage Hedging: Rates are low and falling. With low rates, there isn't sufficient contango to create higher prices in the out years. Thus there is little incentive to hedge, and gold producers are not only hedging, they are reducing their existing hedge positions, thus removing gold from the market. 10. Rising Gold Prices and Low Interest Rates Discourage Financial Speculation on the Short Side: When gold prices were continuously falling and financial speculators could access central bank gold at a minimal leasing rate (0.5 - 1% per annum), sell it and reinvest the proceeds in a high yielding bond or Treasury bill, the trade was viewed as a lay up. Everyone did it and now there are numerous stale short positions. However, these trades now make no sense with a rising gold price and declining interest rates. 11. The Central Banks are nearing an Inflection Point when they will be Reluctant to provide more Gold to the Market: The central banks have supplied too much already via the leasing mechanism. In addition, Far Eastern central banks who are
  • 82. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD accumulating enormous quantities of US dollars are rumored to be buyers of gold to diversify away from the US dollar. 12. Gold is Increasing in Popularity: Gold is seen in a much more positive light in countries beginning to come to the forefront on the world scene. Prominent developing countries such as China, India and Russia have been accumulating gold. In fact, China with its 1.3 billion people recently established a National Gold Exchange and relaxed control over the asset. Demand in China is expected to rise sharply and could reach 500 tonnes in the next few years. 13. Gold as Money is Gaining Credence: Islamic nations are investigating a currency backed by gold (the Gold Diner), the new President of Argentina proposed, during his campaign, a gold backed peso as an antidote for the financial catastrophe which his country has experienced and Russia is talking about a fully convertible currency with gold backing. 14. Rising Geopolitical Tensions: The weakening conditions in the Middle East, the US occupation of Iraq, the nuclear ambitions of North Korea and the growing conflict between the US and China due to China's refusal to allow its currency to appreciate against the US dollar headline the geopolitical issues, which could explode at anytime. A fearful public has a tendency to gravitate towards gold. 15. Limited Size of the Total Gold Market Provides Tremendous Leverage:
  • 83. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD All the physical gold in existence is worth somewhat more than $1 trillion US dollars while the value of all the publicly traded gold companies in the world is less than $100 billion US dollars. When the fundamentals ultimately encourage a strong flow of capital towards gold and gold equities, the trillions upon trillions worth of paper money could propel both to unfathomably high levels. Conclusion: The dollar is in an irreversible death spiral, crude oil prices have topped +$100/barrel, and the stability of societies around the world are becoming more and more fragile by the day as political and religious factions continue to furiously battle. These fundamentals are compounded by an approaching recession triggered by the housing and credit crisis building in the United States. So Foreign investors are going to think twice about putting their money into US stocks especially with the dollar entrenched in a long term bear market. As Gold and silver are also commodities and when paper markets and governments are performing well, precious metals like gold and silver go back to their status as commodities. What we are seeing now, however, because of the lower dollar and investor flows because of safe haven type of purchasing, everyone looking to precious metals, and investors are moving into the precious metals to protect their hard- earned savings. So gold is becoming money again. I think gold prices may move from $1000 to $2000 (i.e. around Rs13000 to Rs.22000) an ounce in a matter of six to eight months, depending on how the issues with the dollar pan out from here.
  • 84. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD Findings • In India MCX is trading in bullion market. • Goldsmiths get their raw material from wholesale dealers. • They fix the prices on daily trading bases. • Hence there is positive correlation between both market traders can easily predict the future prices of the commodities and hedge their positions. • Correlation between spot gold price and dollar rate is 0.2048 & probable error is 0.1659. So it would not be concluded that both spot gold prices and dollar rates are highly correlated or not. • Most of the respondents are interested in investing in equity (i.e. 49%) when compared to the other investment alternatives because they feel investing in equity will provide more returns to them. • Now commodity future market is not new to the investors as almost 82% of respondents are aware about commodity future market out of them only 16% have actually invested.
  • 85. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD • 67% of Investors have not invested as they have a perception that it is risky and they even do not have much knowledge about trading mechanism. • The investors who have not yet invested in the commodity future market, out of them 61% of the investors are interested to invest in the coming future. The investors expect that the brokers should provide them the genuine information regarding the market. Also they want moderate brokerage and good services from the brokers. • For gold price fluctuation main reasons are • Dollar depreciation / appreciation • World distress • Increase in money supply • Inflation
  • 86. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD SUGGESTIONS  Both Spot Gold & Future Gold Markets are positively correlated the traders have knowledge about the commodity demand and supply and their price fluctuations. So Karvy can approach these traders and they can easily convince them so these people are the targeted customers for Karvy.  More Awareness program has to be conducted by Karvy consultants so that already aware investor takes the challenge to invest in this commodity future market. Because since this was new to the market and also risky but gives good return. so it can be done through by giving advertisements in local channels, News papers, by sending E-mail to present customers etc  From survey it is found that most of the potential customers are concerned about the genuine information and moderate brokerage so Karvy can look upon this. If it can give good information and
  • 87. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD charge moderate brokerage it will help to attract more and more customers.  As correlation between spot gold rate and dollar rate is not high, investor can hedge their risk by investing in gold future and dollar. So they get benefit of diversification.  The best opportunities for investors to protect themselves against the coming financial reckoning are with precious metals and mining stocks. CONCLUSION Capital market is already matured and reached at high level, every investor interested to invest but not in commodity Future Market due to lack of awareness. As per Data analysis most of the investors do not have much idea of commodity market in Belgaum they are required to be given awareness training and knowledge with the help of workshops and seminars, as investors are willing to know more about commodity market i.e. 61% of the respondents are willing to invest in the market The Karvy Consultancy and other Brokers should take major steps to give fare knowledge about the commodity market and its operations to the public. Compared to Capital market Commodity market is less risky (minimum margin, easy to hold, no manipulation & fraud), maximum profitability. Commodity market is in growing stage. As in my study it is found that, there exists a high degree of positive correlation between Spot Commodity Market and Commodity Future Market. If an amount of small change in the spot gold market
  • 88. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD prices has the direct impact on the future prices of gold in commodity market. So Traders can take more advantage of this. Because they can predict the future prices, depending upon the present demand and Supply in the spot market. As they also get benefits of diversification, means in case of uncertainty in gold market they can invest in dollar i.e. forex market. It helps to all such as Individual investors and gold traders. There is a maximum hours of trading that is from 10am to 11.55 pm. It is better for working class people to deal at evening. "In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value."