UNIVERSITY OF MUMBAI
A PROJECT REPORT ON
“GOLD MARKET OF INDIA”
ACADEMIC YEAR 2007-2008
H.R COLLEGE OF COMMERCE AND ECONOMICS
Churchgate, Mumbai 400020
BACHELOR OF MANAGEMENT STUDIES
UNIVERSITY OF MUMBAI
A PROJECT REPORT ON
“GOLD MARKET OF INDIA”
ACADEMIC YEAR 2007-2008
BOMBAY STOCK EXCHANGE
H.R COLLEGE OF COMMERCE AND ECONOMICS
Churchgate, Mumbai 400020
BACHELOR OF MANAGEMENT STUDIES
I, Dhawal Parihar studying in TYBMS of H.R College of commerce & Economics
(Churchgate), hereby declare that I have completed this project on “Gold Market Of
India” in the academic year 2007-2008 as per the requirement of the Mumbai university
as a part of BACHELOR MANAGEMENT STUDIES (BMS) programmed.The
information presented through this project is true and original to the best of my
TYBMS, H.R COLLEGE
SR.NO PARTICULARS PG.NO
GOLD IN THE INDIAN SOCIETY 6
GOLD AS A METAL & PROPERTIES 9
MYTHOLOGICAL ORIGIN 12
TRADTION IN INDIA 14
INDUSTRIAL USES OF GOLD 15
INDIA’S GOLD CONSUMPTION 17
FACTORS INFLUENCING THE GOLD PRICE 22
GOLD PRODUCTION IN INDIA 25
GOVERNMENT RULES 26
GOLD JEWELLERY MARKET OF INDIA 27
GOLD TRADING 31
GOLD INVESTMENT 35
GOLD MARKETING 42
“10,900 was the all time high price of gold in the last year, which created
another history in gold commodity trading.”
Gold has a tremendous historical, religious, cultural, social and economic significance in
India. India is by far largest importer of consumer of gold in the world. About 25 percent
of gold production in consumed in India. By volume, the countries import average 700
tones a year, accounting for over fifth of world jewelry fabrication
In India, demand for gold is highly income elastic and price elastic. higher incomes
drives demand up; likewise lover prices. high prices without corresponding rise in
incomes will lead to demand compression as borne out by the experience of 2005 –
2006(drought year).In 2004-05,despite of Higher prices (over 6000) demand was
Many people have become very rich in the commodity market .It is one of the few
investment area where an individual with limited capital can make extra ordinary profit in
a relatively short period of time.
Nevertheless, because more people lose money, commodity trading has a bad reputation
as being too risky for the average individual. The truth is that the commodity trading is
only as risky as you want to make it. Those who treat trading as a get-rich-quick scheme
are likely to lose because they have to take big risks. If you act prudently, treat your
trading like business instead of giant gambling casino and are willing to settle for
reasonable return. The risks are acceptable. The probability of success is excellent.
GOLD IN INDIAN SOCIETY
India has the highest demand for gold in the world and more than 90% of this gold is
acquired in the form of jewellery. The bulk of the Indian jewellery buying is still rooted
in tradition and jewellery is sold in traditional designs.
Jewellery designs vary in different regions of India, making the style unique to each
region. In south India the designs are inspired by nature - paisley motif of the mango, rice
grains, melon and cucumber seeds, etc. In western and northern India the Mughals
influenced the meenakari (enamelling) and kundan (setting of precious and semi-precious
stones in gold) styles to give just give a few examples. Jewellery is crafted not just for
humans but also for the deities, ceremonial elephants, and horses. Hence the varieties of
gold jewellery in India are truly mind-boggling and bears testimony to the excellent skills
of Indian jewellers even today.
Ornaments are made practically for every part of the body, called 'solah shringar' (16
types of body adornment) - nose rings, bangles, necklaces and special jewellery for the
head, ankles, waistbands, and so on. Hindu women wear the 'mangalsutra' or 'thali' to
signify their marital status, which consists of gold pendants strung in a certain
combination with other beads . However, all over India, the toe rings adorning the feet
are made only in silver and never in gold. Gold is Goddess Laxmi incarnate (goddess of
wealth) and She cannot be soiled by touching a human's feet.
Jewellery is fabricated mainly in 22 and 24-karat gold and even 18-karat is not favoured
as the mindset will not accept low purity gold jewellery. The logic is that the jewellery is
primarily bought as an investment in gold as a store of value, and investing in a low
purity product does not make sense. Designer jewellery is generally not very popular and
may not pick up in a big way. The reason is that the investment is made for the gold
content in the jewellery and not for some fancy designer's name.
Confidence has been the anchor of the gold jewellery trade in India. A jeweller or
goldsmith of reasonable standing in a local area has a fixed and loyal clientele. He is the
family jeweller (like a family doctor) and his services are requisitioned whenever any
jewellery is to be purchased or fabricated. The buyer has implicit faith in his jeweller.
Additionally, the local jeweller caters to the local taste for traditional jewellery. This has
led to a very fragmented and unorganized market - a Rs 300 billions market is in the
However, standardization of jewellery designs across the country is not feasible due to
the pre-dominance of local tastes. Some chains and large jewellers have now started
thinking on the lines of expanding their network and marketing nationally, but this is an
uphill task as this is a very person-oriented business. The chains would have to cater to
local tastes by giving the designs that customers want, and win the trust and confidence
by hallmarking and proving the purity of the gold as they have to compete with the local
jeweller . After the liberalization of the markets a lot of jewelers sprung up, and due to
the competition a lot of the jewellery was being marketed which did not have the stated
purity. The system with standard jewelers is that they mark their jewellery and if you
resell it to them they will buy it back at the stated purity. However if this jewellery is sold
in the open market the purity may or may not be as marked and the investor will lose
In a sense I would consider investment in gold jewellery to be very inefficient as the cost
of labor or making charges is between 10%(wholesale) and 15%(retail) of the gold cost!
This labor component is a loss when gold is sold in the market. Often the purity is never
exactly as stated and even a small loss counts. Hence the move towards hallmarking will
slowly but surely pick up.
This was part of the reason for the failure of the government gold bond schemes. If an
investor were to surrender his jewellery which was tested and found to be of a lower
quality, he became skeptical of the testing process. He would lose a lot of money due to
lower gold purity as well as making charges. Also, the sentiments associated with gold
jewellery were deterring the gold owners from participating in the gold deposit scheme.
The gold would be returned in the form of bars and hence the identity of the jewellery
would be lost.
Indian men down the ages have also used gold for adornments. The most striking and
enduring images of a powerful, rich Indian past in painting, literature, and photographs
show our maharajahs and noblemen decked out in stones and ropes of gold and pearls. It
is a chronicle of the magnificence of Indian men and a confident culture, and definitely
not garish. The Britishers succeeded in imposing their code of dressing that they
considered to be in good taste and ornate jewellery was definitely out. So now the Indian
male dresses in gold and diamond "kurta" buttons and maybe a necklace and a bracelet on
festive occasions .
Exposure to western influences and the media has spawned a consumerist culture. The
proliferation of modern gadgetry like laptops, cell phones and white goods like washing
machines have grabbed away a part of the urban Indian's disposable income. The lure of
spending on these modern gadgets has taken precedence over the older virtue of saving.
Also, the urban Indian has been exposed to alternate forms of savings like equities and
bonds via mutual funds which have diminished their desire for gold. In effect, dampening
the urban demand for gold. The passion for gold between the urban and the rural Indian
Indian rulers of the past have issued gold coins and these are hoarded for their investment
value. Hoarding jewellery for its gold content is very inefficient as it leads to a lot of
wastage to recover the gold content, hence the popularity of gold coins and bars. A local
bullion dealer will issue and sell coins and bars bearing his own stamp to his clientele
who have confidence in the purity, having dealt with the dealer over a long period of
time. The standardized British guinea, a 22-karat, 8-gram coin, is a popular investment
vehicle carrying an antique value. It was introduced into India in the 19th century, and
later the British set up a mint in Bombay where the guineas were minted for Indians. The
guinea became established as a standard gold weight in India.
The local price of gold has been hitting new highs in the recent past - Rs 8900 per 10
grams, which the average Indian investor thinks is very good. The Rupee being a soft
currency, the effect of the US$ - Indian Rupee exchange rate is indicative of the inflation
rate, which is not being considered by this investor. In 1980 when the gold price was US$
614.50 per oz the gold price in India was about Rs 1452 per 10 grams according to
GFMS (average prices). Today when the price of gold is US$ 645 per oz, the Indian price
is about Rs 8900 per 10 grams - the pernicious effect of the currency devaluation and
inflation is completely camouflaged by the high nominal rupee price.
Vijay Sarda observed that if the gold prices remain high, retail selling (dishoarding) will
overwhelm the markets and imports may drop. The festival buying season will be over in
May / early June. I would say this is typical investor behaviour conditioned by a
prolonged bear market - selling on a slight uptick fearing further falls later.
GOLD’S METAL & PROPERTIES
Gold is a chemical element with the symbol Au (from the Latin aurum) and atomic
number 79. It is a highly sought-after precious metal which, for many centuries, has been
used as money, a store of value and in jewelry. The metal occurs as nuggets or grains in
rocks, underground "veins" and in alluvial deposits. It is one of the coinage metals. It is a
dense, soft, shiny, yellow metal, and is the most malleable and ductile of the known
Gold forms the basis for a monetary standard used by the International Monetary Fund
(IMF) and the Bank for International Settlements (BIS). The ISO currency code of gold
bullion is XAU. Modern industrial uses include dentistry and electronics, where gold has
traditionally found use because of its good resistance to oxidative corrosion.
Gold is a good conductor of heat and electricity, and is not affected by air and most
reagents. Heat, moisture, oxygen, and most corrosive agents have very little chemical
effect on gold, making it well-suited for use in coins and jewelry; conversely, halogens
will chemically alter gold, and aqua regna dissolves it by virtue of the elemental chlorine
generated by this acid mixture.
Recent research undertaken by Sir Frank Reith of the Australian National University
shows that microbes play an important role in forming gold deposits, transporting and
precipitating gold to form grains and nuggets that collect in alluvial deposits.
Generally, gold is non-toxic if consumed, and is used as food decoration in the form of
gold leaf. However, consumption and thereby accumulation in body of large amount of
gold (or gold compounds) is still toxic and the symptoms are similar to those of heavy
GOLD WITH ALLOYS
The 220kg Gold brick displayed in Chinkuashi Gold Museum, Taiwan.
Medium of monetary exchange.
Pure gold is too soft for ordinary use and is typically hardened by alloying with
silver, copper, or other metals. In various countries, gold, and its many alloys, are most
often used in jewelry, coinage and as a standard for monetary exchange. The gold content
of jewellery alloys is measured in carats (k), pure gold being designated as 24k. It is,
however, more commonly sold in lower measurements of 22k, 18k, 14k and 10k. A lower
"k" indicates a higher percent of silver, copper or other base metals in the alloy, copper
being the more commonly used base metal. Fourteen carat gold-copper alloy is nearly
identical in color to certain bronze alloys, and both may be used to produce police and
other badges. Eighteen carat gold containing 25% copper is found in some antique
jewelry and has a distinct, though not dominant, copper cast, creating an attractively
warm color. When alloyed with silver alone, 18 carat gold appears yellow-green in color.
Alternative white gold alloys are available based on palladium, silver and other white
metals (World Gold Council), but the palladium alloys are more expensive than those
Using nickel. High-carat white gold alloys are far more resistant to corrosion than are
either pure silver or sterling silver.
Gold coins intended for circulation from 1526 into the 1930s were typically a standard
22k alloy called crown gold, for hardness. Modern collector/investment bullion coins
(which do not require good mechanical wear properties) are typically 24k, although the
American Gold Eagle and British gold sovereign continue to be made at 22k, on
historical tradition. Until recently, the Canadian Gold Maple Leaf coin contained the
highest purity gold of any popular bullion coin, at 99.99% (.9999 fine). However, several
other 99.99% pure gold coins are currently available, including Australia's Gold
Kangaroos (first appearing in 1986 as the Australian Gold Nugget, with the kangaroo
theme appearing in 1989), the several coins of the Australian Lunar Calendar series, and
the Austrian Philharmonic. In 2006, the U.S. Mint began production of the American
Buffalo gold bullion coin also at 99.99% purity.
India's love affair with gold is timeless, spanning centuries and millennia.
"In India, it always was and still is, much more than just a precious metal. It is part of the
fabric of our culture and an inseparable part of our belief system. It is the essence from
which the universe was created. In a dark and lifeless universe, the Creator deposited a
seed in the waters he had made from his own body. The seed became a golden egg, bright
and radiant as the sun. From this cosmic egg of gold was born the incarnation of the
Creator Himself - Brahma. From the root word Hri meaning imperishable, comes
Hiranya, the ancient name for gold. Brahma is referred to as Hiranyagarbha - the one
born of gold".
In Hindu mythology, some of our goddesses are described as golden-hued, the ultimate in
beauty. Gold, as the basis of so much purity and beauty, is referred to as the seed of Agni,
the God of Fire. Manu the ancient law-giver decreed that golden ornaments should be
worn for specific ceremonies and occasions. "Mythological tales tell us how our Gods
and Goddesses rode on golden chariots. Gold has always been considered a sacred item
in the Hindu way of life and is a must in every religious function, the explanation being
that gold is pure having passed through fire in its process of evolution.” Over centuries
and millennia, gold has become an inseparable part of the Indian society and fused into
the psyche of an Indian. Indians see the metal as a symbol of purity, prosperity and good
Over a few thousands of years, many kings, emperors and dynasties featuring countless
wars, conquests and political upheavals have ruled the Indian sub-continent. Different
dynasties ruled different parts of India with different monetary systems. Gold acted as a
common medium of exchange or store of value across the monetary systems of different
kingdoms across the sub-continent. Hence wealth could still be preserved in spite of wars
and political turbulence. Gold also helped preserve wealth through natural calamities and
disasters and for centuries was the only means of saving in rural India, land being the
other main asset of economic value. This has largely helped formulate, or evolve, the
Indian sentiment and fanatical passion for gold, which holds true even today. India is
estimated to hold more than 11,000 tones of gold.
As with most old civilizations, traditions are very strong in the Indian society and that
much more so in rural India - still 70% rural. India is a vast country - a culture which is a
heterogeneous mixture of different sub-cultures, communities, customs, food and dress
habits, but the love of gold is universal across the length and breadth of the country! Gold
is the only item that permeates every strata and class of the Indian society; it is equally
sought by a wealthy urban businessman or a poor farmer in a village.
Gold is acquired continuously over the years, as money is saved and available. Thus the
acquisition is done over generations. Except for the last few decades, gold was the only
form of savings that was practical. Gold purchase in India is entwined with religious and
cultural beliefs. Indian customs demand buying gold for special occasions like weddings,
births, birthdays, celebrate various festivals or offer gold to Indian deities. Gold is mainly
acquired all over India for the Diwali (around October-November) festival. Regional
festivals are also very important occasions for the purchase of gold, for example Onam
and Pongal in the South, and Durga Puja in the East. The Indian Hindu calendar even has
auspicious days to buy gold during these festivals like Dhanteras, & Dassera. In rural
India, harvest festivals are big occasions to buy gold, and the farmers are flush with
In the Indian society, the custom of gifting gold in marriages is deeply ingrained. So
much so that families of average means start saving soon after their children are born -
for "stridhan" and dowry, in case a daughter is born. Gold gifted to the bride is called
"stridhan" and this is exclusively her property in her new house. She has full rights on
this gold, which also acts as an insurance against hard times and only she can decide on
what to do with this gold. Women were not independent and educated which left them
vulnerable to social pressures in case of unfortunate events like the death of husband or
drought situations due to poor harvests. In such circumstances, gold would provide some
protection to the family.
Life's earnings go into weddings, especially if a daughter is to be married (in Indian
society the bride's father bears a large part of the wedding expenses). Depending on the
customs in each community, either a fixed amount of gold is given or gold for a fixed
amount of money is gifted to the bride. Gold and jewellery expenses constitute between
30-50% of the total marriage expenses! The emphasis on gifting cash in close family is
less, as cash is too transient whereas gold is eternal! The gold jewellery is exhibited in the
marriage so that the guests can see what is given to the bride and this also reflects on the
status in a very status-conscious society.
The gifting of gold is so pervasive that provisions are made in wills to gift gold to yet
unborn grandchildren or to unmarried children/grandchildren on their marriage. At times
when inheritances are to be decided, chits are drawn to see who inherits what jewellery in
"Gold to us Indians is that ultimate love object… not only does it adorn our bodies, it also
acts as a good investment… Gold is ancestral. From mother to daughter to
granddaughter, (father to son to grandson) gold has a tendency of getting passed down
from generation to generation. So for Indians at least, gold will never lose its sheen."(1).
In fact the mentality is so possessive for gold that it will be sold as a last resort only and
before that most of the other assets will be liquidated.
TRADITION IN INDIA
The yellow metal has captured man's interest everywhere and at all times. As a symbol of
perfection, immortality and prosperity, gold is the substance that myths and legends are
Traditionally a major market for gold, India has once again retained its position as the
largest market for the yellow metal. The Geneva based World Gold Council, the
marketing arm of the gold mining industry, also identifies India as the fastest growing
market for this precious metal.
Unlike the Westerners who invest largely in stocks and other options, Indians believe in
gold as an all time safe investment. For one, gold gives the security against any financial
crisis because of its easy liquidity. Gold, in Hindu culture is considered auspicious and is
symbolic of Goddess Lakshmi (goddess of wealth).
The value of gold has been appreciated in daily life too. The Rig Veda, India's most
ancient text, (dated approximately to 1500 B.C.) says the giver of gold receives a life of
light and glory. And to receive or buy gold is to welcome Lakshmi. That is why during
Diwali time, gold is almost invariably bought. On this festival, it is Goddess Lakshmi
who is worshipped.
Arthasastra, a third century A.D. text, lays down the various rules to be followed by
goldsmiths and the different kinds of alloys that can be made with it. By the fifth century,
ornaments were exquisitely fashioned and Kalidasa, a famous Sanskrit poet, describes
when and how each ornament should be worn. The evidences and designs of ancient
Indian jewelery are also found in sculptures
Within the human body too the colour of gold is celebrated. The human body, according
to Ayurveda, is believed to have many charkas or nodal points of operation. The heart
chakra is said to be golden yellow and so the colour itself is regarded as inspiring divine
Gold's immunity to rust made physicians feel it had properties to cure diseases. Caraka's
medical treatise mentions the use of gold in medicine. The jawahar mohra of Unani
medicine uses gold as one of the components of special medicines as do the many other
Ayurvedic and Tibetan medicines. The thanga baspam is one such medicine that is
supposed to lengthen the life span and act as an aphrodisiac. Gold has been used to fill
the cavities in teeth since ancient times. In India, thanga rekha or a fine golden thread is
often served with betel leaf after a sumptuous dinner or heavy lunch.
Use of gold in medicine naturally led to the association of certain magical properties with
the metal. Gold earrings are said to improve eyesight while those suffering from mumps
believe that if they wear a gold chain, their problem will vanish. In fact the ailment itself
is called ponnuku vingi or swelling caused by lack of gold.
Gold in Weaving
Gold came to be used in weaving and the making of brocades. Kancheepuram in the
south and Varanasi in the north were centres where gold weaving was done. If weaving
was one way of wearing gold, another ingenuous method was the art of zardozi in which
gold thread is used in embroidery. It came to India with the Mughals. Even today, the
intricate detailing that the fine art involves is to be seen to be believed.
• In medieval times, gold was often seen as beneficial for the health, in the belief
that something that rare and beautiful could not be anything but healthy. Even
some modern esotericists and forms of alternative medicine assign metallic gold a
healing power. Some gold salts do have anti-inflammatory properties and are used
as pharmaceuticals in the treatment of arthritis and other similar conditions.
However, only salts and radioisotopes of gold are of pharmacological value, as
elemental (metallic) gold is inert to all chemicals it encounters inside the body.
• Gold leaf, flake or dust is used on and in some gourmet foodstuffs, notably sweets
and drinks as decorative ingredient.
Gold flake was used by the nobility in
Medieval Europe as a decoration in foodstuffs and drinks, in the form of leafs,
flakes or dust, either to demonstrate the host's wealth or in the honest belief that
something that valuable and rare must be beneficial for one's health.
• Goldwasser (German: "Goldwater") is a traditional herbal liqueur produced in
Gdansk, Poland and Schwa Bach, Germany and contains flakes of gold leaf.
There are also some expensive (~$1000) cocktails which contain flakes of gold
leaf. However, since metallic gold is inert to all body chemistry, it adds no taste
nor has it any other nutritional effect and leaves the body unaltered.
• Dentistry. Gold alloys are used in restorative dentistry, especially in tooth
restorations, such as crowns and permanent bridges. The gold alloys' slight
malleability facilitates the creation of a superior molar mating surface with other
teeth and produces results that are generally more satisfactory than those
produced by the creation of porcelain crowns. The use of gold crowns in more
prominent teeth such as incisors is favored in some cultures and discouraged in
• Gold can be made into thread and used in embroidery.
• Gold is ductile and malleable, meaning it is able to be drawn into very thin wire
and can be beaten into very thin sheets known as gold leaf.
• Gold produces a deep, intense red color when used as a coloring agent in glass.
• In photography, Gold toners are used to shift the colour of silver bromide black
and white prints towards brown or blue tones, or to increase their stability. Used
on sepia-toned prints, gold toners produce red tones. Kodak publish formulae for
several types of gold toners, which use gold as the chloride (Kodak, 2006)
• Electronics. Gold is highly conductive to electricity, and has been used for
electrical wiring in some high energy applications (silver is even more conductive
per volume, but gold has the advantage of corrosion resistance). For example,
gold electrical wires were used during some of the Manhattan Project's atomic
experiments, but large high current silver wires were used.
• Many competitions, and honors, such as the Olympics and the Nobel Prize, award
a gold medal to the winner.
• As gold is a good reflector of both infrared and visible light, it is used for the
protective coatings on many artificial satellites and in infrared protective
faceplates in thermal protection suits and astronauts' helmets.
• White gold (an alloy of gold with platinum, palladium, nickel, and/or zinc) serves
as a substitute for platinum.
• Green gold (a gold/silver alloy) is used in specialized jewelry while gold alloys
with copper are more standard, ranging from a pale yellow with little copper all
the way to a deep pink with more copper (rose gold).
• Blue gold can be made by alloying with iron
• Purple gold can be made by alloying with aluminum (done rarely except in
• Gold is used as the reflective layer on some high-end CDs.
• Gold can be used in food and has the E Number 175.
INDIA’S GOLD CONSUMPTION
India is the largest consumer of gold in recent times. The recent World Gold Council
figures estimate Indian demand of gold in 2001 to be 843.2 tonnes comprising 26.2 % of
the total world demand! This is sure to surprise many considering that India is considered
a very poor country with one of the lowest per capita incomes in the world. India is
estimated to hold more than 11,000 tonnes of gold.
70% of the population lives in rural India where agriculture is the main activity. 65-70%
of the gold purchase is done in the rural areas, which is largely dependent on agriculture
although agriculture forms only about a third of our GDP. Agriculture is highly
dependent on the rains and hence the rural disposable income is quite dependent on the
weather. A good year for agriculture assures higher demand for gold as in 1998/1999.
Additionally gold has less competition from other avenues for savings and they would
not trust the new-fangled vehicles like mutual funds anyway. Rural folks are very
Vijay Sarda, a Mumbai-based bullion dealer and past vice-president and presently a
director of Bombay Bullion Association, makes two very important points:
• The main reason for such high rural demand for gold is non-taxation of
agricultural income. If the agricultural income would be taxed, the disposal
income would be substantially reduced resulting in lower gold demand.
• In the rural areas, the womenfolk especially have a low level of education. Hence
the middle-aged rural male will invest more of his savings into gold so that
womenfolk in his house can encash their wealth without legal hassles and having
to deal with strangers.
The months from October to January and April and May constitute the main marriage
season and also have a large number of festivals. Hence demand for gold is very strong
during these months.
The figures of the past few years show that Indian demand for gold has consistently been
hovering around 25% of total world demand as the following table shows:
GFMS – Gold Survey 2001.
WGC - Gold Demand Trends, May 2002.
For 2001, Average Rate is estimated at US$ 270 per troy ounce (oz) and Rs 47 per US$.
India was the world's largest gold market prior to 1962 and Bombay (new name is
Mumbai) was the main trading center. After the Indo-China war in 1962, due to loss of
reserves, the government enacted the Gold Control Act, 1962 prohibiting the citizens of
India from holding pure gold bars and coins! The old holdings in pure gold had to be
compulsorily converted into jewellery that had to be declared. Only licensed dealers were
allowed to deal in pure gold bars and coins. New gold jewellery purchases were either
recycled or smuggled gold.
This legislation killed the official gold market and a large unofficial market sprung up
dealing in cash only. The gold was smuggled in and sold through the unofficial channel
wherein many jewelers and bullion traders traded in smuggled gold. A huge black market
developed for gold.
Gold was smuggled into India in the size of 10-tola bars (called a TT bar in trade
parlance). The traditional Indian measure for gold is "tola", a name derived from the
Sanskrit word "tula" for scale or balance, and one tola is equal to 11.664 grams. Hence a
10-tola bar weighs 116.64 grams. "The size of the 10-tola bar enables it to be easily
concealed -- specially designed smugglers' vests hold around 100 bars in 20 or more
pockets. It has smooth, rounded edges so that it can be inserted inside a smuggler's body
-- up to eight bars in the rectum.
Another important feature is that the bar has no serial number, unlike almost all other cast
bars available on the international market. That made the ten-tola bar the gold currency of
choice, especially from 1947-1992 when India strictly regulated gold imports, giving rise
to a massive black market. "
Additionally, the 50's to the late 80's were a period when India embraced socialism with a
passion. The government moved towards a controlled economy wherein all the factors of
production and resources were controlled and licensed. This led to nothing more than
corruption and shortages resulting in profiteering by the businesses. In 1990 India had a
major foreign exchange problem and was on the verge of default on external liabilities.
The Indian government pledged 40 tonnes from their gold reserves with the Bank of
England and saved the day. Subsequently India embarked upon the path of economic
The era of licensing was gradually dissolved. The gold market also benefited because the
government abolished the 1962 Gold Control Act in 1992 and liberalized gold import
into India on payment of a duty of Rs 250 per 10 grams (periodically the government
feels obliged to fiddle with the duty structure if it works well). The government thought it
more prudent to allow free imports and earn the taxes rather than to lose it all to
unofficial trade -surprisingly a very pragmatic view. This expanded the gold market
while reducing the quantum of trade and the profit margins in the unofficial channel.
According to the WGC figures, from official imports of practically nothing in 1991, India
officially imported more than 110 tonnes in 1992 whereas smuggled gold maintained at
about 160 tonnes in 1992 and gradually declined thereafter. The official imports grew
from 1992 and now the official imports are about 600 tonnes peaking at 663 tonnes
Gold smuggling that was on the rise again last year due to high excise duties has subsided
this year after the government has again reduced the duty to about Rs 2914 per TT bar in
addition to local taxes. India is the most price-sensitive market for gold in the world.
According to GFMS, the smuggling channels have become more efficient (reduced
number of seizures and lower costs). "Gold enters India via a number of different routes.
The trade routes are complex but can be divided into two distinct categories - direct flows
and indirect flows. Direct shipments (mainly official) in the main are from the refining
centers of Europe, South Africa and, to a lesser extent, Australia. Indirect flows tend to
move through the two entrepots of Singapore and Dubai in the first instance. Direct and
indirect flows out of Hong Kong are small. The smuggled gold flows through the indirect
In the first quarter 2002, demand in India has fallen by 40 % to 150 tones from 250 tones
in 2001. However, as discussed earlier, this has been partly compensated by the huge
quantity of the retail sales (dishoarding) by the masses which is being recycled in the
Indian market. On a visit earlier this month to a gold dealer's shop, I was surprised by the
long line of people who wanted to sell their old gold jewellery. Out of curiosity I asked
why they were selling and the routine response was that this is a very high price and it
may or may not sustain! Unfortunately these folks have never heard of rupee devaluation
and gold as a barometer of inflation. I mused at what their emotions would be six months
later! I also believe that once the gold price breaks out, the masses will stop selling and
start hoarding again.
Referring to the table above, we see that the gold demand is stagnating at a nominal value
of about Rs 350 billions for the last four years. Now, as the price of gold rises the billion
rupee question is:
Will the amount of gold demand be constant?
I would hazard that the answer lies somewhere in between. In fact, I feel a lot of the
money may be pulled out of the financial markets (equities, bonds, fixed deposits, and
mutual funds) and be redeployed into investment in gold bullion as the latent desire and
affinity for gold re-awakens in the Indians' minds and hearts!
An important event to note was the rationalization of the local taxes in Maharashtra in
April 2002. This move will concentrate the gold trade back to Mumbai (new name for
Bombay) and I would not be surprised to see Mumbai reemerge as one of the largest gold
trading centers in India and maybe the world.
As George Bernard Shaw's said, "If you have to choose (as a voter) between trusting the
natural stability of gold and the natural stability and intelligence of the members of the
government, with due respect to these gentlemen, I advise you, as long as the capitalist
system lasts, to vote for gold." The people of India have seen the historical behaviour of
their government with regards to gold and the fact that politicians and governments
cannot be trusted, so gold (official and unofficial) has a very bright future here!
To prove the point, the government had launched a gold deposit scheme in September
1999 to utilize the idle gold and simultaneously give a return to the gold owner and
reduce the country's reliance on imports. This scheme has flopped as the citizens have
taken Shaw's advice to heart!
Price in Rupees per 10 grams
Data from Gold Survey 2001
Studying the nominal rupee prices we observe that an investor would have been receiving
lower appreciation for every subsequent five-year period since 1970. After liberalization
of the gold trade in 1992, the prices have been static and the five-year returns are
abysmal, similar to the international trends. In 1996, the price touched Rs 5900 but there
was no dishoarding. The subsequent fall and stagnation in prices at the lower level has
lead to capitulation by the investor - for every rise in prices, investors rush to sell - classic
bear market bottom behaviour. I would also like to point out that with the sustained bear
market, most investors, except the die-hard gold bugs, have thrown in the towel! Talking
to local brokers, investors and dealers about gold investment, the typical myopic advice is
to buy in say July-August and sell in November and other similar short-term trades -
typical bear market conditioning!
The five-year returns in real price terms (inflation-adjusted in constant 2000 rupees) are
even worse for the last 20 years! A devastating bear market for gold and definitely not for
the faint-hearted! This is what a bear market bottom looks like, and this may be the best
investment opportunity in gold for a long time to come.
FACTORS INFLUENCING THE GOLD PRICE
Today, like all investments and commodities, the price of gold is ultimately driven by
supply and demand, including hoarding and dis-hoarding. Unlike most other
commodities, the hoarding and dis-hoarding plays a much bigger role in affecting the
price, since almost all the gold ever mined still exists and is potentially able to come on to
the market at the right price. Given the huge quantity of above ground hoarded gold,
compared to the annual production, the price of gold is mainly affected by changes in
sentiment, rather than changes in annual production or gold jewelry demand.
Central banks and the International Monetary Fund play an important role in the gold
price. At the end of 2004 central banks and official organizations held 19 percent of all
above ground gold as official gold reserves. The Washington Agreement on Gold (WAG)
which dates from September 1999 limits gold sales by its members (Europe, United
States, Japan, Australia, Bank for International Settlements and the International
Monetary Fund) to less than 400 tonnes a year 
. European central banks, such as the
Bank of England and Swiss National Bank, have been key sellers of gold over this period
In November 2005, Russia, Argentina and South Africa expressed interest in increasing
their gold holdings 
. Other than Russia, these are not viewed as significant central
banks, but any move by Japan, China or South Korea to do the same would be seen as
significant. Currently the United States Federal Reserve has 16% of its assets in gold
Federal Reserve gold holdings, whereas China holds approximately 1% in gold.
Although central banks do not generally announce gold purchases in advance, some such
as Russia have expressed interest in growing their gold reserves again as of late 2005 
In early 2006, China, who only holds 1.3% of its reserves in gold 
, announced that it
was looking for ways to improve the returns on its official reserves. Many bulls took this
as a thinly veiled signal that gold would play a larger role in China's reserves, which they
hope will push up the price of gold.
Inflation fears have also been influential in the past. The October 2005 consumer price
index level of 199.2 (1982-84=100) was 4.3 percent higher than in October 2004. During
the first ten months of 2005, the CPI-U rose at a 4.9 percent seasonally adjusted annual
rate (SAAR). This compares with an increase of 3.3 percent for all of 2004.
Inflation 1923-24: A woman in Germany feeds her tiled stove with money. The money
was worth less than firewood.
A 500,000,000,000 (500 billion) Yugoslavia dinar banknote circa 1993, the largest
nominal value ever officially printed in Yugoslavia, the final result of hyperinflation.
Photo courtesy of National Bank of Serbia.
It used to be said that "Gold is the world's frightened bunny". Whenever crisis
threatened, the demand for physical gold increased.
When dollars were fully convertible into gold, both were regarded as money.
However, most people preferred to carry around paper banknotes rather than the
somewhat heavier and less divisible gold coins. If people feared their bank would
fail, a bank run might have been the result.(example) This is what happened in the
USA during the Great Depression of the 1930s, leading President Roosevelt to
impose a national emergency and to outlaw the holding of gold by US citizens.
Thus investing on gold is a safer move then having money.
Paper currencies pose a risk of being inflated, possibly to the point of
hyperinflation. Historically, currencies have lost their value in this way over time.
In times of inflation, people seek to protect their savings by purchasing liquid,
tangible assets that are valued for some other purpose. Gold is in this respect a
good candidate, since producing more is far more difficult than issuing new fiat
currency and its value does not rely on any particular government's health.
Low or negative real interest rates
Gold has a long history of being an inflation proof investment. During times of
low or negative real interest rates when significant inflation is present and interest
rates are relatively low investors seek the safe haven of gold to protect their
capital. A prime example of this is the period of Stagflation that occurred during
the 1970s and which led to an economic bubble forming in precious metals.
War, invasion, looting, crisis
In times of national crisis, people fear that their assets may be seized, and the
currency may become worthless. They see gold as a solid asset which will always
buy food or transportation. Thus in times of great uncertainty, particularly when
war is feared, the demand for gold rises.
According to the World Gold Council, annual gold production over the last few
years has been close to 2,500 tonnes. However, the effects of official gold sales
(500 tonnes), scrap sales (850 tonnes), and producer hedging activities take the
annual gold supply to around 3,500 tonnes.
Supply and demand
Some investors consider that supply and demand factors are less relevant than
with other commodities since most of the gold ever mined is still above ground
and available for sale at a price. However, supply and demand do play a role.
According to the World Gold Council, gold demand rose 29% in the first half of
2005. The increase came mainly from the launch of a gold exchange-traded fund,
but also from jewelry. Gold demand was at an all time record. Demand from the
electronics industry is rising by 11% a year, jewelry by 19%, and industrial and
dental by 21%.
GOLD PRODUCTION IN INDIA
Gold market is experiencing an over supply of the commodity all over the world. In
India for example the Gold production went up heavily in recent days. The pledge
from both the presidential candidates in cutting budget deficit and bringing sanity in
fiscal management is also a sign of trouble for the Gold market.
India's gold production increased 12.26 per cent to 3,742.7 kg during April-August
2004 as against 3,334 kg in the corresponding year-ago period.
Out of the total gold produced, Hutti Gold Mines Ltd produced 1,639.7 kg yellow
metal and Hindalco, which processes gold from the ore stage, recorded 2,103 kg
production during the period in question, an official statement said.
According to sources the Gold bulls are long the positions and get into margin calls.
That can make gold market collapse. The Gold market is in an upturn for the last three
years. It seems like that time is right for a sizable correction at the least. According to
sources, Gold bull to bear ratio reached a twenty year peak of 76%. That is another
sign of trouble in the Gold market.
Though demand for Gold is increasing among the working classes in China and India,
the supply is exceeding growth in demand.
Government of India' has identified BIS a sole agency in India to operate this scheme.
BIS hallmarking Scheme is voluntary in nature and is operating under BIS Act, Rules and
Regulations. It operates on the basis of trust and thus it is desirable that aspects of quality
control are in built in the system responsible for managing quality.
The BIS Hallmarking Scheme has been aligned with International criteria on hallmarking
(Vienna Convention 1972). As per this scheme, license is granted to the jewelers by BIS
under Product Certification Scheme. The BIS certified jewelers can get their jewelery
hallmarked from any of the BIS recognized Assaying and Hallmarking Centre. The
recognition to an Assaying and Hallmarking Centre is given against BIS criteria Doc:
HMS/RAHC/GO1 which is in line with International criteria on Marking and Control of
A hallmark, consists of five components i.e. BIS Mark, the Fineness number
(corresponding to given caratage), Assaying and Hallmarking Centre's Mark, Jeweller's
Mark and year of Makring denoted by a code letter and decided by BIS (e.g. code letter
`A' was approved by BIS for year 2000, `B' being used for the year 2001 and `C' for
2002). The marking is done either using punches or laser marking machine.
The BIS hallmark, a mark of conformity widely accepted by the consumer bestow the
additional confidence to the consumer on the purity of gold jewellery.
The design of the hallmark on gold jewellery is given in the next page. The proposed
design for hallmark on silverware is also given.
GOLD JEWELLERY MARKET OF INDIA
In the late 1990s, the Indian jewellery market witnessed a shift in consumer perceptions
of jewellery. Instead of being regarded as only an investment option, jewellery was
being prized for its aesthetic appeal. In other words, the focus seemed to have
shifted from content to design. Trendy, affordable and lightweight jewellery soon
gained familiarity. Branded jewellery also gained acceptance forcing traditional
jewellers to go in for branding.
Given the opportunities the branded jewellery market offered; the number of gold
retailers in the country increased sharply. Branded players such as Tanishq, Oyzterbay,
Gili and Carbon opened outlets in various parts of the country. Traditional jewellers also
began to bring out lightweight jewellery, and some of them even launched their in-house
However, the share of branded jewellery in the total jewellery market was still small
(about Rs. 10 billion of the Rs. 400 billion per annum jewellery market in 2002), though
growing at a pace of 20 to 30 percent annually. The branded jewellery segment occupied
only a small share of the total jewellery market because of the mindset of the average
Indian buyer who still regarded jewellery as an investment. Moreover, consumers trusted
only their family jewellers when buying jewellery. Consequently, the branded jewellery
players tried to change the mindset of the people and woo customers with attractive
designs at affordable prices.
Before the liberalization of the Indian economy in 1991, only the Minerals and Metals
Trading Corporation of India (MMTC) and the State Bank of India (SBI) were allowed to
import gold. The abolition of the Gold Control Act in 1992 , allowed large export houses
to import gold freely.
Exporters in export processing zones were allowed to sell 10 percent of their produce in
the domestic market. In 1993, gold and diamond mining were opened up for private
investors and foreign investors were allowed to own half the equity in mining ventures.
In 1997, overseas banks and bullion suppliers were also allowed to import gold into
India. These measures led to the entry of foreign players like DeBeers3, Tiffany4 and
Cartiers5 into the Indian market.
In the 1990s, the number of retail jewellery outlets in India increased greatly due to the
abolition of the Gold Control Act. This led to a highly fragmented and unorganized
jewellery market with an estimated 100,000 workshops supplying over 350,000 retailers,
mostly family-owned, single shop operations. In 2001, India had the highest demand for
gold in the world; 855 tons were consumed a year, 95% of which was used for jewellery.
The bulk of the jewellery purchased in India was designed in the traditional Indian style6.
Jewellery was fabricated mainly in 18, 22 and 24-carat gold. (Refer Table I for carat
calculation) As Hallmarking7 was not very common in India, under-caratage was
prevalent. According to a survey done by the Bureau of Indian Standards (BIS)8, most
gold jewellery advertised in India as 22-carat was of a lesser quality. Over 80% of the
jewelers sold gold jewellery ranging from 13.5 carats to 18 carats as 22-carat gold
Source: Icfai Center for Management Research
The late 1990s saw a number of branded jewellery players entering the Indian market.
Titan sold gold jewellery under the brand name Tanishq, while Gitanjali Jewels, a
Mumbai-based jewellery exporter, sold 18-carat gold jewellery under the brand name
Gili. Gitanjali Jewels also started selling 24-carat gold jewellery in association with a
Thai company, Pranda. Su-Raj (India) Ltd. launched its collection of diamond and 22
-carat gold jewellery in 1997. The Mumbai-based group, Beautiful, which marketed the
Tiffany range of products in India, launched its own range of studded 18-carat jewellery,
Dagina. Cartiers entered India in 1997 in a franchise agreement with Ravissant9. Other
players who entered the Indian branded gold jewellery market during the 1990s and
2000-01 included Intergold Gem Ltd., Oyzterbay, Carbon and Tribhovandas Bhimji
In 1994, Gili Jewellery was established as a distinct brand by Gitanjali Jewels, soon after
the abolition of the Gold Control Act by the Indian government. Gili offered a wide range
of 18-carat plain gold and diamond-studded jewellery, designed for the contemporary
Indian woman. The designs combined both the Indian and western styles and motifs.
With sales of Rs.0.14 billion for the year 2000-01, Gili had a 0.03 percent share of the
400 billion jewellery market in India and a 1.4 percent share of the branded jewellery
100 percent pure gold
91.66 percent pure gold
83.33 percent pure gold
75 percent pure gold
8.33 percent pure gold
4.166 percent pure gold
In 1984, Questar Investments Limited (a Tata group company) and the Tamil Nadu
Industrial Development Corporation Limited (TIDCO) jointly promoted Titan Watches
Limited (Titan). Initially involved in the watches and clocks business, Titan later
ventured into the jewellery businesses. In 1995, Titan changed its name from 'Titan
Watches Ltd.' to 'Titan Industries Ltd.' in order to change its image from that of a watch
manufacturer to that of a fashion accessories manufacturer. In the same year, it also
started its jewellery division under Tanishq brand.
Among the branded jewellery players in the Indian market, Tanishq is considered to be a
trendsetter. When it was launched in 1995, Tanishq began with 18-carat jewellery.
Realizing that such jewellery did not sell well in the domestic market, the 18-carat
jewellery range was expanded to include 22 and 24-carat ornaments as well. When
Tanishq was launched, it sold most of its products through multibrand stores. In 1998,
Tanishq decided to set up its own chain of retail showrooms to create a distinctive brand
image. By 2002, Tanishq retailed its jewellery through 53 exclusive stores across 41
cities. To meet increasing demand, Tanishq planned to open 70 stores by the end of 2003
and offer a range of 'wearable' products with prices starting at Rs. 400.
With sales of Rs. 2.66 billion in 2000-01, Tanishq had a 0.66 percent share of the total
jewellery market and a 27 percent share of the branded jewellery market (Refer Table II).
In early 1991, the Bangalore based Peakok Jewellery Pvt. Ltd., (Peakok) was
incorporated and Mahesh Rao (Rao) was appointed director. Peakok realized that the
Indian consumer's relationship with gold jewellery would grow beyond an investment
need towards a lifestyle and personality statement. In 1996, within the Peakok fold a new
brand of 18-carat gold-based jewellery called Carbon was launched. In 2000-01, with
sales of Rs. 0.14 billion, carbon had a 0.03 percent share of the jewellery market and a
1.4 percent share of the branded jewellery market. The company expected Carbon sales
to touch Rs. 1.5 billion by 2005-06 and exports to start by 2008. The brand was available
at 40 outlets in 16 cities in 2002 and would be made available in 23 cities by 2005.
Oyzterbay was founded by Vasant Nangia and his team in July 2000. It began operations
in March 2001. By November 2002, the company had 41 outlets across the country.
Oyzterbay seeks to build a national brand in the jewellery industry in India and aspires to
be the largest branded jewellery company in the country with a chain of 100 stores and
several hundred-distribution points by 2004. With sales of Rs. 0.17 billion in 2000-01,
Oyzterbay had a 0.04 percent share of the Rs.400 billion jewellery market and a
1.7percent share of the branded jewellery market.
Mumbai-based Tribhovandas Bhimji Zaveri (TBZ), which had been in the jewellery
business since 1864, saw tremendous scope in the branded segment and opened its new
concept store 'Trendsmith' in Mumbai in December 2001. Encouraged by the response
towards its first store, the Zaveris planned to take Trendsmith (India) Pvt. Ltd. all over
the nation by opening as many as 50 stores by 2006. Trendsmith offered eight lines of
exclusive designer jewellery from well-known export jewellery manufacturers and
designers from Mumbai and Delhi .
TABLE II BRANDED GOLD
JEWELLERY MARKET (MAJOR
Market share (2000-01) in
A Large Variety of Styles
Jewelry is area specific. All over India, women wear a lot of jewelry and even men used
to wear some of it. India of old times had several small kingdoms and so styles in each
kingdom flourished under the patronage of the local kings. As such the designs existed in
infinite variety. The one common feature was the number of items worn by women. All
of them wore jewelry on their nose, on their forehead, on their ankles and even their toes.
One would find that in areas like those under the Mughals, the jewelry of the hands and
feet were extremely ornate. The reason being the women wore veils and the only exposed
parts of their body were the hands and feet!
The Mughals were showmen who reveled in the fantasy of ornaments. They encouraged
international participation by borrowing designs and getting their jewelry fashioned
abroad. In fact, documentation of Indian jewelry exists only from this period onwards.
Enameling, embedding stones in gold and filigree work were some of the different ways
in which gold was embellished further.
Indians who prefer 24 carat gold have a variety of designs to chose from, whether they
are buying necklaces, nose rings, earrings (four to seven pieces of jewelry can be worn on
the ear alone!), hair clips, waistbands or toe rings.
How trading takes place
The global trade in gold consists of Over the Counter (OTC) transactions in spot,
forwards, and options and other more exotic derivatives, together with exchange-traded
futures and options. This section covers only Over the Counter (OTC) transactions. For
more information on trading in the derivatives market, click here.
Over the Counter transactions take place between principals, not through exchanges.
These transactions account for the majority of global gold trading. This is because OTC
trades take place between counter-parties who deal with each other directly, who arrange
their own terms and conditions and handle their own risk and credit arrangements. They
thus have a high degree of flexibility in their transactions. The futures exchanges, which
tend to dominate trading volume in other commodities, are far more rigid in terms, for
example, of margin requirements, fixed contract sizes and fixed maturity dates.
The OTC market operates on a 24-hour per day basis around the world although intra-day
liquidity will vary, according to which markets are open at any one time. The main
centres for OTC dealings are London, New York, and Zurich, which are wholesale
markets with the lowest transaction size typically not less than 1000 ounces. In general,
mining companies and central banks tend to transact their business through London and
New York. The New York market also services manufacturers of jewellery and industrial
products, and investment and speculative business; Zurich specialises in supplying
physical gold to manufacturers of jewellery and industrial products. Centres such as
Dubai and several cities in the Far East also transact important OTC business, typically
involving jewellery and small bars (of one kilogram or less) for private investment.
Although most OTC trades are cleared through London, a number of bullion dealers have
offices around the world and the majority will operate one trading book, which is handed
on from office to office during the working day. Most of the major bullion dealers around
the world are either members or associate members of the London Bullion Market
Trading in spot, forwards, options and other derivatives is offered on a continuous basis.
Business is generally conducted over the phone and over the electronic dealing system.
Twice daily during London trading hours there is a “fix” which offers reference prices for
that day’s trading. Many long-term contracts will be priced on the basis of either the
morning or afternoon London fix, and the market will usually refer to one or other of
these prices when looking for a basis for valuations.
The settlement process is similar to that of an international foreign exchange market,
where settlement is effected by debits and credits over currency accounts in the
respective banking systems. The basis of settlement is delivery of a standard London
Good Delivery bar, at the London vault nominated by the dealer who made the sale.
Currency settlement for gold transactions will generally be in US dollars over a US dollar
account held in New York.
The clearing process is a system of paper transfers whereby members offering clearing
services utilise the unallocated gold accounts that they maintain between each other, not
only for settlement of mutually agreed trades but also for third party transfers. These
transfers are conducted on behalf of clients and other members of the OTC market in
settlement of their bullion activities. This avoids the security risk and costs of physical
How to trade gold future in India?
The price of gold depends on a host of factors, which makes it very difficult to predict. In a
fashion similar to shares, gold is an asset class by itself. In fact, in many villages and small towns
of India, gold is preferred to bank deposits as a savings and investment instrument.
Till a year ago, to gain from price volatility, one would have to hoard and trade in gold
physically. Not any more, however. With the commodity futures market operating in full swing,
one has the option of not physically stocking gold to gain from its price movements.
Let us see how trading in futures is better than the option of hoarding gold. Firstly, there are
several costs associated with the process of physically stocking gold. The costs include the cost
of the gold itself, the cost of carrying, cost of physical storage, finance cost and last ,but not the
least the safety element.
While futures might have some advantages, there is also a danger of losing big as your risks are
Also magnified and hence ,one tread carefully in this area.
In this context, if the going cost of gold is Rs 6000 per 10 grams, with an investment of
Rs 6 lakh, one can buy 1kg of gold. Now, suppose, three months hence, when the going
price of gold is Rs 6,500 per 10 grams, the person decides to sell the gold. The gross
profit made by the person is Rs 500 for every 10 grams and hence, for 1 kg, it stands at
Rs 50,000. To arrive at the net profit, one would have to deduct the cost of financing; the
cost of storage in a bank and transaction costs ,including sales taxes.
Now, let’s see what the same Rs 6 lakh can achieve in a futures market, assuming the
same sequence of prices. In Indian exchanges, currently, futures contracts up to four
months are available. Let’s assume that three-month gold futures are trading at a little
over the spot price, with the market expecting gold prices to remain stable over the next
three-month period. Let this price be Rs 6050.
Since a futures contract is an obligation to buy or sell a specific quantity of the
commodity, one does not have to pay for the entire value of the commodity. Buying
futures obligates one to take delivery of the underlying commodity at a particular date in
the future. This is also known as taking a long position.
To trade in gold futures, one has to go to a brokerage house and open a trading account.
A trading account involves keeping an initial deposit of Rs 50,000 to Rs 1 lakh. Part of
the money accounts for the margin money, which is required by the exchange when one
For a high amount, however, the deposit amount is usually waived by the brokerage
house. The whole investment is then generally treated as margin money. For commodity
futures, there is usually a lot size or the minimum volume of the commodity of which one
has to buy a futures contract.
Let’s assume, for our case, the minimum lot size is 1 kg (lot sizes are usually 100gm or 1
kg). Thus, if the going futures rate is Rs 6,050 per 10 grams, the minimum value of a
contract is Rs 6,05,000. The beauty of a futures contract is that to trade in them, one has
to only invest the margin money. If we assume a flat 5% margin rate for the contract
(margin rates vary from 5-10%), the margin money for a single lot is Rs 30,250. Add to
that, a brokerage amount, which is usually .1% to .25% and some start-up charges.
Applying these rates, which are prevalent in the market currently, a single lot of gold
futures contract should come around at 32,000
Thus, with Rs 6 lakh, one can buy 19 lots of gold futures. One can , however, expect
‘margin calls’ from brokerage houses if the margin money falls short of the margin
money required for trading in the exchange, determined at the end of the trading session
Now, suppose that at the end of 3 months, the spot price of gold actually reaches Rs
6500 per 10 grams.
The novelty of the futures market is that as long as there is sufficient liquidity in the
markets, the futures price always converges to the price of the under lying. Such is the
leverage of futures, that with the same investment of Rs 6 lakh, one is actually
commanding 19 lots of gold futures or in effect, 19 kgs of gold.
Thus, at the end of three months, assuming the above-mentioned course of events, on an
investment of Rs 6 lakh, one can make a gross profit that is almost 17 times the profit
made by physically stocking gold.
At the same time, the downside risk is also multiplied. To avoid the hassles of delivery,
one must offset the futures contract just before the maturity date is reached. Delivery
would entail gold certification and accreditation by an exchange-appointed assayer and
increased transaction costs in general, as various taxes come into the reckoning.
The above example is about a case of taking a bullish view on the price of gold and
hence, gaining from the price rise by buying futures. One can gain from a futures market
even by having a bearish view on the price of gold. This aspect of gain is absent in the
physical market for gold. If one believes that the spot price of gold is going to fall in the
near future , all he needs to do is to sell gold futures.
While all this seems pretty rosy, there are some things to be kept in mind. Firstly, any
transaction in the futures market is possible only if a counter-party to the buy or sell order
that is placed, exists. For unusually large investments, the exchange may find it difficult
to find a counter -party and so it may take some time to match it. Also, with any futures,
there may be a problem in exiting from a position by buying or selling when one would
The Popularity of Gold
Gold and silver have been sought and prized since prehistoric times. They have also been
both a cause of war and a medium of exchange.
Gold is the standard by which the value of anything is assessed; it is universally accepted.
Silver does not lag behind in global trade markets and as an investment. In the code of
Menes, an Egyptian ruler of 3100 BC, it is declared that one unit of gold is equal to two-
and-a-half units of silver in value. Silver was actually more widely employed as the
standard of value until the nineteenth century.
Indians faith in God and gold dates back to the Vedic times; they worshipped both. The
historian Pliny complained that ancient Romes bullion resources were drained by her
Indian trade. Indian merchants always demanded payment in silver during the times of
the East India Company; so much silver was exported from London that East India
Company teetered on the brink of financial disaster. According to the World Gold
Council Report, India stands today as the worlds largest single market for gold
consumption. In developing countries, people have often trusted gold as a better
investment than bonds and stocks.
Gold and silver have been popular in India because historically these acted as a good
hedge against inflation. In that sense these metals have been more attractive than bank
deposits or gilt-edged securities.
Despite recent hiccups, gold is an important and popular investment for many reasons:
• In many countries gold remains an integral part of social and religious customs,
besides being the basic form of saving. Shakespeare called it the saint-seducing
• Superstition about the healing powers of gold persists. Ayurvedic medicine in
India recommends gold powder and pills for many ailments.
• Gold is indestructible. It does not tarnish and is also not corroded by acid except
by a mixture of nitric and hydrochloric acids.
• Gold has aesthetic appeal. Its beauty recommends it for ornament making above
all other metals.
• Gold is so malleable that one ounce of the metal can be beaten into a sheet
covering nearly a hundred square feet.
• Gold is so ductile that one ounce of it can be drawn into fifty miles of thin gold
• Gold is an excellent conductor of electricity; a microscopic circuit of liquid gold
printed on a ceramic strip saves miles of wiring in a computer.
• Gold is so highly valued that a single smuggler can carry gold worth Rs. 50 lakh
underneath his shirt.
• Gold is so dense that all the 90,000 tonnes estimated to have been mined through
history could be transported by one single modern super tanker.
• Finally, gold is scam-free. So far, there have been no Mundra-type or Mehta-type
scams in gold.
Thus, the lure of this yellow metal continues.
On the other hand, it is interesting to note that apart from its aesthetic appeal gold has no
intrinsic value. You cannot eat it, drink it, or even smell it. This aspect of gold compelled
Henry Ford, the founder of Ford Motors, to conclude that gold is the most useless thing in
Why People Buy Gold
(a) Industrial applications take advantage of golds high resistance to corrosion, its
malleability, ductility, high electrical conductivity and its ability to adhere firmly to other
metals. There is a wide range of industries, from electronic components to porcelain,
which use gold. Dentistry is an important user of gold. The jewellery industry is another.
(b) Acquisition of gold because of its long-proven ability to retain value, and to
appreciate in value.
(c) Purchases by the central banks and international monetary organisations like the
International Monetary Fund (IMF).
Sources and Price of Gold
South Africa produces 72% of the gold in the free world, whereas Indias contribution is
just around 0.3%. The production of gold by the former USSR was considerable, but the
quantities produced were a state secret. Many experts used to think that the Soviet State
Bank had large reserves of gold. But after the fall of the communists in 1991, the Soviet
State Bank had a hearty laugh; it had no gold stocks at all. After that experience, Bank of
England insisted on physical delivery of gold by Reserve Bank of India during the
foreign exchange crisis in early 1991.
As South Africa depends on gold sales to balance her budget, her balance of payment
position influences the gold market in the world.
The Price of Gold
During the 50s gold appreciated marginally; from Rs. 99 in 1950 to Rs. 111 in 1960. The
next decade, 1960-70, it moved up to Rs. 184.
Between 1970 and 1980 came the massive rise from Rs. 184 to Rs. 1,330. During the 80s,
it moved up another 240%. The trend of gold prices in India in the last few years is given
in Table 1.
Table 1 reveals that between 1950 and 2002, gold appreciated 51 times.
Many investment experts have tried to establish a correlation between the price of gold
and the price of something else, like oil and silver. They looked for a ratio. Many experts
used to think that the ratio between silver price and gold price should be 1:35; but in
India, we have a ratio of 1:64. Internationally the ratio now is placed around 1:66!
Gold in India
India has been a traditional gold-hoarder. Indians love gold.
In addition to the 9,000 MT of gold with the people of India the Government of India has
about 80 MT of confiscated gold. Further, the Reserve Bank of India has gold reserves as
well. These official gold reserves helped India to tide over its foreign exchange crisis in
1991. Indias stock of gold of about 9000 tonnes was valued at Rs. 450,000 crore which
perhaps is an indication of the extent of black money in the country. Legal imports of
about 500 tonnes of gold in 1998-99 were valued at about Rs. 20,000 crore. In
comparison, Indias trade deficit that year was only around Rs. 15,000 crore. Today, India
imports gold more than any other commodity.
In 1963, the Gold Control Order was promulgated under the Defence of India Act in the
light of the India-China war. Under the Gold Control Scheme, the maximum purity of all
ornaments to be made in the country, whether from remolten old ornaments of higher
purity or from gold in any other form, was restricted to 14 carats in place of the earlier 22
carats. Since its inception, the Gold Control Act of 1963 has had to be amended, diluted
and whittled down. Eventually in 1990, the Finance Minister repealed the Gold Control
Act. It was very widely welcomed by one and all, for understandable reasons.
Gold smuggling into India was rampant as the gold price in India has been historically
higher than the international parity price. For example, on 27 April 1990, the price of
gold (10 gm) in Bombay was Rs. 3,400, whereas the New York price was only Rs. 2,065.
In other words, the Indian price of gold was nearly 65% higher.
The central problem of bullion trade in India is the excess of demand over supply. As
there was a total ban on import of gold, the excess demand was met through large scale
smuggling. According to the Bombay Bullion Association, more than half of the annual
requirement of gold in India (estimated to be around 200 MT) was met by smuggled gold.
However, the situation changed totally after 1992. The ban on gold imports was lifted in
March 1992. All returning NRIs can now bring gold upto 10 kg per person. They have to
pay a fixed duty. This measure is expected to reduce, if not eliminate, gold smuggling,
bring in revenue for the government, and reduce the disparity between international and
domestic prices of gold.
The Gold Deposit Scheme
In an attempt to mobilize the idle gold savings in households across the country, the
Government announced a Gold Deposit Scheme. According to its terms, the banks were
allowed to accept physical deposits of gold, and issue interest bearing certificates in
return, which can be reclaimed for gold on maturity. Union Finance Minister Yashwant
Sinha has thrown in a host of tax sops to attract investors. The value of the gold deposited
and the interest earned on it is exempt from wealth tax. Further, any capital gains made
on these gold bonds through trading or at redemption will be exempt from capital gains
tax. The returns are around 3% per annum. Certain banks, like the State Bank of India,
also offer benefits like rupee loans of upto 90% of the gold deposit, with the interest rate
linked to the Prime Lending Rate.
Since there is no income as such from holding gold, there is no liability for income tax.
But bullion and jewellery are subject to capital gains tax and wealth tax, without any
While determining the value of gold ornaments for the purpose of wealth tax, making
charges should be ignored, unless the ornaments are studded with precious stones. The
value of gold contained in the ornaments can be reduced by 15% to 20% because the
dealer invariably deducts 15% of the ruling rate of standard gold when ornaments are
sold in the open market.
The Prospects for Gold
Many investors have forgotten that when gold price went up during the late 1970s it was
just trying to catch up with prices of other things which had already gone up. In 1970,
when the price of gold was $35 an ounce (due to the gold standard then followed in USA)
it was unquestionably undervalued. When gold hit $850 an ounce in January 1980 it was
again, unquestionably, overvalued. If the increase in gold price had kept the same pace in
1980s and 1990s as it did in 1970s, it would have become $20,000 an ounce by 2000.
With a number of Central Banks selling off huge chunks of their gold reserves, the
international price of gold has come down in the last few years.
Timothy Green, a well-known gold expert, reminds us of a historical truth: The great
strength of gold throughout history has not been that you make money by holding it, but
rather you do not lose. That ought to remain its best credential. A research study on gold
established a remarkable consistency in the purchasing power of gold over four centuries.
Its purchasing power in the mid-twentieth century was found to be nearly the same as in
the middle of the seventeenth century.
You can safely invest in gold. But take care to keep your jewellery in bank lockers. You
can also raise loans on gold for your other portfolio investments. If the Indian economy
continues to be liberalized and unshackled fast, several new options may emerge for
investors to invest in gold bars, gold coins, gold funds, gold mining companies and gold
options. It will also lead to the eventual equalization of domestic and international prices.
Indian mining companies could be set to flood into Uzbekistan in the near future after the
Uzbek Prime Minister Savkit Mirziyayev welcomed them into his country.
Specifically, Uzbekistan has extended the hand of friendship to both MMTC - Indian
state-owned company - as well as the National Mineral Development Corporation.
In order to take advantage of the offer on the table from the Uzbek government, both of
the above companies have a total of 30 days to either accept or decline the deal relating to
India's minister of state for commerce Shri Jairam Ramesh has stated that "the Uzbek
government wants this proposal to include value-addition investments in Uzbekistan
itself like in gold jewellery.”
Uzbekistan has to date seen investment from Russia, China and South Korea regarding
the eastern European country's natural gas supplies and at this present time the Gas
Authority of India is in talks with the Uzbek government about the potential for gas
WGC India creates a new gold buying day in North & West India with Akshaya
Thritiya 2005 Promotion:
The first major festival of the year was promoted in a big was by WGC across the
country using National TV for the first time ever for greater impact. In North & West
India since Akshaya Thritiya is not a known festival in North & West India, WGC used
the endorsement route with a very popular TV celebrity (Smriti Irani aka Tulsi)
communicating the auspiciousness of the occasion and its linkage to gold purchase. WGC
tied up with a National TV Channel (Star Plus) to promote this campaign along with
advertisements in other mainstream TV channels. The trade in bigger towns across North
& West India reported an increase in off-take of 3-4 times their normal daily sales. There
were number of media reports in leading dailies that the WGC advt. had a direct impact
on sales and was successful in creating a new gold buying day in this region. In South
India, given the hysteria created by WGC on the Akshaya Thrithiya day, this time it was
promoted as a gold buying week in order to extend the gold buying occasion period.
Arrangements were made by leading jewellers to book the purchase in advance for
delivery on the actual day of Akshaya Thritiya. The trade in the Southern States reported
a further increase in of 25 to 30% as compared to the same day last year. The growth and
off-take was more prominent in the Southern State of Karnataka where WGC was also
running a shopping festival around this period.
Background information on Akshaye Trithya
Akshaya Tritiya. Auspicious. Alluring. Always. Celebrated on the third day after
amavasya in the Tamil month of Chithrai, Akshaya Tritiya is one of the most important
days of the Vedic Calendar. It is the day on which the Sun and the Moon are
simultaneously at the peak of their brightness. Legend has it that ancient rishis performed
the first yagya in the history of mankind on Akshaya Tritiya. It is believed that any
purchase made on Akshaya Tritiya is blessed as sanctified. As crowds throng glittering
gold marts, the yearly shopping fest becomes a chance to invest and be inspired. It is a
symbolic celebration of how gold still rules the hearts and minds of Indians. Akshaya
Tritiya becomes the annual golden sign of things to come.According to Vedic
astrologers; Akshaye Trithya is one of the most important days of the Vedic calendar. On
that day the Sun – Surya and the Moon – Chandra are simultaneously at their peaks of
brightness. Today Akshaye Trithya is considered as auspicious as the festival of
‘Dhantaras’ The colour ‘yellow’ is the festive season’s stipulation. Yellow emphasises
happiness, prosperity and a sign that all is well with the world. The yellow metal is
considered a safe investment, that can be realized fast. The 30 second promo will
highlight the purchase and significance of Gold jewellery on the auspicious day of
Akshaye Trithya. To commemorate the auspicious occasion of Akshaye Trithya one of
the three and a half most auspicious days of the Hindu calendar, World Gold Council has
announced their promotional campaign with television actress Sudha Shivpuri, better
known as Baa and Tasneem Shaikh the much admired characters of Kyunki Saas Bhi
Kabhi Bahu thi….the most popular soap on Star Plus.
Baisakhi Gold Festival
Baisakhi marks the beginning of a celebration period post the harvesting of winter crops
in North India, especially in the State of Punjab. In 2005, World Gold Council
successfully conducted the Baisakhi Gold Shopping Festival from 21st April to 20th May
’05 across the State of Punjab, covering 8 cities, for the first time around. The top 72
jewellers from 7 cities participated in this festival. In 2004 it was conducted in just one
city i.e. Chandigarh. During this festival, customers received a lucky coupon on the
purchase of Gold Jewellery worth Rs 2,500 and above. The coupon entitled them to
participate in 3 Lucky Draws whereby consumers got a chance to win prizes ranging
from 20 gm coins to ½ kg of gold and upto 1 kilo of gold at the mega prize. For the first
time a Gold Shopping Festival was promoted on Regional TV thereby increasing
visibility and coverage.
WGC Kicks off a Gold Buying Craze during Rakshabandhan
Gold is something Indians have always used to convey deep emotions. The noteworthy
festival of Raksha Bandhan is a great example. Although prevalent, the gold buying trend
during this festival was not very widespread until recently. Gold gifting at Raksha
Bandhan this year was promoted by the variety of delicate designs available in the market
and the umpteen promotions initiated by the WGC.
The World Gold Council in association with D’damas promoted Collection g brand
during this festival via a celebrity endorsement route wherein gold jewellery was
shown as the gift of choice between famous television characters celebrating
Rakshabandhan on screen.
This communication did wonders in regards to Collection g offtake during this
All D’damas outlets were stocked out within a few days of airing this
A separate print communication was also released via partners in Punjab and
Delhi to promote this festival.
Attempt to create a new gold jeweller purchase occasion during
Karva Chauth is predominantly a North Indian Festival during which a wife fasts for the
entire day and prays for the well-being of her husband. The stylized communication
developed by WGC for this festival attempted to cash on the husband’s guilt factor in
order to convert this occasion into a new gold buying day in India. WGC promoted this
festival with some prominent partners in North and West India who recorded a growth of
20-30% over the same period last year.
WGC & Coca-Cola India’s “Khara Sona” Diwali Promotion
While the Diwali Festival was promoted across North & West India with leading
jewellers of the region, WGC also ran an all India promotion with Coca-Cola India
wherein the Speak Gold messaging was integrated with Coke’s consumer messaging that
promoted gold coin purchases during the festive season.
In this promotion, consumers got a chance to win a gold coin every hour for a period of 4
weeks. All they had to do was to purchase a Coca-Cola bottle and send a text message via
their cell phones to the number specified on the reverse of the label. It was a great success
especially in the States of Andhra Pradesh and West Bengal.
ANDHRA PRADESH GOLD FESTIVAL
AP Gold festival spanning the entire State of Andhra Pradesh was organised for the first
time, involving more than 280 jewellers, across the fourteen districts. Inspite of the
various trade issues that prevented the execution of such a festival in the past three years,
this time around the AP Gold Festival, in association with the Govt., of Andhra Pradesh,
turned out to be a successful venture. ICICI Bank, Credit Cards Division, one of the
reputed private bankers in the Country, was the main Co-sponsor to the event, along with
AP Gems Park, Hyderabad.In the midst of the extreme price volatility and the low off-
take market scenario, the AP Gold festival was a timely launch that aroused the declining
interest of the customers and motivated the dampened spirit of the retailers. Gold festival
arches, hoardings, in shop POP materials, posters and print ads adorned the state to
sustain the interest of the customers throughout the 60 days festival.At the prize
distribution function held to mark the grand finale of the festival, 237 lucky customers
walked away with gold prizes, including a bumper prize of 1kg Gold. ICICI Bank gave
away 1/2kg of Gold to its lucky card member.
KARNATAKA GOLD FESTIVAL 2005
The Gold Festival in Banglore initiated by World Gold Council was a resounding success
with participation from big and small jewellery retailers from across the across the State.
A major advertising blitzkrieg right through the 50 day festival period was on. This
festival coincided with the Telugu New year and Akshaya Thrithiya and boosted the sale
With the participation of 455 jewellers from across the entire State of Karnataka and also
the involvement of the upcountry jewellers / associations / committee members, the
Karnataka Gold festival was a whopping success. Many interesting innovations were
tried out such as jingles on Radio Mirchi, vantage hoarding sites, special messaging by
Airtel across the State of Karnataka.
Prizes worth 5.5 kgs of Gold were distributed during the festival to 256 lucky winners.
Besides bumper draw prizes to customers, 5 lucky winners from amongst the trade
participants were selected to go to Kuala Lumpur ( two nights and three days), through a
special tie up with Malaysian Airlines. ICICI Bank – Credit Card and Gold Coins
divisions were prime Associate Co-Sponsors to the event. The feedback from the trade
across the State during the Karnataka Gold Festival was that their business registered a
growth of 30% to 40%, over the previous years’ sale.
The above two events, Andhra Pradesh Gold Festival and the Karnataka Gold Festival
were managed with excellent results by Art of Jewellery( Bangalore), a reputed Jewellery
Retail Magazine in the country.
AKSHAYA THRITHIYA 2006
In the recent years, Akshaya Thrithiya – an age-old auspicious day has seen a revival in
popularity in many parts of the country. People believe that buying or wearing new gold
on Akshaya Thrithiya brings prosperity for the entire family, all the year round.
Jewellers in South India experienced a phenomenal turnout of customers during this
period. The Festival is being promoted as Akshaya Thrithiya Vaaram (Akshaya Thrithiya
Week), where the public starts to buy jewellery during the entire week instead of the one
single day. The auspicious jewellery bookings are open and customers can pre book
jewellery to be delivered on Akshaya Thrithiya Day. In most of the retail outlets, people
were waiting in queues to get in and some jewelers had to even pull down the shutters to
control the crowd! The experience was similar in many other parts of the country as well.
Jewellers who prepared well in advance by informing their customers through letters,
direct mailers and advertisements, benefited immensely. This year, WGC was able to
convince major Private Banks in India like ICICI Bank, HDFC Bank and Citibank to
promote this festival. Needless to mention, their response from the festival was
something that did not imagine, sales going through the roof, with stock-outs happening
in various Bank branches, by noon
When gold as a commodity did started trading in commodities market in India?
Ans) In India, gold as a commodity started trading in commodities market in 2003, under
the control and regulation of securities and exchange board of India (SEBI) and forward
market commission FMC the regulator of commodities futures markets.
What makes gold investment better then real estate investment?
Ans) Gold could be exchanged in money by any Gold retailer and there is a instant
transaction of money from the value of Gold to Currency .where as in property, it is
difficult to get the net value as well as it takes time to make transaction.
What makes gold investment better then share investment?
Ans) According to the past report a share that is bought for 1000 rupees can turn up to Rs
100 or vise versa depending upon the market position .Where as investment in Gold
suppose bought at a price value of 8800 per ten grams, it is seen that the fluctuation of the
commodity is not much high so it proves to be a safer game and investments for
What is the average daily turnover of gold commodities market for last three
months (NCDEX & MCX)
Ans) Average daily turnover of gold in commodities market for last three months was
between 1400 kgs to 1500 kgs.
What according to you would be the future of Gold?
Ans) Gold has always proved to be a a right investment .the value of gold has always
grown up by the end of the year. Infact, it is estimated that by 2010 Gold price is going to
reach high upto 15000 per 10 grams.
What are the major changes seen in gold trading presently as compared to our past?
1 No regulatory authority Exchange Regulatory authority exchange
2 Used to equalize debt of the country Used as hedging tool for long term funds.
3 No warehouse System Good warehouse system
4 Only used for ornaments &
Used in ornaments investments as well as
other industrial uses.
What are the major factors that affect gold prices in India?
Ans ) Inflation, demand for gold in domestic market, interest ,job opportunities.
Why has branded gold providing guarantee about the quality not yet managed to
tap the Indian market as well?
Ans ) The reason is that the investment is made for the gold content in the jewellery and
not for some fancy designer's name.
It takes a special reward to motivate an athlete to train a lifetime for one chance at
proving his or her greatness. Gold is that reward. Once used as a monetary standard for
any nations, gold is as highly sought after today and not just in the Olympics as it was in
the past, both for its value and its beauty .carats indicate the amount of gold present to an
item, with 24 carats signifying pure gold.
After having keen look to the project, we can be sure that investment in commodities
could be a feather touch to our life. Further we can forecast that Gold as a commodity has
potentiality to hedge the portfolios investment.