Gold Market
Content
A REPORT ON GOLD MARKET
By Manish Madhogaria Lohia Securities Pvt Ltd.
A REPORT ON GOLD MARKET
By Manish Madhogaria
Lohia Securities Pvt Ltd
Date of submission:-
AUTHORISATION
I have been authorized to undertake the project ³Gold Market ¶¶ as my SIP Project for Lohia Securities Pvt. Ltd. I have been assigned to do this project under Mr. Jitesh Agarwal , President , HRD.
ACKNOWLEDGEMENT
The present project is carried out in Lohia Securities Pvt. Ltd located at Kolkata under the guidance of Icfai Business School Kolkata. The project is not fully completed only half of the work has been done so far .Now on the verge of writing this interim report I would like to thank a number of people from whom I have received generous support and who in different ways have contributed me in reaching so far. First I would like to thank my company guide Mr. Jitesh Agarwal of Lohia Securities Pvt. Ltd and all the staff who have helped me . Their support and comments have been of Inestimable value throughout whatever have been achieved in this project. I would also like to thank the staff at IBS kolkata and especially my faculty guide Dr. Sutapa Banerjee for helping & guiding me and at the same time solving all my queries . Furthermore I would also like to thank my dean sir mr. R.K Mandan and all the faculty members present in IBS lucknow for supporting and helping me in this MBA program . I would also like to thank Mr. Rajib Kejriwal, CEO Eureka Commodities Pvt. Ltd. Mr. Sumit Choudhry , Arbitrager Sreepati Balaji Pvt.Ltd for extending their support and providing me all the necessary information needed to prepare the Interim Report .
Manish Madhogaria
TABLE OF CONTENTS
Authorization I Acknowledgement II Abstract III 1. Introduction 2. MainText 2.1 Why Invest in Gold? 2.2 Gold Market Exchanges. 2.3 Special Features of Gold Market. 2.4 Terms and Terminologies in this Market. 2.5 Why prefer MCX? 2.6 Factors affecting Gold prices. 2.7 Inflation, Exchange rate with Dollar, Sensex and Gold prices. 2.8 Recent trend in Gold Market in India. 3. Conclusion 3.1 Recommendation 5. References
ABSTRACT
My project Gold Market gives emphasis on the trading strategies which are followed by different trading firms and brokers and also it gives emphasis on how different factors like inflation affects the price of gold. This will include learning of the gold market in detail from net, how the market started, what was the need behind creating such markets, who regulates this market, what is the minimum requirement, etc. The methodology that I have adopted to conduct the research work is to visit different trading firms. Internet search engines like google, yahoo is used and will be used to carry out the research work. The main idea behind this market research is to gain basic idea what strategies different trading firms and brokers use to gain maximum profit .
1. INTRODUCTION
"Gold is a very solid asset. Buying physical gold does have advantages compared with other investments. Investments in gold-backed financial products and paper gold should be left up to the professionals," says Mark Robinson, a bullion analyst based in Dubai. Gold is the oldest precious metal known to man. Therefore, it is a timely subject for several reasons. It is the opinion of the more objective market experts that the traditional investment vehicles of stocks and bonds are in the areas of their all-time highs and may be due for a severe correction. To fully appreciate why 8,000 years of experience say " gold is forever", we should review why the world reveres what England's most famous economist, John Maynard Keynes, cynically called the "barbarous relic." Why gold is "good as gold" is an intriguing question. However, we think that the more pragmatic ancient Egyptians were perhaps more accurate in observing that gold's value was a function of its pleasing physical characteristics and its scarcity.
y y
y y y
y y y
Gold is primarily a monetary asset and partly a commodity. More than two thirds of gold's total accumulated holdings account as 'value for investment' with central bank reserves, private players and high-carat Jewellery. Less than one third of gold's total accumulated holdings is as a 'commodity' for Jewellery in Western markets and usage in industry. The Gold market is highly liquid and gold held by central banks, other major institutions and retail Jewellery keep coming back to the market. Due to large stocks of Gold as against its demand, it is argued that the core driver of the real price of gold is stock equilibrium rather than flow equilibrium. Economic forces that determine the price of gold are different from, and in many cases opposed to the forces that influence most financial assets. South Africa is the world's largest gold producer with 394 tons in 2001, followed by US and Australia. India is the world's largest gold consumer with an annual demand of 800 tons.
World Gold Markets
y y y y y y
London as the great clearing house New York as the home of futures trading Zurich as a physical turntable Istanbul, Dubai, Singapore and Hong Kong as doorways to important consuming regions Tokyo where TOCOM sets the mood of Japan Mumbai under India's liberalized gold regime
Indian Gold Market
Let us at first take a look at the evolution of the Indian Gold Market. India was never in dearth of Gold Reserves. History had been a witness of the fact that India was always self sufficient in all its natural resources and more so in case of gold. It was this abundance in availability of such precious metals that lured foreign invaders from all parts of the globe as well as from time to time to come to India and plunder as much of it as was possible for them to do. However there were a significant number of such intruders who, after entering the country, fell for the land and its cultural heritage which eventually led them to settle and establish their empire in India. As a inevitable consequence of the lavish livelihood exhibited by the Indian rulers, the Gold reserves in India gradually diminished. The arrival of the British in the hierarchy in the middle of the eighteenth century announced the decline of India's Gold Reserves even further. The colonial status given to India by the British crippled the economy which once boasted of its wealth in gold. Huge quantities of the precious metal was carried to England right after their extraction. As a result a major proportion of India's Gold Reserves was 'vanishing' without even entering into the economy. By the time India gained independence, a huge vacuum had already been created as far as Gold Reserves in India was concerned. Slowly, after several decades have gone by India has finally started to fill up the vacuum in a big way. After
reaching a new height in the form of 8 % growth in Gross Domestic Product (GDP ) for the year 2005-06, India is being recognized as one of the fastest emerging economies of the world. India's growing prospects can also be noticed in the gold market as well. India is viewed as the largest consumer of gold in recent times. According to the figures presented by the estimates of the World Gold Council (WGC), India's total demand for gold in the year 2001 was 243.2 tonnes which comprised 26.2 % of the total world demand. y Gold is valued in India as a savings and investment vehicle and is the second preferred investment after bank deposits. y India is the world's largest consumer of gold in jewellery as investment. y In July 1997 the RBI authorized the commercial banks to import gold for sale or loan to jewellers and exporters. At present, 13 banks are active in the import of gold. y This reduced the disparity between international and domestic prices of gold from 57 percent during 1986 to 1991 to 8.5 percent in 2001. y The gold hoarding tendency is well ingrained in Indian society. y Domestic consumption is dictated by monsoon, harvest and marriage season. Indian jewellery offtake is sensitive to price increases and even more so to volatility. y In the cities gold is facing competition from the stock market and a wide range of consumer goods. y Facilities for refining, assaying, making them into standard bars in India, as compared to the rest of the world, are insignificant, both qualitatively and quantitatively. To sum up, the Indian Gold Market has a very bright future ahead. Who is the regulator? The exchanges are regulated by the Forward Markets Commission. Unlike the equity markets, brokers don't need to register themselves with the regulator.The FMC deals with exchange administration and will seek to inspect the books of brokers only if foul practices are suspected or if the exchanges themselves fail to take action. In a sense, therefore, the commodity exchanges are more selfregulating than stock exchanges. But this could change if retail participation in commodities grows substantially.
Who are the players in commodity derivatives? The commodities market will have three broad categories of market participants apart from brokers and the exchange administration - hedgers, speculators and arbitrageurs. Brokers will intermediate, facilitating hedgers and speculators. Hedgers are essentially players with an underlying risk in a commodity - they may be either producers or consumers who want to transfer the price-risk onto the market. Producer-hedgers are those who want to mitigate the risk of prices declining by the time they actually produce their commodity for sale in the market; consumer hedgers would want to do the opposite. For example, if you are a jewellery company with export orders at fixed prices, you might want to buy gold futures to lock into current prices. Investors and traders wanting to benefit or profit from price variations are essentially speculators. They serve as counterparties to hedgers and accept the risk offered by the hedgers in a bid to gain from favourable price changes.
2.1WHY INVEST IN GOLD?
y Adding gold to a portfolio introduces an entirely different asset class- a tangible & real asset which increases the portfolio's degree of diversification. Effective portfolio diversifier
y As depicted above, while the overall return of a portfolio without gold is 14%, that of a portfolio with gold is over 16%. Hence an allocation of physical gold in a financial portfolio not just helps reduce the impact of the volatility created by the other asset classes like equity, bonds etc., but also increases the average return over a period of time. y A financial portfolio containing gold is generally more robust because it improves the stability and predictability of better average returns. y Superior to other alternative asset classes
y Gold is the most liquid asset class due to its universal acceptance as an alternative to currency, and also because globally, the gold market is functional 24x7. y Same cannot be said about any other asset class as they take much longer time to liquidate (from 1 day to upto 3-4 months). y Effective hedge against currency risk
y y
Due to its inverse relationship to dollar, gold has always proved to be an effective hedge over a period of time. Effective hedge against Inflation
y A study conducted by WGC in UK shows that one ounce of Gold would consistently purchase the same amount of goods & services as it would have done 400 years ago, making it the perfect hedge against inflation over a long period of time. y Other Reasons y More liquid as compared to the other asset classes Gold can be bought, sold or traded globally. y Performance of gold not linked to performance of any company, industry or government. y Gold needs no professional manager unlike mutual funds y Gold is an asset, which is not simultaneously a liability, unlike stocks. y It doesn't require political & social stability to survive, in fact it thrives under worst societal conditions.
y Gold doesn't ever loose its intrinsic value. y Inspite of the growing demand for gold in India, average retail household has seldom considered ³investing in gold´ because of the absence of an efficient and effective platform.
Gold v/s Stock.
Performance of gold not linked to performance of any company, industry or government. Gold needs no professional manager unlike mutual funds. Gold is an asset, which is not simultaneously a liability, unlike stocks. It does not require political & social stability to survive, in fact it thrives in the worst conditions. Gold will never loose its intrinsic value.
2.2 GOLD MARKET EXCHANNGES.
y
MCX (Multi Commodity Exchange):
Multi Commodity Exchange of India Ltd, (MCX) an independent and demutualised multi commodity exchange, has permanent recognition from the Government of India. MCX, a state-of-the-art nationwide, digital exchange facilitates online trading, clearing and settlement operations for a commodities futures trading. Key shareholders of MCX are Financial Technologies (India) Ltd, State Bank of India, Union Bank of India, Bank of India, Corporation Bank & Canara Bank. Headquartered in Mumbai, MCX is led by an expert management team with deep domain knowledge of the commodity futures markets and has successfully established a thriving digital market for trading in Gold, Silver, Steel, Kapas, Cotton, Rubber, Black Pepper, Oil & Oil Seeds, Ferrous and Non-Ferrous Metals, Agri Commodities, Pulses and Soft commodities MCX now stands amongst the top five bullion exchanges in the world and the largest gold futures exchange in India. Between November 11, 2003 and August 12, 2004, MCX has clocked a total Gold turnover of more than 340 tons valued at around Rs. 20,000 crores, which accounts for 90 per cent of the gold futures trading in the country. MCX offers two types of contract in Gold i.e. Gold (1 Kg) and Gold Mini (100 Gms) facilitating a large spectrum of market participants to do trading. MCX has also recorded Gold physical delivery in numerous contracts to the extent of 1.5 quintals.
y NCDEX (National Commodity & Derivative Exchange Limited):
National Commodity & Derivatives Exchange Limited (NCDEX) is a professionally managed on-line multi commodity exchange. The shareholders are : Promoter shareholders: Life Insurance Corporation of India (LIC), National Bank for Agriculture and Rural Development (NABARD) and National Stock Exchange of India Limited (NSE) . Other shareholders: Canara Bank, CRISIL Limited (formerly the Credit
Rating Information Services of India Limited), Goldman Sachs, Intercontinental Exchange (ICE), Indian Farmers Fertiliser Cooperative Limited (IFFCO) and Punjab National Bank (PNB). NCDEX is the only commodity exchange in the country promoted by national level institutions. This unique parentage enables it to offer a bouquet of benefits, which are currently in short supply in the commodity markets. The institutional promoters and shareholders of NCDEX are prominent players in their respective fields and bring with them institutional building experience, trust, nationwide reach, technology and risk management skills. NCDEX is a public limited company incorporated on April 23, 2003 under the Companies Act, 1956. It obtained its Certificate for Commencement of Business on May 9, 2003. It commenced its operations on December 15, 2003. NCDEX is a nation-level, technology driven de-mutualised on-line commodity exchange with an independent Board of Directors and professional management - both 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. NCDEX is regulated by Forward Markets Commission. NCDEX is subjected to various laws of the land like the Forward Contracts (Regulation) Act, Companies Act, Stamp Act, Contract Act and various other legislations. NCDEX is located in Mumbai and offers facilities to its members about 550 centres throughout India. The reach will gradually be expanded to more centres. NCDEX currently facilitates trading of 57 commodities.
2.3 WHY MCX?
Multi Commodity Exchange of India Ltd (MCX), the largest player in the bullion futures trading is participating in the convention as µExchange Partner¶. The convention is organized by Bangalore based Foretell Business Solutions Pvt. Ltd and is supported by Bombay Bullion Association (BBA). MCX now stands amongst the top five bullion exchanges in the world and the largest gold futures exchange in India. Between November 11, 2003 and August 12, 2004, MCX has clocked a total Gold turnover of more than 340 tons valued at around Rs. 20,000 crores, which accounts for 90 per cent of the gold futures trading in the country. MCX offers two types of contract in Gold i.e. Gold (1 Kg) and Gold Mini (100 Gms) facilitating a large spectrum of market participants to do trading. MCX has also recorded Gold physical delivery in numerous contracts to the extent of 1.5 quintals. Gold is for big investors who can invest huge amount of money and is willing to take huge risk. The price quote is per 10gm.Maximum lot size is 10 kg. While Gold Mini is for small investors in which we can trade in 100gm and the maximum lot size is 2MT. Now a days MCX is also providing contracts on Gold Guinea.In this the trading unit is 8gm. It is like small gold coins.
2.4 TERMS AND TERMINOLOGIES IN GOLD MARKET.
This guide is intended to provide a basic understanding of commodity futures terminology. Though the terminology of trading agricultural commodities goes far beyond the scope of this guide, this information can be used to build a knowledge base from which a broader understanding of the futures market can be developed. Arbitrage: The simultaneous purchase and sale of similar commodities in different markets to take advantage of a perceived price discrepancy. Basis: The difference between the current cash price and the futures price of the same commodity for a given contract month. Bear market: A period of declining market prices. Bull market: A period of rising market prices. Broker: A company or individual that executes futures and options orders on behalf of financial and commercial institutions or the general public. Call option: An option that gives the buyer the right, but not the obligation, to purchase (go ³long´) the underlying futures contract at the strike price on or before the expiration date of the option. Cash (spot) market: A place where people buy and sell the actual (cash) commodities, that is, a grain elevator, livestock market, or the like. Commission (brokerage) fee: A fee charged by a broker for executing a transaction. Convergence: A term referring to cash and futures prices tending to come together as the futures contract nears expiration. Cross-hedging: Hedging a commodity using a different but related futures contract when there is no futures contract for the cash commodity being hedged
and the cash and futures markets follow similar price trends. For example, hedging cull cows on the live cattle futures market. Daily trading limit: The maximum price change set by the exchange each day for a contract. Day traders: Speculators who take positions in futures or options contracts and liquidate them before the close of the same trading day. Delivery: The transfer of the cash commodity from the seller of a futures contract to the buyer of a futures contract. Forward (cash) contract: A cash contract in which a seller agrees to deliver a specific commodity to a buyer at a specific time in the future. Fundamental analysis: A method of anticipating future price movement using supply and demand information. Futures contract: A legally binding agreement, made on the trading floor of a futures exchange, to buy or sell a commodity or financial instrument sometime in the future. Futures contracts are standardized according to the quality, quantity and delivery time and location for each commodity. The only variable is price, which is determined on an exchange trading floor. Hedger: An individual or company owning or planning to own a cash commodity ² corn, soybeans, wheat, U.S. Treasury bonds, notes, bills, etc. ² and concerned that the costs of the commodity may change before it can be either bought or sold in the cash market. A hedger achieves protection against changing cash prices by purchasing (selling) futures contracts of the same or similar commodity and later offsetting that position by selling (purchasing) futures contracts of the same quantity and type as the initial transaction and at the same time as the cash transaction occurs. Hedging: The practice of offsetting the price risk inherent in any cash market position by taking an equal but opposite position in the futures market. Hedgers use the futures markets to protect their business from adverse price changes. Initial margin: The amount a futures market participant must deposit into a margin account at the time an order is placed to buy or sell a futures contract.
2.5 FACTORS AFFECTING GOLD PRICES.
Historically, gold prices have reacted sharply to geo-political and economic shocks, inflationary fears, dipping supply and rising demand, a weak dollar and struggling equity markets. Be it the oil shocks of the 1970s or the 1980 invasion of Afghanistan or the reaction to the collapse of investment banks last year²in every case, gold prices touched record highs. In March 2008 for example, gold touched all time highs of $1,023 an ounce (31 grams) following news of the collapse of Bear Stearns. Even in the current year, recessionary conditions and the global equity sell-offs have ensured firm gold prices with the average going at $900 to an ounce. Gold also seems to be giving the best returns when the inflation rate is at high levels (gold has outperformed equities by a wide margin in the US during high inflationary periods) and thus, is considered to be a good hedge against it. While currently inflation is hardly a concern, large amounts of liquidity injected by governments is likely to find its way into the market and push up inflation. While this could lead to depreciation of currencies (as governments print more money and increase money supply), gold because of its limited supply (can¶t increase it suddenly unlike currencies) continues to hold its own and is thus is considered as an effective inflation hedge. While a weak dollar has been positive for gold and the yellow metal has a negative correlation with the dollar, currently both asset classes are in demand. Best among worst Gold has moved up by 33 per cent since November 1, 2008 and the dollar has been moving up against most currencies including the euro and the rupee. Says Manasee S Gokhale, economist, NCDEX, ³With few other options available and as long as other currencies are falling, dollar would continue to strengthen.´ Despite the poor fundamentals of the US economy and a yawning fiscal deficit, institutions have been buying dollars, as it is considered the better bet among weak currencies.
The movement of the gold and dollar in the upward direction is due to recessionary conditions and is therefore temporary, believe experts. Says Jayant Manglik, president, Religare Commodities, ³The gold-dollar relationship will get back to the trend line. Unprecedented investments by governments should help economies recover by the end of the year.´ The frenzy of investment in gold going ahead, he believes, is likely to die down as recovering economies will bring equities into play once again. However, till that happens, the key reason for gold prices moving up will neither be dollars, external shocks or the falling equity markets, but as an investment option with investors seeking assets which have minimal risk, offer stable returns and have low price volatility. The gold rush Jewellery demand in India has always been the key demand driver making up over two-thirds of total global demand for gold. This has, however, changed dramatically over the last one year due to increase in investment demand worldwide. In 2007, jewellery in terms of volumes accounted for 68 per cent of demand while investments had a share of 19 per cent (rest used for industrial and dental purposes). A year on, investment demand has shot up 64 per cent in volume terms, especially in the last two quarters of 2008, (See chart: Gold demand) with investors snapping up a 1,000 tonnes of gold. Share of investments now account for 30 per cent; that of jewellery has fallen to 58 per cent. In addition to retail consumption of gold coins and bars shooting up, investments in exchange traded funds (ETFs) have also seen a rise. Unlike the situation in India where gold ETFs have a miniscule five tonnes of gold with them, ETFs such as the NYSE-listed SPDR saw its gold holdings jump 14 per cent in one month to nearly 1,000 tonnes (See graph: ETFs in vogue) which is more than what India, the largest consumer of gold, imports in a year. Will this trend continue? Dharmesh Sodah of the trade body World Gold Council believes that while there will be profit-taking, the assets under management of US-based ETFs have been increasing due to the lack of alternative investments making them sticky. In India, the movement has not been as dramatic. Says Gokhale, ³ETFs are a new concept in India and are likely to do well over the next two years once investors can see a record of stable returns.´ Demand in the short term, however, is likely to be hit due to the prevailing high prices. Experts expect a rally in April (the Akshya Tritya festival pushes up gold sales) after which gold might stay down. An upward
movement post September (start of the wedding season) could be seen with gold likely to touch about $1,100 levels in a year. While global demand is expected to be steady, supply constraints also favour firm prices. In short supply Globally, with no fresh sources of mining available and a drop in gold prices in the 1990s has meant depressed production and mining activity since 2002. Acute power and labour shortages in South Africa (third largest producer) as well as sharp dips in production in Australia (fourth largest) and Indonesia, has translated to drop in supply for the third consecutive year (2008). GFMS, a UK-based precious metals consultant, believes that supply in 2008 has dipped by about 4 per cent to about 2,385 tonnes, the lowest in 13 years. In anticipation of higher prices, producers have dehedged (squared their forward positions) to the tune of 346 tonnes (or 14.5 per cent of world production of 2,385 tonnes) in 2008.
GLOBAL INVESTMENT DEMAND
2007 Identifiable Invt Net Retail Invt Bar Hoarding Official Coin Medals,Coin Oth Retail Invt. ETFs, similar Prod Inferred Invt Total Invt Total Invt, $ mn 663.7 410.3 236.3 137.0 72.6 -35.6 253.3 -37.7 626.0 14,727 2008 1090.7 769.3 378.2 197.7 60.5 132.8 321.4 -190.5 900.2 24,816 44 69 27 % chg* 64 87 60 44 -17 Q4'07 141.4 61.4 30.2 22.4 8.4 0.3 80.0 192.3 333.7 8,435 Q1'08 153.7 81.0 46.6 29.5 9.7 -4.8 72.7 104.3 258.0 7,671 Q2'08 139.4 135.4 88.4 36.6 12.4 -2.0 4.0 53.0 192.4 5,544 Q3'08 398.6 248.6 116.6 63.8 21.2 47.0 150.0 -354.7 43.9 1,230 Q4'08 399.0 304.2 126.6 67.9 17.2 92.6 94.7 7.0 405.9 10,372
Another key source of supply, government gold holdings, also saw a sharp 42 per cent fall year-on-year as governments sought to maintain their gold stocks amidst an environment of uncertainty. Sales by Central Bank Gold Agreement countries (primarily the EU) which own nearly half of the government-held gold reserves of 30,000 tonnes is controlled by a 500 tonne-a-year sales cap. Thus, analysts believe that despite the rise of scrap (recycled gold) supply on higher prices in 2008 by an estimated 13 per cent and likelihood of the same going up in 2009 as well, the drop
in production and lower government sales will ensure that the pressure on supply will remain going ahead. Price outlook In light of the current scenario, how will prices move? Experts believe that since gold prices have moved up in the last three months, the near-term could see some softening. Says Harish Galipalli, head of research, Karvy Comtrade, ³There is possibility of correction and gold might dip to $930 to an ounce from about $950 per ounce levels prevailing currently.´ In the medium-term though, the overall weak economic environment globally will keep upward pressure on gold prices as investors look for safety. Says Manglik, ³While gold has given about 26 per cent returns in 2008, it will fetch a return of about 20 per cent from here on (rupee terms) over the next one year, with the gains equally split between currency depreciation and investment demand.´ While returns have been good over the last year, future returns in the yellow metal will depend on the position of equity markets and the performance of other assets classes such as debt, currencies and real estate. Gold is exhibiting all the classic signs of being in a structural bull market. In the past year, we've seen gold go up on fears of inflation, then it rose on fears of deflation. The woes of the banking industry certainly appear to be aiding gold. In a bizarre twist, central bankers actually want the price of gold to rise because it would be an indication that attempts to stave off deflation are working.The long-term story for gold, however, is as a re-monetization play as investors lose faith in fiat currencies. The Fed has flooded the market with newly-printed money. Other countries are following suit. Now that all of this money is printed, it may be difficult to pull it back in. This, of course, would lead to currency devaluations. Some believe that the bottom in fiat currencies has begun and hard assets like gold and silver should benefit.Investors in Europe and north America went on an extraordinary shopping spree for gold coins and bars in the final quarter of 2008, snapping up 148.5 tonnes, a jump of 811 per cent compared with the same period in 2007, as the collapse of Lehman Brothers led to a massive increase in safe haven buying. According to the World Gold Council, this rush into physical gold by western investors pushed global retail investment up almost 400 per cent to 304.2 tonnes.Gold is about 25 per cent above its peak from the last great bull market in the metal in 1980.In yen terms, gold is still barely half its 1980 level which
might imply that there could be more gold demand to come from Japanese investors (referred to as 'Mrs Watanabe'). And in sterling terms, gold is double its 1980 peak which implies either great worries about returning inflation in the UK, or an overdone collapse of confidence in the pound sterling. The WGC's data confirmed earlier reports from traders about widespread shortages of coins and exceptional buying interest. Investment inflows into gold exchange traded funds reached 94.7 tonnes in the fourth quarter, up 18 per cent on the same period in 2007, but down from the record 150 tonnes of inflows seen in the third quarter of 2008. Rising prices for gold around the world mean that those currencies are depreciating. Practically all currencies are depreciating relative to gold. The whole world of currencies is depreciating, including the dollar. But due to the liquidity provided by US debt during the financial crisis, the dollar has appeared to rise in value within the overall currency bear market. All currency ships are sinking, the dollar ship is just not sinking as fast. For the better part of a century now, the global gold trade has been dominated by the dollar. All over the world, the prevailing gold price is a function of any currency's exchange rate with the dollar along with the dollar-price of gold. Back in July 2008, the dollar started rallying. It wasn't for fundamental reasons, but because the giant mortgage-backed bond industry was imploding and bond investors desperately sought the safety of US Treasuries. This kicked off the massive dollar panic rally in Q3 CY 2008, and the subsequent stock panic of Q4 CY 2008 accelerated it. Until this anomalous rally erupted, dollar gold remained strong in the high $800s and low $900s. At this dollar rally's apex on the very day the stock markets bottomed in late November, the US Dollar Index had reached levels first seen in early 2004 when gold was near $400. Yet gold didn't even close under $700 in 2008's panic, vastly stronger than the dollar alone would suggest it should be. Once again this highlights the critical fact
that the dollar is no longer gold's primary driver even though it can still temporarily influence gold at times. In order to predict the future of gold prices, one needs to keep an eye on gold lease rates; a spike would be a good lead indicator that gold is about to punch higher as this would reflect a shortage of lendable bullion. Rising lease rates will cause gold to go into backwardation as holders of gold may not want to sell their gold forward under any circumstances a trend currently evidenced by the high physical premium being paid for gold coins. Rising lease rates prefigured the last big move in gold back in the spring of 2007 just as the two Bear Stearns hedge funds were blowing up. Central banks feared counterparty risk for the first time in 20 years and substantially curtailed gold lending and sales. This led to a 40 per cent rally in gold from $700 to over $1,000. Indians are collectively the world's biggest gold investors, so the rupee gold price is very important to the health of this global gold bull. Thanks to a rupee collapse during the stock panic to dismal levels underneath where its secular bull started in mid-2002, rupee gold has been very strong. In fact, it surged to new bull highs during the stock panic and ended 2008 near these levels. During all this turmoil, India's deep cultural affinity for gold investment was strongly affirmed. The rupee gold price is an important one to watch, thanks to India's enormous influence in the global gold markets. Even though tonnage of gold imports is suffering, rupee expenditure levels are holding up well in India. Technical chartists say that gold could move into a parabolic fashion once the $1,000 per ounce barrier is broken. From there the speed of the move could accelerate sharply. For many structural reasons, totally unrelated to the stock panic, the fundamentals of gold remain awesomely bullish. Its strong performance during the stock panic in most of the world is only icing on the cake that will drive additional investment demand.
How high can gold ultimately go? A Dow Jones Industrial Average/gold ratio of 2:1 would be a good sign the bull market in gold is getting well-advanced. We saw this in 1932 and 1980. We are in a multi-year gold structural bull market that will eventually take the price to an integer multiple of where it is now. Within the broader and longer-term positive environment for gold, we need to remember that short-term bursts of emotions might run to extremes. This might be the case in the current situation. Emotions have been running high. Gold is seriously over-bought. While investors need gold in their portfolio, the current price situation might not be the best for buyers. Buy on price weakness, not strength. At the same time, it is never advisable to sell in a structural bull market.
2.8 INFLATION, EXCHANGE RATE WITH DOLLAR, SENSEX AND GOLD PRICES.
Dollar is Negatively Co-related with Gold.
Correlation Dollar Gold -70%
For Inflation Hedge
y The value of gold, in terms of real goods and services that it can buy, has remained remarkably stable. In contrast, the purchasing power of many currencies have varied over time. y Gold has consistently reverted to its historic purchasing power parity y Gold is an inflation hedge as proved by a 400-year study of the purchasing power of gold in Britain between 1596 and 1997. One ounce of gold would consistently purchase the same amount of goods and services as it would have done 400 years ago.
2.6 RECENT TREND IN GOLD MARKET IN INDIA.
MUMBAI: Gold is no longer glittering in India, the biggest global market for the consumption and imports of the yellow metal. Gold imports to the country has plunged to zero levels, as no bank and trading houses imported any gold during the month of February. Gold analysts said that February 2009 is perhaps the only month in this decade where there has been no gold imports to India. ³This is a serious issue. As gold market is all heated up, and gold prices have skyrocketed, imports of the yellow metal have practically stopped in India,´ said Akash Gupta, a bullion trader in Mumbai¶s Zaveri Market. Buying of gold jewellery has fallen sharply in January leading to a slump in the yellow metal¶s imports. According to the Bombay Bullion Association, there was more than 90% plunge in gold imports in January. ³The trend has worsened for February. There was zero gold imports to India in February,´ the Association president Suresh Hundia. In 2008, India¶s gold imports dipped by 45 per cent to touch 450 tons. In the last eight years from 2000, gold imports to India every year have been between 400-800 tons. But trade bodies have warned that gold imports this year could collapse to 100 tons, if the current trend continues. ³It will not be a surprise if gold imports fall to an all-time low of 100 tons or below in 2009,´ said bullion analyst Ashish Roy. High prices, global economic meltdown and financial crunch among investors and bullion dealers led to low demand for gold in India, where yellow metal is considered the best safe haven investment and people buy gold for weddings and other ceremonies. According to Hundia, gold sales and demand are plunging to negligible levels because of high prices. ³Gold and jewellery sector is reeling under a crisis because
of high prices and retrenchments across sectors,´ he said. Gold prices which in December was from Rs 13,505 for10 grams moved to an all-time high of Rs 16,000 per ten grams last week. Analysts and India trade bodies have predicted that gold prices could zoom to Rs 17,000 per ten grams by April this year. They also say that if this lowest level of gold intake continues in India, 2009 will be the worst year in this decade as far as gold imports are concerned. But despite the gloom in gold imports and sales in India, bullion traders hope that the gold market might pick up in April-May season. The World Gold Council has predicted there will be a modest gain in gold purchases in India during the summer wedding season and the Hindu religious festival of Akshaya Tritiya. ³There will be a modest growth of 10-15 per cent in the Indian domestic jewellery business,´ said K Shivram, Vice-President, World Gold Council. Shivram says gold sales will pick in April-May-June after the dull season of December and January.
3. CONCLUSION
Internationally trading in Gold has given the investors very safe and very fruitful option. Today people who earlier feared from entering the market are investing in Gold as it is the most safest asset and also its price is less fluctuating. Gold Market has developed vastly since it was started. Recently gold prices touched the height of Rs.16000/- per 10gm which astonished everybody. The reason may be any but today people willing to invest in Gold rather than Stock. Below the graph relating to increase in investment in Gold is give.
This graph is made by making an average of the whole months investment taking 16th as the base from the year October, 2006 to the year February, 2009. It clearly shows that how there is an increase of investment in gold.
Gold has significantly low correlation to other assets like equity indices, fixed income and commodities. Therefore adding gold to a portfolio may help improve risk adjusted returns or reduce volatility for the expected return. Indian Scenario There is need for an instrument which has Small denomination Cost efficiency Convenience for long term holding Greater uniform availability Transparency Liquidity Tax Efficiency Gold BeES Can fulfill this Need
Improving stability and predictability of returns Gold improves the stability and predictability of portfolio returns. It is not correlated with other assets because the gold price is not necessarily driven by the same factors that drive the performance of other assets Adding gold to a portfolio introduces an entirely different class of asset. Gold is unusual because it is both a commodity and a monetary asset Gold is one of the few financial assets that is not linked to a liability. It can provide 'insurance' against extreme movements on the value of traditional asset classes.
3.1 Recommendation:In my survey part first I visited Mr. Sumit Choudhary, an Arbitrager Sreepati Balaji Commodities Ltd and then I visited Mr. Rajib Kejriwal, CEO Eureka Commodities Ltd. Both of them said that the recent increase in price of gold is due to the fact that stock market is down so people are investing less in the stock market and investing more in gold as it has become a less risk market. Also the fact that dollar is going up has increased the price of gold as per them.
By Manish Madhogaria Lohia Securities Pvt Ltd.
A REPORT ON GOLD MARKET
By Manish Madhogaria
Lohia Securities Pvt Ltd
Date of submission:-
AUTHORISATION
I have been authorized to undertake the project ³Gold Market ¶¶ as my SIP Project for Lohia Securities Pvt. Ltd. I have been assigned to do this project under Mr. Jitesh Agarwal , President , HRD.
ACKNOWLEDGEMENT
The present project is carried out in Lohia Securities Pvt. Ltd located at Kolkata under the guidance of Icfai Business School Kolkata. The project is not fully completed only half of the work has been done so far .Now on the verge of writing this interim report I would like to thank a number of people from whom I have received generous support and who in different ways have contributed me in reaching so far. First I would like to thank my company guide Mr. Jitesh Agarwal of Lohia Securities Pvt. Ltd and all the staff who have helped me . Their support and comments have been of Inestimable value throughout whatever have been achieved in this project. I would also like to thank the staff at IBS kolkata and especially my faculty guide Dr. Sutapa Banerjee for helping & guiding me and at the same time solving all my queries . Furthermore I would also like to thank my dean sir mr. R.K Mandan and all the faculty members present in IBS lucknow for supporting and helping me in this MBA program . I would also like to thank Mr. Rajib Kejriwal, CEO Eureka Commodities Pvt. Ltd. Mr. Sumit Choudhry , Arbitrager Sreepati Balaji Pvt.Ltd for extending their support and providing me all the necessary information needed to prepare the Interim Report .
Manish Madhogaria
TABLE OF CONTENTS
Authorization I Acknowledgement II Abstract III 1. Introduction 2. MainText 2.1 Why Invest in Gold? 2.2 Gold Market Exchanges. 2.3 Special Features of Gold Market. 2.4 Terms and Terminologies in this Market. 2.5 Why prefer MCX? 2.6 Factors affecting Gold prices. 2.7 Inflation, Exchange rate with Dollar, Sensex and Gold prices. 2.8 Recent trend in Gold Market in India. 3. Conclusion 3.1 Recommendation 5. References
ABSTRACT
My project Gold Market gives emphasis on the trading strategies which are followed by different trading firms and brokers and also it gives emphasis on how different factors like inflation affects the price of gold. This will include learning of the gold market in detail from net, how the market started, what was the need behind creating such markets, who regulates this market, what is the minimum requirement, etc. The methodology that I have adopted to conduct the research work is to visit different trading firms. Internet search engines like google, yahoo is used and will be used to carry out the research work. The main idea behind this market research is to gain basic idea what strategies different trading firms and brokers use to gain maximum profit .
1. INTRODUCTION
"Gold is a very solid asset. Buying physical gold does have advantages compared with other investments. Investments in gold-backed financial products and paper gold should be left up to the professionals," says Mark Robinson, a bullion analyst based in Dubai. Gold is the oldest precious metal known to man. Therefore, it is a timely subject for several reasons. It is the opinion of the more objective market experts that the traditional investment vehicles of stocks and bonds are in the areas of their all-time highs and may be due for a severe correction. To fully appreciate why 8,000 years of experience say " gold is forever", we should review why the world reveres what England's most famous economist, John Maynard Keynes, cynically called the "barbarous relic." Why gold is "good as gold" is an intriguing question. However, we think that the more pragmatic ancient Egyptians were perhaps more accurate in observing that gold's value was a function of its pleasing physical characteristics and its scarcity.
y y
y y y
y y y
Gold is primarily a monetary asset and partly a commodity. More than two thirds of gold's total accumulated holdings account as 'value for investment' with central bank reserves, private players and high-carat Jewellery. Less than one third of gold's total accumulated holdings is as a 'commodity' for Jewellery in Western markets and usage in industry. The Gold market is highly liquid and gold held by central banks, other major institutions and retail Jewellery keep coming back to the market. Due to large stocks of Gold as against its demand, it is argued that the core driver of the real price of gold is stock equilibrium rather than flow equilibrium. Economic forces that determine the price of gold are different from, and in many cases opposed to the forces that influence most financial assets. South Africa is the world's largest gold producer with 394 tons in 2001, followed by US and Australia. India is the world's largest gold consumer with an annual demand of 800 tons.
World Gold Markets
y y y y y y
London as the great clearing house New York as the home of futures trading Zurich as a physical turntable Istanbul, Dubai, Singapore and Hong Kong as doorways to important consuming regions Tokyo where TOCOM sets the mood of Japan Mumbai under India's liberalized gold regime
Indian Gold Market
Let us at first take a look at the evolution of the Indian Gold Market. India was never in dearth of Gold Reserves. History had been a witness of the fact that India was always self sufficient in all its natural resources and more so in case of gold. It was this abundance in availability of such precious metals that lured foreign invaders from all parts of the globe as well as from time to time to come to India and plunder as much of it as was possible for them to do. However there were a significant number of such intruders who, after entering the country, fell for the land and its cultural heritage which eventually led them to settle and establish their empire in India. As a inevitable consequence of the lavish livelihood exhibited by the Indian rulers, the Gold reserves in India gradually diminished. The arrival of the British in the hierarchy in the middle of the eighteenth century announced the decline of India's Gold Reserves even further. The colonial status given to India by the British crippled the economy which once boasted of its wealth in gold. Huge quantities of the precious metal was carried to England right after their extraction. As a result a major proportion of India's Gold Reserves was 'vanishing' without even entering into the economy. By the time India gained independence, a huge vacuum had already been created as far as Gold Reserves in India was concerned. Slowly, after several decades have gone by India has finally started to fill up the vacuum in a big way. After
reaching a new height in the form of 8 % growth in Gross Domestic Product (GDP ) for the year 2005-06, India is being recognized as one of the fastest emerging economies of the world. India's growing prospects can also be noticed in the gold market as well. India is viewed as the largest consumer of gold in recent times. According to the figures presented by the estimates of the World Gold Council (WGC), India's total demand for gold in the year 2001 was 243.2 tonnes which comprised 26.2 % of the total world demand. y Gold is valued in India as a savings and investment vehicle and is the second preferred investment after bank deposits. y India is the world's largest consumer of gold in jewellery as investment. y In July 1997 the RBI authorized the commercial banks to import gold for sale or loan to jewellers and exporters. At present, 13 banks are active in the import of gold. y This reduced the disparity between international and domestic prices of gold from 57 percent during 1986 to 1991 to 8.5 percent in 2001. y The gold hoarding tendency is well ingrained in Indian society. y Domestic consumption is dictated by monsoon, harvest and marriage season. Indian jewellery offtake is sensitive to price increases and even more so to volatility. y In the cities gold is facing competition from the stock market and a wide range of consumer goods. y Facilities for refining, assaying, making them into standard bars in India, as compared to the rest of the world, are insignificant, both qualitatively and quantitatively. To sum up, the Indian Gold Market has a very bright future ahead. Who is the regulator? The exchanges are regulated by the Forward Markets Commission. Unlike the equity markets, brokers don't need to register themselves with the regulator.The FMC deals with exchange administration and will seek to inspect the books of brokers only if foul practices are suspected or if the exchanges themselves fail to take action. In a sense, therefore, the commodity exchanges are more selfregulating than stock exchanges. But this could change if retail participation in commodities grows substantially.
Who are the players in commodity derivatives? The commodities market will have three broad categories of market participants apart from brokers and the exchange administration - hedgers, speculators and arbitrageurs. Brokers will intermediate, facilitating hedgers and speculators. Hedgers are essentially players with an underlying risk in a commodity - they may be either producers or consumers who want to transfer the price-risk onto the market. Producer-hedgers are those who want to mitigate the risk of prices declining by the time they actually produce their commodity for sale in the market; consumer hedgers would want to do the opposite. For example, if you are a jewellery company with export orders at fixed prices, you might want to buy gold futures to lock into current prices. Investors and traders wanting to benefit or profit from price variations are essentially speculators. They serve as counterparties to hedgers and accept the risk offered by the hedgers in a bid to gain from favourable price changes.
2.1WHY INVEST IN GOLD?
y Adding gold to a portfolio introduces an entirely different asset class- a tangible & real asset which increases the portfolio's degree of diversification. Effective portfolio diversifier
y As depicted above, while the overall return of a portfolio without gold is 14%, that of a portfolio with gold is over 16%. Hence an allocation of physical gold in a financial portfolio not just helps reduce the impact of the volatility created by the other asset classes like equity, bonds etc., but also increases the average return over a period of time. y A financial portfolio containing gold is generally more robust because it improves the stability and predictability of better average returns. y Superior to other alternative asset classes
y Gold is the most liquid asset class due to its universal acceptance as an alternative to currency, and also because globally, the gold market is functional 24x7. y Same cannot be said about any other asset class as they take much longer time to liquidate (from 1 day to upto 3-4 months). y Effective hedge against currency risk
y y
Due to its inverse relationship to dollar, gold has always proved to be an effective hedge over a period of time. Effective hedge against Inflation
y A study conducted by WGC in UK shows that one ounce of Gold would consistently purchase the same amount of goods & services as it would have done 400 years ago, making it the perfect hedge against inflation over a long period of time. y Other Reasons y More liquid as compared to the other asset classes Gold can be bought, sold or traded globally. y Performance of gold not linked to performance of any company, industry or government. y Gold needs no professional manager unlike mutual funds y Gold is an asset, which is not simultaneously a liability, unlike stocks. y It doesn't require political & social stability to survive, in fact it thrives under worst societal conditions.
y Gold doesn't ever loose its intrinsic value. y Inspite of the growing demand for gold in India, average retail household has seldom considered ³investing in gold´ because of the absence of an efficient and effective platform.
Gold v/s Stock.
Performance of gold not linked to performance of any company, industry or government. Gold needs no professional manager unlike mutual funds. Gold is an asset, which is not simultaneously a liability, unlike stocks. It does not require political & social stability to survive, in fact it thrives in the worst conditions. Gold will never loose its intrinsic value.
2.2 GOLD MARKET EXCHANNGES.
y
MCX (Multi Commodity Exchange):
Multi Commodity Exchange of India Ltd, (MCX) an independent and demutualised multi commodity exchange, has permanent recognition from the Government of India. MCX, a state-of-the-art nationwide, digital exchange facilitates online trading, clearing and settlement operations for a commodities futures trading. Key shareholders of MCX are Financial Technologies (India) Ltd, State Bank of India, Union Bank of India, Bank of India, Corporation Bank & Canara Bank. Headquartered in Mumbai, MCX is led by an expert management team with deep domain knowledge of the commodity futures markets and has successfully established a thriving digital market for trading in Gold, Silver, Steel, Kapas, Cotton, Rubber, Black Pepper, Oil & Oil Seeds, Ferrous and Non-Ferrous Metals, Agri Commodities, Pulses and Soft commodities MCX now stands amongst the top five bullion exchanges in the world and the largest gold futures exchange in India. Between November 11, 2003 and August 12, 2004, MCX has clocked a total Gold turnover of more than 340 tons valued at around Rs. 20,000 crores, which accounts for 90 per cent of the gold futures trading in the country. MCX offers two types of contract in Gold i.e. Gold (1 Kg) and Gold Mini (100 Gms) facilitating a large spectrum of market participants to do trading. MCX has also recorded Gold physical delivery in numerous contracts to the extent of 1.5 quintals.
y NCDEX (National Commodity & Derivative Exchange Limited):
National Commodity & Derivatives Exchange Limited (NCDEX) is a professionally managed on-line multi commodity exchange. The shareholders are : Promoter shareholders: Life Insurance Corporation of India (LIC), National Bank for Agriculture and Rural Development (NABARD) and National Stock Exchange of India Limited (NSE) . Other shareholders: Canara Bank, CRISIL Limited (formerly the Credit
Rating Information Services of India Limited), Goldman Sachs, Intercontinental Exchange (ICE), Indian Farmers Fertiliser Cooperative Limited (IFFCO) and Punjab National Bank (PNB). NCDEX is the only commodity exchange in the country promoted by national level institutions. This unique parentage enables it to offer a bouquet of benefits, which are currently in short supply in the commodity markets. The institutional promoters and shareholders of NCDEX are prominent players in their respective fields and bring with them institutional building experience, trust, nationwide reach, technology and risk management skills. NCDEX is a public limited company incorporated on April 23, 2003 under the Companies Act, 1956. It obtained its Certificate for Commencement of Business on May 9, 2003. It commenced its operations on December 15, 2003. NCDEX is a nation-level, technology driven de-mutualised on-line commodity exchange with an independent Board of Directors and professional management - both 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. NCDEX is regulated by Forward Markets Commission. NCDEX is subjected to various laws of the land like the Forward Contracts (Regulation) Act, Companies Act, Stamp Act, Contract Act and various other legislations. NCDEX is located in Mumbai and offers facilities to its members about 550 centres throughout India. The reach will gradually be expanded to more centres. NCDEX currently facilitates trading of 57 commodities.
2.3 WHY MCX?
Multi Commodity Exchange of India Ltd (MCX), the largest player in the bullion futures trading is participating in the convention as µExchange Partner¶. The convention is organized by Bangalore based Foretell Business Solutions Pvt. Ltd and is supported by Bombay Bullion Association (BBA). MCX now stands amongst the top five bullion exchanges in the world and the largest gold futures exchange in India. Between November 11, 2003 and August 12, 2004, MCX has clocked a total Gold turnover of more than 340 tons valued at around Rs. 20,000 crores, which accounts for 90 per cent of the gold futures trading in the country. MCX offers two types of contract in Gold i.e. Gold (1 Kg) and Gold Mini (100 Gms) facilitating a large spectrum of market participants to do trading. MCX has also recorded Gold physical delivery in numerous contracts to the extent of 1.5 quintals. Gold is for big investors who can invest huge amount of money and is willing to take huge risk. The price quote is per 10gm.Maximum lot size is 10 kg. While Gold Mini is for small investors in which we can trade in 100gm and the maximum lot size is 2MT. Now a days MCX is also providing contracts on Gold Guinea.In this the trading unit is 8gm. It is like small gold coins.
2.4 TERMS AND TERMINOLOGIES IN GOLD MARKET.
This guide is intended to provide a basic understanding of commodity futures terminology. Though the terminology of trading agricultural commodities goes far beyond the scope of this guide, this information can be used to build a knowledge base from which a broader understanding of the futures market can be developed. Arbitrage: The simultaneous purchase and sale of similar commodities in different markets to take advantage of a perceived price discrepancy. Basis: The difference between the current cash price and the futures price of the same commodity for a given contract month. Bear market: A period of declining market prices. Bull market: A period of rising market prices. Broker: A company or individual that executes futures and options orders on behalf of financial and commercial institutions or the general public. Call option: An option that gives the buyer the right, but not the obligation, to purchase (go ³long´) the underlying futures contract at the strike price on or before the expiration date of the option. Cash (spot) market: A place where people buy and sell the actual (cash) commodities, that is, a grain elevator, livestock market, or the like. Commission (brokerage) fee: A fee charged by a broker for executing a transaction. Convergence: A term referring to cash and futures prices tending to come together as the futures contract nears expiration. Cross-hedging: Hedging a commodity using a different but related futures contract when there is no futures contract for the cash commodity being hedged
and the cash and futures markets follow similar price trends. For example, hedging cull cows on the live cattle futures market. Daily trading limit: The maximum price change set by the exchange each day for a contract. Day traders: Speculators who take positions in futures or options contracts and liquidate them before the close of the same trading day. Delivery: The transfer of the cash commodity from the seller of a futures contract to the buyer of a futures contract. Forward (cash) contract: A cash contract in which a seller agrees to deliver a specific commodity to a buyer at a specific time in the future. Fundamental analysis: A method of anticipating future price movement using supply and demand information. Futures contract: A legally binding agreement, made on the trading floor of a futures exchange, to buy or sell a commodity or financial instrument sometime in the future. Futures contracts are standardized according to the quality, quantity and delivery time and location for each commodity. The only variable is price, which is determined on an exchange trading floor. Hedger: An individual or company owning or planning to own a cash commodity ² corn, soybeans, wheat, U.S. Treasury bonds, notes, bills, etc. ² and concerned that the costs of the commodity may change before it can be either bought or sold in the cash market. A hedger achieves protection against changing cash prices by purchasing (selling) futures contracts of the same or similar commodity and later offsetting that position by selling (purchasing) futures contracts of the same quantity and type as the initial transaction and at the same time as the cash transaction occurs. Hedging: The practice of offsetting the price risk inherent in any cash market position by taking an equal but opposite position in the futures market. Hedgers use the futures markets to protect their business from adverse price changes. Initial margin: The amount a futures market participant must deposit into a margin account at the time an order is placed to buy or sell a futures contract.
2.5 FACTORS AFFECTING GOLD PRICES.
Historically, gold prices have reacted sharply to geo-political and economic shocks, inflationary fears, dipping supply and rising demand, a weak dollar and struggling equity markets. Be it the oil shocks of the 1970s or the 1980 invasion of Afghanistan or the reaction to the collapse of investment banks last year²in every case, gold prices touched record highs. In March 2008 for example, gold touched all time highs of $1,023 an ounce (31 grams) following news of the collapse of Bear Stearns. Even in the current year, recessionary conditions and the global equity sell-offs have ensured firm gold prices with the average going at $900 to an ounce. Gold also seems to be giving the best returns when the inflation rate is at high levels (gold has outperformed equities by a wide margin in the US during high inflationary periods) and thus, is considered to be a good hedge against it. While currently inflation is hardly a concern, large amounts of liquidity injected by governments is likely to find its way into the market and push up inflation. While this could lead to depreciation of currencies (as governments print more money and increase money supply), gold because of its limited supply (can¶t increase it suddenly unlike currencies) continues to hold its own and is thus is considered as an effective inflation hedge. While a weak dollar has been positive for gold and the yellow metal has a negative correlation with the dollar, currently both asset classes are in demand. Best among worst Gold has moved up by 33 per cent since November 1, 2008 and the dollar has been moving up against most currencies including the euro and the rupee. Says Manasee S Gokhale, economist, NCDEX, ³With few other options available and as long as other currencies are falling, dollar would continue to strengthen.´ Despite the poor fundamentals of the US economy and a yawning fiscal deficit, institutions have been buying dollars, as it is considered the better bet among weak currencies.
The movement of the gold and dollar in the upward direction is due to recessionary conditions and is therefore temporary, believe experts. Says Jayant Manglik, president, Religare Commodities, ³The gold-dollar relationship will get back to the trend line. Unprecedented investments by governments should help economies recover by the end of the year.´ The frenzy of investment in gold going ahead, he believes, is likely to die down as recovering economies will bring equities into play once again. However, till that happens, the key reason for gold prices moving up will neither be dollars, external shocks or the falling equity markets, but as an investment option with investors seeking assets which have minimal risk, offer stable returns and have low price volatility. The gold rush Jewellery demand in India has always been the key demand driver making up over two-thirds of total global demand for gold. This has, however, changed dramatically over the last one year due to increase in investment demand worldwide. In 2007, jewellery in terms of volumes accounted for 68 per cent of demand while investments had a share of 19 per cent (rest used for industrial and dental purposes). A year on, investment demand has shot up 64 per cent in volume terms, especially in the last two quarters of 2008, (See chart: Gold demand) with investors snapping up a 1,000 tonnes of gold. Share of investments now account for 30 per cent; that of jewellery has fallen to 58 per cent. In addition to retail consumption of gold coins and bars shooting up, investments in exchange traded funds (ETFs) have also seen a rise. Unlike the situation in India where gold ETFs have a miniscule five tonnes of gold with them, ETFs such as the NYSE-listed SPDR saw its gold holdings jump 14 per cent in one month to nearly 1,000 tonnes (See graph: ETFs in vogue) which is more than what India, the largest consumer of gold, imports in a year. Will this trend continue? Dharmesh Sodah of the trade body World Gold Council believes that while there will be profit-taking, the assets under management of US-based ETFs have been increasing due to the lack of alternative investments making them sticky. In India, the movement has not been as dramatic. Says Gokhale, ³ETFs are a new concept in India and are likely to do well over the next two years once investors can see a record of stable returns.´ Demand in the short term, however, is likely to be hit due to the prevailing high prices. Experts expect a rally in April (the Akshya Tritya festival pushes up gold sales) after which gold might stay down. An upward
movement post September (start of the wedding season) could be seen with gold likely to touch about $1,100 levels in a year. While global demand is expected to be steady, supply constraints also favour firm prices. In short supply Globally, with no fresh sources of mining available and a drop in gold prices in the 1990s has meant depressed production and mining activity since 2002. Acute power and labour shortages in South Africa (third largest producer) as well as sharp dips in production in Australia (fourth largest) and Indonesia, has translated to drop in supply for the third consecutive year (2008). GFMS, a UK-based precious metals consultant, believes that supply in 2008 has dipped by about 4 per cent to about 2,385 tonnes, the lowest in 13 years. In anticipation of higher prices, producers have dehedged (squared their forward positions) to the tune of 346 tonnes (or 14.5 per cent of world production of 2,385 tonnes) in 2008.
GLOBAL INVESTMENT DEMAND
2007 Identifiable Invt Net Retail Invt Bar Hoarding Official Coin Medals,Coin Oth Retail Invt. ETFs, similar Prod Inferred Invt Total Invt Total Invt, $ mn 663.7 410.3 236.3 137.0 72.6 -35.6 253.3 -37.7 626.0 14,727 2008 1090.7 769.3 378.2 197.7 60.5 132.8 321.4 -190.5 900.2 24,816 44 69 27 % chg* 64 87 60 44 -17 Q4'07 141.4 61.4 30.2 22.4 8.4 0.3 80.0 192.3 333.7 8,435 Q1'08 153.7 81.0 46.6 29.5 9.7 -4.8 72.7 104.3 258.0 7,671 Q2'08 139.4 135.4 88.4 36.6 12.4 -2.0 4.0 53.0 192.4 5,544 Q3'08 398.6 248.6 116.6 63.8 21.2 47.0 150.0 -354.7 43.9 1,230 Q4'08 399.0 304.2 126.6 67.9 17.2 92.6 94.7 7.0 405.9 10,372
Another key source of supply, government gold holdings, also saw a sharp 42 per cent fall year-on-year as governments sought to maintain their gold stocks amidst an environment of uncertainty. Sales by Central Bank Gold Agreement countries (primarily the EU) which own nearly half of the government-held gold reserves of 30,000 tonnes is controlled by a 500 tonne-a-year sales cap. Thus, analysts believe that despite the rise of scrap (recycled gold) supply on higher prices in 2008 by an estimated 13 per cent and likelihood of the same going up in 2009 as well, the drop
in production and lower government sales will ensure that the pressure on supply will remain going ahead. Price outlook In light of the current scenario, how will prices move? Experts believe that since gold prices have moved up in the last three months, the near-term could see some softening. Says Harish Galipalli, head of research, Karvy Comtrade, ³There is possibility of correction and gold might dip to $930 to an ounce from about $950 per ounce levels prevailing currently.´ In the medium-term though, the overall weak economic environment globally will keep upward pressure on gold prices as investors look for safety. Says Manglik, ³While gold has given about 26 per cent returns in 2008, it will fetch a return of about 20 per cent from here on (rupee terms) over the next one year, with the gains equally split between currency depreciation and investment demand.´ While returns have been good over the last year, future returns in the yellow metal will depend on the position of equity markets and the performance of other assets classes such as debt, currencies and real estate. Gold is exhibiting all the classic signs of being in a structural bull market. In the past year, we've seen gold go up on fears of inflation, then it rose on fears of deflation. The woes of the banking industry certainly appear to be aiding gold. In a bizarre twist, central bankers actually want the price of gold to rise because it would be an indication that attempts to stave off deflation are working.The long-term story for gold, however, is as a re-monetization play as investors lose faith in fiat currencies. The Fed has flooded the market with newly-printed money. Other countries are following suit. Now that all of this money is printed, it may be difficult to pull it back in. This, of course, would lead to currency devaluations. Some believe that the bottom in fiat currencies has begun and hard assets like gold and silver should benefit.Investors in Europe and north America went on an extraordinary shopping spree for gold coins and bars in the final quarter of 2008, snapping up 148.5 tonnes, a jump of 811 per cent compared with the same period in 2007, as the collapse of Lehman Brothers led to a massive increase in safe haven buying. According to the World Gold Council, this rush into physical gold by western investors pushed global retail investment up almost 400 per cent to 304.2 tonnes.Gold is about 25 per cent above its peak from the last great bull market in the metal in 1980.In yen terms, gold is still barely half its 1980 level which
might imply that there could be more gold demand to come from Japanese investors (referred to as 'Mrs Watanabe'). And in sterling terms, gold is double its 1980 peak which implies either great worries about returning inflation in the UK, or an overdone collapse of confidence in the pound sterling. The WGC's data confirmed earlier reports from traders about widespread shortages of coins and exceptional buying interest. Investment inflows into gold exchange traded funds reached 94.7 tonnes in the fourth quarter, up 18 per cent on the same period in 2007, but down from the record 150 tonnes of inflows seen in the third quarter of 2008. Rising prices for gold around the world mean that those currencies are depreciating. Practically all currencies are depreciating relative to gold. The whole world of currencies is depreciating, including the dollar. But due to the liquidity provided by US debt during the financial crisis, the dollar has appeared to rise in value within the overall currency bear market. All currency ships are sinking, the dollar ship is just not sinking as fast. For the better part of a century now, the global gold trade has been dominated by the dollar. All over the world, the prevailing gold price is a function of any currency's exchange rate with the dollar along with the dollar-price of gold. Back in July 2008, the dollar started rallying. It wasn't for fundamental reasons, but because the giant mortgage-backed bond industry was imploding and bond investors desperately sought the safety of US Treasuries. This kicked off the massive dollar panic rally in Q3 CY 2008, and the subsequent stock panic of Q4 CY 2008 accelerated it. Until this anomalous rally erupted, dollar gold remained strong in the high $800s and low $900s. At this dollar rally's apex on the very day the stock markets bottomed in late November, the US Dollar Index had reached levels first seen in early 2004 when gold was near $400. Yet gold didn't even close under $700 in 2008's panic, vastly stronger than the dollar alone would suggest it should be. Once again this highlights the critical fact
that the dollar is no longer gold's primary driver even though it can still temporarily influence gold at times. In order to predict the future of gold prices, one needs to keep an eye on gold lease rates; a spike would be a good lead indicator that gold is about to punch higher as this would reflect a shortage of lendable bullion. Rising lease rates will cause gold to go into backwardation as holders of gold may not want to sell their gold forward under any circumstances a trend currently evidenced by the high physical premium being paid for gold coins. Rising lease rates prefigured the last big move in gold back in the spring of 2007 just as the two Bear Stearns hedge funds were blowing up. Central banks feared counterparty risk for the first time in 20 years and substantially curtailed gold lending and sales. This led to a 40 per cent rally in gold from $700 to over $1,000. Indians are collectively the world's biggest gold investors, so the rupee gold price is very important to the health of this global gold bull. Thanks to a rupee collapse during the stock panic to dismal levels underneath where its secular bull started in mid-2002, rupee gold has been very strong. In fact, it surged to new bull highs during the stock panic and ended 2008 near these levels. During all this turmoil, India's deep cultural affinity for gold investment was strongly affirmed. The rupee gold price is an important one to watch, thanks to India's enormous influence in the global gold markets. Even though tonnage of gold imports is suffering, rupee expenditure levels are holding up well in India. Technical chartists say that gold could move into a parabolic fashion once the $1,000 per ounce barrier is broken. From there the speed of the move could accelerate sharply. For many structural reasons, totally unrelated to the stock panic, the fundamentals of gold remain awesomely bullish. Its strong performance during the stock panic in most of the world is only icing on the cake that will drive additional investment demand.
How high can gold ultimately go? A Dow Jones Industrial Average/gold ratio of 2:1 would be a good sign the bull market in gold is getting well-advanced. We saw this in 1932 and 1980. We are in a multi-year gold structural bull market that will eventually take the price to an integer multiple of where it is now. Within the broader and longer-term positive environment for gold, we need to remember that short-term bursts of emotions might run to extremes. This might be the case in the current situation. Emotions have been running high. Gold is seriously over-bought. While investors need gold in their portfolio, the current price situation might not be the best for buyers. Buy on price weakness, not strength. At the same time, it is never advisable to sell in a structural bull market.
2.8 INFLATION, EXCHANGE RATE WITH DOLLAR, SENSEX AND GOLD PRICES.
Dollar is Negatively Co-related with Gold.
Correlation Dollar Gold -70%
For Inflation Hedge
y The value of gold, in terms of real goods and services that it can buy, has remained remarkably stable. In contrast, the purchasing power of many currencies have varied over time. y Gold has consistently reverted to its historic purchasing power parity y Gold is an inflation hedge as proved by a 400-year study of the purchasing power of gold in Britain between 1596 and 1997. One ounce of gold would consistently purchase the same amount of goods and services as it would have done 400 years ago.
2.6 RECENT TREND IN GOLD MARKET IN INDIA.
MUMBAI: Gold is no longer glittering in India, the biggest global market for the consumption and imports of the yellow metal. Gold imports to the country has plunged to zero levels, as no bank and trading houses imported any gold during the month of February. Gold analysts said that February 2009 is perhaps the only month in this decade where there has been no gold imports to India. ³This is a serious issue. As gold market is all heated up, and gold prices have skyrocketed, imports of the yellow metal have practically stopped in India,´ said Akash Gupta, a bullion trader in Mumbai¶s Zaveri Market. Buying of gold jewellery has fallen sharply in January leading to a slump in the yellow metal¶s imports. According to the Bombay Bullion Association, there was more than 90% plunge in gold imports in January. ³The trend has worsened for February. There was zero gold imports to India in February,´ the Association president Suresh Hundia. In 2008, India¶s gold imports dipped by 45 per cent to touch 450 tons. In the last eight years from 2000, gold imports to India every year have been between 400-800 tons. But trade bodies have warned that gold imports this year could collapse to 100 tons, if the current trend continues. ³It will not be a surprise if gold imports fall to an all-time low of 100 tons or below in 2009,´ said bullion analyst Ashish Roy. High prices, global economic meltdown and financial crunch among investors and bullion dealers led to low demand for gold in India, where yellow metal is considered the best safe haven investment and people buy gold for weddings and other ceremonies. According to Hundia, gold sales and demand are plunging to negligible levels because of high prices. ³Gold and jewellery sector is reeling under a crisis because
of high prices and retrenchments across sectors,´ he said. Gold prices which in December was from Rs 13,505 for10 grams moved to an all-time high of Rs 16,000 per ten grams last week. Analysts and India trade bodies have predicted that gold prices could zoom to Rs 17,000 per ten grams by April this year. They also say that if this lowest level of gold intake continues in India, 2009 will be the worst year in this decade as far as gold imports are concerned. But despite the gloom in gold imports and sales in India, bullion traders hope that the gold market might pick up in April-May season. The World Gold Council has predicted there will be a modest gain in gold purchases in India during the summer wedding season and the Hindu religious festival of Akshaya Tritiya. ³There will be a modest growth of 10-15 per cent in the Indian domestic jewellery business,´ said K Shivram, Vice-President, World Gold Council. Shivram says gold sales will pick in April-May-June after the dull season of December and January.
3. CONCLUSION
Internationally trading in Gold has given the investors very safe and very fruitful option. Today people who earlier feared from entering the market are investing in Gold as it is the most safest asset and also its price is less fluctuating. Gold Market has developed vastly since it was started. Recently gold prices touched the height of Rs.16000/- per 10gm which astonished everybody. The reason may be any but today people willing to invest in Gold rather than Stock. Below the graph relating to increase in investment in Gold is give.
This graph is made by making an average of the whole months investment taking 16th as the base from the year October, 2006 to the year February, 2009. It clearly shows that how there is an increase of investment in gold.
Gold has significantly low correlation to other assets like equity indices, fixed income and commodities. Therefore adding gold to a portfolio may help improve risk adjusted returns or reduce volatility for the expected return. Indian Scenario There is need for an instrument which has Small denomination Cost efficiency Convenience for long term holding Greater uniform availability Transparency Liquidity Tax Efficiency Gold BeES Can fulfill this Need
Improving stability and predictability of returns Gold improves the stability and predictability of portfolio returns. It is not correlated with other assets because the gold price is not necessarily driven by the same factors that drive the performance of other assets Adding gold to a portfolio introduces an entirely different class of asset. Gold is unusual because it is both a commodity and a monetary asset Gold is one of the few financial assets that is not linked to a liability. It can provide 'insurance' against extreme movements on the value of traditional asset classes.
3.1 Recommendation:In my survey part first I visited Mr. Sumit Choudhary, an Arbitrager Sreepati Balaji Commodities Ltd and then I visited Mr. Rajib Kejriwal, CEO Eureka Commodities Ltd. Both of them said that the recent increase in price of gold is due to the fact that stock market is down so people are investing less in the stock market and investing more in gold as it has become a less risk market. Also the fact that dollar is going up has increased the price of gold as per them.
