63496870-a-study-on-commodity-markets-price-drivers-of-gold-and-silver.docx

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INTRODUCTION

“We are moving from a world in which the big eat the small to one in which the fast eat

the slow”.-Klaus Schwab, 2000 (founder of the World Economic Forum)

“A strong and vibrant cash market is a pre-condition for a successful and transparent

futures market.”

Before the North American futures market originated some 150 years ago, farmers would

grow their crops and then them to market in the hope of selling their commodity of inventory.

But without any indication of demand, supply often exceeded what was needed, and not

purchased crops were left to rot in the streets. Conversely, when a given commodity such

soybeans were out of season, the goods made from it became very expensive because the

crop was no longer available, lack of supply.

In the mid-19th century, grain markets were established and a central marketplace was

created for farmers to bring their commodities and sell them either for immediate delivery

(spot trading) or for forward delivery. The latter contracts, forwards contracts, were the fore-

runners to today’s future contracts. In fact, this concept saved many farmers from the loss of

crops and helped stabilize supply and prices in the off-season.

Commodity markets are markets where raw or primary products are exchanged. These raw

commodities are traded on regulated commodities exchanges, in which they are bought and

sold in standardized contracts,

A commodity exchange is an exchange where various commodities and derivatives products

are trade. Most commodity markets across the world trade in agriculture products and other

raw materials like wheat, barley, sugar, maize, cotton, cocoa, coffee, milk products, metals,

etc. and contract based on them. These contracts based on them. These contracts can include

spot prices, forwards, futures and options.

Commodities exchanges usually trade futures contracts on commodities, such as trading

contracts to receive something, say corn, in a certain month. A former raising corn can sell a

T.JOHN INSTITUTE OF MANAGEMENT AND SCIENCE

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future contract on his corn, which will not be harvested for several months, and guarantee the

price he will be paid when he delivers; a breakfast cereal producer buys the contract now and

guarantees the price will

Not go up when it is delivered. This protects the farmer from price drops and the buyer from

price rises. Speculators and investors also buy and sell the future contracts to make a profit

and provide liquidity to the system.

Commodities have occupied a large space in everyone’s life without even notifying them.

Man has bought commodities either for their survival or to make their life comfortable. But at

present scenario one can reverse the cycle i.e. by trading in commodities and make money.

Yes, it is just like buying and selling of shares of companies, one can buy and sell

commodities. The commodities market is one of the oldest prevailing markets in the human

history. It dates back to Greek times when olive trees were auctioned and the future market

was born. In fact, during the 17th century, rice futures were traded in china.

Commodities are much diversified and each commodity has got its own value which keeps on

changing according to their demand in the market. This fluctuation can differ from time to

time owing to numerous factors.

In this project is specifically focused on Gold and Silver, the precious metals. Gold and silver

are most talked about commodities. This study gives a complete picture to the investor about

the investment in gold and silver.

Commodity

Any product that can be used for commerce or an article of commerce which is traded on

an authorized commodity exchange is known as commodity. The article should be movable

of value, something which is bought or sold and which is produced or used as the subject or

barter or sale. Indian Forward Contracts (Regulation) Act (FCRA), 1952 defines “goods” as

“every kind of movable property other than actionable claims, money and securities”.

In current situation, all goods and products of agricultural(including plantation), mineraland

fossil origin are allowed for commodity trading recognized under the FCRA. The national


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commodity exchanges, recognized by the Central Government, permits commodities which

include precious (gold and silver) and non-ferrous metals, cereals and pulses, ginned and

un-ginned cotton, oilseeds, oils and oilcakes, raw jute and jute goods, sugar and potatoes

and onions, coffee and tea, rubber and spices. Etc.

Commodity market:-

Commodity market is an important constituent of the financial markets of any country. It is

the market where a wide range of products, viz., precious metals, base metals, crude oil,

energy and soft commodities like palm oil, coffee etc. are traded. It is important to develop

a vibrant, active and liquid commodity market. This would help investors hedge their

commodity risk, take speculative positions in commodities and exploit arbitrage

opportunities in the market

Commodity markets are markets where raw or primary products are exchanged. These

raw commodities are traded on regulated commodities exchanges, in which they are bought

and sold in standardized contracts.

The modern commodity markets have their roots in the trading of agricultural products.

While wheat and corn, cattle and pigs, were widely traded using standard instruments in the

19th century in the United States, other basic foodstuffs such as soybeans were only added

quite recently in most markets. For a commodity market to be established there must be

very broad consensus on the variations in the product that make it acceptable for one

purpose or another.

The economic impact of the development of commodity markets is hard to overestimate.

Through the 19th century "the exchanges became effective spokesmen for, and innovators

of, improvements in transportation, warehousing, and financing, which paved the way to

expanded interstate and international trade."


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History of commodity markets

Commodities future trading was evolved from need of assured continuous supply of

seasonal agricultural crops. The concept of organized trading in commodities evolved in

Chicago, in 1848. But one can trace its roots in Japan. In Japan merchants used to store

Rice in warehouses for future use. To raise cash warehouse holders sold receipts against the

stored rice. These were known as “rice tickets”. Eventually, these rice tickets become

accepted as a kind of commercial currency. Latter on rules came in to being, to standardize

the trading in rice tickets. In 19th century Chicago in United States had emerged as a major

commercial hub. So that wheat producers from Mid-west attracted here to sell their produce

to dealers & distributors. Due to lack of organized storage facilities, absence of uniform

weighing & grading mechanisms producers often confined to the mercy of dealers

discretion. These situations lead to need of establishing a common meeting place for

farmers and dealers to transact in spot grain to deliver wheat and receive cash in return.

Gradually sellers & buyers started making commitments to exchange the produce for cash

in future and thus contract for “futures trading” evolved. Whereby the producer would

agree to sell his produce to the buyer at a future delivery date at an agreed upon price. In

this way producer was aware of what price he would fetch for his produce and dealer would

know about his cost involved, in advance. This kind of agreement proved beneficial to both

of them. As if dealer is not interested in taking delivery of the produce, he could sell his

contract to someone who needs the same. Similarly producer who not intended to deliver

his produce to dealer could pass on the same responsibility to someone else. The price of

such contract would dependent on the price movements in the wheat market. Latter on by

making some modifications these contracts transformed in to an instrument to protect

involved parties against adverse factors such as unexpected price movements and

unfavorable climatic factors. This promoted traders entry in futures market, which had no

intentions to buy or sell wheat but would purely speculate on price movements in market to

earn profit.

Trading of wheat in futures became very profitable which encouraged the entry of other


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commodities in futures market. This created a platform for establishment of a body to

regulate and supervise these contracts. That’s why Chicago Board of Trade (CBOT) was

established in 1848. In 1870 and 1880s the New York Coffee, Cotton and Produce

Exchanges were born. Agricultural commodities were mostly traded but as long as there are

buyers and sellers, any commodity can be traded. In 1872, a group of Manhattan dairy

merchants got together to bring chaotic condition in New York market to a system in terms

of storage, pricing, and transfer of agricultural products. In 1933, during the Great

Depression, the Commodity Exchange, Inc. was established in New York through the

merger of four small exchanges – the National Metal Exchange, the Rubber Exchange of

New York, the National Raw Silk Exchange, and the New York Hide Exchange.

The largest commodity exchange in USA is Chicago Board of Trade, The Chicago

Mercantile Exchange, the New York Mercantile Exchange, the New York Commodity

Exchange and New York Coffee, sugar and cocoa Exchange. Worldwide there are major

futures trading exchanges in over twenty countries including Canada, England, India,

France, Singapore, Japan, Australia and New Zealand.

International Commodity Exchanges

Futures’ trading is a result of solution to a problem related to the maintenance of a year

round supply of commodities/ products that are seasonal as is the case of agricultural

produce. The United States, Japan, United Kingdom, Brazil, Australia, Singapore are

homes to leading commodity futures exchanges in the world.

The New York Mercantile Exchange (NYMEX)

The New York Mercantile Exchange is the world’s biggest exchange for trading in physical

commodity futures. The exchange is in existence since last 132 years and performs trades

trough two divisions, the NYMEX division, which deals in energy and platinum and the

COMEX division, which trades in all the other metals.

Commodities traded: - Light sweet crude oil, Natural Gas, Heating Oil, Gasoline, RBOB

Gasoline, Electricity Propane, Gold, Silver, Copper, Aluminum, Platinum, Palladium, etc.


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London Metal Exchange

The London Metal Exchange (LME) is the world’s premier non-ferrous market, with

highly liquid contracts. The exchange was formed in 1877 as a direct consequence of the

industrial revolution witnessed in the 19th century.

Commodities traded:- Aluminum, Copper, Nickel, Lead, Tin, Zinc, Aluminum Alloy,

North American Special Aluminum Alloy (NASAAC), Polypropylene, Linear Low Density

Polyethylene, etc.

The Chicago Board of Trade

The first commodity exchange established in the world was the Chicago Board of Trade

(CBOT) during 1848 by group of Chicago merchants who were keen to establish a central

market place for trade. Presently, the Chicago Board of Trade is one of the leading

exchanges in the world for trading futures and options. More than 50 contracts on futures

and options are being offered by CBOT currently through open outcry and/or electronically.

Commodities Traded: - Corn, Soybean, Oil, Soybean meal, Wheat, Oats, Ethanol, Rough

Rice, Gold, and Silver etc.

Tokyo Commodity Exchange (TOCOM)

The Tokyo Commodity Exchange (TOCOM) is the second largest commodity futures

exchange in the world. It trades in to metals and energy contracts. It has made rapid

advancement in commodity trading globally since its inception 20 years back. TOCOM’s

recent tie up with the MCX to explore cooperation and business opportunities is seen as one

of the steps towards providing platform for futures price discovery in Asia for Asian players

in Crude Oil since the demand-supply situation in U.S. that drives NYMEX is different from

demand-supply situation in Asia

Commodities traded: - Gasoline, Kerosene, Crude Oil, Gold, Silver, Platinum, Aluminum,

Rubber, etc


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Chicago Mercantile Exchange

The Chicago Mercantile Exchange (CME) is the largest futures exchange in the US and the

largest futures clearing house in the world for futures and options trading. Formed in 1898

primarily to trade in Agricultural commodities, the CME introduced the world’s first

financial futures more than 30 years ago.

Commodities Traded: - Butter milk, Diammonium phosphate, Feeder cattle, frozen pork

bellies, Lean Hogs, Live cattle, Non-fat Dry Milk, Urea, Urea Ammonium Nitrate, etc.

Introduction to Indian commodity market

India, a commodity based economy where two-third of the one billion population depends

on agricultural commodities, surprisingly has an under developed commodity market. The

vast geographical extent of India and her huge population is aptly complemented . The

broadest classification of the Indian Market can be made in terms of the commodity market

and the bond market.

India Commodity Market can be subdivided into the following two categories:

• Wholesale Market

• Retail Market

ThetraditionalwholesalemarketinIndiadealtwithwholesellerswhobought goods from the

farmers and manufacturers and then sold them to the retailers after making a profit in the

process. It was the retailers who finally sold the goods to the consumers. With the passage of

time the importance of whole sellers began to decline due to various reasons.

In recent years, the extent of the retail market (both organized and unorganized) has

evolved in leaps and bounds. In fact, the success stories of the commodity market of India in

recent years has mainly centered on the growth generated by the Retail Sector. Almost every

commodity under the sun both agricultural and industrial is now being provided at well

distributed retail outlets throughout the country.


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Moreover, the retail outlets belong to both the organized as well as the unorganized sector.

The unorganized retail outlets of the yesteryears consist of small shop owners who are price

takers where consumers face a highly competitive price structure. The organized sectors on

the other hand are owned by various business houses like Pantaloons, Reliance, Tata and

others. Such markets are usually selling a wide range of articles both agricultural and

manufactured, edible and inedible, perishable and durable. Modern marketing strategies and

other techniques of sales promotion enable such markets to draw customers from every

section of the society. However the growth of such markets has still centered on the urban

areas primarily due to infrastructural limitations.

Considering the present growth rate, the total valuation of the Indian Retail Market is

estimated to cross Rs. 10,000 billion in the year 2010. Demand for commodities is likely to

become four times by 2012 than what it presently is.

History of Commodity Market in India

The history of organized commodity derivatives in India goes back to the nineteenth century

when Cotton Trade Association started futures trading in 1875, about a decade after they

started in Chicago. Over the time datives market developed in several commodities in India.

Following Cotton, derivatives trading started in oilseed in Bombay (1900), raw jute and jute

goods in Calcutta (1912), Wheat in Hapur (1913) and Bullion in Bombay (1920).

However many feared that derivatives fuelled unnecessary speculation and were detrimental

to the healthy functioning of the market for the underlying commodities, resulting in to

banning of commodity options trading and cash settlement of commodities futures after

independence in 1952. The parliament passed the Forward Contracts (Regulation) Act, 1952,

which regulated contracts in Commodities all over the India. The act prohibited options

trading in Goods along with cash settlement of forward trades, rendering a crushing blow to

the commodity derivatives market. Under the act only those associations/exchanges, which

are granted reorganization from the Government, are allowed to organize forward trading in

regulated commodities. The act envisages three tire regulations: (i) Exchange which

organizes forward trading in commodities can regulate trading on day-to-day basis. (ii)


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Forward Markets Commission provides regulatory oversight under the powers delegated to

it by the central Government. (iii) The Central Government- Department of Consumer

Affairs, Ministry of Consumer Affairs, Food and Public Distribution- is the ultimate

regulatory authority.

The commodities future market remained dismantled and remained dormant for about four

decades until the new millennium when the Government, in a complete change in a policy,

started actively encouraging commodity market. After Liberalization and Globalization in

1990, the Government set up a committee (1993) to examine the role of futures trading.

Commodity exchange in India plays an important role where the prices of any commodity

are not fixed, in an organized way. Earlier only the buyer of produce and its seller in the

market judged upon the prices. Others never had a say.

Today, commodity exchanges are purely speculative in nature. Before discovering the price,

they reach to the producers, end-users, and even the retail investors, at a grassroots level. It

brings a price transparency and risk management in the vital market. Since 2002, the

commodities future market in India has experienced an unexpected boom in terms of modern

exchanges, number of commodities allowed for derivatives trading as well as the value of

futures trading in commodities, which crossed $ 1 trillion mark in 2006. Since 1952 till 2002

commodity datives

market was virtually non- existent, except some negligible activities on OTC basis.

In India there are 25 recognized future exchanges, of which there are three national level

multi-commodity exchanges. After a gap of almost three decades, Government of India has

allowed forward transactions in commodities through Online Commodity Exchanges, a

modification of traditional business known as Ad hat and VaydaVyapar to facilitate better

risk coverage and delivery of commodities. The three exchanges are: National Commodity

& Derivatives Exchange Limited (NCDEX) Mumbai, Multi Commodity Exchange of India

Limited (MCX) Mumbai and National Multi-Commodity Exchange of India Limited

(NMCEIL)Ahmedabad.There are other regional commodity exchanges situated in different

parts of India.

Legal framework for regulating commodity futures in India


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The commodity futures traded in commodity exchanges are regulated by the Government

under the Forward Contracts Regulations Act, 1952 and the Rules framed there under. The

regulator for the commodities trading is the Forward Markets Commission, situated at

Mumbai, which comes under the Ministry of Consumer Affairs Food and Public Distribution

Forward Markets Commission (FMC)

It is statutory institution set up in 1953 under Forward Contracts (Regulation) Act, 1952.

Commission consists of minimum two and maximum four members appointed by Central

Govt. Out of these members there is one nominated chairman. All the exchanges have been

set up under overall control of Forward Market Commission (FMC) of Government of India.

National Commodities & Derivatives Exchange Limited (NCDEX)

National Commodities & Derivatives Exchange Limited (NCDEX) promoted by ICICI Bank

Limited (ICICI Bank), Life Insurance Corporation of India (LIC), National Bank of

Agriculture and Rural Development (NABARD) and National Stock Exchange of India

Limited (NSC). Punjab National Bank (PNB), Credit Ratting Information Service of India

Limited (CRISIL), Indian Farmers Fertilizer Cooperative Limited (IFFCO), Canara Bank

and Goldman Sachs by subscribing to the equity shares have joined the promoters as a share

holder of exchange. NCDEX is the only Commodity Exchange in the country promoted by

national level institutions.

NCDEX is a public limited company incorporated on 23 April 2003. NCDEX is a national

level technology driven on line Commodity Exchange with an independent Board of

Directors and professionals not having any vested interest in Commodity Markets.

It is committed to provide a world class commodity exchange platform for market

participants to trade in a wide spectrum of commodity derivatives driven by best global

practices, professionalism and transparency.

NCDEX is located in Mumbai and offers facilities to its members in more than 550 centers

throughout India. NCDEX currently facilitates trading of 57 commodities.


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Commodities Traded at NCDEX

Bullion - Gold KG, Silver, Brent

Minerals - Electrolytic Copper Cathode, Aluminum Ingot, Nickel

Cathode, Zinc Metal Ingot, Mild steel Ingots

Oil and Oil seeds - Cotton seed, Oil cake, Crude Palm Oil, Groundnut (in shell),

Groundnut expeller Oil, Cotton, Mentha oil, RBD Pamolein,

Refined soya oil, Rape seeds, Mustard seeds, Caster seed, Yellow soybean.

Pulses -Urad, Yellow peas, Chana, Tur, Masoor,

Grain -Wheat, Indian Pusa Basmati Rice, Indian parboiled Rice,

Indian raw Rice (ParmalPR-106), Barley, Yellow red maize

Spices -Jeera, Turmeric, Pepper

Plantation - Cashew, Coffee Arabica, Coffee Robusta

Fibers and other - Guar Gum, Guar seeds, Jute sacking bags, Indian 28 mm cotton,

Indian 31mm cotton, Lemon, Grain Bold, Medium Staple, Mulberry, Green

Cottons Potato, Raw Jute,Mulberry raw Silk, V-797 Kapas, Sugar, Chilli LCA334

Energy -Crude Oil, Furnace oil.

Multi Commodity Exchange of India Limited (MCX)

Multi Commodity Exchange of India Limited (MCX) is an independent and de-metalized

exchange with permanent reorganization from Government of India, having Head Quarter in

Mumbai. Key share holders of MCX are Financial Technologies (India) Limited, State Bank

of India, Union Bank of India, Corporation Bank of India, Bank of India and Canara Bank.

MCX facilitates online trading, clearing and settlement operations for commodity futures

market across the country.


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MCX started of trade in Nov 2003 and has built strategic alliance with Bombay Bullion

Association, Bombay Metal Exchange, Solvent Extractors Association of India, pulses

Importers Association and ShetkariSanghatana. MCX deals wit about 100 commodities.

Commodities Traded at MCX

Bullion - Gold, Silver, Silver Coins,

Minerals - Aluminum, Copper, Nickel, Iron/steel, Tin, Zinc, Lead

Oil and Oil seeds - Castor oil/castor seeds, Crude Palm oil/ RBD Pamolein,

Groundnut oil, Mustard/ Rapeseed oil, Soy seeds/Soy meal/Refined Soy Oil,

Coconut Oil Cake, Copra, Sunflower oil, Sunflower Oil cake, Tamarind seed oil,

Pulses - Chana, Masur, Tur, Urad, Yellow peas

Grains - Rice/ Basmati Rice, Wheat, Maize, Bajara, Barley,

Spices - Pepper, Red Chili, Jeera, Cardamom, Cinnamon, Clove,

Ginger,

Plantation - Cashew Kernel, Rubber, Areca nut, Betel nuts, Coconut,

Coffee,

Fiber and others - Kapas, KapasKhalli, Cotton (long staple, medium staple,

short staple), Cotton Cloth, Cotton Yarn, Gaur seed and Guargum, Gur and Sugar,

Khandsari, Mentha Oil, Potato, Art Silk Yarn, Chara or Berseem, Raw Jute, Jute

Goods, Jute Sacking,

Petrochemicals - High Density Polyethylene (HDPE), Polypropylene (PP), Poly

Vinyl Chloride (PVC)

Energy - Brent Crude Oil, Crude Oil, Furnace Oil, Middle East Sour Crude Oil,

Natural Gas

National Multi Commodity Exchange of India Limited (NMCEIL)

National Multi Commodity Exchange of India Limited (NMCEIL) is the first de-mutualised

Electronic Multi Commodity Exchange in India. On 25th July 2001 it was granted approval

by Government to organize trading in edible oil complex. It is being supported by Central


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warehousing Corporation Limited, Gujarat State Agricultural Marketing Board and Neptune

Overseas Limited. It got reorganization in Oct 2002. NMCEIL Head Quarter is at

Ahmedabad

STRUCTUREOFCOMMODITYMARKET


Ministry of consumer affairs

Forwards market commission

Commodity Exchange

National stock exchange Regional stock exchange

NCDEX MCX NMCE NBOT 20 other

regional

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GOLD

Gold is a chemical element with the symbol Au (Latin aurum, “shining dawn”) and an atomic

number of 79. It has been a highly sought –after precious metal for coinage, jewelry, in rocks,

in veins and in alluvial deposits. Gold is dense, soft, shiny and the most malleable and ductile

pure metal known. Pure gold has a bright yellow color and luster traditionally considered

attractive, which it maintains without oxidizing in air or water. Gold is one of the coinage

metals and has served as a symbol of wealth and a store of value throughout history. Gold

standards have provided a basis for monetary policies. It also has been linked to a variety of

symbolisms and ideologies.

A total of 158,000 tones (=8,333.33’ cubic meters) of gold have been mined in human

history, as of 2009. Modern industrial uses include dentistry and electronics, where gold has

traditionally found use because of its good resistance to oxidative corrosion and excellent

quality as conductor of electricity.

For thousands of years gold served individuals as the most common medium of exchange.

People began experimenting with convertible paper currencies backed by gold in the 1700

and 1800s. The international system of central bank managed gold-backed currencies that

developed was called the gold standard. The “shackles” placed on central banks by the

necessity of ensuring gold convertibility prevented them from issuing excess paper money to

pay for government expenses, thereby causing inflation.

The gold standard was dismantled and the shackles removed on the eve of World War I when

most central banks removed gold convertibility, ostensibly to make it easier for them to

finance war spending. After this, the world would experience some of the greatest inflations

in history, including that Germany in the early 1920s the hardships experienced in the Great

Depression and World War II kept the gold standard from being properly reconstructed. It


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was only after WWII that the world’s nations attempted to reconnect the international

monetary system to gold. In the resulting Breton Woods system that developed, all currencies

were fixed in price to the United States dollar, while the dollar itself was convertible by the

world’s central banks into 0.028 ounces of gold ( 1 ounce was worth $35). The dollar had

moved to the centre of the world’s monetary system, challenging gold.

This shows the gradual unraveling of both the Breton Woods system and gold’s $35 fixed

price, the end of dollar convertibility god, the elimination of gold as a monetary asset, and the

emergence of today’s system of freely floating competing currencies. Even though the dollar

is no longer linked to gold, it has retained its position as the world’s pre-eminent medium of

exchange. Till today 10 times more silver has been mined when compared to gold. On

Ground availability pf Gold is five times more than that of silver.

History of Gold

A child finds a shiny rock in a creek, thousands of years ago, and the human race is

introduced to gold for the first time.

Gold was first discovered as shining, yellow nuggets. "Gold is where you find it," so the

saying goes, and gold was first discovered in its natural state, in streams all over the world.

No doubt it was the first metal known to early hominids.

Gold became a part of every human culture. Its brilliance,

natural beauty, and luster, and its great malleability and

resistance to tarnish made it enjoyable to work and play with.

Because gold is dispersed widely throughout the geologic

world, its discovery occurred to many different groups in

many different locales. And nearly everyone who found it was impressed with it, and so was

the developing culture in which they lived


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Gold was the first metal widely known to our species. When thinking about the historical

progress of technology, we consider the development of iron and copper-working as the

greatest contributions to our species' economic and cultural progress - but gold came first.

As far back as 3100 B.C., we have evidence of a gold/silver value ratio in the code of Menes,

the founder of the first Egyptian dynasty. In this code it is stated that "one part of gold is

equal to two and one half parts of silver in value." This is our earliest of a value relationship

between gold and silver.

In ancient Egypt, around the time of Sati I (1320 B.C.), we find the creation of the first gold

treasure map now known to us. Today, in the Turin Museum is a papyrus and fragments

known as the "Carte des mines d'or." It pictures gold mines, miners' quarters, road leading to

the mines and gold-bearing mountains, and so on.

Where is that gold mine located? Well, you know how it is with treasure maps - there's

always something a little vague about them, to throw you off the trail.

Modern thought is that it portrays the Wadi Fawakhir region in which the El Sid gold mine is

located, but the matter is far from settled. Jason and the Argonauts sought the Golden Fleece

around 1200 B.C.

That Greek myth makes more sense when you realize that the fleece that it refers to is the

sheep's fleece used in the recovery of fine placer gold.

Early miners would use water power to propel gold-bearing sand over the hide of a sheep,

which would trap the tiny, but heavy, flakes of gold. When the fleece had absorbed all it

could hold, this 'golden fleece' was hung up to dry, and when dry would be beaten gently so

that the gold would fall off and be recovered.


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This primitive form of hydraulic mining began thousands of years ago, and was still being

used by some miners as recently as the California gold rush of 1849.

The first use of gold as money occurred around 700 B.C., when Lydian merchants produced

the first coins. These were simply stamped lumps of a 63% gold and 27% silver mixture

known as 'electrum.' This standardized unit of value no doubt helped Lydian traders in their

wide-ranging

successes, for by the time of Croesus of Mermnadae, the last King of Lydia (570 -546 B.C.),

Lydia had amassed a huge hoard of gold. Today, we still speak of the ultra-wealthy as being

'rich as Croesus.'

A monetary standard made the world economy possible. The concept of money, (i.e., gold

and silver in standard weight and fineness coins) allowed the World's economies to expand

and prosper. During the Classic period of Greek and Roman rule in the western world, gold

and silver both flowed to India for spices, and to China for silk. At the height of the Empire

(A.D. 98-160), Roman gold and silver coins reigned from Britain to North Africa and Egypt.

Money had been invented. Its name was gold.

Uses of Gold


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Gold is an investment.

Since 2001, we have been in the early stage of a gold bull market. A young bull market is the

investment opportunity of a lifetime. This asset class (precious metals) should vastly

outperform traditional asset classes — like stocks, bonds, real estate - for the next 5-10 years.

All signs point to a continued upswing in gold prices. The reality is, gold responds well to

currency debasement and monetary uncertainty.

Gold's Usefulness as safe haven.

The geo-political and world economic structure is currently undergoing major change-some

have even called the situation an "upheaval." This means that the investment outlook,

particularly for certain parts of the world, is more unpredictable than usual. Under these

circumstances, it is logical to conclude that certain investment portfolios should include real

(non-paper) assets such as commodities for protection against a potential decline in the paper

markets.

Gold's Usefulness as an Asset Diversifier

most portfolios are invested primarily in traditional financial assets such as stocks, bonds and

mutual funds. Adding gold to a portfolio introduces an entirely different asset; a tangible or

real asset, thus increasing the portfolio's degree of diversification. The purpose of

diversification is to protect the total portfolio against fluctuations in the value of any one

asset or type of asset. Gold does exactly that.

The reason is basic

The economic forces which determine the price of gold are different from, and in many cases opposed to,

the forces which determine the prices of most financial assets. The price of an equity depends on the

earnings and growth potential of the company it represents. Likewise, the price of a bond depends on its

safety, its yield, and the yields of competing fixed income investments.

Gold is money


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Gold is still the most important money in the world. Gold has been the ultimate store of value

and currency for 4,000 years, outlasting all paper currency and fiat money. Stocks and bonds

expire; governments come and go; but gold is forever. Gold has intrinsic value as a rare asset.

Gold is precious. And what keeps it precious is that the total amount of gold in the world is a

small quantity.

Gold is insurance.

Gold has always acted as portfolio insurance - protecting you against potential disaster of

your financial assets. Gold is a hedge because it is negatively correlated to traditional

financial assets. In other words, when paper assets go up - like, stocks and bonds — gold

goes down. And when paper assets go down, gold goes up. History has shown that a gold-

hedged portfolio during uncertain financial and political times provides the ultimate

insurance against potential economic calamity.


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SILVER

Silver is a metallic chemical element with the chemical symbol Ag (Latin: argentums, from

the Indo European root * arg-for “white” or “shining”) and atomic number 47. a soft, white,

lustrous transition metal, it has the highest electrical conductivity of any element and the

highest thermal conductivity of any metal. The metal occurs naturally in its pure, free from

native silver, as an alloy with gold and other metals, and in minerals such as argentite and

chlorargyrite. Most silver is produced as a by-product of copper, gold, lead, and zinc refining.

Silver has long been valued as precious metal, and it is used to make ornaments, jewelry,

high-value tableware, utensils, and currency coins. Today, silver metal is also used in

electrical contacts and conductor, in mirrors and in catalysis of chemical reactions. Its

compounds are used in photographic film and dilute silver nitrate solutions and other silver

compounds are used as disinfectants and micro biocides. While many medical antimicrobial

uses of silver have been supplanted by antibiotics, further research into clinical potential

continues.

Many well known uses of silver involve its precious metal properties including currency,

decorative items and mirrors. The contrast between the appearance of its bright white color in

contrast with other media makes it very useful to the visual art. It has also long been used to

confer high monetary value as objects (such as silver coins and investment bars) or make

objects symbolic of high social or political rank.

Silver, in the form of electrum (a gold-silver alloy), was coined to produce money in around

700BC by the Lydian’s. Later, silver was refined and coined in its pure form. Many nations

used silver as the basic unit of monetary value. In the modern world, silver bullion has the

ISO currency code XAG. The name of the United Kingdom monetary unit “pound” (£)

reflects the fact that it originally represented the value of one troy pound of sterling silver. In

the 1800s, many nations, such as the United States and Great Britain, switched from silver to

a gold standard of monetary value, then in the 20th century to fiat currency.


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History of silver

Silver has attracted man’s fascination for many thousands of years. Ancient civilizations

found silver deposits plentiful on or near the earth’s surface. Relics of these civilizations,

include jewelry, religious artifacts, and food vessels formed from the durable, malleable

metal. This metal took on near mystical qualities in marking important historical milestones

throughout the ages, and served as a medium of exchange. The Mesopotamian merchants

were doing just that as early as 700 BC.

In 1792, silver assumed a key role in the United States monetary system when Congress

based the currency on the silver dollar, and its fixed relationship to gold. Silver was used for

the nation’s coinage until its use was discontinued in 1965. The dawn of the 20th century

marked an important economic function for silver, that of an industrial raw material.

Today, silver is sought as a valuable and practical industrial commodity, as well as an

appealing investment precious metal. Many countries now issue silver bullion coins, among

them the Unites States, Canada and Mexico. Private issue silver bullion is also available from

select private mints.

Although silver is relatively scarce, it is the most plentiful and least expensive of the precious

metals. The largest silver producing countries are Mexico, Peru, the United States, Australia

and Chile. Sources of silver include; silver mined directly, silver mined as a by-product of

gold, copper, lead and zinc mining, and silver extracted from recycled materials, primarily

used photographic materials. Today, silver bullion stocks make up a significant component of

silver supply.

The American Eagle Bullion program was launched in 1986 with the sale of gold and silver

bullion coins. Platinum was added to the American Eagle Bullion family in 1997. A bullion

coin is a coin that is valued by its weight in a specific precious metal.


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Silver Uses

Demand for silver is built on three main pillars: industrial and decorative uses, photography,

and jewelry & silverware. Together, these three categories represent more than 95 percent of

annual silver consumption. In 2007, 455.5 million ounces of silver were used for industrial

applications, while over 128 million ounces of silver were committed to the photographic

sector, 163.4 million ounces were consumed in the jewelry market, and 58.8 million ounces

were used in the silverware market.

Why is this indispensable metal in such demand? The reasons are simple. Silver has a number

of unique properties including its strength, malleability and ductility, its electrical and

thermal conductivity, its sensitivity to and high reflectance of light and the ability to endure

extreme temperature ranges. Silver’s unique properties restrict its substitution in most

applications. Choose from the following list to learn more about some of the various

applications of silver:

Traditional

Coinage, Silver jewelry, Photography, Silverware and Table Settings.

Industrial

Batteries, Bearings, Brazing and Soldering, Catalysts, Electronics.

Emerging

Medical Applications, Solar Energy, Mirrors & Coatings, Solar Energy,

Water Purification.


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RESEARCH METHODOLOGY

Research in common parlance refers to a search for knowledge. In fact research is an art of

scientific investigation. The Advanced Learner’s Dictionary of current English lays down the

meaning of research as “a careful investigation or inquiry especially through search for new

facts in any branch of knowledge”.

For the preparation of the project report several method were used to collect data and

pertinent information. The data required for the studies were collected is primary source.

Detailed questionnaire were prepared for the different departments covering as many

variables as possible

DISSERTATION TITLE

“A STUDY ON COMMODITY MARKET” - PRICE DRIVERS OF GOLD AND

SILVER”

Statement of the problem

The commodity market is still new and growing in India and it has a bright scope to develop,

on that view this research study is taken.

The Research main intention is to know the various price drivers that determine the price of

commodity. The main problem in the commodity market is the prediction of future price of

commodity; especially prediction of price of global metals (gold and silver) is very difficult.

The future prediction will be made on the basis of the past response of commodity market to

various price drivers. Especially this research on Gold and silver because these two

commodities have global market with high volatility. The price of gold and silver are highly

affected by the various factors happening in and around the world. In order to know behavior


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of this to commodity to that factor, researcher referred past reacts of commodity market.

Objective of the study

To study about the Indian commodity market.

To study different price drivers affect the Gold and silver.

To find out how price of Gold and silver fluctuate in Indian Commodity market

To interpret about movement of future price of gold and silver in commodity market.

To derive the relation of these commodities with other financial instruments such as money

supply.

Research design

Research design is the conceptual structure within which research is conducted; it constitutes

the blueprint for the collection, measurement and analysis of data. It is a plan for selecting of

type of information used to answer the research question. It is a framework for specifying the

relationship among the different influencing variables..

Empirical research:-

This research is done by using the empirical research design to analyze the performance and

to study the impact of price drivers of gold and silver on commodity market, by using all

available data.

Samplingdesign

Sampling is simply the process of learning about the population on basis of a sample. Thus,

sampling technique instead of every unit of the universe. Only a part of the universe is

studied and conclusion is drawn on that basis for the entire universe. A sample is subset of

population units. The researcher adopted the simple random sampling technique for the study


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Simple random sampling

Simple random sampling refers to that sampling technique in which each and every unit of

the population has an equal opportunity of being selected in the sample. The researcher has

adopted simple random sampling because population is known.

Source of data

Data is the fact or an event. This data or information is needed for every research work. The

data can be classified into two types: that is

1) Primary data

2) Secondary data

Primary data

Data originally collected for an investigation are known as primary data. Such data are

originally in character and are generated in large number of survey conducted by individual

researcher on research bodies. For example data collected by the researcher from the

interviewing investor.

Collecting the opinion of investor about commodity market situation

Interviewing the Acumen investment analyst.

Secondary data

Data which are actually collected for some earlier research work and are applicable or usable

in future research and which already have been passed through the satisfied process.

The secondary data for this study was collected from the relevant journals,

newspapers, and textbooks


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The main source of secondary data for this Project is Internet source like MCX,

NCDEX.

Tool used

The live trading of last one year record system which is used in angel broking, and

Bloomberg, SAP software which is used in the angel broking are used in this research to

collect required data.

Scope of the study

The scope of study shows the outer line or border of the research study.

This study limited to only two commodities, i.e. Gold and Silver.

This study is based on last one year performance of Gold and silver.

This study relates to only Indian commodity market that is MCX, NCDX.

Limitation of study

The following are some of the limitations of the study:

1) The project work was required to be completed within a short period of time. So time

constraint was one of the main limitations of the study.

2) Most of the information’s are collected from secondary data, so researcher can’t say it

100% applicable.

3) There is no particular format for the study.

4) Cost Constraint.


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INDUSTRY PROFILE

Broking Insights

The Indian broking industry is one of the oldest trading industries that have been around even

before the establishment of the BSE in 1875. Despite passing through a number of changes in

the post liberalization period, the industry has found its way towards sustainable growth.

With the purpose of gaining a deeper understanding about the role of the Indian stock broking

industry in the country’s economy, we present in this section some of the industry insights

gleaned from analysis of data received through primary research.

For the broking industry, we started with an initial database of over 1,800 broking firms that

were contacted, from which 464 responses were received. The list was further short listed

based on the number of terminals and the top 210 were selected for profiling. 394 responses,

that provided more than 85% of the information sought have been included for this analysis

presented here as insights. All the data for the study was collected through responses received

directly from the broking firms. The insights have been arrived at through an analysis on

various parameters, pertinent to the equity broking industry, such as region, terminal, market,

branches, sub brokers, products and growth areas.

Some key characteristics of the sample 394 firms are:

On the basis of geographical concentration, the West region has the maximum

representation of 52%. Around 24% firms are located in the North, 13% in the South

and 10% in the East

3% firms started broking operations before 1950, 65% between 1950-1995 and 32%

post

1995

On the basis of terminals, 40% are located at Mumbai, 12% in Delhi, 8% in

Ahmadabad, 7% in Kolkata, 4% in Chennai and 29% are from other cities


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From this study, we find that almost 36% firms trade in cash and derivatives and 27%

are into cash markets alone. Around 20% trade in cash, derivatives and commodities

In the cash market, around 34% firms trade at NSE, 14% at BSE and 52% trade at

both exchanges. In the derivative segment, 48% trade at NSE, 7% at BSE and 45% at

both, whereas in the debt market, 31% trade at NSE, 26% at BSE and 43% at both

exchanges

Majority of branches are located in the North, i.e. around 40%. West has 31%, 24%

are located in South and 5% in East

In terms of sub-brokers, around 55% are located in the South, 29% in West, 11% in

North and 4% in East

Trading, IPOs and Mutual Funds are the top three products offered with 90% firms

offering trading, 67% IPOs and 53% firms offering mutual fund transactions

In terms of various areas of growth, 84% firms have expressed interest in expanding

their institutional clients, 66% firms intend to increase FII clients and 43% are

interested in setting up JV in India and abroad

In terms of IT penetration, 62% firms have provided their website and around 94%

firms have email facility

Terminals

Almost 52% of the terminals in the sample are based in the Western region of India, followed

by 25% in the North, 13% in the South and 10% in the East. Mumbai has got the maximum

representation from the West, Chennai from the South, New Delhi from the North and

Kolkata from the East.


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Mumbai also has got the maximum representation in having the highest number of terminals.

40% terminals are located in Mumbai while 12% are from Delhi, 8% from Ahmadabad, 7%

from Kolkata, 4% from Chennai and 29% are from other cities in India.

Branches & Sub-Brokers

The maximum concentration of branches is in the North, with as many as 40% of all branches

located there, followed by the Western region, with 31% branches. Around 24% branches are

located in the South and East constitutes for 5% of the total branches of the total sample.

In case of sub-brokers, almost 55% of them are based in the South. West and North follow,

with 30% and 11% sub-brokers respectively, whereas East has around 4% of total sub-

brokers.


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Financial Markets

The financial markets have been classified as cash market, derivatives market, debt market

and commodities market. Cash market, also known as spot market, is the most sought after

amongst investors. Majority of the sample broking firms are dealing in the cash market,

followed by derivative and commodities. 27% firms are dealing only in the cash market,

whereas 35% are into cash and derivatives. Almost 20% firms trade in cash, derivatives and

commodities market. Firms that are into cash, derivatives and debt are 7%. On the other

hand, firms into cash and commodities are 3%, cash & debt market and commodities alone

are 2%. 4% firms trade in all the markets.


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In the cash market, around 34% firm’s trade at NSE, 14% at BSE and 52% trade at both

exchanges. In the equity derivative market, 48% of the sampled broking houses are members

of NSE and 7% trade at BSE, while 45% of the sample operates in both stock exchanges.

Around

43% of the broking houses operating in the debt market, trade at both exchanges with 31%

and 26% firms uniquely at NSE and BSE respectively.

Of the brokers operating in the commodities market, 57% firms operate at NCDEX and

MCX. Around 20% and 21% firms are solely in NCDEX and MCX respectively, whereas 2%

firms trade in NCDEX, MCX and NMCE.


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Products

The survey also revealed that in the past couple of years, apart from trading, the firms have

started offering various investment related value added services. The sustained growth of the

economy in the past couple of years has resulted in broking firms offering many diversified

services related to IPOs, mutual funds, company research etc. However, the core trading

activity is still the predominant form of business, forming 90% of the firms in the sample.

67% firms are engaged in offering IPO related services. The broking industry seems to have

capitalised on the

growth of the mutual fund industry, which was pegged at 40% in 2006. More than 50% of the

sample broking houses deal in mutual fund investment services. The average growth in assets

under management in the last two years is almost 48%. Company research is another

lucrative area where the broking firms offer their services; more than 33% of the firms are

engaged in providing company research services. Additionally, a host of other value added

services such as fundamental and technical analysis, investment banking, arbitrage etc are

offered by the firms at different levels.


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Of the total sample of broking houses providing trading services, 52% are based in the West,

followed by 25% from North, 13% from South and 10% from the East. Around 50% of the

firms offering IPO related services are based in the West as compared to 27% in North, 13%

in South and 10% in East. In providing mutual funds services, the Western region was

dominant amounting to 49% followed by 27% from North; The South and the East are almost

at par with 13% and 11% respectively.

Future Plans

68% of the firms from the sample have envisaged strategies for future growth. With the

middle class Indian investor as well as foreign investor willing to invest in the stock market,

majority of

the firms preferred expansion of institutional and the Foreign Institutional Investor clients in

their areas of growth. Around 84% have shown interest in expanding their institutional client


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base. Nearly 51% of such firms are located in the West, 25% in North, 15% are from South

and 9% from East. Since the past couple of years, India, along with Korea and Taiwan, has

been one of the preferred destinations for the FIIs. With corporate restructuring, rising market

capitalisation and sectoral friendly policies helping the FIIs, more than two thirds of the firms

are interested in increasing their FII client base. Amongst these firms, West again has

maximum representation of 53%, followed by North with 22%. South has 15% firms and

East makes up for 9%.


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Company profile

a. Background and inception of the company

Acumen Capital Market (India) Ltd. is one of India’s fastest growing integrated financial

services organizations headquartered in Cochin, with a pan India presence through its own,

specialized network of regional offices linked by advanced technology. The company is

driven by a customer centric growth approach reinforcing its commitment towards its clients,

shareholders, employees and the community as a whole in facilitating growth and funding

ideas. The Company believes that life is all about dreaming a big dream, planning how to

make that dream come true and then working towards achieving it. That’s why we made it

our driving force. And that is what we help our clients and associates to do.

Peninsular Capital Market India Ltd. Established in 1995 was rechristened as Acumen

Capital Market India Ltd. in 2008 and in this short span Acumen has managed to position

itself as the second best broking house in the state of Kerala in terms of turnover. Renowned

Chartered Accountant and financial columnist Mr. T S Anantharaman, Director Catholic

Syrian Bank was the founder Chairman. ACML is the flagship company of Acumen group

which comprises of 4 dynamic companies – Acumen Capital Market India Ltd., Acumen

Commodities India Ltd.,

Peninsular Middle East DMCC and PCML Properties Pvt. Ltd. ACML have a network spread

across 12 state locations through more than 30 regional offices. The architects of this success


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story – Managing Director MrAkshayAgarwal, Directors: Mr. SanthoshAgarwal, Mr.

Akhilesh Agarwal, Mr. PR Aravindakshan Nair and Mr. EJ Davis.

With the help of a strong top management team comprising of reputed and vastly experienced

professionals from different fields, Acumen witnessed tremendous growth even during the

economic downturn. This phenomenal performance is attributed to the company’s relentless

focus on excellence in service through impeccable customer oriented, transparent and ethical

business practices which is engrained in the company’s culture. This was also augmented by

investments in advanced technologies that helped in value addition.

Our clients include retail customers, high-net-worth Investors, angel investors, financial

institutions and corporate clients. Acumen is an integrated financial services provider with a

range of financial products and services such as Wealth Management, Broking &

Distribution, Commodity Broking, Currency and interest futures trading, Portfolio

Management Services, and Private Equity.

Having witnessed a strong performance by the Indian economy during the downturn we at

ACML believe that we are well equipped to leverage our core competency to take advantage

of a vibrant economy and set new standards by taking this organization to a new level.

Mile stone …………….

b. Nature of the business carried :

Financial Services – Stock Broking Firm

c. The Vision

To emerge as a global financial services brand, trusted for what it does best: Deliver

Growth!

d. The Mission

To deliver financial growth!

e. Quality policy


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We commit ourselves to deliver services that best meet our clients’ satisfaction;

protection to our clients’ money maximizing the opportunities and minimizing the

risk.

We further commit to get things right, the first time, to deliver the best value for

money & time to our customers.

We will continuously invest in our people and technologies and keep our people

abreast with the latest changes & developments, information and technologies, to

deliver quality & unparalleled service

d. Product /services profile

Equity

• Online Trading in NSE, BSE cash and Derivatives segments

• Web Trading in all segments

• Daily Pre-Market outlook over e-mail

• Intra-day Market Commentary

• Trading Tips and Breaking news over SMS

• Personalized Investment Advises

Commodities

• Online screen based futures trading in about 85 commodities.

• Possibilities for attractive returns based on risk reward ratios.

• Excellent hedging tool against price risk.

• High Liquidity in most contracts.

• 100% transparency, regulated by Forward Market Commission.

• Physical delivery as well as delivery in demats form.

• Adequate warehousing, testing facilities.

• Ability to leverage larger positions due to relatively lower margins.

Depository Services

The operations of Acumen’s depository services are managed by a well-knit team

of dedicated, professionally qualified staff member who leave no stone unturned

in their goal of “Customer Delight”, offering you not only a host of services like

demat, remat, security transfer, pledge creation but also value added services like


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24X7 online holdings, transaction statements, account statements etc. - at costs

that are among the most reasonable in the industry.

Wealth Management

“While you sleep, let your money work hard for you”

Wealth management industry’s most significant change, of late, is its shift from a product-

centric to a customer-centric model. Traditionally targeting only high-net worth clients, the

industry is now reaching out to the mass customer segment.

e. AREA OF OPERATION:

It operates in India and as its national presence in the country

Operations spread across

12 states in India

32 Regional offices

500+ Trading Locations

Close to 50000 registered clients


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OWNERSHIP PATTERN

Top Management Team:

Name Designation Qualification Experience

T S Anantharaman Chairman C A 26 years

AkshayAgrawal V C & MD B Com 25 years

AkhileshAgrawal MD: AMCL Director,

ACML

B Com,

PGDC

8 years

P R Aravindakshan Director Graduate 26 years

E J Davis Director Graduate 19 years

P V Hariharan Management

Consultant

C A 10 years

George Mampilly C E O B Sc 17years

Gireesh K S Manager, Operation B Com 6 years

f. Competitors information

· Motilal Oswal

· India Infoline

· Indiabulls

· Geojit

· Sharekhan


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. Angel broking

g. Work flow model:

Future growth and prospectus

Thanks to the planning that went in into converting our dream into reality, we are well

on our way to achieve our dream. Over time, Acumen has emerged as a leading

financial services provider, having a network of 40,000 customers, spread over 12

states across the country, served by over 375 associates, a figure that continues to

grow aggressively in the near future, thanks to our young, ambitious and service

oriented team that combines well with the team of experienced professionals at senior

levels who have spent a life time in the financial services sector.

At Acumen, we promise to keep to rediscovering ourselves & redefining our services

to ensure that we deliver what we dreamt and promised to deliver:

Make investing a great & rewarding experience!


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ANALYSIS AND INTERPRETATION

Success of any research is based on the analysis part. It shows the core theme of research and

how it is done; any research is not completed without clear analysis and interpretation.

Convincing and understanding capacity of a research is laid in this part. This research

analyze the how gold and silver prices are fluctuate and what make them to change, through

interpretation researcher gives a tips to overcome and predict future changes in gold and

silver price

Gold performance during 2010

Gold prices are currently trading near their all-time highs on global markets as concern over

the ability of several European countries to finance their debt burdens destabilized the euro

and sharpened volatility across financial markets, fuelling an investor flight into the

perceived safe-haven asset. Gold’s gains were mainly imparted by weak dollar and uncertain

economic conditions which prevailed during the 2010. Silver which is also known as poor

man’s gold is also trading near its 30 year high on international bourses tracking sharp moves

in gold and base metal price as it is also used has an industrial metal. Weaker dollar spread

billions alternative investment demand while concerns of faltering economic recovery

strengthened metals’ safe haven appeal. A part from the lowering dollar index, strong

investment demand was another major reason which took the gold price to new highs in

2010. Japan and USA continued to make gold an attractive investment. In particular,

statements by federal reserve officials and discussion in previous policy meetings regarding


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their willingness to provide a more accommodative policy to spur economic growth and

relating the labor market have put pressure on the US dollar, which increased long term

inflation expectations and, consequently, due to its role has a hedging vehicle, pushed up the

price of gold. Secondly officials sector activity continued to be supportive of the gold

market has sales by European central banks remind negligible while in several emerging

markets, including Russia, Bangladesh and Thailand , central bank continued to increase their

gold reserves . Now has we are moving towards 2011, it would not be an easy task for us

forecast or predicting the price of gold in coming period . The entire economy is similar to a

living breathing organism with many complex parts. Isolating any one aspect is done with

the risk of being inaccurate. So the price of gold is a difficult number to determine in the

overall economic outlook. There is no definitive answer to where the price of gold will be in

2011 are prices have Already surged for ten consecutive years. But if we look at the overall

global scenario then we think that the current scenario is still very positive for bullions to

mark an eleventh year of gains in 2011 on international bourses and new highs on local

platform as investors seek refuge from an uncertain global economic outlook and non

reliability on paper currency. On global front, China is now the world’s biggest producer of

the gold and consumes all the gold its mines can dig up. China’s miners produced 277.017

metric tones of gold so far in 2010, up to 8.8% from the same period in 2009. In fact china

imported 209.7 metric tonnes of gold in the first 10 months of 2010 which is up fivefold

compared with the same period of 2009. Surging demand from china is already changing the

seasonal pattern in the gold price pursuing the annual gold price “peak” from November to

February, has gold buying centre around china’s New Year.

Data about last year Performance:-

COMMODIT

Y

EXCHANGE

LIFE TIME

HIGH

LIFE TIME

LOW2010 HIGH 2010 LOW


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GOLD

COMEX

MCX

1431.10

20924.00

252.50

5600.00

1431.10

20924.00

1045.20

15950.00

The Present Gold performance (2011):-

The current performance of gold is very difficult to predict because it shows very volatility in

the market. from last few day gold price was increased continuously due to food inflation and

world crisis.

Last Month Performance Chart of Gold (Feb-march):- The present performance of gold

is analyzed by the performance of gold contract which is trading in the Indian commodity

Contract Expiry Date:- 5th April 2011 Contract Expiry Date:- 4th June 2011


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Contract Expiry Date:- 5th August 2011 Contract Expiry Date:- 5th October 2011


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Analysis of Market moving factors of gold:-

The market movement of gold is affected by enormous factors, but in the last month the price

of gold increased from 20,150 to 21,750 “(Per 10 gm) this price volatility is not equal to all

four contract but by see the chart we can say all most all contract is moved in the same

manner. The some of assumed price drivers are as follows.

Indian gold prices are highly correlated with international prices. However, the

fluctuation in the INR-US Dollar impact domestic gold prices and have to be closely

followed.

Last week when Jean-Claude Trichet announced a 0.25 pt raise in Key interest rates,

Gold and Silver prices dipped as the European Central Bank Chief emphasized his

inflation-fighting focus. But the 2 Key inflation hedges were just temporarily

tarnished by the tough talk as Friday Gold rose to a new all-time high at Rs 22000.

Players have been joining in, and holdings of Gold to back exchange-traded funds

(ETFs), the popular way for retail investors to participate, rose 19.9 tons Thursday,

the biggest single inflow since late January.

After a week January, prices of the precious metals rose in February and march when

the unrest that toppled governments in Tunisia and then Egypt sent players to havens.

Last month the Utah State Legislature passed a bill accepting US Gold and Silver

coins as legal tender and other States in the USA are considering similar legislation in

a direct rebuke to the Federal Reserve and its ultra-loose monetary policy.

The Euro hit a 14-month high of 1.4443 vs. the USD Friday. That makes gold market

moves up.

Inflationary impact of soaring Crude Oil and food prices, which have pushed real US

interest rates, nominal rates minus inflation, to negative levels.


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Negative real rates are not just a US issue; the same is true in China, where demand

for Bullion is climbing too.

The cost of “Carry” (the difference between interest on deposits and non-interest

bearing Gold) is Zero now and that drives money to be invested in assets.

Supply –demand is a major influencer, amid rising global investor demand and almost

stable supplies.

Shifts in official gold reserves, reports of sales/purchases by central banks act as

major price influencing factors, whenever such reports surface.

There is uncertainty in the economy - nobody really has a clear picture about what

will happen in the next 12 months. As a result, people tend to invest in something

defensive (a good hold) and that has traditionally been gold.

The Currency exchange rate is one of the factors determining the gold price. If

currency of different country changes in a positive correlation the price of gold will be

same. If it is in negative correlation the gold price is differ from country to country.

Mainly it will adversely affect to developing and under developed country gold price

Interpretation:

The price of gold is moving upward from last few months the slight volatility in the gold

price because of above all factors, some of the factors which related to price drives of

gold will affect after some time and some of them shown immediate influence on gold

market, So the bullion market movement is not give exact cause to its volatility. Nearly

Rs 500 was gone up in the yellow metal market and also by seeing chart of present

trading contract we can predict the market was in bullish side rather than bearish.


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A Year performance of present gold trading contract:

The gold performance is better as compare to 2010, the last year Average price is Rs19640

but it was moved to 21000 Rs during 2011. The yearly performance of gold is analyzed by

taking consideration of present contract trading in the Bullion market.

-Contract Expiry Date:- 5th April2011 Contract Expiry Date:- 4th June2011

Contract Expiry Date:- 5th Agust2011 Contract Expiry Date:- 5th October 2011


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Analysis of present trading contract yearly movement:-

The yearly movement of gold is influenced by various factors mainly core price drivers of

Gold, like inflation, interest rate, the dollar value or other. This core price driver largely

changes during 12 month gap period and also the number of factors effecting on commodity

market is varies. Some of important gold market moving factors are as follows.

Tightening of gold supply

Gold mining is decreasing and the demand for gold is increasing. Gold supply has decreased

by almost 40 per cent as the cost of mining, legal formalities and geographical problems have

increased which has led to a fall in gold mining. Economics have taught us that lesser the

supply, greater the demand and in turn greater the increase in price.


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Interest rates

Gold has always been considered a good hedge against inflation. Rising inflation rates

typically appreciates gold prices. It has an inverse relationship with interest rates. As gold is

pegged to the US dollar, US interest rates affect gold prices. Whenever interest rates fall, gold

prices increase. Lowering interest rates increases gold prices as gold becomes a better

investment option vis-a-vis debt products that earn lower interest. Gold loses its shine in a

rising interest rate scenario.

Geo-political concerns

Whenever there is geo-political strife, investors around the world rush to prevent erosion of

their investments and gold as a safe haven attracts one and all. For example after terror strike

in the United States the demand for gold had increased. With the recent events like tension

between India-Pakistan, Israeli strikes over Gaza, the ongoing war in Iraq, the tension

between US and Iran coupled with recession have investors scrambling for gold.

Central bank demand

With the dollar losing its value, central banks of most of the developed countries have started

to increase their share of gold. This explains the increasing market demand for gold.

Weakness in financial markets

General rule of thumb in the market is that gold is always attractive when all other

investments are unattractive. Why is this? As gold is negatively co-related to stocks, bonds,

and real estate, gold is considered to be a safe haven and hence during any crises, investors

would like to sell off what they would term as risky investments and be invest the funds in

gold.

Huge purchasing habit by china

China is adding to their reserve of gold. It has been well known that China is trying increase

the amount of gold that they hold so for that reason alone the price of gold has gone up. They

are pushing for their citizens to invest or buy more gold and they need to be sure that they


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have an excess amount of gold in stock to meet their demands. They hold the title for the

most populated area so their demand for gold is much higher than any other area.

Positive response to Portugal PM words:-

The gold price reacted positively to the Portuguese auction, rising to its new record high.

Later in the day, Portugal’s Prime Minister, Jose Socrates, announced that the nation

requested financial assistance from the European Union. The price of gold again responded

favorably, rebounding from its intra-day low.

Interpretation:-

In the mid 2010 the price of gold is Rs 18,000 but at the end of 2010 the market crosses Rs

21,000. The price movements of different trading contract are not moved in the same manner

mainly because of different maturity period. Each contract is affected by different price

drivers based on the expiry date of contract. As compare to last year the movement of gold

price is in positive way. The economy is in the recovery stage of great 2007-2008 depression

so it indicator to development of the economy.


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Gold guinea:-

Gold Guinea is a coin that was minted in the United Kingdom between 1663 and 1813,

originally worth one English Pound sterling and weighing around 8.3-8.4 grams. The name

was derived from Guinea in Africa, from where most of the gold used to make these coins

originated. In the India context, Gold Guinea refers to 8 gram gold coins of atleast 0.995

purity, which are mainly utilized as a retail investment. The demand for gold coins for retail

investment is estimated to be around 35 tonnes in India and this is expected to grow at a rate

of 40% in the coming years.

Performance of Gold guinea:-

The last month (March) performance of gold guinea can be understand by analyzing the gold

guinea trading chart.


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Contract Expiry Date:- 31st March 2011 Contract Expiry Date:- 30th April 2011


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Contract Expiry Date: - 31st May 2011

Analysis of Gold Guinea Monthly trading chart:-

As compare to gold, the market performance of gold guinea is not so familiar even though it

has equal value of gold main. It has high volatility in the beginning of the month, at the

month mid nearly 15 to 18th of March gold guinea went down, on the same time gold main

was in bullish mood. This high volatility may be caused by number of factors but some core

pricing drivers are as follows.

An under supply of newly-mined gold.

Gordon Brown striking out on his IMF gold sales proposal, with the US opposing it.

The Washington Agreement supporting gold by being generally against excessive

Central Bank gold sales.


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The real possibility of Asian countries buying whatever gold the European Central

Banks dish up.

The never-ending story of the US trade deficit.

Gold is a "de facto currency" and therefore not subject to demand deficiencies caused

by worldwide economic slowdowns.

Gold is an inflation fighter and they can see stagflation approaching.

Now-a-days dollar is weakening day by day against other major currencies . India

therefore purchased 200 metric tones of gold recently. Other countries also likely to

take similar decision.

Prices have moved sharper than it should have. It just because speculators moved it up

up and up. Hence prices are expected to come down at faster space which happened

in last few days just after Fed cut rate by 75 basis points.

“The situation in Libya, it seems quite bad and we see the flow of funds into safe-

haven investment because of it,” In addition to oil prices, other commodity that

jumped due to crisis of Libya is gold. This precious metal prices jumped to 1%

became U.S. $ 1,400 per ounce. Investors are competing to divert their investment to

a safe place from inflation like gold.

Every state in the world keeps its foreign reserves in the form of foreign currency i.e.

$, Euro and pond. Gold is also taken as an asset in foreign reserve. Taking it as an

asset was a tradition, very popular in the past that declined after the surge in value of

dollar. Similarly the decline in the value of dollar gives rise to the demand of gold as a

part of foreign reserves.

Interpretation:-

As commonly, fluctuations in the guinea market show that trading turnover of gold

guinea. Gold main is probably show bearish only when international news spread out but

gold guinea is the one commodity which is quickly response to both the national as well


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as international news. The most of the investor in gold guinea are big institutional

investor so slight movement of gold guinea takes into deeper clash down of market.

A Year performance of gold guinea:-

The bullion market movement can analyze by throw understanding of drivers which make

volatile commodity market

Contract Expiry Date:- 31st March 2011 Contract Expiry Date:- 30th April2011

Contract Expiry Date:- 31st May 2011


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Analysis of yearly performance of gold guinea:-

The price movement of gold guinea was followed the price of gold main. In the month

January the price of gold guinea is 16,000 but within the two month it was went up to Rs

17200.each gold guinea contract were moved in different way but all movement of this is

most similar movement of gold main, as compare to gold main it is more volatile due to

following factors.

Bank failures

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. This is what happened in the USA during the Great Depression of

the 1930s, leading Resident Roosevelt to impose a national emergency and to outlaw the

ownership of gold by US citizens.

Low or negative real interest rates.

If the return on bonds, equities and real estate is not adequately compensating for risk and

inflation then the demand for gold and other alternative investments such as commodities


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increases. An example of this is the period of Stagflation that occurred during the 1970s

and which led to an economic bubble forming in precious metal.

Currency fluctuation

As gold is pegged to the US dollar, it has an inverse relationship with the dollar. Right

now with US being in great financial turmoil, the dollar has weakened against many other

currencies. Dollar is expected to weaken further and prices of gold are expected to rise

further. Dollar is a de-facto currency of exchange around the world. But now with US on

the brink of depression, gold is substituted as a safe haven for investments. Though dollar

seems to be getting stronger, it may be a temporary effect and very soon it can head

southwards once again, in turn making gold an attractive and safe investment

Higher inflation expectation

Regulators have pumped in huge amount of liquidity to avert recessions. During the

political meeting held in London recently it was restated that G-20 countries intend to

maintain loose money policies unit economies recover clearly. The rising inflation

expectation benefits gold as gold is seen as a good hedge against inflation.

War, invasion, looting, crisis

In times of national crisis people fear that their assets may be seized and that 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.

Gloomy US dollar outlook – Gold is traded in US dollar term but major consumption of

gold is outside US. Hence weakening US dollars makes gold cheaper for Non- US

investors and thereby increases demand for gold.


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Increase in investment demand –

Gold has limited statistical correlation with any of the assets classes as factors driving gold

prices are different from factors driving other markets. Hence gold acts as an excellent

portfolio diversifier. The average share of gold in global portfolios is quite low and given

the present fundamental setup it is undoubtedly going to go up, leading to higher gold

demand. Again gold prices have exhibited astonishing performance during recent financial

turmoil and that has managed to attract lot of investor’s attention. Such investors are

investing in gold by way of exchange traded products and physical gold bars and coins.

Interpretation:-

Gold guinea is the mid-way between the gold main and gold mini, so its volatility is

influenced by the enormous factors. The price of gold guinea will go up suddenly due to

national and international events and here sentiment of investor plays a major role.

Gold Mini:

Gold is the oldest precious metal known to man and for thousands of years it has been valued

as a global currency, a commodity, an investment and simply an object of beauty.

Monthly trading chart of gold mini:-

Contract Expiry Date:- 5thapril 2011 Contract Expiry Date:- 5th may 2011


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Contract Expiry Date:- 4th June 2011


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Analysis of monthly performance of Gold Mini:-

Investment in the Gold mini gives us a confidential return with high volatility, from above

chart we can clearly understand the price of gold mini is come down (20950 to20000),as

compare to gold and gold guinea ,gold mini is moving in reverse manner, the reason for that

is as follows.

World oil price hikes will trigger inflation, which is currently a major concern of

global investors.

Rising demand of gold jewellery.

The investments in gold are influenced by comparative returns from other markets

like stock markets real estate other commodities like crude oil.

Domestically, demand and consequently prices to some extent are influenced by

seasonal factors like marriages. The rural demand is influenced by monsoon,

agricultural output and health of the rural economy.


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price of gold is mainly affected by changes in sentiment, rather than changes in

annual production.

It's a natural hedge against the US dollar.

It traded predominantly between $420 and $435 this year, thus setting a new price

floor, which is considered a "strong buy signal.

There are signs of inflation in the coming year or so, and again gold has been the

commodity that people have tended use to act as a hedge against gold

The primary factors include the value of your country's currency and other currencies

around the world. The lack of confidence in the Euro is one reason why gold is going

up now. Another factor is the overall confidence in the world economy.

Interpretation:-

The last month performance of gold mini is not so satisfactory, gold mini was in bearish

movement. The main reason for difference in movement of gold, gold guinea and gold mini

is the pattern of investment by institution and individual. The individual investors are invest

more in gold mini and their sentiment play vital role in market movement.

A year performance of gold mini:-

Contract Expiry Date:- 5th April 2011 yearly Contract Expiry Date:- 5th May 2011


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Contract Expiry Date:- 30th jun2011

Analysis of yearly performance of gold mini:-


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The present contract which is trading in bullion market shows a high volatility, In January the

price of gold mini is Rs 20,600 but after two month the price is same. so we can say gold

mini has high short term fluctuation. Some of reason for this fluctuation is as follows

UK inflation has now out-run the Bank of England's official upper tolerance of 3.0%

per year for 13 months running on the Consumer Price Index.

India is a country of contrasts where lavish palaces are mixed with shacks.

Poorer layers of population prefer to keep their valuable assets in the form of gold jewelry so

it can be easily carried in times of distress, floods and social unrest.

World’s overall economic situation is a very important factor influencing gold prices

in India. With many European countries being on the brink of bankruptcy like Greece, for

example, or facing huge state budget deficits, multiple investors see gold as the only worthy

commodity worth investing. If the world’s gold price is on the rise, it automatically affects

Indian price for gold.

India is also world’s largest importer of gold from other countries. Rising or lowering

import costs inadvertently affect gold price in India today.

Rising population in India triggers even higher demand for gold driving gold price in

India today even higher.

India is known to be a country of parallel economy, money laundering and large scale

tax evasions. Since this unaccounted money cannot be kept in banks and the value of national

currency is on the downfall, Indians prefer to buy gold jewelry or gold bullions to protect them

from devaluation.

Interpretation:-

From last 12 month performance of Gold mini is quit critical to analysis, even though

bullion market was in up word trend gold mini is not supporting to movement especially

from the last six moth it has same price with little volatility so we can say the investor of

gold mini are try to hold and they expect long term profit.


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Silver performance during 2010:-

When it comes to silver also, India is the world’s #1 consumer as well. And it can be seen

from imports figure which are up sharply in 2010, nearing 30-year peaks. All such factors

shows that in spite of such high prices from these countries will continue to climb up, taking

bullion prices to their new highs in 2011. While both the gold and silver are set to rise further

owing to continued currency devaluation and enhancing physical demand, Silver is likely to

out perform gold, in our view.Silver prices is reasonably tracks gold and are more volatile

than the yellow metal.

COMMODIT

Y

EXCHANGE

LIFE TIME

HIGH

LIFE TIME

LOW2010 HIGH 2010 LOW

SILVER

MCX

COMEX

45735.00

5035.00

7551.00

194.50

45735.00

3069.00

23610.00

1482.30

However, silver is also dependent on industrial growth, and therefore, price advance may be

limited if the global economic recovery is perceived to have stalled. Moreover, the nation

has received abundant monsoon in 2010, which is likely to result in abundant harvesting and

rising agricultural income. Silver is expected to see higher demand from rural India in

medium term.

Silver is also likely to attract greater attention from the fund community; particularly in the

US. Owing to its out performance, the white metal is likely to receive more importance than

gold. The world’s largest silver-backed exchange traded fund, ishares silver Trust said that

its holdings hit record at 10,941.34 tones by December 7, 2010. Such strong fundamentals


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clearly shows us that there is still a long way to go for bullion in coming period as current

economical environment is igniting up the heat in this counter.

Present performance of silver (2011):-

The silver is famously called poor man’s gold, due to recovery of economy from great

depression of 2007-08 silver performed well. These days enormous use of silver for different

purposes from manufacturing to pharmaceutical industry made to silver hit 32 year hike in

their price.

Last month performance of silver:-

Performance of silver is affected by various price drivers , the presently silver hits the 36 year

records the reason for that level hike can be understand by analyzing the present performance

of silver.

Contract Expiry Date:- 5th May 2011 Contract Expiry Date:- 5th Jul2011


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Contract Expiry Date:- 5th Sep 2011

Analysis of last month performance of silver:-

The silver is increasing continuously from last few months due to various reasons, some of

them are as follows

Market demand for silver and gold is good, particularly industrial demand for Silver,

but this is not enough to absorb all the supply, so that leaves the rest down to investor

demand.

Players have been joining in, and holdings of silver stock, the popular way for retail

investors to participate, rose 59.9 tons Thursday, the biggest single inflow since late

January. On the same day, holdings of Silver jumped 42 ton to another record at

15,554 tons.

After a weak January, prices of the precious metals rose in February when the unrest

that toppled governments in Tunisia and then Egypt sent players to havens.


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Retail investors are showing particular interest in Silver coins in many countries,

including the US.

Last month the Utah State Legislature passed a bill accepting US Gold and Silver

coins as legal tender and other States in the USA are considering similar legislation in

a direct rebuke to the Federal Reserve and its ultra-loose monetary policy.

Silver is more likely to follow gold higher, than base metals lower over the next year.

Interpretation:-

The present contract of silver performing well in the market, mainly because of increasing the

silver use in various industries. The foreign market also in bullish trend that influencing

performance of silver directly in the India. last month silver outperforming gold.


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A year performance of silver:-

The current performance of silver is shown by below chart

Contract Expiry Date:- 5th may 2011 Contract Expiry Date:- 5th jul2011


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Contract Expiry Date: - 5th Sep 2011

Analysis of last year performance of silver:-

In the beginning of the year silver has slow movement after first month of this year silver

start to show bullish trend continuously and now it is in Peak of market even gold also not

performing like silver.

Demand for silver from new sources like the solar energy, medical and water

purification sectors is likely to quadruple in the next 10 years

Part of the reason for this is that such an uptick in industrial demand, which has

waned significantly as the photographic industry has used less and less of the metal,

would result in a decrease in the current metal surplus.


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TheSilver Bookexplains, "For years the silver market has been characterized by

falling demand in the photographic industry and tepid jewelleryofftake, while supply

has seen rapid growth. The resulting market surplus has thus risen from 1,800t in

2000 to an estimated 7,200t in 2010."

As the Silver Booksays, "Investment demand has soared since the launch of the first

silver-backed ETF in 2009, and now accounts for more than 400 Moz (12,440t) of

silver held in bullion bank vaults. Physical investment in the form of coins and bars

has also helped support prices in the face of this explosive growth in supply".

The primary reason for our bullish outlook on silver is due to the continuing &

increasing global macroeconomics, currency & geopolitical risks; silver historic role

as money & a store of value; the declining & very small supply of silver; significant

industrial demand & perhaps most importantly significant & increasing investment

demand.

Interpretation:-

The current performance of the silver in the market is unpredictable; the market is moving

rapid bullish so the future trend of market will be bearish because equity market is in

upward but as compare to inflation rate the market will continue in the same order as

before so the prediction of silver movement is quite difficult.


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Silver Mini

Silver's unique properties make it a very useful 'Industrial Commodity', despite it being

classed as a precious metal. Demand for silver is built on three main pillars; industrial uses,

photography and Jewellery.

Last month performance of silver mini:-

Contract Expiry Date:- 30th April 2011 Contract Expiry Date:- 30th June2011


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Contract Expiry Date:- 31st august 2011 Contract Expiry Date:-30th Nov2011

Analysis of last month performance of silver Mini:-

As compare to silver main, silver mini has high volatility this is mainly because of its

volume traded and market fluctuation factors they are as follows:-

The Rapid hike in the silver price due to the some of more new silver consuming

technologies would seek to substitute the metal with cheaper products.

The unrest in the economy like continuous increasing the inflation rate, hike of oil

price, commodity market boom also make upward movement of silver mini.

The situation in Libya, it seems quite bad and we see the flow of funds into safe-

haven investment because of it. So it automatically reflect in silver market.

There are lot of scams happened in India like 2G scam, due this investor moved from

equity market to commodity market.

Silver is known as the 'healthy metal' and has many and increasing medical

applications. Research is ongoing on the use of silver and its compounds for


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therapeutic uses and on its potential use as a disinfectant in hospitals and other

medical facilities.

The Supply/Demand dynamics for gold and silver are vastly different. The practical

demand for silver relative to the supply of silver is much greater than that of gold.

Unlike gold, silver is like oil - as it is consumed in these many industrial applications

it is gone forever.

Net government sales of silver rose to 44.8 Moz, primarily the result of increased

sales from Russia, with China and India in the beginning of 2011. That gave a

leverage to silver market.

Interpretation:-

The last month (Feb-March) silver mini shows a positive sign of growth with little

volatility. Sudden shift of market from 53000 to 57000 during mid-March gave new

history in the bullion market that is 36 year hike in the silver market. So by considering

the present silver market and future demand prospect we can say silver mini will continue

in bullish trend for some more months.


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A year performance of Silver Mini

The last year market performance of silver mini can be analyzed by studying performance

chart of silver Mini

Contract Expiry Date:- 30th April 2011 Contract Expiry Date:- 30th June2011

Contract Expiry Date:- 31st August 2011 Contract Expiry Date:- 30th Nov 2011


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Analysis of a year performance of silver Mini

There was a tremendous growth in the silver performance as compare to last year, at end

of 2010 the silver price was Rs 43,000 but in March 2011 it was gone up to Rs 56500.this

rapid increase of silver price is mainly due to following reason.

There has been a marked increase in investment demand for silver in recent years.

Some of the reasons why this trend is likely to continue are - the introduction of ETFs

that track the price of silver, a new global liquidity bubble, the significant growth in

the global money supply, the proliferation of millionaires, ultra high net worth

individuals and billionaires, the proliferation of hedge funds and the exponential

growth in derivatives.

The Bank for International Settlements has estimated that the total value of

derivatives contracts was $592 trillion at the end of 2009 (up exponentially from $260

trillion in June 2008). Thus, dwarfing the GDP of the entire world which was

estimated at some $78 trillion at the end of 2010.

Silver is a hedge against macroeconomics, systematic & inflationary risk with the

attractive added potential for significant capital gains. Real asset allocation & prudent

diversification would be an important reason to have an allocation to silver. Silver is

highly correlated to the safe haven of gold & is in effect a leveraged sister of the


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precious white metal. Thus, informed investors use gold for wealth preservation &

silver in order to make a return.

Investors in silver bullion coins and bars are hedging themselves against further

deflation and falls in property and equity markets. They are further protecting

themselves against rising inflation, possible currency devaluations and still very

prevalent geopolitical and macroeconomic risks such those posed by the humongous

global derivatives market.

According to the Silver Book, supply is expected to increase at a CAGR of around

2.4% over the next ten years, from more than 22,000t in 2009 to more than 28,500t in

2020, so keeping supply running well ahead of potential demand could be a very tall

order."

Silver posted an average price of $20.19 in 2010, a level only surpassed in 1980, and

a marked increase over the $14.67 average price in 2009. This buoyancy is very much

alive today, with the 2011 price averaging $31.86, based on the London fix, through

the end of the first quarter.

A significant boost in retail silver investment demand paved the way for higher

investment in both physical bullion bars and in coins and medals in 2010. Physical

bullion bars accounted for 55.6 Moz of the world investment total last year. Coins and

medals fabrication rose by 28 percent to post a new record of 101.3 Moz. In the

United States, over 34.6 million U.S. Silver Eagle coins were minted, smashing the

previous record set in 2009 at almost 29 million. Other key silver bullion coins

reaching milestones include the Australian Kookaburra, the Austrian Philharmoniker,

and the Canadian Maple Leaf–all three posting record highs in 2010.

Interpretation:-

By analyzing the present trading contract performance, we can say silver market is in

bullish but by comparing all contract each other we can understand that contract


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which has expiry date on November has high volatility that shows the future trend of

silver will be unpredictable. Even though the present movement will continue for

some more months but the end of year we can expect the price band of silver mini

will be in Rs 55000 to 60000.

PRICE DRIVERS

Drivers are those things that could materially affect either a company's earnings or the price

of its stock. Every company will have its own unique drivers; although some of the most

common drivers similarly in commodity market we can find some of core price drivers that

lead the price of gold and silver in the market.

Price drivers of Gold:-

Assuming that the short-run price of gold is determined by supply and demand, it will

fluctuate on a period-by-period basis in response to variables that alter the supply and/or

demand for gold. We start by discussing factors that influence the short-run supply of gold.

Central banks have been willing to lease gold since the early 1980’s. Gold producers (i.e.

mines) can implicitly supply their customers by leasing gold from central bank gold reserves,

through a bullion bank intermediary, as well as extracting it from their mines. The quantity of

gold supplied from extraction in any period is positively related to the gold price in an earlier

period because there may be a substantial time lag before mines react to a price change.

The quantity of gold supplied from extraction is also negatively related to the amount of

extracted gold that is diverted to repay central banks for the gold leased in the previous period

incremented by a physical interest rate in those cases where the central bank opts for interest

to be repaid in gold. Therefore the total supply of gold to the market in each period from

extraction is positively related to the lagged gold price, negatively related to the amount of

gold leased in the previous period and negatively related to the gold lease rate in the previous

period.


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There are two components to the short-run demand for gold. The first category consists of the

“use” demand for jewellery, medals, electrical components etc. The “use” demand for gold is

a negative function of the price of gold. The demand for jewellery is also affected by price

volatility but the impact of this variable may be too short-term to this analysis. The second

category is the “asset” demand for gold as an investment. This demand is based on a number

of factors including dollar exchange rate expectations, inflationary expectations, “fear”, the

returns on other assets and the lack of correlation with other assets.

Gold and Dollar rate

There is a strong relationship between the gold and US dollar, mainly we see the inverse

relationship between these two,AS per the analyst correlation between gold and the US dollar

index is minus 0.42 over the last two years, minus 0.44 over the last nine years and minus

0.28 over the last 17 years. As a matter of fact, the two former periods and the last (current)

one have something important in common, they saw the lowest (inverse) correlations with the

currency. That is, they occurred when the U.S. dollar had reached some level of relative

stability following a two-three year collapse in its foreign exchange rate

Since we are still in the midst of the final period, I used the current gold and dollar price for

the table, while measuring all the other periods from trough to peak.But if we take the high in

gold prices last year as our peak, the gain in gold was actually 70%, and the U.S. dollar lost

just 2% in this period

Chart of Gold and US Dollar Relationship


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By the above movement of gold we can clearly understand inverse relationship between these

two, when gold dollar value decrease automatically the gold price increase because of

devaluation of world currency. The current movement of gold shows that US dollar value is

declining.

Gold and money supply

We analyze the impact that money supply has on the performance of gold, in a global

context. There are two main reasons why there can be a surge in money supply. First, it can

increase as a consequence of economic growth which in turn may not result in higher

inflation. Conversely, if central banks increase the money supply to induce growth – as they

have done as result of the financial crisis that started unfold in 2007 – and too much money in

introduced into the economy for too long, this may result in inflationary pressures, according

to classic economic theories of monetarism. Intuitively, a positive relationship between

money supply and gold can exist in either case. First, if money supply is accompanied by

economic growth, the increase in wealth an access to capital can increase demand for luxury

consumer goods, including gold. Second, as excess money enters the system and the

economy remains stagnant, inflation pressures may prompt investors to safeguard their

wealth by increasing their exposure to hard assets, such as gold. The system, peace time

deficits will soon hit new record highs as a proportion of FDP and that alone is a strong

enough argument for many to flock to hard assets.


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Gold demand and supply

Supply –demand is a major influencer, amid rising global investor demand,Gold mining is

decreasing and the demand for gold is increasing. Gold supply has decreased by almost 40

per cent as the cost of mining, legal formalities and geographical problems have increased

which has led to a fall in gold mining. Economics have taught us that lesser the supply,

greater the demand and in turn greater the increase in price.

Supply of gold from last 5 year

Mine produc-tion

Net official sec-tor sale

Recycled gold


Supply of Gold Tonnes Percentage

Mine production 2209 59%

Net official sector

sale

234 6%

Recycled gold 1323 35%

Total 3766 100%

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Demand of gold from last 5 year

investment

industry

juwelry

Interest rates

Gold has always been considered a good hedge against inflation. Rising inflation rates

typically appreciates gold prices. It has an inverse relationship with interest rates. As gold is

pegged to the US dollar, US interest rates affect gold prices. Whenever interest rates fall, gold

prices increase. Lowering interest rates increases gold prices as gold becomes a better

investment option vis-a-vis debt products that earn lower interest. Gold loses its shine in a

rising interest rate scenario.


Demand of

Gold

Tonnes Percentage

investment 1182 31.38%

Industry 433 11.49%

Jewelry 2151 57.11%

Total 3766 100%

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Currency fluctuation

As gold is pegged to the US dollar, it has an inverse relationship with the dollar. Right now

with US being in great financial turmoil, the dollar has weakened against many other

currencies. Dollar is expected to weaken further and prices of gold are expected to rise

further. Dollar is a de-facto currency of exchange around the world. But now with US on the

brink of depression, gold is substituted as a safe haven for investments. Though dollar seems

to be getting stronger, it may be a temporary effect and very soon it can head southwards

once again, in turn making gold an attractive and safe investment.

Geo-political concerns

Whenever there is geo-political strife, investors around the world rush to prevent erosion of

their investments and gold as a safe haven attracts one and all. For example after 9/11 terror

strike in the United States the demand for gold had increased. With the recent events like

tension between India-Pakistan, Israeli strikes over Gaza, the ongoing war in Iraq, the tension

between US and Iran coupled with recession have investors scrambling for gold.

Central bank demand

With the dollar losing its value, central banks of most of the developed countries have started

to increase their share of gold. This explains the increasing market demand for gold.

Weakness in financial markets

General rule of thumb in the market is that gold is always attractive when all other

investments are unattractive. Why is this? As gold is negatively co-related to stocks, bonds,

and real estate, gold is considered to be a safe haven and hence during any crises, investors


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would like to sell off what they would term as risky investments and be invest the funds in

gold.

Price drivers of silver

Silver has historically been a volatile choice for investing, but it is currently poised to drastically

increase in price in the near future. It is not easy to understand everything that affects silver prices, but

you could get an idea with a quick look at price history and the current uses for silver. By seeing where

we’ve been and where we are now, you can get a better idea of where we might be going. Silver is one

of the only precious metals that are affected by the law of supply and demand.

Gold to Silver ratio

Historically gold to silver ratio has been maintained between gold and silver where a certain

amount of silver could buy 1 oz of gold. In fact a long time ago, there used to be a US law that

fixed the gold silver ratio at 1:15, which then allowed 15 silver ounces to buy 1 ounce of gold.

Since 1840, the gold to silver ratio has ranged from 1:15 to as high as 1:97. Today’s gold to

silver ratio sits at about 1:63. Many analyst believe that this ratio is currently out of whack and

will return to historical levels which according Ted Butler and others has averaged 12-15 oz of

silver to 1 oz of gold. If the ratio returns to historical levels it would require a substantial rise

in the price of silver. At $1150 gold, silver would need to be around $76/oz.

Inflation Past and Future

Just as gold is a great inflation hedge, so is silver. As you know silver has been known as the

poor man’s gold. The dollar has lost over 98% of its value, Gold vs Dollar, What A Knock

Out. This is just considering the inflation effect over the past 100 years or so, but what about

right now and the near future? The erosion of dollar continues but at an accelerated pace not

seen before in the history of this country, and thus makes it imperative to take the necessary

precautions to protect the value of savings now. I have not seen anything more compelling

than silver to protect and dramatically increase my wealth at the same time.

The Federal Reserve is working overtime printing dollars and inflating the money supply

which means every new dollar they create is taking away value from every one of the dollars

in your pocket! This is where gold & silver really shine since this type of monetary expansion


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has always driven up the price of gold and silver historically. You can see just over the last

year or two how the fed has really kicked it into overdrive. The inflationary effect of the spike

you see on the graph has not yet hit, so it is still time to get positioned for the inflation tsunami

and load up on silver while you can and while it’s still cheap.

Increasing Silver Industrial & Investment Demand

Last year global silver demand hit 888 million ounces, while worldwide mining production

totaled only 680 million ounces, thus creating a 208 million ounce deficit. Many people don’t

know that silver is the most used commodity in industry next to oil. Industrial demand

continues to pick up with new applications for silver coming to the market all the time, like

silver zinc batteries. The silver zinc battery market alone is forecasted to be a large driver

going forward for silver. If you are looking for more reasons, then how about Ten Thousand

Reasons To Buy Silver, which goes into more detail about the numerous industrial

applications that require silver.

Silver investment demand is on the rise as well and perhaps may soon surpass that of

industrial demand. Just like people are turning to gold in the great flight to quality, silver is

also starting to attract demand from investors. One of the biggest wildcards in the mix is

China. Until recently, the chinese government did not allow its citizens to buy precious metals.

They have done a complete reverse and now highly encourage all of their 1.3 billion citizens

to buy, buy, buy. Don’t forget about their neighbors, you know, the other country that has a 1

billion plus people in it, India. The Indians have a long history and tradition of buying both

gold and silver. I believe silver demand in India will increase as the price of gold rises

.

The Real Silver Advantages: Leverage & Availability

Since more people are waking up and running to gold for asset protection due to the erosion of

the dollar and other fiat currencies, gold will naturally not be as affordable as silver. One

could argue that we have already reached this point. People will come to reason that they can

get the same level of protection as purchasing gold, but at a more affordable price by

purchasing silver instead. The late comers to the party, who missed out on the chance to buy

gold when it was only $250/oz will want the next best thing which is silver. Likewise, many


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investors will also see that they can get a much higher leverage on purchasing silver. So if

gold is starting to get too expensive for your wallet, then why not get some leverage by

purchasing silver? The best time to buy is whenever the prices are falling. Since you get way

more ounces of silver for your money than gold, you naturally get more leverage. Leverage

coupled with a great investment, equals great profits.

Dwindling Silver Stock Piles

Going back in history, governments around the world use to have huge silver stock piles.

Around the 1950’s, the US government alone had 3.5 billion ounces of silver, the largest stock

pile in history. Since then according to the CPM group, just about all of these stock piles have

been sold off/consumed. The CPM data shows that world silver stock piles have gone from

over 2 billion ounces in 1990 to under 300 million ounces in 2007. Furthermore, silver

demand has outpaced silver production by 156% annually for 19 consecutive years. According

to Ted butler’s article, Why Silver is More Valuable Than Gold, more silver has been

consumed than produced for over 60 years now. Available silver stockpiles have tanked to an

estimated 140 million ounces or only a four-month supply of silver! No matter whose

estimates you believe, the real point to get from all of this is that the quantity of silver has

been disappearing at an alarming rate while demand is substantially increasing. Conditions are

ripe for a shortage

Silver Leasing

According to Ted Butler in his article, Silver Leasing or Silver Fleecing, there are/were about

150 million ounces of gold and about 1 billion ounces of silver that have been leased out.

What does this mean? It means that some gold & silver producers at one time or another did

not have enough gold or silver to sell to their customers, so they leased (borrowed) the metals

from others (like central banks) that had ample supplies at the time. The producers then would

sell these metals to their customers.

The leasing created a phantom supply of gold and especially silver. The problem here is, all of

this leased gold and silver has to eventually be produced or paid back. It is the equivalent of

borrowing money and living off of it with the plan of paying it back at some point in the

future. The problem is, when pay back comes you have to come up with the borrowed money

and you still have to come up with additional money to continue to live off of. So the 1 billion


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ounces of silver has to be produced/repaid at the some point, all the while silver demand

continues to increase along with yearly silver deficits.

FINDING AND SUGGESTIONS

Commodity market is one of the budding markets especially in India. It has a wide

scope to develop because India is country which grows large number of commodity

and metal which can be traded in the commodity market.

There is a lack of awareness and education about the commodity market in India as

compare to equity market.

The forward market commission and SEBI is the present regulating body of

Commodity market but it requires a single focused governing body to control,

manage, and stimulate legal aspect of commodity trading.

Devaluation of US dollar, Inflation, Demand and supply are the main price drivers of

bullion market. Because of change in these factors bullion market creates new history

in the market price of gold and silver.

There is a close relationship between the price movement of gold and silver. If gold

price increase, silver price also moved in the same direction because both are affected

by same price drivers.

Most of the commodity which is traded in the Indian commodity markets is based on

three to six month contract. If the commodity contracts become default, the loss will

be entered on the expiry date of contract itself.


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The gold price is in hike due to fear of future inflation and hedging strategy. As per

analyst it will further goes up, so this is a right time to invest in gold.

As compare to Gold, Gold guinea and Gold mini has high volatility in price. Mainly

because of difference in investment pattern, in gold Govt. and institutional investor

play a major role but in the case of gold guinea and gold mini individual investor play

a major role that makes more volatility in these two.

Silver is one of the new commodity added in the market, today market for silver is

hyped it’s only because of more demand for silver at the global level.

Silver demand increased mainly due to finding the new uses of silver and new silver

consuming projects like solar energy, nuclear plant, medical and water purification.

Suggestions:

Commodity market is a new concept to Indian investor, there should

be a clear education and awareness required to developing and

guiding the investor about commodity market and concerned

authority should take initiation to marketing this investment

instrument appropriately.

Today if an investor want to enter in to a commodity market he

should invest a minimum amount which is proscribed by concern

commodity exchange but this limit create a barrier to entry.

Especially in gold and silver they should invest a minimum lum-sum

amount which is not affordable to small investor so if minimum

investment is reduced to some extent that might help to more

people invest in commodity.


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In India commodity market is growing at present so it is a better

time to one should trade in exchange traded market rather than the

OTC market.

“As compare to equity market, there is a volatility in commodity

market”, this was saying best suit during 19th century but today

because of gold and silver commodity market has equal volatility as

equity market. So it’s better to follow hedging in commodity market.

It is not necessary that one must be educated to invest in

commodity futures. So, it is recommended that those who are not so

informed can also invest in commodity futures.

It is recommended that now a day’s investor should invest in

agriculture commodity because within the few days some of

agriculture commodity is coming up with huge quantity.

Conclusion

After almost two years that commodity trading is finding favor with Indian investors and is

been seen as a separate asset class with good growth opportunities. For diversification of

portfolio beyond shares, fixed deposits and mutual funds, -term investors and arbitrageurs

and speculators. And, now, with daily global volumes in commodity trading touching

three times that of equities, commodities cannot be ignored by Indian investors.

Online commodity exchanges need to revamp in commodities to make the markets more

attractive. TheS national multi- commodity exchanges have unitedly proposed to the

government that in view of the growth of the commodities market, foreign institutional

investors should be given the go-ahead to invest in commodity futures in India. Their entry


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will deepen and broad base the commodity futures market. As a matter of fact, derivative

instruments, such as futures, can help India become a global trading

hubforselectcommodities.CommoditytradinginIndiaispoisedforabigtake-off in India on the

back of factors like global economic recovery and increasing demand from China for

commodities. Considering the huge recently with the

Rs21000levelcommoditiescouldaddthe required zingto investors 'portfolio. Therefore, it

won't belong before the market sees the emergence of a completely redefined set of retail

investors.As majority of Indian investors are not aware of organized commodity market;

their perception is of risky to very risky investment. Many of them have wrong impression

about commodity market in their minds. It makes them specious towards commodity

market. Concerned authorities have to take initiative to make commodity trading process

easy and simple. Along with Government efforts NGO’s should come forward to educate

the people about commodity markets and to encourage them to invest in to it. There is no

doubt that in near future commodity market will become Hot spot for Indian farmers rather

than spot market. And producers, traders as well as consumers will be benefited from it.

But for this to happen one has to take initiative to standardize and popularize the

Commodity Market.

BIBLIOGRAPHY

Book name Author Publisher

Financial derivatives Bishnupriya Mishra

Sathya swaroop Debasish

Excel Books

Financial derivatives S.L Gupta Prentice-Hall of India

private limited


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(Theory and Problem)

Journals and magazines

Commodity outlook – 2010

UBS Research focus – June 2010

(Gold- the ultimate currency)

Websites

www.mcxindia.com

www.ncdex.com


http://www.ncdex.com/

http://www.mcxindia.com/

63496870-a-study-on-commodity-markets-price-drivers-of-gold-and-silver.docx

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