a project report on commodity market with special reference to gold at karvy stock exchange

7/31/2019 A Project Report on Commodity Market With Special Reference to Gold at Karvy Stock Exchange

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A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO GOLD

S.NO Table of Contents Page

No

1 Executive Summary 1-4

2 Company Profile

History

Overview

About Karvy Group

Stock Broking Services

About Karvy Commodities Broking Limited

KARVY Advantage

Organization Chart

5-14

3 Introduction to commodity market 15-25

4 Research Methodology 26-29

5 Indian Commodity Futures Market

Introduction

Commodity trading contracts

Future market mechanisms

Participants in futures market & trading procedure

Limitations of commodity future market

30-46

6 Gold Commodity Future Market Introduction

Gold in Indian Scenario

World Markets

Gold an Independent Asset

Turning to demand

What makes Gold Special?

Fixing of spot gold prices

Sources Of Gold For The Goldsmiths

47-60

7 Investor Awareness And Their Perception 61-65

BABASAB PATIL PROJECT REPORT OF FINANCE


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Investment

Aware

Investment in commodity future

Future investment and services expectation

8 Impact of Spot Gold Market on Future Gold Market 66-69

9 Factors Affecting Future Gold Market 70-78

10 FINDINGS 79-80

11 SUGGESTIONS 81

12 CONCLUSION 82

13 BIBLIOGRAPHY 83

Executive Summary

Investing in various types of assets is an interesting activity that

attracts people from all walks of life. Investors who are having extra

cash could invest it in securities like shares or any other assets like gold,

which comes under commodity futures market. Commodity Futures are

contracts to buy specific quantity of a particular commodity at a future

date. It is similar to the index futures and stock futures but the

underlying happens to be commodities instead of stocks.

Now days, the commodity market is in growth stage and the

Karvy Finapolis Belgaum; working as a broking firm wants to expand

and for extensive reach thinking of establishing branches in various

cities of Karnataka.

I have taken thecommodity futures, to study and analyze, as it is the

emerging trend in the market, at Karvy Finapolis Belgaum, I have



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taken Gold as the commodity to study the Impact of present gold price

on future gold market and its trading mechanism.

Title: Study of Commodity Market with Special Reference to

Gold. at KARVY Finapolis Belgaum

Objectives:

To study the mechanism of commodity market.

To study the spot gold market.

To study whether the goldsmiths of Belgaum city aware of

commodity market and their perception.

To analyses the impact of spot gold market on future gold

market.

To study the factors such as economic factors of US, worldpolitical and other factors affect on future market.

Research methodology:

SAMPLE SIZE: 100 random sample size

SAMPLE TYPE: Simple random sampling

SAMPLE AREA: Belgaum city

TOOL USED FOR ANALYSES:1. Graphical Representation of Analysis:

Pie charts

Line Chart

2. SPSS



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3. Correlation

SOURCES OF DATA COLLECTION:

Primary Data- Questionnaire

Observation and personal discussion with gold traders.

Secondary data-

Information collected from different websites

likes Gold World, MCX etc.

From various text books, journals, magazines, newspapers and booklets from company.

LIMITATION OF THE STUDY:

Spot prices are varying from shop to shop.

Commission has not included spot prices of the

commodity. Study of awareness and perception of the

investor is only based on sample size.

The study of awareness is limited to Belgaum city.

Findings:

There is positive correlation between both market traders

can easily predict the future prices of the commodities and hedgetheir positions.

Most of the respondents are interested in investing in equity

(i.e. 49%) when compared to the other investment alternatives



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because they feel investing in equity will provide more returns to

them.

82% of Investors are aware about commodity future market.

67% of Investors have not invested as they have a

perception that it is risky and they even do not have much

knowledge about trading mechanism.

For gold price fluctuation main reasons are

Dollar depreciation / appreciation

World distress

Increase in money supply

Inflation

Suggestions:

Both the markets are positively correlated the traders have

knowledge about the commodity demand and supply and their

price fluctuations. So Karvy can approach these traders and they

can easily convince them so these people are the targeted

customers for Karvy.

More Awareness program has to be conducted by Karvy

consultants so that already aware investor takes the challenge to

invest in this commodity future market. Because since this was

new to the market and also risky but gives good return. so it can

be done through by giving advertisements in local channels, News

papers, by sending E-mail to present customers etc



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From survey it is found that most of the potential customers are

concerned about the genuine information and moderate

brokerage so Karvy can look upon this. If it can give good

information and charge moderate brokerage it will help to attract

more and more customers.

Conclusion

Capital market is already matured and reached at high level, every

investor interested to invest but not in commodity Future Market due to

lack of awareness. As per Data analysis most of the investors do not

have much idea of commodity market in Belgaum they are required to

be given awareness training and knowledge with the help of workshops

and seminars, as investors are willing to know more about commodity

market. There exists a high degree of positive correlation between Spot

Commodity Market and Commodity Future Market. If an amount of small

change in the spot gold market prices has the direct impact on the

future prices of gold in commodity market.

COMPAN PROFILE

The birth of Karvy was on a modest scale in 1981. It began with

the vision and enterprise of a small group of practicing Chartered

Accountants who founded the flagship company Karvy Consultants

Limited. We started with consulting and financial accounting

automation, and carved inroads into the field of registry and share

accounting by 1985. Since then, we have utilized our experience and

superlative expertise to go from strength to strengthto better ourservices, to provide new ones, to innovate, diversify and in the process,

evolved Karvy as one of Indias premier integrated financial service

enterprise.



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Thus over the last 20 years Karvy has traveled the success route,

towards building a reputation as an integrated financial services

provider, offering a wide spectrum of services. And we have made this

journey by taking the route of quality service, path breaking innovations

in service, versatility in service and finallytotality in service.

Our highly qualified manpower, cutting-edge technology, comprehensive

infrastructure and total customer-focus has secured for us the position

of an emerging financial services giant enjoying the confidence and

support of an enviable clientele across diverse fields in the financial

world.

Our values and vision of attaining total competence in our

servicing has served as the building block for creating a great financial

enterprise, which stands solid on our fortresses of financial strength -

our various companies.

With the experience of years of holistic financial servicing behind

us and years of complete expertise in the industry to look forward to, we

have now emerged as a premier integrated financial services provider.And today, we can look with pride at the fruits of our mastery and

experience comprehensive financial services that are competently

segregated to service and manage a diverse range of customer

requirements.

Overview:

KARVY, is a premier integrated financial services provider, and ranked

among the top five in the country in all its business segments, services

over 16 million individual investors in various capacities, and provides

investor services to over 300 corporate, comprising the who is who of

Corporate India. KARVY covers the entire spectrum of financial services

such as Stock broking, Depository Participants, Distribution of financial



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products - mutual funds, bonds, fixed deposit, equities, Insurance

Broking, Commodities Broking, Personal Finance Advisory Services,

Merchant Banking & Corporate Finance, placement of equity, IPO,

among others. Karvy has a professional management team and ranks

among the best in technology, operations and research of various

industrial segments.

Value and Vision of Karvy Stock Broking Ltd:

Our values and vision of attaining total competence in our servicing has

served as the building block for creating a great financial enterprise,

which stands solid on our fortress of financial strength our various

companies.

About KARVY Group

Karvy has traveled the success route, towards building a

reputation as an integrated financial services provider, offering a wide

spectrum of services for over 20 years.

Karvy, a name long committed to service at its best. A fame

acquired through the range of corporate and retail services including

mutual funds, fixed income, equity investments, insurance to

name a few. Our values and vision of attaining total competence in our

servicing has served as a building block for creating a great financial

enterprise.



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The birth of Karvy was on a modest scale in the year 1982. It

began with the vision and enterprise of a small group of practicing

Chartered Accountants based in Hyderabad, who founded Karvy. We

started with consulting and financial accounting automation, and then

carved inroads into the field of Registry and Share Transfers.

Since then, we have utilized our quality experience and

superlative expertise to go from strength to strength to provide better

and new services to the investors. And today, we can look with pride at

the fruits of our experience into comprehensive financial services

provider in the Country.

KARVY Group companies are:

Karvy Consultants Limited

Karvy Stock Broking Limited

Karvy Investor Services Limited

Karvy Computershare Private Limited

Karvy Global Services Limited

Karvy Comtrade Limited

Karvy Insurance Broking Private Limited



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Karvy Mutual Fund Services

Karvy Securities Limited

Stock Broking Services:

It is an undisputed fact that the stock market is unpredictable and

yet enjoys a high success rate as a wealth management and wealth

accumulation option. The difference between unpredictability and a

safety anchor in the market is provided by in-depth knowledge of

market functioning and changing trends, planning with foresight and

choosing one & rescues options with care. This is what we provide in

our Stock Broking services.

We offer services that are beyond just a medium for buying and

selling stocks and shares. Instead we provide services, which are multi

dimensional and multi-focused in their scope. There are several

advantages in utilizing our Stock Broking services, which are the reasons

why it is one of the best in the country.

We offer trading on a vast platform; National Stock Exchange,

Bombay Stock Exchange and Hyderabad Stock Exchange. More

importantly, we make trading safe to the maximum possible extent, by

accounting for several risk factors and planning accordingly. We are

assisted in this task by our in-depth research, constant feedback and

sound advisory facilities. Our highly skilled research team, comprising of

technical analysts as well as fundamental specialists, secure result-

oriented information on market trends, market analysis and market

predictions. This crucial information is given as a constant feedback to

our customers, through daily reports delivered thrice daily ; The Pre-

session Report, where market scenario for the day is predicted, The Mid-

session Report, timed to arrive during lunch break , where the market



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forecast for the rest of the day is given and The Post-session Report, the

final report for the day, where the market and the report itself is

reviewed. To add to this repository of information, we publish a monthly

magazine. The Finapolis, which analyzes the latest stock market trends

and takes a close look at the various investment options, and products

available in the market, while a weekly report, called Karvy Bazaar

Baatein keeps you more informed on the immediate trends in the stock

market. In addition, our specific industry reports give comprehensive

information on various industries. Besides this, we also offer special

portfolio analysis packages that provide daily technical advice on scripts

for successful portfolio management and provide customized advisory

services to help you make the right financial moves that are specifically

suited to your portfolio.

Our Stock Broking services are widely networked across India,

with the number of our trading terminals providing retail stock broking

facilities. Our services have increasingly offered customer oriented

convenience, which we provide to a spectrum of investors, high-net

worth or otherwise, with equal dedication and competence.

About Karvy Commodities Broking Limited:

Commodities market, contrary to the beliefs of many people, has

been in existence in India through the ages. However the recent attempt

by the Government to permit Multi-commodity National levels

exchanges has indeed given it, a shot in the arm. As a result two

exchanges Multi Commodity Exchange (MCX) and National Commodity

and derivatives Exchange (NCDEX) have come into being. These

exchanges, by virtue of their high profile promoters and stakeholders,

bundle in themselves, online trading facilities, robust surveillance



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measures and a hassle-free settlement system. The futures contracts

available on a wide spectrum of commodities like Gold, Silver, Cotton,

Steel, Soya oil, Soya beans, Wheat, Sugar, Channa etc., provide

excellent opportunities for hedging the risks of the farmers, importers,

exporters, traders and large scale consumers. They also make open an

avenue for quality investments in precious metals. The commodities

market, as the movements of the stock market or debt market do not

affect it provides tremendous opportunities for better diversification of

risk. Realizing this fact, even mutual funds are contemplating of entering

into this market.

Karvy Commodities Broking Limited is another venture of the

prestigious Karvy group. With our well established presence in the

multifarious facets of the modern Financial services industry from stock

broking to registry services, it is indeed a pleasure for us to make foray

into the commodities derivatives market which opens yet another door

for us to deliver our service to our beloved customers and the investor

public at large.

With the high quality infrastructure already in place and a committed

Government providing continuous impetus, it is the responsibility of us,the intermediaries to deliver these benefits at the doorsteps of our

esteemed customers. With our expertise in financial services, existence

across the lengths and breadths of the country and an enviable

technological edge, we are all set to bring to you, the pleasure of

investing in this burgeoning market, which can touch upon the lives of a



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vast majority of the population from the farmer to the corporate alike.

We are confident that the commodity futures can be a good value

addition to your portfolio.

The company provides investment, advisory and brokerageservices in Indian Commodities Markets. And most importantly, we offer

a wide reach through our branch network of over 225 branches located

across 180 cities.

KARVY Advantage:

Trade from anywhere in India Karvy, with its network of branches across

the length and breadth of the country, is always within your reach, no

matter where you are. This gives you the facility to trade from anywhere

in India.

Reliable research

Karvy has a dedicated team of research analysts who work round the

clock to provide the best research newsletters and advices. We reach

your desk daily, weekly and monthly.

Personalized Services

Karvy, with its wide array of personalized services from registry to stock

broking takes the pleasure of adding one more service, commodities

broking with the same personal touch



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State of Infrastructure

The strong IT backbone of Karvy helps us to provide customized direct

services through our back office system, nation-wide connectivity and

website.

Round the clock operations in commodities trading

Indian commodities market, unlike stock market keeps awake till 11 in

the night and Karvy is all poised to offer round the clock services

through its dedicated team of professionals.

The account opening forms are available at our branch offices and

with our business associates. You are requested to kindly contact a

branch nearby your area and complete the account opening formalities

for commodities trading at the branches.

Also you can take a print out and fill out a simple account opening

form from our website and complete the necessary documentation as

per the checklist enclosed in the form. The form after duly filled up may

be deposited at the nearest Karvy Branch or Associate along with a

cheque/DD favoring Karvy Commodities Broking Private Limitedpayable at Hyderabad towards initial margin. Please remember the

Member-Client agreement has to be executed on a non-judicial stamp

paper, as per the applicable by the Stamp Duty Act of the relevant

state.

Deposit Initial Margin:

You need to deposit an initial upfront margin as specified by the

exchange (usually between 5-10% of the contract value).The cheque/DD

should be in favour of Karvy Commodities Broking Private Limited

Mark to Market Margin:



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In addition to initial margin, you also need to keep a mark to

market margin for taking care of the adverse price movements, if any.

Achievements

Among the top 5 stock brokers in India (4% of NSE volumes)

India's No. 1 Registrar & Securities Transfer Agents

Among the to top 3 Depository Participants

Largest Network of Branches & Business Associates

ISO 9002 certified operations by DNV

Among top 10 Investment bankers

Largest Distributor of Financial Products

Adjudged as one of the top 50 IT uses in India by MIS Asia

Full Fledged IT driven operations

Organization Chart

Managing Director

Chief Managing Director

Vice-President Vice-President Vice-President Vice-President



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Karvy Karvy Karvy KarvySecurities Ltd. Stock Broking Ltd Consultants Ltd. Investors Services Ltd.

Deputy Deputy Deputy Deputy

General General General General

Manager Manager Manager Manager

Senior Manager Senior Manager Senior Manager SenoirManager

Branch Manager

Number of Team Leaders

N number of Executives

Introduction to commodity market

Ever since the drawn of civilization, commodity trading has

become an integral part of mankind. The first and foremost reason is

that commodity represents the fundamental elements of lifestyle of

human beings. In the early days, people used to exchange goods for

goods, which was called as Barter System. With the advancement of

civilization, trading system has gone through various changes and has

now entered into an era of Future trading besides existence physical

trading across the world. The history of Commodity Future trading can



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be traced back to 1688 with the introduction of Future trading in rice in

Japan. This was followed by an increased participation in commodity

derivatives, especially in Futures, in the industrialized countries like

America and Britain. All the countries opened the avenue for

introduction of Future trading in commodities in 19th century. Major

commodity Future trading platforms opened in the world are Chicago

Board of Trade (NYBOT) and New York Mercantile Exchange (NYMEX).

A Commodity derivative is a contract which derives its value from

an underlying commodity. The main purpose of Future market is to

provide a mechanism for successfully managing the price risk

associated with commodities. Future markets provide a platform for

buyers and sellers to trade in a huge number of diverse commodities

such as agricultural products, metals and energy. These markets are not

only meant for hedgers, speculators and arbitrages, but also for retail

investors who want to trade in booming commodity market.

Indian scenario

The commodity derivatives markets in India are as old as those of

the US. The origin of commodity derivatives markets in India can be

traced back to 1875, when Bombay Cotton Trade Association Ltd., was

set up to start trading in cotton Futures. Subsequent to this, many otherassociations have started Future trading in commodities at different

places. For example, the Futures trading in oilseeds started in 1900 at

Bombay, raw jute and jute products in 1912 in Calcutta, wheat in Hapur

in 1913, bullion in Bombay in 1920. However, in 1939, the Option

trading in cotton was banned by the government of Bombay to restrict



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the speculative activity in the cotton market. in subsequent years,

forward trading in various commodities like oilseeds, food grains,

vegetable oil, sugar cloth were also prohibited.

Indias commodity exchanges have come a long way since their

opening up in the early twenty first century. In India, three national level

exchanges namely Multi Commodity Exchange of India (MCEX), National

Commodity and Derivatives Exchange (NCDEX) and National Multi

Commodity Exchanges are operating to cater to the needs of Indian

investors. Apart from these national level exchanges, nearly 20 regional

exchanges are in operation, to deal with specified commodities in that

region.

Present Scenario

Over the last 20 years, the prices of commodities have generally

been bearish. Even as recently as 2002-03, the outlook on the recovery

in the global economy and world trade was generally subdued due to

depressed equity markets, weakening US dollar and geopoliticalconcerns. Commodity market across the world was impacted by these

developments. However, of late, the scenario has completely changed

as the global economy recovered from its slump aided by the boom in

the US markets and increased demand from developing economies like



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India and China. In the global investment market, the newly hailed,

attractive, asset class is commodities. So, investors are being attracted

to this new booming market for investment.

Meaning of commodity derivative market

FCRA Forward Contracts (Regulation) Act, 1952 defines goods as

every kind of movable property other than actionable claims, money

and securities. Futures trading is organized in such goods or

commodities as are permitted by the Central Government. At present,

all goods and products of agricultural (including plantation), mineral and

fossil origin are allowed for futures trading under the auspices of the

commodity exchanges recognized under the FCRA.

A commodity derivative is a contract which derives its value from

an underlying commodity. The main purpose of future market is to

provide a mechanism for successfully managing the price risks

associated with commodities. Future market provides a platform for

buyer and seller to trade in a huge number of diverse commodities suchas agriculture products, metals and energy. These markets are not only

meant for hedgers, speculators and arbitrages, but also for retail

investors who want to trade in booming commodity market.

Commodity derivatives market trade contracts for which the

underlying asset is commodity. It can be an agricultural commodity like



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wheat, soybeans, rapeseed, cotton, etc or precious metals like gold,

silver, etc.

Difference between Commodity and Financialderivatives

The basic concept of a derivative contract remains the same

whether the underlying happens to be a commodity or a financial asset.

However there are some features which are very peculiar to commodity

derivative markets. In the case of financial derivatives, most of these

contracts are cash settled. Even in the case of physical settlement,

financial assets are not bulky and do not need special facility for

storage. Due to the bulky nature of the underlying assets, physical

settlement in commodity derivatives creates the need for warehousing.

Similarly, the concept of varying quality of asset does not really exist as

far as financial underlings are concerned. However in the case of

commodities, the quality of the asset underlying a contract can vary at

times.

Why are Commodity Derivatives Required

India is among the top-5 producers of most of the commodities, in

addition to being a major consumer of bullion and energy products.

Agriculture contributes about 22% to the GDP of the Indian economy. It

employees around 57% of the labor force on a total of 163 million

hectares of land. Agriculture sector is an important factor in achieving a

GDP growth of 8-10%. All this indicates that India can be promoted as a

major center for trading of commodity derivatives.



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It is unfortunate that the policies of FMC during the most of 1950s

to 1980s suppressed the very markets it was supposed to encourage

and nurture to grow with times. It was a mistake other emerging

economies of the world would want to avoid. However, it is not in India

alone that derivatives were suspected of creating too much speculation

that would be to the detriment of the healthy growth of the markets and

the farmers. Such suspicions might normally arise due to a

misunderstanding of the characteristics and role of derivative product.

It is important to understand why commodity derivatives are

required and the role they can play in risk management. It is common

knowledge that prices of commodities, metals, shares and currenciesfluctuate over time. The possibility of adverse price changes in future

creates risk for businesses. Derivatives are used to reduce or eliminate

price risk arising from unforeseen price changes. A derivative is a

financial contract whose price depends on, or is derived from, the price

of another asset.



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Spread trade in commodities

In Future trading, a spread trade refers to the act of buying one

commodity or Futures contract and selling a related one, in an attempt

to profit from the price difference between the two. Basically, it is an act

of entering long (buying) as well as short (selling) position

simultaneously in an attempt to make profit.

There can be three types of spread one can enter in Commodity

Derivative Market.

1. A spread can be established between different

months of the same commodity (called an inter

delivery spread).

2. Between the same related commodities, usually

for the same month (inter commodity spread).

3. Between the same or related commodities traded

on two different exchanges (inter market spread).

Spread trading can be done at the market price or at desired difference

level between the commodities. For example, Buy one contract of

February of December Gold and at the same time sell one contract of

February Gold when the February Gold contract is 100 points higher

than the December contract.

In this case first and foremost thing that need to be observed is the

liquidity present in both the contracts. The benefits that can be arrived

from entering in spread trading is the lower margin requirement,

because these strategies normally carry less risk. Spreads are usually

less volatile and prices move less quickly, which can be good forbeginners who may be intimated by the speed and price fluctuations of

a single outright trade in Future Market.



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Myths on commodities trading

In recent past, we notice that the regulators banned trading in few

commodities, thereby creating misconception in the minds of traders

about the commodities market. Hence, the following is an attempt to

demystify the common myths prevailing among the investors.

Commodity market is too complex to understand:

Commodities markets are not complex as the product dealt in are

natural and therefore cannot be artificially manipulated. The demand

and supply also depends upon economic factors. It is easier to

understand commodities as in our daily life we are familiar with

commodities, we know the ruling prices of these commodities in the

market, while in stocks, we are not fully aware about internal affairs of

the company.

2) Only farmers are interested In trading and

also only they should be trading:

It is in correct to say that farmers would use this market. Actually, the

farmers only use the commodity future prices as a tool to decide which

crop to grow and to what extent and some large formers would use this

market to hedge their risk through an intermediary. These

intermediaries would normally be the same commission agents who help

formers to sell their crop in cash market. Apart from farmer, others

related to commodity trading either directly or indirectly can participate

in trading to hedge their price risk.



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3) Commodity markets are operating to serve

the needs of speculators and not of the real

investors:

Commodities markets existence serves for price discovery and

price risk management. Through this platform everybody related to

commodities can find better price discovery mechanism. Producers and

consumers of the commodity can minimize their price risk by way of

hedging. However, speculators constitute only one dimension the

market. they can work only because someone is hedging their risk in the

market. this market provides the price signals to producers as well as

consumers to meet their long term requirement. These price signals are

not available to users unless there is a commodity futures exchange and

in its absence, the markets have price fluctuations. Price stabilization

comes from the price discovery process when market participants react

positively to the information available to decide a price.

4) Large membership is required to run

commodity exchanges:

It is a misconception that to be a successful commodity exchange itneeds large number of members. Success of any commodity exchange

depends upon good and well-spread brokerage houses and there

penetration levels. Once the commodity futures trading is well

established, then the services will be broadened to many intermediaries

with separate trading rights and have few members with separate

trading rights and have few members with clearing rights like banks.

5) Commodities are only cash settled contracts:

Unlike equity market, commodities traded through exchanges are

deliverable on expiry. To facilitate smooth delivery process, the Forward

Markets Commission (FMC) has categorized the delivery mechanism into

three dimensions viz., compulsory delivery contracts, sellers option



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contracts. On expiry of the contracts, the open positions will be either

settled by delivery or cash depending upon sellers and buyers. Since the

delivery process takes long time to materialize and one has to keep

track of all the delivery process transactions, nobody wants to take

burden of delivery handling process.

Note:

Compulsory delivery option- it is an option where on the expiry of

contract of a particular commodity, all the open outstanding positions

are closed out by way of delivery. Heavy penalties are levied in case of

default in delivery.

Seller option it is an option where the sellers has right to deliver the

particular commodity on the expiry of the contract. In this option seller

has to give his intention 5 working days prior to the expiry of the

contract. The client who has not delivery intention and having open

position at the expiry of the contract has to bear a stipulated penalty.

Both Option/Intention Matching in both the option contract the delivery

happens only case of where the intention from buyer as well as seller

received for a prescribed commodity to the extent of matched quantity.

These contracts are generally cash selected and there is no penalty foropen position.

6) The quality of produce stored in godown is

guaranteed by depository/warehouse:

Quality of produce is stored in exchange designated warehouse is not

guaranteed by anyone until the standards in warehousing management

improve to ensure preservation of the quality of goods stored. If the

quality is not assured no benefit accrues to the user. Therefore, the

exchange should provide a system, whereby the seller must ensure

quality certification before tendering delivery and the buyer must have

option to recheck the at the time of collecting delivery and in case of

any discrepancies compare to the contract specifications, they should



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have an option to reject it. Worldwide no demat delivery is operational in

commodity.

7) Commodity future markets are more risky

and so it is not advisable to trade in

commodities:

While scrip price can go down even by 30-40 percent in a single trading

session, it cannot happen in commodity futures price is based on the

intrinsic value of the commodity. For instance, a scrip future can go

down from Rs.4000 to Rs.2800 in a trading session, but Gold Feb 2004

contract would normally not come down from Rs.10300 to Rs.8400 in a

single trading session, because the inherent value of the gold would not

fall so drastically. Therefore it would volatile than stocks.

What can commodity market offer?

If you are an investor, commodities futures represent a good form of

investment because of the following reasons..

High Leverage The margins in the commodity futures market are less

than the F&O section of the equity market.

Less Manipulations - Commodities markets, as they are governed by

international price movements are less prone to rigging or price

manipulations.

Diversification The returns from commodities market are free from

the direct influence of the equity and debt market, which means that

they are capable of being used as effective hedging instrumentsproviding better diversification. If you are an importer or an exporter,

commodities futures can help you in the following ways

Hedge against price fluctuations Wide fluctuations in the prices of

import or export products can directly affect your bottom-line as the



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price at which you import/export is fixed before-hand. Commodity

futures help you to procure or sell the commodities at a price decided

months before the actual transaction, thereby ironing out any change in

prices that happen subsequently.

If you are a producer of a commodity, futures can help you as follows:

Lock-in the price for your produce If you are a farmer, there is

every chance that the price of your produce may come down drastically

at the time of harvest. By taking positions in commodity futures you can

effectively lock-in the price at which you wish to sell your produce

Assured demand Any glut in the market can make you wait

unendingly for a buyer. Selling commodity futures contract can give you

assured demand at the time of harvest. If you are a large scale

consumer of a product, here is how this market can help you.

Control your cost If you are an industrialist, the raw material cost

dictates the final price of your output. Any sudden rise in the price of

raw materials can compel you to pass on the hike to your customers and

make your products unattractive in the market. By buying commodity

futures, you can fix the price of your raw material.

Ensure continuous supply Any shortfall in the supply of raw

materials can stall your production and make you default on your sale

obligations. You can avoid this risk by buying a commodity futures

contract by which you are assured of supply of a fixed quantity of

materials at a pre-decided price at the appointed time.



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Research Methodology

TOPIC:

Study of Commodity Market with Special Reference to

Gold. at KARVY Finapolis Belgaum for fulfillment of requirement of

MBA IVth semester in Institute of Management Education and research.

It was an opportunity to learn the practical aspects of the firm.

OBJECTIVES:

To study the mechanism of commodity market.

To study the spot gold market.

To study whether the goldsmiths of Belgaum city aware of

commodity market and their perception.

To analyses the impact of spot gold market on future gold

market.

To study the factors such as economic factors of US, world

political and other factors affect on future market.



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SAMPLE SIZE:

The sample size is consisting of goldsmiths and gold traders

of Belgaum city. 100 random sample sizes have taken to identify the

awareness level of gold commodity market in Belgaum city and to know

the spot gold market.

SAMPLE TYPE:

Simple random sampling is adopted to select respondent.

SAMPLE AREA:

Belgaum City

DURATION OF PROJECT:

1st Phase - December to January

2nd Phase - January to April (weekly two days)

TOOL USED FOR ANALYSES:

1. Graphical Representation of Analysis:

a. Pie charts

b. Line Chart

2. SPSS

3. Correlation coefficient: It measures the intensity or the

magnitude of linear relationship between two variables.



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NXY-(X) (Y)Correlation(r) =

[NX2 (X)2]1/2[NY2 (Y)2]1/2

Probability Error: It is an old measure of testing the reliability of an

observed value of correlation coefficient in so far as it depends upon the

condition of the random sampling.

Probable Error = 0.6745* (1-r2)n

Rules:

If, PE *6 > r then correlation is not significant.

If, PE < r then correlation is significant.

In other situation, nothing can be concluding with certainty.

DATA COLLECTION APPROACH:

Primary data is important data for successful research. It has

collected through questionnaire and personal discussion with brokers

and gold traders. And also secondary data which act like key for

successful research is collected from MCX, Gold World website and

articles in newspapers such as Business Line, Economic Standards. Spot

prices were collected from business line news paper and confirm it from

gold smith and future prices were collected from MCX.



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SOURCES OF DATA COLLECTION:

Primary and secondary data are collected from following sources

Primary Data-

Questionnaire

Observation and personal discussion with gold traders.

Secondary data-

Information collected from different websites likes Gold World,

MCX etc.

From various text books, journals, magazines, news papers and

booklets from company.

LIMITATION OF THE STUDY:

Spot prices are varying from shop to shop.

Commission has not included spot prices of the commodity.

Study of awareness and perception of the investor is only based

on sample size.

The study of awareness is limited to Belgaum city.



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INDIAN COMMODITY FUTURES MARKET

India has a long history of commodity futures market, extending

over 125 years. Still, such trading was interrupted suddenly since the

mid seventies in the fond hope of ushering in an elusive socialistic

pattern of society. As the country embarked on economic liberalization

policies and signed the GATT agreement in the early nineties, the

government realized the need for futures trading to strengthen the

competitiveness of Indian agriculture and the commodity trade and

industry. Futures trading began to be permitted in several commodities,

and the ushering in of the 21st century saw the emergence of new

National Commodity Exchanges with countrywide reach for trading in

almost all primary commodities and their products.

There have been over 20 exchanges existing for commodities all

over the country. However these exchanges are commodity specific and

have a strong regional focus. The Government, in order to make the

commodities market more transparent and efficient, accorded approval

for setting up of national level multi commodity exchanges. Accordingly

two widest exchanges are there which deal in a wide variety of

commodities and which allow nation-wide trading. They are:

1) National Commodity & Derivatives Exchange (NCDEX)

2) Multi Commodity Exchange of India (MCX)

3) National Multi Commodity Exchange (NMCX)



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1) National Commodity & Derivatives Exchange (NCDEX):

NCDEX is a public limited company incorporated on April 23, 2003

under the Companies Act, 1956. NCDEX is a technology driven

commodity exchange with an independent Board of Directors and

professionals not having any vested interest in commodity markets. It is

committed to provide a world-class commodity exchange platform for

market participants to trade in a wide spectrum of commodity

derivatives driven by best global practices, professionalism and

transparency.

Forward Market Commission regulates NCDEX in respect of futures

trading in commodities. Besides, NCDEX is subjected to various laws of

the land like the Companies Act, Stamp Act, Contracts Act, ForwardCommission (Regulation) Act and various other legislations, which

impinge on its working. NCDEX is located in Mumbai and to start with

would offer facilities in about 40 cities throughout India. The reach will

gradually be expanded to other cities.



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2) Multi Commodity Exchange of India (MCX):

Multi Commodity Exchange of India Limited (MCX), is an Exchange

with a mandate for setting up a nationwide, online multi-commodity

marketplace, offering unlimited growth opportunities to commodities

market participants. As a true neutral market, MCX has taken several

initiatives to usher in a new-generation commodities futures market in

the process, become the country's premier Exchange. MCX has started

operations from November 10, 2003.

Statutory framework for regulating commodity futures

Commodity futures contracts and the commodity exchanges

organizing trading in such contracts are regulated by the Government of

India under the Forward Contracts (Regulation) Act, 1952 (FCRA), and

the Rules framed there under. The nodal agency for such regulation is

the Forward Markets Commission (FMC), situated at Mumbai, which

functions under the aegis of the Ministry of Consumer Affairs, Food &Public Distribution of the Central Government.

Forward Markets Commission (FMC)

Forward Markets Commission (FMC) headquartered at Mumbai is a

regulatory authority, which is overseen by the Ministry of Consumer

Affairs and Public Distribution, Govt. of India. It is a statutory body set upin 1953 under the Forward Contracts (Regulation) Act, 1952.



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"The Act Provides that the Commission shall consist of not less

then two but not exceeding four members appointed by the Central

Government out of them being nominated by the Central Government to

be the Chairman thereof. Currently Commission comprises three

members among whom Dr. Kewal Ram, IES, is acting as Chairman and

Smt. Padma Swaminathan, CSS and Dr. (Smt.) Jayashree Gupta, CSS,

are the Members of the Commission."

The functions of the Forward Markets Commission are as follows:

To advise the Central Government in respect of the recognition or

the withdrawal of recognition from any association or in respect of

any other matter arising out of the administration of the Forward

Contracts (Regulation) Act 1952.

To keep forward markets under observation and to take such

action in relation to them, as it may consider necessary, in

exercise of the powers assigned to it by or under the Act.

To collect and whenever the Commission thinks it necessary, to

publish information regarding the trading conditions in respect of

goods to which any of the provisions of the act is made applicable,

including information regarding supply, demand and prices, and to

submit to the Central Government, periodical reports on the

working of forward markets relating to such goods;

To make recommendations generally with a view to improving the

organization and working of forward markets;



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To undertake the inspection of the accounts and other documents

of any recognized association or registered association or any

member of such association whenever it considerers it necessary.

Commodities selected in Phase I

Bullion

Gold

Silver

AFGRI commodities

Soya bean

Soya oil

Rapeseed/Mustard

Seed Rapeseed/

Mustard Seed Oil

Crude Palm oil

RBD Palmolein

0 Commodities introduced in Phase II

Rubber

Jute

Pepper

Chana (Gram)

Guar

Wheat



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COMMODITY TRADING CONTRACTS

All the commodities are not suitable for futures trading & for being

suitable for futures trading the market for commodity should be

competitive, i.e., there should be large demand for and supply of the

commodity no individual or group of persons acting in concert should be

in a position to influence the demand or supply, and consequently the

price substantially. There should be fluctuations in price. The commodity

should have long shelf life and be capable of standardization and

gradation.

A commodity futures contract is essentially a financial instrument.

Following the absence of futures trading in commodities for nearly four

decades, the new generation of commodity producers, processors,

market functionaries, financial organizations, broking agencies and

investors at large are, unfortunately, unaware at present of the

economic utility, the operational techniques and the financial

advantages of such trading. Commodity future market involves

particularly different types of forward contracts.

Forward contracts

FCRA defines forward contract as "a contract for the delivery of

goods and which not a ready delivery contract is".

All contracts in commodities providing for delivery of goods and/or

payment of price after 11 days from the date of the contract are

"forward" contracts. Forward contracts are of three types

1) Specific Delivery & Ready Delivery Contracts

2) Futures Contracts

3) Option Contracts



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Specific Delivery/Ready Delivery contracts:

Specific delivery contracts provide for the actual delivery of

specific quantities and types of goods during a specified future period,

and in which the names of both the buyer and the seller are mentioned.

Under the Act, a ready delivery contract is one, which provides for

the delivery of goods and the payment of price therefore, either

immediately or within such period not exceeding 11 days after the date

of the contract, subject to such conditions as may be prescribed by the

Central Government. Already delivery contract is required by law to be

fulfilled by giving and taking the physical delivery of goods. In market

parlance, the ready delivery contracts are commonly known as "spot" or

"cash" contracts.

Futures Contract:

A commodity futures contract is essentially a financial instrument.

Following the absence of futures trading in commodities for nearly four

decades, the new generation of commodity producers, processors,market functionaries, financial organizations, broking agencies and

investors at large are, unfortunately, unaware at present of the

economic utility, the operational techniques and the financial

advantages of such trading.

A futures contract is a legally binding agreement between two

parties to buy or sell in the future, on a designated exchange, a specific

quantity of a commodity at a specific price. The buyer and seller of afutures contract agree now on a price for a product to be delivered, or

paid, for at a set time in the future, known as the "settlement date."

Although actual delivery of the commodity can take place in fulfillment



39/85


of the contract, most futures contracts are actually closed out or "offset"

prior to delivery.

A commodity futures contract is a tradable standardized contract,

the terms of which are set in advance by the commodity exchange

organizing trading in it.

The futures contract is for a specified variety of a commodity,

known as the "basis, though quite a few other similar varieties, both

inferior and superior, are allowed to be deliverable or tender-able for

delivery against the specified futures contract.

The parties to the contract are required to negotiate only the

quantity to be bought and sold, and the price. The Exchange prescribes

everything else. Because of the standardized nature of the futures

contract, it can be traded with ease at a moments notice.

Option Contract:

An option on a commodity futures contract is a legally binding

agreement between two parties that gives the buyer, who pays a

market determined price known as a "premium," the right (but not the

obligation), within a specific time period, to exercise his option. Exerciseof the option will result in the person being deemed to have entered into

a futures contract at a specified price known as the "strike price." In

some cases, an option may confer the right to buy or sell the underlying

asset directly, and these options are known as options on the physical

asset.

Commodity future trading contracts rarely are for the actual or

physical delivery allowed to be settled otherwise than by issuing or

giving deliveries. Therefore, speculators use these futures contracts to

benefit from changes in prices and are hardly interested in either taking

or receiving deliveries of goods.



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FUTURE MARKET MECHANISMS

1) Price Discovery through Future Market:

In an active futures market, the demand for information by traders

is enormous. Futures exchanges tend to become collection centers for

statistics on supplies, transportation, storage, purchases, exports,

imports, currency values, interest rates, and other pertinent information.

These data, which are compiled and distributed throughout the

exchange community on a continuous basis, are immediately reflected

in the trading pits as traders digest the new information and adjust theirbids and offers accordingly. As a result of active buying and selling of

futures contracts, the market determines the best estimate of today and

tomorrow's prices for the underlying commodity. In effect, prices are

discovered at futures exchanges. Prices determined via this open and

competitive process are considered to be accurate reflections of the

supply and demand for a commodity, and for this reason they are widely

used as today's best estimate of tomorrow's cash market prices for a

standardized quantity of a commodity.

Price discovery is the process of arriving at a figure at which one

person will buy and another will sell a futures contract for a specific

expiration date. In an active futures market, the process of price

discovery continues from the market's opening until its close. Futures

contracts are standardized as to quantity, quality, and location so

buyers and sellers only bargain over price. Because of this

standardization, commercial interests are better able to compute local

cash prices. In many commodities, futures prices have earned a role as

key reference prices for those who produce, process, and merchandise

the commodity.



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2) Transferring Risk: Hedging through future market

Commodity production and marketing involve sizable price risks,

and risk represents a cost that affects the value of a commodity. While

there is no way to eliminate uncertainty, futures markets provide a

competitive way for commodity producers, merchandisers, processors,

and others who may own the actual commodity to transfer some price

risk to speculators who will willingly assume such risk in hopes of

making a profit.

The process of hedging involves the concurrent use of both cash

and futures markets. Since futures and cash prices tend to move

together (that is, parallel to each other), and at contract expiration

converge to one price, it is possible for a cotton merchant, for example,

to hedge an unsold inventory of cotton with a sale of an equivalent

amount of futures contracts. Since the merchant owns the commodity,

he would have a loss if prices fell. To hedge, the merchant would sell

futures contracts. Now if prices drop, the cash market loss will be at

least partially offset by a gain on the futures contract. When the

merchant sells his inventory at the lower cash market price, he will

simultaneously lift his hedge by buying back his futures contracts at the

lower price. The gain on his futures contracts should roughly equal the

merchant's loss in the cash market.



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Here are three examples of how hedging helps the cash market

work better:

1) Hedging stretches the marketing period. For instance, a livestock

feeder does not have to wait until his cattle are ready to market

before he can sell them. The futures market permits him to sell

futures contracts to establish the approximate sale price at any

time between the time he buys his calves for feeding and the time

the fed cattle are ready to market, some four to six months later.

He can take advantage of good prices even though the cattle are

not ready for market.

2) Hedging protects inventory values. A merchandiser with a large,

unsold inventory can sell futures contracts that will protect the

value of the inventory, even if the price of the commodity drops.

3) Hedging permits forward pricing of products. A jewelrymanufacturer can determine the cost for gold, silver or platinum

by buying a futures contract, translate that to a price for the

finished products, and make forward sales to stores at firm prices.

Having made the forward sales, the manufacturer can use its

capital to acquire only as much gold, silver, or platinum as may be

needed to make the products that will fill its orders.

These are just a few ways that commodity owners use futures

markets. It requires skill and knowledge acquired that comes only by

study and experience.



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PARTICIPANTS IN FUTURES MARKET & TRADING

PROCEDURE

The Futures market participants comprise of:

Farmers

Traders

Producers

Processors

Exporters

Importers

Industries associated with commodities.

The futures market is used for hedging the price risk and for

trading or arbitrage. Brokers of all commodity exchanges, who are

located all across the country, serve the futures market users directly

through their own branch offices' network or through the network of

their franchisees or sub-brokers.

Procedure for Individual investor to start trading in Commodity

Futures Market can be as follows:

Selection of Broker:

A trustworthy, reliable, efficient, effective & innovative broker,

having membership to any of the Exchange like MCX / NCDEX etc. would

be in Investors interest. Broker should be such that recognizes

investors needs & aspirations & work as a dedicated team to deliver

highly effective & customized solutions to investors risk management

needs.



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Information about Self:

After selecting a broker, investor will be asked to provide

information that is personal & financial. A member client agreement

should be signed between the broker & investor. Investor should give

photographs, bank details & should possess normal DMAT Account or

broker opens that account for him/her. If trading is intended with

delivery of commodities then Commodity DMAT Account is been opened.

Depositing the Margin:

In order to trade futures contracts, investor has to deposit margins

in cash with broker. There are two types of margins, namely; initial

margin & mark to market margin.

i) Initial Margin-

Initial Margin is set by the exchanges on basis of volatility in the

particular commodity & is a percentage of the contract.

ii) Mark to market Margin-

At the end of the day, the contract is marked to market; meaning

traders account is credited or debited based on the profit/ loss made

during the session. On this profit or loss there broker can charge marginthat is nothing but mark to market margin.

Intraday Trading:

Then as per individual investors wish he can buy or sell

commodities online. Just he has to specify which commodity & what

price is he going to buy or sell. Electronic terminals are used for this

trading at various broking offices that provides the same information

countrywide. This trading process is called as, Intraday Trading.



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Benefit of this online trading is that it provides a secure,

transparent, fast and user-friendly system. It leads to better price

discovery of commodities like Bullion, Metals and Agro products by

bringing large number of Buyers and Sellers on a common National and

International platform.

Clearing Trades on Commodity Exchange

All trades on Commodity Exchange are supported by an initial

margin. At the End-of day Commodity Exchange does mark-to-market of

all the open positions. This activity results into final position of all

members in respect to booked losses or losses on open positions.

Members make the shortfalls good by way of pay-ins to Commodity

Exchange by next day and the members in profit on such positions are

given the necessary credits. These payments are processed

electronically through a countrywide network of clearing banks.

Settlement of the Contract and Delivery

A contract has a life cycle of two months. At Commodity

Exchange, 5 days before the expiry of a contract, the contract enters

into a tender period. At the start of the tender period, both the parties

must state their intentions to give or receive delivery, based on which

the parties are supposed to act or bear the penal charges for any failure

in doing so. Those who do not express their intention to give or receive

delivery at the beginning of tender period are required to square-up

their open positions before the expiry of the contract. In case they do

not their positions are closed out at 'due date rate'. The links to the

physical market through the delivery process ensures maintenance of

uniformity between spot and futures prices.



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Tendering Delivery to a Buyer by Exchange Seller

Sellers intimate the exchange at the beginning of the tender

period and get the delivery quality certified from empanelled quality

certification agencies. They also submit the documents to the Exchange

with the details of the warehouse within the city, chosen as a delivery

center.

Sellers are free to use any warehouse, as they are responsible for

the goods until the buyer picks up the delivery, which is a practice

followed in the commodities market globally.

Seller would receive the money from the exchange against thegoods delivered, which happens when the buyer has confirmed its

satisfaction over quality and picked up the deliveries within stipulated

time.

Receiving Delivery of Commodities by Buyer

Buyers intending to take delivery will receive it, if there are sellers

willing warehouse at the designated delivery centers on the designated

delivery days.

There are commission agents who help the brokers with handling

of the delivery, logistic support, and associated quality certification

through to give delivery. The Buyer will have to make the payment

within three days after the delivery is allotted. The buyer will take actual

delivery from the empanelled agencies and associated billings due to

tax implications. This support is required as the buyer may be in adifferent city than the place where the delivery is being received.



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Utility of Physical Delivery of Commodity to Client of Buyer

The client of a buyer may use this delivery for his

consumption in the industry, or for exports, or he may sell in the spot

market or may sell in futures market in the subsequent contract, if he is

a regular trader. Generally, the commodities available in the physical

form are consumed by the industry and, rarely, commodities, are stored

in the warehouse for a longer period.

Percentage of Delivery in the Futures Market

Though, Exchanges have specified the deliverable grades in the

contract specifications, which are notified before commencement oftrading in a contract. The seller is required to submit the quality

certification issued by empanelled quality certification agencies, like,

SGS, Geo Chem. etc. Thus, quality of a commodity is ensured, the

percentage is delivery in such market is fairly low. Generally, the futures

markets all over the world are used for hedging where actual delivery

percentage is about 1% any user in the commodities ecosystem unlike

the physical spot or forward market does not use these markets for

regular consumption.



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LIMITATIONS OF COMMODITY FUTURE MARKET

Commodity market is very difficult to predict. Commodity prices

depend upon region, monsoon, transportation cost, demand-supply theory, import/ export policies & Global market trends. So

commodity market experience volatility that cannot be predicted

easily.

Without knowing the spot market for commodities it is very

difficult to play with Future market. In capital market it depends

upon Companies performance, decisions, long run plans, mergers,

etc. there are definite regions to move up & down in the market,

but in the case of Commodity market there are so many regions

for the market movement, it is like a game of luck to the investor.

Customer has to deposit the margin amount that is based on

volatility of commodity plus brokerage that is deducted from total

losses made. So if at all there is a loss, the total loss amount will

be very huge. In this aspect it is very risky market.

Commodity market not yet developed in India so it is less reliable.

Commodity market gives high return but with multiplier of high

risk.



49/85


Gold commodity Future MarketIntroduction

Gold is a unique asset based on few basic characteristics. First, it

is primarily a monetary asset, and partly a commodity. As much as two

thirds of golds total accumulated holdings relate to store of value

considerations. Holdings in this category include the central bank

reserves, private investments, and high-cartage jewelry bought primarily

in developing countries as a vehicle for savings. Thus, gold is primarily a

monetary asset. Less than one third of golds total accumulated holdings

can be considered a commodity, the jewelry bought in Western markets

for adornment, and gold used in industry.

The distinction between gold and commodities is important. Gold

has maintained its value in after-inflation terms over the long run, while

commodities have declined.

Some analysts like to think of gold as a currency without a

country. It is an internationally recognized asset that is not dependent

upon any governments promise to pay. This is an important featurewhen comparing gold to conventional diversifiers like T-bills or bonds,

which unlike gold, do have counter-party risk.



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Gold in Indian Scenario:

Gold is valued in India as a savings and investment vehicle and is

the second preferred investment behind bank deposits. India is theworlds largest consumer of gold in jewelry (much of which is purchased

as investment). The hoarding tendency is well ingrained in Indian

society, not least because inheritance laws in the middle of the

twentieth century lent a great desirability to anonymity. Indian people

are renowned for saving for the future and the financial savings ratio is

strong, with a ratio of financial assets-to-GDP of 93%.

Golds circulates within the system and roughly 30% of goldjewelry fabrication is from recycled pieces. India is typically also the

largest purchaser of coins and bars for investment (>80tpa), although

last year it had to concede first place to Japan in the wake of the heavy

buying in the first quarter due to fears for the stability of the Japanese

banking system. In 1998-2001 inclusive, annual Indian demand for gold

in jewelry exceeded 600 tons; in 2002, however, due to rising and

volatile prices and a poor monsoon season, this dropped back to 490

tons, and coin and bar demand dropped to 67 tons. Indian jewelry off

take is sensitive to price increases and even more so to volatility,

although this decline in tonnage since 1998 is also due in part to

increasing competition from white and brown goods and alternative

investment vehicles, but is also a reflection of the increase in price. The

Indian brides Streedhan, the wealth she takes with her when she

marries and which remains hers, is still gold, however (thus giving gold

an important role in the empowerment of women in India).



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The distinction between gold and commodities is important. Gold

has maintained its value in after-inflation terms over the long run, while

commodities have declined.

Some analysts like to think of gold as a currency without a

country. It is an internationally recognized asset that is not dependent

upon any governments promise to pay. This is an important feature

when comparing gold to conventional diversifiers like T-bills or bonds,

which unlike gold, do have counter-party risk.



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World Markets

Today's gold market is a round-the-world, round-the-clock

business, played out largely on dealers' trading screens. The core of the

business, however, remains in the key markets of London, as the great

clearing house, New York as the home of futures trading, Zurich as

physical turntable, Istanbul, Dubai, Singapore and Hong Kong as

doorways to important consuming regions and Tokyo where the

Commodity Exchange (TOCOM) sets the mood of Japan. Even Paris still

has a small market, a reminder of the days when the French were great

hoarders, while Mumbai has increasing importance under India's

liberalized gold regime that permits official imports through localmarkets.



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Gold an Independent Asset

Its not difficult to understand why the gold price moves

independently from the economic cycle when one considers the

diversity of its demand and supply base, the ultimate determinants of

price movements.

There are three sources of gold supply: mine production, official

sector sales and scrap or recycled gold. Mine production is by far the

largest element, accounting for 70% of total supply last year. Changes in

annual mine supply bear no relation to changes in US or even global

GDP growth. The upward trend in mine production that was underway in

the late 1980s was not arrested by 1990 recession (the US economy

suffered an outright contraction, while world GDP growth slowed to 1.6%

from 2.9% the previous year). Nor was the downtrend in mining output

that began in 2001 reversed by the sharp acceleration in world growth.



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Mine production is influenced by very specific factors, such as the

level of exploration spending, the success or otherwise in discovering

new gold deposits and the cost of extraction (some new discoveries may

not be economically viable). Lead times in gold mining are often very

long. It can take years to re-open a closed mine, let alone find and mine

new reserves.

The decision to build a mine shaft (and often an entire

infrastructure) is a long term one that will often see business cycles

comes and goes. Central bank decisions to buy or sell gold (they remain

net sellers) are also usually strategic in nature, rather than reactive to

the economic cycle. The decision to buy or sell gold is often made years

in advance and then carried out over a period of years. In Switzerland,

for example, the proposition to sell gold (the first gold sales

programmed) was first recommended by a group of experts in 1997.

However, the actual sales programmed did not commence until May

2000, with the sales then taking place over a period of five years.

Scrap supply is influenced by many factors, perhaps the most

important being price and price volatility, but recessions and periods of

economic distress have also had an impact. The most dramatic exampleis when Korea was pushed into recession during the 1998 Asian

currency crisis; its scrap supply increased by almost 200 tonnes as the

government bought gold from the local populace in exchange for won-

denominated bonds. It then sold the gold on the international market in

order to raise the dollars necessary to avoid defaulting on its external

debt.

Similarly, in Indonesia the 1998 recession saw scrap supply

increase by 72 tonnes in the first quarter of the year, in this instance

purely for independent reasons rather than at the behest of the

government.



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Turning to demand

Conventional wisdom argues that recessions are bad for

commodity prices. The reasoning goes that as consumer and business

confidence falls, demand for goods and services is cut back and hence

the materials used in the production of those goods or in the provision of

services (many of which are commodities) declines, thereby depressing

their price.

The argument is logical. However, a few points are worth bearing

in mind with respect to gold. Demand for gold as an intermediate good

is relatively small in comparison to many other commodities. Last year,just 14% of gold demand came from the industrial sector (mainly

electronics). This is in stark contrast to base metals and even other

precious metals, where the vast majority of demand comes from

industry. As a result, gold is much less vulnerable to the vagaries of the

economic cycle. That said, demand for gold in electronics is likely to fall

if the economy falls into recession as consumer spending on non-

essential electronics goods declines. A US recession would undoubtedly

have negative implications for gold jewelry demand in America, as

consumer spending slows. However, this negative implication could be

at least partially offset by the higher share of gold jewelry in the retail

market that gold jewelry has enjoyed in recent years. Moreover, gold is

much less vulnerable than other jewelry materials, such as diamonds or

platinum, to a US recession as far more demand for gold comes from

outside of the US 70% of diamond jewelry demand comes from the US

market, compared with just 10% for gold.

India is in fact the single largest consumer of gold jewellery in the

world in tonnage terms. Last year, Indian households bought 558 tonnes

of gold jewelry, more than double their US counterparts (Chart 7).



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Chinese consumers rank second, having bought 331 tonnes. US

consumers are third in tonnage terms, although US demand remains

highest in retail value terms due to its higher trade margins. The extent

to which worldwide gold jewelry demand suffers from a US recession will

depend partly on the spill-over effects to other countries. If proponents

of decoupling prove to be correct (they argue that emerging market

economies are now strong enough domestically to withstand a US

slowdown) then worldwide jewelry demand need not fare badly.

The final source of demand comes from investors. Investors buy

gold for many reasons. Chief among these are golds inflation and dollar-

hedging properties, both of which have been proven over

a project report on commodity market with special reference to gold at karvy stock exchange

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