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A PROJECT REPORT

ON COMMODITY MARKET

Project Submitted in partial fulfillment of Post Graduate Diploma in

Management

Submitted by: PANKAJ KUMAR

Roll No. 528

Batch 2007-2009

Under the guidance of:

Dr. Shashidharan Kutty - Dy. Director (Banking, Finance & Insurance)

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S.No. INDEX Page

No. 1 Introduction 4

2 Commodity 6

3 Commodity Market 7

4 Structure of Commodity Market 8

5 Different Types of Commodity Traded 9

6 Turnover of Indian Commodity Exchange 10

7 Market Share of Commodity Exchanges in India 10

8 Different Segments in Commodities Market 11

9 Leading Commodity Markets of World 12

10 Regulators 13

11 Leading Commodity Markets of India 14

12 Volumes in commodity Derivatives Worldwide 14

13 Commodity Futures Trading in India 15

14 Introduction 15

15 Benefits to Industry From Futures Trading 16

16 Benefits to Exchange Member 16

17 Why Commodity Futures? 17

18 What makes commodity trading attractive? 18

19 NCDEXs Trading System 20

20 Gold 22

21 Introduction 22

22 What makes Gold special 22

23 Market characteristics 22

24 Demand & Supply 23

25 Indian Gold Jewellery Market 24

26 MCX contract specifications of gold 25

27 FAQ on Gold 32

28 Gold Terminology 35

29 Conclusion 36

30 Bibliography 37

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India Commodity Market

“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.”

INTRODUCTION

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

complemented by the size of her market. The broadest classification of the

Indian Market can be made in terms of the commodity market and the bond

market.

The commodity market in India comprises of all palpable markets that we

come across in our daily lives. Such markets are social institutions that

facilitate exchange of goods for money. The cost of goods is estimated in

terms of domestic currency. India Commodity Market can be subdivided into

the following two categories:

• Wholesale Market

• Retail Market

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The traditional wholesale market in India dealt with whole sellers who bought

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 fade out for the following reasons:

The whole sellers in most situations, acted as mere parasites who did

not add any value to the product but raised its price which was

eventually faced by the consumers.

The improvement in transport facilities made the retailers directly

interact with the producers and hence the need for whole sellers was

not felt.

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.

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 sector 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

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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 by the year 2010. Demand for

commodities is likely to become four times by 2010 than what it presently is.

COMMODITY

A commodity may be defined as an article, a product or material that is

bought and sold. It can be classified as every kind of movable property,

except Actionable Claims, Money & Securities. Commodities actually offer

immense potential to become a separate asset class for market-savvy

investors, arbitrageurs and speculators. Retail investors, who claim to

understand the equity markets, may find commodities an unfathomable

market. But commodities are easy to understand as far as fundamentals of

demand and supply are concerned. Retail investors should understand the

risks and advantages of trading in commodities futures before taking a

leap. Historically, pricing in commodities futures has been less volatile

compared with equity and bonds, thus providing an efficient portfolio

diversification option.

In fact, the size of the commodities markets in India is also quite

significant. Of the country's GDP of Rs 13, 20,730 crore (Rs 13,207.3

billion), commodities related (and dependent) industries constitute about

58 per cent.

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Currently, the various commodities across the country clock an annual

turnover of Rs 1, 40,000 crore (Rs 1,400 billion). With the introduction of

futures trading, the size of the commodities market grows many folds here

on.

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.

Turnover in Financial Markets and Commodity Market

(Rs in Crores)

S No.

Market segments 2002-03 2003-04 2004-05 (E)

1 Government Securities Market 1,544,376 (63) 2,518,322 (91.2) 2,827,872 (91)

2 Forex Market 658,035 (27) 2,318,531 (84) 3,867,936 (124.4)

3 Total Stock Market Turnover (I+ II) 1,374,405 (56) 3,745,507 (136) 4,160,702 (133.8)

I National Stock Exchange (a+b) 1,057,854 (43) 3,230,002 (117) 3,641,672 (117.1)

a)Cash 617,989 1,099,534 1,147,027

b)Derivatives 439,865 2,130,468 2,494,645

II Bombay Stock Exchange (a+b) 316,551 (13) 515,505 (18.7) 519,030 (16.7)

a)Cash 314,073 503,053 499,503

b)Derivatives 2,478 12,452 19,527

4 Commodities Market NA 130,215 (4.7) 500,000 (16.1)

Note: Fig. in bracket represents percentage to GDP at market prices

Source: Sebi bulletin

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STRUCTURE OF COMMODITY MARKET

Transporters/

support agencies Consumers

(Retail/Institutio

-nal)

Traders

(speculators)arbi

-trageurs/client)

Hedger

(Exporters /

Millers Industry)

Quality

Certification

Agencies

Commodities

Ecosystem

MCX

Producers

(Farmers/Co-

operatives/Ins

titutional)

Clearing Bank

Warehouses

Ministry of

Consumer Affairs

FMC (Forwards

Market Commission)

Commodity

Exchange

National Exchange Regional Exchange

NCDEX MCX NMCE NBOT 20 other regional

exchanges

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DIFFERENT TYPES OF COMMODITIES TRADED

World-over one will find that a market exits for almost all the commodities

known to us. These commodities can be broadly classified into the

following:

METAL Aluminium, Copper, Lead, Nickel, Sponge Iron, Steel Long

(Bhavnagar), Steel Long (Govindgarh), Steel Flat, Tin, Zinc

BULLION Gold, Gold HNI, Gold M, i-gold, Silver, Silver HNI, Silver M

FIBER Cotton L Staple, Cotton M Staple, Cotton S Staple, Cotton Yarn,

Kapas

ENERGY Brent Crude Oil, Crude Oil, Furnace Oil, Natural Gas, M. E.

Sour Crude Oil

SPICES Cardamom, Jeera, Pepper, Red Chilli

PLANTATIONS Arecanut, Cashew Kernel, Coffee (Robusta), Rubber

PULSES Chana, Masur, Yellow Peas

PETROCHEMICALS HDPE, Polypropylene(PP), PVC

OIL & OIL SEEDS Castor Oil, Castor Seeds, Coconut Cake, Coconut Oil, Cotton

Seed, Crude Palm Oil, Groundnut Oil, Kapasia Khalli, Mustard

Oil, Mustard Seed (Jaipur), Mustard Seed (Sirsa), RBD

Palmolein, Refined Soy Oil, Refined Sunflower Oil, Rice Bran

DOC, Rice Bran Refined Oil, Sesame Seed, Soymeal, Soy Bean,

Soy Seeds

CEREALS Maize

OTHERS Guargum, Guar Seed, Gurchaku, Mentha Oil, Potato (Agra),

Potato (Tarkeshwar), Sugar M-30, Sugar S-30

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TURNOVER OF INDIAN COMMODITY EXCHANGES Indian Commodity Futures Market (Rs Crores)

Exchanges 2004 2005 2006 2007

Multi Commodity Exchange (MCX) 165147 961,633 1,621,803 2,505,206

NCDEX 266,338 1,066,686 944,066 733,479

NMCE(Ahmadabad) 13,988 18,385 101,731 24,072

NBOT(Indore) 58,463 53,683 57,149 74,582

Others 67,823 54,735 14,591 37,997

All Exchanges 571,759 2,155,122 2,739,340 3,375,336

Turnover on Commodity Futures Markets

(Rs. In Crores)

Exchange 2003-04 2004-05 FIRST Half

NCDEX 1490 54011

NBOT 53014 51038

MCX 2456 30695

NMCE 23842 7943

ALL EXCHANGES 129364 170720

MARKET SHARE OF COMMODITY EXCHANGES IN INDIA

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DIFFERENT SEGMENTS IN COMMODITIES MARKET

The commodities market exits in two distinct forms namely the Over the

Counter (OTC) market and the Exchange based market. Also, as in

equities, there exists the spot and the derivatives segment. The spot markets

are essentially over the counter markets and the participation is restricted to

people who are involved with that commodity say the farmer, processor,

wholesaler etc. Derivative trading takes place through exchange-based

markets with standardized contracts, settlements etc.

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LEADING COMMODITY MARKETS OF WORLD

Some of the leading exchanges of the world are:

S. No. Global Commodity Exchanges

1 New York Mercantile Exchange (NYMEX)

2 London Metal Exchange (LME)

3 Chicago Board of Trade (CBOT)

4 New York Board of Trade (NYBOT)

5 Kansas Board of Trade

6 Winnipeg Commodity Exchange, Manitoba

7 Dalian Commodity Exchange, China

8 Bursa Malaysia Derivatives exchange

9 Singapore Commodity Exchange (SICOM)

10 Chicago Mercantile Exchange (CME), US

11 London Metal Exchange

12 Tokyo Commodity Exchange (TOCOM)

13 Shanghai Futures Exchange

14 Sydney Futures Exchange

15 London International Financial Futures and Options Exchange

(LIFFE)

16 National Multi-Commodity Exchange in India (NMCE), India

17 National Commodity and Derivatives Exchange (NCDEX), India

18 Multi Commodity Exchange of India Limited (MCX), India

19 Dubai Gold & Commodity Exchange (DGCX)

20 Dubai Mercantile Exchange (DME), (joint venture between Dubai

holding and the New York Mercantile Exchange (NYMEX))

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Regulators

Each exchange is normally regulated by a national governmental (or semi-

governmental) regulatory agency:

Country

Regulatory agency

Australia

Australian Securities and Investments Commission

Chinese mainland

China Securities Regulatory Commission

Hong Kong

Securities and Futures Commission

India

Securities and Exchange Board of India and Forward Markets Commission (FMC)

Pakistan

Securities and Exchange Commission of Pakistan

Singapore

Monetary Authority of Singapore

UK

Financial Services Authority

USA

Commodity Futures Trading Commission

Malaysia

Securities Commission

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LEADING COMMODITY MARKETS OF INDIA

The government has now allowed national commodity exchanges, similar to

the BSE & NSE, to come up and let them deal in commodity derivatives in an

electronic trading environment. These exchanges are expected to offer a

nation-wide anonymous, order driven, screen based trading system for

trading. The Forward Markets Commission (FMC) will regulate these

exchanges.

Consequently four commodity exchanges have been approved to commence

business in this regard. They are:

S.NO. Commodity Market in India

1 Multi Commodity Exchange (MCX), Mumbai

2 National Commodity and Derivatives Exchange Ltd (NCDEX),

Mumbai

3 National Board of Trade (NBOT), Indore

4 National Multi Commodity Exchange (NMCE), Ahmadabad

VOLUMES IN COMMODITY DERIVATIVES WORLDWIDE

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Source: FMC

Commodity Futures Trading in India

INTRODUCTION

Derivatives as a tool for managing risk first originated in the Commodities

markets. They were then found useful as a hedging tool in financial markets

as well. 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

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exist as far as financial underlyings are concerned. However in the case of

commodities, the quality of the asset underlying a contract can vary largely.

This becomes an important issue to be managed.

BENEFITS TO INDUSTRY FROM FUTURES TRADING

Hedging the price risk associated with futures contractual

commitments.

Spaced out purchases possible rather than large cash purchases and its

storage.

Efficient price discovery prevents seasonal price volatility.

Greater flexibility, certainty and transparency in procuring commodities

would aid bank lending.

Facilitate informed lending.

Hedged positions of producers and processors would reduce the risk of

default faced by banks. * Lending for agricultural sector would go up

with greater transparency in pricing and storage.

Commodity Exchanges to act as distribution network to retail agri-

finance from Banks to rural households.

Provide trading limit finance to Traders in commodities Exchanges.

BENEFITS TO EXCHANGE MEMBER

Access to a huge potential market much greater than the securities and

cash market in commodities.

Robust, scalable, state-of-art technology deployment.

Member can trade in multiple commodities from a single point, on real

time basis.

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Traders would be trained to be Rural Advisors and Commodity

Specialists and through them multiple rural needs would be met, like

bank credit, information dissemination, etc.

WHY COMMODITY FUTURES?

One answer that is heard in the financial sector is "we need commodity

futures markets so that we will have volumes, brokerage fees, and something

to trade''. We have to look at futures market in a bigger perspective -- what is

the role for commodity futures in India's economy?

In India agriculture has traditionally been an area with heavy government

intervention. Government intervenes by trying to maintain buffer stocks, they

try to fix prices, and they have import-export restrictions and a host of other

interventions. Many economists think that we could have major benefits from

liberalization of the agricultural sector.

In this case, the question arises about who will maintain the buffer stock, how

will we smoothen the price fluctuations, how will farmers not be vulnerable

that tomorrow the price will crash when the crop comes out, how will farmers

get signals that in the future there will be a great need for wheat or rice. In all

these aspects the futures market has a very big role to play.

If we think there will be a shortage of wheat tomorrow, the futures prices will

go up today, and it will carry signals back to the farmer making sowing

decisions today. In this fashion, a system of futures markets will improve

cropping patterns.

Next, if I am growing wheat and am worried that by the time the harvest

comes out prices will go down, then I can sell my wheat on the futures

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market. I can sell my wheat at a price, which is fixed today, which eliminates

my risk from price fluctuations. These days, agriculture requires investments -

- farmers spend money on fertilizers, high yielding varieties, etc. They are

worried when making these investments that by the time the crop comes out

prices might have dropped, resulting in losses. Thus a farmer would like to

lock in his future price and not be exposed to fluctuations in prices.

The third is the role about storage. Today we have the Food Corporation of

India, which is doing a huge job of storage, and it is a system, which -- in my

opinion -- does not work. Futures market will produce their own kind of

smoothing between the present and the future. If the future price is high and

the present price is low, an arbitrager will buy today and sell in the future. The

converse is also true, thus if the future price is low the arbitrageur will buy in

the futures market. These activities produce their own "optimal" buffer stocks,

smooth prices. They also work very effectively when there is trade in

agricultural commodities; arbitrageurs on the futures market will use imports

and exports to smooth Indian prices using foreign spot markets.

In totality, commodity futures markets are a part and parcel of a program for

agricultural liberalization. Many agriculture economists understand the need of

liberalization in the sector. Futures markets are an instrument for achieving

that liberalization.

WHAT MAKES COMMODITY TRADING ATTRACTIVE?

A good low-risk portfolio diversifier

A highly liquid asset class, acting as a counterweight to stocks, bonds

and real estate.

Less volatile, compared with, equities and bonds.

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Investors can leverage their investments and multiply potential

earnings.

Better risk-adjusted returns.

A good hedge against any downturn in equities or bonds as there is

Little correlation with equity and bond markets.

High co-relation with changes in inflation.

No securities transaction tax levied.

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The NCDEX System

Every market transaction consists of three components i.e. trading, clearing

and settlement. A brief overview of how transactions happen on the NCDEX’s

market.

TRADING

The trading system on the NCDEX provides a fully automated screen based

trading for futures on commodities on a nationwide basis as well as online

monitoring and surveillance mechanism. It supports an order driven market

and provides complete transparency of trading operations. Order matching is

essential on the basis of commodity, its price, time and quantity. All quantity

fields are in units and price in rupees. The exchange specifies the unit of

trading and the delivery unit for futures contracts on various commodities.

The exchange notifies the regular lot size and tick size for each of the

contracts traded from time to time. When any order enters the trading

system, it is an active order. It tries to finds a match on the other side of the

book. If it finds a match, a trade is generated. If it does not find a match, the

order becomes passive and gets queued in the respective outstanding order

book in the system. Time stamping is done for each trade and provides the

possibility for a complete audit trail if required. NCDEX trades commodity

futures contracts having one month, two month and three month expiry

cycles. All contracts expire on the 20th of the expiry month. Thus a January

expiration contract would expire on the 20th of January and a February expiry

contract would cease trading on the 20th of February. If the 20th of the expiry

month is a trading holiday, the contracts shall expire on the previous trading

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day. New contracts will be introduced on the trading day following the expiry

of the near month contract.

CLEARING

National Securities Clearing Corporation Limited (NSCCL) undertakes clearing

of trades executed on the NCDEX. The settlement guarantee fund is

maintained and managed by NCDEX. Only clearing members including

professional clearing members (PCMs) only are entitled to clear and settle

contracts through the clearing house. At NCDEX, after the trading hours on

the expiry date, based on the available information, the matching for

deliveries takes place firstly, on the basis of locations and then randomly,

keeping in view the factors such as available capacity of the vault/warehouse,

commodities already deposited and dematerialized and offered for delivery

etc. Matching done by this process is binding on the clearing members. After

completion of the matching process, clearing members are informed of the

deliverable/ receivable positions and the unmatched positions. Unmatched

positions have to be settled in cash. The cash settlement is only for the

incremental gain/loss as determined on the basis of final settlement price.

SETTLEMENT

Futures contracts have two types of settlements, the MTM settlement which

happens on a continuous basis at the end of each day, and the final

settlement which happens on the last trading day of the futures contract. On

the NCDEX, daily MTM settlement and the final MTM settlement in respect of

admitted deals in futures contracts are cash settled by debiting/crediting the

clearing accounts of CMs with the respective clearing bank.

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All positions of a CM, brought forward, created during the day or closed out

during the day, are market to market at the daily settlement price or the final

settlement price at the close of trading hours on a day. On the date of expiry,

the final settlement price is the spot price on the expiry day. The responsibility

of settlement is on a trading cum clearing member for all trades done on his

own account and his client’s trades. A professional clearing member is

responsible for settling all the participants’ trades, which he has confirmed to

the exchange. On the expiry date of a futures contract, members submit

delivery information through delivery request window on the trader

workstations provided by NCDEX for all open positions for a commodity for all

constituents individually. NCDEX on receipt of such information matches the

information and arrives at delivery position for a member for a commodity.

The seller intending to make delivery takes the commodities to the designated

warehouse. These commodities have to be assayed by the exchange specified

assayer. The commodities have to meet the contract specifications with

allowed variances. If the commodities meet the specifications, the warehouse

accepts them. Warehouse then ensures that the receipts get updated in the

depository system giving a credit in the depositor’s electronic account. The

seller the gives the invoice to his clearing member, who would courier the

same to the buyer’s clearing member. On an appointed date, the buyer goes

to the warehouse and takes physical possession of the commodities.

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Gold

Introduction

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

monetary asset, and partly a commodity. As much as two thirds of gold’s total

accumulated holdings relate to “store of value” considerations. Holdings in this

category include the central bank reserves, private investments, and high-

caratage jewellery bought primarily in developing countries as a vehicle for

savings. Thus, gold is primarily a monetary asset. Less than one third of gold’s

total accumulated holdings can be considered a commodity, the jewellery

bought in Western markets for adornment, and gold used in industry.

The distinction between gold and commodities is important. Gold has

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

commodities have declined.

Some analysts like to think of gold as a “currency without a country’. It is an

internationally recognized asset that is not dependent upon any government’s

promise to pay. This is an important feature when comparing gold to

conventional diversifiers like T-bills or bonds, which unlike gold, do have

counter-party risk.

What makes gold special?

Timeless and Very Timely Investment

Gold is an effective diversifier

Gold is the ideal gift

Gold is highly liquid

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Gold responds when you need it most

Market Characteristics

The gold market is highly liquid. Gold held by central banks, other

major institutions, and retail jewellery is reinvested in market.

Due to large stock of gold, against its demand, it is argued that the core

driver of the real price of gold is stock equilibrium rather than flow

equilibrium.

Effective portfolio diversifier: This phrase summarizes the usefulness of

gold in terms of “Modern Portfolio Theory”, a strategy used by many

investment managers today. Using this approach, gold can be used as a

portfolio diversifier to improve investment performance.

Effective diversification during “stress” periods: Traditional method of

portfolio diversification often fails when they are most needed, that is

during financial stress (instability). On these occasions, the correlations

and volatilities of return for most asset class (including traditional

diversifiers, such as bond and alternative assets) increase, thus

reducing the intended “cushioning” effect of the diversified portfolio.

Demand and supply

China produced 276 metric tons of gold last year, equal to about 9.7

million ounces, said London precious metals consultancy GFMS Ltd.

That's up 12% from the year-ago and represented just over one-tenth

of the world's supply.

The ranking pushes South Africa into second place, the first time the

gold giant has lost its top ranking since 1905. South Africa, whose late

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19th century gold rush led to the founding of mining heavyweight Anglo

American Plc and is home to global producers Gold Fields Ltd and

AngloGold Ashanti Ltd, saw its production decline 8% to 272 metric

tons.

India is world largest gold consumer with an annual demand of 800

tonnes.

Demand and Supply of Gold in India (in tonnes)

2006 2007 % change Supply

Mine Production 573 580 1

Net Producer Hedging -140 -129 - Total mine supply 430 451 5

Official sector sales 93 95 2

Old gold Scrap 303 262 -13 Total Supply 826 808 2

Demand

Fabrication - - -

Jewellery 519 568 9 Industrial & Dental 111 112 1

Subtotal of above fabrication 630 680 8

Bar & coin retail investment 89 116 31 Other retail investment -3 -5 -

ETFs and similar 113 36 -68

Total Demand 829 827 0

Inferred Investment -3 -19 - Source: GFMS Ltd.

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Indian Gold Jewellery Market

Plain 22 carat jewellery is the core of consumption especially in the

rural areas, where gold is so important in judging a family's status at a

marriage. A basic marriage set for a bride is two earrings, one nose pin,

one ring, one necklace and two bangles, all in 22 carat gold and

weighing up to 200 grams (6.2 oz).

Studded (i.e. gem-set) 18 carat jewellery is increasingly popular in the

cities and is estimated to have used 31 tonnes (1 million oz) in 2001.

Medallions, charms and small gift items account for up to half of what is

loosely called jewellery. These items are popular as gifts at weddings

and other family events.

Gold thread, known as Jari used in high quality saris worn at weddings

and special occasions requires somewhere in the region of 20 tonnes

(0.6 m oz) annually.

The market is highly fragmented with an estimated 100,000 workshops

supplying over 300,000 retailers, mostly family-owned, single shop

operations. The industry is beginning to be modernised with large

factories, installing the latest equipment, in centres such as Mumbai,

Ahmadabad and Bangalore.

Hallmarking does not exist in India and under-caratage is

commonplace. The Bureau of Indian Standards has introduced a

voluntary scheme which, although not yet widely used, is becoming

more popular. The minimum legal caratage is 9 carat.

The number of retail jewellery outlets has increased greatly since the

abolition of gold control, as has the number of Indians possessing gold

jewellery.

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MCX Contract Specifications of Gold:

GOLD

Name of Commodity Gold

Ticker Symbol GLDPURMUMK

Trading System MCX Trading System

Trading Period Monday to Saturday

Trading Session Monday to Friday: 10:00a.m. to 11:30 p.m. Saturday: 10:00a.m. to 2:00 p.m.

TRADING

Trading Unit 1 kg

Price Quote Rs. Per 10 g, ex-Ahmedabad (inclusive of all

taxes and levies relating to import and custom duty, but excluding sales tax/VAT, any other

additional tax or surcharge on sales tax, local

taxes and octroi)

Maximum order size 10 kg

Tick Size Re. 1 per 10 g (minimum price movement)

Daily price limit 3%

Initial Margin 4%

Special Margin In case of initial volatility, a special margin at such percentage (as deemed fit), will be imposed

immediately on both buy and sell side in respect

of all outstanding positions, which will remain in force for next 2 days, after which the special

margin will be relaxed.

Maximum Allowable For individual client: 2 MT

For members collectively for all clients: 6 MT or 15%of the market position, whichever is high

DELIVERY

Delivery unit 1 kg

Delivery period margin 25% of the value of the open position during the delivery period

Delivery center(s) At designated clearing house facilities of Group 4

Securitas at these centers and at additional delivery centers at Chennai, New Delhi and

Hyderabad.

Delivery Logic Compulsory

SETTLEMENT PERIOD

Tender Period 1st to 6th day of the contract expiry month.

Delivery Period 1st to 6th day of the contract expiry month.

Pay-in of commodities

(delivery by seller

member)

On any tender days by 6.00 p.m. except

Saturdays, Sundays and Trading Holidays.

Marking of delivery will be done on the tender days based on the intentions received from the

sellers after the trading hours. On expiry all the

open positions shall be marked for delivery. Delivery pay-in will be on E + 1 basis.

Pay-in of funds By 11.00 a.m. on Tender day +1 basis

Pay-out of funds and

commodities (delivery to

By 05.00 p.m. on Tender day +1 basis.

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buyer member)

INFORMATION RELATED TO DELIVERY

Delivery Logic Compulsory Delivery. Any seller having open position on the expiry date fails to deliver then

the penalty as per the penal provision will be

imposed to the defaulting seller.

Mode of Communication Fax or Courier

Tender Period Margin 5% incremental margin for last 5 days on all

outstanding positions. Such margin will be

addition to initial, additional and special margin as applicable.

Margin during delivery

period

25% on the marked quantity.

Exemption from margin during tender and delivery

period

Margin is exempted on receipt of documentary evidence (viz., Warehouse Receipt and Quality

Certificate) of tendering delivery with the

Exchange during tender days.

Delivery order rate (DOR) Settlement/closing price on the respective tender days except on expiry date. On expiry date the

delivery order rate shall be the Due Date Rate

(DDR) and not the closing price.

Penal Provision A penalty of 2.5% of DOR will be imposed on defaulting buyer / seller out of which 2% will be

credited to IPF and 0.5% will be credited to the

counter party. Additionally, 4% of DOR as a replacement cost

will be charged from defaulting buyer / seller out

of which 90% will be given to the counter party and 10% will be retained by the Exchange as

administrative expenses.

Delivery Centers Ahmedabad and Mumbai at designated Clearing

House facilities of Group 4 Securitas at these centers and at additional delivery centers at

Chennai, New Delhi and Hyderabad

Deliverable grade of

underlying commodity

The selling members tendering delivery will have

the option of delivering such grades as per the contract specifications. The buyer has no option

to select a particular grade and the delivery

offered by the seller and allocation by the Exchange shall be binding on him.

Verification by the Buyer

at the time of release of

delivery

At the time of taking delivery, the buyer can

check his delivery in front of Group 4 personnel.

If he is satisfied with the quantity, weight and quality of material, then he will issue receipt of

the metals instantly. If he is not satisfied with the

metal, he can insist for assaying by any of the approved assayers available at that center. If the

buyer chooses for assaying, Group 4 person will

carry the goods to the assayers facilities, get it assayed and bring it back to Group 4 facilities

along with assayer’s certificate. If the assayer’s

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certificate differs from the certificate submitted

by the seller in respect of quality or weight materially, then the buyer and seller have to

mutually negotiate the final settlement proceeds

within 1 day from receipt of assayer’s report,

however if they do not agree on any mutually acceptable amount within 1 day, then the

Exchange will send the goods to a second

assayer and in that case, the report received from such assayer will be final and binding on

both buyer and seller. The cost of first assaying

as well as cost of transportation from Group 4 to

assayer’s facilities to and fro will be born by the buyer, while the cost of second assaying, if any,

will be equally divided between the buyer and

seller. The vault charges during such period of first and second assaying, if any, will be born by

both the buyers and sellers equally. If the buyer

does not opt for assaying at the time of lifting delivery, then he will not have any further

recourse to challenge the quantity or quality

subsequently and it will be assumed that he has

received the quantity and quality as per the bill made by the seller.

Validation Process On receipt of delivery, the Group 4 personnel will

do the following validations: a. whether the person carrying Gold is the

designated clearing agent of the member.

b. whether the selling member is the bonafied

member of the Exchange. c. whether the quantity being delivered is from

Exchange approved refinery

d. whether the serial numbers of all the bars is mentioned in the packing list provided.

e. whether the original certificates are

accompanied with the Gold Bars Any other validation checks, as they may desire.

Delivery Process In case any of the above validation fails, the

Group 4 Securitas will contact the Exchange

office and take any further action, only as per instructions received from the

Exchange in writing. If all validations are

through, then the Group 4 Securitas personnel will put the Gold in the vault. Then the custodian

of Group 4 will cut a serially numbered Group 4

receipt (in triplicate consisting of White, Pink and

Yellow slips), get the signature of the seller’s clearing agent and signing the same for

authorization, hand over the Pink slip to seller’s

clearing agent, send by courier the third copy (Yellow Colour slip) while retaining the White for

the records of Group 4 Securitas. Group 4 in

30

front of the selling member’s clearing agent will

deposit the said metal into their vault.

Quality Adjustment The price of gold is on the basis of 995 purity. In case a seller delivers 999 purity, he would get a

premium. In such case, the sale proceeds will be

calculated by way of delivery order rate * 999/ 995

Procedure of taking

delivery from the Vault

For the purpose of taking delivery of goods fully

or partially, the Member shall send to the

Exchange an Authority letter on his letter head, authorising a representative on his behalf to take

the delivery. The Authority letter sent by the

Member shall consist of the following details: a. Name of the authorised representative.

b. Name of the Commodity along with quantity.

c. Name of the Vault along with the location. d. Signature of the authorised representative.

e. Proof of Identity viz. PAN card, driving license,

Election ID.

f. Photo identity proof duly attested by the Member.

The above-mentioned details are required to be

sent to the Exchange. Once the Exchange receives the above-mentioned details, the

Exchange will send Delivery Order (DO) to the

Vault authorities directly.

Based on the Delivery Order received, the Vault will issue the requested quantity to the

authorised representative who has to present

himself personally at the Vault along with the requisite photo identity proof in original, the copy

of which was sent/communicated to the

Exchange by its Member. The Vault officials will, upon final

scrutiny/checking of the identity, deliver goods to

the representative of the Member. The Vault

officials in case of any discrepancy or doubt or any other reason may refuse to issue the goods

to the representative under the intimation to the

Exchange. The delivery given to the representative shall be

final & binding to the Member at all times.

Taxes, duties, cess and

levies

Ex-Ahmedabad.

Inclusive of all charges / levies relating to import duty, customs to be borne by Seller. But

excluding Sales Tax / VAT, any other additional

tax or surcharge on sales tax, local taxes and octroi to be borne by the Buyer.

Endorsement of delivery

order

The buyer member can endorse delivery order to

a client or any third party with full disclosure

given to the Exchange. Responsibility for

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contractual liability would be with the original

assignee.

Vault, Insurance and Transportation charges

Borne by the seller till the date of pay-out of delivery and the buyer after the date of pay-out.

Extension of delivery

period

As per Exchange decision due to a force majeure

or otherwise.

Due date rate (DDR) DDR is calculated on 5th day of the contract month. This is calculated by way of taking simple

average of last 5 days of the spot market of

Ahmedabad.

Legal obligation The members will provide appropriate tax forms

wherever required as per law and as customary

and neither of the parties (seller member and

buyer member) will unreasonably refuse to do so.

Applicability of Business

Rules

The general provisions of Byelaws, rules and

Business Rules of the Exchange and decisions taken by Forward Markets Commission, Board of

Directors and Executive Committee of the

Exchange in respect of matters specified above

will form and integral part of this contract. The Exchange or FMC as the case may be further

prescribe additional measures relating to delivery

procedures, warehousing, quality certification, margining, risk management from time to time.

(The interpretation or clarification given by the

Exchange on any terms of this contract shall be final and binding on the members and others.)

STEPS TO BE FOLLOWED FOR DELIVERY

Intention to take delivery

by buyers

On any tender days by 6.00 p.m.

Dissemination of information on tendered

delivery and buyers

interest

The Exchange will inform members through TWS regarding tender notice and delivery intentions of

the seller’s members and the buyers respectively

by 7.00 p.m. on the respective tender days and on Saturdays by 1:00 p.m.

Evidence of stocks in

possession

At the time of issuing delivery order, the Member

must satisfy the Exchange that he holds stocks of

the quantity and quality specified in the Delivery Order at the declared delivery center by

producing warehouse receipt.

Tender notice by seller The seller will issue tender notice along with evidence of delivery to the Exchange in a

specified format by 6:00 p.m. and on Saturdays

by 12:00 noon.

Buyer’s obligation The buyer shall not refuse taking delivery and such refusal will entertain penalty as per the

penal provision.

Allocation of delivery As per the closing price on the respective tender

days.

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Source: MCX Gold Report 1

33

Frequently Asked Questions on Gold

Q1. What is Gold and why is its chemical symbol Au?

Gold is a rare metallic element with a melting point of 1064 degrees

centigrade and a boiling point of 2808 degrees centigrade. Its chemical

symbol, Au, is short for the Latin word for gold, 'Aurum', which literally means

'Glowing Dawn'. It has several properties that have made it very useful to

mankind over the years, notably its excellent conductive properties and its

inability to react with water or oxygen.

Q2. Where does the word Gold come from?

The word gold appears to be derived from the Indo-European root 'yellow',

reflecting one of the most obvious properties of gold. This is reflected in the

similarities of the word gold in various languages: Gold (English), Gold

(German), Guld (Danish), Gulden (Dutch), Goud (Afrikaans), Gull (Norwegian)

and Kulta (Finnish).

Q3. How much gold is there in the world?

At the end of 2001, it is estimated that all the gold ever mined amounts to

about 145,000 tonnes.

Q4. Why is gold measured in carats?

This stems back to ancient times in the Mediterranean /Middle East, when a

carat became used as a measure of the purity of gold alloys (see next

Question 5). The purity of gold is now measured also in terms if fineness, i. e.

parts per thousand. Thus 18 carats is 18/24th of 1000 parts = 750 fineness.

Q5. What is a Carat?

A Carat (Karat in USA & Germany) was originally a unit of mass (weight)

based on the Carob seed or bean used by ancient merchants in the Middle

East. The Carob seed is from the Carob or locust bean tree. The carat is still

used as such for the weight of gem stones (1 carat is about 200 mg). For

gold, it has come to be used for measuring the purity of gold where pure gold

34

is defined as 24 carats. How and when this change occurred is not clear. It

does involve the Romans who also used the name Siliqua Graeca (Keration in

Greek, Qirat in Arabic, now Carat in modern times) for the bean of the Carob

tree. The Romans also used the name Siliqua for a small silver coin, which

was one-twentyfourth of the golden solidus of Constantine. This latter had a

mass of about 4.54 grammes, so the Siliqua was approximately equivalent in

value to the mass of 1 Keration or Siliqua Graeca of gold, i.e the value of

1/24th of a Solidus is about 1 Keration of gold, i.e 1 carat.

Q6. Who owns most gold?

If we take national gold reserves, then most gold is owned by the USA

followed by Germany and the IMF. If we include jewellery ownership, then

India is the largest repository of gold in terms of total gold within the national

boundaries. In terms of personal ownership, it is not known who owns the

most, but is possibly a member of a ruling royal family in the East.

Q7. If all the gold was laid around the world, how far would it stretch?

If we make all the gold ever produced into a thin wire of 5 microns (millionths

of a metre) diameter – the finest one can draw a gold wire, then all the gold

would stretch around the circumference of the world an astounding 72 million

times approximately!

Q8. How much new gold is produced per year?

In 2001, mine production amounted to 2,604 tonnes or 67% of total gold

demand in that year. Gold production has been growing for years, but the real

acceleration took place after the late 1970s, when output was in the region of

1,500tpa. This year output will fall short of production levels in 2001. This is

partly for specific operational reasons at some of the larger mines (Grasberg

and Porgera), along with lower grades at some of the operations in Nevada.

The reduction in exploration and development expenditure over the past five

years is leading a number of analysts to suggest that, with other operations

nearing the end of their lives, global production is likely to drop slightly over

the next two to three years subject always of course to price.

35

Q9. How much does it cost to run a gold mine?

Gold mining is very capital intensive, particularly in the deep mines of South

Africa where mining is carried out at depths of 3000 meters and proposals to

mine even deeper at 4,500 meters are being pursued. Typical mining costs

are US $238/troy ounce gold average but these can vary widely depending on

mining type and ore quality. Richer ores mined at the surface (open cast

mining) is considerably cheaper to mine than underground mining at depth.

Such mining requires expensive sinking of shafts deep into the ground.

Q10. How does a gold mine work?

The gold-containing ore has to be dug from the surface or blasted from the

rock face underground. This is then hauled to the surface and milled to release

the gold. The gold is then separated from the rock (gangue) by techniques

such as flotation, smelted to a gold-rich doré and cast into bars. These are

then refined to gold bars by the Miller chlorination process to a purity of

99.5%. If higher purity is needed or platinum group metal contaminants are

present, this gold is further refined by the Wohlwill electrolytic process to

99.9% purity. Mine tailings containing low amounts of gold may be treated

with cyanide to dissolve the gold and this is then extracted by the carbon in

pulp technique before smelting and refining.

Q12. How big is a tonne of gold?

Gold is traditionally weighed in Troy Ounces (31.1035 grammes). With the

density of gold at 19.32 g/cm3, a troy ounce of gold would have a volume of

1.64 cm3. A tonne of gold would therefore have a volume of 51, 760 cm3,

which would be equivalent to a cube of side 37.27cm (Approx. 1' 3'').

36

Gold Terminology

For the purpose of this standard, the following definitions shall apply:

Assaying: The method of accurate determination of the gold content of

the sample expressed in parts per thousand (%). Carat: One-twenty fourth part by mass of the metallic element gold.

Fineness: The ratio between the mass of gold content and the total

mass expressed in parts per thousand (%).

Find Gold: It is gold having fineness 999 parts per thousand (5) and

above without any negative tolerance.

Gold: The metallic element gold, free from any other element.

Standard Gold: Gold having fineness 995 parts per thousand (%) and

above without any negative tolerance.

Grain: One of the earliest weight units used for measuring gold. One

grain is equivalent to 0.0648 grams.

Hallmark: Mark, or marks, which indicate the producer of a gold bar

and its number, fineness, etc.

Karat: Unit of fineness, scaled from one to 24. 24 karat gold (or pure

gold) has at least 999 parts pure gold per thousand; 18-karat has 750,

parts pure gold and 250 parts alloy, etc.

Kilo Bar: A bar weighing one kilogram – approximately 32.1507 troy

ounces.

Legal Tender: The coin or currency which the national monetary

authority declares to be universally acceptable as a medium of

exchange; acceptable for instance in the discharge of debts.

Liquidity: The quality possessed by a financial instrument of being

readily convertible into cash without significant loss of value.

Troy Ounce: A unit of weight, equal to about 1.1 avoirdupois

(ordinary) ounces. The word ounce when applied to gold refers to a troy

ounce. 1 troy ounce is equivalent to 31.1034768 grams.

37

CONCLUSION

After almost two years that commodity trading is finding favour 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, commodity trading offers a good option for long-term

investors and arbitrageurs and speculators. And, now, with daily global

volumes in commodity trading touching three times that of equities, trading in

commodities cannot be ignored by Indian investors.

Online commodity exchanges need to revamp certain laws governing futures

in commodities to make the markets more attractive. The 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

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 hub for select commodities.

Commodity trading in India is poised for a big take-off in India on the back of

factors like global economic recovery and increasing demand from China for

commodities. Considering the huge volatility witnessed in the equity markets

recently with the Sensex touching 21000 level commodities could add the

required zing to investors' portfolio. Therefore, it won't be long before the

market sees the emergence of a completely redefined set of retail investors.

38

Bibliography

www.mcxindia.com

www.indiamba.com

www.commodityindia.com

www.business.mapsofindia.com

www.bseindia.com

www.ncdex.com

www.sebi.gov.in, SEBI Bulletin

www.indiaexpress.com

www.nmce.com

www.nbotind.org

www.gold.org