Gold as an Investment Option

8/3/2019 Gold as an Investment Option

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Gold as an a investment option in commodity Market

Industry Profile

A. Commodity includes all kinds of goods. FCRA defines "goods" as

"every kind of movable property other than actionable claims, money and

securities. The national commodity exchanges have been recognized by the

Central Government for organizing trading in all permissible commodities which

include precious (gold & silver) and nonferrous metals, cereals and pulses,

ginned and unginned cotton, oilseeds, oils and oilcakes, raw jute and jute goods,

sugar and , potatoes and onions, coffee and tea, rubber and spices, etc.

A commodity also has a use value, an exchange value and a price. It has a use

value because, by its intrinsic characteristics, it can satisfy some human need orwant, physical or ideal. By nature this is a social use value, i.e. the object is

useful not just to the

It has an exchange value, meaning that a commodity can be traded for

other commodities, and thus give its owner the benefit of others' labor (the

labor done to produce the purchased commodity).

Price is then the monetary expression of exchange-value (but exchange

value could also be expressed as a direct trading ratio between two

commodities without using money

WHAT IS COMMODITY MARKET?Commodity markets are markets where raw

or primary products are exchanged. These raw commodities are traded on

regulated exchanges, in which they are bought and sold in standardized

Contracts.

TYPES OF COMMODITY:

Basically products in commodity is broadly classified into 3 category, they are

Agricultural product

Energy product

Metals

AMC Engineering college, Bannerghatta Road Bangalore - 83

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HISTORY OF COMMODITY MARKET:

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

products. While gold and silver, wheat and guar, were widely traded using

standard instruments in the 19th century in India, other basic foodstuffs as

soybeans were only added quite recently in most markets. For a commodity

market to be established there must be very broad consensus on the variations

in the product that make it acceptable for one purpose or another.

Ancient Indian use of bullions, stones and many agro product or other items as

commodity money, people have sought ways to standardize and trade contracts

in the delivery of such items, to render trade itself more smooth and predictable.

The economic impact of the development of commodity markets is hard to over-

estimate. Through the 19th century "the exchanges became effective spokesmen

for, and innovators of, improvements in transportation, warehousing, and

financing, which paved the way to expanded interstate, national and international

trade."

Classical civilizations built complex global markets trading gold or silver for

spices, cloth, wood and weapons, most of which had standards of quality and

timeliness. Considering the many hazards of climate, piracy, theft and abuse ofmilitary fiat by rulers of kingdoms along the trade routes, it was a major focus of

these civilizations to keep markets open and trading in these scarce

commodities. Reputation and clearing became central concerns, and the states,

which could handle them most effectively, became very powerful empires, trusted

by many peoples to manage and mediate trade and commerce. Therefore 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 measures and a hassle-free settlement system.


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COMMODITIES MARKET CAN OFFER

a) FOR AN INVESTOR:-

Commodities futures represent a good form of investment for an investor 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 instruments providing better diversification.

b) FOR ANIMPORTER OR AN EXPORTER:

Commodities futures can help an importer or exporter 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 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.

c) FOR A PRODUCER OF A COMMODITY:

Futures can help a producer as follows:

Lock-in the price for the 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 abuyer. Selling commodity futures contract can give you assured demand at the

time of harvest.


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d) FORA LARGE SCALE CONSUMER OF A PRODUCT:

Here is how this market can help a consumer:

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 areassured of supply of a fixed quantity of materials at a pre-decided price at the

appointed time.

COMMODITIES EXCHANGE:

A commodities exchange is an exchange where various commodities and

derivatives products are traded. Most commodity markets across the world trade

in agricultural products and other raw materials (like wheat, barley, sugar, maize,

cotton, cocoa, coffee, milk products, pork bellies, oil, metals, etc.) and contracts

based on them. These contracts can include spots, forwards, futures and options

on futures. Other sophisticated products may include interest rates,

environmental instruments, swaps, or ocean freight contracts.


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DIFFERENT COMMODITY EXCHANGES:

(1) U.S MARKETS:

The Chicago Board Of Trade (CBOT)

The Chicago Mercantile Exchange (CME)

The New York Mercantile Exchange (NYMEX)

The New York Board Of Trade (NYBOT)

The London Metal Exchange (LME)

The Tokyo Commodity Exchange (TOCOM)

(2) INDIAN MARKETS:

Multi-Commodity Exchange (MCX)

National Commodity and Derivative Exchange (NCDEX)

National multi commodity exchange (NMCE)

INDIAN COMMODITY FUTURES EXCHANGES:


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INTERNATIONAL SCENARIO:

Gold producing countries:

South Africa, United States, Australia, China , Canada, Russia, Indonesia,

Peru, Uzbekistan, Papua New Guinea, Ghana, Brazil, Chile, Philippines, Mali,

Mexico, Argentina, Kyrgyz tan, Zimbabwe, Colombia.

Gold Production by major region, 2008 (total, 2,556 tonnes)

The largest

producer of

Gold is South

Africa. It

accounts for

an estimated

16.5 million

ounces ofGold annually

in the next 3

years; and produces almost 14 percent of the worlds bullion. Hoping to control

its declining production trend due to the extended weakness in the price of Gold

in recent years, the South African Gold Industry is working in the direction to

lower its production costs and boost

productivity. The second largest producer of gold is United States. It accounts

for an estimated production about 11% of the worlds Gold supply. Due to the

expansion US Mining operations, and because of the reduced profitability due to

the low price of Gold, reduction in mine production is expected by 9% by the US


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during the next three years. The third largest producer of gold is Australia with an

10% annual production.

Nearly 45% of the world Gold supply was produced by the top three producing

nations. Latin America (Mexico, Peru, Chile and Brazil) and the Far East

producers are expected to increase production in the next three Years. Though

these countries add up to a very small share in worlds total supply, their

production increase will counteract some of the production cuts made by the top

three, big producers.

WORLD GOLD MARKETS:

London as the great clearing house

New York as the home of futures trading

Zurich as a physical turntable

Istanbul, Dubai, Singapore and Hong Kong as doorways to important

consuming regions

Tokyo where TOCOM sets the mood of Japan

Mumbai under India's liberalized gold regime.

INDIAN GOLD MARKET: Gold is valued in India as a savings and investment vehicle and is the

second preferred investment after bank deposits.

India is the world's largest consumer of gold in jewellery as investment.

90% of the gold is used for jewellery.

In July 1997 the RBI authorized the commercial banks to import gold for

sale or loan to jewelers and exporters. At present, 13 banks are active in the

import of gold.

The gold hoarding tendency is well ingrained in Indian society.

Domestic consumption is dictated by monsoon, harvest and marriage

season. Indian jewellery off take is sensitive to price increases and even


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more so to volatility.

In the cities gold is facing competition from the stock market and a wide

range of consumer goods.

The domestic consumption was stood at 750 tonnes in 2008

PRODUCTION OF GOLD IN INDIA:

Gold holdings in India are estimated to be in the range of 10000-20000

tonnes and are predominantly private.

Indias gold consumption is 25% of worlds total gold production.

India has a very limited gold production of around 9 tonnes in 2002 The

domestic production of the gold is very limited which is around 9 tonnes in

2002 including 2.940 tonnes from mines and 6.203 tonnes from Birla

Copper.

Currently the domestic production is 2 tonnes p.a. only

More than 90% of Indian consumption is met through imports

The availability of recycled Gold is price sensitive and the fabricated old

Gold scraps is price elastic and was estimated to be near 500 tonnes in

2006 rose almost more than 40%.

TYPE OF MARKET:

Cash market: it deals with the spot market trading

Future market: it deals with future market trading

CASH AND FUTURE MARKET:

Hedging is a mechanism by which the participants in the physical/cash

markets can cover their price risk. Theoretically, the relationship between

the futures and cash prices is determined by cost of carry. The two prices

therefore move in tandem. This enables the participants in the


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physical/cash markets to cover their price risk by taking opposite position

in the futures market.

Futures prices evolve from the interaction of bids and offers emanating

from all the buyers and sellers which converge in the

trading floor or the trading engine. The bid and offer prices are based

on the expectations of prices on the maturity date.

Participants in physical markets use futures market for price discovery and

price risk management. In fact, in the absence of futures market, they

would be compelled to speculate on prices.

The spot price is the real price of the physical commodity while the futures

price refers to the price of a contract being traded in the futures market.

REGULATORY MEASURES EVOLVED BY THE OMMISSION

Limit on open positions of an individual operator to prevent overtrading.

Limit on price fluctuations to prevent abrupt upswing or downswing inprices.

Special margin deposits to be collected to be collected on outstanding

purchases or sales to curb excessive speculative activity through financial

restraints.

Minimum/maximum prices to be prescribed to prevent futures prices from

falling below the levels that are un-remunerative and from rising above the

levels not warranted by genuine supply and demand factors.

During shortages, extreme steps like skipping trading in certain deliveries of

the contract, closing the markets for a specified period and even closing out

the contract to overcome emergency situations are taken.

Company Profile


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Nirmal Jain, MBA and a Chartered and Cost Accountant, founded Indias

leading financial services company India Infoline Ltd. in 1995, providing globally

acclaimed financial services in equities and commodities broking, life insurance

and mutual funds distribution, among others. Mr. Jain began his career in 1989

with Hindustan Levers commodity export business, contributing tremendously to

its growth. He was also associated with Inquire-Indian Equity Research, which he

co-founded in 1994 to set new standards in equity research in India.

Indiainfoline a one-stop financial service shop, most respected for quality of its

advice, personalized service and cutting-edge technology.India Infoline Limited is listed on both the leading stock exchanges in India, viz.

the Stock Exchange, Mumbai (BSE) and the National Stock Exchange (NSE) and

is also a member of both the exchanges. It is engaged in the businesses of

Equities broking, Wealth Advisory Services and Portfolio management Services.

It offers broking services in the Cash and Derivatives segments of the NSE as

well as the Cash segment of the BSE. It is registered with NSDL as well as CDSL

as a depository participant, providing a one-stop solution for clients trading in the

equities market. It has recently launched its Investment banking and Institutional

Broking business.

A SEBI authorized Portfolio Manager; it offers Portfolio Management Services to

clients. These services are offered to clients as different schemes, which are

based on differing investment strategies made to reflect the varied risk-return

preferences of clients.


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The content services represent a strong support that drives the broking,

commodities, mutual fund and portfolio management services businesses.

Revenue generation is through the sale of content to financial and media houses,

Indian as well as global.

The content services represent a strong support that drives the broking,

commodities, mutual fund and portfolio management services businesses.

Revenue generation is through the sale of content to financial and media houses,

Indian as well as global.

It undertakes equities research which is acknowledged by none other than

Forbes as 'Best of the Web' and 'a must read for investors in Asia'. IndiaInfoline's research is available not just over the internet but also on international

wire services like Bloomberg (Code: IILL), Thomson First Call and Internet

Securities where India Infoline is amongst the most read Indian brokers.


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Board of Directors

Mr. Nirmal Jain Chairman and Managing Director

R Venkataraman Executive Director

Mr. Nilesh Vikamsey Independent Director

Mr Sat Pal Khattar Non Executive Director

Mr. Kranti Sinha Independent Director

India infolines services as follows.

Vision

To be the most respected company in the financial services space

India Infoline Commodities Limited.


Institutional DistributiServices

Depository

Services

Commodities

BrokingServices

WealthManagement

Services

Internet

Trading

Private Equity

Lending Services

Equity&DerivativeTrading

12

InternationalEquity &

Commodities


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India Infoline Commodities Pvt Limited is engaged in the business of

commodities broking. Our experience in securities broking empowered us with

the requisite skills and technologies to allow us offer commodities broking as a

contra-cyclical alternative to equities broking.

India Infoline Marketing & Services

India Infoline Marketing and Services Limited is the holding company of

India Infoline Insurance Services Limited and India Infoline Insurance Brokers

Limited.

Equities

Indiainfoline provided the prospect of researched investing to its clients,

which was hitherto restricted only to the institutions. Research for the retail

investor did not exist prior to Indiainfoline. Indiainfoline leveraged technology to

bring the convenience of trading to the investors location of preference

(residence or office) through computerised access. Indiainfoline made it possible

for clients to view transaction costs and ledger updates in real time.

Mortgages

During the year under review, Indiainfoline acquired a 75% stake in Money

tree Consultancy Services to mark its foray into the business of mortgages and

other loan products distribution. The business is still in the investing phase and at

the time of the acquisition was present only in the cities of Mumbai and Pune.

The Company brings on board expertise in the loans business coupled with

existing relationships across a number of principals in the mortgage and personal

loans businesses. Indiainfoline now has plans to roll the business out across its

pan-Indian network to provide it with a truly national scale in operations.

Commodities


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Indiainfoline extension into commodities trading reconciles its strategic

intent to emerge as a one-stop solutions financial intermediary. Its experience in

securities broking has empowered it with requisite skills and technologies. The

Companys commodities business provides a contra-cyclical alternative to

equities broking. The Company was among the first to offer the facility of

commodities trading in Indias young commodities market (the MCX commenced

operations only in 2003). Average monthly turnover on the commodity exchanges

increased from Rs 0.34 bn to Rs 20.02 bn. The commodities market has several

products with different and non-correlated cycles. On the whole, the business is

fairly insulated against cyclical gyrations in the business.

Invest Online

Indiainfoline has made investing in Mutual fund and primary market so effortless.

All you have to do is register with us and thats all. No paperwork no queues and

No registration charges.

Insurance

An entry into this segment helped complete the clients product basket;

concurrently, it graduated the Company into a one-stop retail financial solutions

provider. To ensure maximum reach to customers across India, we have

employed a multi pronged approach and reach out to customers via our Network,

Direct and Affiliate channels. Following the opening of the sector in 1999-2000, a

number of private sector insurance service providers commenced operations

aggressively and elped grow the market.


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Mutual fund

Indiainfoline offers you a host of Mutual fund choices under one roof,

backed by in-depth research and advice from research house and tools

configured as investor friendly.

Wealth Management Service.

Imagine a financial firm with the heart and soul of a two-person

organization. A world-leading wealth management company that sits down with

you to understand your needs and goals. We offer you a dedicated group for

giving you the most personal attention at every level.

Newsletters.

The Daily Market Strategy is your morning dose on the health of the

markets. Five intra-day ideas, unless the markets are really choppy coupled with

a brief on the global markets and any other cues, which could impact the market.

Occasionally an investment idea from the research team and a crisp round up of

the previous day's top stories. That's not all. As a subscriber to the Daily Market

Strategy, you even get research reports of India Infoline research team on a

priority basis.

The Indiainfoline Weekly Newsletter is your flashback for the week gone by. A

weekly outlook coupled with the best of the web stories from Indiainfoline and

links to important investment ideas, Leader Speak and features is delivered in

your inbox every Friday evening.

Research.

Sound investment decisions depend upon reliable fundamental data and stock

selection techniques. Indiainfoline Equity Research is proud of its reputation for,

and we want you to find the facts that you need. Equity investment professionals


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routinely use our research and models as integral tools in their work.

They choose Ford Equity Research when they can clear your doubts.

Portfolio Management Service.

India Infoline Portfolio Management Service is a product wherein an equity

Investment portfolio is created to suit the investment objectives of a client.

Indiainfoline invest resources into stocks from different sectors, depending on

client risk-return profile. This service is particularly advisable for investors who

cannot afford to give time or don't have that expertise for day-to-day

management of their equity portfolio.

LITERATURE REVIEW:

INVESTMENT:


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Investment is a sacrifice of current money or other resources for future benefits.

Two key aspects of any investments are time and risk. The sacrifice takes place

now and is certain whereas benefit is expected in future & tends to be uncertain.

An investors plan of attack to guide their investment decisions based on

individual goals, risk tolerance & future needs for capital. The components of

most investment strategies include asset allocation, buy & sell guidelines & risk

guidelines.

REASONS FOR INVESTMENTS:

Future income

Earning short term & long term profit

Liquidity of capital

Saving the money

Saving tax liability

INVESTMENT ALTERNATIVES:

As an investor will have a wide array of investment avenues available, such as:

Non-Marketable Financial Assets: A good portion of financial assets is

represented by Non-Marketable Financial Assets. These can be classified into

the following broad categories:

Bank Deposit,

Post office deposits Company deposits,

Provident Fund Deposits.


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Equity Shares : Equity is the share in the company. It means that one has

an ownership stake in the company. These indirectly mean that equity

holder has a residual interest in income & wealth of the company. Equity

shares are classified into the following broad categories by stock market

analysis.

Blue chip Shares

Growth shares

Income shares

Cyclical share

Speculative shares

Bonds : It represents the long-term debt instruments. The issuer of a bond

promises to pay a stipulated of cash flows. Bonds may be classify into the

following categories,

Government securities,

PSU bonds,

Debenture of Private Sector companies,

Preference bonds

Money Market Instrument : It is the instrument which has a maturity of

less than one year. Some of the important money instrument are,

Treasury bills,

Commercial bonds,

Certificates of Deposit.

Mutual Funds : It is an indirect way to invest in Equity shares or fixed

income instruments. There are various schemes floated by mutual funds

which will help to invest your money as per your needs & requirements.

Three board types of mutual funds schemes:

Equity schemes,


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Debt schemes,

Balanced schemes, etc.

Life Insurance : It is not a direct form of investment but in a board sense,

it may be viewed as an investment. Few important types of insurance

policies in India are,

Endowment assurance policy

Money back policy

Whole life policy

Term assurance policy

Real Estate : the most important asset in their portfolio is a residential

house & the most affluent investors are likely to be interested in the

following types of real estate:

Agricultural land,

Semi-urban land,

Time-share in a holiday resort.

Commodities : Commodities are the items that are generally small in size

but highly valuable in monetary terms, such as:

Metals,

Agricultural products,

Energy.

Financial Derivatives : it is an instrument whose value is derived from the

value of an underlying asset. It may be viewed as a side bet on the asset.

The most important financial derivatives from the point of view of investors

are:

Options,


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Futures.

Statement of problem

The statement of problem is to study the investment opportunities in gold market,

methods of analyzing the price trends, utilization of derivatives in the market,

evaluating the impact of various factors affecting the gold prices & hedging

strategies used in the market.

Objectives of the study

To know the method of investment in gold market.

To understand. & lay down the fundamental & technical tools to predict theprice of the commodity.

To understand the fundamentals of trading in derivatives in gold market.

To understand the functioning of the commodity market & governing

authority of commodity market.

Scope of the study

The scope of the study was to get a clear view about the concept of

Commodity Market & Investment opportunities in gold The report covers brief

description about commodity market. It gives brief idea about commodity

derivatives and method of investment in gold.

Research Methodology

Sources of data collection

The primary data is collected from investors & company with the help of a

structured questionnaire.

The secondary data is collected from internet, newspapers, mazgines & text

books.


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Design of the study:

Research design

Descriptive design

Sampling method

Convenient random sampling is taken for this project

Sampling method

Convenient random sampling is taken for this project

Sample size

The sample size is 30 units from the Bangalore city.

Limitations of the study

The interaction with company people may be influenced by their busy

schedules and attitude. Due the volatility of the commodity market, some of

the predictions are based on the personal views of the experts. The study

was limited to a period of 45 days only. So the critical information is notcollected. The sample unit has been randomly selected which might not give

true representative of the total market


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CHAPETER 2

ANALYSIS & DATA INTERPRETATION

FUNDAMENTAL ANALYSIS:

The fundamental analysis is likely to be based on demand & supply, production $

consumption, import & export, geo-political tension, currency fluctuation, governmentpolicy, speculation and on some fundamental news so the fundamental analysis of gold

is also associated with this factors.

Four years gold price as follows from 2005- 2008


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REASONS FOR RISE IN GOLD PRICES

The following are the reasons for rise in gold prices:

In 2005


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The World Gold Council reveal that the rising gold price did not deter

buyers, with net consumer demand 6% higher in tonnage terms

(17% higher in dollar terms) than during the same period in 2004.

The results bring the year-to-date increase to 8% in tonnage terms

and 23% in dollar terms.

Overall supply of gold to the market was sharply reduced at

828 tonnes, 22% below the level of supply 2004. Identified net

central bank selling was 42% below last years levels with sales

partly offset by continued buying from Argentina. Argentinas

further 12 tonne purchase brought its 2005 annual total to 55

tonnes. However, as part of the Central Bank Gold Agreement, net

central bank selling is expected to rise.

Consumer Demand

Purchasers in Asia and the Middle East are usually highly

sensitive to changes in the price level; however reports from many

countries now suggest that consumers have not only become

accustomed to prices in excess of $400 per ounce but are prepared

for further increases. As a result, jewellery consumption in Q3 was6% higher than a year earlier in tonnage terms and 17% higher in

dollar terms during the same period in 2004. Net retail investment

was 10% higher in tonnage terms and 21% higher in dollar terms.

1 India

In both jewellery and retail investment in India were 16%

higher than a year earlier. Strong economic growth, underpinned by

fast growth in manufacturing and services, and the financial comfort

afforded by last years good monsoon contributed to this growth


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rate. 2005 also saw an increase in shopping festivals and

promotions allied to festive occasions.The rise in price encouraged

investment buying as did the underlying concerns regarding

geopolitical issues and fears over potential inflation, particularly in

the light of the oil price rise.

Industrial Demand

Industrial demand accounted for 83 tonnes in Q3, a 5% rise on

the same period in 2004. Electronic demand continued to be the

main influence, although the growth rate of this component was

lower than in Q2, reflecting the first signs of economic slowdown.

Supply

The overall supply of gold to the market in 2005 was sharply reduced

from one year earlier at 828 tonnes, 22% below the level of supply

in 2004.

1 Mine production was 3% lower due to temporary factors including

the ongoing effects of last years landslides at the Grasberg mine in

Indonesia.

2 De-hedging was substantial in the quarter reaching an estimated144 tonnes compared to an exceptionally small (for recent years) 4

tonnes one year earlier.

3 Scrap, too, was lower than in 2004 when the rising price provoked

more selling back of jewellery, bars and coins.

4 Identified net central bank selling, at 87 tonnes, remained

substantially less than 2004 levels. Among the signatories of the

Central Bank Gold Agreement there was continued, steady selling

by Switzerland and also a small sale by Germany for coin minting.

Argentina, which had purchased 42 tonnes in the first half year,

bought a further 12 tonnes, making 55 tonnes in total for the year.


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In 2006

Investment Demand

Identifiable investment in 2006 was 26% higher than a year

earlier in tonnage terms and 37% higher in value terms. The fastest

growing category was Exchange Traded Funds and similar products

(ETFs) which grew by a massive 53% in tonnage terms and 67% in

dollar terms. Of the total 203 tonnes inflow, 168 tonnes, or 83% of

the total, were accounted for by the WGC-backed, street TRACKS

Gold Shares, listed on the New York Stock Exchange.

Aside from ETFs and similar products, there was positive

growth in all categories of gold investment for the year as a whole.

Despite profit-taking in the fourth quarter, bar hoarding and official

coins increased by 8% and 6% respectively over the year while

retail investment in medals and imitation coins, a category

concentrated largely in India, grew by a substantial 26% over theyear.

Jewellery Demand

Overall jewellery demand in 2006 was 5% higher than 2005 in

tonnage terms and a substantial 14% higher in dollar terms. New

annual demand records were set in 2006 in UAE, Vietnam and, for

the third successive year, in Turkey.

In tonnage terms, double-digit increases were seen in India (up

14%) and Saudi Arabia (up 12%) with solid increases of around 6 to

8% in China, Taiwan, United Arab Emirates and Turkey for the year

as a whole.


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Consumer demand trends in India:

1 Overall consumer demand in India in 2006 was 17% higher in

tonnage terms than the year before. In rupee terms, this was

equivalent to a 25% increase bringing the value of gold demand in

India to a second successive annual record.

1 Jewellery demand also experienced a second successive annual

record of over 20% in rupee terms over 2005. This translated to an

increase of 14% in tonnage terms, accounting for 589 tonnes.

1 Net retail investment was less affected by the upward price

movement and set a new annual record in tonnage terms, with a

massive 34% increase over 2005.

In 2007

Consumers and investors pushed demand for gold to a record

level of $65.3billion in 2007, according to figures published by the

World Gold Council (WGC), with positive tonnage growth in the

investment and industrial segments and double-digit dollar growth

in the jewellery sector. The record dollar values for overall demandand jewellery demand occurred despite a fall in supply, reducing the

quantity of gold purchased.

Investment Demand

Identifiable investment in 2007 was 7% higher than 2006 in

tonnage terms and 45% higher in dollar terms. The fourth quarter

was particularly strong with a 19% rise in tonnage terms and a 51%

increase in dollar terms.

. Investment into the ETFs varied throughout the year but

they continued to attract buy and hold investors, thus suffering

only very limited attrition at times when other gold instruments


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were seeing disinvestment. By the end of 2007 the gold held by ETF

and similar funds amounted to 652.5 tonnes, worth $13.3bn.

Aside from ETFs and similar investment products, net retail

investment displayed a steadily improving trend throughout the

year. In Q1 and Q2 tonnage was 33% and 18% respectively below

year-earlier levels; in Q3 and Q4 tonnage was 16% and 41%higher.

Jewellery Demand

For the year as a whole, demand rose 14% to a new annual

record of $44bn. Q4 was also a record in dollar terms at $13.5bn.

However, at 2,267 tonnes, tonnage was 16% lower than a year

earlier, mainly due to declines in the first eight months of the year,

when price movements were a deterrent to jewellery purchases,

especially in Asia and the Middle East.

As price volatility subsided from late August, conditions

became better for jewellery demand. It then surged from mid-

September to late-October when the price fell below $600 andremained, until the very end of October, in a $570-$600 range. This

period also saw the run-up to both Diwali in India and the id ul

Fitr at the end of Ramadan, both of which occurred almost

simultaneously in late-October, and which are both strong gold

buying occasions. While demand was lower in November, a fall-back

of the price in December, coupled with Christmas and the Eid al

Adha at the end of the year, helped demand recover.

In summary, jewellery demand in Q4 was stronger than in the

earlier part of the year. In the first half year it was 28% lower than a

year earlier in tonnage terms and effectively unchanged in dollar

terms. In Q3 it was 9% lower than a year earlier in tonnage terms


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but 29% higher in dollar terms. In Q4 it was 2% higher than in Q4

2006 and 29% higher in dollar terms.

Industrial Demand

Industrial and dental demand reached a new record in both

tonnage and dollar terms in 2007. Tonnage figures, up 7% on 2006

at 458 tones. This was due to vibrant demand from the electronics

sector, which also established new annual records, rising 11% in

tonnage terms to 312 tonnes. In dollar terms the year on year

increases were 45% for the category as a whole and 51% for

electronics.

Supply

Gold supply was tight in 2007, falling 13% from 2006 levels to

3,451 tonnes, due to a sharp reduction in net central bank selling,

and to a sharp increase in producer de-hedging. These factors

reduced overall supply by 657 tonnes. Mine output contributed a

further 56 tonne reduction. In 2007 as a whole de-hedgingamounted to 403 tonnes compared to just 86 tonnes in 2006. Total

mine supply (mine output less net de-hedging) was therefore 15%

lower in 2007 than in 2006.

Net central bank sales amounted to just 319 tonnes in 2007,

less than half the 659 tonnes recorded for 2006. Signatories to the

Central Bank Gold Agreement (CBGA) sold just 395.75 tonnes

during the second Agreement year (27 September 2006 to 26

September 2007), over 100 tonnes below the 500 tonne limit.

During the calendar year 2007 their net sales amounted to 341

tonnes, with non-CBGA signatories accounting for 22 tonnes of net

purchases.


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Scrap supply, the only element of supply which is responsive to

price movements in the short-term, rose by 180 tonnes, or 20%, but

this was not sufficient to counter the 23% fall in the other three

elements combined.

In 2008

A steady annual increase in overall identifiable gold tonnage

demand, coupled with a gold price racing towards the long held

$850 record, combined to make dollar demand for gold hit a record

US $79bn in 2008. According to World Gold Councils (WGC) Gold

Demand Trends, identifiable gold demand was 4% higher in 2008

than in 2007 at 3,547 tonnes.

There were very positive stories in three key gold markets. In

China total consumer demand reached 326 tonnes, 26% above

2007 levels. China has now overtaken the US as the second largest

volume retail market for gold jewellery after India, with demand for

jewellery reaching 302 tonnes and surpassing 300 tonnes for the

first time since 1997. In Turkey, 2008 brought record overalldemand for gold. Jewellery demand was, at 188 tonnes, the second

highest annual figure ever, up 14% on 2007. Net retail investment

demand was up 2% on 2007 at 61 tonnes. Strong growth continued

in Russia with jewellery demand rising 11% to set a further annual

record. Growth remained vibrant throughout the year with demand

in Q4 nearly 25% higher than a year earlier making Russia the

fastest growing country for the quarter.

In the investment sector, Q4 2008 saw record levels of inflows

at US$8 billion, the highest quarterly level in recent years. Net retail

investment, in the form of bars and coins was up 2% year on year in

2008, but the last quarter was heavily impacted by price


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movements as investors took profits. Net retail investment in Q4 at

67 tonnes was 39% lower than Q4 2007. After record inflows into

gold exchange traded funds in the third quarter of 2008(139

tonnes), demand fell back to 78 tonnes for the last quarter. Total

ETF demand was 251 tonnes for the year, 4% lower than 2007

levels. Overall identifiable dollar investment demand was up 15%

on 2007 levels.

Industrial demand reached a record 465 tonnes in 2008, up 2%

on 2007. Demand for the fourth quarter meanwhile, was up 2%

year-on-year at 77.4 tonnes.

TECHNICAL ANALYSIS:

MOVING AVERAGE ANALYSIS:

Moving averages are used to smooth out short-term fluctuations, thus

highlighting longer-term trends or cycles. The moving average is a simple

method when compared to least square and it also gives the price movement in

an easy way.

The following table show the three years moving average of gold in 2008

-2009


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Gold price Price Average

Apr 12702

May 11400 11734Jun 11100 11400Jul 11700 11600Aug 12000 12167Sep 12800 12467Oct 12600 12267Nov 11400 12370Dec 13110 12737Jan 13700 13887

Feb 14852

Graph Showing three yearly moving average


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The above graph represents that the gold price indicate the bullish

trends in the market the gold price may go beyond Rs.14000 in 2009.

Risk

Risk refers to the possibility that the actual outcome of an investment

will differ from the expected outcome. For estimating the risk, most of

the investors use standard deviation.

The standard deviation is a measure of how widely values are

dispersed from the average value (the mean). The following formula is

used for computing standard deviation.


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For calculating the S.D, the price of gold in Jan Feb . 2009 is

considered as below

Calculation of SD for the moth of Jan - 2009

Date Price1/1/2009 13435

1/2/2009 13650

1/3/2009 13575

1/4/2009 13540

1/5/2009 13425

1/6/2009 13425

1/7/2009 13220

1/8/2009 13445

1/9/2009 13375

1/10/2009 13602

1/11/2009 134051/12/2009 13700

1/13/2009 13555

1/14/2009 13250

1/15/2009 13310

1/16/2009 13090

1/17/2009 13200

1/18/2009 13240

1/19/2009 13285

1/20/2009 13195

1/21/2009 13215

1/22/2009 13610

1/23/2009 13485

1/24/2009 13765

1/25/2009 14075

1/26/2009 13485

1/27/2009 14075

1/28/2009 14005

1/29/2009 13865

1/30/2009 13740

1/31/2009 14175

Total 419417

Mean 13530

SD=


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Return

Return is the income expected by the investor for investing his money

in a particular security/commodity. It represents the reward for

undertaking investment. The return on gold is calculated by using

following formula Return = (closing price-opening price)/opening

price*100

Date Opening Price Closing Price Return

1/1/2009 13435 13650 1.600

1/2/2009 13650 13569 0.5934

1/3/2009 13575 13540 0.2504

1/4/2009 13540 13540 0.85411/5/2009 13425 13425 0.0

1/6/2009 13425 13220 1.5270

1/7/2009 13220 13445 -1.7019

1/8/2009 13445 13375 0.5503

1/9/2009 13375 13602 1.6971

1/10/2009 13602 13405 1.4483

1/11/2009 13405 13700 2.1484

1/12/2009 13700 13555 3.3962

1/13/2009 13555 13250 1.2075

1/14/2009 13250 13310 0.8174

1/15/2009 13310 13090 -0.30301/16/2009 13090 13200 0.3398

1/17/2009 13200 13240 0.9774

1/18/2009 13240 13285 0.1515

1/19/2009 13285 13195 -2.9890

1/20/2009 13195 13195 0.91840

1/21/2009 13215 13610 -4.3752

1/22/2009 13610 13610 0.4973

1/23/2009 13485 13485 0.0000

1/24/2009 13765 14075 0.9996

1/25/2009 14075 13485 0.90150

1/26/2009 13485 14075 -3.1659


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RELATIVE STRENGTH INDEX (RSI):

RSI measures the strength or weakness of recent activity relative to

historical activity for a particular stock or index. The RSI is an

oscillator. Its value swings between an upper limit and a lower limit.

RSI is calculated using an exponential moving average of the upward

price movements divided by the downward price movements over a

particular time interval, such as 14 days. The RSI can be calculated by

using following formula.

RSI = 100 - [100/(1 + RS)]

Where: RS = AG/AL

AG = Average gain of upward price moves over RSI period of n days

AL = Average loss of downward price moves over RSI period of n

days n= days (many analysts use 9 - 15 day RSI)

Date Gold Price Gain Loss

1/1/2009 13435 215

1/2/2009 13650 751/3/2009 13575 35

1/4/2009 13540 1151/5/2009 13425 01/6/2009 13425 2051/7/2009 13220 2251/8/2009 13445 701/9/2009 13375 227

1/10/2009 13602 1971/11/2009 13405 2951/12/2009 13700 145

1/13/2009 13555 305

1/14/2009 13250 601/15/2009 13310 220

Total 1057 1332

Average 70.467 88.8


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RS= Relative Strength

RSI= Relative Strength Index

RS= Avg gain per day/ Avg loss per day

= 70.467/88.8

= 0.7935

RSI = 100 - (100/1+Rs)

= 100-(100/1+.7935)

= 44.243

Interpretation:

When the RSI rises above 35 or 40 (in a bull market), it is considered

overbought. Since the RSI is 44.243, the gold is over priced. Hence it

may be sold.

DATA ANALYSIS & INTERPRETATION OF PRIMARY

INFORMATION

TABLE 1: showing number of respondents aware of Commodity

trading


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SI.NO

.

Particular No. of

respondents

Percentage

1 Yes 23 77.00%

2 No 7 23.00%

TOTAL 30 100%

Source: question No1 from Questionnaire

NO. of respondent aware of commodity

trading

77% 23%

From the graph it is clear that, 77% of the respondents are of

commodity trading & 23% of the respondents are unaware of the

commodity market.

Interpretation:

It is clear from the above table that the many respondents are

aware of commodity trading.

Table 2: Showing number of respondents dealing in commodity

market

Sl No. Particular No. of

Respondents

Percent

age1 Yes 21 70%2 No 9 30%


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Total 30 100%Source: question No2 from Questionnaire

NO.of respondent dealing in commodity

market

70%

30%

Analysis:

From the above graph it is clear that, 70% of respondents are dealing

in commodity market & 30% of the respondents not trading in the

commodity market.

Interpretation:

It is clear from the above table that the many respondents are

dealing in Commodity market.

Table 3: Showing the respondents experience in trading

Sl. No. No. of years in trading No. of

Respondents

Percenta

ge

1 6 months or less 13 43.332 1 year or less 07 23.333 2 year or less 06 20.004 More than 2 year 04 13.34

Total 30 100%


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Analysis:

From the above data it is clear that 43.33% of the respondents

are settled in investing business6 months or less, 23.33% of

respondents are settled in business of 1 years or less, 20.00% of

respondents are settled in business of 2 years or less and 13.34% of

respondents are settled in business of more than 2 years.

Interpretation:

We can say that investors having sufficient knowledge in

commodity trading. They are the well aware of market conditions.

TABLE 4: showing investors knowledge about commodity derivatives

market

Sl

No.

Particulars No. of

Responden

ts

Percentage

1 Yes 16 53.33%

2 No 14 46.67%Total 30 100%



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Analysis:

from the above data we can say that, 16 respondents have the

knowledge of derivatives in commodity market & 14 respondents lacks

the knowledge of derivatives in the commodity market.

Interpretation:

From the above we can make out there is a mixed opinion regardinginvestors knowledge on commodity derivatives market.

TABLE 5: showing commodity market is a safe investment avenue for

retail investors.

Sl

No.

Particulars No. of

Respondents

Percentage

1 Yes 18 60%2 No 12 40%

Total 30 100%Source: question No.5 from Questionnaire


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Analysis:

From the above table it is clear that 60.00% of respondents are

telling that it is a safe for Investment Avenue. And 40.00% are telling

that not safe for investment.

Interpretation:

From the above analysis we can say that, gold is a safe investment

avenue for majority of investors.

TABLE 6 : showing reasons for commodity preferences

Sl.No. Reasons No. of

Responden

ts

Percentage

1 Number of investors 4 19.06%

2 Low risk 9 42.85%3 Rate of return 7 33.33%

4 Any other 1 4.76%

Total 21 100%


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19.06%

42.85%

33.33%

4.76%Number of

investors

Low risk

Rate of return

Any other

Analysis:

from the above table it has been noticed that, 42.35% of respondents

are investing commodities due to low risk, 33.33% of respondents are

investing in commodities due to rate of return, 19.06% of respondents

in commodities due to number of investors in such commodity, &

4.07% of respondents for any other reasons.

Interpretation:

From the above table it is clear that the most of the investors

who prefers specific commodity due to low risk.

TABLE 7: showing the price voilality in gold market


Sl

No

.

Particulars No. of

Respondent

s

Percentag

e

1 Highly Volatile 06 28.58%2 Volatile 09 42.86%3 Stable 04 19.05%4 Un Stable 02 9.53%

Total 21 100%

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28.58%

42.86%

19.05%

9.53%

Highly Volatile

Volatile

Stable

Un Stable

Analysis:

from the above data it can be said that, 42.86% of respondents says

that gold market is volatile, 28.58% of respondents says that gold

market is highly volatile, 19.05% of respondents says that gold market

is stable, & 9.53% of respondents says that gold market is unstable.Interpretation:

It can be clearly said from the above table, that investors feel Indian

Gold market is volatile.

TABLE 11: showing kind of analysis effective for investment decision

SL.NO ANALYSIS RESPONDENT

S

PERCENT

1 Fundamental 5 252 Technical 5 253 Both 10 50

TOTAL 20 100


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Analysis:

From the above data it can be said that, 50% of respondents

says that, both kind of analysis are effective, 25% of respondents

says that, fundamental analysis are effective, & 25% of respondents

says that technical analysis are effective.

Interpretation:

It can be clearly said from the above table, that investors prefer

both kind of analysis to know the price trends in the market.

TABLE 12: showing opinion about commodity derivatives market in

india

Source: question No. 12 from Questionnaire


Sl No. Particulars No. of

Respondents

Percentag

e1 Highly volatile 09 42.86%

2 Volatile 06 28.58%3 Stable 04 19.05%4 Unstable 02 9.53%

Total 21 100.00%

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No. o

50%


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42.86%

28.58%

19.05%

9.53%

Highly volatile

Volatile

Stable

Unstable

Analysis:

From above table it can be indicated that, 42.86% of respondents says

that, commodity derivatives market is highly volatile, 28.58% ofrespondents says that, commodity market is volatile, 19.05% of

respondents says that, commodity market is stable, & 9.53% of

respondents says that commodity market is unstable.

Interpretation:

It can be clearly said from the above table, that investors feel

Indian commodity derivatives market is highly volatile. This may be

due to resent fall & rise in commodity market.

SUMMARY OF FINDINGS

Primary Findings

1) 77.00% of the respondents are aware of commodity trading &

23% of the respondents are unaware of the commodity market.

2) 70% of respondents are dealing in the commodity market & 30%

of the respondents not trading in the commodity market.

3) 43.33 of the respondents are settled in investing business less

than 6 month, 23.33% of respondents are settled in business of


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less than 1 years & 20.00% of respondents are settled in

business of 2 years or less.

4) 53.33% respondents have the knowledge of derivatives in

commodity market & 46.67% respondents lacks the knowledge

of derivatives in the commodity market.

5) 60.00% of respondents are telling that it is a safe for Investment

Avenue and

40.00% are telling that not safe for investment.

6) 42.35% of respondents are investing commodities due to low

risk, 33.33% of respondents are investing in commodities due to

rate of return, 19.06% of respondents in commodities due to

number of investors in such commodity, & 4.07% of respondents

for any other reasons

7) 42.86% of respondents says that gold market is volatile,

28.58% of respondents says that gold market is highly volatile,

19.05% of respondents says that gold market is stable, & 9.53%

of respondents says that gold market is unstable.

8) 50% of respondents says that, both kind of analysis are

effective, 25% of respondents says that, fundamental analysis

are effective, & 25% of respondents says that technical analysis

are effective.

9) 42.86% of respondents says that, commodity derivatives market

is highly volatile, 28.58% of respondents says that, commodity

market is volatile, 19.05% of respondents says that, commodity

market is stable, & 9.53% of respondents says that commodity

market is unstable.

Secondary findings


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1) In 2005 consumer demand was 10% higher in tonnage terms, in

India retail investment were is 16% higher than a year earlier.

The supply of gold to the market was sharply reduced from one

year earlier at 828 tones, 22% below the level of supply in 2004.

2) In 2006 the investment demand was 26% higher than a year

earlier in tonnage terms and 37% higher in value terms. Overall

jewellery demand in 2006 was 5% higher than 2005 in tonnage

terms and a substantial 14% higher in dollar terms.

3) Overall consumer demand in India in 2006 was 17% higher in

tonnage terms than the year before. In rupee terms, this was

equivalent to a 25% increase bringing the value of gold demand

in India to a second successive annual record.

4) Jewellery demand also experienced a second successive annual

record of over 20% in rupee terms over 2005. This translated toan increase of 14% in tonnage terms, accounting for 589 tonnes.

5) Investment demand in 2007 was 7% higher than in 2006 in

tonnage terms and 45% higher in dollar terms, spurred by a 27%

year on year tonnage increase in holdings of gold Exchange

Traded Funds and similar products. The fourth quarter was

particularly strong with a 19% rise in tonnage terms and a 51%

increase in dollar terms. Jewellery demand rose 14% in dollar

terms in 2007 as a whole, but fell back by 16% in tonnage terms

due to a volatile gold price in the first half of the year. In the


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industrial sector, demand rose by 7% in tonnage terms and 45% in

dollar terms to set a new annual record.

6) Industrial and dental demand reached a new record in both

tonnage and dollar terms in 2007. Tonnage figures, up 7% on

2006 at 458 tones. This was due to vibrant demand from the

electronics sector, which also established new annual records,

rising 11% in tonnage terms to 312 tones. In dollar terms the

year on year increases were 45% for the category as a whole and

51% for electronics.

7) Gold supply was tight in 2007, falling 13% from 2006 levels to

3,451 tonnes, due to a sharp reduction in net central bank

selling, and to a sharp increase in producer de-hedging. These

factors reduced overall supply by 657 tonnes. Mine outputcontributed a further 56 tonne reduction.

8) According to World Gold Councils (WGC) Gold Demand Trends,

identifiable gold demand was 4% higher in 2008 than in 2007 at

3,547 tonnes.

9) In the investment sector, Q4 2008 saw record levels of inflows at

US$8 billion, the highest quarterly level in recent years. Net retail

investment, in the form of bars and coins was up 2% year on

year in 2008, but the last quarter was heavily impacted by price


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movements as investors took profits. Net retail investment in Q4

at 67 tonnes was 39% lower than Q4 2007.

10) Industrial demand reached a record 465 tonnes in 2008, up 2%

on 2007.

11)The moving average trends shows that the gold price indicate

the bullish trends in the market & the gold price may go beyond

Rs. 13887 in 2008.

12)The RSI is 44.243, the gold is over priced. Hence it may be sold.

SUGGESTIONS & RECOMMENDATIONS:

Gold is very sensitive metal because the price of gold is determined

from the international activities. Recommendation to the investor of

gold is that excessive reliance on trading strategies to generate

returns can be dangerous and counter productive. Return from buy

and hold strategy should be more than sufficient to compensate for

the inherent volatility. So a reasonable allocation in a conservative,

diversified portfolio should be 0 to 3% during a gold bear market and

5% to 10% during a bull market.

As an investor one should look technical chart like candle stick, line

graph, bar chart. In candle stick one should look for the resistance and

support level of the price where he will able to judge the range in


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which the price lies, there are different formations in candle stick like

ascending triangle, descending triangle, symmetric triangle on which

one should also look for the breaking or high of the price so that he will

be able to take decision were to enter were to exit. In my view most

attractive investment in gold is through GETF. GETF is easy way of

purchasing gold because we have to pay only one-tenth of the price of

gold, so it is very easy way of investing in gold. Investor should not

fully rely on the news because any news come to market has already

been discounted the big giants always get the news before it reaches

the market. That means the news that come in television, news paper

is late and market has already reacted for that news. For being on the

safer side an investor should always enter into the market with

hedging or arbitraging option cause that will assured the investor with

a reasonable profit, which in turn involves low risk.

Gold as an Investment Option

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