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SCHOOL OF MANAGEMENT SCIENCES
For The Award Of Post Graduate Diploma in Management Submitted By Prashant Kumar Submitted To
(Roll No. : PG/08/32)
SCHOOL OF MANAGEMENT SCIENCES LUCKNOW
A REPORT ON Gold- Investment Rationale
Submitted By Prashant Kumar
(Roll No. : PG/08/26)
SCHOOL OF MANAGEMENT SCIENCES LUCKNOW
This project report is basically done on the gold which is a component traded in the commodity market. Gold is an inflation hedge & also short-term fluctuations in Gold offer good potential for trading. It is in the upward trend and in the current it is safe to invest in the gold. The basic objective behind the project is analyzing the gold market the factors affecting it and fluctuation in the gold market. This project report will help the investors to analyze the right time for investment in the gold. They will also come to know about the various factors which affect the gold market. While doing this project the history and the company profile are basically searched either from the internet or by the literature review of the company. This means that it is basically based on the secondary source. Also the topic related concepts are done on the basis of the secondary sources. The data for the analysis is taken either by the consulting the company’s employees or from the net. So it is partially primary and partially secondary. The analysis part is done with the help of Microsoft EXCEL by computing the required output. Finally the conclusions and recommendations have been written on the self finding basis.
I hereby state that the Project Report titled “Gold –An Investment Rationale.” submitted in partial fulfillment of the degree of Post Graduate Diploma In Management is an original work done entirely by me and is based entirely on my own observations. It has not previously formed the basis for the award of any other degree, diploma, fellowship or any other similar title. The facts presented here are true to the best of my knowledge.
Prashant Kumar PG/08/26
Table of Contents
P.No 8 9 21
22 24 24 24 25 26 27 30 30 32
2) Company Profile. 3) Introduction of the Project.
• • • • • • • • • • Preface Objective of the project Scope of the project Methodology Literature Review Basic terms of Investment Short term & Long Term Investment Options History of Gold Gold as Money Ways of Investment in Gold
4) Factors Affecting Gold and Their Analysis • • • • Crude Oil US Dollar Repo Rate Inflation Rate
40 45 49 55
• • • • • •
Bank Failure Stock Market Gold Anti Trust Committee Real Interest Rate War & Other Crisis Demand & Supply
59 60 64 65 65 66
5) Scenario Analysis 6) Findings 7)Limitations 8) Recommendations 9) References
69 75 77 78 80
This project simply shows the entire dedication of me and the people who have coordinated for successful accomplishment in this project. It shows the knowledge, skill and experience of able minded people. I am greatly obliged to Unicon Investment Solutions for providing me this opportunity to take up this project as long as a platform to learn and enhance my professional skill. I would like to express my deep sense of gratitude to Mr. Sachin Jain –Product Manager (National) Mutual Fund, Unicon Investment Solutions, my corporate guide, for his kind help and support and valuable guidance throughout the project. I am thankful to him for providing me with necessary insights and helping me out at every single step. I also express my deep gratitude to Mr. Dhritiman Chakraborty – Senior Manager Research, Unicon Investment Solutions. I am highly thankful to Dr. Sudhir Sharan my Director under whose able guidance this project work was carried out. I thank him for his continuous support and mentoring during the tenure of the project. I am also thankful to my academic guide Dr. Vandana Shrivastva with deep of my heart who has given me their co-ordination from time to time. I am also thankful to the entire teaching staff without which this acknowledgement will be incomplete.
Prashant Kumar PGDM PG/08/26 SMS- Lucknow
Company Name Business Type Product/Services Address Brands No of Employees Company website Unicon Investment Solutions Trading company, Distributor/Wholesaler Mutual Funds, Insurance, NFO, IPO,Equity,Debt 26, IIIrd Floor, Pusa Road, Karol Bagh, New Delhi Kotak,Hdfc,Hsbc,Reliance,ICICI,BSP etc Above 1000 people www.uniconindia.in
Ownership & Capital:
Year Established Registered Capital Ownership Type Legal Representative 2004 Above US $ 100 million Private Limitated Company Mr. Gajendra Nagpal
Trade & Market: South East Asia.
Unicon is a financial services company which has emerged as a one stop investment solution provider. It was founded in 2004 by two visionary and flamboyant entrepreneurs, Mr. Gajendra Nagpal and Mr. Ram Gupta who possess expertise in the field of finance .The Company is headquartered in New Delhi, and has its corporate office in Mumbai with regional offices in Kolkata, Chennai, Hyderabad and Noida. Unicon is a professionally managed company with outstanding managerial acumen and cumulative experience of more than 200 years in the financial markets. the company is supported by more 3500 uniconians and has an extensive network of over 100 branches , 600 plus business partner locations & 2500 remisers providing it with a national footprint. With a customer base of over 200000, the Unicon Group has an eye for the intricate financial needs of its clients and caters to both their short term and long term financial needs through a comprehensive bouquet of investment services. These services range from offline and online trading in equity, commodities, currency derivatives to debt markets to corporate finance and portfolio management services. The company has a sizable presence in the distribution of 3rd party financial products like mutual funds, insurance products and property broking. It also provides expert Advisory on life insurance, General insurance, mutual funds and IPO’S. The distribution network is backed by in – house back office support to provide prompt and efficient customer service. The equity broking arm – UNICON Securities Pvt. Ltd offers personalized premium services on the NSE, BSE & Derivatives market. The commodity broking arm UNICON commodities Pvt. Ltd offers Services in commodity trading on NCDEX & MCX. The UNICON Group Also has PCG division providing investment solutions for High Net worth Individuals. UNICON can boast of some of the most respected names in the private equity space like Sequoia Capital and Nexus India capital as its shareholders.
Unicon has been founded with the aim of providing world class investing experience to hitherto undeserved investor community. The technology today has made it possible to reach out to the last person in financial market & give him the same level of service which was available to only the selected few. They give personalized premium service with reasonable commissions on the NSE, BSE & Derivative market through their equity broking arm Unicon securities Pvt. Ltd. With their sophisticated technology we can trade through our computer & if we want human touch we can also deal through their relationship managers out of their more than 100 branches across the nation.
Mission of the company:
To create long term value by empowering individual investors through superior financial services supported by culture based on highest level of team work, efficiency & integrity.
Vision of the company:
To provide the most useful and ethical investment solutions guided by values driven approach to growth, client service and employee development.
Name Mr. Gajendra NagpalMr. Ram M Gupta Mr. Y.P. Narang Designation Founder & CEO Co- Founder & President Head- Fixed Income group Chief Operating Officer Chief Financial Officer National Head (E-Broking) Director (P & D) Chief Compliance Officer National Head (Buss.Alliances) Chief Technology Officer Head (Client Relations) Head (HR & Training)
Mr. Sandeep Arora Mr. Vikas Mallan Mr. Trinadh Kiran -
Mr. Subhash Nagpal Ms. Anjali Mukhija Mr. Vijay Chopra Mr. Anurag Nayar -
Mr. Ashish Kukreja Ms. Deepa Mohamed -
SWOT ANALYSIS OF UNICON:
Strengths • Professional Services • Customized solution to customer needs • Support of extensive network of 100 branches and 600 franchises across India • Strong brand Name • Regular information flow and research Opportunities • Growing Indian economy and advent of young investors • Savings of Indians are very high and thus can be channelized investment • Financial product penetration is very low in Tier II and III cities. • Financial product penetration is low in Corporate Changes to be incorporated inMarket Plan • Increase financial awareness amongst investors • Promote financial planning and its benefits • Penetrate retail in tier II and III cities • Penetrate HNI and corporate segments within metro • Extend presence of brand in all states in India Product Plan • Selling all products from every AMC and insurance companies. • Cross selling between mutual funds,Life insurance, general insurance, IPO and fixed Deposit scheme Weakness • Lack of strong MIS framework • Usage of manual paper based processes for reconciliation • Absence of sustainable source of income
Threat • Global economic recession • Financial Markets in hibernation • Enterprises in distress • Financial intermediaries in pain
Financial Plan • Better incentive plan to boost sales • Make efforts to increase overall productivity • Increase Turnover • Increase Profit
People Plan • Increase team size to 250 across the country and activate maximum number of branches • Recruitment of quality manpower to improve sales • Improve motivation level within teams 15
Unicon customers have the advantage of trading in all the market segments in the same window, as they understand the need of transactions to be executed with high speed and reduced time. At the same time, they have the advantage of having all Advisory services for Life Insurance, General Insurance, Mutual Funds and IPO’s also. Unicon is a customer focused financial services organization providing a range of investment solutions to our customers. They work with clients to meet their overall investment objectives and achieve their financial goals. Their clients have the opportunity to get personalized services depending on their investment profiles. Their personalized approach enables clients to achieve their total investment objectives.
The Key products offering are as follows: • Equity- It is of two typesUnicon Plus-It is browser based trading terminal that can be accessed by a unique ID and password. This facility is available to all online customers the moment they get registered. Features: Trading at NSE, BSE & Derivatives on single screen. Add multiple scrip’s on the market watch Greater exposure for trading on the available margin. Common window for display of market watch and order execution. Real time updating of exposure and portfolio while trading. Offline order placement facility. Stop – loss feature. Competitive Brokerages. Banking integration with ICICI Bank, HDFC Bank, AXIS Bank. 16
Proxy link to enable trading behind firewalls.
Unicon swift- It is application based terminal for active traders. It provides better speed, greater analytical features & priority access to Relationship Managers.
Features: Trading at NSE, BSE & Derivatives on the single screen. Add any number of scrips in the market watch. Tick by tick live updation of Intraday chart. Greater exposure for trading on the margin available. Common window for market watch and order execution. Key board driven short cuts for punching orders quickly. Real time updation of exposure & portfolio. Facility to customize any number of portfolio & watch lists. Best 5 bids and offers, updated live for all scripts. Facility to cancel all pending orders with a single click. Instant trade confirmations. Banking integration with ICICI Bank, HDFC Bank, Axis bank, Bank of India, Corporation bank, Karnataka bank, Vijaya Bank etc.
Unicon offers a unique feature of a single screen trading platform in MCX and NCDEX Unicon offers both offline & online trading platforms. You can walk in or place your orders through telephone at any of our branch locations. Features: Live market watch for commodity market (NCDEX , MCX) in one screen. Add any number of scrip’s in the market watch.
Tick by tick live updation of intraday chart.
Greater exposure for trading on the margin available. Common window for market watch and order execution. Keyboard driven shortcuts for punching order • DepositoryIt offers dematerialization services as a participant in central Depository Services Ltd through its Depository operations. The company believes in efficient and cost-effective and integrated service support to its brokerage business. Unicon securities Pvt. Ltd, as a depository participant, will offer depository accounts for individual investors as well as corporate which will enable them to transact in the dematerialized segment, without any hassles. Depository offers a safe, convenient way to hold securities as compared to holding securities in paper form. Their service provides an integrated single platform for all their clients ensuring a risk free, efficient and prompt depository process. • DistributionUnicon is a fast emerging as a leader in the insurance and mutual funds distribution space. It has over 100 branches and a huge number of “ Business Development Executives” who help to source and service the customers throughout the country. Unicon is fast becoming the preferred “ Vendor Independent” distribution houses because of providing efficient service like free collection of cheques , keeping track of the premiums etc. to the customers. Unicon offers the following distribution products: IPO’s Mutual Funds Insurance Properties
With India becoming the epicenter of growth the Global Indian feels the needs to be connected to the domestic growth story. It now offers a convenient and hassle free way of investing in the Indian securities Market to the people who are living outside India and wish to participate in the Indian growth story. • Back office-
Unicon through its online back-office aims to increase the transparency and provides us the link to view the details of our account online any time and any where.
The fixed income vertical of UNICON group deals in sovereign paper, money market/fixed income instruments and merchant banking activities.
Competitors of UNICON:
• • • • • • • • • • • • • • India Bulls Reliance Money India infoline Narayan Securities Pvt. Ltd Vivek Financial Focus Ltd Multiplex Capital Ltd Nikunj stock Broker Ltd O J financial services Ltd Elite stock management Ltd Mani stock brokers Ltd Trans Asia securities Pvt. Ltd SMC RR Centrum
INTRODUCTION OF THE PROJECT
Gold – An Investment Paradise Gold has been synonymous to wealth and prosperity through the ages. The history of Gold dates back to as early as 4000 BC when the prehistoric men used it as a tool. Since then Gold has filled 21
the pages of history as the divine metal that has attracted the attention of men –powerful and otherwise. Gold was the source of power for the kings. Wars were waged; lives were lost as kingdoms piled up and hoarded tonnes of Gold. In the modern history, Gold became the international currency as the Gold standard came into existence. Even after the dismantling of Gold standard, Gold existed as the backbone of international trade and economics as the US accumulated tones of yellow metal. Till today, Gold has retained its basic use as a commodity without losing its sheen as a currency. Gold, because of its ability to protect the wealth of investors can be an ideal addition to a portfolio. Also the short-term fluctuations in Gold offer good potential for trading. Gold has been on its long-term upwards trajectory which began in early 2001. This long-term move has been punctuated by short-term pullbacks offering opportunities for late entrants to join the bandwagon. With the US economy outgrowing the league of developed nations during the last two years coupled with the worsening of long-term structural weaknesses and the subsequent movements in the USD have moved the focus away from Gold’s use as a commodity. However the long-term fundamentals of the yellow metal have also undergone a significant change with the mining output falling quite steadily during the last decade coupled with an evergreen demand especially from Asia. This report analyses the long-term and short-term fundamental factors expected to move Gold prices. We believe that the short-term weakness expected in gold is a great opportunity for the late-comers to join the great Gold. Strategically, gold is one of the two most important commodities on the planet along with crude oil. Gold has been historically recognized as the ultimate store of value and method of payment. The following characteristics of Gold have enabled it play this role:
• • • •
It is durable, homogenous and divisible Gold’s rarity gives it intrinsic value and that value is high per unit of volume. Its value is recognized across the globe and is traded in a continuous market. Gold is the only financial medium of exchange that is not someone else’s liability.
In updating our price outlook, we have considered the following factors: • • • Investment demand will continue to be the prime driver for the rally in Gold prices, As economic factors will make gold more attractive compared to other financial assets. Furthermore strong buying support from the Central Banks of Russia, China and Middle East countries will help support the rally in Gold prices. • Mine production will not be able to meet current demand due to lack of new Discoveries. • The long term average in the Crude/Gold ratio has been around 16 times, but is Currently only around 10 times. In the remaining part of this report we will consider the major factors that are likely to drive Gold prices higher in the near future.
Objective of the project
The objective of my project is: •
To study the current investment scenario To analyze the different options available for investment options
To overview the different ways of investment in gold To acquaint the investor with the factors that affects the investment scenario in gold. To have the extensive overview on the working system of UNICON COMMODITY SECTION.
To analyze the different factors which affect the gold market and suggest the investors about the right time to invest in gold.
Also see that is it the right time to invest in gold or not.
Scope of the study
The analysis of the factors which affect the prices of gold and the investment decisions in gold. A comparative analysis of these factors has been done on the various parameters like Standard Deviation, Regression; correlation to make possible the tedious task of analysis of these factors. Further analyzing the factors will suggest the investors that whether it will be profitable for the investors to invest in gold or not.
Methodology ⇒ The history and the company profile are basically searched either from the internet or by
the literature review of the company. This means that it is basically based on the secondary source. Also the topic related concepts are done on the basis of the secondary sources.
⇒ The data for the analysis is taken either by the consulting the company’s employees or from the net. So it is partially primary and partially secondary. ⇒ The analysis part is done with the help of Microsoft EXCEL by computing the required output. ⇒ Finally the conclusions and recommendations has been written on the self finding basis.
Literature Review: ⇒ Robert Preachter historical report on Gold and silver has been studied ⇒ Sites like email@example.com, mcxindia.in, gold research.org, etc has been studied. ⇒ The literature review of the commodity section of Unicon. ⇒ Annual report published by RBI & World Gold Council
Basic Descriptive terms:
The money you earn is partly spent and the rest saved for meeting future Expenses. Instead of keeping the savings idle, you may like to use savings in Order to get return on it in the future. This is called Investment.
Reasons for investment:
One needs to invest to: Earn return on your idle resources Generate a specified sum of money for a specific goal in life Make a provision for an uncertain future
It is also to meet the cost of Inflation. Inflation is the rate at which the cost of living increases. The cost of living is simply what it costs to buy the goods and services you need to live. Inflation causes money to lose value because it will not buy the same amount of a good or a service in the future, as it does now or did in the past. This is why it is important to consider inflation as a factor in any long-term investment strategy. The aim of investments should be to provide a return above the inflation rate to ensure that the investment does not decrease in value.
Right time for investment:
The sooner one starts investing the better. By investing early we allow our Investments more time to grow, whereby the concept of compounding increases your income, by accumulating the principal and the interest or dividend earned on it, year after year. The three golden rules for all investors are: Invest early Invest regularly Invest for long term and not short term
Various options available for investment:-
One may invest in: Physical assets like real estate, gold/jewellery, commodities etc. Financial assets such as fixed deposits with banks, small saving instruments with post offices, insurance/provident/pension fund etc. or securities market related instruments like shares, bonds, debentures etc.
Short-term financial options available for investment:
Savings Bank Account is often the first banking product people use, which offers low interest (4%-5% p.a.), making them only marginally better than fixed deposits. Money Market or Liquid Funds are a specialized form of mutual funds that invest in extremely short-term fixed income instruments and thereby provide easy liquidity. Unlike most mutual funds, money market funds are primarily oriented towards protecting your capital and then, aim to maximize returns. Money market funds usually yield better returns than savings accounts, but lower than bank fixed deposits. Fixed Deposits with Banks are also referred to as term deposits and minimum investment period for bank FD is 30 days. Fixed Deposits with banks are for investors with low risk appetite, and may be considered 6-12 months investment period as normally interest less than 6 months bank FDs is likely to be lower than money market returns *Long-term financial options available for investment: Post Office Savings: Post Office Monthly Income Scheme is a low risk saving instrument, which can be availed through any post office. It provides an interest rate of 8% per annum, which is paid monthly. Minimum amount, which can be invested, is Rs. 1,000/- and additional investment in multiples of 1,000/-. Maximum amount is Rs. 3, 00,000/- (if Single) or Rs. 6, 00,000/- (if held jointly) during a year. It has a maturity period of 6 years. Premature 27
Withdrawal is permitted if deposit is more than one year old. A Deduction of 5% is levied from the principal amount if withdrawn prematurely.
Public Provident Fund: A long-term savings instrument with a maturity of 15 years and interest payable at 8% per annum compounded annually. A PPF account can be opened through a nationalized bank at anytime during the year and is open all through the year for depositing money. Tax benefits can be availed for the amount invested and interest accrued is tax-free. A withdrawal is permissible every year from the seventh financial year of the date of opening of the account and the amount of withdrawal will be limited to 50% of the balance at credit at the end of the 4th year immediately preceding the year in which the amount is withdrawn or at the end of the preceding year whichever is lower the amount of loan if any. Company Fixed Deposits: These are short-term (six months) to medium-term (three to five years) borrowings by companies at a fixed rate of interest, which is payable monthly, quarterly, semiannually or annually. They can also be cumulative fixed deposits 10 where the entire principal along with the interest is paid at the end of the loan period. The rate of interest varies between 6-9% per annum for company FDs. The interest received is after deduction of taxes. Bonds: It is a fixed income (debt) instrument issued for a period of more than one year with the purpose of raising capital. The central or state government, corporations and similar institutions sell bonds. A bond is generally a promise to repay the principal along with a fixed rate of interest on a specified date, called the Maturity Date. Mutual Funds: These are funds operated by an investment company, which raises money from the public and invests in a group of assets (shares, debentures etc.), in accordance with a stated set of objectives. It is a substitute for those who are unable to invest directly in equities or debt because of resource, time or knowledge constraints. Benefits include professional money management, buying in small amounts and diversification. Mutual fund units are issued and redeemed by the Fund Management Company based on the fund's net asset value (NAV), which is determined at the end of each trading session. NAV is calculated as the value of all the shares held by the fund, minus expenses, divided by the number of units issued. Mutual Funds are
usually long term investment vehicle though there some categories of mutual funds, such as money Market mutual funds, which are short-term instruments.
History of Gold:
Gold was first discovered as shining, yellow nuggets. Gold became a part of every human culture. Its brilliance, natural beauty, and luster, and its great malleability and resistance to tarnish made it enjoyable to work and play with. Gold is the easiest of the metals to work. It occurs in a virtually pure and workable state, whereas most other metals tend to be found in ore-bodies that pose some difficulty in smelting. Gold's early uses were no doubt ornamental, and its brilliance and permanence (it neither corrodes nor tarnishes) linked it to deities and royalty in early civilizations
Gold as Money:
Gold, measured out, became money. Gold's beauty, scarcity, unique density (no other metal outside the platinum group is as heavy), and the ease by which it could be melted, formed, and measured made it a natural trading medium. Gold gave rise to the concept of money itself: portable, private, and permanent. Gold (and silver) in standardized coins came to replace barter arrangements, and made trade in the Classic period much easier. Gold was money in ancient Greece. The Greeks mined for gold throughout the Mediterranean and Middle East regions by 550 B.C., and both Plato and Aristotle wrote about gold and had theories about its origins. Gold was associated with water (logical, since most of it was found in streams), and it was supposed that gold was a particularly dense combination of water and sunlight.Their science may have been primitive, but the Greeks learned much about the practicalities of gold mining. By the time of the death of Alexander of Macedon (323 B.C.), the Greeks had mined gold from the Pillars of Hercules (Gibraltar) all the way eastward to Asia Minor and Egypt, and we find traces of their placer mines today. Some of the mines were owned
by the state, some were worked privately with a royalty paid to the state. Also, nomads such as the Scythians and Cimmerians worked placer mines all over the region. The surviving Greek gold coinage and Scythian jewelry both show superb artistry. The Roman Empire furthered the quest for gold. The Romans mined gold extensively throughout their empire, and advanced the science of gold-mining considerably. They diverted streams of water to mine hydraulically, and built sluices and the first 'long toms.' They mined underground, also, and introduced water-wheels and the 'roasting' of gold-bearing ores to separate the gold from rock. They were able to more efficiently exploit old mine-sites, and of course their chief laborers were prisoners of war, slaves, and convicts. A monetary standard made the world economy possible. The concept of money, (i.e., gold and silver in standard weight and fineness coins) allowed the World's economies to expand and prosper. During the Classic period of Greek and Roman rule in the western world, gold and silver both flowed to India for spices, and to China for silk. At the height of the Empire (A.D. 98-160), Roman gold and silver coins reigned from Britain to North Africa and Egypt. Money had been invented. Its name was gold.
Ways of investment in gold:
Coins and small bars
Bullion coins and small bars offer private investors an attractive way of investing in relatively small amounts of gold. In many countries - including the whole of the European Union - gold purchased for investment purposes is exempt from Value Added Tax.
These coins are legal tender in their country of issue for their face value, rather than for their gold content. For investment purposes, the market value of bullion coins is determined by the value of their fine gold content, plus a premium or mark-up that varies between coins and dealers. The premium tends to be higher for smaller denominations. It is important not to confuse bullion coins with commemorative or numismatic coins, whose value depends on their rarity, design and finish rather than on their fine gold content.
Small gold bars
Gold bars can be bought in a variety of weights and sizes, ranging from as little as one gram to 400 troy ounces (the size of the internationally traded London Good Delivery bar). Small bars
are defined as those weighing 1000g or less. According to industry specialists Gold Bars Worldwide, there are 94 accredited bar manufacturers and brands in 26 countries, producing a total of more than 400 types of standard gold bars between them. They normally contain a minimum of 99.5% fine gold. The Gold Bars Worldwide website provides a wealth of additional information regarding the international gold bar market.
Gold is traded in the form of securities on stock exchanges in Australia, France, Hong Kong, Japan, Mexico, Singapore, South Africa, Switzerland, Turkey, the United Kingdom and the United States. By design, these forms of securitized gold investment, all regulated financial products, are generally referred to as Exchange Traded Commodities or Exchange Traded Funds (ETFs), and are expected to track the gold price almost perfectly. Unlike derivative products, the securities are 100% backed by physical gold held mainly in allocated form.
Gold futures contracts are firm commitments to make or take delivery of a specified quantity and purity of gold on a prescribed date at an agreed price. The initial margin - or cash deposit paid to the broker - is only a fraction of the price of the gold underlying the contract. That means investors can achieve notional ownership of a value of gold considerably greater than their initial cash outlay. While this leverage can be the key to significant trading profits, it can also give rise to equally significant losses in the event of an adverse movement in the gold price. Futures prices are determined by the market's perception of what the carrying costs - including the interest cost of borrowing gold plus insurance and storage charges - ought to be at any one time. The futures price is usually higher than the spot price for gold. Futures contracts are traded on regulated commodity exchanges.
These give the holder the right, but not the obligation, to buy ('call' option) or sell ('put' option) a specified quantity of gold at a predetermined price by an agreed date. The cost of such an option depends on the current spot price of gold, the level of the pre-agreed price (the 'strike price'), interest rates, the anticipated volatility of the gold price and the period remaining until the agreed date. The higher the strike price, the less expensive a call option and the more expensive a put option. Like futures contracts, buying gold options can give the holder substantial leverage. Where the strike price is not achieved, there is no point in exercising the option and the holder' loss is limited to the premium initially paid for the option. Like shares, both futures and options can be traded through broker
In the past, gold warrants were mostly related to the shares of gold mining companies. Nowadays commonly used by leading investment banks, they give the buyer the right to buy gold at a specific price on a specific day in the future. For this right, the buyer pays a premium. Like futures, warrants are generally leveraged to the price of the underlying assets.
Gold Allocated account
Effectively like keeping gold in a safety deposit box, this is the most secure form of investment in physical gold. The gold is stored in a vault owned and managed by a recognized bullion dealer or depository. Specific bars (or coins, where appropriate), which are numbered and identified by hallmark, weight and fineness, are allocated to each particular investor, who pays the custodian for storage and insurance. The holder of gold in an allocated account has full ownership of the gold in the account, and the bullion dealer or depository that owns the vault where the gold is stored may not trade, lease or lend the bars except on the specific instructions of the account holder.
Gold Unallocated account
Traditionally, one advantage of unallocated accounts has been the lack of any storage and insurance charges, because the bank reserves the right to lease the gold out. Now that the gold lease rate is negative in real terms, some banks have begun to introduce charges even on unallocated accounts. Investors are exposed to the creditworthiness of the bank or dealer providing the service in the same way as they would be with any other kind of account. As a general rule, bullion banks do not deal in quantities under 1000 ounces - their customers are institutional investors, private banks acting on behalf of their clients, central banks and gold market participants wishing to buy or borrow large quantities of gold.
Gold pool accounts
There are alternatives for investors wishing to open gold accounts holding less than 1000 ounces.
There are also electronic 'currencies' available - linked to gold bullion in allocated storage which offer a simple and cost-effective way of buying and selling gold, and using it as money. Any amount of gold can be purchased, and these currencies allow gold to be used to send online payments worldwide.
Gold Accumulation Plans
Gold Accumulation Plans (GAPs) are similar to conventional savings plans in that they are based on the principle of putting aside a fixed sum of money every month. GAPs is different from ordinary savings plans is that the fixed sum is invested in gold. A fixed sum of money iswithdrawn automatically from an investor's bank account every month and is used to buy gold every trading day in that month. The fixed monthly sums can be small, and purchases are not subject to the premium normally charged on small bars or coins. Because small amounts of gold are bought over a long period of time, there is less risk of investing a large sum of money at the
wrong time. At any time during the contract term (usually a minimum of a year), or when the account is closed, investors can get their gold in the form of bullion bars or coins, and sometimes even in the form of Jewellery. If they choose to sell their gold, they can also get cash.
Historically, gold certificates were issued by the U.S. Treasury from the civil war until 1933. Denominated in dollars, these certificates were used as part of the gold standard and could be exchanged for an equal value of gold. These U.S. Treasury gold certificates have been out of circulation for many years, and they have become collectibles. They were initially replaced by silver certificates, and later by Federal Reserve notes. Nowadays, gold certificates offer investors a method of holding gold without taking physical delivery. Issued by individual banks, particularly in countries like Germany and Switzerland, they confirm an individual's ownership while the bank holds the metal on the client's behalf. The client thus saves on storage and personal security issues, and gains liquidity in terms of being able to sell portions of the holdings (if need be) by simply telephoning the custodian. It runs a certificate programme that is guaranteed by the government of Western Australia and is distributed in a number of countries.
Gold orientated funds
A number of collective investment vehicles specialize in investing in the shares of gold mining companies. The term "collective investment vehicles" as used here should be taken to include mutual funds, open-ended investment companies (OEICs), closed-end funds, unit trusts, and any similar structures. A wide range of such funds exists and they are domiciled in a number of different countries. These funds are regulated financial products and as such it is not possible here to provide details on any specific funds. Funds are likely to differ in their structure - some may invest simply in the shares of gold mining companies, some may invest in companies that mine minerals other than gold, some may invest in futures as well as mining equities and some may invest partly in mining equities and partly in the underlying metal (s).It would be misleading to equate investment in a gold mining equity with direct investment in gold bullion as there are
some significant differences. The appreciation potential of a gold mining company share depends on market expectations of the future price of gold, the costs of mining it, the likelihood of additional gold discoveries and several other factors. To a degree, therefore, the success of the investment depends on the future earnings and growth potential of the company. Most gold mining equities tend to be more volatile than the gold price. While they are subject to the same risk factors that influence the prices of most other equities there are additional risks linked to the mining industry in general and to individual mining companies specifically.
The market for structured products is dominated by institutional investors - or, in the case of forwards, by gold market professionals - because the minimum investment can be high. The following is a general overview of what these products are like and how they work.
Like futures, forward contracts are agreements to exchange an underlying asset - in this case, gold - at an agreed price at some future date. They can therefore be used either to manage risk or for speculative purposes. But there are important differences between forwards and options traded in the over-the-counter (OTC) gold market on the one hand, and futures and options traded on one of the exchanges on the other.
a forward contract (or OTC option) is negotiated directly between counterparties and is therefore tailor-made, whereas futures contracts are standardized agreements that are traded on an exchange
although forward contracts offer a greater flexibility and are private agreements, there is a degree of counterparty risk, whereas futures contracts are guaranteed by the exchange on which they are traded
Because futures contracts can be sold to third parties at any point before maturity, they are more liquid than forward contracts (whose obligations cannot be transferred).
Gold-linked bonds and structured notes
Gold-linked bonds are available from the world's largest bullion dealers and investment banks. Their products provide investors with some combination of:
• • •
exposure to gold price fluctuations a yield Principal protection.
Structured notes tend to allocate part of the sum invested to purchasing put/call options (depending on whether the product is designed for gold bulls or bears). The balance is invested in traditional fixed income products, such as the money market, to generate a yield. They can be structured to provide capital protection and a varying degree of participation in any price appreciations depending on market conditions and investor preferences.
Factors affecting price of gold and their analysis.
1. Crude Oil-
The crude oil is one of the factors for inflation. As the prices of crude oil increases there is upward pressure on inflation. In order to hedge against the inflation people invest in gold . so we can say that there is no direct relationship between gold and crude oil prices. It will be more clear from the following discussion. Gold has almost always been the most-highly-sought-after universal store of wealth. The seemingly magical yellow metal is the de facto standard by which every other form of money and wealth in history has been measured. Empires and currencies rise and fall, but gold stands strong, monolithic and proud, casting an enormous shadow over all of monetary history. 40
So we can say that the gold is the king of all the currencies. Where as the demand for crude oil is in elastic. Now paper currencies loose their purchasing power with time but this doesn’t happen with the gold. So during inflationary period when other currencies loose their value more gold can be purchased with gold due to its purchasing power stability. So during high crude oil prices, high inflation, and decling equity market gold can be stored to hedge the inflation.
May-05 Jun-05 Jul-05 Aug-05 Sep-05 Oct-05 Nov-05 Dec-05 Jan-06 Feb-06 Mar-06 Apr-06 May-06 Jun-06 Jul-06 Aug-06 Sep-06 Oct-06
6104.576 6185.849 6173.774 6276.731 6574.167 6889.167 7174.826 7610.6 7957.714 7998 8246.146 8958.106 9988.8 8896.447 9513.714 9572.941 9029.255 8703.302
2162.145 2448.941 2550.24 2806.07 2890 2799.087 2658.758 2712.404 2905.925 2737.923 2797.556 3123.673 3212.491 3262.516 3456.657 3401.893 2956.86 2683.683
May07 Jun-07 Jul-07 Aug07 Sep07 Oct-07 Nov07 Dec07 Jan-08 Feb08 Mar08 Apr-08 May08 Jun-08 Jul-08 Aug08 Sep08 Oct-08
8863.392 8690.265 8732.315 8829.425 9286.778 9671.96 10301.33 10247.9 11264.54 11857.93 12609.42 11792.93 12142.66 12327.35 13005.86 11791 12194.02 12715
2593.224 2739 2988.308 2950.413 3197.846 3357.95 3735.319 3507.764 3686.8 3755.872 4166.343 4479.091 5272.683 5726.128 5757.04 5037.213 4723.304 3748.739
Nov-06 Dec-06 Jan-07 Feb-07 Mar-07 Apr-07
9167.857 9152.87 9072.782 9494.511 9345.75 9311.894
2589.456 2776.262 2412.615 2615.884 2665.638 2706.61
Nov08 Dec08 Jan-09 Feb09 Mar09 Apr-09 May09
12108.59 12865.25 13475.67 14791.53 15254.53 14491.34 14559.66
2846.875 2266.143 2075.2 1977.682 2452.408 2526.794 2859.558
T r e n d A n a ly s is o f C r u d e O il
tre n d a n a ly s is o f g o ld
18000 16000 14000 5000 12000 4000 10000 8000 3000 6000 2000 4000 1000 2000 0 0 A u g -0 F e b -0 5 e p -0 M a r-0 6 c t -0 6A p r-0 7N o v-0 7 u n -0 8 e c -0 8J u l-0 9J a n -1 0 4 S 5 O J D A u g -0 4 e b -0 5 e p -0 5 a r-0 6 c t -0 6A p r-0 7N o v-0 7J u n -0 8D e c -0 8J u l-0 9 J a n -1 0 F S M O M o n th s prices m o n th s
12000 10000 8000 6000 4000 2000 0
No v05 No v06 Fe b06 Au g05 Au g06 Fe b07 ay -0 5 ay -0 6
Gold Crude oil
The above sheet and diagram shows the change in gold and crude oil prices at different dates with fixed intervals.
Hypothesis Assumed (H0) : Gold prices do not depend on crude oil prices Alternative Hypothesis (H1):Gold prices depend on crude oil prices.
Regression Statistics Multiple R R Square Adjusted R Square Standard Error Observations
0.328567618 0.107956679 0.088977034 2329.254449 49
ANOVA Significance Df Regression 1 SS 30859955.67 MS 30859955.6 F 5.68802 F 0.02116642
7 5425426.28 Residual Total 47 48 254995035.6 285854991.2 9
Upper 99% 10506.47507
Intercept 7170.20307 5 X 0.89836666
1242.76509 2 0.37668030 5
5.76955 6 2.38495 8
variable1 6 Tabulated value of z- 2.56
Significant correlation with r -0.3286 Approx 11% of variation in gold prices accounted for with crude oil. Significant linear regression with p value- 0.0212 Regression Equation- Y=0.90 X+ 7170.2031
Interpretation- Here multiple R is 0.3256 which shows that there is correlation between
predicted gold prices and Actual one but it is closer to 0 which shows that the correlation is not significant. It can also be interpretated from the R square value which is only 0.10 which shows
insignificance correlation. By R square we can say that variation in crude oil prices accounts for only 11% (approx) for the variation in the prices in gold. Also the t value is (2.39) less than the tabulated value (2.56) which shows that the null Hypothesis is accepted. Therefore we can say that the crude oil prices don’t affect the prices of gold significantly. Here it is important to know that there is great impact of the current economic scenario. We can analyze from the graph and the table that there is more correlation in some time period. But since there is an indirect relationship, so it is not important to analyze the time period separately.
2. US Dollar-
It is an important question that is their any correlation between gold prices and the value of US DOLLAR. Now the answer depends upon situation and changes with change in global economic scenario. Now there is a inverse relationship between gold prices and US Dollar. Before 1950 US $ was also considered as the inflation hedge. But this is not true now. So in the past we can observe the positive correlation between gold prices and US $. But now the relation is negative. US has a large debt (3 trillion $) and also it pays more interest than it earns. So it creates a downward pressure on the Dollar and make it weak. This creates a inverse relation.
As a tool of hedge now gold is demanded more than the US $. When the price of gold depreciates the investors outside US will benefited because the dollar price of the gold will increase. Investor can shift away from the dollar denominated assets to gold. Past experiences also that gold has been used as a hedge against currency risk.
Date May-05 Jun-05 Jul-05 Aug-05 Sep-05 Oct-05 Nov-05 Dec-05 Jan-06 Feb-06 Mar-06 Apr-06 May-06 Jun-06 Jul-06 Aug-06 Sep-06
Gold 6104.57 6 6185.84 9 6173.77 4 6276.73 1 6574.16 7 6889.16 7 7174.82 6 7610.6 7957.71 4 7998 8246.14 6 8958.10 6 9988.8 8896.44 7 9513.71 4 9572.94 1 9029.25
dollar 43.69 43.51 43.49 44.04 43.99 45.11 45.92 45.07 44.07 44.44 44.61 44.97 46.43 46.08 46.51 46.55 45.96
Date May-07 Jun-07 Jul-07 Aug-07 Sep-07 Oct-07 Nov-07 Dec-07 Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08
Gold 8863.39 2 8690.26 5 8732.31 5 8829.42 5 9286.77 8 9671.96 10301.3 3 10247.9 11264.5 4 11857.9 3 12609.4 2 11792.9 3 12142.6 6 12327.3 5 13005.8 6 11791 12194.0
Dollar 40.73 40.75 40.44 40.96 39.74 39.32 39.67 39.41 39.39 39.92 39.97 40.46 42.59 42.95 42.49 43.79 46.94
5 8703.30 Oct-06 Nov-06 Dec-06 Jan-07 Feb-07 Mar-07 Apr-07 2 9167.85 7 9152.87 9072.78 2 9494.51 1 9345.75 9311.89 4 44.76 44.23 44.17 44.31 43.59 41.29 Nov-08 Dec-08 Jan-09 Feb-09 Mar-09 Apr-09 May-09 45.02 Oct-08
2 12715 12108.5 9 12865.2 5 13475.6 7 14791.5 3 15254.5 3 14491.3 4 14559.6 6 49.25 49.84 48.45 49.02 50.73 50.95 50.22 47.29
G o ld v s U S d o lla r
m o n th 18000 16000 14000 12000 10000 8000 6000 4000 2000 0
G old dollar 60 50 40 30 20 10 0 Dollar exchange rate
May-09 Apr-09 Mar-09 Feb-09 Jan-09 Dec-08 Nov-08 Oct-08 Sep-08 Aug-08 Jul-08 Jun-08 May-08 Apr-08 Mar-08 Feb-08 Jan-08 Dec-07 Nov-07 Oct-07 Sep-07 Aug-07 Jul-07 Jun-07 May-07 Apr-07 Mar-07 Feb-07 Jan-07 Dec-06 Nov-06 Oct-06 Sep-06 Aug-06 Jul-06 Jun-06 May-06 Apr-06 Mar-06 Feb-06 Jan-06 Dec-05 Nov-05 Oct-05 Sep-05 Aug-05 Jul-05 Jun-05 May-05 m o n th
trend analysis of US $ 60 Exchange rate 50 40 30 20 10 0 Aug-04 Feb-05 Sep-05 Mar-06 Oct-06 Apr-07 Nov-07 Jun-08 Dec-08 Jul-09 Months Jan-10
Hypothesis Assumed (H0): Gold Prices do not depend upon Dollar exchange rate. Alternative Hypothesis(H1):Gold prices depend upon Dollar exchange rate.
Regression Statistics Multiple R R Square Adjusted R Square Standard Error Observations
0.360509804 0.129967319 0.111455985 2300.338479 49
Df Regression Residual Total 1 47 48
37151806.78 248703184.5 285854991.2
Intercept X variable1
Tabulated value of z- 2.56
Significant correlation with r -0.36051 Change in US $ exchange rate accounts only 13% for the change in gold prices. Significant linear regression with p value- 0.6512 Regression Equation- Y=273.85 X-2085.412
Interpretation:Here the value of multiple R value which is 0.36, shows that the correlation
between the US $ and Gold prices is insignificant. This shows that in the current scenario the US $ exchange rate doesn’t affect the gold prices significantly. This is because R value is less than 0.5 and more closer to 0. Also the value of R square is 0.13 which shows the extent at which Fluctuation in US $ affects Gold prices. But from t value which is more than the tabulated value (hypothesis is accepted) we can predict that there is a relation between US $ and gold prices. The –ve intercept of t value as well
as –ve intercept of regression equation shows the inverse relation between the US$ and gold prices.
Also for time period May 05 to Oct 06 there is high correlation (0.82) & t value is 5.8 which makes the hypothesis to be accepted. This tells that due to the change in the global economic scenario the effect of US $ on gold prices is decreasing. Now by doing the regression analysis for year 08 to 09 (value of multiple R=.71 , t value=3.98) we can also predict that the there is improvement in the scenario and again the correlation is being establishing. So there is great impact of the current economic scenario.
3. REPO RATE:
Repo Rate is that rate at which the commercial banks borrow money from the RBI. It is a good measure to control inflation. When the repo rate will be high, the borrowing from the banks will be low which will actually reduce the purchasing power of the public. This will reduce the investment in gold and it will ultimately reduce the price the gold.
Repo Date May-05 Jun-05 Jul-05 Aug-05 Sep-05 Oct-05 Nov-05 Dec-05 Jan-06 Feb-06 Mar-06 Apr-06 May-06 Jun-06 Jul-06 Aug-06 Sep-06 Oct-06 Nov-06 Gold 6104.576 6185.849 6173.774 6276.731 6574.167 6889.167 7174.826 7610.6 7957.714 7998 8246.146 8958.106 9988.8 8896.447 9513.714 9572.941 9029.255 8703.302 9167.857 rate 6 6 6 6 6 6.25 6.25 6.25 6.5 6.5 6.5 6.5 6.5 6.75 7 7 7 7 7.25 Date Jun-07 Jul-07 Aug-07 Sep-07 Oct-07 Nov-07 Dec-07 Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 Gold 8690.265 8732.315 8829.425 9286.778 9671.96 10301.33 10247.9 11264.54 11857.93 12609.42 11792.93 12142.66 12327.35 13005.86 11791 12194.02 12715 12108.59 12865.25
Repo rate 7.75 7.75 7.75 7.75 7.75 7.75 7.75 7.75 7.75 7.75 7.75 7.75 8.5 9 9 9 6.5 6.5 6.5
Dec-06 Jan-07 Feb-07 Mar-07 Apr-07 May-07
Prices 10000 12000 14000 16000 18000 2000 4000 6000 8000 0
9152.87 9072.782 9494.511 9345.75 9311.894 8863.392 7.25 7.25 7.5 7.5 7.75 7.75 Jan-09 Feb-09 Mar-09 Apr-09 May-09
13475.67 14791.53 15254.53 14491.34 14559.66
Gold prices VS Repo rate
0 1 2 3
repo rate value
4 5 6 7 8 9 10
6.5 5.75 5 4.75 4.75
May-05 Jun-0 5 Jul-05 Aug-05 Sep-05 Oc t- 05 No v-0 5 De c-0 5 Jan-0 6 Feb-06 Mar- 06 Apr-06 May-06 Jun-0 6 Jul-06 Aug-06 Sep-06 Oc t- 06 No v-0 6 De c-0 6 Jan-0 7 Feb-07 Mar- 07 Apr-07 May-07 Jun-0 7 Jul-07 Aug-07 Sep-07 Oc t- 07 No v-0 7 De c-0 7 Jan-0 8 Feb-08 Mar- 08 Apr- 08 May-08 Jun-0 8 Jul-08 Aug-08 Sep-08 Oc t- 08 No v-0 8 De c-0 8 Jan-0 9 Feb-09 Mar- 09 Apr- 09 May-09
Trend Analysis of Repo rate
10 repo rate in % 8 6 4 2 0 Jan-04 Repo rate Linear (Repo rate)
Hypothesis Assumed:(H0)- The Repo rate doesn’t affect the gold prices. Alternate Hypothesis (H1)- The Repo rate affect the gold prices.
*NOTE- By analyzing the graph and table we can observe that there are three time periods.
• One that is there is continuous increase in the gold prices with the increase in time period 2nd is that period in which there is increase in gold prices but there is no change in repo rate. Last is that period in which there is decrease in repo rate but increase in gold prices. So it will be better that we will show the regression analysis separately in three different parts.
Regression Analysis for the whole period:
Multiple R R Square Adjusted R Square Standard Error Observations 0.044010528 0.001936927 -0.019298458 2463.785839 49
Regression Residual Total
Df 1 47 48
SS 553680.1381 285301311.1 285854991.2
MS 553680.138 6070240.66
Significance F 0.763974109
Standard Intercept X Variable 1 Coefficients 9270.172641 107.96492 Error 2527.017003 357.4836224 T Stat 3.668425115 0.302013612 P-value 0.000621127 0.763974109 Lower 99.0% 2486.254969 -851.7197437 Upper 99.0% 16054.09031 1067.649584
Regression Analysis for the period of May 05 to Sep 09:
Multiple R R Square Adjusted R Square Standard Error Observations 0.85704807 0.734531395 0.727724508 982.2792188 41
ANOVA Regression Residual Total df 1 39 40 SS 104119413.9 37630026.09 141749440 MS 104119413.9 964872.4638 F 107.9100273 Significance F 8.6124E-13
Standard Coefficients Intercept X Variable 1 4542.661702 1911.568612 Error 1340.687899 184.0174421 t Stat 3.388306633 10.38797513 P-value 0.001619293 8.6124E-13 Lower 99.0% 8173.128133 1413.265356
Upper 99.0% -912.195 2409.872
Regression Analysis for the period of Oct 08 to may 09 :
Multiple R R Square Adjusted R Square Standard Error Observations
0.838340857 0.702815392 0.653284624 673.8858348 8
ANOVA Significance Regression Residual Total Df 1 6 7 SS 6443752.59 2724732.71 9168485.3 MS 6443752.587 454122.1183 F 14.18947091 F 0.009322706
Standard Intercept X Variable 1 Coefficients 20477.82008 1158.075451 Error 1793.258299 307.4353158 t Stat 11.41933658 3.766891412 P-value 2.70487E-05 0.009322706 Lower 99.0% 13829.44402 -2297.869755
Upper 99.0% 27126.19615 -18.2811466
Now here we have divided the regression analysis in three parts. The overview of the 1st part, 2nd part and the 3rd part are as below:
1. Significant correlation with r -0.044010528 Change in repo rate accounts 2 % for the change in gold prices.
Significant linear regression with p value- 0.763974109 Regression Equation- Y= 107.96492X+9270.172641
2. Significant correlation with r –0.85704807 Change in Repo rate accounts for the change73% in gold prices. Significant linear regression with p value- (Approx) 0.00 Regression Equation- Y= 1911.568612X-4542.661702
3. Significant correlation with r -0.838340857 Change in repo rate accounts 70 % for the change in gold prices. Significant linear regression with p value- 0.009322706 Regression Equation- Y= -1158.075451X+20477.82008 Now the three cases are contradicting to each other. Case 1 shows the poor correlation where as case 2 & 3 shows the stronger correlation. Also the t-value and p-value shows that the hypothesis should be accepted (case 2 & 3) but according to case 1 the hypothesis should be rejected. Therefore, the question is why here such contradiction arises. The answer could be found by observing the graphs of this section. We can easily observe that in the period (which relates to the 2nd case-sep-08 to oct-08) there is a sharp downfall in the repo rate which is affect of crisis in the economy and inflation rate downfall in this period. So we can say that there is a high correlation between repo rate and gold prices, being other economic factors constant. By generalizing the case 2 and 3 where multiple R values are .86 and .84 we can say that the there is significant correlation between gold prices and repo rate. Also the t-values are 10.38 and -3.76 which shows the acceptance of hypothesis. –ve sign only shows the inverse correlation within that period.
4. Inflation Rate-
Gold has always been considered a good hedge against inflation. Rising inflation rates typically appreciates gold prices. Traditional theory implies that the relative price of consumer goods and of such real assets as land and gold should not be permanently affected by the rate of inflation. A change in the general rate of inflation should, in equilibrium, cause an equal change in the rate of inflation for each asset price The experience of the past decade has been very different from the predictions of this theory: the prices of land, gold, and other such stores of value have increased by substantially more than the general price level. The present paper presents a simple theoretical model that explains the positive relation between the rate of inflation and the relative price of such real assets. More specifically, in an economy with an income tax, an increase in the expected rate of inflation causes an immediate increase in the relative price of such 'store of value' real assets. The behavior of real asset prices discussed in this paper is thus a further example of the non-neutral response of capital markets to inflation in an economy with income taxes.
* NOTE: While calculating the price of gold there are two inflation rates. One is Gold internal inflation rate, which is change in its production from its mines. Other is monetary inflation. The price of gold over the medium to long term is determined by its inflation rate relative to that of the currency you want to measure it with. With most fiat currency inflation rates, running substantially higher than gold's inflation rate it is easy to see why the gold price will continue to increase over time, and why it has consistently increased over time. This is not about to change regardless of short-term volatility.
inflation Date May-05 Jun-05 Gold 6104.57 6 6185.84 9 rate 5.2 4.14 Date May-07 Jun-07 Gold 8863.39 2 8690.26 5 Inflation rate 5.27 4.03
6173.77 Jul-05 Aug-05 Sep-05 Oct-05 Nov-05 Dec-05 Jan-06 Feb-06 Mar-06 Apr-06 May-06 Jun-06 Jul-06 Aug-06 Sep-06 Oct-06 Nov-06 Dec-06 Jan-07 4 6276.73 1 6574.16 7 6889.16 7 7174.82 6 7610.6 7957.71 4 7998 8246.14 6 8958.10 6 9988.8 8896.44 7 9513.71 4 9572.94 1 9029.25 5 8703.30 2 9167.85 5.3 7 9152.87 5.58 9072.78 2 57 6.58 Nov-08 Dec-08 Jan-09 3.84 3.01 3.75 4.75 4.54 4.4 4.3 4.34 3.96 3.59 4.68 4.84 4.67 5.01 5.16 5.09 Jul-07 Aug-07 Sep-07 Oct-07 Nov-07 Dec-07 Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08
8732.31 5 8829.42 5 9286.77 8 9671.96 10301.3 4.41 3.94 3.23 3.07 3.21
3 10247.9 3.45 11264.5 4.11 4 11857.9 5.02 3 12609.4 7.41 2 11792.9 7.61 3 12142.6 8.75 6 12327.3 11.89 5 13005.8 12.01 6 11791 12.1 12194.0 11.8 2 12715 10.72 12108.5 8 9 12865.2 5.91 5 13475.6 4.39 7
Gold Prices 1 8000 1 6000 1 4000 1 2000 1 0000 8000 6000 4000 2000 0
4 5.66 Apr-09 May-09
1 9345.75 6.1 5.74 Feb-09 Mar-09
G o ld V s In fla tio n R a te
T im e P e rio d
T im e P e rio d
0 5 10 Inflation Rate
3 14491.3 0.7
4 14559.6 0.13 6
3 2.43 15254.5 0.26
May-05 Jun-05 Jul-05 Aug-05 Sep-05 Oct-05 Nov-05 Dec-05 Jan-06 Feb-06 Mar-06 Apr-06 May-06 Jun-06 Jul-06 Aug-06 Sep-06 Oct-06 Nov-06 Dec-06 Jan-07 Feb-07 Mar-07 Apr-07 May-07 Jun-07 Jul-07 Aug-07 Sep-07 Oct-07 Nov-07 Dec-07 Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 Jan-09 Feb-09 Mar-09 Apr-09 May-09 G old inflation rate 15
Trend Analysis Of inflation R ate 14 12 Inflation Rate 10 8 6 4 2 0 Jan-04 May-05 Oct-06 Feb-08 Time Period Jul-09 Nov-10
Trend A nalysis of inf lation rate Linear (Trend A nalysis of inf lation rate)
Hypothesis Assumed :(H0)- The Repo rate doesn’t affect the gold prices. Alternate Hypothesis (H1)- The Repo rate affect the gold prices.
Regression Statistics Multiple R R Square Adjusted R Square Standard Error Observations
0.893479 0.798305 0.779969 554.9848 49
ANOVA Df Regression Residual Total 1 48 49 SS 7168366.40 8 278686624. 8 285854991. 2 MS 7168366.40 8 5929502.65 6 F 1.2089321 5 Significance F 0.277143878
Coefficient s 9286.05485 3
Standard Error 757.506159 4
X Variable 139.943407 127.277454 1 6 4
Lower t Stat P-value 99.0% 12.2587186 7252.48744 1 0.00 4 1.09951450 0.27714387 201.739996 8 8 6
Upper 99.0% 11319.622 3 481.62681 2
Significant correlation with r -0.893479 Change in INFLATION Rate accounts only 80% for the change in gold prices. Significant linear regression with p value- 0.277143878 Regression Equation- Y=139.943 X+9286.05
The value of multiple R shows that (0.89) shows that there is significant relation between gold prices and inflation rate. It verifies what ever our studies are until now that is the gold is an inflation hedge. This analysis also shows that change in inflation rate accounts 80% for the variation in gold prices but this movement is in reverse direction. In addition, it should be noted that increase in inflation rate accounts for increase in investment in gold, as it is an inflation hedge. Also from the t-value we can see that the hypothesis can be rejected. This means that our assumption was wrong. (T-value is 1.099 which is less than tabulated value 2.56). Also from the graph we can observe that in the initial period the variation
from the trend line is less in later period (from May 08 to May 09).Also in the later period the gap between gold prices and inflation rate becomes larger which shows the inverse movement between them. Now actually what happens is, when there is increase in inflation rate, generally the RBI increases the CRR and Repo rate and the securities are demanded more. Gold is one of them universally accepted within the accepted within the banking industry. Therefore the demand increases as well as prices also.
5. Bank FailuresWhen dollars were fully convertible into gold, both were regarded as money. However, most people preferred to carry around paper banknotes rather than the somewhat heavier and less divisible gold coins. If people feared their bank would fail, a bank run might have been the result. This is what happened in the USA during the great depression of the 1930s, imposing a national emergency and to outlaw the ownership of gold by US citizens.
Source: RBI Site
This means that gold and bank failure are inversely related. Bank failure will affect inversely the investment in gold but the relation is not visa-versa absolutely.
6. Stock marketThe performance of gold bullion is often compared to stocks. They are fundamentally different asset classes. Gold is regarded by some as a store of value (without growth) whereas stocks are regarded as a return on value (i.e. growth due to anticipated real price increase plus dividends). Stocks and bonds perform best in a stable political climate with strong property rights and little turmoil. As the crude oil becomes cheap, the inflation rate goes down. (As on 6th June 2009). We have discussed earlier that how inflation rate is on the base of the gold prices. Similarly the lower inflation rate or the situation of deflation makes the stock market down. It tends to lower return from the stock market. At this time investment pattern moves towards the gold market. Now the return from both these sources is of long terms. Investment decision partly on, or solely on, technically analysis.
Date May-05 Jun-05 Jul-05 Aug-05 Sep-05 Oct-05 Nov-05 Dec-05 Gold 6104.57 6 6185.84 9 6173.77 4 6276.73 1 6574.16 7 6889.16 7 7174.82 6 7610.6 Sensex 6,715.11 7193.85 7635.42 7805.43 8634.48 7892.32 8788.81 9397.93 Date Jun-07 Jul-07 Aug-07 Sep-07 Oct-07 Nov-07 Dec-07 Jan-08 Gold 8690.26 5 8732.31 5 8829.42 5 9286.77 8 9671.96 10301.3 3 10247.9 11264.5 4 62 Sensex 14650.51 15550.99 15318.6 17291.1 19837.99 19363.19 20286.99 17648.71
Jan-06 Feb-06 Mar-06 Apr-06 May-06 Jun-06 Jul-06 Aug-06 Sep-06 Oct-06 Nov-06 Dec-06 Jan-07 Feb-07 Mar-07 Apr-07 May-07
7957.71 4 7998 8246.14 6 8958.10 6 9988.8 8896.44 7 9513.71 4 9572.94 1 9029.25 5 8703.30 2 9167.85 7 9152.87 9072.78 2 9494.51 1 9345.75 9311.89 4 8863.39 2
9919.89 10370.2 4 11279.9 6 12042.5 6 10398.6 1 10609.2 5 10743.8 8 11699.0 5 12454.4 2 12961.9 13696.3 1 13786.9 1 14092.9 2 12938.0 9 13072.1 13872.3 7 14544.4 6
Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 Jan-09 Feb-09 Mar-09 Apr-09 May-09
11857.9 3 12609.4 2 11792.9 3 12142.6 6 12327.3 5 13005.8 6 11791 12194.0 2 12715 12108.5 9 12865.2 5 13475.6 7 14791.5 3 15254.5 3 14491.3 4 14559.6 6
17578.72 15644.44 17287.31 16415.57 13461.6 14355.75 14564.53 12860.43 9788.06 9092.72 9647.31 9424.24 8891.61 9708.5 11403.25 14625.25
gold prices 10000 12000 14000 16000 18000 2000 4000 6000 8000 0
Trend Analysis of Sensex Values
0.00 Aug-04 Feb-05 Sep-05 Mar-06 Oct-06 Apr-07 Nov-07 Jun-08 Dec-08 Jul-09 Jan-10
Time Period 0.00
Gold Vs Sensex
May-05 Jun-05 Jul-05 Aug-05 Sep-05 Oct-05 Nov-05 Dec-05 Jan-06 Feb-06 Mar-06 Apr-06 May-06 Jun-06 Jul-06 Aug-06 Sep-06 Oct-06 Nov-06 Dec-06 Jan-07 Feb-07 Mar-07 Apr-07 May-07 Jun-07 Jul-07 Aug-07 Sep-07 Oct-07 Nov-07 Dec-07 Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 Jan-09 Feb-09 Mar-09 Apr-09 May-09 5,000.00 10,000.00 15,000.00 Sensex value 20,000.00 25,000.00
Hypothesis Assumed (H0): Sensex values and Gold prices are not sufficiently co-related. Alternative Hypothesis (H1): Sensex value and Gold Prices are sufficiently co-related.
Regression Analysis: Regression Statistics Multiple R 0.671901 R Square 0.451451 Adjusted R Square 0.396596 Standard Error 421.0839 Observations 49
ANOVA Df Regression 1 Residual Total 48 49 SS 1459260.49 1773116.60 8 3232377.09 9 MS 1459260.49 177311.660 8 F 8.22991834 4 Significance F 0.01670353
Coefficient s Intercep 7127.15453 t 8 X Variabl 0.13794436 e1 3
Standard Error 774.224815 5 0.04808462 1
t Stat 9.20553616 3 2.86878342 6
P-value 0.0000 0.0167035 3
Lower 99.0% 4673.42498 8 0.01444891 1
Upper 99.0% 9580.884087 0.290337637
Analytical Overview: Significant correlation with r -0.671901 Change in INFLATION Rate accounts 46% for the change in gold prices. Significant linear regression with p value- 0.0167 Regression Equation- Y=0.1379 X-7127.154538 65
The relation between the gold and stock market can be clearly interpretated from the analytical calculation from the data. The t-value, p-value, multiple R & R square values clearly shows the picture. Here the t- value is 2.86 which is greater than tabulated value 2.56. This means that our hypothesis is wrong. There is significant correlation between gold prices and Sensex value. Also the Multiple R is 67% which shows the significancy of relation between the two factors. The pvalue is also very less. From the graph-2 we can observe the trend in the fluctuation in the Sensex value. We can observe that now the market is recovering. The graph-1 shows the correlation. In the period after apr-08 the correlation is less which is due to the crisis effect.
7. The Gold Anti Trust Committee:
The Gold Anti-Trust Action Committee was organized in January 1999 as a Delaware corporation to advocate and undertake litigation against illegal collusion to control the price and supply of certain financial securities, particularly securities involving gold. The committee arose from essays by Bill Murphy, a financial commentator, and by Chris Powell, a newspaper editor in Connecticut, published at Murphy's Internet site. Murphy's essays reported evidence of collusion among financial institutions to control the price of gold. Powell, whose newspaper had been involved in antitrust litigation, replied with an essay proposing that gold interests should act on Murphy's essays by bringing suit against the financial institutions involved in the collusion against gold. The response to these essays from gold interests throughout the world was so favorable that the committee was formed. Murphy is chairman and Powell is secretary/treasurer. GATA seeks to disclose and publicize the huge speculative short positions in gold taken by financial institutions and bullion banks. GATA believes that 10,000 tons of gold or more have been sold short by these speculators, even as yearly mine supply of gold is only about 2,500 tons. When we are able to show how the gap between gold demand and mine supply is being filled largely by dishoarding of central bank gold reserves, investors may buy gold in quantity,
knowing the supply gap is too large to close without causing a substantial rise in the price of gold. Then the gold price suppression scheme will be over.
or negative real interest rates:
If the return on bonds, equities and real estate is not adequately compensating for risk and inflation then the demand for gold and other alternative investments such as commodities increases. An example of this is the period of STAGFLATION that occurred during the 1970s and which led to an economic bubble forming in precious metals. *STAGFLATION is a situation when inflation and economic stagnation occurs simultaneously. * An economic bubble (sometimes referred to as a speculative bubble, a market bubble, price bubble, a financial bubble, or a speculative mania) is trade in products or assets with inflated values.
9. War, invasion, looting, crisis:
In times of national crisis, people fear that their assets may be seized and that the currency may become worthless. They see gold as a solid asset, which will always buy food or transportation. Thus in times of great uncertainty, particularly when war is feared, the demand for gold rises. So price also rises.
10. Demand & Supply:
Demand and Supply factor is very important for the price analysis of Gold. The demand – supply dynamics play an important role in determining the price of Gold. For a long time Gold prices have been suppressed as a result of concerted selling by Central Banks of various countries. However this trend has reversed, with Central Banks, especially those of Russia and China becoming net importers of Gold. The demand for Gold is primarily driven by three factors: Ø Jewellery Ø Industrial Uses Ø Investment As a result of the huge spike in Gold prices, Jewellery demand from countries like India and the Middle East fell by 22 % in tonnage terms from a year earlier. In Asia and the Middle East, which account for around two thirds of the Jewellery demand, consumers and the retail trade are very sensitive to price volatility. However we believe that consumers within these markets will continue to purchase Gold Jewellery if they are offered the right products at the right price.
Jewellery Dem and Chart
Demand in tonnes 1000 900 800 700 600 500 400 300 200 100 0 Q 12004 Q 22004 Q 32004 Q 42004 Q 12005 Q 22005 Q 32005 Q 42005 Q 12006
Time period D emand (tonnes )
The global economy enabled electronics demand to rise strongly, causing overall industrial demand to increase by 5 % compared to a year earlier. This form of gold demand is not price sensitive since manufacturers of electronic goods which need electronic components, cannot change specifications overnight. The strong growth was due to a recovery in the Japanese market for Gold bonding wire. There was also a slight growth in the dental use of gold.
Industrial Demand Chart
Demand in tonnes 115 110 105 100 95 90 Q12004 Q22004 Q32004 Q42004 Q12005 Q22005 Q32005 Q42005 Q12006 z
Time period Demand (tonnes)
The main propellant for the high Gold prices was the investment demand. The increase in investment demand was due to the growing number of investors who are seeking to use Gold to hedge against different types of risk. In countries like the US and Switzerland, the rising price spurred interest from investors driving overall investment demand up. Moreover a recent development has been that in India where traditionally Gold has been consumed as Jewellery, increasing promotion of Gold bars and coins by several banks resulted in Gold being purchased for investment purposes. However the main driver of investment demand was the investment in Gold Exchange Traded Funds whose total off take for the first quarter was around 109 tonnes. 60
Demand in tonnes
Investm Dem ent and Chart
250 200 150 100 50 0 Q 12004 Q 22004 Q 32004 Q 42004 Q 12005 Q 22005 Q 32005 Q 42005 Q 12006 z
Tim period e D and (tonnes em )
While investor activity was the main driver behind the rising Gold price in the first quarter of 2006, a contraction in supply also helped. Mine production plays a vital role in determining the price of Gold as it is the only way by which new stocks can be added to the existing above the ground stocks. A sharp decline in mining production in the first quarter of 2006 contributed to the high prices of gold during that period. Although Gold prices are attractive now, it will take at least 3-4 years to get a new mine into commercial production stage. So any near term increase of supplies can be ruled out. But, the main factor constraining supply in the first quarter of 2006 was a sharp reduction in net central bank selling which, at 116 tonnes, was 57 % lower than the comparative period in the year 2005. This sharp decline in supply caused by the fall in central bank sales was partly Offset by a very substantial rise in scrap supply which in the first quarter of 2006 was higher by 51 % compared to the first quarter of 2005. Huge sales by Central Banks
were the primary factor in suppressing Gold prices in the nineties. Reduction in these sales due to the Central Banks Gold Sales Agreement will play an important role in supporting higher Gold prices. The demand and supply factors as outlined previously do play a role in determining Gold prices; however they are not the most important ones. As we have outlined previously, since Gold acts as a reserve currency to the US dollar, the factors which work negatively for the US Dollar work positively for Gold and vice versa. These factors are outlined here in the following sections under various categories like GDP, Trade Balance, and the like. * So we can say that the gold prices are directly proportional to the demand and inversely proportional to the supply.
Current Scenario Analysis:
The Current Scenario is analyzed in the terms of: ⇒ Crude oil Prices ⇒ US Dollar Value ⇒ Repo Rate ⇒ Inflation Rate ⇒ Real interest rates ⇒ Demand And Supply ⇒ Stock market
• High Inflation Period To Deflation PeriodThere was the period of high inflation in the year 08.The inflation rate starts from the rare 4.11 & lasts to 0.13 in the may 09. By observation the trend analysis Graph we can expect that now the inflation rate is rising from the deflationary period. On 6th June 2009 the inflation rate 0.48and the current inflation rate is -1.61 means deflation.
This deflation is due to the downward trend in the crude oil prices as it can be observed from the graph of the crude oil. The movement of oil prices in the world markets has brought about the setting in of some important changes. We have witnessed that the price of oil has been slowly coming down but not before the governments of the world interfered in some way. For starters, they realized that there were two ways to deal with the problem. Firstly to use the OPEC meetings as a means to persuade oil producers to produce more oil in an effort to match supply with demand for oil. The second way was to strictly monitor the oil markets to make sure that the speculation over the price of oil does not set in hence leading to inconsistent buying and selling frenzies These two primary steps have brought down the level of oil to where it is today. For India the cooling of oil prices has helped the rate of inflation to slightly decrease. Today’s inflation figures show that the figures have fallen for the third week in a row. It is however premature to say that the grip of inflation has melted away. •
GDP OF INDIA:
India GDP and Standard of Living are closely related as GDP features among the significant factors in the assessment of the standard of living. Standard of living comprises quality as well as amount of commodities offered for consumption by the citizens and the distribution system. The substantial growth in various sectors like IT, Real Estate, ITES has led to the improvement of the standard of living at a constant rate. However, the statistical figures still delineate that approximately 27.5 % of the Indian population lives below the poverty line. The most significant indicator required to measure the standard of living is in realty per capita purchasing power parity-adjusted gross domestic product. A comparative analysis of the standard of living of India with other countries will aid in the assessment of the position of India in the standard of living chart. The per capita- adjusted gross domestic product of China in the year 2003 was $4,900 and that of the majority of western European countries is $26,000 and that of the most developed country like US is $33,000. The per capita- adjusted gross domestic product of India has been calculated to be US $ 31, 00 Measurement of India GDP and Standard of Living: GDP makes an assessment of India's national output by dividing the current GDP of India with the total population of the country. In the examination of overall production, GDP takes into account both the public as well as the private consumption accompanied with the manufacture of capital goods that consequently aid in the further production of commodities. Current Statistics: Industry 2008-09 Agriculture, forestry & fishing Manufacturing Construction Financing, insurance, real estate & business Services Q1 3.0 5.6 11.4 9.3 Q2 2.7 5 9.7 9.2 Q3 -2.2 -0.2 6.7 9.5 09 Growth rate in % (Estimated ) 2.6% 4.1% 6.5% 8.6%
Mining & quarrying Trade, hotels, transport and communication Community, social & personal services Electricity, gas & water supply
4.8 11.2 8.5 2.6
3.9 10.7 7.7 3.6
5.3 6.8 17.3 3.3
4.7% 10.3% 9.3% 4.3%
Source: RBI- Hand Book of Statistics
Repo Rate and Other RatesThe Indian economy ushered in 2008 amidst excess liquidity related problems in the system. Growth in money supply saw 21.2 % increase in the last week of April 2008 on y-o-y basis, it touched 22.5% in May end and slowed to 20.7% by the end of June 2008. During Jan-May08, With inflation and money supply growing far above RBI's target, the RBI raised the CRR by as much as 75 basis points effective in 3 phases during April and May to control excess liquidity and to rein in inflationary expectations. Between June and Aug 08, the RBI increased repo rate by 125 basis points and CRR by 75 basis points to 9.0% each. The increase in capital outflows especially from the equity markets had put significant downward pressure on the rupee value. This in turn led to RBI intervention in the forex market through dollar sales to support the falling value of rupee and thereby adding to the tight liquidity conditions. Global financial woes intensified significantly in Sep 08, with the collapse of Lehman Bros and bankruptcy of some other big financial institutions. The financial distress caused thereby was characterized by severe credit freeze and crisis of confidence worldwide. The substantial FII outflows from domestic stock markets coupled with tight monetary policy followed by the RBI till Aug 08 led to significant liquidity crunch in the money market. Meanwhile, FII outflows from equity, increased dollar demand by oil importers (due to surging oil prices) and strengthening of dollar against other major currencies exerted significant downward pressure on rupee value. In order to arrest further fall in rupee value, the RBI intervened in the forex market by way of dollar sales, which in turn resulted into absorption of liquidity from the system and added to the liquidity pressures. 74
*Also the real interest rates are decling or not giving the proper return. *Current Repo Rate-4.75% *Current CRR-5% *Current SLR-24%
Trends in the Exchange Rates:
The rupee moved in the range of Rs.39.89-50.53 per US dollar during the financial year 2008-09 so far. The rupee showed a depreciating trend during the second quarter of 2008-09, which started in the beginning of current financial year. The rupee remained around the level of Rs.43 per US dollar during third week of May 2008 to second week of August 2008, depreciated thereafter sharply mainly on the back of widening trade deficit, capital outflows and strengthening of US dollar. From January to May 22nd Rupee depreciated by 7% as against the US dollar. The Indian rupee depreciated by about 20 per cent against the US dollar in 2008 due to a combination of factors. As the credit crisis deepened in the West, foreign money started leaving Indian shores, which resulted in the rupee falling. Money from all across the world flowing into US Treasury bonds in search of safety resulted in the US dollar appreciating. As a result currencies across the world, including the Indian rupee, depreciated. The rupee is expected to appreciate in the next fiscal and to be around 46.5/US$ by the end of FY10. On an average, rupee is expected to be around 45.90/US$ during FY09 and 47.50/US$ during FY10. The appreciation in rupee in next fiscal (towards end) would be on account of an expected fall in value of US dollar and resumption in the FII inflows as the global economy begins to stabilize the latter part of FY10. *Current exchange rate of US $- Rs.48.53 75
The stock market has badly crashed in the year 08. But it is recovering now. It is also below the trend line. So we can say that this factor is supporter of gold investment in the current scenario. *Current Sensex Value-14422.73
Supply and demand in the current scenarioGold market is undergoing radical change with investments in Europe and US taking a lead over the traditional market – Jewelry in India. While Indian Jewelry is still the world’s biggest consumer, the market seems more diverse now. Gold ETF- GLD has become the biggest market mover and there has been heavy demand for coins and bars. If this fundamental change in consumer/investor choices continues, Gold could see a significant upward movement in price in the short to medium term, and even a $1200/ounce is likely. It remains to be seen how this change in behavior would continue after the end of this crisis (in 3-5 years). If it is a permanent change, it is good for gold industry as it gives a far wider/diverse base and removes the quirkiness associated with Indian marriage seasons and domestic economy. Indian consumption is the only bright aspect in the Jewelry scene, with the Jewelry consumption of rest of the world has gone to the toilet. This is most likely due to the fact that world recession has not come to India so far. However, Jewelry consumption could significantly tank once the reality sinks in and Indian market goes faces Economic straight winds. India as-expected leads the space. It consumed nearly 21.3% of world gold in Q4 and it has regained back its lead from the US. China, Europe and US for the next 3 big markets. Indian Jewelry shows a significant upswing while Jewelry consumption in many other countries are facing deep downturn – most notably in Turkey, US and UK. This is partly due to the fact that world recession has not come to India in a big way so far. But this could change and Jewelry could be deeply hit.
Also we can observe that the demand has almost higher than the supply. The trends also show that demand is also on the higher side in the near future.
FINDINGS & RECOMMENDATIONS
a) The dollar is weak and getting weaker due to national economic policies which don’t
appear to have an end. b) c) Gold price appreciation makes up for lost interest, specially in a bull market. Central Banks in several countries have stated their intent to increase their gold
holdings instead of selling. d) All gold funds are in a long term up trend with bullion, most recently setting new all-
time highs. e) f) The trend of commodity prices to increase is relative to gold price increases. Worldwide Gold production is not matching consumption. The price will go up with
demand. g) Most Gold consumption is done in India &also its demand is increasing with their
increase in national wealth.
Several gold funds reached all-time highs in 2008 and are still trending upward. U.S government economic policies over the past decade have systematically
projected the U.S economy down a road with uncontrollable federal spending and uncontrollably increasing trade deficits. Both will cause the dollar to lose in international value and will increase the price of alternative investments, specially gold. j) With the recent devaluation of many international currencies, the U.S dollar was the
international safe haven of last resort. We can observe the signs of this ending due to many financial factors, the most important one being a falling dollar. k) There are over one trillion dollars of U.S debt owned by foreigners which could be
repatriated under certain conditions. This could cause a major decline in the value of the dollar and a soaring gold price. l) Gold is still low, but climbing.
Limitations of the study:
Every study suffers from some limitations which are inevitable:
⇒ The time period taken for the analysis part is only 5 years. It would have better if taken
⇒ The analysis is based on the monthly data. The graph reveals more accurate picture if the
data is taken monthly or daily.
⇒ The project is maximum based on the secondary data. ⇒ We can clearly review the effect of global crisis on the analytical part.
Now on the basis of above findings we can conclude and recommend that this is the right time to invest in gold. Besides Bank FDs, Indian investors have a revealed preference towards Gold as a viable investment avenue. Gold remains a favorable investment avenue in India. The Survey depicted that 97% of the investors invested in Gold in Q4, 2008 compared to 42% in Q3, 2008. The reason seems obvious. Gold gained an impressive 23.13% between Jan 1, 08 and Jan 9, 09. Moreover, it gained 91.1% between Jan 1, 07 and Jan 9, 09.. The BSE Sensex and S&P Nifty fell by ‐32.53% and ‐28.31 respectively. Hence, the reasons for Gold Fund Investing are: • • • Enormous Volatility in the Equity Markets. Global Recessionary Syndrome. Low Inflationary pressures Depreciation of US dollar as price of gold is inversely proportional to the value of the US dollar. Countries keep the major chunk of their foreign exchange reserves in US dollar or Gold. With the depreciation of dollar, countries will be compelled to keep their reserves in Gold so as to maintain the reserves.
The sharp fall in equities prompted the investors to park their money in Gold Funds. Gold reserves with Gold Trust, the world’s largest Gold Exchange Traded Fund (ETF) touched 780.23 metric tons on Dec, 29, 2008 up from 627.88 metric tons at the beginning of the year.
Gold miners are the best performers in the 162 member Bloomberg World Mining Index
7The sub‐prime crisis leads to recessionary pressures across the globe. In order to tide over the crisis,
governments are resorting to excessive borrowing. This created an adverse impact on the currency. • Investors flock to gold as a hedge against currency depreciation
Gold is a safe investment option in a situation of deflation. Merrill expects that the global inflation will near to zero. In a situation of low inflation, gold can act as a store of value as bank deposits will generate low return. With reducing inflationary pressure, lending rate goes down. However, banks’ offset the low interest income by reducing deposit rate as they have to maintain Net Interest Margin.So in my opinion this it is the right time to invest in gold.
i. ii. iii. iv. v. vi. vii. viii. ix.
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