1

A PROJECT REPORT
ON
COMMODITY MARKET

Project Submitted in partial fulfillment of Post Graduate Diploma in

Management

Submitted by:
PANKAJ KUMAR
Roll No. 528
Batch 2007-2009

Under the guidance of:

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

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INDEX
Introduction
Commodity
Commodity Market
Structure of Commodity Market
Different Types of Commodity Traded
Turnover of Indian Commodity Exchange
Market Share of Commodity Exchanges in India
Different Segments in Commodities Market
Leading Commodity Markets of World
Regulators
Leading Commodity Markets of India
Volumes in commodity Derivatives Worldwide
Commodity Futures Trading in India
Introduction
Benefits to Industry From Futures Trading
Benefits to Exchange Member
Why Commodity Futures?
What makes commodity trading attractive?
NCDEXs Trading System
Gold
Introduction
What makes Gold special
Market characteristics
Demand & Supply
Indian Gold Jewellery Market
MCX contract specifications of gold
FAQ on Gold
Gold Terminology
Conclusion
Bibliography

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India Commodity Market

We are moving from a world in which the big eat the small to
one in which the fast eat the slow.
-Klaus Schwab, 2000
(founder of the World Economic Forum)

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

successful and transparent futures market.
INTRODUCTION
The vast geographical extent of India and her huge population is aptly
complemented by the size of her market. The broadest classification of the
Indian Market can be made in terms of the commodity market and the bond
market.
The commodity market in India comprises of all palpable markets that we
come across in our daily lives. Such markets are social institutions that
facilitate exchange of goods for money. The cost of goods is estimated in
terms of domestic currency. India Commodity Market can be subdivided into
the following two categories:

Wholesale Market

Retail Market

The traditional wholesale market in India dealt with whole sellers who bought
goods from the farmers and manufacturers and then sold them to the retailers
after making a profit in the process. It was the retailers who finally sold the
goods to the consumers. With the passage of time the importance of whole
sellers began to fade out for the following reasons:

The whole sellers in most situations, acted as mere parasites who did
not add any value to the product but raised its price which was
eventually faced by the consumers.

The improvement in transport facilities made the retailers directly

interact with the producers and hence the need for whole sellers was
not felt.

In recent years, the extent of the retail market (both organized and
unorganized) has evolved in leaps and bounds. In fact, the success stories of
the commodity market of India in recent years has mainly centered on the
growth generated by the Retail Sector. Almost every commodity under the
sun both agricultural and industrial is now being provided at well distributed
retail outlets throughout the country.
Moreover, the retail outlets belong to both the organized as well as the
unorganized sector. The unorganized retail outlets of the yesteryears consist
of small shop owners who are price takers where consumers face a highly
competitive price structure. The organized sector on the other hand are owned
by various business houses like Pantaloons, Reliance, Tata and others. Such
markets are usually selling a wide range of articles both agricultural and
manufactured, edible and inedible, perishable and durable. Modern marketing
strategies and other techniques of sales promotion enable such markets to
5

draw customers from every section of the society. However the growth of such
markets has still centered on the urban areas primarily due to infrastructural
limitations.
Considering the present growth rate, the total valuation of the Indian Retail
Market is estimated to cross Rs. 10,000 billion by the year 2010. Demand for
commodities is likely to become four times by 2010 than what it presently is.

COMMODITY
A commodity may be defined as an article, a product or material that is
bought and sold. It can be classified as every kind of movable property,
except Actionable Claims, Money & Securities. Commodities actually offer
immense potential to become a separate asset class for market-savvy
investors, arbitrageurs and speculators. Retail investors, who claim to
understand the equity markets, may find commodities an unfathomable
market. But commodities are easy to understand as far as fundamentals of
demand and supply are concerned. Retail investors should understand the
risks and advantages of trading in commodities futures before taking a
leap. Historically, pricing in commodities futures has been less volatile
compared with equity and bonds, thus providing an efficient portfolio
diversification option.
In fact, the size of the commodities markets in India is also quite
significant. Of the country's GDP of Rs 13, 20,730 crore (Rs 13,207.3
billion), commodities related (and dependent) industries constitute about
58 per cent.

Currently, the various commodities across the country clock an annual

turnover of Rs 1, 40,000 crore (Rs 1,400 billion). With the introduction of
futures trading, the size of the commodities market grows many folds here
on.
COMMODITY MARKET
Commodity market is an important constituent of the financial markets of
any country. It is the market where a wide range of products, viz.,
precious metals, base metals, crude oil, energy and soft commodities like
palm oil, coffee etc. are traded. It is important to develop a vibrant, active
and liquid commodity market. This would help investors hedge their
commodity risk, take speculative positions in commodities and exploit
arbitrage opportunities in the market.
Turnover in Financial Markets and Commodity Market
(Rs in Crores)
S
No.

Market segments

2002-03

2003-04

2004-05 (E)

Government Securities Market

Forex Market

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

4,160,702 (133.8)

National Stock Exchange (a+b)

3,641,672 (117.1)

658,035 (27) 2,318,531

(84)

1,057,854 (43) 3,230,002 (117)

617,989

1,099,534

1,147,027

b)Derivatives

439,865

2,130,468

2,494,645

a)Cash
b)Derivatives
Commodities Market

316,551 (13) 515,505

(18.7)

519,030

314,073

503,053

499,503

2,478

12,452

19,527

NA

130,215

(4.7)

(91)

3,867,936 (124.4)

a)Cash
II Bombay Stock Exchange (a+b)

1,544,376 (63) 2,518,322 (91.2) 2,827,872

500,000

(16.7)

(16.1)

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

Source: Sebi bulletin

STRUCTURE OF COMMODITY MARKET

Ministry of
Consumer Affairs

FMC (Forwards
Market Commission)

Commodity
Exchange

National Exchange

NCDEX

MCX

Warehouses

Clearing Bank

Regional Exchange

NMCE

Quality
Certification
Agencies

Commodities
Ecosystem
MCX

Transporters/
support agencies

Consumers
(Retail/Institutio
-nal)

NBOT

20 other regional
exchanges

Hedger
(Exporters /
Millers Industry)

Producers
(Farmers/Cooperatives/Ins
titutional)

Traders
(speculators)arbi
-trageurs/client)

DIFFERENT TYPES OF COMMODITIES TRADED

World-over one will find that a market exits for almost all the commodities
known to us. These commodities can be broadly classified into the
following:

METAL

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

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

BULLION

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

FIBER

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

Kapas

ENERGY

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

Sour Crude Oil

SPICES

Cardamom, Jeera, Pepper, Red Chilli

PLANTATIONS

Arecanut, Cashew Kernel, Coffee (Robusta), Rubber

PULSES

Chana, Masur, Yellow Peas

PETROCHEMICALS HDPE, Polypropylene(PP), PVC

OIL & OIL SEEDS

Castor Oil, Castor Seeds, Coconut Cake, Coconut Oil, Cotton

Seed, Crude Palm Oil, Groundnut Oil, Kapasia Khalli, Mustard
Oil, Mustard Seed (Jaipur), Mustard Seed (Sirsa), RBD
Palmolein, Refined Soy Oil, Refined Sunflower Oil, Rice Bran
DOC, Rice Bran Refined Oil, Sesame Seed, Soymeal, Soy Bean,
Soy Seeds

CEREALS

Maize

OTHERS

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

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

TURNOVER OF INDIAN COMMODITY EXCHANGES

Indian Commodity Futures Market (Rs Crores)
Exchanges

2004

2005

2006

2007

Multi Commodity Exchange (MCX)

165147

961,633

1,621,803

2,505,206

NCDEX

266,338

1,066,686

944,066

733,479

NMCE(Ahmadabad)

13,988

18,385

101,731

24,072

NBOT(Indore)

58,463

53,683

57,149

74,582

Others

67,823

54,735

14,591

37,997

All Exchanges

571,759 2,155,122

2,739,340

3,375,336

Turnover on Commodity Futures Markets

(Rs. In Crores)
Exchange
NCDEX
NBOT
MCX
NMCE
ALL EXCHANGES

2003-04

2004-05 FIRST Half

1490

54011

53014

51038

2456

30695

23842

7943

129364

170720

MARKET SHARE OF COMMODITY EXCHANGES IN INDIA

10

DIFFERENT SEGMENTS IN COMMODITIES MARKET

The commodities market exits in two distinct forms namely the Over the
Counter (OTC) market and the Exchange based market. Also, as in
equities, there exists the spot and the derivatives segment. The spot markets
are essentially over the counter markets and the participation is restricted to
people who are involved with that commodity say the farmer, processor,
wholesaler etc. Derivative trading takes place through exchange-based
markets with standardized contracts, settlements etc.

11

LEADING COMMODITY MARKETS OF WORLD

Some of the leading exchanges of the world are:
S. No.

Global Commodity Exchanges

New York Mercantile Exchange (NYMEX)

London Metal Exchange (LME)

Chicago Board of Trade (CBOT)

New York Board of Trade (NYBOT)

Kansas Board of Trade

Winnipeg Commodity Exchange, Manitoba

Dalian Commodity Exchange, China

Bursa Malaysia Derivatives exchange

Singapore Commodity Exchange (SICOM)

10

Chicago Mercantile Exchange (CME), US

11

London Metal Exchange

12

Tokyo Commodity Exchange (TOCOM)

13

Shanghai Futures Exchange

14

Sydney Futures Exchange

15

London International Financial Futures and Options Exchange

(LIFFE)

16

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

17

National Commodity and Derivatives Exchange (NCDEX), India

18

Multi Commodity Exchange of India Limited (MCX), India

19

Dubai Gold & Commodity Exchange (DGCX)

20

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

holding and the New York Mercantile Exchange (NYMEX))

12

Regulators
Each exchange is normally regulated by a national governmental (or semigovernmental) regulatory agency:
Country

Regulatory agency

Australia

Australian Securities and Investments Commission

Chinese mainland

China Securities Regulatory Commission

Hong Kong

Securities and Futures Commission

India
Pakistan

Securities and Exchange Board of India and Forward

Markets Commission (FMC)
Securities and Exchange Commission of Pakistan

Singapore

Monetary Authority of Singapore

UK

Financial Services Authority

USA

Commodity Futures Trading Commission

Malaysia

Securities Commission

13

LEADING COMMODITY MARKETS OF INDIA

The government has now allowed national commodity exchanges, similar to
the BSE & NSE, to come up and let them deal in commodity derivatives in an
electronic trading environment. These exchanges are expected to offer a
nation-wide anonymous, order driven, screen based trading system for
trading.

The

Forward

Markets

Commission

(FMC)

will

regulate

these

exchanges.
Consequently four commodity exchanges have been approved to commence
business in this regard. They are:
S.NO.

Commodity Market in India

Multi Commodity Exchange (MCX), Mumbai

National Commodity and Derivatives Exchange Ltd (NCDEX),

Mumbai

National Board of Trade (NBOT), Indore

National Multi Commodity Exchange (NMCE), Ahmadabad

VOLUMES IN COMMODITY DERIVATIVES WORLDWIDE

14

Source: FMC
Commodity Futures Trading in India
INTRODUCTION
Derivatives as a tool for managing risk first originated in the Commodities
markets. They were then found useful as a hedging tool in financial markets
as well. The basic concept of a derivative contract remains the same whether
the underlying happens to be a commodity or a financial asset. However there
are some features, which are very peculiar to commodity derivative markets.
In the case of financial derivatives, most of these contracts are cash settled.
Even in the case of physical settlement, financial assets are not bulky and do
not need special facility for storage. Due to the bulky nature of the underlying
assets, physical settlement in commodity derivatives creates the need for
warehousing. Similarly, the concept of varying quality of asset does not really

15

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

commodities, the quality of the asset underlying a contract can vary largely.
This becomes an important issue to be managed.
BENEFITS TO INDUSTRY FROM FUTURES TRADING

Hedging

the

price

risk

associated

with

futures

contractual

commitments.

Spaced out purchases possible rather than large cash purchases and its
storage.

Efficient price discovery prevents seasonal price volatility.

Greater flexibility, certainty and transparency in procuring commodities

would aid bank lending.

Facilitate informed lending.

Hedged positions of producers and processors would reduce the risk of

default faced by banks. * Lending for agricultural sector would go up
with greater transparency in pricing and storage.

Commodity Exchanges to act as distribution network to retail agrifinance from Banks to rural households.

Provide trading limit finance to Traders in commodities Exchanges.

BENEFITS TO EXCHANGE MEMBER

Access to a huge potential market much greater than the securities and
cash market in commodities.

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

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

time basis.

16

Traders would be trained to be Rural Advisors and Commodity

Specialists and through them multiple rural needs would be met, like
bank credit, information dissemination, etc.

WHY COMMODITY FUTURES?

One answer that is heard in the financial sector is "we need commodity
futures markets so that we will have volumes, brokerage fees, and something
to trade''. We have to look at futures market in a bigger perspective -- what is
the role for commodity futures in India's economy?
In India agriculture has traditionally been an area with heavy government
intervention. Government intervenes by trying to maintain buffer stocks, they
try to fix prices, and they have import-export restrictions and a host of other
interventions. Many economists think that we could have major benefits from
liberalization of the agricultural sector.
In this case, the question arises about who will maintain the buffer stock, how
will we smoothen the price fluctuations, how will farmers not be vulnerable
that tomorrow the price will crash when the crop comes out, how will farmers
get signals that in the future there will be a great need for wheat or rice. In all
these aspects the futures market has a very big role to play.
If we think there will be a shortage of wheat tomorrow, the futures prices will
go up today, and it will carry signals back to the farmer making sowing
decisions today. In this fashion, a system of futures markets will improve
cropping patterns.
Next, if I am growing wheat and am worried that by the time the harvest
comes out prices will go down, then I can sell my wheat on the futures
17

market. I can sell my wheat at a price, which is fixed today, which eliminates
my risk from price fluctuations. These days, agriculture requires investments - farmers spend money on fertilizers, high yielding varieties, etc. They are
worried when making these investments that by the time the crop comes out
prices might have dropped, resulting in losses. Thus a farmer would like to
lock in his future price and not be exposed to fluctuations in prices.
The third is the role about storage. Today we have the Food Corporation of
India, which is doing a huge job of storage, and it is a system, which -- in my
opinion -- does not work. Futures market will produce their own kind of
smoothing between the present and the future. If the future price is high and
the present price is low, an arbitrager will buy today and sell in the future. The
converse is also true, thus if the future price is low the arbitrageur will buy in
the futures market. These activities produce their own "optimal" buffer stocks,
smooth prices. They also work very effectively when there is trade in
agricultural commodities; arbitrageurs on the futures market will use imports
and exports to smooth Indian prices using foreign spot markets.
In totality, commodity futures markets are a part and parcel of a program for
agricultural liberalization. Many agriculture economists understand the need of
liberalization in the sector. Futures markets are an instrument for achieving
that liberalization.
WHAT MAKES COMMODITY TRADING ATTRACTIVE?

A good low-risk portfolio diversifier

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

and real estate.

Less volatile, compared with, equities and bonds.

18

Investors can leverage their investments and multiply potential

earnings.

Better risk-adjusted returns.

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

Little correlation with equity and bond markets.

High co-relation with changes in inflation.

No securities transaction tax levied.

19

The NCDEX System

Every market transaction consists of three components i.e. trading, clearing
and settlement. A brief overview of how transactions happen on the NCDEXs
market.
TRADING
The trading system on the NCDEX provides a fully automated screen based
trading for futures on commodities on a nationwide basis as well as online
monitoring and surveillance mechanism. It supports an order driven market
and provides complete transparency of trading operations. Order matching is
essential on the basis of commodity, its price, time and quantity. All quantity
fields are in units and price in rupees. The exchange specifies the unit of
trading and the delivery unit for futures contracts on various commodities.
The exchange notifies the regular lot size and tick size for each of the
contracts traded from time to time. When any order enters the trading
system, it is an active order. It tries to finds a match on the other side of the
book. If it finds a match, a trade is generated. If it does not find a match, the
order becomes passive and gets queued in the respective outstanding order
book in the system. Time stamping is done for each trade and provides the
possibility for a complete audit trail if required. NCDEX trades commodity
futures contracts having one month, two month and three month expiry
cycles. All contracts expire on the 20th of the expiry month. Thus a January
expiration contract would expire on the 20th of January and a February expiry
contract would cease trading on the 20th of February. If the 20th of the expiry
month is a trading holiday, the contracts shall expire on the previous trading

20

day. New contracts will be introduced on the trading day following the expiry
of the near month contract.
CLEARING
National Securities Clearing Corporation Limited (NSCCL) undertakes clearing
of trades executed on the NCDEX. The settlement guarantee fund is
maintained and managed by NCDEX. Only clearing members including
professional clearing members (PCMs) only are entitled to clear and settle
contracts through the clearing house. At NCDEX, after the trading hours on
the expiry date, based on the available information, the matching for
deliveries takes place firstly, on the basis of locations and then randomly,
keeping in view the factors such as available capacity of the vault/warehouse,
commodities already deposited and dematerialized and offered for delivery
etc. Matching done by this process is binding on the clearing members. After
completion of the matching process, clearing members are informed of the
deliverable/ receivable positions and the unmatched positions. Unmatched
positions have to be settled in cash. The cash settlement is only for the
incremental gain/loss as determined on the basis of final settlement price.
SETTLEMENT
Futures contracts have two types of settlements, the MTM settlement which
happens on a continuous basis at the end of each day, and the final
settlement which happens on the last trading day of the futures contract. On
the NCDEX, daily MTM settlement and the final MTM settlement in respect of
admitted deals in futures contracts are cash settled by debiting/crediting the
clearing accounts of CMs with the respective clearing bank.
21

All positions of a CM, brought forward, created during the day or closed out
during the day, are market to market at the daily settlement price or the final
settlement price at the close of trading hours on a day. On the date of expiry,
the final settlement price is the spot price on the expiry day. The responsibility
of settlement is on a trading cum clearing member for all trades done on his
own account and his clients trades. A professional clearing member is
responsible for settling all the participants trades, which he has confirmed to
the exchange. On the expiry date of a futures contract, members submit
delivery

information

through

delivery

request

window

on

the

trader

workstations provided by NCDEX for all open positions for a commodity for all
constituents individually. NCDEX on receipt of such information matches the
information and arrives at delivery position for a member for a commodity.
The seller intending to make delivery takes the commodities to the designated
warehouse. These commodities have to be assayed by the exchange specified
assayer. The commodities have to meet the contract specifications with
allowed variances. If the commodities meet the specifications, the warehouse
accepts them. Warehouse then ensures that the receipts get updated in the
depository system giving a credit in the depositors electronic account. The
seller the gives the invoice to his clearing member, who would courier the
same to the buyers clearing member. On an appointed date, the buyer goes
to the warehouse and takes physical possession of the commodities.

22

Gold
Introduction
Gold is a unique asset based on few basic characteristics. First, it is primarily a
monetary asset, and partly a commodity. As much as two thirds of golds total
accumulated holdings relate to store of value considerations. Holdings in this
category include the central bank reserves, private investments, and highcaratage jewellery bought primarily in developing countries as a vehicle for
savings. Thus, gold is primarily a monetary asset. Less than one third of golds
total accumulated holdings can be considered a commodity, the jewellery
bought in Western markets for adornment, and gold used in industry.
The distinction between gold and commodities is important. Gold has
maintained its value in after-inflation terms over the long run, while
commodities have declined.
Some analysts like to think of gold as a currency without a country. It is an
internationally recognized asset that is not dependent upon any governments
promise to pay. This is an important feature when comparing gold to
conventional diversifiers like T-bills or bonds, which unlike gold, do have
counter-party risk.
What makes gold special?

Timeless and Very Timely Investment

Gold is an effective diversifier

Gold is the ideal gift

Gold is highly liquid

23

Gold responds when you need it most

Market Characteristics

The gold market is highly liquid. Gold held by central banks, other
major institutions, and retail jewellery is reinvested in market.

Due to large stock of gold, against its demand, it is argued that the core
driver of the real price of gold is stock equilibrium rather than flow
equilibrium.

Effective portfolio diversifier: This phrase summarizes the usefulness of

gold in terms of Modern Portfolio Theory, a strategy used by many
investment managers today. Using this approach, gold can be used as a
portfolio diversifier to improve investment performance.

Effective diversification during stress periods: Traditional method of

portfolio diversification often fails when they are most needed, that is
during financial stress (instability). On these occasions, the correlations
and volatilities of return for most asset class (including traditional
diversifiers, such as bond and alternative assets) increase, thus
reducing the intended cushioning effect of the diversified portfolio.

Demand and supply

China produced 276 metric tons of gold last year, equal to about 9.7
million ounces, said London precious metals consultancy GFMS Ltd.
That's up 12% from the year-ago and represented just over one-tenth
of the world's supply.

The ranking pushes South Africa into second place, the first time the
gold giant has lost its top ranking since 1905. South Africa, whose late
24

19th century gold rush led to the founding of mining heavyweight Anglo
American Plc and is home to global producers Gold Fields Ltd and
AngloGold Ashanti Ltd, saw its production decline 8% to 272 metric
tons.

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

tonnes.
Demand and Supply of Gold in India (in tonnes)

Supply
Mine Production
Net Producer Hedging
Total mine supply
Official sector sales
Old gold Scrap
Total Supply
Demand
Fabrication
Jewellery
Industrial & Dental
Subtotal of above fabrication
Bar & coin retail investment
Other retail investment
ETFs and similar
Total Demand
Inferred Investment

2006

2007

% change

573
-140
430
93
303
826

580
-129
451
95
262
808

1
5
2
-13
2

519
111
630
89
-3
113
829
-3

568
112
680
116
-5
36
827
-19

9
1
8
31
-68
0
-

Source: GFMS Ltd.

25

Indian Gold Jewellery Market

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

rural areas, where gold is so important in judging a family's status at a
marriage. A basic marriage set for a bride is two earrings, one nose pin,
one ring, one necklace and two bangles, all in 22 carat gold and
weighing up to 200 grams (6.2 oz).

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

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

Medallions, charms and small gift items account for up to half of what is
loosely called jewellery. These items are popular as gifts at weddings
and other family events.

Gold thread, known as Jari used in high quality saris worn at weddings
and special occasions requires somewhere in the region of 20 tonnes
(0.6 m oz) annually.

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

supplying over 300,000 retailers, mostly family-owned, single shop
operations. The industry is beginning to be modernised with large
factories, installing the latest equipment, in centres such as Mumbai,
Ahmadabad and Bangalore.

Hallmarking

does

not

exist

in

India

and

under-caratage

is

commonplace. The Bureau of Indian Standards has introduced a

voluntary scheme which, although not yet widely used, is becoming
more popular. The minimum legal caratage is 9 carat.

The number of retail jewellery outlets has increased greatly since the
abolition of gold control, as has the number of Indians possessing gold
jewellery.
26

MCX Contract Specifications of Gold:

GOLD
Name of Commodity
Ticker Symbol
Trading System
Trading Period
Trading Session
TRADING
Trading Unit
Price Quote

Maximum order size

Tick Size
Daily price limit
Initial Margin
Special Margin

Maximum Allowable
DELIVERY
Delivery unit
Delivery period margin
Delivery center(s)

Delivery Logic
SETTLEMENT PERIOD
Tender Period
Delivery Period
Pay-in of commodities
(delivery by seller
member)

Pay-in of funds
Pay-out of funds and
commodities (delivery to

Gold
GLDPURMUMK
MCX Trading System
Monday to Saturday
Monday to Friday: 10:00a.m. to 11:30 p.m.
Saturday: 10:00a.m. to 2:00 p.m.
1 kg
Rs. Per 10 g, ex-Ahmedabad (inclusive of all
taxes and levies relating to import and custom
duty, but excluding sales tax/VAT, any other
additional tax or surcharge on sales tax, local
taxes and octroi)
10 kg
Re. 1 per 10 g (minimum price movement)
3%
4%
In case of initial volatility, a special margin at
such percentage (as deemed fit), will be imposed
immediately on both buy and sell side in respect
of all outstanding positions, which will remain in
force for next 2 days, after which the special
margin will be relaxed.
For individual client: 2 MT
For members collectively for all clients: 6 MT or
15%of the market position, whichever is high
1 kg
25% of the value of the open position during the
delivery period
At designated clearing house facilities of Group 4
Securitas at these centers and at additional
delivery centers at Chennai, New Delhi and
Hyderabad.
Compulsory
1st to 6th day of the contract expiry month.
1st to 6th day of the contract expiry month.
On any tender days by 6.00 p.m. except
Saturdays, Sundays and Trading Holidays.
Marking of delivery will be done on the tender
days based on the intentions received from the
sellers after the trading hours. On expiry all the
open positions shall be marked for delivery.
Delivery pay-in will be on E + 1 basis.
By 11.00 a.m. on Tender day +1 basis
By 05.00 p.m. on Tender day +1 basis.

27

buyer member)
INFORMATION RELATED TO DELIVERY
Delivery Logic
Compulsory Delivery. Any seller having open
position on the expiry date fails to deliver then
the penalty as per the penal provision will be
imposed to the defaulting seller.
Mode of Communication
Fax or Courier
Tender Period Margin
5% incremental margin for last 5 days on all
outstanding positions. Such margin will be
addition to initial, additional and special margin
as applicable.
Margin during delivery
25% on the marked quantity.
period
Exemption from margin
Margin is exempted on receipt of documentary
during tender and delivery evidence (viz., Warehouse Receipt and Quality
period
Certificate) of tendering delivery with the
Exchange during tender days.
Delivery order rate (DOR)
Settlement/closing price on the respective tender
days except on expiry date. On expiry date the
delivery order rate shall be the Due Date Rate
(DDR) and not the closing price.
Penal Provision
A penalty of 2.5% of DOR will be imposed on
defaulting buyer / seller out of which 2% will be
credited to IPF and 0.5% will be credited to the
counter party.
Additionally, 4% of DOR as a replacement cost
will be charged from defaulting buyer / seller out
of which 90% will be given to the counter party
and 10% will be retained by the Exchange as
administrative expenses.
Delivery Centers
Ahmedabad and Mumbai at designated Clearing
House facilities of Group 4 Securitas at these
centers and at additional delivery centers at
Chennai, New Delhi and Hyderabad
Deliverable grade of
The selling members tendering delivery will have
underlying commodity
the option of delivering such grades as per the
contract specifications. The buyer has no option
to select a particular grade and the delivery
offered by the seller and allocation by the
Exchange shall be binding on him.
Verification by the Buyer
At the time of taking delivery, the buyer can
at the time of release of
check his delivery in front of Group 4 personnel.
delivery
If he is satisfied with the quantity, weight and
quality of material, then he will issue receipt of
the metals instantly. If he is not satisfied with the
metal, he can insist for assaying by any of the
approved assayers available at that center. If the
buyer chooses for assaying, Group 4 person will
carry the goods to the assayers facilities, get it
assayed and bring it back to Group 4 facilities
along with assayers certificate. If the assayers
28

Validation Process

Delivery Process

certificate differs from the certificate submitted

by the seller in respect of quality or weight
materially, then the buyer and seller have to
mutually negotiate the final settlement proceeds
within 1 day from receipt of assayers report,
however if they do not agree on any mutually
acceptable amount within 1 day, then the
Exchange will send the goods to a second
assayer and in that case, the report received
from such assayer will be final and binding on
both buyer and seller. The cost of first assaying
as well as cost of transportation from Group 4 to
assayers facilities to and fro will be born by the
buyer, while the cost of second assaying, if any,
will be equally divided between the buyer and
seller. The vault charges during such period of
first and second assaying, if any, will be born by
both the buyers and sellers equally. If the buyer
does not opt for assaying at the time of lifting
delivery, then he will not have any further
recourse to challenge the quantity or quality
subsequently and it will be assumed that he has
received the quantity and quality as per the bill
made by the seller.
On receipt of delivery, the Group 4 personnel will
do the following validations:
a. whether the person carrying Gold is the
designated clearing agent of the member.
b. whether the selling member is the bonafied
member of the Exchange.
c. whether the quantity being delivered is from
Exchange approved refinery
d. whether the serial numbers of all the bars is
mentioned in the packing list provided.
e.
whether
the
original
certificates
are
accompanied with the Gold Bars
Any other validation checks, as they may desire.
In case any of the above validation fails, the
Group 4 Securitas will contact the Exchange
office and take any further action, only as per
instructions received from the
Exchange in writing. If all validations are
through, then the Group 4 Securitas personnel
will put the Gold in the vault. Then the custodian
of Group 4 will cut a serially numbered Group 4
receipt (in triplicate consisting of White, Pink and
Yellow slips), get the signature of the sellers
clearing agent and signing the same for
authorization, hand over the Pink slip to sellers
clearing agent, send by courier the third copy
(Yellow Colour slip) while retaining the White for
the records of Group 4 Securitas. Group 4 in
29

Quality Adjustment

Procedure of taking
delivery from the Vault

Taxes, duties, cess and

levies

Endorsement of delivery
order

front of the selling members clearing agent will

deposit the said metal into their vault.
The price of gold is on the basis of 995 purity. In
case a seller delivers 999 purity, he would get a
premium. In such case, the sale proceeds will be
calculated by way of delivery order rate * 999/
995
For the purpose of taking delivery of goods fully
or partially, the Member shall send to the
Exchange an Authority letter on his letter head,
authorising a representative on his behalf to take
the delivery. The Authority letter sent by the
Member shall consist of the following details:
a. Name of the authorised representative.
b. Name of the Commodity along with quantity.
c. Name of the Vault along with the location.
d. Signature of the authorised representative.
e. Proof of Identity viz. PAN card, driving license,
Election ID.
f. Photo identity proof duly attested by the
Member.
The above-mentioned details are required to be
sent to the Exchange. Once the Exchange
receives the above-mentioned details, the
Exchange will send Delivery Order (DO) to the
Vault authorities directly.
Based on the Delivery Order received, the Vault
will issue the requested quantity to the
authorised representative who has to present
himself personally at the Vault along with the
requisite photo identity proof in original, the copy
of which was sent/communicated to the
Exchange by its Member.
The
Vault
officials
will,
upon
final
scrutiny/checking of the identity, deliver goods to
the representative of the Member. The Vault
officials in case of any discrepancy or doubt or
any other reason may refuse to issue the goods
to the representative under the intimation to the
Exchange.
The delivery given to the representative shall be
final & binding to the Member at all times.
Ex-Ahmedabad.
Inclusive of all charges / levies relating to import
duty, customs to be borne by Seller. But
excluding Sales Tax / VAT, any other additional
tax or surcharge on sales tax, local taxes and
octroi to be borne by the Buyer.
The buyer member can endorse delivery order to
a client or any third party with full disclosure
given to the Exchange. Responsibility for
30

contractual liability would be with the original

assignee.
Vault, Insurance and
Borne by the seller till the date of pay-out of
Transportation charges
delivery and the buyer after the date of pay-out.
Extension of delivery
As per Exchange decision due to a force majeure
period
or otherwise.
Due date rate (DDR)
DDR is calculated on 5th day of the contract
month. This is calculated by way of taking simple
average of last 5 days of the spot market of
Ahmedabad.
Legal obligation
The members will provide appropriate tax forms
wherever required as per law and as customary
and neither of the parties (seller member and
buyer member) will unreasonably refuse to do
so.
Applicability of Business
The general provisions of Byelaws, rules and
Rules
Business Rules of the Exchange and decisions
taken by Forward Markets Commission, Board of
Directors and Executive Committee of the
Exchange in respect of matters specified above
will form and integral part of this contract. The
Exchange or FMC as the case may be further
prescribe additional measures relating to delivery
procedures, warehousing, quality certification,
margining, risk management from time to time.
(The interpretation or clarification given by the
Exchange on any terms of this contract shall be
final and binding on the members and others.)
STEPS TO BE FOLLOWED FOR DELIVERY
Intention to take delivery
On any tender days by 6.00 p.m.
by buyers
Dissemination of
The Exchange will inform members through TWS
information on tendered
regarding tender notice and delivery intentions of
delivery and buyers
the sellers members and the buyers respectively
interest
by 7.00 p.m. on the respective tender days and
on Saturdays by 1:00 p.m.
Evidence of stocks in
At the time of issuing delivery order, the Member
possession
must satisfy the Exchange that he holds stocks of
the quantity and quality specified in the Delivery
Order at the declared delivery center by
producing warehouse receipt.
Tender notice by seller
The seller will issue tender notice along with
evidence of delivery to the Exchange in a
specified format by 6:00 p.m. and on Saturdays
by 12:00 noon.
Buyers obligation
The buyer shall not refuse taking delivery and
such refusal will entertain penalty as per the
penal provision.
Allocation of delivery
As per the closing price on the respective tender
days.

31

Source: MCX Gold Report 1

32

Frequently Asked Questions on Gold

Q1. What is Gold and why is its chemical symbol Au?
Gold is a rare metallic element with a melting point of 1064 degrees
centigrade and a boiling point of 2808 degrees centigrade. Its chemical
symbol, Au, is short for the Latin word for gold, 'Aurum', which literally means
'Glowing Dawn'. It has several properties that have made it very useful to
mankind over the years, notably its excellent conductive properties and its
inability to react with water or oxygen.
Q2. Where does the word Gold come from?
The word gold appears to be derived from the Indo-European root 'yellow',
reflecting one of the most obvious properties of gold. This is reflected in the
similarities of the word gold in various languages: Gold (English), Gold
(German), Guld (Danish), Gulden (Dutch), Goud (Afrikaans), Gull (Norwegian)
and Kulta (Finnish).
Q3. How much gold is there in the world?
At the end of 2001, it is estimated that all the gold ever mined amounts to
about 145,000 tonnes.
Q4. Why is gold measured in carats?
This stems back to ancient times in the Mediterranean /Middle East, when a
carat became used as a measure of the purity of gold alloys (see next
Question 5). The purity of gold is now measured also in terms if fineness, i. e.
parts per thousand. Thus 18 carats is 18/24th of 1000 parts = 750 fineness.
Q5. What is a Carat?
A Carat (Karat in USA & Germany) was originally a unit of mass (weight)
based on the Carob seed or bean used by ancient merchants in the Middle
East. The Carob seed is from the Carob or locust bean tree. The carat is still
used as such for the weight of gem stones (1 carat is about 200 mg). For
gold, it has come to be used for measuring the purity of gold where pure gold
33

is defined as 24 carats. How and when this change occurred is not clear. It
does involve the Romans who also used the name Siliqua Graeca (Keration in
Greek, Qirat in Arabic, now Carat in modern times) for the bean of the Carob
tree. The Romans also used the name Siliqua for a small silver coin, which
was one-twentyfourth of the golden solidus of Constantine. This latter had a
mass of about 4.54 grammes, so the Siliqua was approximately equivalent in
value to the mass of 1 Keration or Siliqua Graeca of gold, i.e the value of
1/24th of a Solidus is about 1 Keration of gold, i.e 1 carat.
Q6. Who owns most gold?
If we take national gold reserves, then most gold is owned by the USA
followed by Germany and the IMF. If we include jewellery ownership, then
India is the largest repository of gold in terms of total gold within the national
boundaries. In terms of personal ownership, it is not known who owns the
most, but is possibly a member of a ruling royal family in the East.
Q7. If all the gold was laid around the world, how far would it stretch?
If we make all the gold ever produced into a thin wire of 5 microns (millionths
of a metre) diameter the finest one can draw a gold wire, then all the gold
would stretch around the circumference of the world an astounding 72 million
times approximately!
Q8. How much new gold is produced per year?
In 2001, mine production amounted to 2,604 tonnes or 67% of total gold
demand in that year. Gold production has been growing for years, but the real
acceleration took place after the late 1970s, when output was in the region of
1,500tpa. This year output will fall short of production levels in 2001. This is
partly for specific operational reasons at some of the larger mines (Grasberg
and Porgera), along with lower grades at some of the operations in Nevada.
The reduction in exploration and development expenditure over the past five
years is leading a number of analysts to suggest that, with other operations
nearing the end of their lives, global production is likely to drop slightly over
the next two to three years subject always of course to price.

34

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

Gold mining is very capital intensive, particularly in the deep mines of South
Africa where mining is carried out at depths of 3000 meters and proposals to
mine even deeper at 4,500 meters are being pursued. Typical mining costs
are US $238/troy ounce gold average but these can vary widely depending on
mining type and ore quality. Richer ores mined at the surface (open cast
mining) is considerably cheaper to mine than underground mining at depth.
Such mining requires expensive sinking of shafts deep into the ground.
Q10. How does a gold mine work?
The gold-containing ore has to be dug from the surface or blasted from the
rock face underground. This is then hauled to the surface and milled to release
the gold. The gold is then separated from the rock (gangue) by techniques
such as flotation, smelted to a gold-rich dor and cast into bars. These are
then refined to gold bars by the Miller chlorination process to a purity of
99.5%. If higher purity is needed or platinum group metal contaminants are
present, this gold is further refined by the Wohlwill electrolytic process to
99.9% purity. Mine tailings containing low amounts of gold may be treated
with cyanide to dissolve the gold and this is then extracted by the carbon in
pulp technique before smelting and refining.
Q12. How big is a tonne of gold?
Gold is traditionally weighed in Troy Ounces (31.1035 grammes). With the
density of gold at 19.32 g/cm3, a troy ounce of gold would have a volume of
1.64 cm3. A tonne of gold would therefore have a volume of 51, 760 cm3,
which would be equivalent to a cube of side 37.27cm (Approx. 1' 3'').

35

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

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

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

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

mass expressed in parts per thousand (%).

Find Gold: It is gold having fineness 999 parts per thousand (5) and
above without any negative tolerance.

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

Standard Gold: Gold having fineness 995 parts per thousand (%) and
above without any negative tolerance.

Grain: One of the earliest weight units used for measuring gold. One
grain is equivalent to 0.0648 grams.

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

and its number, fineness, etc.

Karat: Unit of fineness, scaled from one to 24. 24 karat gold (or pure
gold) has at least 999 parts pure gold per thousand; 18-karat has 750,
parts pure gold and 250 parts alloy, etc.

Kilo Bar: A bar weighing one kilogram approximately 32.1507 troy

ounces.

Legal Tender: The coin or currency which the national monetary

authority declares to be universally acceptable as a medium of
exchange; acceptable for instance in the discharge of debts.

Liquidity: The quality possessed by a financial instrument of being

readily convertible into cash without significant loss of value.

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

(ordinary) ounces. The word ounce when applied to gold refers to a troy
ounce. 1 troy ounce is equivalent to 31.1034768 grams.

36

CONCLUSION
After almost two years that commodity trading is finding favour with Indian
investors and is been seen as a separate asset class with good growth
opportunities.

For diversification of portfolio beyond shares, fixed deposits

and mutual funds, commodity trading offers a good option for long-term
investors and arbitrageurs and speculators.

And, now, with daily global

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

commodities cannot be ignored by Indian investors.
Online commodity exchanges need to revamp certain laws governing futures
in commodities to make the markets more attractive.

The national multi-

commodity exchanges have unitedly proposed to the government that in view

of the growth of the commodities market, foreign institutional investors should
be given the go-ahead to invest in commodity futures in India.
will deepen and broad base the commodity futures market.

Their entry

As a matter of

fact, derivative instruments, such as futures, can help India become a global
trading hub for select commodities.
Commodity trading in India is poised for a big take-off in India on the back of
factors like global economic recovery and increasing demand from China for
commodities. Considering the huge volatility witnessed in the equity markets
recently with the Sensex touching 21000 level commodities could add the
required zing to investors' portfolio.

Therefore, it won't be long before the

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

37

Bibliography
www.mcxindia.com
www.indiamba.com
www.commodityindia.com
www.business.mapsofindia.com
www.bseindia.com
www.ncdex.com
www.sebi.gov.in, SEBI Bulletin
www.indiaexpress.com
www.nmce.com
www.nbotind.org
www.gold.org

38