TABLE OF CONTENTS

1. Introduction…………………………………………………………………………………………. 1 1.1.Spot Vs Forward Transactions………………………………………………………………… 4 1.2.Limitations…………………………………………………………………………………...... 5 2. Company Profile……………………………………………………………………………………. 7 3. History of Commodity trading and Precious Metals……………………………………………….. 9 3.1. Commodity trading in India………………………………………………………………….... 9 3.2. Kabra committee report……………………………………………………………………...... 10 3.3. Forward Market Commission………………………………………………………………….. 12 3.4. Multi-commodity exchange of India……………………………………………………………13 3.5. National Commodity and Derivatives Exchange limited……………………………………… 15 3.6. History of Gold Market………………………………………………………………………... 19 3.6.1. Gold Trading…………………………………………………………………………….. 20 3.6.2. Production of the Gold…………………………………………………………………… 20 3.6.3. Why central Banks Hold Gold…………………………………………………………… 21 3.7.History of silver Market……………………………………………………………………….. 23 3.7.1. Production of silver……………………………………………………………………. ... 24 4. Pricing Commodity Futures……………………………………………………………………….. 26 4.1.Investment Vs Consumption Assets…………………………………………………………..... 26 4.2.Cost of Carry model………………………………………………………………………….... 27 4.3.Pricing Futures Contract on Investment commodities………………………………………… 29 4.4.Pricing Futures Contract on Consumption commodities……………………………………… 32 5. Clearing, Settlement and Risk Management……………………………………………………….. 35 5.1.Clearing………………………………………………………………………………………… 35 5.2.Settlement………………………………………………………………………………………. 37 5.3.Risk Management……………………………………………………………………………… 40 6. Fundamental and Technical Analysis………………………………………………………………. 42

6.1.Fundamental 42

analysis………………………………………………………………………......

6.1.1. Demand and Consumption………………………………………………………………. 42 6.1.2.Consumption of gold in India…………………………………………………………….. 44 6.1.3.Uses of Gold……………………………………………………………………………… 44 6.2.Technical analysis……………………………………………………………………………… 46 6.2.1. Dow Theory……………………………………………………………………………… 46 6.2.2. Basic principles of Technical analysis…………………………………………………… 50 6.2.3. Line Chart………………………………………………………………………………… 51 6.2.4. Bar Chart………………………………………………………………………………….. 52 6.2.5. Japanese Candlestick Chart………………………………………………………………. 55 6.2.6. Chart Patterns…………………………………………………………………………...... 59 6.2.6.1. Support and resistance patterns…………………………………………………. 59 6.2.6.2 Reversal pattern…………………………………………………………………. 62 6.3. Mathematical Indicators………………………………………………………………………. 64 6.3.1. Moving Average………………………………………………………………………… 64 6.3.1.1. Average……………………………………………………….. 64 6.3.1.2. Exponential moving Average………………………………………………….. 66 6.3.2. Oscillators……………………………………………………………………………….. 68 6.3.2.1. Rate of Change indicators……………………………………………………… 68 6.3.3. Market Indicators……………………………………………………………………….. 71 7. References………………………………………………………………………………………….. 72 Simple moving

ABSTRACT
Aim: An empirical study on precious metals based on fundamental and technical analysis. Abstract: We study the gold and silver prices based on fundamental analysis like inventories in the entire globe, central bank reserves and currency fluctuations. We study the Inventories which will effect due to strikes, political conditions and demand & supply mismatch. According to central Bank policies and central agreements reserves will various. Currency trading on Dollar verses Euro or Dollar verses sterling pound causes volatility which leads to gold/silver price fluctuations. We forecast the gold and silver prices with advanced technical analysis tools by using mathematical indicators and Market indicators like

................................... 48 4................. Oscillators like Rate of change Indicators....................................... Bar Chart of silver........................................................................ 56 10.......................Simple moving average......................................................... 47 3............... 62 .......................................................................................................................................................... Primary trend and secondary reactions................. 52 7............... Line chart.... Exponential moving average............ Bar chart of Gold.... 54 8..Head and shoulder formation..................................... Consumption of Gold............ Market indicators are the indicators used by technical analysts to study the trend of the market as a whole.............................................................................................................. 49 5....................................... LIST OF FIGURES 1....................................................................................... Japanese candlesticks of Silver....................................... In this study we are applying both fundamental and technical analysis for predicting the future price actions based on historical data and previous trends................................................................................................................. Three Phases of bull market... 55 9................................................................................ 51 6............................................ Japanese candlesticks of Gold........... 61 13.................................................. 57 11. Japanese candlesticks of crude oil.................................... and we use Oscillators to identify overbought and oversold conditions........................ Bar Chart of Crude oil........................................ 43 2.......... 58 12............. We use mathematical indicators to know the average prices of the commodity........... Support and resistance levels.................... Three Phases of a bear market...............................

Highest................................... Prices of Crude oil.............................................................................. Lowest and Closing prices of Silver……………………………………………52 6...... Lowest and closing prices of Gold…………………………………………................................................................................. 30 5.... 53 7........................... Comparative Data for Three Periods Value of Turnover………………………………............... 70 LIST OF TABLES 1............................................ Active contracts traded in NCDEX……………………………………………………............................................... Highest........... Highest............. EMA Chart........ 56 10.............. 55 9........... Lowest and closing prices of Silver............................................................... Lowest and Closing Prices of Gold...................... 59 12....... 18 4.......................... 68 15................................ 17 3............... 54 8.............. ROC Chart........... 57 11........... Prices of Gold. Highest...................... 63 .............. Highest.................... NCDEX – indicative warehouse charges………………………………………………................ Prices of Silver........................... 14 2.......................................................... Lowest and closing Prices of Crude oil...........................14................... Active contracts traded in MCX………………………………………………………........

30 days gold price of 7 – day ROC........................................ Gold price of Five – Day EMA.................... 69 CHAPTER – 1 INTRODUCTION ........13........... 66 15............ Gold price Five days Simple Moving Average.......................................................................................................................... 65 14............................

Through the use of simple derivative products the farmers can transfer their risk (i.e. silver. wheat. the Chicago Board of Trade (CBOT) was established to bring farmers and merchants together.Trading on derivatives first started to protect farmers from the risk of their values against fluctuations in the price of their crop. Let’s take an example when a farmer who sowed his crop in June which he would receive his harvest in September may face uncertainty in prices over the period because of the oversupply they are selling at a very low cost. A group of traders got together and created the `to-arrive' contract that permitted farmers to lock in to price upfront and deliver the grain later. cotton. Besides commodities. . In 1848. etc. derivatives contracts also exist on a lot of financial underlying like stocks. exchange rate. From the time it was sown to the time it was ready for harvest. interest rate. etc. fully or partially) by locking the price of their products. derivative contracts exist on a variety of commodities such as corn. farmers would face price uncertainty. This was developed to reduce the risk of the farmers. Today. pepper.

that is. The underlying asset can be equity. by putting in . regulates the forward/ futures contracts in commodities all over India. The Forwards Contracts (Regulation) Act.Hedgers. They use the futures or options markets to reduce or eliminate this risk. Futures and options contracts can give them leverage. However when derivatives trading in securities was introduced in 2001. and Arbitragers. Definition of Derivatives: A derivative is a product whose value is derived from value of one or more underlying assets or variables in a contractual manner. Many people have become very rich in commodity markets. 1956 (SCRA). For example. Speculators. But most importantly. the term security in the Securities Contracts Regulation Act. Participants who trade in the derivatives market can be classified under the following three broad categories . commodity or any other assets. Apart from being used for armament purpose. In India gold has traditionally played a multi-faceted role. It is one of the areas where people can make extraordinary profits within a short span of time. 2. it has most often been treated as an investment. Products and participants: Derivative contracts are of different types. 1. Hedgers: Hedgers face risk associated with the price of an asset. The most common ones are forwards. For example: A wheat farmers may wish to sell their harvest at a future date to eliminate the risk of a change in prices by that date. forex. options and swaps. it has also served as an asset of the last resort and a hedge against inflation and currency depreciation.Due to the high volatility in Financial Market with high risk & low rate of return had made investors to choose alternate investments such as Bullion market in Commodity market. was amended to include derivative contracts in securities. 1952. Speculators: Speculators are participants who wish to bet on future movements in the price of an asset. Richard Dennis borrowed $1600 and turned it into a $200 million fortune in about ten years. futures.

15000 per 10 grams. Spot versus forward transaction: Let us try to understand the difference between spot and derivatives contract. Clearing involves finding out the net outstanding. For example ‘A’ buys goods worth Rs. In a spot transaction. 3. clearing and settlement. that is exactly how much of goods and money the two should exchange.e. Then the goldsmith quotes Rs. As a result of this leveraged speculative position. Every transaction has three components like trading. Arbitragers: Arbitragers work at making profits by taking advantage of discrepancy between prices of the same product across different markets. they see the futures price of an asset getting out of line with the cash price. negotiate and arrive at a price this is trading. for example. This is a spot transaction. On a net basis ‘A’ has to pay Rs. Settlement is the actual process of exchanging money and goods. they can take large positions on the market. Suman wants to buy some gold. clearing and settlement happens immediately. A month later.1000 from ‘B’ and sells goods worth Rs. the trading. They agree upon the forward price for 20 grams of gold that Suman wants to buy and Suman leaves.small amounts of money upfront. A buyer and seller come together. he . The goldsmith quotes Rs. They agree upon this price and Suman buys 20grams of gold. on the spot. they would take offsetting positions in the two markets to lock in the profit. Now suppose Suman does not want to buy the gold on the 1 March. For example on 1March 2009.15050 per 10 grams.400 to ‘B’. but wants to buy it a month later. He pays Rs. i. they increase the potential for large gains as well as large losses.600 to ‘B’.30000 to the goldsmith and collects his gold. If.

for a stated price and quantity. The trading happens today.15000. but the clearing and settlement happens at the end of the specified period.15100 in the spot market. the price of gold drops down to Rs. This analysis will be holding good for a limited time period that is based on present scenario and study conducted. in this case gold. 2. In a forward contract the process of trading. “Note that the value of the forward contract to the goldsmith varies exactly in an opposite manner to its value for Suman”. A forward is the most basic derivative contract. gold trades for Rs. clearing and settlement does not happen immediately. If however.15050. The suggestion is based on the study on Fundamental and Technical Analysis such as price movement.pays the goldsmith Rs.15050 for the same gold. The contract has now lost value from Suman’s point of view. We call it a derivative because it derives value from the price of the asset underlying the contract. The exchange of money and the underlying goods only happens at the future date as specified in the contract. This is a forward contract.30100 and collects his gold. No money changes hands when the contract is signed. Relationship of gold with other factors. the contract becomes more valuable to Suman because it now enables him to buy gold at Rs. a contract by which two parties permanently agree to settle a trade at a future date. If on the 1st of April. Limitations of the Study: 1. . Volumes and Open Interest (OI). he is bound to pay Rs. future movement on gold price may or may not be similar. he is worse off because as per the terms of the contract.

CHAPTER – 2 GEOJIT BNP PARIBAS FINANCIAL SERVICES LTD .

Geojit is a charter member of the Financial Planning Standards Board of India and is one of the largest DP brokers in the country. 2007 the formation of Geojit BNP Paribas Financial Services Ltd. And in the year 1993 Mr. 4. It became a Public limited company by the name Geojit Securities Ltd.Geojit BNP Paribas Financial Service was founded by Mr. In 2003 the Company was renamed as Geojit Financial Services Ltd. C. C. BNP Paribas had taken 27% stake in Geojit. (GFSL). BNP Paribas has one of the largest international banking networks with significant presence in Asia and the United States. The Kerala State Industrial Development Corporation Ltd (KSIDC) Became a Co-promoter of Geojit by taking 24% stake in the company in the year 1995. was announced in Mumbai and Paris. George and Mr.J. In July 2005. which will eventually increase to 34. With this take over Geojit has become Geojit BNP Paribas Financial Services LTD in April 2009. George.J. Currently Geojit BNP Paribas has more than 500 branches. Mumbai (BSE) in the year 2000. the company is also listed at The National Stock Exchange (NSE). Ranajit Kanjilal as a partnership firm in the year 1987. Geojit listed at The Stock Exchange. in the year 1994. On March 13. With presence in more than 85 countries the bank has a headcount of more than 138000. Ranajit Kanjilal retired from the firm and Geojit became a proprietary concern of Mr..35%. Through a preferential allotment.7 lakhs clients and .

offers services in Equities. Life and General Insurance. stock alerts. real-time charts and news and many more features enable the customer to take informed decisions CHAPTER – 3 HISTORY OF COMMODITY TRADING & PRECIOUS METALS . The online trading was first introduced by the Geojit BNP Paribas to their clients that allows the customers to track the markets by setting up their own market watch. Mutual Funds. Futures and Options. Loan against shares. Portfolio Management services. receiving research tips.

spices. The Act prohibited Options trading in goods. currency and actionable claims. 1952 which Regulated forward contracts in commodities all over India. However. and were harmful to the healthy functioning of the markets for the underlying commodities. Over time the derivatives market developed in several other commodities in India. The Act envisages (imagine) three-tier regulation: .Commodity trading in India: The history of organized commodity derivatives in India goes back to the nineteenth century when the Cotton Trade Association started futures trading in 1875. The Act applies to goods. barely about a decade after the commodity derivatives started in Chicago. vegetable oils. which are defined as any movable property other than security. and also to the farmers. many feared that derivatives lead to unnecessary speculation in essential commodities. With a view to restricting speculative activity in cotton market. raw jute and jute goods in Calcutta (1912). Following cotton. sugar And cloth. derivatives trading started in oilseeds in Bombay (1900). Later in 1943. the Parliament passed Forward Contracts (Regulation) Act. wheat in Hapur (1913) and in Bullion in Bombay (1920). After Independence. forward trading was prohibited in oilseeds and some other commodities including food-grains. the Government of Bombay prohibited options business in cotton in 1939.

Kabra. The Kabra committee report After the introduction of economic reforms since June 1991 and the consequent gradual trade and industry liberalisation in both the domestic and external sectors. K. The committee was setup with the following objectives: 1. Ministry of Consumer Affairs.1) The Exchange which organizes forward trading in commodities can regulate trading on a day-to-day basis. In 1970s and 1980s the Government relaxed forward trading rules for some commodities.Department of Consumer Affairs. To examine the extent to which forward trading has special role to play in promoting exports. . Food and Public Distribution .N. To assess • • The working of the commodity exchanges and their trading practices in India To make suitable recommendations with a view to making them compatible with those of other countries 1. 2) The Forward Markets Commission provides regulatory oversight under the powers delegated to it by the central Government. To review the role that forward trading has played in the Indian commodity markets during the last 10 years. the Government of India appointed in June 1993 a committee on Forward Markets under chairmanship of Prof.is the ultimate regulatory authority. 3) The Central Government . 2.

1952. ➢ Due to the inadequate infrastructural facilities such as space and telecommunication facilities the commodities exchanges were not able to function effectively. ➢ The FMC which regulates forward/ futures trading in the country should continue to act a watch. regulations and bye-laws of the commodity exchanges should require the approval of the FMC only. would need to be strengthened. ➢ In-built devices in commodity exchanges such as the vigilance committee and the panels of surveyors and arbitrators are strengthened further. The recommendations of the Committee were as follows: ➢ The Forward Markets Commission (FMC) and the Forward Contracts (Regulation) Act. ensuring capital adequacy norms and encouraging computerisation would enable these exchanges to place themselves on a better footing.dog and continue to monitor the activities and operations of the commodity exchanges.3. Enlisting more members. To suggest measures to ensure that forward trading in the commodities in which it is allowed to be operative remains constructive and helps in maintaining prices within reasonable limits. . Amendments to the rules. The committee submitted its report in September 1994.

To collect and whenever the Commission thinks it necessary. periodical reports on the working of forward markets relating to such goods. FORWARD MARKET COMMISSION:-Forward Markets Commission (FMC) headquartered at Mumbai. is a regulatory authority which is overseen by the Ministry of Consumer Affairs and Public Distribution. . demand and prices. in exercise of the powers assigned to it by or under the Act. 1952. to publish information regarding the trading conditions in respect of goods to which any of the provisions of the act is made applicable. To advise the Central Government in respect of the recognition or the withdrawal of recognition from any association or in respect of any other matter arising out of the administration of the Forward Contracts (Regulation) Act 1952. To keep forward markets under observation and to take such action in relation to them. Govt.All the exchanges have been set up under overall control of Forward Market Commission (FMC) of Government of India. 3. and to submit to the Central Government. The functions of the Forward Markets Commission are as follows: 1. including information regarding supply. of India. It is a statutory body set up in 1953 under the Forward Contracts (Regulation) Act. 2. To make recommendations generally with a view to improving the organization and working of forward markets. as it may consider necessary. 4.

5. To undertake the inspection of the accounts and other documents of any recognized association or registered association or any member of such association whenever it considerers it necessary. Commodity Exchanges in India: The two important commodity exchanges in India are MultiCommodity Exchange of India Limited (MCX), and National Multi-Commodity & Derivatives Exchange of India Limited (NCDEX). I. Multi-Commodity Exchange of India Limited (MCX) MCX an independent multi-commodity exchange has permanent recognition from Government of India for facilitating online trading, clearing and settlement operations for commodity futures markets across the country. Key shareholders of MCX are Financial Technologies (India) Ltd., State Bank of India, NABARD, NSE, HDFC Bank, State Bank of Indore, State Bank of Hyderabad, State Bank of Saurashtra, SBI Life Insurance Co. Ltd., Union Bank of India, Bank Of India, Bank Of Baroda, Canara Bank, Corporation Bank. Headquartered in Mumbai, MCX is led by an expert management team with deep domain knowledge of the commodity futures markets. Through the integration of dedicated resources, robust technology and scalable infrastructure, since inception MCX has recorded many first to its credit. Inaugurated in November 2003 by Shri Mukesh Ambani, Chairman & Managing Director, Reliance Industries Ltd, MCX offers futures trading in the following commodity categories: Agri Commodities, Bullion, Metals- Ferrous & Non-ferrous, Pulses, Oils & Oilseeds, Energy, Plantations, Spices and other soft commodities. MCX has built strategic alliances with some of the largest players in commodities eco-system, namely, Bombay Bullion Association, Bombay Metal Exchange, Solvent Extractors' Association of India, Pulses Importers Association, Shetkari Sanghatana, United Planters Association of India and India Pepper and Spice Trade Association.

Today MCX is offering spectacular growth opportunities and advantages to a large cross section of the participants including Producers / Processors, Traders, Corporate, Regional Trading Centers, Importers, Exporters, Cooperatives, Industry Associations, amongst others MCX being nation-wide commodity exchange, offering multiple commodities for trading with wide reach and penetration and robust infrastructure, is well placed to tap this vast potential. Active Contracts Traded in MCX
Trading Lot

S.NO 1 2 3 4 5 6 7 8 9 10 11 12 13

COMMODITIY NAME GOLD GOLDM GOLD GUINEA SILVER SIVERM MENTHA OIL KAPASIA KHALLI ALUMINIUM COPPER NICKEL
ZINC LIGHT SWEET CRUDE OIL

Price/Unit Rs / 10Gms Rs / 10Gms Rs/ 8Gms RS/ KG Rs / 1 KG Rs/KG Rs/50 KG Rs/KG Rs/KG RS/KG RS/KG Rs/Barrel Rs/mmBtu

Delivery Center

Multiplier 100 10 1 30 5 360 200 5000 1000 250 5000 100 1250

Initial Margin % 7 5 14.5 8 8 11 6.5 7 12 15.5 11 12 10.5

1 KG 100Gms 8Gms 30 KG 5 KGS 360 KG
10 MT

MUMBAI MUMBAI MUMBAI /AHMEDABAD AHMEDABAD AHMEDABAD
CHANDAUSI

AKOLA MUMBAI MUMBAI
MUMBAI

5 MT 1 MT 250 KG 5000 KG 100/Barrel 1250/mmBtu

MUMBAI JNPT-MUMBAI

NATURAL GAS

II. National Commodity & Derivatives Exchange Limited (NCDEX) National Commodity & Derivatives Exchange Limited (NCDEX) is a professionally managed online multi commodity exchange promoted by ICICI Bank Limited (ICICI Bank), Life Insurance Corporation of India (LIC), National Bank for Agriculture and Rural Development (NABARD) and National Stock Exchange of India Limited (NSE). Punjab National Bank (PNB), CRISIL Limited (formerly the Credit Rating Information Services of India Limited), Indian Farmers Fertiliser Cooperative Limited (IFFCO) and Canara Bank by subscribing to the equity shares have joined the initial promoters as shareholders of the Exchange. NCDEX is the only commodity exchange in the country promoted by national level institutions. This unique parentage enables it to offer a bouquet of benefits, which are currently in short supply in the commodity markets. The institutional promoters of NCDEX are prominent players in their respective fields and bring with them institutional building experience, trust, nationwide reach, technology and risk management skills. NCDEX is a public limited company incorporated on April 23, 2003 under the Companies Act, 1956. It obtained its Certificate for Commencement of Business on May 9, 2003. It has commenced its operations on December 15, 2003. NCDEX is a nation-level, technology driven de-mutualized on-line commodity exchange with an independent Board of Directors and professionals not having any vested interest in commodity markets. It is committed to provide a world-class commodity exchange platform for market participants to trade in a wide spectrum of commodity derivatives driven by best global practices, professionalism and transparency. NCDEX is regulated by Forward Market Commission in respect of futures trading in commodities. Besides, NCDEX is subjected to various laws of the land like the Companies Act, Stamp Act, Contracts Act, Forward Commission (Regulation) Act and various other

Raw Jute. Coffee. Silk. Cotton Seed Oilcake. Silver. Expeller Mustard Oil. Urad (Black Matpe).Mustard Seed . Since 2002 when the first national level commodity derivatives exchange started. both in terms of the number of commodities allowed for futures trading as well as the value of trading. Exhibit presents comparative trading data for three fortnightly periods in March. Jute sacking bags. NCDEX is located in Mumbai and offers facilities to its members in more than 390 centres throughout India. there has been a great revival of the commodities futures trading in India. Castor Seed. Sugar. Turmeric. Chana. At subsequent phases trading in more commodities would be facilitated. Below Table . RBD Palmolein. In the last three years. Sesame Seeds. the number jumped to 80 commodities in June 2004. Guar Seeds. futures trading were allowed in only 8 commodities. June and September 2005 and brings up some interesting facts. Jeera. The reach will gradually be expanded to more centres. Gur. Pepper. Mild Steel Ingot.3 Trillion in 2003-04. Chilli. Cotton. Guar gum. Crude Palm Oil. The data in the below Table indicates that the value of commodity derivatives in India could cross the US$ 1 Trillion mark in 2006. Tur. Yellow Red Maize & Yellow Soybean Meal. Yellow Peas.legislations. Rice. Rubber. The value of trading in local currency saw a quantum jump from about INR 350 billion in 2001-02 to INR 1. NCDEX currently facilitates trading of thirty six commodities . Rapeseed . Refined Soy Oil. Wheat.Cashew. While in year 2000. Gold. The market regulator Forward Markets Commission (FMC) disseminates fortnightly trading data for each of the 3 national & 21 regional exchanges that have been set up in recent years to carry on the futures trading in commodities in the country. the exchanges have conducted brisk business in commodities futures trading. Soy Bean. which impinge on its working. The market regulator Forward Markets Commission (FMC) disseminates fortnightly trading data for each of the 3 national & 21 regional exchanges that have been set up in recent years to carry on the futures trading in commodities in the country. Mulberry Green Cocoons.

1 2 Name of the Exchange Multi-Commodity Exchange of India Limited.29 $m 8. Mumbai. National Multi-Commodity Exchange of India Limited.042.85 3 $m 5.13 16 Sep 05 to 30 Sep 05 $m 11.39 Active Contracts Traded in NCDEX S.503.843.950.38 $m 21.360. Comparative Data for Three Periods Value of Turnover in USD Millions Sl.999.No.represents comparative trading data for three fortnightly periods in March.64 16 Jun 05 to 30 Jun 05 $m 4. Total of three exchanges 16 Mar 05 to 31 Mar 05 $m 3.694.25 $m 106.49 $m 10.NO 1 2 COMMODITIY NAME PURE KILO GOLD PURE SILVER Price/Unit Rs / 10Gms Rs / 1 KG Trading Lot 1 KG 30 KGS Delivery Center MUMBAI DELHI Multiplier 100 30 Initial Margin % 8 18 .974. Ahmadabad.45 $m 7.76 $m 113.78 $m 13038. June and September 2005 and brings up some interesting facts. Mumbai. National Commodity & Derivatives Exchange Limited.69 $m 135.

Gold has long been considered one of the most precious metals. Gold has been used as a symbol for purity. where it is considered as a metal of immense value.C.3 4 5 6 7 8 9 10 11 SILVER 5 (mini Lot) GOLD 100 (mini Lot) JEERA PEPPER TURMERIC FINGERS CHILLI LCA 334 MAIZE GUAR SEED GUARGUM Rs / 1 KG Rs / 10 Gms Rs / Quintal Rs / Quintal Rs / Quintal Rs / Quintal Rs / Quintal Rs / Quintal Rs / Quintal 5 KG 100 Gms 3 MT 1 MT 10 MT 5 MT 50 MT 10 MT 5 MT DELHI MUMBAI UNJHA KOCHI NIZAMABAD GUNTUR NIZAMABAD JODHPUR JODHPUR 5 10 30 10 100 50 500 100 50 9 8 8 15 12 33 21 15 15 History of Gold: In India Gold is having a history of more than 7000 years which can find in religious book of Hindu. . gold is found at the Egypt at 2000B. But looking at the history of world. and its value has been used as the standard for many currencies in history. and particularly roles that combine these properties. value. royalty. which is the first metal used by the humans value for ornament and rituals.

gold does become particularly desirable in times of extremely weak confidence and during hyperinflation because gold maintains its value even as fiat money becomes worthless when the value of currency depreciates. National Commodity and Derivative Exchange (NCDEX) and Multi-Commodity Exchange (MCX). which is negligible. It has a special role in India and in certain countries. led to many countries had too started gold future trading. encouraging for exploration programs in gold mines. and in India. Chicago Mercantile Exchange. Which include London gold future. . Shanghai Gold Exchange. and untapped gold reserves. Dubai Gold and Commodity Exchange are some of the world Top recognized exchange. Singapore International Monetary Exchange (Simex). Sydney future exchange. Chicago Board of Trade (CBOT). History of gold trading in India is dates back to 1948 with Bombay Bullion Association. festivals and celebrations. this all factor makes India as largest consumer (18.7% of world total demand in 2004) and importer of gold due to its low production. HISTORY OF GOLD TRADING Gold future trading debuted first at Winnipeg Commodity Exchange (know is Comex) in Canada in 1972. Tokyo Commodity Exchange (Tocom). and National Board of Trade (NBOT) are some Indian exchanges where Gold are traded. This is due to lack of new technology in finding gold reserves and low interest shown by government in financing. gold Jewelry is worn for ornamental value on all social functions. It is the popular form of investment in rural areas between the farmers after having bumper crop or after harvesting. However.As a tangible investment gold is held as part of a portfolio by the countries as a reserves because over the long period gold has an extensive history of maintaining its value. The gold contract gain popularity among traders. which is formed by the group of Merchants.

there are good reasons for countries continuing to hold gold as part of their reserves. However.464 tonnes in the year 2004 from total supply of 3328 tonnes but unable to meet identifiable demand of 3497 tonnes. it rarely makes sense to have all your eggs in one basket. which is accumulated in physical form is enough to built Eiffel tower. Why central banks hold gold Monetary authorities have long held gold in their reserves. These are recognized by central banks themselves although different central banks would emphasize different factors. followed by the United States. Canada. South Africa is the largest gold producing country. .000 tonnes of world-wide reserves. Worldwide. gold mines produce about 2.PRODUCTION OF GOLD Till now the total gold is extracted from the mines is about $1 trillion dollar. Obviously the price of gold can fluctuate . Gold is mined in more than 118 countries around the world. It is sometimes suggested that maintaining such holdings is inefficient in comparison to foreign exchange.but so too do the exchange and interest rates of currencies held in reserves. Indonesia. Annual gold production worldwide is about US$35 billion and by far the one of the largest-trading world commodity. Australia. with the large number of development projects in these countries expected to keep production growing well into the next century. Diversification: In any asset portfolio. Russia and others. Currently. A strategy of reserve diversification will normally provide a less volatile return than one based on a single asset.similar to their holdings 60 years ago. Today their stocks amount to some 30.000 tonnes . some of these countries also account for highest gold reserves from potential 50.

Physical Security: Countries have in the past imposed exchange controls or. a regression to a world of currency or trading blocs or the international isolation of a country. These stem from the fact that its value is determined by supply and demand in the world gold markets. an unexpected surge in inflation. The price of gold therefore behaves in a completely different way from the prices of currencies or the exchange rates between currencies. whereas currencies and government securities depend on government promises and the variations in central banks’ monetary policies. Such events might include war. at the worst. a generalised crisis leading to repudiation of foreign debts by major sovereign borrowers. Where appropriately located. Gold provides this. it is that today’s status quo will not last forever.Gold has good diversification properties in a currency portfolio. It provides a form of insurance against some improbable but. Total and incontrovertible liquidity is therefore essential. Reserves are for using when you need to. Unexpected needs: If there is one thing of which we can be certain. if it occurs. gold is much less vulnerable. total asset freezes. Owning gold is thus an option against an unknown future. . Reserves held in the form of foreign securities are vulnerable to such measures. Economic developments both at home and in the rest of the world can upset countries’ plans. while global shocks can affect the whole international monetary system.an indestructible asset and one not prone to the inflationary worries overhanging paper money. Gold is liquid and is universally acceptable as a means of payment. In emergencies countries may need liquid resources. It can also serve as collateral for borrowing. Confidence: The public takes confidence from knowing that it’s Government holds gold . highly damaging event.

or the international isolation of a country. has recognized that the Fund's own holdings of gold give a "fundamental strength" to its balance sheet. Trading in silver futures resumed at the Comex in New York in 1963. It is the price deliberately paid to provide protection against a highly improbable but highly damaging event. The fix begins at 12:15 p. after a gap of 30 years. Insurance: The opportunity cost of holding gold may be viewed as comparable to an insurance premium. in a world of low interest rates. The same applies to gold held on the balance sheet of a central bank. This is untrue. The IMF's Executive Board. buying and selling orders. a regression to a world of currency and trading blocs. Such an event might be war.Some countries give explicit recognition to its support for the domestic currency. and is a balancing exercise. which started trading in the 17th century provide a vehicle for trade in silver on a spot basis. representing the world's governments. There may be an "opportunity cost" of holding gold but. plus clients. this is less than is often thought. History of Silver Market Major markets like the London market (London Bullion Market Association). or on a forward basis. an unexpected surge of inflation. There is a gold lending market and gold can also be traded to generate profits. the price is fixed at the point at which all the members of the fixing can balance their own. And rating agencies will take comfort from the presence of gold in a country's reserves.m. The London Metal Exchange and the Chicago Board of Trade introduced futures . The London market has a fix which offers the chance to buy or sell silver at a single price. a generalized debt crisis involving the repudiation of foreign debts by major sovereign borrowers. Income: Gold is sometimes described as a non income-earning asset. The other advantages of gold may well offset any such costs.

the Commodity Futures Trading Commission (CFTC). . Mexico is the world’s leading producer of silver. Canada. The main factors affecting these countries demand for silver are macro economic factors such as GDP growth. respectively. income levels. which is the world’s largest consumer of silver. Japan and India. The main consumer countries for silver are the United States. Spot prices for silver are determined by levels prevailing at the COMEX. and silver has been mined and treasured longer than any of the other precious metals. In the United States. followed by Peru. the United Kingdom. a precious metals company. and Australia. Although London remains the true center of the physical silver trade for most of the world. publishes a price for 99. followed by Canada. Although there is no American equivalent to the London fix. and a whole host of other financial macroeconomic indicators. Production of Silver Silver ore is most often found in combination with other elements. the most significant paper contracts trading market for silver in the United States is the COMEX division of the New York Mercantile Exchange. industrial production.trading in silver in 1968 and 1969. the silver futures market functions under the surveillance of an official body. France. the United States. Handy & Harman. Mexico. Italy.9% pure silver at noon each working day. Germany.

CHAPTER – 3 PRICING COMMODITY FUTURES .

Investment assets versus consumption assets When we are studying futures contracts. As we saw earlier silver for example. which is essential to the effective functioning of futures market. these assets have to satisfy the requirement that they are held by a large number of investors solely for investment. exports.of .carry model to understand the dynamics of pricing that constitute the estimation of fair value of futures. It is not . purchases.The process of arriving a figure at which a person buys and another sells a futures contract for a specific expiration date is called price discovery. The process of price discovery continues from the market's opening until its close and also free flow of information is also very important in an active future market. An investment asset is an asset that is held for investment purposes by most investors. Stocks. Price discovery facilitates this free flow of information. the market determines the best estimate of today and tomorrow's prices and it is considered to be the accurate reflection of the supply and demand for the underlying commodity. However investment assets do not always have to be held entirely for investment. imports. bonds. We study the cost . Futures exchanges act as a focal point for the collection and distribution of statistics on supplies. Gold and silver are examples of investment assets. currency values. interest rates and other relevant formation. As a result of this free flow of information. transportation. have a number of industrial uses. storage. it is essential to distinguish between investment assets and consumption assets. However to classify as investment assets. We try to understand the pricing of commodity futures contracts and look at how the futures price is related to the spot price of the underlying asset. A consumption asset is an asset that is held primarily for consumption.

The basis for the cost – of – carry model where the price of the futures contract is defined as: F=S+C Where F = Future price ……………………………… Eq (1) C = Holding cost or carrying cost S = Spot price The fair value of future contracts can alsoF =expressed tas: be S (1+r) . Examples of consumption assets are commodities such as copper. we need to review the arbitrage arguments a little differently. We look at the cost – of – carry model and try to understand the pricing of futures contracts on investment assets. A futures contract is nothing but a forward contract that is exchange traded and that is settled at the end of each day. The buyer who needs an asset in the future has the choice between buying the underlying asset today in the spot market and holding it. or buying it in the forward market.…………………………… Eq (2) . We can use arbitrage arguments to determine the futures prices of an investment asset from its spot price and other observable market variables. If he buys it in the spot market today it involves opportunity costs. If instead he buys the asset in the forward market. oil. he does not incur an initial outlay. For pricing consumption assets. He incurs the cash outlay for buying the asset and he also incurs costs for storing it.usually held for investment. and pork bellies. The cost of carry model:For pricing purposes we treat the forward and the futures market as one and the same.

equation – (2) is expressed as: F = S erT Where: ………………………………. the holding cost is the cost of financing minus the dividends returns. In case of equity futures. Most books on derivatives use continuous compounding for pricing futures too. We know that what is Spot price and what are future price. If F > S (1+r) t or F < S (1+r) t arbitrage would exit. i.Where: R = percentage cost of financing T = time till expiration Whenever the futures price moves away from the fair value. We should know that what are the components of the holding cost? The components of holding cost vary with contracts on different assets. where interest rates are compounded at discrete intervals like annually or semiannually.. When we use continuous compounding. In case of commodity futures. Eq (3) r = Cost of financing (Using continuously compounding interest rate) . the holding cost is the cost of financing plus cost of storage and insurance purchased. Sometimes holding cost may even be negative. Equation – (2) uses the concept of discrete compounding. Pricing of options and other complex derivative securities requires the use of continuously compounded interest rates.e. there would be opportunities for arbitrage.

S = 13763/ 10gms. What is the spot price of gold? The spot price of gold. expiring on 30th March. the futures price would be F = 13763 e 0.58 plus the holding costs. If the cost of financing is 15% annually. .15 ×90/365 = Rs 14281. The price of the futures contract would then be Rs. then it would involve non-zero holding costs which would include storage and insurance costs.71828 Let us take an example of a future contract on commodity and we work out the price of the contract. the cost of financing would increase the futures price. hence we ignored the storage costs. What are the holding costs? Let us assume that the storage cost = 0 F = S erT = 13763 e0.e. then what should be the future price of 10gms of gold one month later? Let us assume that we are on 1 Jan 2009. Therefore. However.15 ×30/365 3.14281.15 ×30/365 = 13933. 1.73 If the contract was for a three months period i. 13763÷10gms. Let the spot price of gold is RS. 2. How would we compute the price of gold future contract expiring on 30 January? Let us first try to work out the components of cost – of – carry model.T = Time till expiration e = 2. What is the cost of financing for month? e0. the gold contract was for 10 grams of gold. if the one month contract was for a 100kgs of gold instead of 10gms. In the example we considered.58 Pricing futures contracts on investment commodities In the example above we saw how a futures contract on gold could be raised using cost – of – carry model.

Per unit charges include storage costs and insurance charges. We saw that in the absence of storage costs.) 310 610 110 110 110 110 110 110 110 110 Warehouse charges per unit per week (Rs. the futures price of a commodity that is an investment asset is given by F = S erT Storage Costs add to the cost of carry.Medium Fixed charges (Rs.) 55 per kg 1 per kg 13 per MT 30 per MT 18 per MT 42 per MT 26 per MT 25 per MT 6 per Bale 6 per Bale The above table gives the indicative warehouse charges for qualified warehouses that will function as delivery centers for contracts that trade on the NCDEX. If U is the present value of all the storage costs that will be incurred during the life of a futures contract.NCDEX – indicative warehouse charges Commodity Gold Silver Soy Bean Soya oil Mustard seed Mustard oil RBD palmolein CPO Cotton . it follows that the futures price will be equal to F = (S+U) erT Where: r = Cost of financing (annualized) T = Time till expiration U = Present value of all storage costs ………………………………Eq (4) . and as per unit per week charge.Long Cotton . Warehouse charges include a fixed charge per deposit of commodity into the warehouse.

and the variable storage costs are Rs.For understanding the above formula let us consider a one – year future contract of gold.072508 = 1479493 We see that the one year futures price of a kg of gold would be Rs.3170 to store one kg of gold for a year (52 weeks). Assume that the storage costs are paid at the time of deposit.93. It costs Rs. Assume further that the spot gold price is Rs 13763per 10 grams and the risk free rate is 7% per annum.310 per deposit up to 500kgs and the variable storage costs are Rs.55 per week.14794.13763 per 10 grams and the risk – free rate is 7% per annum.07 × 1 = 1379470 × e0. Assume further that the spot gold price is Rs. What would the price of one year gold futures be if the delivery unit is one kg? F = (S+U) erT = (1376300 + 310 + 2860) e0. Now let us consider a three – month futures contract on gold. The one year futures price for 10 grams of gold would be about Rs.1025 to store one kg of gold for three months (13 weeks). Assume that the payment is made at the beginning of the year.55 per week. We make the same assumptions that the fixed charge is Rs.310 per deposit up to 500kgs. What would the price of three month gold futures if the delivery unit is one kg? .07 × 1 = 1379470 × 1. Suppose the fixed charge is Rs.1479493. it costs Rs.

For commodities that are consumption commodities rather than investment assets.40 Pricing futures contracts on consumption commodities We used the arbitrage argument to price futures on investment commodities.30 We see that the three – month futures price of a kg of gold would be Rs.F = (S+U) erT = (1376300 + 310 + 715) e0. an arbitrager can implement the following strategy: I. II. at the risk – free interest rate and use it to purchase one unit of the commodity.25 = 1377325 × 1. the arbitrage arguments used to determine futures prices need to be reviewed carefully.30. Borrow an amount S + U.07 × 0. 14016. The three – month futures price for 10 grams of gold would be about Rs. Short a forward contract on one unit of the commodity. 1401640. . Suppose we have F > (S+U) erT ……………………………… Eq (5) To take advantage of this opportunity.017654 = 1401640.

Eq (7) . many investors hold the commodity purely for investment. this strategy leads to a profit of F . and invest the proceeds at the risk –free interest rate. This would result in a profit at maturity of (S+U) erT – F relative to the position that the investors would have been in had they held the underlying commodity.(S+U) erT at the expiration of the futures contract. they will find it profitable to trade in the following manner: I. Individuals and companies who keep such a commodity in inventory. for commodities like cotton or wheat that are held for consumption purpose. As arbitragers exploit this opportunity. Eq (6) In case of investment assets such as gold and silver. Take a long position in a forward contract. do so. Suppose next that F < (S+U) erT …………………………………….If we regard the futures contract as a forward contract. equation 4 holds good. They are reluctant to sell these commodities and buy forward or futures contracts because these contracts cannot be consumed. because of its consumption value – not because of its value as an investment. When they observe the inequality in equation 6. Therefore there is unlikely to be arbitrage when equation 6 holds good. This means that for investment assets. save the storage costs. the spot price will decrease and the futures price will increase until equation 6 does not hold well. In short. Sell the commodity. the spot price will increase and the futures price will decrease until Equation (5) does not hold good. However. As arbitragers exploit this opportunity. II. for a consumption commodity therefore F ≤ (S+U) erT ………………………………………. this argument cannot be used.

SETTLEMENT AND RISK MANAGEMENT .That is the futures price is less than or equal to the spot price plus the cost of carry. CHAPTER – 4 CLEARING.

It guarantees the performance of the parties to each transaction. ➢ Control of the evolution of open interest. The settlement guarantee fund is maintained and managed by NCDEX. National Securities Clearing Corporation Limited (NSCCL) undertakes clearing of trades executed on the NCDEX. physical delivery or cash settlement. Clearing Clearing of trades that take place on an exchange happens through the exchange clearing house. The main task of the clearing house is to keep track of all the transactions that take place during a day so that the net position of each of its members can be calculated. 1.Clearing and settlement Most futures contracts do not lead to the actual physical delivery of the underlying asset. The settlement is done by closing out open positions. A clearing house is a system by which exchanges guarantee the faithful compliance of all trade commitments undertaken on the trading floor or electronically over the electronic trading systems. . All these settlement functions are taken care of by an entity called clearing house or clearing corporation. Typically it is responsible for the following: ➢ Effecting timely settlement ➢ Trade registration and follow up. ➢ Financial clearing of the payment flow.

1. Every clearing member is required to maintain and operate a clearing account with any one of the designated clearing bank branches. A clearing member having funds obligation to pay is required to have clear balance in his clearing account on or before the stipulated pay – in day and the stipulated time.. for settling funds and other obligations to NCDEX including payments of margins and penal charges. The clearing house has a number of members.➢ Physical settlement (by delivery) or financial settlement (by price difference) of contracts. On the NCDEX. The clearing account is to be used exclusively for clearing operations i. Thus depending on a day's transactions and price movement. who are mostly financial institutions responsible for the clearing and settlement of commodities traded on the exchange. A clearing member can deposit funds into this account. the members either need to add funds or can withdraw funds from their margin accounts at the end of the day. but can withdraw funds from this account only in his self-name.1 Clearing banks: NCDEX has designated clearing banks Through whom funds to be paid and / or to be received must be settled. reporting of balances and other operations as may be required by NCDEX from time to time.e. in the case of clearing house members only the original margin is required (and not maintenance margin). ➢ Administration of financial guarantees demanded by the participants. The brokers who are not the clearing members need to maintain a margin account with the clearing house member through whom they trade in the clearing house. The margin accounts for the clearing house members are adjusted for gains and losses at the end of each day (in the same way as the individual traders keep margin accounts with the broker). The clearing . Every day the account balance for each contract must be maintained at an amount equal to the original margin times the number of contracts outstanding. Clearing members must authorize their clearing bank to access their clearing account for debiting and crediting their accounts as per the instructions of NCDEX.

2 Depository participants: Every clearing member is required To maintain and operate a CM pool account with any one of the empanelled depository participants. for effecting and receiving deliveries from NCDEX. 2.e. However. either brought forward created during the day or closed out during the day.bank will debit/ credit the clearing account of clearing members as per instructions received from NCDEX. daily MTM settlement and 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. .. ➢ 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. Canarabank. The following banks have been designated as clearing banks. in the absence of trading for a contract during closing session. The CM pool account is to be used exclusively for clearing operations i. • Daily settlement price: Daily settlement price is the consensus closing price as arrived after closing session of the relevant futures contract for the trading day. All positions of a CM. Settlement Futures contracts have two types of settlements. are marked to market at the daily settlement price or the final settlement price at the close of trading hours on a day. daily settlement price is computed as per the methods prescribed by the exchange from time to time. ICICI Bank Limited. UTI Bank Limited and HDFC Bank ltd 1. On the NCDEX.

by closing out open positions and by cash settlement. Trading period. On the NCDEX all contracts settling in cash are settled on the following day after the contract expiry date. are all defined as per the settlement calendar. the exchange provides alternatives like delivery place. Closing out by offsetting positions . When a contract comes to settlement. The exchange also specifies the accurate period (date and time) during which the delivery can be made.• Final settlement price: Final settlement price is the closing price of the underlying commodity on the last trading day of the futures contract. The delivery place is very important for commodities with significant transportation costs. All open positions in a futures contract cease to exist after its expiration day. month and quality specifications. By physical delivery of the underlying asset.7 days after expiry. All contracts materialising into deliveries are settled in a period 2. 2. We shall look at each of these in some detail. nor guarantees settlement of such deals. The settlement price is calculated and notified by the exchange. The exact settlement day for each commodity is specified by the exchange.1 Settlement Methods: Settlement of futures contracts on the NCDEX can be done in three ways. A member is bound to provide delivery information. it is closed out with penalty as decided by the exchange. If he fails to give information. delivery date etc. A member can choose an alternative mode of settlement by providing counter party clearing member and constituent. The exchange is however not responsible for.

over the period of holding the position. it is marked to the market at the end of the last trading day and all positions are declared closed. Risk management NCDEX has developed a comprehensive risk containment mechanism for its commodity futures market. In this case. When a contract is settled in cash. the last trading day of the contract. The salient features of risk containment mechanism are: . On 20th February. but simply takes away the profit of Rs. that is Rs.6725.Most of the contracts are settled by closing out open positions.1043 per unit. As a holder of a short position on cotton. This loss would have been debited from his margin account over the holding period by way of MTM at the end of each day. For example an investor took a short position in five long staple cotton futures contracts on December 15 at Rs. and finally at the price that he closes his position. A buy contract is closed out by a sale and a sale contract is closed out by a buy.225 per trading unit of cotton in the form of cash. he has gained an amount of Rs.15445. Cash settlement Contracts held till the last day of trading can be cash settled. 15445 in this case. The settlement price on the last trading day is set equal to the closing spot price of the underlying asset ensuring the convergence of future prices and the spot prices. an investor who took a long position in two gold futures contracts on the January 30. 2009 at 14402 can close his position by selling two gold futures contracts on February 27. In closing out. the spot price of long staple cotton is Rs. For example. 2004 at Rs.6950. he does not have to actually deliver the underlying cotton. the opposite transaction is effected to close out the original futures position. This is the settlement price for his contract.

✔ The financial reliability of the members is the key to risk management. It specifies the initial margin requirements for each futures contract on a daily basis. ✔ The open positions of the members are marked to market based on contract settlement price for each contract. the requirements for membership in terms of capital adequacy (net worth. Therefore. It also follows value-at-risk (VAR) based margining through SPAN. . security deposits) are quite stringent. ✔ NCDEX charges an open initial margin for all the open positions of a member. ✔ A member is alerted of his position to enable him to adjust his exposure or bring in additional capital. The difference is settled in cash on a T+1 basis. The PCMs and TCMs in turn collect the initial margin from the TCMs and their clients respectively. ✔ A separate settlement guarantee fund for this segment has been created out of the capital of members. Position violations result in withdrawal of trading facility for all TCMs of a PCM in case of a violation by the PCM.

.CHAPTER – 5 FUNDAMENTAL AND TECHNICAL ANALYSIS Fundamental Analysis DEMAND AND CONSUMPTION OF GOLD Gold produced from different sources and demanded for consumption in form of Jewellery. Industrial applications. Government & Central bank Investment and Private investor. which has been worth US$ 38 billion on average over the past five years in world.

also formed large part of business in India with 527 tonnes of gold fabricated in India in 2004. Japan. the following graph shows the demand in each country.7% of world gold consumption. China. who seem to spend a disproportionate percentage of their disposable income on gold and gold jewelry. 18. as most of its consumed in India (479 tonnes).50% 5.30% 7.90% .30% 6. According to Countries wise demand. Turkey. USA.5%.56% during 2004 by Indian consumers. which make India a leading consumer of gold followed by Italy. Gold fabrication for domestic and international market.10% Turkey US China Japan Rest of world 8.70% In dia Italy 42. Where gold production in India is only 2tonnes. making world largest fabricator which is 60% more than its closest competitor Italy. Turkey. where demand is 18. But this Jeweler Fabrication is unable to generate much revenue. Large part constitute by Jewelry consumption with 85.5% and rest of gold is used as investment purpose 8.20% 11. the demand for Gold consumption is far more ahead than its availability through production. Considering the situation in India. Industrial application 11.Total of world gold produced is mostly consumed by different sectors are Jewelers 80%. scrap or recycled gold. USA.

Consumption of Gold .

demand from the jewelry industry alone has exceeded Western mine production.5 times of US consumption of gold.GOLD CONSUMPTION IN INDIA India consumed around 18% of world Gold produced. banking facilities are improving And economic can confidence has picked up. Gold has been a good safety net for Indian households. Uses of Gold 1. the Gold rush is on”. Increasing by nearly 60% in 2003-04. Estimates for this recycled jewellery vary between 80 tons . Jewellery fabrication: The largest source of demand is the jewelry industry. inflation is relatively low. the sharp rise in gold imports over the last three years when the rupee has started appreciating. Even though it only contribute 1. “Traditionally. This shortfall has been bridged by supplies from reclaimed jewelry and other industrial scrap. unique beauty. is surprising” say Market watchers. and universal appeal make this rare precious metal the favorite of jewelers all over the world. as well as the release of official sector reserves. India is the world's foremost gold jewellery fabricator and consumer with fabricator and consumption annually of over 600 tons according to GFMS. Gold's workability. but during this fiscal Gold imports increased by another 58%.6% of Global GDP. In new years. Measures of consumption and fabrication are made more difficult because Indian jewellery often involves the re-making by goldsmiths of old family ornaments into lighter or fashionable designs and the amount of gold thus recycled is impossible to gauge. July 18 ‘05) The demand is much that it consumed more than 1. with Import of gold and silver account around $11 billion consumption increased by 88% during March’05quarter. “ Forget sensex. However.(Source: -Economic Times. Article.

Industrial applications: Besides jewelry. Central banks holds 28. gold alloys are popular because they are highly resistant to corrosion and tarnish. and in 2001 stood at over 60 tons. 3. Prices of the commodity prices move in trends and . medicine. and other equipment. 2. The US accounted for about one third of total official exports. For this reason gold alloys are used for crowns. the holdings of Reserve Bank of India are only a modest 397. and partial debenture. telephones. Gold's unique properties provide superior electrical conducting qualities and corrosion resistance.4 tons. Private investors: Finally. Depending upon market circumstances. there are private investors. electronics and dentistry. bridges.225. 4. TECHNICAL ANALYSIS Prices of the commodities in the commodity market fluctuate daily because of the continuous buying and selling of the commodities. In dentistry. the investment component of demand can vary substantially from year to year. GFMS estimates are that official gold bullion imports in 2001 were 654 tons. gold inlays.and 300 tons a year.5 tons. televisions. which are required in the manufacture of sophisticated electronic circuitry. Governments and central banks: The third source of gold demand is governments and central banks that buy gold to increase their official reserves. Exports have increased dramatically since 1996. gold has many applications in a variety of industries including aerospace. Manufacturers located in Special Export Zones can import gold tax-free through various registered banks under an Export Replenishment scheme. The electronics industry needs gold for the manufacture of computers.

There are two approaches that we use for analyze the price of the commodities. Dow who was the editor of the wall street journal in U. According t this theory. The secondary reactions act as a restraining force on the primary movement. The primary movements are a long range cycle that carries the entire market up or down. An investor in the commodity market is interested in buying commodities at a low price and sells them at a high price. The third movement in the market is the minor movements which are the day – to – day fluctuations in the . this upward movement will be interrupted by downward movements of short durations. He therefore tries to analyze the movement of the share prices in market. Charles Dow formulated a hypothesis that the commodity market does not move on a random basis but is influenced by three distinct cyclical trends that guides its direction.cycles and are never stable. This is the long – term trend in the market. These are called secondary reactions. the market has three movements and these movements are simultaneous in nature. The theory is so called because it was formulated by Charles H. These are also known as correction. It is an alternative approach to study the commodity price behavior. One of these is the fundamental analysis wherein the analyst tries to determine the true worth or intrinsic value of the commodity when its market price is below its intrinsic value. For example. Dow Theory Whatever is generally being accepted today as technical analysis has its roots in the Dow theory. when the market is moving upwards continuously.S. so that he can get good return on his investment. These movements are primary movements. The second approach to analyze the commodity is technical analysis. secondary reactions and minor movements. These are in the opposite direction to the primary movement and last only for a short while.A.

Three Phases of bull market . the prices of the commodities can be identified by the means of a line chart. Thus during the bull market the line chart would exhibit the formation of three peaks. The three movements of the market have been compared to the tides. the closing prices of the commodities may be plotted against the corresponding trading days. In this chart. During the second phase. The below diagram shows a line chart of closing prices of the commodity in the market. each of which be interrupted by a counter move or secondary reaction which would retrace about 33 – 66 % of the earlier rise or fall. The future prospects of business in general would be perceived to be promising. According to Dow theory. According to Dow theory. This would prompt the investors to buy the commodities.market. the formation of higher bottoms and higher tops indicates a bullish trend. prices would advance due to inflation and speculation. in the first phase the prices would advance with the revival of confidence in the future of business. The primary trend is said to have three phases in it. Each peak would be followed by a bottom formed by the secondary reaction. the waves and the ripples in the ocean. Primary trend and secondary reactions Bullish Trend During a bull market (upward moving market).

prices fall still further due to distress selling. The second hypothesis states that averages discount everything. The market value of the commodity is related to demand and supply factors operating in the market. Investors begin to sell their commodities. . In the second phase. There are both rational and irrational factors which surrounded the supply and demand factors of a security. The theory also makes certain assumptions which have been referred to as the hypotheses of the theory. In the final phase. The theory is concerned with the trend of market and has no forecasting value as regards the duration or the likely price targets for the peak or bottom of the bull and bear markets. Three Phases of a bear market BASIC PRINCIPLES OF TECHNICAL ANALYSIS The basic principles on which analysis is based are as follows: 1. The third hypothesis states that the theory is not perfect.Bearish Trend The bear market is also characterized by three phases. the prices fall due to increased selling pressure. It means that no single individual or institution or group of individuals and institutions can exert influence on major trend of the market. The first hypothesis states that the primary trend cannot be manipulated. 2. In the first phase the prices begin to fall due to abandonment of hopes.

4. 5. Commodity prices behave in a manner that their movement is continuous in a particular direction for some length of time. The shift in demand and supply can be detected through charts prepared specifically to show market action. Line chart of closing prices Bar Chart . Line Chart It is the simplest price chart. The closing price of each day would be represented by a point on the XY graph. Trends in a commodity prices have been seen to change when there is a shift in the demand and supply factors. All these points would be concerned by straight line which would indicate the trend of the market. A line chart is illustrated below. In this chart the closing prices of the share are plotted on the XY graph on a day to day basis.3.

Lowest and closing prices of Gold Highest Price Lowest Price Closing Price . 11 Days Highest. Gold & Crude oil prices. This can be explained by taking 10 days silver. Lowest and Closing prices of Silver Highest Price 18358 18432 18208 18193 17990 17345 17203 17200 17116 17778 17380 Lowest Price 17204 18000 17953 17975 16941 16837 16884 16900 16500 16556 17001 Closing Price 18200 18129 18062 18014 17060 17124 17062 17061 16770 17422 17203 Bar Chart 10Days Highest. Sometimes the opening price of the day is marked as a hash on left side of the bar.It is perhaps the most popular chart used by technical analysts. The top of the bar represents the highest price and the bottom of the bar represents the lower price and the small horizontal hash on the right of the bar is used to represents the closing price of the day. In this chart the highest price and the lowest price and the closing price of each day are plotted on a day – to – day basis. A bar is formed by joining the highest price and the lowest price of a particular day by a vertical line.

Lowest and closing Prices of Crude oil Highest Prices 2485 2555 2582 2559 2559 2519 2470 2501 2374 2410 Lowest Prices 2446 2448 2480 2438 2475 2482 2340 2300 2291 2289 Closing prices 2474 2515 2507 2461 2496 2484 2360 2360 2348 2317 .12030 11990 12100 12200 12820 13155 13226 13288 13192 13179 11779 11780 11924 12080 12225 12830 12785 13004 13000 12985 11903 11885 11997 12141 12797 12941 13105 13145 13051 13125 Bar Chart 10Days Highest.

There are mainly three types of candlesticks. Gold & Crude oil i. A White candlestick indicates a bullish trend while a black candlestick indicates a bearish trend. The highest price and the lowest price of a day are joining by a vertical bar. A white candlestick is used to represents a situation where the closing price of the day is higher than the opening price. (opening.e. This can be expressed below by taking prices of silver. closing. like the white. the black and the doji or neutral candlestick. high. A Black candlestick is used to represents a situation where the closing price of the day is lower than the opening price. the opening price and the closing price of the commodities on day – to – day basis.. the lowest price. low) 19Days Prices of Silver Open 21725 23075 23481 23100 23625 23400 23555 22950 22664 21950 21954 22279 High 23225 23634 23703 23806 23876 23885 23850 23196 22775 22600 22480 22838 Low 21000 23000 22800 22933 22987 23100 22621 22354 21780 21803 21954 21916 Close 23052 23422 22890 23755 23625 23810 22930 22936 21861 22189 22170 22640 .Japanese Candlestick Charts The Japanese candlestick chart shows the highest price. A doji candlestick is the one where the opening price and the closing price of the day are the same.

22526 21976 22051 22526 23444 22488 21583 21344 22050 21922 21976 22424 Japanese candlesticks 10Days Prices of Crude oil Opening Price 2446 2460 2568 2491 2500 2519 2460 2354 2374 2289 Highest Prices 2485 2555 2582 2559 2559 2519 2470 2501 2374 2410 Lowest Prices 2426 2448 2480 2438 2475 2482 2340 2300 2291 2219 Closing Prices 2474 2515 2507 2461 2496 2484 2360 2360 2348 2317 10Days Prices of Gold Opening Price 11880 11890 11925 Highest Prices 11980 11890 12100 Lowest Prices 11779 11880 11924 Closing Prices 11880 11885 11997 .

A horizontal line joining these tops forms the . The price may fall back every time it reaches a particular level. In other words. reversal patterns.12127 12437 12955 12868 13102 13192 13055 12200 12820 12955 13226 13288 13192 13179 12080 12225 12930 12785 13004 13000 12985 12141 12797 12941 13105 13145 13051 13125 CHART PATTERNS: When the price bar charts of several days are drawn close together. Support occurs when price is falling but bounces back or reverses direction every time it reaches a particular level. it forms the support line. Support and resistance patterns: Support and resistance are the price levels at which the downtrend or uptrend in price movements is reversed. 1. certain patterns emerge. These patterns are used by technical analysts to identify trend reversal and predict the future movement of prices. The chart patterns may be classified as support and resistance patterns. Resistance occurs when the commodity price moves upwards. When all these low points are connected by a horizontal line. support level is the price level at which sufficient buying pressure is exerted to stop the fall in prices.

resistance level. resistance level is the price level where sufficient selling pressure is exerted to halt the ongoing rising in the price of a share. Lowest and Closing Prices of Gold Highest price 12088 12411 12383 12200 12820 12955 13226 13288 13192 13179 13199 13134 12727 12640 12600 12421 12193 12487 12430 12798 12973 12915 12851 Lowest Price 12012 12200 12281 11962 12225 12930 12785 13004 13000 12985 13157 12640 12467 12451 12375 11981 12110 12175 12221 12374 12660 12690 12820 Closing price 12050 12312 12332 12141 12797 12941 13105 13145 13051 13125 13172 12720 12636 12507 12403 12104 12134 12326 12385 12752 12845 12839 12830 . If the scrip were to break the support level and move downwards it has bearish implications signaling the possibility of a future fall in prices. 45Days Highest. Thus. if the scrip were to penetrate the resistance level it would be indicative of a bullish trend or a future rise in prices. Similarly.

Reversal patterns: .13021 12974 13288 13276 12919 12797 13118 13235 13205 13500 13447 13825 13677 13690 13800 13730 13590 13582 13450 12800 12863 12968 12835 12671 12737 12816 13016 12907 13023 13380 13609 13392 13375 13670 13515 13552 13216 13116 12913 12960 13196 12960 12748 12757 13047 13084 13111 13357 13417 13660 13462 13646 13763 13580 13572 13351 13394 Support and resistance levels \ 2.

This is followed by another reaction on less volume which takes the price down to a bottom near to the earlier downswing. A third rally now occurs taking the price to a height the head but comparable to the left shoulder. This is followed by another high volume advance which takes the price to a higher top known as the head. These reversal can be identified with the help of certain chart formations that typically occur during these trend revaesals. Head and shoulder formation . The first hump known as the left shoulder is formed when the prices reach the top under a strong buying impulse. This rally results in the formation of the right shoulder. A horizontal line joining the bottoms of this formation is known as the neckline. Then trading volume becomes less and there is a short downward swing. Head and shoulder Formation: The most popular reversal pattern is Head and Shoulder formation which usually occurs at the end of a long uptrend. Thus reversal patterns are chart formations that trend to signal a change in direction of the earlier trend. This head and shoulder formation usually occurs at the end of the bull phase and is indicative of a reversal of trend. This formation resembles the head and two shoulders of a man and hence the name head and shoulder formation.The trends reverse direction after a period of time. After breaking the neckline the price is expected to decline sharply.

Highest. Lowest and closing prices of Silver Highest prices 16834 16987 17380 17649 17790 17572 17688 17690 17320 17200 17290 17118 17458 17649 17790 17572 17890 18095 17950 17901 18737 18500 18729 17963 17990 17844 17690 17580 17550 17649 17790 17672 17890 17410 17508 17320 17200 17190 17118 17158 Lowest Prices 16800 16556 17001 17238 17471 17211 17234 17548 17100 16803 17215 16800 16653 17238 17471 17211 17509 17700 17378 17721 18002 17975 18113 17987 17990 17740 17500 17480 17440 17238 17471 17211 17509 17410 17246 17100 16803 17050 16800 16653 Closing prices 16825 16898 17203 17536 17612 17465 17600 17610 17210 17010 17229 16915 16998 17536 17612 17465 17763 17886 17721 17792 18372 18329 18663 17580 17825 17773 17600 17543 17490 17536 17612 17465 17763 17410 17403 17210 17010 17110 16815 16998 .

a set of averages are calculated for a specified number of days. 5. This makes the investors difficult for the analyst to measure the underlying trend.e. We can use the mathematical tool of moving averages to smoothen the unpredictable movements of the commodity prices and highlight the underlying trend. Calculation of gold price Five days Simple Moving Average Days Close Prices(Rs) Total prices of 5 Days 5 Days Moving Avg(MA) . 2. There are two types of moving averages (MA) are commonly used by the analyst. In the below table the first total of 67022 in column 3 is obtained by adding the prices of the first five days. The closing prices of the shares are generally used for the calculation of moving averages. 1.e. in a simple moving average. (13611+13124+13124+13433+13730).MATHEMATICAL INDICATORS Commodity prices do not rise or fall in a straight line. (67022+14037-13611) this process is continued. Exponential moving average. The movements are unpredictable. Moving Averages: moving averages are mathematical indicators of underlying trend of price movement. I. Simple Moving Average.e. The moving average in column 4 is obtained by dividing the total figure in column 3 by the number of days i. i. Simple moving average: An average is the sum of prices of a Commodity for a specified number of days divided by the number of days. The next Total of 67448 in column 3 is obtained by adding 6th day and deleting first day price from the first total i. each average being calculated by including a new price and excluding an old price.

4 12068.6 12814.6 13672.4 11823.4 11808.8 11817.2 12975.2 12123.6 12119.2 13904 14074 13956 13777.6 13651.4 12329 12200.4 - II.8 13056.6 12620.2 11866 11841. Exponential Moving Average(EMA): It is calculated by using the Following formula: EMA = (Current closing price – Previous EMA) × Factor + Previous EMA .6 11793.2 13444 13135.6 12106 11964.1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 13611 13124 13124 13433 13730 14037 14037 14283 14283 13140 13145 13405 13247 12742 12742 12742 12600 12277 11976 12050 12099 11940 12050 12312 12332 11962 11962 11962 11603 11841 11841 11841 11841 11753 11766 67022 67448 68361 69520 70370 69780 68888 68256 67220 65679 65281 64878 64073 63103 62337 61645 61002 60342 60115 60451 60733 60596 60618 60530 59821 59330 59209 59088 58967 59117 59042 - 13404.6 12467.2 12146.4 12023 12090.4 13489.

99 13420.42 12235.44 13670.61 13372.73 13505.75 12302.33 The EMA for the first day is taken as the closing price of that day itself.29 13342.29 12137.79 14062.44 13490.14 12041.86 12175.61 13046.65 13953.01 11878.82 12081.43 13758.59 12946.89 12227. Calculation of 30 days gold price of Five – Day EMA Days 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 Closing price 13611 13124 13124 13433 13730 14037 14037 14283 14283 13140 13145 13405 13247 12742 12742 12742 12600 12277 11976 12050 12099 11940 12050 12312 12332 11962 11962 11962 11603 11841 EMA 13611 13450.07 12831.53 Factor = 2/ n+1 = 2/ 5+1 = 2/6 = 0.83 11897.03 13555.85 12108.52 13196.87 12648.Where Factor = 2/ n+1 and n = number of days for which the average is to be calculated.41 12139. The EMA for the second day is calculated as EMA = (closing price – Previous EMA) × Factor + Previous EMA .8 13791.76 12426.

Oscillators: Oscillators are the mathematical indicators calculated with the help of the closing price data. two moving averages – one short-term and the other long term are used in combination. . The period of the average indicates the type of trend being identified. These indicators are called oscillators because they move across a reference point.29 EMA = (13124 – 13450.61 If we are calculating the five day exponential moving average.= (13124 – 13611) × 0.33 + 13450. To calculate a 7 day rate of change. When the price of the commodity intersects and moves below or above this trendline.29 = 13342. The moving averages are plotted on the price charts. A moving average represents the underlying trend in commodity price movement. a 50 day average would indicate the medium term trend and a 200 day average indicates the long term trend. They help to identify overbought and oversold conditions and also the possibility of trend reversals. In this case. For example. it may be taken as the first sign of trend reversal. trend reversal is indicated by the intersection of the two moving averages. Rate of change Indicators (ROC): It is a very popular oscillator which measures the rate of change of current price as compared to the price a certain number of days or weeks back. each day’s price is divided by the price which prevailed 7 days ago and then 1 is subtracted from this price ratios . the correct five day EMA will be available from the sixth day onwards. Sometimes. Five day or Ten day average would represent the short – term trend. The curved line joining these moving averages represent the trend line.33 + 13611 = 13450.29) × 0.

90963991 8 0.049371832 0. Calculation of 30 days gold price of 7 – day ROC Days 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 Closing Price 13611 13124 13124 13433 13730 14037 14037 14283 14283 13140 13145 13405 13247 12742 12742 12742 12600 12277 11976 12050 12099 Closing Price 7 Days ago Price Ratio ROC = ratio .090360082 -0.04937183 2 1.97632920 6 0.89339798 6 0.90774382 0.107890499 -0.94372016 8 0.95890411 0.107890499 -0.08831149 1.001219141 -0.93396728 8 0.023670794 -0.056279832 -0.04109589 -0.00121914 1 0.050463036 .066032712 -0.ROC = (Current price / Price ‘n’ period ago) – 1 Let’s take an example of 30 days Gold price.021439738 -0.106602014 -0.08831149 0.97856026 2 0.89210950 1 0.1 13611 13124 13124 13433 13730 14037 14037 14283 14283 13140 13145 13405 13247 12742 1.09225618 -0.89210950 1 0.94953696 4 0.

MARKET INDICATORS: .062941453 -0. the overbought zone is above the zero line and the oversold zone is below the zero line.001169005 -0. the price is rising and when it below the zero line.99883099 5 0. one should buy a commodity that is oversold and sell a commodity that is overbought. The buying and selling signals indicated by the ROC should also be confirmed by the price chart.022857143 0.004479922 -0.007302905 -0. The ROC has to be used along with the price chart. Ideally. An ROC chart is shown below where the X – axis represents the time and the Y – axis represents the values of the ROC.97177554 4 0.94569141 4 0.98265560 2 -0.98867675 0.017344398 The ROC values may be positive.99269709 5 0. the price is falling. The ROC values oscillate across the zero line.01132325 -0.00447992 2 0. while a downside crossing (from above to below the zero line) indicates a selling opportunity.97714285 7 1.22 23 24 25 26 27 28 29 30 11940 12050 12312 12332 11962 11962 11962 11603 11841 12742 12742 12600 12277 11976 12050 12099 11940 12050 0.93705854 7 0. In the ROC chart. Negative and also be zero.054308586 -0. Upside crossing (from below to above the zero line) indicates a buying opportunity. Many analysts use the zero line for identifying buying and selling opportunities.028224456 -0. When the ROC line is above the zero line.

This is a tedios process and takes a rather long time to complete the process. But technical analysis helps in identifying the best timing of an investment. It is not an accurate method of analysis. Neither of them is perfect nor complete by itself. Thecnical analysis studies the price and volume movements in the market and by careful examining the pattern of these movements. differ in terms of their databases and tools of analysis. Since the whole process involves much less timeand data analysis. The two approaches. Technical analysis has several limitations. Fundamental analysis helps in identifying undervalued or overvalued securities. Technical Analysis Vs Fundamental Analysis: Fundamental analysis tries to estimate the intrinsic value of a commodity by evaluating the fundamental factors affecting the economy. however.Technical analysis focuses its attention not only on individual commodity price behaviour. compared to fundamental analysis. Moreover. industry and company. Indicators used by technical analysts to study the trend of the market as a whole are known as market indicators. It is offen difficult to identify the patterns underlying commodity price movements. Fudamental analysis and technical analysis are two alternative approaches to predicting stock pricebehaviour. the future price of the commodity is predicted. Thus.e. technical analysis may be used as a supplement to fundamental analysis rather thanas a substitute to it. i. REFERENCES . the best time to buy or sell a security identified by fundamental analysis as undervalued or overvalued. it facilitates timely decision. it is not easy to interpret the meaning of patterns and their likely impact on future price movements. but also on the general trend of market.

G.bseindia.kitco.com Websites: • • • • • www.com www. (2004): Commodity Futures Markets in India: Ready for Take Off”? www.kevin E – Books: • • • • Ncfm module for commodity market COMDEX Educational series Investors Educational series .geojit.K.nseindia.ncdex.S.com www.Angel commodities Nair C.mcx.com www.com .com www.Books: • Security Analysis And Portfolio Management .

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