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Introduction

Gold is a unique asset based on few basic characteristics. First, it is primarily a monetary asset, and partly a commodity. As much as two thirds of gold’s total accumulated holdings relate to “store of value” considerations. Holdings in this category include the central bank reserves, private investments, and high-cartage jewelry bought primarily in developing countries as a vehicle for savings. Thus, gold is primarily a monetary asset. Less than one third of gold’s total accumulated holdings can be considered a commodity, the jewelry bought in Western markets for adornment, and gold used in industry. The distinction between gold and commodities is important. Gold has maintained its value in after-inflation terms over the long run, while commodities have declined. Some analysts like to think of gold as a “currency without a country’. It is an internationally recognized asset that is not dependent upon any government’s promise to pay. This is an important feature when comparing gold to conventional diversifiers like T-bills or bonds, which unlike gold, do have counter-party risk. Why gold is "good as gold" is an intriguing question. However, we think that the more pragmatic ancient Egyptians were perhaps more accurate in observing that gold's value was a function of its pleasing physical characteristics and its scarcity. • Gold is primarily a monetary asset and partly a commodity.
• • •

More than two thirds of gold's total accumulated holdings account as 'value for investment' with central bank reserves, private players and high-carat Jewellery. Less than one third of gold's total accumulated holdings is as a 'commodity' for Jewellery in Western markets and usage in industry. The Gold market is highly liquid and gold held by central banks, other major institutions and retail Jewellery keep coming back to the market. Due to large stocks of Gold as against its demand, it is argued that the core driver of the real price of gold is stock equilibrium rather than flow equilibrium. Economic forces that determine the price of gold are different from, and in many cases opposed to the forces that influence most financial assets. South Africa is the world's largest gold producer with 394 tons in 2001, followed by US and Australia. India is the world's largest gold consumer with an annual demand of 800 tons

• • • •

What makes Gold different from other commodities? The flow demand of commodities is driven primarily by exogenous variables that are subject to the business cycle, such as GDP or absorption. Consequently, one would expect that a sudden unanticipated increase in the demand for a given commodity that is not met by an immediate increase in supply should, all else being equal, drive the price of the commodity upwards.
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However, it is our contention that, in the case of gold, buffer stocks can be supplied with perfect elasticity. If this argument holds true, no such upward price pressure will be observed in the gold market in the presence of a positive demand shock. The existence of a sophisticated liquid market in gold has, over the past 15 years, provided a mechanism for gold held by central banks and other major institutions to come back to the market. Although the demand for gold as an industrial input or as a final product (jewellery) differs across regions, it is argued that the core driver of the real price of gold is stock equilibrium rather than flow equilibrium. This is not to say that exogenous shifts in flow demand will have no influence at all on the price of gold, but rather that the large supply of inventory is likely to dampen any resultant spikes in price. The extent of this dampening effect depends on the gestation lag within which liquid inventories can be converted in industrial inputs. In the gold industry such time lags are typically very short. Gold has three crucial attributes that, combined, set it apart from other commodities: firstly, assayed gold is homogeneous; secondly, gold is indestructible and fungible; and thirdly, the inventory of aboveground stocks is astronomically large relative to changes in flow demand. One consequence of these attributes is a dramatic reduction in gestation lags, given low search costs and the well-developed leasing market. One would expect that the time required to convert bullion into producer inventory is short, relative to other commodities which may be less liquid and less homogenous than gold and may require longer time scales to extract and be converted into usable producer inventory, making them more vulnerable to cyclical price volatility. Of course, because of the variability of demand, the price responsiveness of each commodity will depend in part on precautionary inventory holding. The fundamental differences between gold and other financial assets and commodities give rise to the following “hard line” hypothesis: the impact of cyclical demand using as proxies GDP, inflation, nominal and real interest rates, and the term structure of interest rates on returns on gold, is negligible, in contrast to the impact of cyclical demand on other commodities and financial assets.

Using the gold price and US macroeconomic and financial market quarterly data from January 1975 to December 2001, the following conclusions may be drawn:
• There is no statistically significant correlation between returns on gold and changes in macroeconomic variables, such as GDP, inflation and interest rates; whereas returns on other financial assets, such as the Dow Jones Industrial Average, Standard & Poor’s 500 index and 10-year government bonds, are highly correlated with changes in macroeconomic variables. • Macroeconomic variables have a much stronger impact on other commodities (such as aluminum, oil and zinc) than they do on gold. • Returns on gold are less correlated with equity and bond indices than are returns on other commodities.
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Global Scenario
Demand
Demand for gold is widely spread around the world. East Asia, the Indian sub-continent and the Middle East accounted for 72% of world demand in 2007. 55% of demand is attributable to just five countries - India, Italy, Turkey, USA and China, each market driven by a different set of socio-economic and cultural factors. Rapid demographic and other socio-economic changes in many of the key consuming nations are also likely to produce new patterns of demand. This buying is likely to be centered in those countries where the investment element of the jewellery sector is strongest. The constraints surrounding mine output are unlikely to ease, and in fact, have the potential to worsen as credit conditions continue to cause problems for some miners and explorers. Furthermore, net selling by the central bank sector should remain at relatively low levels. However, as we saw in Q4, much will depend on the direction of the gold price and the scrap response. Continued high levels of the gold price could see scrap levels increase further.

Table: Identifiable Gold Demand (tones)

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Jewellery
Gold jewellery demand declined during the fourth quarter as the global economic crisis began to bite and prices continued to fluctuate around relatively high levels. Total tonnage off-take, at 538.9 tones, was down 6% on Q4 2007, while the year-on-year decline was a more marked
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11%. Meanwhile, the $US value measure of demand reveals that Q4 demand of $US13.8bn was 4% below year-earlier levels, with the result that 2008 annual demand – at $US59.7bn – was 11% higher than 2007 levels. The main factor affecting jewellery demand was the difficult economic environment that has taken hold in most countries. Consumers are facing issues such as rising unemployment and falling house prices and stock markets and are focusing their spending decisions on necessities. Once again however, it is worthy of comment that the value measure of jewellery demand confirms that spending on gold jewellery remains relatively robust. Although the severity of the economic climate took its toll in the fourth quarter, for calendar 2008 the primary value of gold jewellery demand increased by $US6.1bn. Movements in the price of gold were also a key factor in quashing demand. Although the gold price dipped sharply in October, it soon recovered lost ground and this higher price level, together with a rise in volatility, discouraged purchases in many of the more price sensitive markets. In contrast however, some markets, e.g. mainland China, Russia and the Middle East, benefited from elevated levels of investment-related demand for gold jewellery, as the intrinsic value of gold lent a stronger investment perspective to jewellery purchases.

Industrial
Electronics demand was profoundly affected by the global economic slowdown and subsequent lack of confidence across the supply chain, slipping 15%. Elsewhere, the other industrial and decorative sector recorded a modest 2% increase on the back of a significant rise in Indian off take, while gold used in dental applications continued its secular decline, falling 7%. Looking more closely at the electronics sector reveals an industry that, for the most part, is currently undergoing a crisis on the back of steadily deteriorating economic conditions. The decline of 15% relative to year-earlier levels took tonnage to its lowest level since Q4 2004. Waning consumer spending resulted in sharp declines in both production and exports from the world’s largest producers. Demand from the other industrial and decorative segment was relatively stable Italy recorded a 6% rise relative to year-earlier levels as a result of increased GPC (gold potassium cyanide) production, much of which is used in the electro-forming of jewellery (a process geared to producing low weight jewellery items) and in the plating of accessories. Lastly, gold used in dental applications is estimated to have declined 7% relative to Q4 2007 as ongoing substitution to more affordable and cosmetically pleasing applications continued to limit the use of the precious metal.

Investment
Net retail investment drove the result, rising from 61.4 tons in Q4 2007 to 304.2 tons in Q4 2008 (an astonishing 243 tones or 396%) and accounting for 94% of the tonnage increase in identifiable investment. Net investment in Exchange Traded Funds (ETFs) and similar products also made a notable contribution to the increase in investor inflows, up 18% or 15 tones. All components of net retail investment recorded extremely strong growth. Bar hoarding, which
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largely covers the non-western markets, increased from 30.2 tonnes in Q4 2007 to 126.6 tonnes in Q4 2008, a rise of 318%? Official coins also enjoyed impressive growth, more than tripling from 22.4 tons to 67.9 tones. However, the highlight of the quarter was the 92.3 tone improvement in "other identified retail investment" to 92.6 tons from just 0.3tonnes. This category reflects the impact of “western” investor activity in the secondary retail investment market, predominantly Europe and North America i.e. it includes western demand for bars and secondary demand for official coins. These dramatic retail investment inflows reflect the extreme uncertainty that surrounds the global economy and financial system. In an environment where investors are more concerned about the loss of capital than they are about the return on capital, the absence of default risk or counterparty risk has been a key attraction for gold Combining identifiable investment (largely investors with a medium and long term focus) with inferred investment (largely investors with a more speculative focus) gives us total investment flows. In Q4 2008, total investment was up 22% on the levels of Q4 2007. For the year as a whole, total investment was up 44%, equivalent to a 69% rise in $US value terms from $14.7bn to $24.8bn. These investment flows help explain why the gold price rose 25% from an average of $US695/ oz in 2007 to $US872 in 2008. Notably, the annual increase in identifiable investment (which excludes speculative flows) exceeded that of total investment (which includes them). It is also clear that while those speculative flows were reasonably volatile on a quarter-to quarter basis, the main source of total investment flows during the quarter were, in fact, investors with a medium to longer term focus.

Table : Identifiable Gold Demand ($USmn)

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Table : Investment demands (in tonnes except where specified)

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Table: Consumer demand in selected countries 2007 & 2008 (tonnes)

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Above table clearly shows that demand for gold in India is gradually decreasing because of very high price and also in India jewelry are made out of recycled or scrap gold. But we can find out that there is increasing in demand of gold from Greater china, China, Hong Kong and Vietnam. In Indonesia and USA there is tremendous increase for demand for net retail investment. Totally there is overall 3% increase in gold demand of gold but jewellery demand decreased 11% compare to 2007 and gold for net retail investment had reached 87% increase peoples are more interested keeping gold bars as asset.

Supply
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Table: Gold Supply and Demand

Chart:Gold supply tonnes Q1 05 – Q4 08

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Mine Productions
1. South Africa: 275mt (11.0%) 2. United States: 260mt (10.5%) 3. Australia: 251mt (10.2%) 4. China: 240mt (9.7%) 5. Peru: 203mt (8.2%) 6. Indonesia: 167mt (6.8%) (2005) 7. Russia: 152.6mt (6.2%) 8. Canada: 104mt (4.2%) 9. Papua New Guinea 66.7mt (2.7%) (2005) 10. Ghana 63.1mt (2.6%) (2005) Other: 699mt TOTAL: 2469mt

1. China: 276mt

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2. South Africa: 254.7 mt 3. Australia: 246mt 4. United States: 238mt 5. Peru: 170mt 6. Russia: 144.5mt 7. Indonesia: 118mt 8. Canada: 101mt 9. Uzbekistan 85mt 10. Ghana 78mt Other: 821mt TOTAL: 2444mt

1. China: 288mt (1) 2. United States: 234mt (1) 3. South Africa: 232mt (1) 4. Australia: 225mt 5. Peru: 175mt 6. Russia: 163.9 mt 7. Canada: 100mt 8. Indonesia: 90mt 9. Uzbekistan 85mt 10. Ghana 81mt Other: 660mt TOTAL: 2356mt

World Gold Production Vs South Africa (Million Ounces)

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World gold mine production is gradually decreasing from 2004 due to less supply and more demand the price of gold had shot up in the in te international market and also there tremendous increasing in cost of production of gold that also contributed for more price. The share of south Africa which was ones time is major gold producer its share start decreasing from 1995, from 2007 China became major gold producer in the world. Central banks and supranational organizations (such as the International Monetary Fund) currently hold just over one-fifth of global above-ground stocks of gold as reserve assets (amounting to around 29,000 tones, dispersed across 110 organizations). On average, governments hold around 10% of their official reserves as gold, although the proportion varies country-by-country. They hold gold has a monetary supplement to fight against fluctuations in US $ it actas hedging agent which secures international trade of counties.

Indian Scenario
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India is the world’s largest consumer of gold in tonnage terms. In 2005, India accounted for 22% of global gold jewellery demand and 35% of all net retail investment (coins and bars). Gold demand has grown at an average annual rate of 10% since the repeal of the Gold Control Act in 1990, which had forbidden the holding of gold in bar form1. Although estimates vary, India is now thought to hold close to 15,000 tons or 10% of the world’s entire above-ground gold stocks.

Origin of gold demand
Indian gold demand is firmly embedded in cultural and religious traditions. The country has one of the most deeply religious societies in the world, the most widespread faith being Hinduism, which is practiced by around 80% of the population. Gold is seen as a symbol of wealth and prosperity in the Hindu religion. The goddess Lakshmi, who symbolizes fertility, productiveness and prosperity, is said to have been bathed by elephants that carried pure water in golden vessels. She is depicted as a beautiful woman of golden complexion, dressed in goldembroidered red clothes, with gold coins flowing from her hands. Since it is suggested that those who worship her gain wealth, Hindus consider gold an auspicious metal, which they like to buy or gift during religious festivals. The most important of these is Diwali, which marks the beginning of the Hindu New Year and usually takes place in October or November. Akshaya Thrithiya, falling in April or May, has also become an important day to buy gold. Purchases on this day are considered auspicious (it is the third most auspicious day in the Hindu calendar). The association between gold and “auspiciousness” has been used in recent years to promote the idea of buying gold. Over the past five years, Akshaya Thrithiya has become a major gold-buying occasion in the South of India, especially in the State of Tamil Nadu, where sales have reached record levels. Since 2005, the idea has been promoted across the North and West of the country, which has also resulted in a significant rise in gold sales in these regions. Gold also plays an important role in the marriage ceremony, where brides are often adorned from head to toe in gold jewellery. Most of this will be a gift from her parents as a way of giving her some inheritance, as Hindu tradition dictates that the family’s assets are only passed down to sons. The gold (and other gifts) the bride receives or her “Streedhan” (“Stree” meaning woman and “dhan” meaning wealth) mean her parents can make sure she is financially secure and enjoys at least the same standard of living to which she was accustomed in her childhood. Gold is especially important in this respect as it remains directly under her control, whereas she may not be privy to the family’s other financial affairs. With an estimated 10 million marriages a year taking place in India, wedding-related demand is big business. Much of this demand takes place in the wedding season, which falls between October and January, and April and May, though a good many purchases will be made well in advance of the wedding. Indeed, it is customary for the parents of a baby girl to start accumulating gold for this purpose soon after the child is born. Not all gold demand is allied with cultural and religious beliefs. Gold is also viewed as a secure and easily accessible savings vehicle by the rural community, where around 70% of the population lives. Gold has the added virtue of being an inflation hedge. An investor who had
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bought gold in 1970, for example, would have been more than protected against inflation (Figure 3). Gold is also one of the limited ways in which Indian investors can diversify their currency exposure. This is because the Rupee is not yet fully convertible – Indians are only allowed to hold financial assets in Rupees – whereas they have been allowed to hold gold since 1990 when the Gold Control Act was repealed.

Gold demand and prices
The past decade can be split into two distinct periods as far as the value of gold sales is concerned: 1996-2001, when sales were broadly stable in value terms, and 2002-2005, when sales accelerated strongly. During the first period, spending averaged Rs. 284 billion per annum and fluctuated in a relatively narrow range of Rs. 224 316 billion a year. Spending was especially strong in 1998 thanks to the release of pent up demand following the removal of import controls in November 1997. Gold sales were broadly stable in the three years that followed, held back by relatively weak income growth. Sales in tonnage were more volatile over the period, averaging 709 tones and fluctuating between 506-810 tonnes. The higher variability of volume as oppose to value spending is a function of both the retail price setting mechanism in Indian, as well as the origins of demand. The price of jewellery changes in line with changes in the international market price in India, with each item weighed then priced according to the prevailing daily market rate. The retail mark up is also normally relatively small in relation to the value of the piece.

Chart : Indian Gold (tonnes) and Prices (rupees)

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Chart: Indian Gold Demand in tones and rupee gold price

Major Indian markets
Traditionally most investment has taken the form of physical gold. In 2005, Indians bought 102 tons of gold coins and bars. But there are new ways to invest in gold. Since October 2003 the government has allowed futures trading and there are now three futures exchanges, the two largest being the Multi Commodity Exchange of India Ltd (MCX) and the National Commodity and Derivatives Exchange Ltd (NCDEX). The next major development is likely to be the arrival of Exchange Traded Funds (ETFs), expected before the end of 2006. UTI Asset Management Company Ltd and Benchmark Asset Management Ltd are currently seeking regulatory approval to sell gold ETF. These instruments give investors a relatively cost efficient and secure way to access the gold market. They are listed securities that are backed by allocated gold held in a vault on behalf of investors and are intended to offer investors a means of participating in the gold bullion market without the necessity of taking physical delivery of gold, and to buy and sell that interest through the trading of a security on a regulated stock exchange.
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Role of RBI in Gold
The Reserve Bank is required to hold a fixed amount of gold under the Reserve Bank of India Act. The original RBI Act (1934) obliged the Reserve Bank to hold 40% of its assets in gold coin, gold bullion and foreign securities, with not less than Rs. 400 million in value held in gold. The system was later amended, under the Reserve Bank of India Amendment Act 1956, to the minimum reserve system, that required the bank to hold at least Rs.1150 million of its assets in gold (this did not imply the need to acquire additional gold, as the value of existing gold reserves were revised up at the time). Rs.1150 million equates to just $24.7 million at today’s exchange rate and is tiny in comparison to India’s total foreign exchange reserves of $151.6 billion. India mobilized its gold reserves during the 1991 balance of payments crisis. Between May and July, India shipped a total of 47 tones of the country’s gold reserves (the RBI is allowed to hold up to 15% of its total gold reserves outside the country) to the Bank of England as collateral against a $400 million loan and leased a further 20 tons of confiscated gold (not included in the reserve figures) to Union Bank of Switzerland with a six-month buyback option to raise a $200 million loan. The funds were used to help India meet its short-term debt obligations and import bill. The RBI bought back all 67 tons of gold later that year. It also revalued its gold reserves from Rs. 28 billion to Rs. 72 billion, as it moved from using an outdated gold price4 to valuing its reserves at close to the international market price. The move vastly improved India’s reported import coverage ratio. The RBI currently holds 357.7 tons of gold, which though small in comparison to total reserves (4.4% as at September 2006), is still the fifteenth highest of central banks in tonnage terms in the world.

Supply from Indian mines
There is a huge mismatch between demand and primary supply in India, the balance being made up by imports. The only major gold mine currently in production is the Hutti mine, owned by state owned Hutti Gold Mines Company Limited, which produces around 3 tons of gold a year. The other major operation – the Kolar Gold Fields – closed in April 2000 having produced a total of 800 tons of gold. Hindustan Copper also produces some gold as a by-product, but its output is small, at just 0.2 tons a year. Still, there is scope for some catch up in the future, as the geological terrain of India is very similar to other major gold producing countries, like South Africa and Australia, and as the government has now opened the mining sector to foreign direct investment. In summary, India looks poised to remain the world’s foremost gold consumer in tonnage terms for many years to come. Its dynamic population growth and strong cultural and religious affinity to gold will continue to underpin structural demand. Meanwhile, rapid income growth, thanks to the influx of foreign capital, should, in tandem with new successful marketing campaigns, continue to boost discretionary spending on gold, notwithstanding temporary fluctuations associated with spikes in price volatility. India’s demand will continue to be satisfied almost entirely from imports, as aside from the scrap market, very little supply comes from domestic sources.
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Seasonality Pattern of Gold Demand
There are seasonal patterns to jewellery demand, although the pattern varies from one country to another. Global demand is usually strongest in the fourth quarter of the year, followed by first quarter demand. The main elements governing this are:

Western world: Christmas Islamic world: Eid Al Fitr at the end of Ramadan is a major gold giving occasion. Since the
Islamic year is ten or eleven days shorter than the calendar year, the date of Ramadan moves each year. In 2006 the Eid Al Fitr was on October 23rd. Eid Al Adha (Feast of Sacrifice) takes place seventy days after the Eid Al Fitr and is also a significant gold-giving occasion. In 2006 Eid Al Adha fell on December 31st. Pilgrims going to Mecca and Medina may also buy gold; the main pilgrimage period, the Haj, culminates around the time of the Eid Al Adha.

India: gold buying peaks during the wedding season and at the times of various festivals that
vary from region to another. The biggest festival is Diwali, which usually falls in late October or November. The wedding season varies from region to region but is normally from November to May with a break from approximately mid-December to mid-January. In August, the two-week Shrad period is inauspicious for ceremonies associated with gold buying; every three years or so this is followed by an additional month (Adik Mas) which is also not a time for gold buying. (Exact dates vary since the Hindu calendar is a lunar one.)

China and East Asia: Chinese New Year (last part of January or first half of February). Turkey: Demand is highest in the third quarter due to tourist purchases. The effect of a festival
would normally show up earlier than the date in gold sales since people purchase in advance. Also, since data often represents retail or wholesale purchases demand may often reflect distributors stocking up for the season. The seasonal pattern does not affect price; it is well known in the gold markets and therefore discounted. There are many other factors in addition to demand which affect the price of gold.

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Generalized Mercantile Trade Relationships
PRODUCERS CONSUMERSW MAJOR TRADE CENTERS

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World Gold Markets
London: London Bullion Market Association (LBMA). It is world’s biggest market major
clearing house of gold.

New York: New York Mercantile Exchange Comdex Division (NYMEX) begins trading on
31st December 1974. It is spot market also but majorly considered as “home of future trading”

Zurich: It is also one of the major spot and future market in Europe mainly known as a
“Physical Turntable”.

Istanbul: Istanbul Gold Exchange begins trading on 26th July 1995. Major gold spot and
future market in Turkey and Middle East.

Dubai: Dubai Gold & Commodities Exchange (DGCX) begins trading in June 2005. Major
spot gold market for Saudi and gulf countries. It is also one of the famous jewelers market.

Singapore: It is doorway to South East Asian consuming countries major spot and future
market.

Hong Kong: It is doorway to China now one of the major gold consuming country in the
world it is both spot and future market.

Tokyo: Tokyo Commodities Exchange (TOCOM) begins trading on 23rd March 1982 major
spot and future market in Japan.

Shanghai: began trading on 26th July 1995. It is one of the major future centres in China. Mumbai: Major market for Indian consumer two trade centers Multi Commodity exchange
(MCX) began trading on 10th Nov 2003 and National Commodities and Derivatives Exchange (NCDEX) began trading in 15th Dec 2003. Both are spot as well as future mabkets.

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Gold Exchange Traded Funds
Exchange Traded Funds are passively managed funds tracking a benchmark index and reflect the performance of that index. They have the flexibility of trading on stock exchanges like a share and offer best features of open and close end funds. A new entrant in the market has been the category of Exchange Traded Funds (ETF). These are schemes that have the features of both mutual funds as well as stocks and are listed on the stock exchange. The investor can buy and sell units in these schemes as per their convenience on the stock exchange, just like they do with stocks. An important feature of gold ETF is that they track the gold prices live. This is suitable for investors who want to use gold as an investment option. By buying a gold ETF, the investor takes a position on the price of the gold as the price of the ETF is directly linked to the price of gold prevailing in the market. There are a lot of gold ETFs present in the Indian market and the performance of these schemes will be similar, as all of them track the same asset. Due to this reason, the investor should be buying ETFs when they feel that the price of gold will rise from the current level. The idea here is that the investor will buy the fund at a lower level and then sell it when the price of gold moves up, taking up the ETF price along with it.

5 points someone should remember while investing in GTEF
1) Cost of one unit of GETF = Cost of one gram of gold on the date of allotment. Most mutual fund schemes impose a kind of tax called 'load' while buying or selling units. The former is called 'entry load' and the latter is called 'exit load'.
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2) Trading in GETF: Just like you trade in shares. You will need to have a demat account. Also, you need to register yourself with a broker having membership of the NSE. Once these GETFs are listed the daily movement in their prices can be checked online like the way you keep track of your equity portfolio. The price of GETF unit will track the price of physical gold in the international market like the London Bullion Market association. Listing on the NSE will help the buyers and sellers meet on a single platform for trading in GETFs. This will enable them convert their units into cash easily. 3) Brokerage charges; your broker will not let you trade in GETFs for free. You will have to pay a small brokerage fee for using his trading platform. Thankfully, the brokerage charges here are not too high. They will range from 0.4 per cent to 0.6 per cent of your transaction value. You will be paying Rs 4 to Rs 6 as brokerage charges if you buy units worth Rs 10,000. 4) Tax; Yes we have to pay since GETFs are being sold as non-equity (there is no buying/selling of shares) schemes there will be dividend distribution tax (DDT) you will have to contend with. That is dividend will be taxable in the hands of investors if and when these GETFs declare dividends. Simply put, dividend is money distributed to unit holders if the scheme declares a profit. Current law stipulates DDT of a shade over 14 per cent for individual investors and a shade below 22.5 per cent for corporate investors. This tax is inclusive of surcharge and education cess (a type of tax). However, the good news is there will be no wealth tax or securities transaction tax, STT, to contend with when you sell your GETFs. There is no STT because this is a non-equity scheme. STT is applicable only when shares are bought or sold. The case for wealth tax would have existed if you were in possession of gold in physical form. The magic of GETFs lies in this. They convert your money into gold which again is converted into units in demat form. So as a matter of fact you don't own gold in physical form. Hence there is no wealth tax. 5) Guarantee for Purity of Gold; It will be the custodians appointed by both Benchmark Mutual Fund and UTI Mutual Fund. Both the mutual funds have appointed the Bank of Nova Scotia as the custodian (safe keeper) for the gold bought on behalf of investors. The amount of physical gold held by the custodians in both these schemes will be of fineness (purity) of 99 parts per 1000. In other words, this gold will be 99.5 per cent pure. We call this degree of purity as 24 carat gold in general parlance. What's more the gold held with the custodian will be fully insured and will not be used for lending.
Rating Benchmar k Gold BeES Quantum Gold Fund Asset
(Rs. cr.)

NAV 302.86

1 wk 1,501.4 0 748.25

1 mth -2.4

3 mth -2.2

6 1 yr 2 yr 3 yr 5 yr mth 16.7 15.6 22.5 59.4 ---

Not Rated Not Rated

8.28

-2.6

-4.7

8.7 13.2 22.5

--

--

--

Kotak Gold Not ETF Rated UTI Gold Exchange Not Rated

54.35 197.60

1,504.7 2 1,502.5 3

-2.6 -2.7

-4.7 -4.7

8.9 13.3 22.4

--

---

---

8.7 13.2 22.3 58.2

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Traded Fund Reliance Gold ETF DSP-BR World Gold - RP (G) AIG World Gold Fund (G) Not Rated Not Rated 204.52 1,699.1 8 1,462.5 3 12.63 -2.6 2.6 -4.7 13.8 8.5 12.2 20.6 18.0 11.2 -12. 2 -------

Not Rated

281.01

9.35

2.8

12.5

19.0 15.1

--

--

--

--

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Market Influencing Factors
Above ground supply from sales by central banks, reclaimed scrap and official gold loans:

This is mainly concern with supplies other than mining due to continuous decrease in mine production and also increase in the cost of mining but no decrease in demand had tremendous demand for supply from this above ground reserve holdings this lead to more price of gold due to supply and demand mismatch. In India due to more price of gold now it’s mainly jewelries are made out of the scrap gold. Official sales by central banks will result in priced fluctuation in market. (Refer to table 1 of Global scenario)

Producer / miner hedging interest;

It is mainly driven by producer were they are having chance to deposit there produced gold in their stock in anticipation of more price. Otherwise it will also happen like due to fewer prices at today market they will have future contracts with trade exchanges to supply gold at particular date at particular price so that they can hedge their risk. It is largely effect the market of prices of gold.

World macro-economic factors - US Dollar, Interest rate

It is directly related to change in the exchange rate of currency due to macro economic factors at world level. Gold is traded in terms of US$ for that if our Indian rupee will become weak against US$ than the gold prices will automatically move up in our country vice versa is also true.

Comparative returns on stock markets

If stock market is giving better results than more money will be invested in share market rather than in gold. Due recession stock market has collapsed it started from 2008 and still continuing from that day the more investor are interested toward investing in gold. People fear
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about investing in stock market had lead to more demand of gold that intern had pushed to the price of gold.

Domestic demand based on monsoon and agricultural output

In our country economy is driven by monsoon and agricultural output if year has very good rainfall and output than there will be price stabilization in the market due to which farmer get good price for his produce and consumer also have good purchase price due to which people have more money to invest in the gold it will increase the demand for gold simultaneously prices also. We can find that during continuous three year drought from 2001 to2004 there decrease in the price of gold due to less demand from India. It is mainly depend upon income generating of the country.

Bar Types and Purities
.Gold bars are normally classified into two broad categories of weight. A large bar weighs more than 1000 g; a small bar weighs 1000 g or less. Bars are manufactured in different millesimal gold purities (or fineness), most ranging between 965 and 999.9.

UNITS OF WEIGHT;
Around the world, bars can be denominated or traded in different units of weight to accommodate the preferences of regions or countries. The most prominent units are the gram, troy ounce, tola, tael, baht, chi (or cay or luong), don and mesghal. Although the London Good Delivery 400 oz bar, the world’s most important large bar, is traded in troy ounces on the London Bullion Market, and the international gold price is quoted in US dollars per troy ounce, there is a worldwide trend for small cast and minted bars to be denominated in grams. Although the table below provides a broad indication of where the listed units of weight for small bars are widely used, in many countries a variety of units is used.

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LARGE BARS
There are three prominent large bars: 400 oz: Approximate weight. London Good Delivery, if manufactured by a LBMA-accredited refiner. 100 oz: Approximate weight. COMEX Good Delivery, if the brand is accredited to COMEX. 3000 g: Shanghai Gold Exchange Good Delivery, if manufactured by a SGE-accredited refiner. Some refiners advise that other large bars are also occasionally made to precise or approximate weights. For example, in ounces (250 oz and 50 oz) and in grams (2 kg, 5 kg and 10 kg).

SMALL BARS;
Among surveyed manufacturers, small bars around the world are available in a diverse range of more than 50 different cast or minted weights. However, by far the most important small bar, widely used by fabricators and investors around the world, is the cast kilo bar (1000 g).

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BAR PURITIES;
The declared purity (or fineness) of a bar’s gold content is important as it enables its weight of “fine gold” to be calculated. The purity is normally marked in parts gold per 100, 1,000 or 10,000 parts. For example, the same gold purity (99.99% by weight) can be expressed as follows; 9999 999.9 99.99 9,999 parts gold in 10,000 parts 999.9 parts gold in 1,000 parts 99.99 parts gold in 100 parts

Although there is generally a widespread preference for small bars with a precise millesimal purity of 995 or 999.9, bars are also manufactured in other purities. Large bars In the case of some large bars, the gold fineness can vary. For example, as London Good Delivery 400 oz bars and COMEX Good Delivery 100 oz bars are permitted to vary between 995.0 and 999.9, a mark of 995.8 or 998.7 or 999.6 might be stamped on a bar. Small bars Although there is generally a widespread preference for small bars with a fineness of 999.9 or 995, bars are also manufactured in other purities. Although the table below broadly indicates where specific purities for small bars are popular, in many countries bars are available in a variety of purities.

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BIS, Carat, Hallmarking, Weighing
BIS is a statutory institution established under the Bureau of Indian Standards Act, 1986 to promote harmonious development of the activities of standardization, marking and quality certification of goods and attending to connected matters in the country.

Carat
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A Carat (Karat in USA and 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 is defined as 24 carats.

Table: Fineness of gold

Hallmarking

Bureau of Indian Standards (BIS), national standards body in India, formulated a scheme of hall marking in 1998, as a Voluntary Certification Scheme, with a combination of quality certification and BIS Laboratory recognition schemes. The BIS-recognized laboratories would affix/stamp/hall mark jewellery manufactured by BIS certified jewellers. BIS launched the scheme of hallmarking in April 2000 under the BIS Act, 1986. Under the Scheme, 12 firms of jewellers (MMTC Ltd., New Delhi; Bharat Assayers, Chennai; Calicut Assay and Hallmarking Centre Pvt Ltd., Chennai; Chemmanur Gold Refinery (P) Ltd., Cochin; VIMTA Labs, Hyderabad; Emerald Testing (India) Pvt. Ltd., Coimbatore; Geekay Exim (India) Ltd., Mumbai; Gujarat Gold Centre, Ahmedabad; J. J. Hallmarking Centre, Kolkata; Jalan and Co., New Delhi; Jewel Metallochem Laboratory, Mumbai; MICRO Assaying & Hallmarking Centre, New Delhi) have been certified as assaying and hallmarking centers so far. Consumer awareness campaign highlighting the advantages of going in for hallmarking jewellery is being conducted by BIS. The major objectives of introducing a proper assaying and hallmarking system in the country are enabling consumer protection, developing export competitiveness of the gold jewellery industry, introducing gold based financial products, which will help in mopping up the vast dormant gold resources with the domestic sector and developing India into a leading gold market centre in the world. The objectives behind instituting a credible system of Assaying and Hallmarking can be enumerated as under: • To protect consumer against victimization of irregular gold quality.
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• To develop export competitiveness of gold jewellery industry and thus provide strong impetus For gold jewellery exports • To develop gold based financial products which will help in mopping up of the vast dormant? Gold resources lying with the household sector. • To develop India as a leading gold market centres in the world commensurate with its status as top most customer. Weighing Gold is made into a large number of different bars of different weights. The most well known are the large 'London Good Delivery Bars' which are traded internationally. These weigh about 400 Troy Ounces, i.e. 12.5 kg/ 27 lbs. each. Others are denominated in kilograms, grammas, troy ounces, etc. In grammas, bars range from 1 g up to 10 kg. In troy oz, from 1/10 tr.oz. Up to 400 troy.. Other bars include tola bars and Tael bars. Gold is traditionally weighed in Troy Ounces (31.1035 grammas). With the density of gold at 19.32 g/cm3, a troy ounce of gold would have a volume of 1.64 cm3. A tone 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'').the topmost consumer.

Constraints in development of Commodity Gold
Gold is an international traded commodity its price is fixed interms of dollars. And payment is also made interms of dollars due to which price is mainly determined on the basis of dollar only.

Fluctuation in exchange rates: It is main factor which govern the entire gold

economy due to its price is determined interms pf dollar that’s why. Any change in exchange rates it will directly affect Gold prices domesticaly.

Gold purity: It is mainly jewellery making where they will add impurity due to which

purity of gold is lost. Government had taken some initiatives but the lot of customers does not aware of those facilities. Due to which Goldsmiths exploite the customer and they will earn huge profit on that.
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Seasonality of Demand: Every where world during certain seasons Gold demand

will be hire due to which gold traders create artificial rise in price domestically. This will result in inadequate price realisation in the market.

Malpractises of Goldsmiths:During Jewellery making gold smiths add more

impurity which will leads to impure gold. Due to which they will earn very huge profit but consumer will be in very huge losses.

Official reserves of Gold: If cental banks and other govornment institute start

holding golds in their deposit means they will create short supply in the market due to which prices may go up in the market.

Consumer awareness regarding gold jewelleries: Consumer awareness is very

minimum in deciding a purity of gold. They always purchase from the nearest or close Goldsmiths they will the customer buy selling 20 carat Gold telling that it is 24 carat. Government had taken initiatives to educate the peoples regarding this issues but that are not adequate and majority of the customer are still in that trap.

Future Contract Specifications by NCDEX
Future Contract Specification Gold 1 kg. Updated as on 16 July 08. ( Applicable for contract’s expiry upto March 2009 ) Type of Contract Futures Contract Specifications Name of Commodity Ticker symbol Trading System Basis Unit of trading Delivery unit Gold GLDPURMUMK NCDEX's Trading System Ex-Mumbai inclusive of Customs Duty and Octroi, exclusive of Sales Tax/VAT 1 kg 1 kg 33

Quotation/base value Tick size

Rs per 10 Grams of Gold with 995 fineness Re 1 Not more than 999.9 fineness bearing a serial number and identifying stamp of a refiner approved by the Exchange.

Quality specification List of approved refiners is available at: http://www.ncdex.com/downloads/refiners_gold_new .pdf Quantity variation Delivery center None Mumbai Ahmedabad Additional delivery centres Location Premium/Discount as notified by the Exchange from time to time. As per directions of the Forward Markets Commission from time to time, currently Mondays through Fridays:10:00 AM to 11:30 PM Saturdays: 10:00 AM to 02:00 PM On the expiry date, contracts expiring on that day will not be available for trading after 5 PM. The Exchange may vary the above timing with due notice. Tender Period Tender Date –T Tender Period: Tender period would be of 5 working days during trading hours prior to and including the expiry date of the contract. Pay-in and Pay-out: on a T+1 basis. If the tender date is T then, pay-in and pay-out would happen on T + 1 day. If such a T + 1 day happens to be a Saturday, a Sunday or a holiday at the Exchange, clearing banks or any of the service providers, Payin and Pay-out would be effected on the next working day. 34

Trading hours

There would be 5 pay-in & pay-outs starting T +1 the 5th being the Final Settlement. Expiry date of the contract: 20th day of the delivery month. If 20th happens to be a holiday, a Saturday or a Sunday then the due date shall be the immediately preceding trading day of the Exchange, which is other than a Saturday. The settlement of contract would be by a staggered system of 5 Pay-ins and Pay-outs including the 5th Pay-in and Pay-out which would be the Final Settlement of the contract. Upon expiry of the contracts all the outstanding open positions should result in compulsory delivery. The penalty structure for failure to meet delivery obligations will be as per circular no. NCDEX/TRADING-086/2008/216 dated September 16, 2008. During the Tender period, if any delivery is tendered by seller, the corresponding buyer having open position and matched as per process put in place by the Exchange, shall be bound to settle by taking delivery on T + 1 day from the delivery centre where the seller has delivered same. Clearing and settlement of contracts will commence with the commencement of Tender Period by compulsory delivery of each open position tendered by the seller on T +1 to the corresponding buyer matched by the process put in place by the Exchange. Upon the expiry of the contract all the outstanding open position should result in compulsory delivery. Trading in the far month contract will open on the 10th day of the month in which the near month contract is due to expire. If the 10th happens to be 35

Due date / Expiry Date

Delivery specification

Closing of Contracts

Opening of Contracts

a non-trading day, contracts would open on the next trading day. No. of active contracts As per launch calendar Base daily price fluctuation limit is (+/-)3%. If the trade hits the prescribed base daily price limit, the limit will be relaxed up to (+/-)6% without any break/ cooling off period in the trade. In case the daily price limit of (+/-)6% is also breached, then after a cooling off period of 15 minutes, the daily price limit will be further relaxed up to (+/-) 9%. Trade will be allowed during the cooling off period within the price band of (+/-)6%. In case of price movement in International markets which is more than the maximum daily price limit (currently 9%), the same may be further relaxed in steps of 3% with the approval of FMC. Member wise : As per Annexure 1 or 15% of market wide open position whichever is higher Client-wise : As per Annexure 1 Position limits The above limits will not apply to bonafide hedgers. For bonafide hedgers the Exchange will decide the limits on a case-to-case basis. Gold bars of 999.9 / 995 fineness Quality allowance (for Delivery) A premium will be given for fineness above 995. The settlement price for more than 995 fineness will be calculated at (Actual fineness/995) * Final Settlement Price. Premium of 0.49% would be given for gold delivered of 999.9 purity. In case of additional volatility, a special margin at such other percentage, as deemed fit by the Regulator/Exchange, may be imposed on either the buy or the sell side in respect of all outstanding positions. Removal of such Margins will be at the discretion of the Regulator/Exchange. In addition to the above margins the Regulator/Exchange may impose additional margins on both long and short side at such other 36

Price limit

Special Margin

Additional Margin

percentage, as deemed fit. Removal of such Margins will be at the discretion of the Regulator/Exchange.

Bibliography

World Gold Coucil reports Commodity India Magazine http://www.gfms.co.uk/ http://www.lbma.org.uk/ http://www.nymex.com/ http://www.tocom.com.jp/ http://www.gold.org/


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