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Page 1
Acknowledgement
First & foremost I would like to thank Mr. Hemant Agrawal (Assistant Vice
President) for giving me an opportunity to work as a management trainee in Bonanza
Portfolio Ltd, Pune.
I wo u l d a l s o l i k e t o t h a n k M r . M o h s i n S h a i k h ( S e n io r R e l a t i o n s h i p
M a n a g e r & my P r o je c t He a d ) f o r g i v i n g me g u i d a n c e a n d t r a i n i ng i n
u n d e r s t a n d i n g t h e commodity market and helping me to complete my project
successfully.
Gaurav Patel
Executive summary
Commodity Market: With Special Reference to Gold & Silver
Page 2
India is one of the largest agrarian economies makes it a natural territory for trading
in commodities. Agriculture’s share in India’s GDP stands at 26%, while the commodity
sector, including non-agro commodities and bullion-related industries, constitutes about
58% of the country’s GDP.
India is essentially a commodity-based economy and the physical commodity market
in India is around Rs.11, 00,000 crore. India also happens to be one of the largest importers
of gold (80% of demand of 800 tones) and silver (70% of demand of 3800 tones). It is also
the largest producer of cotton (15 % of world production).
Therefore, it is necessary to study the Indian Commodity Market.
INDEX
Commodity Market: With Special Reference to Gold & Silver
Page 3
Introduction
Company Profile
Objectives
Research Methodology
Conceptual Background:
Literature Review
What is commodity market?
o History
o Early history of commodity markets
o India and the Commodity Market
When did Commodity Market start in India?
History of commodity market in India
Present commodity market in India
o Indian commodity market structure
o Commodities Traded in India
Derivatives
o Meaning of Derivatives:
o Using commodity futures
Hedging:
Speculation:
Arbitrage:
How the commodity market works (Working Procedure):
Commodity Profile
Gold
o Production
o Global and domestic demand-supply dynamics
o Demand
o Supply
o Price trends and factors that influence Prices of the Gold
o History of Derivatives markets in Gold
o Analysis of Prices of Gold in India in last 5 years
Silver
o Production
o Demand
o Supply
o Factors influencing Prices of the silver
o Historical background of Silver market
o Analysis of Prices of Silver in India in last 5 years
Commodities (commodity) are basic raw materials and foodstuffs such as metals,
petroleum, coffee, grain etc. Commodities are traded on a commodity exchange both by
the companies that use them (e.g. chocolate manufacturers) and by speculators. Futures
contracts allow commodity producers and commodity users to bring some predictability
and stability to pricing. By buying futures contracts, they can hedge against underlying
price changes in the commodity.
Commodity exchange are the exchanges where the trading of futures and forwards
take place, basically commodity exchange are trading in future contracts on
those commodities which have some regional relevance it is not going to be as easy as
a share of a company to get listed in a different exchange.
Company Profile
Commodity Market: With Special Reference to Gold & Silver
Page 5
Bonanza mission statement
Achievements
1. Top Equity Broking House in terms of branch expansion for 2008*.
2. 3rd in terms of Number of Trading Accounts for 2008*.
3. 6th in terms of trading terminals in for two consecutive years 2007 -
2008*.
4. 9 t h i n t e r m s o f S u b B r o k e r s f o r 2 0 0 7 *
5. Awarded by BSE 'Major Volume Driver 04 -05, 06-07, 07-08’.
6. N o m i n a t e d a m o n g t h e T o p 3 f o r t h e " B e s t F i n a n c i a l A d v i s o r
A w a r d s ' 0 8 " i n t h e c a t e g o r y o f National Distributors - Retail instituted
by CNBC-TV18 and OptiMix.
EXPERIENCE
Bonanza Portfolio ltd has more than eight decades of trust and credibility in the
Indian stock market. In the Asia Money broker’s poll held recently, SSKI won the ‘India’s
best broking house for 2004 award’. Ever since it launched Company as its retail broking
division in February 2000, it has been providing institutional-level research and broking services to individual
investors.
TECHNOLOGY
With our online trading account you can buy and sell shares in an instant from any PC with an
Internet connection. You will get access to our powerful online trading tools that
will help you take complete control over your investment in shares.
ACCESSIBILITY
Commodity Market: With Special Reference to Gold & Silver
Page 7
Company provides Advice, Education, Tools and Execution services for investors. These
services are accessible through our centers across the country (over 250 locations in 123 cities),
over the internet as well as over the voice.
KNOWLEDGE
In a business where the right information at the right time can translate into direct profits, you get
access to a wide range of information on our content-rich portal, sharekhan.com. You will
also get a useful set of knowledge-based tools that will empower you to take informed decisions.
CONVENIENCE
You can call our Dial-N-Trade number to get investment advice and execute your
transactions. We have a dedicated call-centre to provide this service via a toll free number
from anywhere in India.
CUSTOMERSERVICE
Our customer service team will assist you for any help that you need relating to
transactions, billing, Demat and other queries. Our customer services
c a n b e contracted via a toll-free number, email or live chat on sharekhan.com.
INVESTMENT ADVICE
Company has dedicated research teams for fundamental and technical research. Our
analyst constantly track the pulse of the market and provide timely investment advice to you
in the form of daily research emails, online chat, printed reports and SMS on your phone.
BENEFITS
Objectives
Research Methodology
Primary Data
Secondary Data
Primary Data:
Primary data is the original information gathered for a specific purpose. It is usually
collected by coming in direct contact with people. It is the raw data. The Most important
source of primary data is Telephonic Study and Questionnaire.
Secondary data:
Secondary data is the information which already exists having been collected for
some purpose. The information is already formatted. Various sources of secondary data are
INTERNET, MAGAZINES, PAST RECORDS, REFERNCE BOOKS etc. For this project
websites of broking firm were referred.
Collection of Data:
For this research secondary data is used such as websites, discussions with seniors,
obtaining information from senior authorities and also make a use of same financial
reference book.
Literature Review
History
The modern commodity markets have their roots in the trading of agricultural
products. While wheat and corn, cattle and pigs, were widely traded using standard
instruments in the 19th century in the United States, other basic foodstuffs such as soybeans
were only added quite recently in most markets. For a commodity market to be established
there must be very broad consensus on the variations in the product that make it acceptable
for one purpose or another.
Commodity money and commodity markets in a crude early form are believed to
have originated in Sumer where small baked clay tokens in the shape of sheep or goats
were used in trade. Sealed in clay vessels with a certain number of such tokens, with that
number written on the outside, they represented a promise to deliver that number. This
made them a form of commodity money - more than an I.O.U. but less than a guarantee by
a nation-state or bank. However, they were also known to contain promises of time and
date of delivery - this made them like a modern futures contract. Regardless of the details,
it was only possible to verify the number of tokens inside by shaking the vessel or by
breaking it, at which point the number or terms written on the outside became subject to
doubt. Eventually the tokens disappeared, but the contracts remained on flat tablets. This
represented the first system of commodity accounting.
(i) Exchange which organizes forward trading in commodities can regulate trading
on day-to-day basis;
(ii) Forward Markets Commission provides regulatory oversight under the powers
delegated to it by the central Government.
(iii) The Central Government- Department of Consumer Affairs, Ministry
of Consumer Affairs, Food and Public Distribution- is the ultimate
regulatory authority
Meaning of Derivatives:
A derivative is a product whose value is derived from the value of one or more
underlying variables or assets in a contractual manner. The underlying asset can be equity,
forex, commodity or any other asset. In other words, Derivative means having no independent
value. i.e. the value is derived from the value of the underlying asset. Derivative means a forward, future,
option or any other hybrid contract of predetermine fixed duration, linked for
the purpose of c o n t r a c t f u l f i l l m e n t t o t h e v a l u e o f a s p e c i f i e d r e a l o f
f i n a n c i a l a s s e t o r t o a n i n d e x securities. Thus, a derivative contract is an
enforceable agreement whose value is derived from the value of an underlying asset.
The four most common examples of derivative instruments are forwards, futures, options
and swaps / spreads.
Speculation:
An entity having an opinion on the price movements of a given commodity can
speculate using the commodity market. While the basics of speculation apply to any
market, speculating in commodities is not as simple as speculating on stocks in the
financial market. For a speculator who thinks the shares of a given company will rise, it is
easy to buy the shares and hold them for whatever duration he wants to. However,
commodities are bulky products and come with all the costs and procedures of handling
these products. The commodities futures markets provide speculators with an easy
mechanism to speculate on the price of underlying commodities.
To trade commodity futures on the NCDEX, a customer must open a futures trading
account with a commodity derivatives broker. Buying futures simply involves putting in
the margin money. This enables futures traders to take a position in the underlying
commodity without having to actually hold that commodity. With the purchase of futures
contract on a commodity, the holder essentially makes a legally binding promise or
obligation to buy the underlying security at some point in the future (the expiration date
of the contract).
Arbitrage:
A central idea in modern economics is the law of one price. This states that in a
competitive market, if two assets are equivalent from the point of view of risk and return,
they should sell at the same price. If the price of the same asset is different in two markets,
there will be operators who will buy in the market where the asset sells cheap and sell in
the market where it is costly. This activity termed as arbitrage, involves the simultaneous
purchase and sale of the same or essentially similar security in two different markets for
advantageously different prices. The buying cheap and selling expensive continues till
prices in the two markets reach equilibrium. Hence, arbitrage helps to equalize prices and
restore market efficiency.
Following diagram gives a fair idea about working of the Commodity Market:
Commodity Profile
Gold
Production
Traditionally South Africa has been the largest producers of gold in the world
accounting for almost 80% of all non-communist output in 1970. Although it retained its
position as the single largest gold producing country, its share had fallen to around 17%
by 1999 because of high costs of mining and reduced resources. Table 4.1 gives the
country-wise share in gold production. In contrast other countries like US, Australia,
Canada and China have increased their output exponentially with output from developing
countries like Peru and other Latin American countries also increasing impressively.
Mining and production of gold in India is negligible, now placed around 2 tonnes
(mainly from the Kolar gold mines in Karnataka) as against a total world production of
about 2,272 tonnes in 1995.
Demand
The Consumer demand for gold is more than 3400 tonnes per year making it
whopping $40 billion worth. More than 80% of the gold consumed is in the form of
jewellery, which is generally pre-dominated by women. The Indian demand to the tune of
800 tonnes per year is making it the largest market for gold followed by USA, Middle East
and China. About 80% of the Physical gold is consumed in the form of jewellery while
bars and coins occupy not higher than 10% of the gold consumed. If we include jewellery
ownership, then India is the largest repository of gold in terms of total gold within the
national boundaries.
Regarding pattern of demand, there are no authentic estimates, the available evidence
shows that about 80% is for jewellery fabrication for domestic demand, and 15% is for
investor-demand (which is relatively elastic to gold-prices, real estate prices, financial
markets, tax-policies, etc.). Barely 5% is for industrial uses. The demand for gold jewellery
is rooted in societal preference for a variety of reasons - religious, ritualistic, a preferred
Commodity Market: With Special Reference to Gold & Silver
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form of wealth for women, and as a hedge against inflation. It will be difficult to prioritize
them but it may be reasonable to conclude that it is a combined effect, and to treat any
major part as exclusively a store of value or hedging instrument would be unrealistic. It
would not be realistic to assume that it is only the affluent that creates demand for gold.
There is reason to believe that a part of investment demand for gold assets is out of black
money.
Rural India continues to absorb more than 70% of the gold consumed in India and it
has its own role to fuel the barter economy of the agriculture community. The yellow metal
used to play an important role in marriage and religious festivals in India. In the Hindu,
Jain and Sikh community, where women did not inherit landed property whereas gold and
silver jewellery was, and still is, a major component of the gifts given to a woman at the
time of marriage. The changeover hands of gold at the time of marriage are from few grams
to kgs. The gold also occupies a significant position in the temple system where gold is
used to prepare idol and devotees offer gold in the temple. These temples are run in trust
and gold with the trust rarely comes into re-circulation. The existing social and cultural
system continues to cause net gold buyer market and the government policies have to take
note of the root cause of gold demand, which lies in the social and cultural system of India.
The annual consumption of gold, which was estimated at 65 tonnes in 1982, has increased
to more than 700 tonnes in late 90s. Although it is likely that, with prosperity and
enlightenment, there may be deceleration in demand, particularly in urban areas, it would
be made good by growing demand on account of prosperity in rural areas. In the near
future, therefore, the annual demand will continue to be over 600 tonnes per year.
Supply
Indian gold holding, which are predominantly private, is estimated to be in the range
of 10000-13000 tonnes. One fourth of world gold production is consumed in India and
more than 60% of Indian consumption is met through imports. The domestic production of
the gold is very limited which is around 9 tonnes in 2002 resulting in more dependence on
imported gold. The availability of recycled gold is price sensitive and as such the
dominance of the gold supply through import is in existence. The fabricated old gold scraps
is price elastic and was estimated to be near 450 tonnes in 2002. It rose almost more than
40% compared to the previous year because of rise in gold price by more than 15%.
The demand-supply for gold in India can be summed up thus:
1. Demand for gold has an autonomous character. Supply follows demand.
2. Demand exhibits income elasticity, particularly in the rural and semi-urban areas.
3. Price differential creates import demand, particularly illegal import prior to the
commencement of liberalization in 1990.
Silver
The dictionary describes it as a white metallic element, sonorous, ductile, very
malleable and capable of high degree of polish. It also has the highest thermal and electrical
Commodity Market: With Special Reference to Gold & Silver
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conductivity of any substance. Silver is somewhat harder than gold and is second only to
gold in malleability and ductility. Silver remains one of the most prominent candidates in
the metals complex as far as futures' trading is concerned. Thanks to its unique volatility,
silver has remained a hot favorite speculative vehicle for the small time traders. Though
futures trading were banned in India since late sixties, parallel futures markets are still very
active in Delhi and Indore. Speculative interest in the white metal is so intense that it is
believed that combined volume of Indian punters represent almost 40 percent of volume
traded at New York Commodity Exchange. Delhi, Rajasthan, MP and UP are the active
pockets for the silver futures. Until recently, Rajkot and Mathura were conducting futures
but now players have diverted toward comex trade.
Most of the world's silver is mined in the US, Australia, Mexico, Peru, and Canada.
Cash markets remain highly unorganized in the silver and impurity and excessive
speculation remain key issue for the trade. Taking cue from gold, government of India is
planning to introduce hallmarking in silver which is likely to address quality and credibility
of Indian silverware and jeweler industry. The unique properties of silver restrict its
substitution in most applications.
Production
Silver ore is most often found in combination with other elements, and silver has
been mined and treasured longer than any of the other precious metals. Mexico is the
world’s leading producer of silver, followed by Peru, Canada, the United States, and
Australia. The main consumer countries for silver are the United States, which is the
world’s largest consumer of silver, followed by Canada, Mexico, the United Kingdom,
France, Germany, Italy, Japan and India. The main factors affecting these countries
demand for silver are macro economic factors such as GDP growth, industrial production,
income levels, and a whole host of other financial macro-economic indicators.
Demand
Demand for silver is built on three main pillars; industrial and decorative uses,
photography and jewelry & silverware. Together, these three categories represent more
than 95 percent of annual silver consumption. In recent years, the main world demand for
silver is no longer monetary, but industrial. With the growing use of silver in photography
and electronics, industrial demand for silver accounts for roughly 85% of the total demand
for silver. Jewelry and silverware is the second largest component, with more demand from
the flatware industry than from the jewelry industry in recent years. India, the largest
consumer of silver, is gearing up to start hallmarking of the white precious metal by April.
India annually consumes around 4,000 tonnes of silver, with the rural areas accounting for
Commodity Market: With Special Reference to Gold & Silver
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the bulk of the sales. India's demand for silver increased by 177 per cent over the past 10
years as compared to 517 tonnes in 1991. According to GFMS, India has emerged as the
third largest industrial user of silver in the world after the US and Japan.
Supply
The supply of silver is based on two facts, mine production and recycled silver
scraps. Mine production is surprisingly the largest component of silver supply. It normally
accounts for a little less than 2/3 rd of the total (last year was slightly higher at 68%).
Fifteen countries produce roughly 94 percent of the world’s silver from mines. The most
notable producers are Mexico, Peru, the United States, Canada and Australia. Mexico, the
largest producer of silver from mines. Peru is the world’s second largest producer of silver.
Silver is often mined as a byproduct of other base metal operations, which accounts for
roughly four-fifths of the mined silver supply produced annually. Known reserves, or
actual mine capacity, is evenly split along the lines of production. The mine production is
not the sole source - others being scrap, disinvestments, government sales and producers
hedging. Scrap is the silver that returns to the market when recovered from existing
manufactured goods or waste. Old scrap normally makes up around a fifth of supply. Scrap
supply increased marginally last year up by 1.2%. The other major source of silver is from
refining, or scraps recycling. Because silver is used in the photography industry, as well as
by the chemical industry, the silver used in solvents and the like can be removed from the
waste and recycled. The United States recycles the most silver in the world, accounting for
roughly 43.6 million ounces. Japan is the second largest producer of silver from scrap and
recycling, accounting for roughly 27.8 million troy ounces in 1997. In the United States
and Japan, three-quarters of all the recycled silver comes from the photographic scrap,
mainly in the form of spent fixer solutions and old X-ray films.