Professional Documents
Culture Documents
Commodity Market With Special Refernce To Gold and Silver
Commodity Market With Special Refernce To Gold and Silver
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 i o 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 vi n g me g u i d a n c e a nd
t r a i n i n g 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
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.
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.
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 consecutiv e 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.
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broking division in February 2000, it has been providing institutional-level research and broking services to
individual investors.
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BENEFITS
Primary Data
Secondary Data
Primary Data:
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.
While doing this project I studied the previous researches which helped me to
get a broader prospective for my project. I also referred various books and journals to
have a better understanding about the topic of my project.
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
Commodity Market: With Special Reference to Gold & Silver
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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.
Classical civilizations built complex global markets trading gold or silver for
spices, cloth, wood and weapons, most of which had standards of quality and timeliness.
Considering the many hazards of climate, piracy, theft and abuse of military fiat by rulers
of kingdoms along the trade routes, it was a major focus of these civilizations to keep
markets open and trading in these scarce commodities. Reputation and clearing became
central concerns, and the states which could handle them most effectively became very
powerful empires, trusted by many peoples to manage and mediate trade and commerce.
(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 fi xed
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.
Hedging:
Many participants in the commodity futures market are hedgers. They use the
futures market to reduce a particular risk that they face. This risk might relate to the price
of wheat or oil or any other commodity that the person deals in. The classic hedging
example is that of wheat farmer who wants to hedge the risk of fluctuations in the price
of wheat around the time that his crop is ready for harvesting. By selling his crop
forward, he obtains a hedge by locking in to a predetermined price. Hedging does not
necessarily improve the financial outcome; indeed, it could make the outcome worse.
What it does however is, that it makes the outcome more certain. Hedgers could be
government institutions, private corporations like financial institutions, trading
companies and even other participants in the value chain, for instance farmers, extractors,
ginners, processors etc., who are influenced by the commodity prices.
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
Commodity Market: With Special Reference to Gold & Silver
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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
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,
Commodity Market: With Special Reference to Gold & Silver
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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 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
Commodity Market: With Special Reference to Gold & Silver
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commencement of liberalization in 1990.
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
Commodity Market: With Special Reference to Gold & Silver
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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 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.