India Commodity Market We are moving from a world in which the big eat the small to one in which

the fast eat the slow. -Klaus Schwab, 2000 (founder of the World Economic Forum) A strong and vibrant cash market is a pre-condition for a successful and transparent futures market. INTRODUCTION The vast geographical extent of India and her huge population is aptly complemented by the size of her market. The broadest classification of the Indian Market can be made in terms of the commodity market and the bond market. The commodity market in India comprises of all palpable markets that we come across in our daily lives. Such markets are social institutions that facilitate exchange of goods for money. The cost of goods is estimated in terms of domestic currency. India Commodity Market can be subdivided into the following two categories: Wholesale Market Retail Market

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

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

The improvement in transport facilities made the retailers directly interact with the producers and hence the need for whole sellers was not felt.

In recent years, the extent of the retail market (both organized and unorganized) has evolved in leaps and bounds. In fact, the success stories of the commodity market of India in recent years has mainly centered on the growth generated by the Retail Sector. Almost every commodity under the sun both agricultural and industrial is now being provided at well distributed retail outlets throughout the country. Moreover, the retail outlets belong to both the organized as well as the unorganized sector. The unorganized retail outlets of the yesteryears consist of small shop owners who are price takers where consumers face a highly competitive price structure. The organized sector on the other hand are owned by various business houses like Pantaloons, Reliance, Tata and others. Such markets are usually selling a wide range of articles both agricultural and manufactured, edible and inedible, perishable and durable. Modern marketing strategies and other techniques of sales promotion enable such markets to draw customers from every section of the society. However the growth of such markets has still centered on the urban areas primarily due to infrastructural limitations. Considering the present growth rate, the total valuation of the Indian Retail Market is estimated to cross Rs. 10,000 billion by the year 2010. Demand for commodities is likely to become four times by 2010 than what it presently is. COMMODITY A commodity may be defined as an article, a product or material that is bought and sold. It can be classified as every kind of movable property, except Actionable Claims, Money & Securities. Commodities actually offer immense potential to become a separate asset

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class for market-savvy investors, arbitrageurs and speculators. Retail investors, who claim to understand the equity markets, may find commodities an unfathomable market. But commodities are easy to understand as far as fundamentals of demand and supply are concerned. Retail investors should understand the risks and advantages of trading in commodities futures before taking a leap. Historically, pricing in commodities futures has been less volatile compared with equity and bonds, thus providing an efficient portfolio diversification option. In fact, the size of the commodities markets in India is also quite significant. Of the country's GDP of Rs 13, 20,730 crore (Rs 13,207.3 billion), commodities related (and dependent) industries constitute about 58 per cent. Currently, the various commodities across the country clock an annual turnover of Rs 1, 40,000 crore (Rs 1,400 billion). With the introduction of futures trading, the size of the commodities market grows many folds here on. COMMODITY MARKET Commodity market is an important constituent of the financial markets of any country. It is the market where a wide range of products, viz., precious metals, base metals, crude oil, energy and soft commodities like palm oil, coffee etc. are traded. It is important to develop a vibrant, active and liquid commodity market. This would help investors hedge their commodity risk, take speculative positions in commodities and exploit arbitrage opportunities in the market. Turnover in Financial Markets and Commodity Market (Rs in Crores) S Market segments 2008-09 2009-10 No. 1 Government 1,544,37 (63 2,518,322 (91.2 2 3 I Securities Market Forex Market 6 658,035 ) (27 ) (56 ) (43 ) 2,318,531 (84) 3,745,507 (136) 3,230,002 (117)

2010-11 (E) 2,827,872 (91) 3,867,936 (124.4) 4,160,702 (133.8) 3,641,672 (117.1)

Total Stock Market 1,374,40 Turnover (I+ II) 5 National Stock 1,057,85

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II

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

4 617,989 439,865 316,551

) (13 1,099,534 2,130,468 515,505 (18.7 1,147,027 2,494,645 519,030 (16.7) 499,503 19,527 500,000

Exchange (a+b) ) ) a)Cash 314,073 503,053 b)Derivatives 2,478 12,452 4 Commodities Market NA 130,215 (4.7) Note: Fig. in bracket represents percentage to GDP at market prices Source: Sebi bulletin

(16.1)

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STRUCTURE OF COMMODITY MARKET

DIFFERENT TYPES OF COMMODITIES TRADED World-over one will find that a market exits for almost all the commodities known to us. These commodities can be broadly classified into the following: METAL BULLION FIBER ENERGY Aluminium, Copper, Lead, Nickel, Sponge Iron, Steel Long (Bhavnagar), Steel Long (Govindgarh), Steel Flat, Tin, Zinc Gold, Gold HNI, Gold M, i-gold, Silver, Silver HNI, Silver M Cotton L Staple, Cotton M Staple, Cotton S Staple, Cotton Yarn, Kapas Brent Crude Oil, Crude Oil, Furnace Oil, Natural Gas, M. E.

Sour Crude Oil SPICES Cardamom, Jeera, Pepper, Red Chilli PLANTATIONS Arecanut, Cashew Kernel, Coffee (Robusta), Rubber PULSES Chana, Masur, Yellow Peas PETROCHEMICALS HDPE, Polypropylene(PP), PVC OIL & OIL SEEDS Castor Oil, Castor Seeds, Coconut Cake, Coconut Oil, Cotton Seed, Crude Palm Oil, Groundnut Oil, Kapasia Khalli, Mustard Oil, Mustard Seed (Jaipur), Mustard Seed (Sirsa), RBD Palmolein, Refined Soy Oil, Refined Sunflower Oil, Rice Bran DOC, Rice Bran Refined Oil, Sesame Seed, Soymeal, Soy Bean, Soy Seeds

CEREALS OTHERS

Maize Guargum, Guar Seed, Gurchaku, Mentha Oil, Potato (Agra), Potato (Tarkeshwar), Sugar M-30, Sugar S-30

TURNOVER OF INDIAN COMMODITY EXCHANGES Indian Commodity Futures Market (Rs Crores) Exchanges 2007 Multi Commodity Exchange (MCX) 165147 NCDEX NMCE(Ahmadabad) NBOT(Indore) Others All Exchanges 266,33 8 13,988 58,463 67,823 571,75 9 2008 961,633 1,066,68 6 18,385 53,683 54,735 2,155,12 2 2009 1,621,80 3 944,066 101,731 57,149 14,591 2,739,34 0 2010 2,505,206 733,479 24,072 74,582 37,997 3,375,336

Turnover on Commodity Futures Markets (Rs. In Crores) Exchange 2008-09 2009-10 FIRST Half NCDEX 1490 54011 NBOT 53014 51038 MCX 2456 30695 NMCE 23842 7943 ALL EXCHANGES 129364 170720 MARKET SHARE OF COMMODITY EXCHANGES IN INDIA

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

LEADING COMMODITY MARKETS OF WORLD Some of the leading exchanges of the world are: S. No. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Global Commodity Exchanges New York Mercantile Exchange (NYMEX) London Metal Exchange (LME) Chicago Board of Trade (CBOT) New York Board of Trade (NYBOT) Kansas Board of Trade Winnipeg Commodity Exchange, Manitoba Dalian Commodity Exchange, China Bursa Malaysia Derivatives exchange Singapore Commodity Exchange (SICOM) Chicago Mercantile Exchange (CME), US London Metal Exchange Tokyo Commodity Exchange (TOCOM) Shanghai Futures Exchange Sydney Futures Exchange London International Financial Futures and Options Exchange (LIFFE) National Multi-Commodity Exchange in India (NMCE), India National Commodity and Derivatives Exchange (NCDEX), India Multi Commodity Exchange of India Limited (MCX), India Dubai Gold & Commodity Exchange (DGCX) Dubai Mercantile Exchange (DME), (joint venture between Dubai holding and the New York Mercantile Exchange (NYMEX))

Regulators Each exchange is normally regulated by a national governmental (or semi-governmental) regulatory agency: Country Australia Chinese mainland Hong Kong India Pakistan Singapore UK USA Malaysia Regulatory agency Australian Securities and Investments Commission China Securities Regulatory Commission Securities and Futures Commission Forward Markets Commission (FMC) Securities and Exchange Commission of Pakistan Monetary Authority of Singapore Financial Services Authority Commodity Futures Trading Commission Securities Commission

LEADING COMMODITY MARKETS OF INDIA The government has now allowed national commodity exchanges, similar to the BSE & NSE, to come up and let them deal in commodity derivatives in an electronic trading environment. These exchanges are expected to offer a nation-wide anonymous, order driven, screen based trading system for trading. The Forward Markets Commission (FMC) will regulate these exchanges. Consequently four commodity exchanges have been approved to commence business in this regard. They are: S.NO. Commodity Market in India 1 Multi Commodity Exchange (MCX), Mumbai 2 National Commodity and Derivatives Exchange Ltd (NCDEX), Mumbai 3 4 National Board of Trade (NBOT), Indore National Multi Commodity Exchange (NMCE), Ahmadabad

VOLUMES IN COMMODITY DERIVATIVES WORLDWIDE

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

BENEFITS TO INDUSTRY FROM FUTURES TRADING Hedging the price risk associated with futures contractual commitments. Spaced out purchases possible rather than large cash purchases and its storage. Efficient price discovery prevents seasonal price volatility. Greater flexibility, certainty and transparency in procuring commodities would aid bank lending. Facilitate informed lending. Hedged positions of producers and processors would reduce the risk of default faced by banks. * Lending for agricultural sector would go up with greater transparency in pricing and storage. Commodity Exchanges to act as distribution network to retail agri-finance from Banks to rural households. Provide trading limit finance to Traders in commodities Exchanges.

BENEFITS TO EXCHANGE MEMBER Access to a huge potential market much greater than the securities and cash market in commodities. Robust, scalable, state-of-art technology deployment. Member can trade in multiple commodities from a single point, on real time basis. Traders would be trained to be Rural Advisors and Commodity Specialists and through them multiple rural needs would be met, like bank credit, information dissemination, etc. WHY COMMODITY FUTURES? One answer that is heard in the financial sector is "we need commodity futures markets so that we will have volumes, brokerage fees, and something to trade''. We have to look at futures market in a bigger perspective -- what is the role for commodity futures in India's economy?

In India agriculture has traditionally been an area with heavy government intervention. Government intervenes by trying to maintain buffer stocks, they try to fix prices, and they have import-export restrictions and a host of other interventions. Many economists think that we could have major benefits from liberalization of the agricultural sector. In this case, the question arises about who will maintain the buffer stock, how will we smoothen the price fluctuations, how will farmers not be vulnerable that tomorrow the price will crash when the crop comes out, how will farmers get signals that in the future there will be a great need for wheat or rice. In all these aspects the futures market has a very big role to play. If we think there will be a shortage of wheat tomorrow, the futures prices will go up today, and it will carry signals back to the farmer making sowing decisions today. In this fashion, a system of futures markets will improve cropping patterns. Next, if I am growing wheat and am worried that by the time the harvest comes out prices will go down, then I can sell my wheat on the futures market. I can sell my wheat at a price, which is fixed today, which eliminates my risk from price fluctuations. These days, agriculture requires investments -- farmers spend money on fertilizers, high yielding varieties, etc. They are worried when making these investments that by the time the crop comes out prices might have dropped, resulting in losses. Thus a farmer would like to lock in his future price and not be exposed to fluctuations in prices. The third is the role about storage. Today we have the Food Corporation of India, which is doing a huge job of storage, and it is a system, which -- in my opinion -- does not work. Futures market will produce their own kind of smoothing between the present and the future. If the future price is high and the present price is low, an arbitrager will buy today and sell in the future. The converse is also true, thus if the future price is low the arbitrageur will buy in the futures market. These activities produce their own "optimal" buffer stocks, smooth prices. They also work very effectively when there is trade in agricultural commodities; arbitrageurs on the futures market will use imports and exports to smooth Indian prices using foreign spot markets.

In totality, commodity futures markets are a part and parcel of a program for agricultural liberalization. Many agriculture economists understand the need of liberalization in the sector. Futures markets are an instrument for achieving that liberalization. WHAT MAKES COMMODITY TRADING ATTRACTIVE? A good low-risk portfolio diversifier A highly liquid asset class, acting as a counterweight to stocks, bonds and real estate. Less volatile, compared with, equities and bonds. Investors can leverage their investments and multiply potential earnings. Better risk-adjusted returns. A good hedge against any downturn in equities or bonds as there is Little correlation with equity and bond markets. High co-relation with changes in inflation. No securities transaction tax levied.

COMMODITIES WITH HUGE FLUCTUATIONS : 1. 2. BULLION Gold Silver ENERGY Crude Oil Natural Gas BASE METAL Copper Lead

PERFORMANCE OF GOLD (MONTHWISE) : Commodity Value Contract (Rs. In Lakhs) GOLD 17572472 GOLD 14083971 GOLD 16308244 GOLD 1940447

Month Jan Feb Mar Apr

Year 2011 2011 2011 2011

Segment Name PRECIOUS METAL PRODUCTS PRECIOUS METAL PRODUCTS PRECIOUS METAL PRODUCTS PRECIOUS METAL PRODUCTS

Month Jan Feb Mar Apr

Year 2011 2011 2011 2011

Commodity Contract GOLD GOLD GOLD GOLD

Quantity (In 000's) 867610 687189 779570 92556

Unit GRMS GRMS GRMS GRMS

Segment Name PRECIOUS METAL PRODUCTS PRECIOUS METAL PRODUCTS PRECIOUS METAL PRODUCTS PRECIOUS METAL PRODUCTS

PERFORMANCE OF SILVER (MONTHWISE) : Value (Rs. In Lakhs) 2513268 4 2689451 1 3594816 7 4284907 Segment Name

Month

Year

Commodity Contract SILVER SILVER SILVER SILVER

Jan Feb Mar Apr

2011 2011 2011 2011

PRECIOUS METAL PRODUCTS PRECIOUS METAL PRODUCTS PRECIOUS METAL PRODUCTS PRECIOUS METAL PRODUCTS

Month Jan Feb Mar Apr

Year 2011 2011 2011 2011

Commodity Contract SILVER SILVER SILVER SILVER

Quantity (In 000's) 57196.14 57160.11 66958.8 7588.41

Unit KGS KGS KGS KGS

Segment Name PRECIOUS METAL PRODUCTS PRECIOUS METAL PRODUCTS PRECIOUS METAL PRODUCTS PRECIOUS METAL PRODUCTS

PERFORMANCE OF COPPER (MONTHWISE) : Commodity Contract COPPER COPPER COPPER COPPER Value (Rs. In Lakhs) 10900451 10362846 12081780 1293899

Month Jan Feb Mar Apr

Year 2011 2011 2011 2011

Segment Name NON-PRECIOUS METAL PRODUCTS NON-PRECIOUS METAL PRODUCTS NON-PRECIOUS METAL PRODUCTS NON-PRECIOUS METAL PRODUCTS

Month Jan Feb Mar Apr

Year 2011 2011 2011 2011

Commodity Contract COPPER COPPER COPPER COPPER

Quantity (In 000's) 2481385 2303941 2800831 307768

Unit KGS KGS KGS KGS

Segment Name NON-PRECIOUS METAL PRODUCTS NON-PRECIOUS METAL PRODUCTS NON-PRECIOUS METAL PRODUCTS NON-PRECIOUS METAL PRODUCTS

PERFORMANCE OF LEAD (MONTHWISE) : Commodity Contract LEAD LEAD LEAD LEAD Value (Rs. In Lakhs) 2866682 2512448 3111016 413479.6

Month Jan Feb Mar Apr

Year 2011 2011 2011 2011

Segment Name NON-PRECIOUS METAL PRODUCTS NON-PRECIOUS METAL PRODUCTS NON-PRECIOUS METAL PRODUCTS NON-PRECIOUS METAL PRODUCTS

Month Jan Feb Mar Apr

Year 2011 2011 2011 2011

Commodity Contract LEAD LEAD LEAD LEAD

Quantity (In 000's) 2442775 2146300 2641045 335475

Unit KGS KGS KGS KGS

Segment Name NON-PRECIOUS METAL PRODUCTS NON-PRECIOUS METAL PRODUCTS NON-PRECIOUS METAL PRODUCTS NON-PRECIOUS METAL PRODUCTS

PERFORMANCE OF CRUDE OIL (MONTHWISE) : Commodity Contract CRUDEOIL CRUDEOIL CRUDEOIL CRUDEOIL Value (Rs. In Lakhs) 14785542 17438548 19893232 1738271

Month Jan Feb Mar Apr

Year 2011 2011 2011 2011

Segment Name ENERGY PRODUCTS ENERGY PRODUCTS ENERGY PRODUCTS ENERGY PRODUCTS

Month Jan Feb Mar Apr

Year 2011 2011 2011 2011

Commodity Contract CRUDEOIL CRUDEOIL CRUDEOIL CRUDEOIL

Quantity (In 000's) 360862.7 418613.6 429627.1 36170.7

Unit BBL BBL BBL BBL

Segment Name ENERGY PRODUCTS ENERGY PRODUCTS ENERGY PRODUCTS ENERGY PRODUCTS

PERFORMANCE OF NATURAL GAS (MONTHWISE) : Commodity Contract NATURALGAS NATURALGAS NATURALGAS NATURALGAS Value (Rs. In Lakhs) 2898351 1702131 1914927 220593.3

Month Jan Feb Mar Apr

Year 2011 2011 2011 2011

Segment Name ENERGY PRODUCTS ENERGY PRODUCTS ENERGY PRODUCTS ENERGY PRODUCTS

Month Jan Feb Mar Apr

Year 2011 2011 2011 2011

Commodity Contract NATURALGAS NATURALGAS NATURALGAS NATURALGAS

Quantity (in 000s) 1125302 730266 831228 91251

Segment Name ENERGY PRODUCTS ENERGY PRODUCTS ENERGY PRODUCTS ENERGY PRODUCTS

Regression model with two Independent variables using normal equation : X1 Gold 175 141 163 89 568 X2 Silver 252 269 359 427 1307

MCX 44 54 57 63 218

X12 30625 19881 26569 7921 84996

X22 63504 72361 128881 182329 447075

X1 X2 44100 37929 58517 38003 178549

YX1 7700 7614 9291 5607 30212

YX2 11088 14526 20463 26901 72978

For Gold & Silver : nb0 + b1 X1 + b2 X2 = Y b0 X1 + b1 X12 + b2 X1 X2 = YX1 b0 X2 + b1 X1 X2 + b2 X2 = YX2 4b0 + b1 568 + b2 1307 = 218 b0 568 + b1 84996 + b2 178549 = 30212 b0 1307 + b1 178549 + b2 447075 = 72978 b0 = 43.83, b1 = 0.069, b2 = 0.628

Similarly for Copper & Lead : b0 = 1286.29, b1 = 9.69, b2 = 7.173

Similarly for Crude Oil & Natural Gas : b0 = 61.454, b1 = 0.113 , b2 = 0.03 The MCX System

Every market transaction consists of three components i.e. trading, clearing and settlement. A brief overview of how transactions happen on the MCX market. TRADING The trading system on the MCX provides a fully automated screen based trading for futures on commodities on a nationwide basis as well as online monitoring and surveillance mechanism. It supports an order driven market and provides complete transparency of trading operations. Order matching is essential on the basis of commodity, its price, time and quantity. All quantity fields are in units and price in rupees. The exchange specifies the unit of trading and the delivery unit for futures contracts on various commodities. The exchange notifies the regular lot size and tick size for each of the contracts traded from time to time. When any order enters the trading system, it is an active order. It tries to finds a match on the other side of the book. If it finds a match, a trade is generated. If it does not find a match, the order becomes passive and gets queued in the respective outstanding order book in the system. Time stamping is done for each trade and provides the possibility for a complete audit trail if required. MCX trades commodity futures contracts having one month, two month and three month expiry cycles. All contracts expire on the 20th of the expiry month. Thus a January expiration contract would expire on the 20th of January and a February expiry contract would cease trading on the 20th of February. If the 20th of the expiry month is a trading holiday, the contracts shall expire on the previous trading day. New contracts will be introduced on the trading day following the expiry of the near month contract. CLEARING National Securities Clearing Corporation Limited (NSCCL) undertakes clearing of trades executed on the MCX. The settlement guarantee fund is maintained and managed by MCX. Only clearing members including professional clearing members (PCMs) only are entitled to clear and settle contracts through the clearing house. At MCX, after the trading

hours on the expiry date, based on the available information, the matching for deliveries takes place firstly, on the basis of locations and then randomly, keeping in view the factors such as available capacity of the vault/warehouse, commodities already deposited and dematerialized and offered for delivery etc. Matching done by this process is binding on the clearing members. After completion of the matching process, clearing members are informed of the deliverable/ receivable positions and the unmatched positions. Unmatched positions have to be settled in cash. The cash settlement is only for the incremental gain/loss as determined on the basis of final settlement price. SETTLEMENT Futures contracts have two types of settlements, the MTM settlement which happens on a continuous basis at the end of each day, and the final settlement which happens on the last trading day of the futures contract. On the MCX, daily MTM settlement and the final MTM settlement in respect of admitted deals in futures contracts are cash settled by debiting/crediting the clearing accounts of CMs with the respective clearing bank. All positions of a CM, brought forward, created during the day or closed out during the day, are market to market at the daily settlement price or the final settlement price at the close of trading hours on a day. On the date of expiry, the final settlement price is the spot price on the expiry day. The responsibility of settlement is on a trading cum clearing member for all trades done on his own account and his clients trades. A professional clearing member is responsible for settling all the participants trades, which he has confirmed to the exchange. On the expiry date of a futures contract, members submit delivery information through delivery request window on the trader workstations provided by MCX for all open positions for a commodity for all constituents individually. MCX on receipt of such information matches the information and arrives at delivery position for a member for a commodity. The seller intending to make delivery takes the commodities to the designated warehouse. These commodities have to be assayed by the exchange specified assayer. The commodities have to meet the contract specifications with allowed variances. If the commodities meet the specifications, the warehouse accepts them. Warehouse then ensures that the receipts get updated in the depository system giving a

credit in the depositors electronic account. The seller the gives the invoice to his clearing member, who would courier the same to the buyers clearing member. On an appointed date, the buyer goes to the warehouse and takes physical possession of the commodities. GOLD : Introduction Gold is a unique asset based on few basic characteristics. First, it is primarily a monetary asset, and partly a commodity. As much as two thirds of golds total accumulated holdings relate to store of value considerations. Holdings in this category include the central bank reserves, private investments, and high-caratage jewellery bought primarily in developing countries as a vehicle for savings. Thus, gold is primarily a monetary asset. Less than one third of golds total accumulated holdings can be considered a commodity, the jewellery bought in Western markets for adornment, and gold used in industry. The distinction between gold and commodities is important. Gold has maintained its value in after-inflation terms over the long run, while commodities have declined. Some analysts like to think of gold as a currency without a country. It is an internationally recognized asset that is not dependent upon any governments promise to pay. This is an important feature when comparing gold to conventional diversifiers like T-bills or bonds, which unlike gold, do have counter-party risk. What makes gold special? Timeless and Very Timely Investment Gold is an effective diversifier Gold is the ideal gift Gold is highly liquid Gold responds when you need it most

Market Characteristics The gold market is highly liquid. Gold held by central banks, other major institutions, and retail jewellery is reinvested in market. Due to large stock of gold, against its demand, it is argued that the core driver of the real price of gold is stock equilibrium rather than flow equilibrium. Effective portfolio diversifier: This phrase summarizes the usefulness of gold in terms of Modern Portfolio Theory, a strategy used by many investment managers today. Using this approach, gold can be used as a portfolio diversifier to improve investment performance. Effective diversification during stress periods: Traditional method of portfolio diversification often fails when they are most needed, that is during financial stress (instability). On these occasions, the correlations and volatilities of return for most asset class (including traditional diversifiers, such as bond and alternative assets) increase, thus reducing the intended cushioning effect of the diversified portfolio. Demand and supply China produced 276 metric tons of gold last year, equal to about 9.7 million ounces, said London precious metals consultancy GFMS Ltd. That's up 12% from the yearago and represented just over one-tenth of the world's supply. The ranking pushes South Africa into second place, the first time the gold giant has lost its top ranking since 1905. South Africa, whose late 19th century gold rush led to the founding of mining heavyweight Anglo American Plc and is home to global producers Gold Fields Ltd and AngloGold Ashanti Ltd, saw its production decline 8% to 272 metric tons. India is world largest gold consumer with an annual demand of 800 tonnes.

Demand and Supply of Gold in India (in tonnes) 2006 Supply Mine Production Net Producer Hedging Total mine supply Official sector sales Old gold Scrap Total Supply Demand Fabrication Jewellery Industrial & Dental Subtotal of above fabrication Bar & coin retail investment Other retail investment ETFs and similar Total Demand Inferred Investment Source: GFMS Ltd. 573 -140 430 93 303 826 519 111 630 89 -3 113 829 -3 2007 580 -129 451 95 262 808 568 112 680 116 -5 36 827 -19 % change 1 5 2 -13 2 9 1 8 31 -68 0 -

MCX Contract Specifications of Gold: GOLD Name of Commodity Ticker Symbol Trading System Trading Period Trading Session TRADING Trading Unit Price Quote Gold GLDPURMUMK MCX Trading System Monday to Saturday Monday to Friday: 10:00a.m. to 11:30 p.m. Saturday: 10:00a.m. to 2:00 p.m. 1 kg Rs. Per 10 g, ex-Ahmedabad (inclusive of all taxes and levies relating to import and custom duty, but excluding sales tax/VAT, any other additional tax or surcharge on sales tax, local taxes and Maximum order size Tick Size Daily price limit Initial Margin Special Margin octroi) 10 kg Re. 1 per 10 g (minimum price movement) 3% 4% In case of initial volatility, a special margin at such percentage (as deemed fit), will be imposed immediately on both buy and sell side in respect of all outstanding positions, which will remain in force for next 2 days, after which the special margin Maximum Allowable will be relaxed. For individual client: 2 MT For members collectively for all clients: 6 MT or 15%of the market position, whichever is high DELIVERY Delivery unit Delivery 1 kg period 25% of the value of the open position during the delivery period At designated clearing house facilities of Group 4 Securitas at these centers and at additional delivery centers at Chennai, New Delhi and Hyderabad. Delivery Logic Compulsory SETTLEMENT PERIOD Tender Period 1st to 6th day of the contract expiry month. Delivery Period 1st to 6th day of the contract expiry month.

margin Delivery center(s)

Pay-in commodities (delivery member) by

of On any tender days by 6.00 p.m. except Saturdays, Sundays and Trading Holidays. seller Marking of delivery will be done on the tender days based on the intentions received from the sellers after the trading hours. On expiry all the open positions shall be marked for delivery.

Delivery pay-in will be on E + 1 basis. Pay-in of funds By 11.00 a.m. on Tender day +1 basis Pay-out of funds and By 05.00 p.m. on Tender day +1 basis. commodities (delivery to buyer member) INFORMATION RELATED TO DELIVERY Delivery Logic Compulsory Delivery. Any seller having open position on the expiry date fails to deliver then the penalty as per the penal Mode provision will be imposed to the defaulting seller. of Fax or Courier 5% incremental margin for last 5 days on all outstanding positions. Such margin will be addition to initial, additional and Margin special margin as applicable. during 25% on the marked quantity.

Communication Tender Period Margin

delivery period Exemption from Margin is exempted on receipt of documentary evidence (viz., margin during tender Warehouse Receipt and Quality Certificate) of tendering and delivery period delivery with the Exchange during tender days. Delivery order rate Settlement/closing price on the respective tender days except on (DOR) Penal Provision expiry date. On expiry date the delivery order rate shall be the Due Date Rate (DDR) and not the closing price. A penalty of 2.5% of DOR will be imposed on defaulting buyer / seller out of which 2% will be credited to IPF and 0.5% will be credited to the counter party. Additionally, 4% of DOR as a replacement cost will be charged from defaulting buyer / seller out of which 90% will be given to the counter party and 10% will be retained by the Exchange as

administrative expenses.

Delivery Centers

Ahmedabad and Mumbai at designated Clearing House facilities of Group 4 Securitas at these centers and at additional delivery

centers at Chennai, New Delhi and Hyderabad Deliverable grade of The selling members tendering delivery will have the option of underlying commodity delivering such grades as per the contract specifications. The buyer has no option to select a particular grade and the delivery offered by the seller and allocation by the Exchange shall be binding on him. Verification by the At the time of taking delivery, the buyer can check his delivery Buyer at the time of in front of Group 4 personnel. If he is satisfied with the quantity, release of delivery weight and quality of material, then he will issue receipt of the metals instantly. If he is not satisfied with the metal, he can insist for assaying by any of the approved assayers available at that center. If the buyer chooses for assaying, Group 4 person will carry the goods to the assayers facilities, get it assayed and bring it back to Group 4 facilities along with assayers certificate. If the assayers STEPS TO BE FOLLOWED FOR DELIVERY Intention to take delivery On any tender days by 6.00 p.m. by buyers Dissemination delivery interest and of The Exchange will inform members through TWS regarding buyers and the buyers respectively by 7.00 p.m. on the respective tender days and on Saturdays by 1:00 p.m.

information on tendered tender notice and delivery intentions of the sellers members

Evidence possession

of

stocks

in At the time of issuing delivery order, the Member must satisfy the Exchange that he holds stocks of the quantity and quality specified in the Delivery Order at the declared delivery center by producing warehouse receipt. The seller will issue tender notice along with evidence of delivery to the Exchange in a specified format by 6:00 p.m. and on Saturdays by 12:00 noon. The buyer shall not refuse taking delivery and such refusal will entertain penalty as per the penal provision. As per the closing price on the respective tender days.

Tender notice by seller

Buyers obligation Allocation of delivery Source: MCX Gold Report 1 Gold Terminology

For the purpose of this standard, the following definitions shall apply: Assaying: The method of accurate determination of the gold content of the sample expressed in parts per thousand (%). Carat: One-twenty fourth part by mass of the metallic element gold. Fineness: The ratio between the mass of gold content and the total mass expressed in parts per thousand (%). Find Gold: It is gold having fineness 999 parts per thousand (5) and above without any negative tolerance. Gold: The metallic element gold, free from any other element. Standard Gold: Gold having fineness 995 parts per thousand (%) and above without any negative tolerance. Grain: One of the earliest weight units used for measuring gold. One grain is equivalent to 0.0648 grams. Hallmark: Mark, or marks, which indicate the producer of a gold bar and its number, fineness, etc. Karat: Unit of fineness, scaled from one to 24. 24 karat gold (or pure gold) has at least 999 parts pure gold per thousand; 18-karat has 750, parts pure gold and 250 parts alloy, etc.

Kilo Bar: A bar weighing one kilogram approximately 32.1507 troy ounces. Legal Tender: The coin or currency which the national monetary authority declares to be universally acceptable as a medium of exchange; acceptable for instance in the discharge of debts.

Liquidity: The quality possessed by a financial instrument of being readily convertible into cash without significant loss of value. Troy Ounce: A unit of weight, equal to about 1.1 avoirdupois (ordinary) ounces. The word ounce when applied to gold refers to a troy ounce. 1 troy ounce is equivalent to 31.1034768 grams.

CONCLUSION After almost two years that commodity trading is finding favour with Indian investors and is been seen as a separate asset class with good growth opportunities. For diversification of portfolio beyond shares, fixed deposits and mutual funds, commodity trading offers a good option for long-term investors and arbitrageurs and speculators. And, now, with daily global volumes in commodity trading touching three times that of equities, trading in commodities cannot be ignored by Indian investors. Online commodity exchanges need to revamp certain laws governing futures in commodities to make the markets more attractive. The national multi-commodity exchanges have unitedly proposed to the government that in view of the growth of the commodities market, foreign institutional investors should be given the go-ahead to invest in commodity futures in India. Their entry will deepen and broad base the commodity futures market. As a matter of fact, derivative instruments, such as futures, can help India become a global trading hub for select commodities. Commodity trading in India is poised for a big take-off in India on the back of factors like global economic recovery and increasing demand from China for commodities. Considering the huge volatility witnessed in the equity markets recently with the Sensex touching 21000 level commodities could add the required zing to investors' portfolio. Therefore, it won't be long before the market sees the emergence of a completely redefined set of retail investors.

BIBLIOGRAPHY

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