CHAPTER-1 1. INTRODUCTION 1.1 DEFINITION: A commodity derivative derives its value from an underlying asset, which is necessarily a commodity. Commodities, in simple words are any goods that are common and unbranded. Gold, silver, rubber, pepper, jute, wheat, sugar, cotton etc., are some of the common commodities. For e.g. apple juice can be a commodity whereas the ‘Real’ apple juice cannot be called a commodity. One may be surprised to know that in the US commodities markets there are futures available even on cattle. Commodity includes all kinds of goods. FCRA defines "goods" as "every kind of movable property other than actionable claims, money and securities". Futures' trading is organized in such goods or commodities as are permitted by the Central Government. At present, all goods and products of agricultural (including plantation), mineral and fossil origin are allowed for futures trading under the auspices of the commodity exchanges recognized under the FCRA. The national commodity exchanges have been recognized by the Central Government for organizing trading in all permissible commodities which include precious (gold & silver) and nonferrous metals; cereals and pulses; ginned 1
Transcript
CHAPTER-1
1. INTRODUCTION
1.1 DEFINITION:
A commodity derivative derives its value from an underlying asset, which is
necessarily a commodity.
Commodities, in simple words are any goods that are common and unbranded.
Gold, silver, rubber, pepper, jute, wheat, sugar, cotton etc., are some of the common
commodities. For e.g. apple juice can be a commodity whereas the ‘Real’ apple juice
cannot be called a commodity. One may be surprised to know that in the US commodities
markets there are futures available even on cattle.
Commodity includes all kinds of goods. FCRA defines "goods" as "every kind of
movable property other than actionable claims, money and securities". Futures' trading is
organized in such goods or commodities as are permitted by the Central Government. At
present, all goods and products of agricultural (including plantation), mineral and fossil
origin are allowed for futures trading under the auspices of the commodity exchanges
recognized under the FCRA. The national commodity exchanges have been recognized
by the Central Government for organizing trading in all permissible commodities which
include precious (gold & silver) and nonferrous metals; cereals and pulses; ginned and
unpinned cotton; oilseeds, oils and oilcakes; raw jute and jute goods; sugar and Gur;
potatoes and onions; coffee and tea; rubber and spices, etc.
Commodities market essentially represents another kind of organized market just
like the stock market and the debt market. However, commodities market, because of its
unique nature lends to the benefits of a wide spectrum of people like investors, importers,
exporters, producers, corporate etc.
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1.2 COMMODITY MARKET
Commodity markets are markets where raw or primary products are exchanged.
These raw commodities are traded on regulated commodities exchanges, in which they
are bought and sold in standardized contracts.
This article focuses on the history and current debates regarding global
commodity markets. It covers physical product (food, metals, and electricity) markets but
not the ways that services, including those of governments, nor investment, nor debt, can
be seen as a commodity. Articles on reinsurance markets, stock markets, bond markets
and currency markets cover those concerns separately and in more depth. One focus of
this article is the relationship between simple commodity money and the more complex
instruments offered in the commodity markets.
1.3 HISTORY
Commodity futures’ trading has been first recorded in the 17th century in Japan.
The futures’ trading was basically done with the seasonal agricultural products so as to
ensure their continuous supply all the year around. Japanese merchants used to store rice
in the warehouses for their future use and used to sell receipts against such stored rice.
These receipts were called as ‘rice tickets ‘which then eventually became the basis for
their commercial currency. The rules which were established during this time for trading
these rice tickets are similar to the rules set for American futures trading. In the United
States, the commodity futures trading first started in the middle of the 19th century with
the help of the Chicago Board Of Trade set up in the year 1848.Gradually then about 10
commodity exchanges were set up with a wide variety of agricultural products being
traded.
Commodity derivative market first started in India in cotton in the 1875 and in the
oilseeds in 1900 at Bombay. Forward trading in raw jute and jute goods started at
Calcutta in the year 1912. But however, within few years of their establishment, the
forwards trading in these commodities was banned in the year 1960. Recently, in the year
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2003, such ban on trading was lifted and the trading in commodity futures was started.
Permission was given to establish online multi-commodity exchange in order to facilitate
trading. The long period of prohibition of forward trading in major commodities like
cotton and oilseeds complex has an enduring impact on the development of the
commodity derivative markets in India and the futures market in commodities find
themselves left far behind the derivative markets in the developed countries, which have
been functioning uninterruptedly. Thus, today the challenge before the commodity
markets is to make up for the loss of growth and development during the three decades of
government policies, which had the effect of restricting the growth of the derivative
markets.
1.4 DEFINITION OF AN EXCHANGE:
A futures or derivatives exchange is defined as a trading forum that links a central
marketplace, where all those with buying and selling interests in a product designed to
permit the shifting risk can meet, with a mechanism (such as clearing house), for
intermediating, validating, and enhancing the credit of anonymous counterparts. Key to a
successful exchange is the efficient transfer of risk among the exchange participants. This
requires efficient trading systems, settlement and clearing mechanisms, membership
structures and viable products.
What is Exchange?
A commodities exchange is an exchange where various commodities and derivatives
products are traded. Most commodity markets across the world trade in agricultural
products and other raw materials (like wheat, barley, sugar, maize, cotton, cocoa, coffee,
milk products, pork bellies, oil, metals, etc.) and contracts based on them. These contracts
can include spot prices, forwards, futures and options on futures. Other sophisticated
products may include interest rates, environmental instruments, swaps, or ocean freight
contracts. Steel contracts started to be traded for the first time on the London Metal
Exchange in 2008.
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1.5 COMMODITY EXCHANGES IN INDIA:
Commodity exchanges are places which trade in particular commodities,
neglecting the trade the trade of securities, stock index futures and options etc. Exchanges
are the centralized places which provide a platform for both the buyers and the sellers to
meet, set quality standards and establish the rules of businesses. Commodity exchanges in
India plays an important role as it offers a tool for efficient risk management and price
transparency.
In India, there are about 25 recognized regional exchanges (Annexure-1- List of all
the Regional Commodity Exchanges), of which three are national level multi-commodity
exchanges. These three national level multi-commodity exchanges are,
National Commodity and Derivative Exchange Limited( NCDEX)
Multi-Commodity Exchange Of India( MCX)
National Multi-Commodity Exchange Of India Limited ( NMCEIL)
All the above exchanges have been set up under the overall control of Forward
Market Commission of Government of India. The other 22 exchange are given below
National Commodity & Derivative Exchange Limited (NCDEX)
National Commodity & Derivative Exchange Limited (NCDEX) located in
Mumbai is a public limited company incorporated on April 23, 2003 under the
Companies Act, 1956 and had commenced its operations on December 15, 2003. This is
the only commodity exchange in the country promoted by the national level institutions.
It is promoted by ICICI Bank Limited, Life Insurance Corporation of India ( LIC) ,
National Bank for Agriculture and Rural Development ( NABARD) and National Stock
Exchange ( NSE) .It is a professionally manages online multi- commodity exchange.
NCDEX is regulated by Forward Market Commission and is subject to various law of
land like the Companies Act, Stamp Act, Contracts Act, Forward Commission
(Regulation) Act and various other legislations.
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Multi Commodity Exchange of India Limited (MCX)
Multi Commodity Exchange is headquartered in Mumbai and is an independent,
de-mutualised exchange with the permanent recognition from Government of India. Key
Shareholders of MCX are Financial Technologies (India) Ltd., State Bank of India,
Union Bank of India, Corporation Bank, Bank of India and Canara Bank. MCX facilitates
online trading, clearing and settlement operations for commodity futures market across
the country.MCX started offering trade in November 2003 and has built strategic
alliances with Bombay Bullion Association, Bombay Metal Exchange, Solvent
Extractors’ Association of India, Pulse Importers Association and Shetkari Sanghatana.
National Multi-Commodity Exchange of India Limited (NMCEIL)
National Multi-Commodity Exchange of India Limited (NMCEIL) is the first de-
mutualised, Electronic Multi-commodity Exchange in India. On 25th July, 2001, it was
granted approval by the government to organize trading in the edible oil complex. It has
been operationalised from November 26 2002. It has been supported by Central
Warehousing Corporation Ltd. Gujarat State Agricultural Marketing Board and Neptune
Overseas limited. It has got its recognition in October 2002.
The other 22 exchanges include are as follows:
1. Bhatinda Om & Oil Exchange Ltd., Batinda.
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2. The Bombay Commodity Exchange Ltd.Mumbai
3. The Rajkot Seeds oil & Bullion Merchants` Association Ltd
4. The Kanpur Commodity Exchange Ltd., Kanpur
5. The Meerut Agro Commodities Exchange Co. Ltd., Meerut
6. The Spices and Oilseeds Exchange Ltd.
8. Ahmedabad Commodity Exchange Ltd.
8. Vijay Beopar Chamber Ltd., Muzaffarnagar
9. India Pepper & Spice Trade Association. Kochi
10. Rajdhani Oils and Oilseeds Exchange Ltd. , Delhi
11. National Board of Trade. Indore.
12. The Chamber Of Commerce, Hapur
13. The East India Cotton Association Mumbai.
14. The Central India Commercial Exchange Ltd, Gwaliar
15. The East India Jute & Hessian Exchange Ltd,
16. First Commodity Exchange of India Ltd, Kochi
18. Bikaner Commodity Exchange Ltd., Bikaner
18. The Coffee Futures Exchange India Ltd, Bangalore.
19. Esugarindia Limited.
20. Surendranagar Cotton oil & Oilseeds Association Ltd,
21. Haryana Commodities Ltd., Hissar
22. e-Commodities Ltd.
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COMMODITIES TRADED IN THE DIFFERENT EXCHANGE
MCX
Gold, Gold M, Gold HNI, Silver, Silver M, Silver HNI
seed, copra and soybean, and oils and oilcakes of all of them.
5. Rice bran oil
6.Castor oil and its oilcake
8.Linseed
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8.Silver
9.Onions.
The committee also recommended that some of the existing commodity
exchanges particularly the ones in pepper and castor seed, may be upgraded to the level
of international futures markets.
The liberalized policy being followed by the Government of India and the gradual
withdrawal of the procurement and distribution channel necessitated setting in place a
market mechanism to perform the economic functions of price discovery and risk
management.
The National Agriculture Policy announced in July 2000 and the announcements
of Honorable Finance Minister in the Budget Speech for 2003-2004 were indicative of
the Governments resolve to put in place a mechanism of futures trade/market. As a
follow up the Government issued notifications on 1.4.2004 permitting futures trading in
the commodities, with the issue of these notifications futures trading is not prohibited in
any commodity. An option trading in commodity is, however presently prohibited.
3.3 HEDGING:
Hedging is a mechanism by which the participants in the physical market can
cover their price risk. Theoretically, the relationship between the futures and the cash
prices is determined by the cost of carry. The two prices therefore move in tandem. This
enables the participants in the physical market to cover their price risk by taking opposite
positions in the futures market.
Hedging can be better understood by two hypothetical illustrations:
Hypothetical illustration: 1
A Wheat miller enters into a contract to sell flour to the bread manufacturer four
months from now. The price is agreed upon though the flour would be delivered only
after four months. The wheat miller is worried that the price of the wheat would increase
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during the course of next four months. A rise in the prices would lead to losses on the
contract of the miller. To safeguard against the risk of increasing prices of wheat, the
miller buys the Wheat futures Contract that call for delivery of wheat in the four months
time. After the expiry of the four months, as feared by the miller, the prices of wheat may
have risen. The mille then purchases Wheat in the spot market at a higher price.
However, since he has hedged in the futures market, he can sell contract in the futures
markets at a gain since there is a gain in the future price as well. Thus, he offsets his
purchase of wheat at a higher cost by selling the futures contract thereby protecting his
profit on the sale of the flour. Thus, the wheat miller hedges against exposure to price
risk.
Hypothetical Situation: 2
A farmer plans to harvest the guar seed crop in the month of November. But in
the harvesting season the Guar Seed prices usually decline due to excess supply in the
market. This usually forces the farmer, who requires income for the nest subsequent
harvesting season, to sell his harvest at a discount. The farmer has two options to counter
this risk he is exposed due to price fluctuations:
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April
July
Wheat Miller
Buy Wheat Futures Contract
Sell wheat futures contractBuy Wheat in the spot market for delivery to the bread manufacturer
Option 1:
Store the Guar Seed, which has been harvested for few months and subsequently
sell the Guar Seed when the prices increase. But, this would not b possible if the farmer
requires the proceeds from the sale of his harvest to finance the next crop season. Also,
the farmer would require adequate storage space and would require following
preservation techniques to ensure that the stored harvest would not be destroyed due to
infestation.
Option 2:
Alternatively, the farmer can hedge himself by selling November Guar Seed
future contract in the month of September. Any decline in the spot prices in the month of
November would decline in the futures prices, which he has already sold for a higher
price. Upon harvest, the farmer would offset his futures transaction by buying Guar Seed
November futures contract and simultaneously sell his Gaur Seed crop harvest in the
physical market. This ensures that the farmer is protected against any decline in the prices
in the physical market.
CHAPTER 4
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September
November
Farmer
Sell Gaur Seed November Futures
Buy Guar Seed November Futures Sell Guar Seed Harvest in the Physical Market.
4. BULLION MARKET
Bullion is defined as a bulk quantity of precious metals consisting of gold, silver and others that can be assessed by weight and cast as a lump. The bullion reserve of a country is the indicator of the amount of wealth a country possesses. Bullion is valued by its purity and mass rather than its face value which is applicable in the case of money. India Bullion Market is a recognizable index that highlights the economic growth of the nation.
Indian Bullion Market Association
IBMA or the Indian Bullion Market Association is a national level body that represents the Indian Bullion Trade and Industry. This body is an association of all leading bullion dealers and jewelry merchants who have tied up with the National Spot Exchange Limited. The idea of this association is to promote a professional organizational dedication towards the development and growth of the bullion industry in India.
London Bullion Market
The world's largest market for gold and silver trading. Market makers mainly quote prices in US dollars per troy ounce for spot and forward delivery. It is operated by the London Bullion Market Association (LBMA), whose primary task is to ensure that refiners of gold and silver meet the required standards of quality. The Association maintains close links with the Bank of England, which is responsible for the supervision of the market and for publishing its code of conduct
Trading System
The best five buy and sell orders for every contract available for trading are visible to the market and orders are matched based on price time priority logic. Orders can be placed with time conditions and/ or price conditions Time related Conditions DAY order- A Day order is valid for the day on which it is entered. If the order is not matched during the day, the order gets cancelled automatically at the end of the trading day.
GTC - A Good Till Cancelled (GTC) order is an order that remains in the system until the expiry of the respective contract in which it is entered or until when the same is cancelled by the member.
GTD - A Good Till Date (GTD) order is valid till the date specified by the member. After the specified date the unexecuted orders get automatically cancelled by the system.
IOC - An Immediate or Cancel (IOC) order allows a member to execute the orders as soon as the same is placed in the market, failing which the order will get cancelled immediately Price Conditions Limit Order – The order wherein the price is to be specified while placing the same.
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Market Order – The order at the best available price at the time of placing the same
Trade Timings
Special Session:Monday to Saturday: 9:45 a.m. to 9:59 a.m.Special Session (order cancellation session) is held to cancel the pending orders prior to opening of market Normal Session:Monday through Friday: 10:00 a.m. to 11:30 p.m. (up to 11:55 p.m. on account of day light savings typically between every November and March of the following year)Saturdays: 10:00 a.m. to 2:00 p.m.Agri-commodities are available for futures trading up to 5:00 p.m. whereas non agri-commodities (bullions, metals, energy products) are available up to 11:30 pm / 11.55pm.
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5. GOLD AN INVESTMENT AVENUE
Global Inflation ---------------------------
Dollar and its traded Dollar Index ----
Investment Demand ----------------------
Production of Gold ------------------------
SHORT TERM TARGET $1000 - $1030
LONG TERM TARGET $1150 - $1250
5.1 INTRODUCTION
Gold is the oldest precious metal known to man. Therefore, it is a timely subject
for several reasons. It is the opinion of the more objective market experts that the
traditional investment vehicles of stocks and bonds are in the areas of their all-time highs
and may be due for a severe correction
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To fully appreciate why 8,000 years of experience say “gold is forever", we
should review why the world reveres what England most famous economist, John
Maynard Keynes, has cynically called the "barbarous relic.” 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.
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.
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.
Measurement Weight Conversion Table
To Convert from To Multiple byTroy Ounce Grams 31.1035
Purity Gold purity is measured in terms of karats and finenessKarat: Pure gold is defined as 24 karatFineness: Parts per thousanThus, 18 karat = (18/24)th of 1000 parts = 750 fineness
OVERVIEW:
World’s largest gold producing country is South Africa with 394 tons in 2001. On
the other hand, world's largest gold consuming country is India with an annual demand of
843.2 tones comprising of 26.2% of total world demands. World’s gold demand is
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constantly increasing and it is nearing record levels at 4000 tones per year while the mine
production is constant at 2250 tones per annum (Source: World Gold Council)
The gold prices are moving upwards due to the reduction in production level as
compared to the demand and also due to the weakening economy of the US.
It has been found out the total world gold production would decline about 30%
over the next 7 years as the new discoveries in the major gold producing countries have
become difficult, expensive and time consuming according to the studies done by The
World Bank and Beacon Group.
5.2 HISTORY OF GOLD IN INDIA
Prior to 1962, India was the world's largest gold market and the main trading
center was Bombay. In 1962, the government enacted the Gold Control Act, which
prohibited the citizens of India from holding pure gold bars and coins due to loss of
reserves during the indo-china war. It was declared that the old holdings in pure gold had
to be compulsorily converted into jewelry. Pure gold bars and coins were to be dealt only
by licensed dealers.
In 1990, India was on a verge of default of external liabilities as it had a major
foreign exchange problem. It had to give up the concept of controlling and licensing as it
led to nothing more than corruption and shortages. As a result, the Indian government
pledged 40 tones from their gold reserves with the Bank of England. India had to adopt
the concept of liberalization. The government abolished the 1962 Gold Control Act in
1992 and liberalized the import of gold in India for a duty payment of Rs. 250 per 10
grams. The government made up for the foreign exchange problem by allowing free
imports and earning the taxes. This step expanded the gold market and it also waved off
the unofficial trade i.e. smuggling and black marketing. This makes India the most price-
sensitive.
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5.3 GOLD AND ITS BULL RUN:
Gold has had a great run from 2001 to the current year 2008 where the prices have
gone from around 250$/ounce to break its previous high of 850$/ounce and peak at
1030$/ounce before correcting to the 900 levels.
The reason for gold spot prices to increase so much is the new demand for gold
futures as a form of investment .It is used :-
As a hedge against inflation.
As a hedge against a declining dollar.
As a safe haven in times of geopolitical and financial market instability.
As a commodity, based on gold’s supply and demand fundamentals.
As a store of value.
As a portfolio diversifier; gold can act as portfolio insurance.
GOLD PRODUCTION AND SUPPLY
The world gold production stands at around 3500 tones and come in primarily
three forms. The majority of the gold supply comes from mining and the rest from scrap
sales and sales from central banks.(Fig 5.3 below)
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Source World Gold Council
5.4 MINE PRODUCTION
Mining of gold takes place in every continent except for Antarctica, where mining
is forbidden. According to recent figures, there are around 400 operating gold mines
world wide. The production of gold has reached a stable level, averaging approximately
2550 tones per year over the last five years. New mines that are being developed are
serving to replace current production, rather than to cause any significant expansion in
the global total.
Gold mines take a longer time to set up usually 10 years for a mine to be up and
running. Since the price of Gold was at a real low in 2001 China which is the largest
producer of gold in the world did not explore enough for new mine sites and is estimated
to run out of ore in 2014. South Africa the once largest producer of gold and now the
world’s second largest has seen its output decline due to hazardous environmental
conditions and an acute power shortage which started recently when the economy opened
up a bit.
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(fig. 5.4) 2007 Mine Production of Gold
1. China: 276mt 2. South Africa: 272mt 3. United States: 255mt (est.) 4. Australia: 251mt (est.) 5. Indonesia: 171mt (est.) 6. Peru: 167mt8. Russia: 149mt (est.) 8. Canada: 93mt 9. Papau New Guinea 10. Ghana
All these issues regarding mine production could push up the gold prices as the
demand for it has increased in recent years while the supply is dwindling.
INDIA
Indian love of gold and silver is deep-rooted and embedded in historical, cultural
and religious traditions. As it has never mined more than a small amount of gold itself,
gold holdings were built up as a result of trade. India consumes around 800 tones of gold
a year more than double its nearest rival China at 350 tones.
Shown below is a graph of the demand for gold in India.(fig 5.4.1)
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Tones on Left hand side Rs. Billion on Right hand side
Image taken from the world gold council website
The degree of economic prosperity is inevitably a key determinant of gold
demand. Rapidly rising incomes have been a supportive factor for the growing level of
spending on gold jeweler. Nevertheless this is not a one-way factor since rising prosperity
also brings a wider choice of goods and services for consumers and hence more
competition. In India, as elsewhere, it has proven important to provide attractive and
well-marketed products to satisfy the more demanding and sophisticated consumer. So
we could say if the Indian economy keeps on growing there will always be a growing
demand for Gold and this could be a factor in increasing prices.
MARKET MOVING FACTORS FOR GOLD IN INDIA
Reclaimed scrap and official gold loans (Above ground supply from sales by
central banks)
Producer / miner hedging interest.
World macro-economic factors - US Dollar, Interest rate.
Comparative returns on stock markets
Domestic demand based on monsoon and agricultural output.
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WORLD GOLD DEMAND- Four major sources of demand for gold
1) Jewellery Fabrication 2) Industrial Applications3) Governments and Central Banks 4) Private Investors
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India is the leading consumer and importer of gold in the world. Due to this, the potential of the India bullion market is very promising. Owing to the weak price of Dollar in the global market, the price of bullion is soaring. The gem and jewelry industry of India is one of the fastest growing sectors of the economy at an approximate rate of 15%. The India Bullion market is under the strict supervision of the Government as bullion is one of the major indicators of the wealth of the country.
India is the largest investor in gold jewelry as a large number of people believe that investing in gold is beneficial. The domestic consumption of gold depends on factors like the wedding season, festive season, the performance of the harvest and the monsoon of the country.
Country Bullion (in tons)United States 8133.5France 2445.1Germany 3408.5Italy 2451.8Netherlands 612.5Switzerland 1041.5ECB 501.4India 558.7Russia 568.4Japan 765.2China 1054.0
5.5 OIL/ GOLD RELATIONSHIP
The positive correlation between gold and oil prices will continue over the next
few years. Historically, the average oil/gold ratio has been around 7:1 meaning that the
price of 7 barrels of oil equals the price of one ounce of gold (APPX). The past few years
we have seen an average ratio of 10:1. To return to average levels, the price of gold
would have to increase to over $1250 or the price of oil would have to fall by a factor of
that magnitude as the price of oil is hovering around the $130 mark per barrel. Hence
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using these ratios the long term price of gold could be in the range of $1250 as oil doesn’t
seem to be going down by too much.
The correlation between gold and crude quarterly has been very high in the last 4
years and is presently at 0.90 taking a quarterly time period.
DOLLAR INDEX
The US Dollar Index (USDX) is an index or measure of the value of the United
States dollar relative to a basket of foreign currencies. It is a weighted geometric mean of
the dollar's value compared to the euro (EUR), Japanese yen (JPY), Pound sterling
(GBP), Canadian dollar (CAD), Swedish kroner (SEK) and Swiss franc (CHF).
PORTFOLIO DIVERSIFIER:
The most effective way to diversify your portfolio and protect the wealth created
in the stock and financial markets is to invest in assets that are negatively correlated with
those markets. Gold is the ideal diversifier for a stock portfolio, simply because it is
among the most negatively correlated assets to stocks.
Although the price of gold can be volatile in the short-term, gold has maintained
its value over the long-term, serving as a hedge against the erosion of the purchasing
power of paper money. Gold is an important part of a diversified investment portfolio
because its price increases in response to events that erode the value of traditional paper
investments like stocks and bonds.
Using statistical analysis which, the world gold council has provided us for the
US markets it is clear that there are obvious winners in terms of asset performance in a
recession fixed income asset and losers like cyclical stocks. The behavior of gold during
the five official US recessions that have occurred since the gold price was fully freed in
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1971 has been mixed during these periods: it rose strongly in one, rose modestly in
toward fell in two. In short, there has been no clear pattern in the behavior of the gold
price during an economic downturn.
Investment advisors recognize that diversification of investments can improve
overall portfolio performance. The key to diversification is finding investments that are
not closely correlated to one another. Most stocks and bonds are relatively closely
correlated with each other. Hence many investors combine tangible assets such as gold
with their stock and bond portfolios in order to reduce risk. Gold and other tangible assets
have historically had a very low correlation to stocks and bonds.
5.6 INTERPRETATION:
The gold which was trading on a weaker note since Mid March this year, seems to
have regain some momentum in the month of July 3rd week where it has touched
at Life Time High in Future at Rs 13,764. (15th July 2008). The international price
per ounce was at $986, on the same date.
After making a life time high it was not able to sustain in Rs13, 000 levels and
with a spam of week it came back to the levels of Rs12, 200.
Markets are expected to find a support at $850. This is arrived by analysis the
price movement of the price of Gold of the last 50 days, i.e. 50days WMA. Not
only by also from April 1st to 1st July is the lowest price of the gold per ounce in
the international market $853(1st may 2008), so on the basis of these past history
data the support level is expected to be $850.
This suggests that the price of the Gold in the international levels is not expected
to fall below $850/Ounce which is considered to be a very strong support.
However from 19th July to 29th July it was hovering over and about $900, which
had show some good sign for the price of gold to increase, and also it made a
historical record on 15th July by touching $ 986.
Prices were once also trading well above both short-term as well long-term
weighted moving averages indicating the bullish strength in the market. However
market faces another major frontier at $960 levels, only a break and close above
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which would confirm the bullish strength and prepare market for an assault on
$1000 and then $1032.8 levels.
Support level of $ 907 was break on 30-July-08 and reached $898.5 for a single
day and it again jumped to $918 the very next day.
Support Levels $907, $ 845. Resistance levels $960, $ 1032.8
Thus on the basis of the above mentioned interpretation we can focused that the price of
the Gold may touch the Long Term target of $1250 in the near future with further
weakness in US Dollar, rise in Global inflation and increased demand for the portfolio
hedging. The demand form/for Jewelry fabrication, industrial application, Govt. & central
reserves and private investors can also play an important role for the touching the Long
term target of $1250.
5.7 FACTORS THAT MAY CAUSE THE PRICES OF GOLD TO INCREASE:
An under supply of newly-mined gold.
Global inflation is the main factor that can cause the price of the gold to increase.
It's a natural hedge against the US dollar
Dollar Price Gold is typically quoted in Dollars, and if the dollar begins to falls
then the value of Gold tends to increase and vice-versa.
Market Fear Whenever the stock markets or political situations look bad then
people tend to fly towards Gold. Stock market crashes, terrorist attacks, or wars
will all tend to push the value of Gold up.
5.8 MAJOR TRADING CENTERS OF GOLD
London (clearing house)
New York (home of futures trading)
Zurich (physical turntable)
Istanbul, Dubai, Singapore and Hong Kong (doorways to important consuming
regions)
Tokyo
Mumbai (India's liberalized gold regime)
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Hong Kong Gold Market, Zurich Gold Market, London Gold Market and New York
Market are the 24-hour gold markets.
In India the gold is traded thought the well know exchange mainly MCX and
NCDEX, but most of the traders favor trading through MCX. If a particular trader wants
to take the physical delivery of the Gold then he can do so as per the specifications set by
the respective exchange. The trading in Gold is available in 1kg, 100Grams and Gold
Guinea which consists of 8Grams. The increase in 1rupee of gold is termed a 1 tick
which stands for Rs100, Rs10 and Rs8 respectively. The margin amount which is
supposed to be paid by the traders is set by the exchange depending upon the fluctuation
in the prices. Initially the margin was set @4% for every month, and this may vary
depending upon the volatility.
CHAPTER-6
6. SILVER
LONG TERM FORECAST – SILVER PRICES $23 to $25
DEMAND SUPPLY
47
Industrial Demand Mine Production
Investment Demand Scrap Sales
Jeweler Demand Government Sales
6.1 PROFILE
Silver has been known since ancient time and has been long valued as a precious
metals used to make jewellery and high value tableware. Apart from its former uses its
now an important metal in the industrial use. The property of a good conductor of
electricity has enhanced the appeal of the metal for various industrial purposes. The
silver’s antimicrobial properties have made the foray for use of the metal into the food
industry, solar panels, new soaps and medicinal purposes.
48
6.2 SALIENT CHARACTERISTICS:
Silver is a very ductile and malleable (slightly harder than gold) monovalent
coinage metal with a brilliant white metallic luster that can take a high degree of polish. It
has the highest electrical conductivity of all metals, even higher than copper, but its
greater cost and tarnishability have prevented it from being widely used in place of
copper for electrical purposes. Another notable exception is in high-end audio cables,
although the actual benefits of its use in this application are questionable. Among metals,
pure silver has the highest thermal conductivity, the whitest color, and the highest optical
reflectivity Silver also has the lowest contact resistance of any metal. Silver halides are
photosensitive and are remarkable for their ability to record a latent image that can later
be developed chemically. Silver is stable in pure air and water, but tarnishes when it is
exposed to air or water containing ozone or hydrogen sulfide.
GRADING OF SILVER:
Silver that is found with some percentage of other elements in it is called impure
silver. That is why it is graded upon its fineness. According to the Indian standards, silver
is graded into six categories
Grade 9999 9995 999 970 925 916
Fineness 999.9 999.5 999 970 925 916
SILVER PRODUCING COUNTRIES
Mexico (99 million ounces)
Peru (98.4 million ounces)
Australia (71.9 million ounces)
China (63.8 million ounces)
Poland (43.8 million ounces)
Chile (42.8 million ounces)
49
Canada (40.6 million ounces)
United States (40.2 million ounces)
Russia (38.9 million ounces)
Kazakhstan (20.6 million ounces)
Bolivia (13.1 million ounces)
Sweden (9.4 million ounces)
Indonesia (8.6 million ounces)
Morocco (6.3 million ounces)
Argentina (5 million ounces)
Turkey (3.7 million ounces)
South Africa (3.2 million ounces)
Iran (2.6 million ounces)
Japan (2.4 million ounces)
India (2.1 million ounces)
{The above-mentioned figures are the silver production figures of the countries in
2004}
The countries that are the major consumers of silver are: -
United states Canada Mexico United Kingdom France Germany Italy Japan India
6.3 PRODUCTION OF SILVER IN INDIA
India hardly produces any silver and is basically a silver importing country. It
holds the 20th place in the list of silver producing countries and the total production of
silver in India in 2004 was around 2.1 million ounces. The three major silver producing
states in India are: -
Rajasthan
Gujarat
50
Jharkhand
Rajasthan was the leading silver producing state in India with a production of around
32 thousand tons. Gujarat follows on the second place with a production of around 20
thousand tons.
6.4 INDIAN SILVER MARKET
As we know that, India is primarily a silver importing country, as the production
of India is not sufficient to satisfy the ever-growing domestic demand. The production of
silver in India stands out at the figure of around 2.1 million ounces placing it at the 20th
position in the list of major silver producing countries. The import of silver in India
hovers over 110 million ounces that shows the huge size of Indian domestic demand.
However, this import level fell sharply as a result of the decline in demand due to rise in
silver prices and inconsistent monsoon on which the income of the rural sector depends.
But, even this sharp decline could not affect India’s reputation of being one of the largest
consumer countries of silver in the world. India stands third after United States and Japan
among the leading consumers of silver in the world. The countries from which India
imports silver and maintain the flow of silver in the market are: -
China
United Kingdom
European Union
Australia
Dubai
Over 50% share of import of silver in India is held by Chinese silver. The major
importing center of silver in India was Mumbai but now it has been shifted to
Ahmedabad and Jaipur due to high sales tax and octroi charges.
MARKET INFLUENCING FACTORS (for India)
Price movements of other metals.
Income level of the rural sector of the economy.
51
Available supply verses Fabrication demand.
Fluctuation in deficits and interest rates.
Inflation.
6.5 SILVER – SUPPLY ANALYSIS
Like any other metal silver is also formed naturally and is mostly formed in its
native state with gold. The sources of silver supply constitute of mine production, central
bank reserves and the scrap supply. Any decrease in the supply sources would lead to a
demand supply mismatch thereby increasing the prices. Mine production is by far the
largest component of the silver supply. In the year 2007 the mine production accounted to
75% of the total world silver supply. The other components being, silver scrap (20%) and
the net government sales (5%). (Fig 5.5 below)
Silver Supply Source
75%
5%
20%
Mine Production Net Governemnt Sales Oil Silver Scraps
Mine production remains by far the largest contributor to the world silver supply.
The supply of silver has been increasing year-on–year from the past few years. Hence in
the year 2007, total mine supply increased by 4% to 670 million an ounce, with
particularly solid gains from Chile, China and Mexico. Peru was the world’s biggest
silver mining country in 2007, followed in the rankings by Mexico, China, Chile and
Australia.
6.5 Top 5 Silver Producing Countries in 2007 (in million ounces)
1 Peru 112.3
2 Mexico 99.2
3 China 82.4
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4 Chile 62
5 Australia 60.4
The mining production has been growing with an annualized growth rate of
2.13% until 2007 from the year 1999 onwards. Mine production constituting a major
portion of the total supply the growing production is offsetting the losses in other sources
like the government sales. According to the recent World silver survey 2008, Silver mine
production is expected to record a sixth consecutive increase and even accelerate this
year as several new major mines likely to increase production. The silver is mined in
primary mines and also in communion with other metals like gold, lead/zinc and copper
mines as a byproduct.
Mine Production by Source Metal 2006
25%
13%
26%
33%
3%
Primary Gold Copper Lead/Zinc Other
Historically data shows that on approximately 25% of the silver is produced from
mines whose main revenue is silver. These mines are referred to as the primary mines. As
per the graph an equal and higher amount is derived from lead and zinc mines. Higher
prices of these metals would encourage higher production of the metal thereby increasing
the silver supply as a byproduct. Hence the prices of these metals play a significant role
in the mining of silver as a byproduct.
6.5.1 Silver Correlation Table
Gold 0.983
Copper 0.963
53
Zinc 0.851
Lead 0.898
Nickel 0.880
Daily prices from 4/1/2000 to 6/6/2008
The above matrix tells us that there exists a strong correlation between the prices
of metals and that of silver. With more than 70% of silver being produced as a byproduct
the prices of these metals have a significant bearing in the price outlook for silver. As the
increasing prices of these metals act as an incentive for raise in mine production, thereby
the supply of silver is also influenced. Supply from above ground stocks comprising of
the net government sales and the scrap sales together constitute a 30% of the total silver
supply. The scrap is recovered from various sources like the jewellery, photography,
coins and industrial applications.
NET GOVERNMENT SALES:
Government sales constitute the old coins and bars of silver that are placed back
into the market. The government sales constitute around 8% in the total supply of silver.
Net government sales declined in 2007, plummeting by 46 percent to 42.3 Moz. The
decline was the result of two major sellers in 2006, namely China and India, being
essentially absent in 2008. In contrast, Russian government sales, which comprised the
bulk of net sales in 2006, rose, partly offsetting the others’ declines.
6.6 SILVER DEMAND ANALYSIS :
Demand for silver is dominated by three main categories: jewelry and silverware;
Industrial; and photographic fabrication. (Below fig 6.6)
54
Silver Demand Source
51%
14%
18%
7%
4%
3%
3%
Industrial Application
Photography
Jewelry
Silverware
Coins&Medal
Producer de-hedger
Implied Net investement
The above chart depicts the sources of demand for silver, with major share
dominated by the industrial applications, followed by jewellery & silverware and
photography. These accounted respectively for 25%, 51% and 14% of demand last year,
though photo graphic’s share has slipped over the last decade with the advent of digital
photography. Coin demand, producer dehedging and the net investment retained its share
just fewer than 5% share of the total. The producers hedge their risk by entering into the
forward contracts. Producer hedge against the price risk and the quantity. The dehedging
refers to taking opposite position thereby resulting in source of demand.
SOME SOURCES FOR THE DEMAND OF THE SILVER:
Industrial applications:
Industrial fabrication region wise:
Jewelley demand:
Photography demand:
Coins and medal’s demand:
6.7 PRICE DETERMINING FACTORS:
The prices of any commodity are firstly influenced by the changes in demand and
supply factors of the individual commodity. The different uses of the metal have their
bearing on the prices of the commodity. However apart from being commodity, precious
55
metals like silver and gold are regarded as a store of value and draw much attention as an
investment alternative. Hence forth it is essential to discuss the factors which have
influence the demand for the commodity as an investment avenue. Apart from the
industrial activities and supply-demand factors, the price of silver is majorly influenced
by factors like the weakening dollar and inflation hedge demand, prices of gold etc.
Following is an elaborate explanation of how silver has been performing with other
instruments.
U.S Dollar:
The weakening U.S dollar has been the major factor in the recent increase of prices in
the commodity complex. The weak U.S dollar makes the dollar priced commodities
cheaper for the investors. The slump in the U.S economy with the continued interest rate
cuts by the Federal Reserve has been the main reasons of a declining dollar. This in turn
has worked positively for the commodity prices resulting in flow of funds into the
commodity sector. The weaker dollar has resulted in the recent hike of the silver prices in
on the 17th of March to record high levels of $20.78.
Investment Demand:
Apart from the demand and supply factors the prices of silver are influenced by the
increasing investment into commodities. The launch of silver Exchange traded funds
(ETF) has been seen as powerful medium for investments thereby resulting in rally in
prices of silver. The ETF are backed by the silver stored in on behalf of the trust. Silver
ETF was launched on American stock exchange on April 28th 2006. From the incipient
of the funds the sliver investment has been seen a sea change. iShares Silver Trust ETF
gives investors direct access to silver and since its launch, SLV has become the largest
single buyer of silver. The iShares launched by Barclays are the most traded silver ETF.
The total reserves held by the trust stand at 5868 tones of silver. The volumes in ETF
have been on steady increase since its launch noting the investment interest in the funds.
The holdings of the trust have been increasing from its inception. The trust now holds
around 5868 tones of silver against which the iShares are issued. The gain in the trust
holdings has been recorded to be 14% from the previous year until June 9th. The
56
increasing trust holding reflect the amount of silver that is being hold by the trust due to
the increasing investment demand in ETF.
Gold Factor:
Silver is generally known as the poor cousin of gold and is priced lower than that of
gold. Silver has been continuing to follow gold prices historically. With high correlation
of 0.98 the prices of silver prices move in tandem with the gold prices. However with the
use of the metal increasing as industrial metal the fundamentals of silver are changing
and coming to the fore to play a role in price determination.
Producer Hedging:
To guarantee themselves of an assured future price the producer’s hedge their
production into forward contracts. The producers hedge their position due to the
anticipation of lower prices in future. This leads them to sell their production at an
assured price in the present for a future date. The high price since the year 2006 has
resulted in the producers to dehedge their positions. In order to "de-hedge" future
production, producers either deliver the metal when specified according to existing
contracts, without entering new agreements or simply buy back the contracts outright in
the futures market. Since the year 2006 the producer were seen to dehedge their positions
due to the increasing prices. In 2007 the net producer de hedging raised to 25 million
ounces. This increasing producer de hedging is an anticipation of continued uptrend in
prices.
CFTC Report:
The data published by U.S. Commodity Futures Trading Commission (CFTC) helps
to grasp the market intensity in silver derivative trading. The report shows the net long
and net short positions held by commercial and non-commercial investors along with the
non-reportable data. The changes in the long and short positions help in gauging the
possible future activity in the market. However since released data is lagged by one week
much of the opportunity is already discounted in the market. Historically if we see the
movement of silver prices along with the net long and net short positions by various
57
investors, then we can interpret that silver prices move in tandem with commercial Long
and short and non-commercial long positions.
STATISTICAL ANALYSIS OF THE SILVER PRICES:
1.) CORRELATION ANALYSIS:
Historically silver has shown a fair amount of correlation with the other metals.
Being an industrial metal the shining silver metals prices are also dependent upon the
industrial production indices of major consuming nations.
Correlation of Silver with the following
Gold 0.970
Crude 0.757
India Industrial Product 0.883
European Industrial Product 0.920
US Industrial Product 0.867
Data Description: Monthly for the period of 37 months starting from April 2005
INTERPRETATION:
From the above matrix it can be inferred that the silver has been highly correlated
with gold and European industrial production having the correlation of 0.97 and 0.92
respectively. Thus it can be said that the surge in gold prices and rising industrial
production of the countries will have positive impact on silver prices and vice versa.
2.) REGRESSION ANALYSIS:
58
The regression analysis is carried out to determine how much variation in the
independent variable is explained by the dependent variables. In the regression test taken
out, the different variables selected are categorized as follows:
Independent Variable: Silver Price
Dependent Variables:
International Gold Price International Crude Oil Price
Euro/USD Currency rate India Industrial Production Index
Japan Industrial Production Index USA Industrial Production Index
Euro zone Industrial Production Index.
6.8 INTERPRETATION:
Factors which might cause the prices to rise:
Silver has the highest electrical conductivity of all metals, even higher than
copper.
The sources of silver supply constitute of mine production, central bank reserves
and the scrap supply. Any decrease in the supply sources would lead to a demand
supply mismatch thereby increasing the prices.
The regression analysis suggests that the industrial production indices have some
influence on the silver performance. The increasing growth rates of these nations
will work well for the prices enhancing the usage of the metal for industrial
purposes.
The increasing demand for the industrial demand will still be a positive factor
driving the prices to higher levels. Apart from this the increasing demand for
jeweler, for photography and coins & medals may also contribute for the silver
prices to soar.
The increasing inflation which is the result of the increase in the crude oil prices
and they impact on the stock market world wide may be form for an investor o
move towards metals as an alternative investment, or as an diversification.
The increasing use of silver in the Radio Frequency Identification and also for the
medical purpose are likely considered as an factor the prices to increase from the
current levels.
59
The supply of silver from the scrap is on continues decline from the past few
months despite the fact that the price of the silver are on rise.
As we have founded that the correlation of the silver on gold is 0.970 (by taking
the daily price form 2000 to 6/6/2008) which shows that as long as the gold prices
remain strong the silver is not likely to fade in the near term.
Prices which can limit the increase of the prices of the silver:
The projected industrial demand for silver may not grow that much due the reason
of the fear of the slow economic growth.
The high price rise might reduce the price sensitive jewellery and silver ware
demand.
In the first quarter of 2008 we have seen that the price of the silver has made an
historic price by touching a life time high of $21.35 and since than we have find that it is
in an corrective stage. However the average price of the silver form the month of April to
July ranges in an around $18.50.
Thus on the basis of the above factors we are interpreting that the silver may touch its
Long term target of $23 to $25. However the above mention is some of the factors while
in current situation it may include more then the above mention.
CUREENT SCENARIO:
Prices are likely to remain weak and the crucial support is seen at $15.00 and
break below it may extend its fall towards $14.00-13.00 levels. As mentioned the crucial
support is at $ 15.00 and it has not yet come close to that level. However it has came to
$16.19 on 02-May-08, and currently it is trading at around $18.50 (31-July-2008),
breaking of $15 seems to be a rare one.
As it has been mention before that the price of the gold is likely to go up to $1250
and if it maintains that then the price of the silver can got up the long term projection of
$25 because the correlation of Silver from Gold is 0.92 (From 1 st April 2008 to 31st July
2008)
60
PREFERENCE ON SPOT SILVER:
Take long above $15.00 targeting $20.00-$22.00 (previous top) and break above the
same may extend its rally towards $26.00. In the adverse condition keep a stop loss
below $13.00.
LONG TERM SCENARIO: SILVER-MCX:
Currently market is into a correction state and prices may extend its losses towards
18500-20000 range. If market sustains above 18000 may see prices to reverse and
recommend taking fresh long positions for long term for a possible target of 25000 and
then 30000.
Major trading centers of silver
London
Zurich
New York (COMEX)
Chicago (CBOT)
Hong Kong
Tokyo Commodity Exchange (TOCOM)
In India, silver is traded at the following places
Delhi
Indore
Rajasthan
Madhya Pradesh
Mathura (Uttar Pradesh)
Rajkot (Gujarat)
In India the Silver is traded through the well know exchange mainly MCX and
NCDEX, but most of the traders favor trading through MCX. If a particular trader wants
to take the physical delivery of the silver then he can do so as per the specifications set by
the respective exchange. The trading in Silver is available in 1kg and 100Grams. The
increase in 1rupee of Silver is termed a 1 tick which stands for Rs100 and Rs10
61
respectively. The margin amount which is supposed to be paid by the traders is set by the
exchange depending upon the fluctuation in the prices. Initially the margin was set @4%
for every month, and this may vary depending upon the volatility.
LIMITATIONS AND ASSUMPTIONS OF THE STUDY:
Only past 5 years data have been undertaken for the study.
The resistance and support levels of the prices of the gold and silver have been
derived or came to that point on the basis of the past 6 months study.
The factors mention above for the price to increase may or may not happen. As
there was some emphasis given that with the increase in the crude oil price, due to
correlation the prices of the Gold and Silver might increase, but seeing the current
situation (last 2 week of July) the price of Crude oil have hovering around $125+
levels.
The results are statistically validated; the practical results can be different from
that of the theoretical results obtained.
DIFFERENT TECHINQUE USE TO FORECAST THE FUTURE
PRICE
WHAT IS TECHNICAL ANALYSIS?
62
Definition 1: A method of evaluating future security prices and market directions based
on statistical analysis of variables such as trading volume, price changes, etc., to identify
patterns.
Definition 2: Analysis applied to the price action of the market to develop trading
decisions, irrespective of fundamental factors.
TECHNICAL VS FUNDAMENTAL
FUNDAMENTAL:
Study the cause of market movement.
Supply demand factor.
Government inventories.
TECHNICAL:
Study the effect of the movement.
Charts, prices, volumes and trend.
THEORIES SUPPORTS TECHNICAL ANALYSIS
1. DOW THEORY:
2. ELLIOT WAVE THEORY:
TYPES OF CHARTS:
1. Line chart.
2. Candlestick chart.
3. Bar chart.
63
4. Point and figure chart.
APPROACHES OF TECHNICAL ANALYSIS:
1. SUPPORT AND RESISTANCE:
Pivot analysis
Trend channel supports and resistance
2. TREND LINE THEORY
Fibonacci Method.
GANN Theory.
Bollinger Band.
3. PATTERNS: Continuation and reversal.
4. MARKET INDICATORS:
Volume indicators.
Momentum indicators
CHAPTER-7
7. RESEARCH METHODOLOGY
7.1 OBJECTIVES OF THE STUDY
To understand about the commodity market
64
To Study the level of awareness of commodities futures
To analyze the perception of investors towards commodities futures
To Study the “Factors considered by the Investors” and Those, Which Ultimately
Influence him while investing.
Another objective is to study the volatility of the market.
7.2 DATA COLLECTION METHODS
Survey method was adopted in this project.
Primary data is data that is tailored to a company’s needs, by customizing true
approach focus groups, survey, field-tests, interviews or observation.
Primary data delivers more specific results than secondary research, which is an
especially important consideration when one launching a new product or service. In
addition, primary research is usually based on statistical methodologies. The tiny sample
can give an accurate representation of a particular market.
Secondary data is based on information gleaned from studies previously
performed by government agencies, chambers of commerce, trade associations and other
organizations. This includes census bureau information. Much kind of this information
can be found in libraries or on the web, but looks on business publications, as well as
magazines and newspapers.
Analysis of individual investment patterns can be done by this primary data
analysis. In this project survey has done with a questionnaire with a sample size of 40
individuals who are mostly IT employees, doctor and other business people. Apart from
these we have also visited the software company to understand the awareness of their
knowledge with regard to the commodity futures. The questionnaire includes the
economic status of the individuals, age group, investments made, nature of the business
etc.
65
As ShareKhan securities ltd. distributes several investment products like
Demat accounts with regard to the equities and commodities, mutual funds, insurance,
etc. This survey will help them in developing marketing strategies for their investment
products.
7.2.1 PRIMARY DATA COLLECTION:
For the customized needs to the project, primary data was collected through a
survey in the twin cities of Hyderabad & Secunderabad. A Random sample of 40
investors was surveyed. They were all asked to answer a questionnaire true to their
knowledge. The feedback obtained from the customer was instrumental, gauging the
perception of the investors towards commodity futures or capital market. It also throws
light on the factors, which influence them to make decisions while investing. Further the
interaction with few of the investors goes a long way in understanding the inlaid reasons
for their decisions.
7.2.2 SECONDARY DATA COLLECTION
The main sources of secondary data are the various web sites like Sharekhan
Commodities Pvt Ltd, Multi Commodity Exchange (MCX), National Commodity and
Derivatives Exchange (NCDEX), Chicago Board of Trade (CBOT), New York
Mercantile Exchange (NYMEX) and more such organizations. In addition to the above
sources, working with sharekhan associates and interaction with their personnel provided
a pragmatic edge to my theoretical concepts
7.3 RESEARCH INSTRUMENT
The main instrument of this research is questionnaire method. In this
questionnaire method various types of questions have been framed.
They are:
66
Open-ended
Close ended
Dichotonomos method
Multi choice method
7.4 QUESTIONNAIRE DESIGN
Questionnaire is the heart of the survey operation. This is structured
questionnaire, which has been framed for conducting the survey. The questions were
presented with exactly the same wording and in the same order to all of the respondents.
7.5 PERIOD OF THE STUDY
The period of study was limited to 45days (Mid June 2008 to July 2008). During
the period the following step were taken:
Objectives were set and questionnaire was finalized.
Data were collected and recorded.
Data were analyzed and interpreted
Reports were generated
7.6 LIMITATIONS OF THE STUDY:
The sample used for the study has been taken from the investors only of the twin
cities Hyderabad and Secunderabad
The survey is done among those investors who have some knowledge of trading
and not of the general public.
The random sampling technique has been used for the primary research, i.e., no
segregation is done on the basis of the age, gender, type of trading ( Equity or
commodities )
67
Although adequate care was taken to elicit the accurate information from the
respondents, some of them have felt difficulty in crystallizing their feelings into
words.
The study was done only for a period of 45 days.
CHAPTER-8
8. DATA ANALYSIS AND INTERPRETATION:
ANALYSIS AND INTERPRETATION OF THE PRIMARY RESEARCH
68
8.1 OBJECTIVE 1:
The first objective is to find out the views of the respondent with regard to the
current marker trend for the investment purpose, whether it is a positive or negative for
the investment purpose.
Current Trend for Buying Purpose
Positive45%
Negative35%
No idea20%
INTERPRETATION:
From the above pie chart we can come to conclusion that there are 45% who feels
that it is a positive as they can buy at these levels form a long term view.
While they are 35% of responded says that it’s a negative trend to invest as they
are not sure where the market will go ahead.
But they are 20% who are not sure regarding what to do in such a sudden crash in
the market.
8.2 OBJECTIVE 2:
To find out, the past experience of investing in various financial instrument, if
any.
69
30%
15%23%
32%
Mutual Funds Capital Markets MF & CM No
INTERPRETATION:
From the above pie chart we can say that 30% of them have an experience of
investing in Mutual Funds and only 15% have in Capital Markets. While 23%
have experience in both Mutual Funds and capital Markets.
They are only 32% who don’t have any experience in investing, but they have
knowledge of those markets.
Out of these many have some knowledge of the emerging market, i.e.,
Commodity futures?
8.3 OBJECTIVE 3:
To know the annual saving of the IT people, Doctors, etc.
70
50%
8%
42%
<1.5lac 1.5 - 5lac Not Given
INTERPRETATION:
Most of the respondent have an annual saving of around 1.5lakhs (50%) and
nearly 40% of those actively invest a part of there saving either in Mutual Funds
or any other financial instrument.
They are 42% respondent who does not want to disclose they annual savings, but
they do invest in the market.
8.4 OBJECTIVE 4:
How do they invest, means on a monthly basis or in a bulk.
71
Monthly Basis, 30% Bulk, 25%
Both, 10%
Others, 35%
0%5%
10%15%20%25%30%35%40%
MonthlyBasis
Bulk Both Others
INTERPRETATION:
Those who invest on a monthly basis (30%) do investment both in Capital market
and also in Mutual Funds.(SIP)
The 25% mostly invest in the Mutual Funds might be in NFO. While 10% invest
either in a monthly basis or bulk.
The remaining 35% include those who don’t invest, and also those who do invest
as per the situation prevailing in the market. In this some have fixed deposit or
insurance have been included in others.
8.5 OBJECTIVE 5
Now coming to the important point, i.e. to know for what purpose they are
investing.
72
Purpose for Investment
40%
20%
2%10% 10%
18%
0%10%20%30%40%50%
Ta
xP
lan
nin
g
Fu
ture
Se
curi
ty/I
nve
stm
en
t
Re
tire
me
nt
Pla
nn
ing
Ne
wB
usi
ne
ess
/N
ew
Ho
use
Ch
ildre
nE
du
catio
n
No
td
eci
de
dPe
rce
nta
ge
INTERPRETATION:
We can see that 40% invest mainly for the purpose of the tax saving purpose and
these are mainly invested in the TAX saving plans of the Mutual Funds.
20% prefer in invested for the future security and the 10% invest from now for the
purpose of the children education.
Those 40% of the tax planning, also have the plans in an indirect form for the
future security, as they think that on the one hand they are saving tax and on the
other hand they will earn return in rear future.
8.6 OBJECTIVE 6
How they want return on their investment.
73
Return on Investment.
Fixed.Period
35%
Regular.Basis23%
.Depends42%
INTERPRETATION:
When we came to the question of how they want the return on their investment,
we find out that they were 42% of the responded who said that it depends upon
the different situation, while fixed period had 35% which were mostly invested in
the Mutual Fund and some selected stocks of the capital market.
The 23% want the return on their investment on regular basis. They have invested
mostly in the Dividend option of the Mutual Fund.
8.7 OBJECTIVE 7
To find out the awareness of the commodity market, the awareness may in a
partly or some knowledge of the market. However the amount of awareness was found to
a lesser one means the people have heard of the commodity trading but were not aware of
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how it exactly works. They were some who had a partial knowledge of it i.e. what are the
kinds of the commodities traded.
However when we on a visit to the corporate, IT company and software
companies in somajiguda, Hitech city, etc we founded that many of them were not aware
about the commodity futures, and more importantly they were also not aware of the how
to use the hedging concept thru the commodity futures.
We visited the companies to have an appointment fixed so as to conduct a
short presentation with regard to the commodity market.
CHAPTER-9
9. FINDINGS:
Around 85 commodities are trading in futures in India through 25 exchanges,
which an ordinary investor does not know it.
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Very few traders traded in the futures market. This was basically because they
were not fully aware of hedging and the benefits that can be accrued from it
They did not have the confidence in the technology that is adopted in trading, i.e.,
the traders were not well-versed in accessing the internet. Thus, the traders were
good businessmen but not very tech-savvy.
Awareness among many other investors of mutual funds, equities etc. are very
low. Most of them are even did no hear about commodities futures.
Among High Net worth Individuals (HNIs) only few persons are aware about
commodities futures trading and they also know only about Bullion commodities.
Some of Investors considered gold as ultimate substitute investment since it is
tangible. Since gold is fully independent from the paper financial system.
Almost all the traders had the issues regarding the delivery system, as there is not
enough warehouse of the exchanges situated at nearby distances. Thus adding
additional cost of transportation to the traders.
The following findings shows to the quantity offered for delivery.
Quantity Offered for Delivery at MCX Exchange.
Commodity Jan Feb Mar Apr May Jun
Gold (1KG) 0 192 0 559 0 268
Gold
Mini(100GM)
116.800 95.90 68.10 226.600 163.20 96.400
The above date shows us that the data from Jan to Jun with regard to the quantity offered
for delivery at MCX exchange. The quantity can be given a green signal for the delivery
only after the approval by the MCX exchange with respect to their set specified
specification.
Most of the people participating in the commodity markets trade only as speculators and
not as hedgers due to the following reasons:
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Hedgers have a problem with the delivery mechanism of the goods, hence they
would prefer squaring off their position rather than taking the delivery of the
goods.
Historical data shows that there is a greater scope of high returns ( more than
25%) in the commodity markets, high returns incentivizes the speculators to
invest more for profit maximisation.
As compared to the total market participants, very few people participate in the
commodity markets due to the high risk involved in the commodity markets.
To reap higher profits in the commodity one requires or is required to acquire
strong fundamental, as it helps them in maximizing the profit, and also helps in
minimizing the losses if any by putting stop loss.
The commodity market happens to be highly volatile. For Example: When the
gold touched a life time high of Rs13764, it didn’t sustain even in 13000 levels
for a period a of 10 days also and it went below 12700 levels with in a week.
Most of the traders in the commodity maket first perfer in investing in Gold
followed by Silver, Crude Oil, and the Base Metals. Apart form these they were
some trader who also invest agricultural commodities like Gur, Turmeric, Mentha
Oil, Sugar, etc. For the bullion and base metal most of them prefer to invest in
MCX exchange.
If a person who want to take a physical delivery of the Gold or Silver they are
adviced to invest thru NCDEX exchange as the procedure are considered to
simple.
CHAPTER-10
10. SUGGESTIONS AND RECOMMENDATIONS
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ENHANCE AWARENESS: -
Enhance awareness among Gold merchants who can be play pivotal role in
Bullion Market(Gold and Silver).
Bring awareness among agricultural merchants about their respective
commodities.
Arranging free seminars in different organizations about mutual fund investments.
Arranging stalls in Public places is a good publicity.
More advertisements need to come to explain the various advantages of
commodity futures and even the various commodities available to trade in futures
market.
Focus on industries whose raw material is one of these commodities.
EDUCATE CLIENTS: -
You must literate your clients financially since futures trading more conceals than
what it reveals.
Investor must get aware about many features of futures trading.
Strengthen Research team and Risk Management: -
Make strong research team since a strong research department can reduce losses
even in market goes downward trend, because having a strong research team will
satisfy the existing client. It says one happy man bring more than 11 people with
him.
HELP THE INVESTOR DEVELOP REALISTIC EXPECTATIONS BY
DISCUSSING THE RISKS AND REWARDS OF INVESTMENT.
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Every investment choice has its strengths and weaknesses, and investor should
never feel less than fully informed. When investors ask questions, or have doubts.
Investor should expect your financial advisor to answer honestly, and help him develop a
strategy that is both realistic and comfortable for him.
11. CONCLUSION:
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India is an agrarian country producing a large variety of crops. It also stands as
one of the leaders in the production of wheat, spices and other such crops. For such a
country like ours, commodity futures trading can prove to be an excellent opportunity to
the farmers and other such traders for efficient price discovery. Commodity trading can
also be used as a hedging tool for minimizing risk against future price fluctuations.
In order to attain the actual objective of commodity trading, there should be
adequate awareness among these farmers, traders, manufacturers, importers and
exporters. But according to the primary research, we have concluded that the awareness
level about the commodity market is very less and there is a long way to go to reach the
actual beneficiaries of these markets. One can say this because the awareness level
among the qualified and educated people is itself low so it will take a long period of time
to reach these farmers.
The main reason for this lack of awareness is due to the nascent markets and the
mechanism of their operations. Almost all the commonly traded commodities are present
over the exchanges; most of the market participants prefer forward contracts over the
exchange traded futures contracts. The participants who prevail in the market have issues
regarding the delivery mechanism and the specification standards of the contract. Also, as
only very few large players exist in the markets, monopoly is being created by them and
thus efficient price discovery is unable to take place.
People prefer the security in the investments in the assets as compared to the high
returns on those particular assets. As an asset class, commodity markets are said to have
high risk with high returns. So, not many people who have knowledge about commodity
trading participate in the markets.
Primary research also reveals the fact that the amount of speculator as more as
compared to the number of hedgers in the commodity markets. Due to this fact, although
the volumes are high, the actual amount of delivery is very meager.
CHAPTER 12
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12 APPENDIX AND ANNEXURE
Research on Financial Market AwarenessUnder the guidance of Share Khan
To help us to find out the investor’s awareness and determination of the appropriate
Financial instruments that suites your requirements. Please answer the following
questions (Tick the option(s) that best suits you)
Name: Contact:
Profession: Email:
Introduction
1) How do you look at the current trend in the stock market for buying purpose?
I. Negative II. Positive.
2) Are you satisfied with the low rate of interest paid and high rate of interest
charged by the banks?
I. Yes II. No.
3) Would you like to invest in an instrument that can give you better returns at a
diversified risk like equity/commodity/mutual funds?
I. Yes II. No.
Personal Information
4) Do you have any past experience of investing in Mutual funds or Capital markets?
I. Mutual Funds II. Capital Markets III No.
5) How much investment experience do you have?
I. Zero II. Low
III. Average IV. High.
6) How much professional advice do you expect from us?
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I. Low II Average III .High
7) What is your age?
I. 21-30 II. 31-40
III. 41-50 IV >51
8) Are you married?
I. Yes II. No.
9) If married, how many children do you have?
I. 0 II. 1-2
III. 3-5 IV. More than 5
10) What is the age of your children?
I. Zero II. < 6yrs III 6-12 yrs
IV. 13-19yrs V. >19yrs.
Financial Information
11) What’s your annual income?
I. < 5lac II.5.1lac -15lac
III. 15.1lac – 40lac IV. > 40lac
12) How much would you like to invest?
13) How would you like to invest your money?
I. On a monthly basis II. Bulk at a time.
14) How much are your annual savings appx?
I. <1.5 lac II. 1.5lac – 5lac III. 5.1lac- 15lac IV > 15lac
Risk and Return Information
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15) What is more important for you?
I. Returns. II. Less capital depreciation.
16) What is main purpose of your savings?
I. Tax planning. II. Children’s Education
III. Buying a House or Daughter’s Marriage IV Retirement Planning
V Other reason_____________________
17) When would you like to receive the returns on your investment?
I. On a regular basis. II. After a fixed period of time
18) For how many years would you like to invest your money?
I. < 1 Year II. 1- 3 Years
III. 3-5 Years IV. 5-15 Years. V > 15 Years.
19) Are you ready to take the benefit of high growth rate in the economy even if it
riskier?
I. Yes II. No
20) Do you want your investment to be secure and would be satisfied with
comparatively lower returns.
I. Yes II. No.
21) In case of long term investment, what is your tolerance limit for reduction in the
value of your investment before being uncomfortable?
I. Uncomfortable with any loss II. 5% drop
III. 10% reduction IV 15% reduction V 20% reduction.
ANNEXURE-I
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Table 3.1 Global Commodities Derivatives Exchanges
Country ExchangeUnited States of America Chicago Board Of Trade (CBOT)
Chicago Mercantile Exchange (CME)Minneapolis Grain ExchangeNew York Cotton ExchangeNew York Mercantile ExchangeKansas Board of TradeNew York Board of Trade
Canada The Winnipeg Commodity ExchangeBrazil Brazilian Mercantile & Futures Exchange (BM&F)Australia Sydney Futures Exchange Ltd.People’s Republic of China Shanghai Metal Exchange, Beijing Commodity ExchangeHong Kong Hong Kong Futures ExchangeJapan Tokyo International Financial Futures Exchange
Malaysia Kuala Lumpur Commodity ExchangeNew Zealand New Zealand Futures & Options Exchange Ltd.Singapore Singapore Commodity Exchange Ltd.France Le Nouveau Marche MATIF Italy Italian Derivatives MarketNetherlands Amsterdam Exchanges Option TradersRussia The Russian Exchange
MICEX/Relis Online St. Petersburg Futures ExchangeSpain The Spanish Options Exchange
Citrus Fruit and Commodity Futures Market of ValenciaUnited Kingdom The London International Financial Futures Exchange
The London Metal Exchange
ANNEXURE-II
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Table 3.2 Chronological Order of the Development of Commodity Futures Exchanges
Year Exchange Established Commodity Traded1875 Bombay Cotton Trade Association Cotton1893 Bombay Cotton Exchange Ltd. Cotton1900 Gujarati Vyapari Mandali Groundnut, castor seed & cotton1913 Chamber of Commerce, Hapur Wheat1919 Calcutta Hessian Exchange Ltd. Raw Jute and Jute goods1920 Gold and Silver Exchange, Mumbai Gold and Silver1921 East India Cotton Association Cotton1927 East Indian Jute Association Raw Jute1945 East India Jute and Hessian ltd. Raw Jute and Jute goods1951 Rajkot seeds oil and Bullion Merchants’
seed oil and oil cake.1956 The Spices and oilseeds Exchange Ltd Turmeric 1957 India pepper and spices Trade Association Spices1970 Vijai Beopar chamber Ltd, Muzaffar Nagar Gur1973 Bhatinda Om Oil and oilseeds Exchange
Ltd.Gur
1982 The Rajdhani oil and oilseeds Exchange Gur1984 The Meerut Aro commodities Exchange co.
