SUMMER TRAINING PROJECT REPORT ON

“COMMODITY DERIVATIVES MARKET IN INDIA AND GOLD TREND ANALYSIS”

IN PARTIAL FULFILMENT OF AWARD OFPOST GRADUATE DIPLOMA IN BUSINESS

MANAGEMENT

BY:

KANIKA VERMAFINANCE & ENTREPRENEURSHIP

ROLL NO: 88

UNDER GUIDANCE OFMr. KRISHNA MURTHY

PGDM(BM)ENTREPRENEURSHIP AND PROCESSES INTERNATIONAL

NEW DELHI-110074AUGUST 2011

DECLARATION

I submit this report on the study of RESEARCH ON COMMODITY DERIVATIVES MARKET IN INDIA AND GOLD TREND ANALYSIS for NIRMAL BANG SECURITIES PVT. LTD. for the partial fulfillment of the course of 3rd trimester at EMPI Business School, New Delhi. This is an original work done by me except the guidance received which has been properly acknowledged in the report.

This is not the copy of any other report or any part of it hasn’t been submitted for the award of any degree or diploma.

KANIKA VERMAPGDM (BM)

3RD TRIMESTEREMPI Business School

New Delhi

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PREFACE

Theoretical knowledge is of use, until and unless it is applied into some practical aspect. This has been the thinking of EMPI BUSINESS SCHOOL (NEW DELHI). It lays the stress on the proper implementation of the theoretical knowledge into the real life practical aspects. 60 Days of practical training is required for the Master’s Degree in PGDM (BM) (POST GRADUATE DIPLOMA IN BUSINESS MANAGEMENT) 3RD Trimester EMPI Business School, New Delhi.

The privilege of receiving the training at NIRMAL BANG SECURITIES PVT. LTD., New Delhi for “COMMODITY DERIVATIVES MARKET IN INDIA AND GOLD TREND ANALYSIS” as my main topic. Thus to apply all the theoretical knowledge gained so far on practical lines, I conducted my Summer Training NIRMAL BANG SECURITIES PVT. LTD. New Delhi, and learned to counter the Summer Training in real practical problems that comes during day-to-day job. Now, I take this opportunity to present my Project Report and hope that it would be of some use to all its readers.

KANIKA VERMAPGDM (BM)

3RD TRIMESTEREMPI Business School

New Delhi

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ACKNOWLEDGEMENT

The present work is an effort to throw some light on “COMMODITY DERIVATIVES MARKET IN INDIA AND GOLD TREND ANALYSIS” The work would not have been possible to come to the present shape without the able guidance, supervision and help to me by number of people.

With deep sense of gratitude I acknowledge the encouragement and guidance received by Mr. Ravikant Chopra and Ms. Neeru Kumari (Sr. Commodity Manager), Nirmal Bang Securities Pvt. Ltd, New Delhi. I also convey my heartfelt affection to Prof. Krishna Murthy who helped and supported me during the course of completion of my Summer Internship.

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SYNOPSIS

Establishing realistic goals is an essential first step toward successful investing. Understanding the obligation best suited to achieve one’s goal is equally important. Most of us invest o meet long term goals and therefore this has to be done very carefully and too upon a reliable source so as to maintain the security of the money that is hard earned in today’s world.

Therefore this report explores all the obligation regarding securities and commodities concepts explaining essential information about the products helping one determine how several activities and features fit into a well formulated plan and offering additional resources which can help you knowledge of day to day activities.

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INDEX

S NO. Chapter Page No.

1. Executive summary 42. Company Profile 53. Introduction to Project 324. Literature review 375. Research Methodology 486. Analysis and Interpretation 577. Findings 718. Recommendation 729. Bibliography 7310. Annenxures 74

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NIRMAL BANG SECURITIES PVT. LTD.

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INTRODUCTION

Name of the company : Nirmal Bang Securities Pvt. Ltd.Address : Nirmal Bang Securities Flat No.120, 1st floor, New Delhi House, 27 Barakhamba Road, Connaught Place, New Delhi-110001Contact Person : Mr. Iftekhar AbdiTelephone No. : 011-49400700 011-49400708Email address : info@nirmalbang.com

Website : http://www.nirmalbang.com/

Type of Company : NationalHead Office :38-B/39,Khatau Building,2nd Floor, Alkesh Dinesh Mody Marg Fort Mumbai – 400001Telephone no. : 022-39268600

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About Company

Nirmal Bang Securities Pvt Ltd (Nirmal Bang) is amongst the top full-service broking firm established in the year 1989. It started as a small localized player and ultimately transformed into a diverse group in a span of 20 years. The company offers comprehensive range of products and services to meet the financial needs of its investors. It is solidly capitalized to meet the demands of retail clients and sufficiently caring to ensure that service is not compromised.

History

The Nirmal Bang group of companies were founded by Nirmal Bang,Dilip Bang and Kishore Bang. The group always believed in developing retail client network and had wide network of clients all over India. It started up the DP services and also added broking into commodities and insurance advisory services to diversify into allied activities. Thus Nirmal Bang became a corporate member of BSE with three membership rights. The company, besides broking is a depository participant with NSDL and CDSL. Bang Equity Broking Private Limited was formed in the year 1997. This company also became the corporate member of the BSE with three membership rights in the year 1999. The Group was thus thefirst in the history of the Bombay Stock Exchange to acquire six membership rights of the Exchange.

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Mission

“To work together with integrity and make our customers feel valued”

Vision

“To create valuable relationships and provide the best financial services most professionally”

Core Values

“Respect our colleagues and the business itself”

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Number of TERMINALS

Total 790

MAJOR CITIES

Mumbai 250

Delhi 10

Kolkata 10

Chennai 5

Ahmedabad 10

OTHER CITIES & States

Jaipur 25

Hosiarpur 35

Jodhpur 45

Pune 15

Others 38

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NIRMAL BANG

ADVANTAGES PEOPLE

Our greatest asset . Drawn from a diversity of professional backgrounds, their blend of experience, skill and dedication is shared with all our clients.

APPROACHInnovative and enthusiastic. We emphasize adequate, thorough research local and worldwide developments, balancing these with the astute discovery of intrinsic values, synergies and growth.

AIMSimply to help you maximize your returns. Your interests no matter how big or small - come first.

PRODUCTS & SERVICESComprehensive and available to meet every investment financial need.

COMMITMENTTo provide service, par excellence and become your spirit of change

Professionally Driven

Nirmal Bang is a professionally driven organization having people with diverse professional backgrounds. The blend of experience, skill and dedication is shared with all clients. The group has more than 300 well-experienced and efficient staff to cater to the large clientele base.

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PRODUCTS & SERVICES

Trading (Equity/Derivative/Commodity)IPOsDepository ServicesArbitrageMargin FinancingSale of Mutual FundsOnline Trading

Currency DerivativesEach country has its own currency through which both national and international transactions are performed. All the business transactions involve and exchange of one currency for another.

Rules and Regulations

WITH RESPECT TO ITORS SERVICES, IT IS HEREBY AGREED BETWEEN THE STOCK BROKER AND CLIENT as follows: 1. Definitions:1.1 In this Agreement (including the Recitals above), unless the context otherwise requires the following words shall have the following meanings:- (i) "the Exchange" means "The Bombay Stock Exchange Limited and/or National Stock Exchange of India Limited" and includes a segment of the Exchange. (ii) "Exchange Provisions" means the Rules, Bye-laws, Regulations, Business Requirement, Specifications, handbooks, notices, circulars and resolutions of the Exchange or any segment of the Exchange in force from time to time and includes the Minimum Requirements Handbook for ITORS prescribed by the Exchange, as amended from time to time.(iii) "ITORS" means Internet based Trading through Order Routing System, being a system approved by the Exchange for enabling clients to route their orders to their Member-brokers over the internet. (iv) "ITORS Account Application" means the application submitted by the Client to the Member to permit the Client to avail of the Member’s ITORS Service.

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(v) "ITORS Service" or "Service" means the service offered by the Member to its clients through ITORS whereunder the clients can route their orders for purchase, sale and other dealings in securities through the Member’s ITORS System. (vi) "Member’s ITORS System" or "Member’s ITORS WebSite" means the web site hosted by the Member on the internet through which the Member offers the ITORS Service and includes the hardware and software used for hosting and supporting the WebSite.(vii) "Password" means an alphanumeric code used by the Client to validate his/her username and access the Service. (viii) "SEBI" means the Securities & Exchange Board of India. (ix) "Username" means an alphanumeric login identification used by the Client for accessing the Service. 1.2 In this Agreement, headings are used for convenience and ease of reference only and shall not affect the construction or interpretation of any provision of this Agreement. 1.3 In this Agreement, unless the context otherwise requires, reference to the singular includes a reference to the plural and vice-versa, and reference to any gender includes a reference to all other genders. 1.4 In this Agreement, unless the context otherwise requires, references to Recitals and Clauses shall be deemed to be a reference to the recitals and clauses of this Agreement. 1.5 References to any enactment are to be construed as referring also to any amendment or re-enactment thereof and to any rule, bye-law, regulation, business requirement, specification, order or other provision made under it. 2. AGREEMENT TO PROVIDE AND AVAIL OF THE ITORS SERVIC E :The Member agrees to provide the Member’s ITORS Service to the Client, and the Client agrees to avail of the Member’s ITORS Service, on and subject to the terms and conditions of this Agreement, the Exchange Provisions and the terms of the Member’s ITORS Web Site. 3. USER NAME AND PASSWORD:3.1 The Client will be entitled to a username and password, which will enable him to access the Member’s ITORS System for availing of the Service. 3.2 The Client is aware that the Member’s ITORS System itself generates

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the initial password and that the Member is aware of the same. The Client agrees and undertakes to immediately change his initial password upon receipt thereof. The Client is aware that subsequent passwords are not known or available to the Member. 3.3 The Client shall be responsible for keeping the Username and Password confidential and secure and shall be solely responsible for all orders entered and transactions done by any person whosoever through the Member’s ITORS System using the Client’s Username and/or Password whether or not such person was authorised to do so. 3.4 The Client shall immediately inform the Member of any unauthorised use of the Client’s Username or Password with full details of such unauthorised use including the date of such unauthorised use, the manner in which it was unauthorisedly used, the transactions effected pursuant to such unauthorised use, etc. 3.5 The Client acknowledges that he is fully aware of and understands the risks associated with availing of a service for routing orders over the internet including the risk of misuse and unauthorized use of his Username and/or Password by a third party and the risk of a person hacking into the Client’s account on the Member’s ITORS System and unauthorized routing orders on behalf of the Client through the System. The Client agrees that he shall be fully liable and responsible for any and all unauthorized use and misuse of his Password and/or Username and also for any and all acts done by any person through the Member’s ITORS System on the Client’s Username in any manner whatsoever.3.6 The Client shall log off from the ITORS Service at any time the Client is not accessing or using the Service and any liability incurred to the Client as a consequence of the Client not logging off the Service shall borne solely by the Client. 3.7 Without prejudice to the provisions of Clause 3.5, the Client shall immediately notify the Member in writing with full details if : (i) he discovers or suspects unauthorized access through his Username, Password or account, (ii) he notices discrepancies that might be attributable to unauthorized access, (iii) he forgets his password or (iv) he discovers a security flaw in the Member’s ITORS System. 3.8 In any of the above events specified in Clause 3.7, the Client shall

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immediately change his Password. However, if the Client is unable to change his Password by reason of his having forgotten his Password or his Password having been unauthorized changed by some other person or for any other reason then the Client shall immediately request the Member in writing to discontinue his old Password; and thereupon the Member shall cause the Member’s ITORS System to discontinue the use of the Client’s old Password and the Member’s ITORS System shall generate a new Password for the Client which shall be communicated to the Client. At no point in time shall the Member be liable for any loss, whether notional or actual, that may be suffered by the Client on account of the misuse of the Password. 4. TRANSACTIONS AND SETTLEMENTS: 4.1 All orders for purchase, sale or other dealings in securities and other instructions routed through the Member’s ITORS System via the Client’s Username shall be deemed to have been given by the Client.4.2 The orders and instructions and all contracts and transactions entered into pursuant thereto and the settlement thereof will be in accordance with the Exchange Provisions. 4.3 The Member may from time to time impose and vary limits on the orders that the Client can place through the Member’s ITORS System (including exposure limits, turnover limits, limits as to the number, value and/or kind of securities in respect of which orders can be placed, the companies in respect of whose securities orders can be placed, etc.). The Client is aware and agrees that the Member may need to vary or reduce the limits or impose new limits urgently on the basis of the Member’s risk perception and other factors considered relevant by the Member, and the Member may be unable to inform the Client of such variation, reduction or imposition in advance. The Client agrees that the Member shall not be responsible for such variation, reduction or imposition or the Client’s inability to route any order through the Member’s ITORS System on account of any such variation, reduction or imposition of limits. The Client understands and agrees that the Member may at any time, at its sole discretion and without prior notice, prohibit or restrict the Client’s ability to place orders or trade in securities through the Member. 4.4 Though orders will generally be routed to the Exchange’s computer systems within a few seconds from the time the order is placed by the Client on the Member’s ITORS System, the Member shall not be liable

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for any delay in the execution of any order or for any resultant loss on account of the delay. 4.5 The Client agrees that the Member may, at its sole discretion, subject any order placed by a Client to manual review and entry, which may cause delays in the processing of the Client’s order or may result in rejection of such order. 4.6 In case of a market order, the Client agrees that he will receive the price at which his order is executed by the exchange’s computer system; and such price may be different from the price at which the security is trading when his order is entered into the Member’s ITORS System. 5. MARGIN: The Client agrees and undertakes to immediately deposit with the Member such cash, securities or other acceptable security, which the Member may require as margin. The Client agrees that the Member shall be entitled to require the Client to deposit with the Member a higher margin than that prescribed by the Exchange. The Member shall also be entitled to require the Client to keep permanently with the Member a margin of a value specified by the Member so long as the Client desires to avail of the Member’s ITORS Service. 6. CANCELLATION REQUESTS:6.1 When the Client places a request to cancel an order, the cancellation of that order is not guaranteed. The order will only be cancelled if the Client’s request for cancellation is received and the order is successfully cancelled before it is executed. 6.2 The Client shall not be entitled to presume an order as having been executed or canceled until the Client receives a confirmation from the Member. 6.3 The Exchange may anull a trade suo-moto without giving a reason therefor. In the event of such anullment, the Member shall be entitled to cancel the relative contract(s) with the Client. 7. BROKERAGE, COMMISSIONS AND FEES:7.1 The Client agrees to pay the Member brokerage, commission, fees, service tax and other taxes and transaction expenses as they exist from time to time and as they apply to the Client’s account and transactions, and the services that he receives from the Member. 7.2 A schedule of brokerage, fees and commissions, applicable service and other taxes and other transaction expenses shall be provided by the

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Member to the Client from time to time upon request by the Client. 8. CONFIRMATIONS:Online confirmation will be available to the Client upon execution or cancellation of an order placed by him through the Member’s ITORS System. This shall be followed by a confirmation, which may be sent by postal mail, electronic mail or other electronic means. It is the responsibility of the Client to review upon first receipt, whether delivered to him online, by postal mail, by electronic mail, or other electronic means, all confirmations of transactions or cancellations. 9. INVESTMENT ADVICE:9.1 The Client acknowledges that the Member shall not be liable to provide him with any legal, tax, investment or accounting advice or advice regarding the suitability or profitability of a security or investment. 9.2 The Client also acknowledges that the Member’s employees are not authorized to give any such advice and that the Client will not solicit or rely upon any such advice from the Member or any of its employees. 9.3 The Client agrees that in the event of the Member or any employee or official of the Member providing any information, recommendation or advice to the Client, the Client may act upon the same at the sole risk and cost of the Client, and the Member shall not be liable or responsible for the same. 9.4 The Client assumes full responsibility with respect to his investment decisions and transactions. 9.5 The Member, its officers, directors, partners, employees, agents and affiliates will have no liability with respect to any investment decisions or transactions of the Client. 10. SUPPLEMENTAL TO MAIN MEMBER – CLIENT AGREEMENT:This Agreement is supplemental to, and does not supersede, the Main Member-Client Agreement. Save and except as modified expressly or by implication by this Agreement the Exchange Provisions or the terms of the Member’s ITORS WebSite, the provisions of the Main Member-Client Agreement shall apply mutatis mutandis to the extent applicable to dealings between the Member and the Client pursuant to or otherwise relating to the Member’s ITORS Service.

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11. REPRESENTATIONS AND WARRANTIES OF CLIENT:The Client represents and warrants to the Member that: 11.1 All the information provided and statements made in the Client’s ITORS Account Application are true and correct and are not misleading (whether by reason of omission to state a material fact or otherwise) and the Client is aware that the Member has agreed to provide the Member’s ITORS Service to the Client on the basis, inter alia, of the statements made in the Client’s ITORS Account Application. 11.2 The Client is aware and acknowledges that trading over the internet involves many uncertain factors and complex hardware, software, systems, communication lines, peripherals, etc. which are susceptible to interruptions and dislocations; and the Member’s ITORS Service may at any time be unavailable without further notice. The Member and the Exchange do not make any representation or warranty that the Member’s ITORS Service will be available to the Client at all times without any interruption. The Client agrees that he shall not have any claim against the Exchange or the Member on account of any suspension, interruption, non-availability or malfunctioning of the Member’s ITORS System or Service or the Exchange’s service or systems for any reason whatsoever. 11.3 The Client has the required legal capacity to, and is authorized to, enter into this Agreement and is capable of performing his obligations and undertakings hereunder. 11.4 All actions required to be taken to ensure compliance of all the transactions, which the Client may enter into pursuant to this Agreement with all applicable laws, shall be completed by the Client prior to such transaction being entered into.11.5 The Client shall abide by the Exchange Provisions and the terms of the Member’s ITORS WebSite in force from time to time. 11.6 Any instructions given by an authorised representative of the Client to the Member (or to the Member’s representative) shall be binding on the Client.

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12. REPRESENTATIONS AND WARRANTIES OF THE MEMBER:The Member represents and warrants to the Client that: - The Exchange has approved the Member’s ITORS System. Where the ITORS system has not been approved by the Exchange, the Member has applied/ proposes to apply to the Exchange to approve the said ITORS System and the Member will commence the Member’s ITORS Service only after the Exchange has approved the Member’s ITORS System.

13. MARKET DATA:13.1 The Client understands that the Exchange asserts a proprietary interest in all of the market data it furnishes, directly or through the Member or otherwise. The Client understands that the Exchange does not guarantee the timeliness, sequence, accuracy or completeness of market data or any other market information, or any messages disseminated by it. Neither the Member nor the Exchange shall be liable in any way for incorrect, misleading, incomplete or dated data or information and, if the Client acts on the basis of the same, he shall do so at his own risk and cost. 13.2 The Client shall not furnish market information provided by the Exchange to any other person or entity for consideration or otherwise and in the event the Client uses such information he shall do so at his own risk and cost. 14. NOTICES:14.1 Any notice or other communication to be given by any party to the other in connection with this Agreement shall be in writing and shall be deemed duly served if delivered personally or sent by facsimile transmission or by prepaid registered post or by e-mail to the addressee at the address or (as the case may be), the e-mail or facsimile number (if any), of that party set opposite its name below: To the Member at : To the Client at :Name of the person concerned : Address : 38-B/39, Khatau Bldg, 2nd Flr,Alkesh Dinesh Mody MargFort, Mumbai - 400 001Tel. 022 - 22641234, 30272000 / 2222Fax. 022 - 30272006

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or at such other address, facsimile number or e-mail address as the party to be served may have notified the other in accordance with the provisions of this Clause. Notwithstanding anything stated above, communication relating to orders, margins, maintenance calls and other similar matters in the ordinary course of dealings between the Member and the Client may be communicated orally. 15. EXTRAORDINARY EVENTS:The Member and/or its agents will not be liable for losses caused directly or indirectly by government restriction, Exchange or market rulings, suspension of trading, computer, communication, telephone or system failure, war, earthquakes, flood, accident, power failure, equipment or software malfunction, strikes or any other conditions beyond the Member’s control. 16. AMENDMENT TO AGREEMENT :The Client understands and agrees that the Member may discontinue his ITORS Service in part or in its entirety and change the terms of the Service (including the terms on the Member’s ITORS Website) at any time and from time to time, without prior notice. 17. TERMINATION OF AGREEMENT:17.1 The Client agrees that the Member may at any time terminate this Agreement. The Client is aware and accepts that in view of the nature of the transactions and dealings involved in providing the Service it may not be possible for the Member to give advance notice of such termination or suspension to the Client. 17.2 The Client may at any time terminate this Agreement by not less than seven days notice to the Member, provided that unless the Member otherwise permits, the Client shall not be entitled to terminate this Agreement so long as any amount is payable or securities are deliverable by the Client to the Member. 17.3 The termination of this Agreement shall not affect any rights or obligations of either party which have accrued prior to the termination or which may arise out of or in connection with acts done or omitted prior to the termination. 17.4 The provisions of Clauses 14, 20 and 21 of this Agreement shall survive the termination of this Agreement.18. SEVERABILITY:In the event of any provisions of this Agreement being held to be or

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becoming invalid, unenforceable or illegal for any reason, this Agreement shall remain otherwise in full force apart from the said provision which will be deemed deleted. The parties shall however attempt to replace the deleted provision with a legally valid provision that reflects the same purpose as the deleted provision to the greatest extent possible. 19. WAIVER:No forbearance, relaxation or inaction by any party at any time to require the performance of any provision of this Agreement shall in any way affect, diminish, or prejudice the right of such party to require the performance of that or any other provision of this Agreement or be considered to be a waiver of any right, unless specifically agreed in writing. 20. LAW AND JURISDICTION:20.1 This Agreement shall be governed by and construed in all respects in accordance with the laws of the Republic of India and, subject to the provisions of Clause 21, the courts at Mumbai, India shall have jurisdiction over this Agreement and the arbitration proceedings in relation to the Agreement. 20.2 This Agreement and all contracts and transactions between the Member and the Client pursuant hereto shall be subject to the Exchange Provisions, the Rules, Bye-Laws, Regulations, and other provisions of its clearing house, if any, the provisions of the Securities and Exchange Board of India Act, 1992, the Securities Contracts (Regulation) Act of 1956 and the rules and regulations made there under and as amended from time to time. 21. DISPUTE RESOLUTION :Any claim, dispute or difference arising between the Parties hereto in respect of this Agreement or any contracts, dealings or transactions pursuant hereto or any rights, obligations, terms or conditions as contained in this Agreement or the interpretation or construction of this Agreement shall be subject to the grievance redressal procedure of the Exchange and shall be subject to the arbitration procedure as prescribed by the Exchange Provisions.

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REVIEW OF LITRATURE

Apte (2001) investigated the relationship between the volatility of the stock market and the nominal exchange rate of India by using the EGARCH specifications on the daily closing USD/INR exchange rate, BSE 30 (Sensex) and NIFTY-50 over the period 1991 to 2000. The study suggests that there appears to be a spillover from the foreign exchange market to the stock market but not the reverse.Bhattacharya and Mukharjee (2002) studied the nature of causal relation between the stock market, exchange rate, foreign exchange reserves and value of trade balance in India from 1990 to 2001 by applying the co-integration and long-run Granger Non-causality tests. The study suggests that there is no causal linkage between stock prices and the three variables under consideration.To examine the dynamic linkages between the foreign exchange and stock markets for India, Nath and Samanta (2003) employed the Granger causality test on daily data during the period March 1993 to December 2002. The empirical findings of the study suggest that these two markets did not have any causal relationship. When the study extended its analysis to verify if liberalization in both the markets brought them together, it found no significant causal relationship between the exchange rate and stock price movements, except for the years 1993, 2001 and 2002 during when a unidirectional causal influence from stock index return to return in forex market is detected and a very mild causal influence in the reverse direction is found in some years such as 1997 and 2002.Yamini Karmarkar and G Kawadia tried to investigate the relationship between RS/$ exchange rate and Indian stock markets. Five composite indices and five sectorial indices were studied over the period of one year: 2000. The results indicated that exchange rate has high correlation with the movement of stock markets.

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Research MethodologyObjective of the study

To differentiate risk and allocate it to those investor most able and willing to take it

To provide the right platform for trading in currency future To show how currency future cover ground in comparison with

other available derivatives instrument and provide awareness in market and attract the investors

To study the basic concept of currency future To study the exchange traded currency future

To analyze different currency derivatives product

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“COMMODITY DERIVATIVES MARKET IN INDIA”

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DESIRED RESEARCH AREACommodity Derivatives Market in India, its development, regulation and future prospects.

ScopeThe research will be limited to the three national level multi- commodity exchanges:-National Commodity & Derivatives Exchange Limited (NCDEX) Multi Commodity Exchange of India Limited (MCX)National Multi-Commodity Exchange of India Limited (NMCEIL)

Further the commodities would include Crude Oil, Copper, Gold, Silver and Steel.

HYPOTHESISThe commodity market is a genuine place for investment and could be used for investment by fund managers and retail investors to diversify there risk from equity market.Commodity Derivatives Market in India.

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PROBLEM DEFINITION

Organized commodity derivatives in India started as early as 1875, barely about a decade after they started in Chicago. However, many feared that derivatives fuelled unnecessary speculation and were detrimental to the healthy functioning of the markets for the underlying commodities. As a result, after independence, commodity options trading and cash settlement of commodity futures were banned in 1952. A further blow came in 1960s when, following several years of severe draughts that forced many farmers to default on forward contracts (and even caused some suicides), forward trading was banned in many commodities considered primary or essential. Consequently, the commodities derivative markets dismantled and remained dormant for about four decades until the new millennium when the Government, in a complete change in policy, started actively encouraging the commodity derivatives market. Since 2002, the commodities futures market in India has experienced an unprecedented boom in terms of the number of modern exchanges, number of commodities allowed for derivatives trading as well as the value of futures trading in commodities, which might cross the $ 1 Trillion mark in 2006. However, there are several impediments to be overcome and issues to be decided for sustainable development of the market. Questions like sustainability and importance to emerging economies.

LITERATURE RELATING TO THE PROBLEM

The Indian economy is witnessing a mini revolution in commodity derivatives and risk management. Commodity options trading and cash settlement of commodity futures had been banned since 1952 and until 2002 commodity derivatives market was virtually non-existent, except some negligible activity on an OTC basis. Now in September 2005, the country has 3 national level electronic exchanges and 21 regional exchanges for trading commodity derivatives. As many as eighty (80) commodities have been allowed for derivatives trading. The value of trading has been booming and is likely to cross the $ 1 Trillion mark in 2006 and, if all goes well, seems to be set to touch $5 Trillion in a few years. As nothing much has been done in this field which could become a

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vital ingredient to the financial system. I would try to bring out the potential of the commodity market and also would try to highlight the obstacles that need urgent need.

Commodity Market in IndiaA commodity may be defined as a product or material or any physical substance like food grains, processed products and agro-based products, metals or currencies, which investors can trade in the commodity market. One of the characteristics of a commodity is that its price is determined as a function of its market as a whole. Well-established physical commodities are actively traded in spot and derivative commodity market. Commodities actually offer immense potential to become a separate asset class for market-savvy investors, arbitragers and speculators. Retail investors, who claim to understand the equity market, may find commodity market quite tricky. 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 commodity market before taking a leap. Historically, prices of commodities have remained extremely volatile.

The gradual evolution of commodity market in India has been of great significance for the country's economic prosperity. The commodity futures exchanges were evolved in 1800 with the sole objective of meeting the demand of exchangeable contracts for trading agricultural commodities. For example, the cotton exchange located at Cotton Green in Mumbai (then Bombay) was the one of the first organised commodity market in the country.

A commodity market is a market where various commodities and derivatives products are traded. Most commodity market 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.

Commodities exchanges usually trade futures contracts on commodities, such as trading contracts to receive a particular commodity in physical form. Speculators and investors also buy and sell the futures contracts at commodity exchanges to make a profit and provide liquidity to the system.

The Indian commodity market offers a variety of products like rice, wheat,

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coal, petroleum, kerosene, gasoline; metals like copper, gold, silver, aluminum and many more. There are some commodities such as sugar, cocoa, and coffee, which are perishable, so cannot be stocked for long time. These days, a wide range of agricultural products, energy products, perishable commodities and metals can be sold under standardised contracts on futures exchanges prevailing across the globe. Commodities have gained importance with the development of commodity futures indexes along with the mobilisation of more resources in the commodity market.

India has around 25 recognised commodity future exchanges including three national-level commodity exchanges. They are:National Commodity & Derivatives Exchange Limited (NCDEX)Multi Commodity Exchange of India Limited (MCX)National Multi-Commodity Exchange of India Limited (NMCE) All these exchanges are under the control of the Forward Market Commission (FMC) of Government of India.

National Commodity & Derivatives Exchange Limited (NCDEX) located in Mumbai is a public limited company incorporated on April 23, 2003 under the Companies Act, 1956 and commenced its operations on December 15, 2003.This is the only commodity exchange in the country promoted by national level institutions like ICICI Bank Limited, Life Insurance Corporation of India (LIC), National Bank for Agriculture and Rural Development (NABARD) and National Stock Exchange of India Limited (NSE India). It is a professionally managed online multi-commodity exchange. It is a technology driven de-mutualised on-line commodity exchange with an independent Board of Directors and professional management.

Multi Commodity Exchange of India Limited (MCX) in Mumbai, is also an independent and de-mutualised exchange recognized by the Government of India. This commodity exchange which started operations in November 2003 has above 40 commodities on its platform and has a market share of around 80% in the Indian commodity market. 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. This commodity exchange facilitates online trading, clearing and settlement operations for commodity futures market across the country.

National Multi Commodity Exchange of India Limited (NMCE) is the first de-mutualized, Electronic Multi-Commodity Exchange to be formed in India. On 25th July, 2001, it was granted approval by the Government of

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India to organise trading in the edible oil complex. It started operating in the commodity market from November 26, 2002. NMCE is the only Exchange in India to have investment and technical support from commodity relevant institutions like Central Warehousing Corporation Ltd., Gujarat State Agricultural Marketing Board, Neptune Overseas Ltd, National Agricultural Cooperative Marketing Federation of India (NAFED), Gujarat Agro-Industries Corporation Ltd. (GAICL), Gujarat State Agricultural Marketing Board (GSAMB) and the National Institute of Agricultural Marketing (NIAM).

As compared to other markets in the last ten years, commodity market has performed relatively better than other markets like bonds , equity or currency. However, the participation in future trading in Indian commodity market is very low as compared to other countries as there is lack of knowledge about this market to the investors and traders. It is not for mere trading purpose; commodity trading is also used for hedge against inflation, price discovery of the commodity and also as a sound investment.

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RESEARCH METHODOLOGYData Collection toolsQuestionnairesDiscussion Guidelines

Data collection sourcesPrimary SourcesBrokersRetail TradersFinance Minister Office

Secondary SourcesInformation available on the internetInformation from documents procured during the course of projectMagazines and newspapers

JUSTIFICATION FOR CHOOSING THIS PARTICULAR RESEARCH PROJECTIndia is among the top-5 producers of most of the commodities, in addition to being a major consumer of bullion and energy products. Agriculture contributes about 22% to the GDP of the Indian economy.It employees around 57% of the labor force on a total of 163 million hectares of land. Agriculture sector is an important factor in achieving a GDP growth of 8-10%. All this indicates that India can be promoted as a major center for trading of commodity derivatives.

DETAILS OF THE EXTERNAL GUIDEMr. Ravikant Chopra

(Sr. Commodities Manager)

Nirmal Bang Pvt. Ltd.

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GOLD TREND ANALYSIS

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INTRODUCTION

BUREAU OF INDIAN STANDARDS

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

CARAT

This stems back to ancient times in the Mediterranean/Middle East, when a carat became sad as a measure of the purity of gold alloys. The purity of gold is now measured also in terms of fineness, i.e., parts per thousand. Thus 18 carats is 18/24th of 1000 parts = 750 fineness. A Carat (Karat in USA and Germany) was originally a unit of mass (weight) based on the Carob seed or bean used by ancient merchants in the Middle East. The Carob seed is from the Carob or locust bean tree. The carat is still used as such for the weight of gem stones (1 carat is about 200 mg). For gold, it has come to be used for measuring the purity of gold where pure gold is defined as 24 carats.

WEIGHTING

Gold is made into a large number of different bars of different weights. The most well known are the large ‘London Good Delivery Bars’ which are traded internationally. These weigh about 400 Troy Ounces, i.e. 12.5 kg/ 27 lbs. Each others are denominated in kilograms, grammas, troy ounces, etc. In grammas, bars range from 1 g up to 10 kg. In troy oz, from 1/10 tr.oz. up to 400 tr.oz.. Other bars include tola bars and Tael bars. Gold is traditionally weighed in Troy Ounces with the density of gold at 19.3 g/cm3, a troy ounce of gold would have a volume of 1.64 cm3. A tone of gold would therefore have a volume of 51,760 cm3, which would be equivalent to a cube of side 37.27cm (approx. 1’ 3”).

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INTERNATIONAL GOLD EXCHANGES

The major exchanges for gold forward trading are the COMEX division of the New York Mercantile Exchange, Chicago Board of Trade, Hong Kong Gold and Silver Exchange, Bolsa de Macadamias et futures in Sao Paulo and the Tokyo Commodities Exchange. At the Chicago Board of Trade, Futures contract is of 33.2 fine troy ounces of gold, no less than 0.995 fine contained in no more than one bar. Variations in the quantity of the delivery unit is not allowed in excess of 10% of 33.2 fine troy ounces. All gold is required to be certified as to fineness and weight by an Exchange approved refiner or assayer. The trading Unit of gold is 100 troy ounces at New York Mercantile Exchange. (5%) of refined gold, assaying not less than .995 fineness, cast either in one bar or in three one-kilogram bars, and bearing a serial number and identifying stamp of a refiner approved and listed by the Exchange.

GOLD FUTURES IN INDIAThe Indian gold market has always been linked to international gold market in view of large requirement of imported gold. Given the inevitable integration between the global and local gold markets, there is considerable merit in following the global practice of integration of gold markets with financial markets and introducing forward trading.

1) SUITABILITY OF GOLD FUTURES

Uncontrolled and uncertain supply

Besides new mining supply, the available supply of gold in the market is made up of three major ‘above-ground sources’. In recent years, the growth in gold supply has come from these ‘aboveground’ sources.Reclaimed scrap, or gold reclaimed from jewelry and other industries such as electronics and dentistry;Official, or central-bank, salesGold loans made to the market from official gold reserves for borrowing and leading purposes.Following the growing pattern of liberalization f the gold trade since the early 1990’s the local markets and exchanges of countries like India and Turkey can flourish legitimately. Consequently the pattern of gold flows from mine to end-user, whether in jewellery, industry or investment, is more direct. Growing gold production, particularly in Australia and the United States, has also influenced this

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pattern, which are now major sources of supply for Asian markets. World gold output rose from only 1,311 tons in 1980 to 2,604 tons in 2001, i.e. almost double. In 1993 the Indian government permitted non-resident Indians to bring 5kg of gold into the country twice yearly on the payment of import tax of Rs. 250 per 10 grammas (at current rates this equates to US$14356/ounce or 4.2%). The allowance was raised to 10 kg per trip in January 1997.1997 Open General License (OGL) was introduced in India, paving the way for substantial direct imports by local banks from the international market for sale or loan to jewelers and exporters, thus party eliminating the regional supplies from Dubai, Singapore and Hong Kong. At present, 13 banks are active in the import of gold. The quantum of gold imported through these banks has been in the range of 500 tons per year. Gold consumers are very aware of its price movements and very sensitive to them. Gold is sold in times of financial need but holders frequently take profits and sell gold back to the market if the price rises. Thus the supply of scrap gold normally automatically rises if the gold price rises. Even gold used for industrial purposes such as electrical contacts in electronic equipment is frequently recovered as scrap and a rise in the gold price increases the incentive for such recovery.

2)Fluctuating and uncertain demandThe deregulation of the Indian gold market during the 1990s brought about a dramatic change. Jewellery demand increased from 208 tons in 1991 to peak at 658 tons in 1998, while demand for investment bars grew from 10 tons in 1991 to 116 tons in 1998, and registered 85 tons in 2002. Indian in 2001 it absorbed around 700 tons from the world market compared to just 320 tons in 1994; that is without taking into account the recycling of scrap. In India the rural population accounts for approximately 70% of national gold demand. Thus India’s annual gold consumption is dictated both by the monsoon, with its effect on the harvest, and the marriage season. Between 1998-2001 annual Indian demand for gold in jewellery exceeded 600 tons, however in 2002, due to rising and volatile prices and a poor monsoon season, this dropped back to 490 tons, and coin and bard demand dropped to 67 tons. Indian jewellery off-take is sensitive to price increases and even more so to volatility, although this decline in tonnage since 1998 is also due in part to increasing competition from white and brown goods and alternative investment vehicles, but is also a reflection of the increase in price. In the cities, however, gold is having to compete with the stock market, investment in internet industries, and a wide range of consumer goods. In the rural areas 22-carat jewellery remains the basic investment. Indian

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gold jewellery exports have increased dramatically since 1996, and in 2001 stood at over 60 tons. The major factors influencing demand for gold in India are,Generation of large market surplus in rural areas as a result of all round increase in agricultural productionUnaccounted income/wealth generated mainly in the service sectorDomestic gold prices relative to those of ordinary shares and international gold prices

3) Wide and unforeseen price variation

Economic forces that determine the price of gold are different from, and in many cases opposed to, the forces that influence most financial assets. Econometric studies indicate that the price of gold is determined by two sets of factors: ‘supply’ and ‘macro-economic factor’. Supply and the gold price are inversely related. In the case of ‘macro-economic factors’, the U.S. dollar tends to be inversely related to gold, while inflation and gold tend to move in tandem with each other. Also, high low-interest rates are generally a positive factor for gold. Overall, the impact of all of these determinants on the gold price is judged to be neutral-to-positive at this time. Also there is low to negative correlation between returns on gold and those on stock markets.

Likely Benefits from Gold Futures

Development of gold futures would help in efficient price discovery and emergence of healthy and transparent practices in the market. The basic framework for such an exchange already exists with 13 banks active in import of precious metals. Five of them have launched the Gold Deposit Scheme also. They can also enter into forward contracts in a limited way. To begin with the banks can start trading among themselves and then with MMTC, STC and also with big traders according to the demand/supply dynamics. The demand driven gold market of India may well become the dictator of gold prices over a period of a few years displacing the supplier driven international market. Futures trading will facilitate to bring down hoarding demand and help in bringing the idle gold into the market/official pool (mobilize domestic gold) or permit their use as a financial asset in the banking sector. Futures in gold part from offering jewellery manufacturers and exporters the chance of hedging their inventories would provide many other investors or speculators with a cheap and highly efficient way of getting into gold. Studies show in

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India the consumers on an average would be paying Rs. 8,000 crores extra each year by virtue of the questionable quality of gold sold to them. In particular, the rural and middle class and women are especially vulnerable to the low quality of gold. (Refer Annexure) Development of futures market would make a positive contribution to the protection of consumer and improvement of the industry by setting the benchmark quality for trading.

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LITERATURE REVIEWGOLD V/S COMMODITIES

Gold is a unique asset based on few basic characteristics. First, it is primarily a monetary asset, and partly a commodity. As much as two thirds of gold’s total accumulated holdings relate to “store of value” considerations. Holdings in this category include the central bank reserves, private investments, and high-caratage jewelry bought primarily in developing countries as a vehicle for savings. Thus, gold is primarily a monetary asset. Less than one third of gold’s total accumulated holdings can be considered a commodity, the jewelry bought in Western markets for adornment, and gold used in industry. The distinction between gold and commodities is important. Gold has maintained its value in after-inflation terms over the long run, while commodities have declined. Some analysts like to think of gold as a “currency without a country”. It is an internationally recognized asset that is not depends upon any government’s promise to pay. This is an important feature when comparing gold to conventional diversifiers like T-bills or bonds, which unlike gold do have counter-party risk.Gold has three crucial attributes that, combined, set it apart from other commodities: firstly, assayed gold is homogeneous; secondly, gold is indestructible and fungible and thirdly, the inventory of aboveground stocks is astronomically large relative to changes in flow demand. One consequence of these attributes is a dramatic reduction in gestation lags, given low search costs and the well-developed leasing market. One would expect that the time required to convert bullion into producer inventory is short, relative to other commodities which may be less liquid and less homogenous that gold and may require longer time scales to extract and be converted into usable producer inventory, making them more vulnerable to cyclical price volatility. Of course because of the variability of demand, the price responsiveness of each commodity will depend in part on precautionary inventory holdings. There is low to negative correlation between returns on gold and those on stock markets, whereas it is well known that stock and bond market returns are highly correlated with GDP. This is because, generally speaking, GDP is a leading indicator of productivity: during a boom, dividends can be expected to rise. On the other hand, the increased demand for credit, countercyclical monetary policy and higher expected inflation that characterize booms typically depress bond prices. The fundamental differences between gold and other financial assets and commodities give rise to the following “hard line” hypothesis: the impact of cyclical demand using as proxies

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GDP, inflation, nominal and real interest rates, and the term structure of interest rate on returns on gold, is negligible, in contrast to the impact of cyclical demand on other commodities and financial assets.

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ADVANTAGE OF INVESTING IN GOLD

Timeless and Very Timely Investment:For thousands of years, gold has been prized for its rarity, its beauty, and above all, for its unique characteristics as a store of value. Nations may rise and fall, currencies come and go, but gold endures. In today’s uncertain climate, many investors turn to gold because it is an important and secure asset that can be tapped at any time, under virtually any circumstances. But there is another side to gold that is equally important, and that is its day-to-day performance as a stabilizing influence for investment portfolios. These advantages are currently attracting considerable attention from financial professionals and sophisticated investors worldwide.

Gold is an Effective Diversifier:

Diversification helps protect your portfolio against fluctuations in the value of any one –asset class. Gold is an ideal diversifier, because the economic forces that determine the price of gold are different from, and in many cases opposed to, the forces that influence most financial assets.

Gold is the ideal gift:

In many cultures, gold serves as a family treasure or a wealth transfer vehicle that is passed on from generations to generation. Gold bullion coins make excellent gifts for birthdays, graduations, weddings, holidays and other occasions. They are appreciated as much for their intrinsic value as for their mystical appeal and beauty. And because gold is available in a wide range of sizes and denominations, you don’t. need to be wealthy to give the gift of gold.

Gold is highly liquid:

Gold can be readily bought or sold 24 hours a day, in large denominations and at narrow spreads. This cannot be said of most other investments, including stocks of the world’s largest corporations. Gold is also more liquid that many alternative assets such as venture capital, real estate, and timberland. Gold proved to be the most effective means of raising cash during the 1987 stock market crash, and again during the 1997/98 Asian debt crisis. So holding a portion of your portfolio in gold can be invaluable in moments when cash is essential, whether for margin calls of other needs.

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Gold responds when you need it most:

Recent independent studies have revealed that traditional diversifiers often fall during times of market stress or instability. On these occasions, most asset classes (including traditional diversifiers such as bonds and alternative assets) all move together in the same direction. There is no “cushioning” effect of a diversified portfolio – leaving investors disappointed. However, a small allocation of gold has been proven to significantly improve the consistency of portfolio performance, during both stable and unstable financial periods. Greater consistency of performance leads to a desirable outcome – an investor whose expectations are met.

Gold as an investment vehicle:

Gold is valued in India as a savings and investment vehicle and is the second preferred investment behind bank deposits. India is the world’s largest consumer of gold in jewellery (much of which is purchased as investment). The hoarding tendency is well ingrained in Indian society, not least because inheritance laws in the middle of the twentieth century tent a great desirability to anonymity. Indian people are renowned for saving ration is strong, with a ration of financial assets –to GDP of 93%. Gold’s circulated within the system and roughly 30% of gold jewellery fabrication is from recycled pieces. India is typically also the largest purchaser of coins and bars for investment (>80tpa), although last year it had to concede first place to Japan in the wake of the heavy buying in the first quarter due to fears for the stability of the Japanese banking system. In 1998-2001 inclusive, annual Indian demand for gold in jewellery exceeded 600 tons; in 2002, however, due to rising and volatile prices and a poor monsoon season, this dropped back to 490 tons, and coin and bar demand dropped to 67 tons. Indian jewellery off take is sensitive to price increases and even more so to volatility, although this decline in tonnage since 1998 is also due in part to increasing competition from white and brown goods and alternative investment vehicles, but is also a reflection of the increase in price. The Indian bride’s “Streedhan”, the wealth she takes with her when she marries and which remains hers, is still gold, however (thus giving gold an important role in the “empowerment” of women in India). Local expenditure, in terms of the value if the gold content purchased, peaked at Rs 302 billion (Rs 311 per capita) in 1998, when total Indian demand was almost 775 ton, and since then has dropped to Rs 279 Bn in 2002 (Rs 284 per capita), a decline of almost 9%. This peak in 1998 came in the wake of the main liberalization step, which was the freeing of imports in November

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1997. Typically, India accounts for 20% of global gold off take in any one year. Its GDP (as measured by the World Bank) in 2001 was 1.5% of the world’s total, ranking twelfth – although if this is measured on purchasing Power Parity, then India ranks fourth with 6.4% of the world total. While changes in total demand per capita, in terms both of tonnage and expenditure show how Indian jewellery demand in 2002 compared with the rest of the world in terms of off take per capita and against GDP. Off take per capita is still very low, reflecting the widespread distribution of the rural population accounts for approximately 70% of national gold demand), but off take in terms of GDP is high. At ust over one gramme of demand per thousand dollars of GDP, India stands third in the world, behind only the UAE (just over two grammes) and Bahrain (almost 1.5g)- although these two are both enhanced by tourist purchases. It was not always thus. As recently as 1991, Indian gold demand was a little over 230 tons, or only 8% of world off take. The deregulation of the market during the 1990s brought about a dramatic change. Jewellery demand increased from 208 tons in 1991 to peak at 658 tons in 1998, while demand for investment bars grew from ten tons in 1991 to 116 tons in 1998, and registered 85 tons in 2002. These figures reflect average growth rates of 16% and 30% per annum respectively between 1991 and 1998. While both have eased since 1998, there is still a fascination in India for gold and there is significant scope for the development of further demand in the country. In the cities, however, gold is having to compete with the stock market, investment in internet industries, and a wide range of consumer goods. In the rural areas 22 carat jewellery remains the basic investment. The world Gold Council, which was involved in the deregulation of the market in the 1990s, continues to work closely with Indian gold market stakeholders to foster increased demand , partly through the development of new gold instruments that can be bought through banks, as an additional set of distribution channels, although the rural community does still tend to prefer to use jewelers

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WHY GOLD PRICE INCREASE

According to the views of the international investor community, gold prices will continue to rise due to the following reasons:US dollar is expected to remain weak during the year as explained above.Supply of gold is not expected to grow or rise.Demand for gold jewellery and also investment is expected to grow substantially China’s demand for physical gold and also paper-backed gold is expected to grow exponentially. Many analysts in the gold market feel that a massive surge in Chinese demand is imminent based on income growth and greater liberalization of the domestic bullion market. The Government of India has constituted a Committee to examine the regulator structure of the gold industry to make India a gold trading hub. The findings of the Committee are expected to improve the prospects of gold trade in the country. The Committee will be instrumental in recommending measures to facilitate banks to hedge in Future Markets on gold, facilitate mutual funds to invest in gold, improve the ability of the banks to implement Gold-Linked Saving Scheme and customs and foreign trade initiatives required to facilitate manufacturing and trading in gold.

Issues for the Future It would only be logical to assume that the need for a review of the overall policy stance with regard to gold is now being increasingly felt in official circles. As with other areas of liberalization, the direction of change will certainly be positive, although it would be difficult to imagine any specific time frame. However, the following issues are likely to be the focus of policy:Strengthening of the infrastructure and market in physical gold. More assaying, refining and recycling capacities of international standard and accreditation are expected. Technological collaboration with established international names is sure to occur.Better protection for consumers, by way of the spread of hallmarking of jewelry. The emphasis will continue to be on more self-regulation by jewelry manufactures and retailers.Further liberalization of the gold import regime is a live issue. Removal of all the remaining restrictions on gold imports has been advocated by many on the following grounds: in Indian legal parlance this would mean placing gold under full Open General License (OGL) enabling anyone to import gold for any purpose:Trade liberalization for gold is a pre-requisite for financial liberalization.There is no specific advantage in restricting gold imports to a select number of nominated agencies.If gold is imported freely under full OGL, fiscal benefits will accrue to more provincial governments and local bodies than at present.

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Going by the Turkish example, free imports under full OGL and free export are preconditions for establishing a foothold in the world jewellery exports.Arguments in favor of continuing with the existing arrangements, at least for some more time are:It would not be prudent to put gold import under full OGL without first assessing the possible adverse impact on the balance of payments.There is hardly any excess demand in the country now, with the price differential reflecting customs duty and local taxes.Bulk import through nominated banks affords better monitoring and control over wholesale gold market. Gold transactions can be better tracked, and ceilings on gold import, if necessitated for any reason, can be imposed with better effectiveness. In the transition period, pending full liberalization, this arrangement is best suited.However, in the interim, i.e. before eventual full import liberalization, it is possible that the government will the requirement of payment of duty in foreign exchange for the NRI route.Regulation of the physical and financial markets in gold is another major issue. Regulation in general means formulation of norms (followed by surveillance in respect of observance thereof) by the regulator for (i) risk assessment and control for the regulated institutions, and (ii) investor protection.Certain developments in the last few years have highlighted the risks for nominated banks in dealing in physical gold. Risks associated with gold banking are beginning to be felt. It is time a regulatory mechanism for the physical market is put in place. Here again, the past could provide a good guidance – it would be worthwhile to examine, among other things, the self-regulation practiced by the Bombay Bullion Association in the past. As regards the regulation of gold banking, it would be efficient to integrate in with the regulation for other activities. As regards investor protection, first and foremost the legal character of all gold-related instruments needs to be defined.Bringing the gold held by the private sector into the economic mainstream has rightly been an objective throughout. Mobilization of gold by the government in the past did not yield any major long-term benefit. Any government-led mobilization has inherent disadvantages. A better alternative would be to allow holders of gold to raise capital from the banking system by way of pledge. It would be inconsistent with spirit of liberalization to discriminate against those who saved in gold will be predominantly for unproductive purposes, like speculation, etc. A mechanism can be evolved whereby banks lending in rupees against gold would be able to borrow in foreign currency in the international markets using the same gold as collateral. This would serve the purpose of raising external resources, should there be a need for this. The advantage of this arrangement is that it is market-oriented, price-based and decentralized.

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If development of e-money in the west is any indication, is possible that a private sector unit of account that is linked to gold may come into existence in India, given the facts of huge private sector gold stocks, India’s tremendous progress in the IT area, and the fast spread of Internet in the country. The demand for private alternatives as regards store of value/medium for transactions is growing in some countries. It would be advantageous to look into this possibility.Does gold have any official monetary role left in India? Not much in a formal sense. Long before the demonetization of gold in the international monetary system in the post- Bretton Wood era, gold’s role in currency issue was brought to a level of insignificance in India. The de jure position for the last 45 years is that for gold backing against currency issue, there is a minimum level prescribed, which is quite modest at Rs 1.15 billion. The de fact position is that gold has been maintained at a much higher level, currently at around 360 tones. At the current level of currency in circulation, gold provides a backing of approximately 6%.There is good evidence to support the view that gold is held as an inflation hedge in India. This is not surprising because inflection, as it affects the vast majority of the Indian people, has been highly unpredictable. Demand for gold is likely to contain information regarding inflation expectations. Since monetary policy is reflected in the growth of money stock and ultimately, the rate of inflation, there is a case for including gold in the monetary calculus. It needs to be examined whether there is any advantage in including gold held by the private sector in the broad measure for liquidity, even though gold is not anybody’s liability. Also, gold could be included in the index for the real effective exchange rate for the rupee. There are indications that, other things things being equal, old import demands have a relationship with the real effective exchange rate of the rupee.An interesting aspect in this regard is that, while the authorities have pursued policies to de-emphasize gold and to suppress demand for gold, the balance sheet of households showed more gold on the asset side. Over the last three decades or so, the additions to the gold stocks held by households constituted around 20% of the increase in their financial assets, although on a year-to-year basis, this number has been very volatile. The happened at a time when the currency liability of the RBI was backed mostly by the debt obligations of the government. Clearly, gold was ahead in competition with money and quasi-money, which had adverse implications for interest rates and the seignior age earnings of the RBI. Does the preference for gold reflect a choice in favor of a more stable asset vis-à-vis money and bank deposits?It is a known fact that even in the present age of fiat money enforced with coercion, currency competition is a fact of life. Consumer preference, even with regard to the choice of medium of exchange/store of value, has its own way of expressing itself, no matter what the legal other and other restrictions.

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MODIFYING SHARPE RATIO

Generally, investors can be taken as risk averse. If an individual has surplus funds for investment, he would prefer to invest in risk-free securities if he is averse to taking any risk. So, if he is going to assume some risk, then he would like to be compensated by the higher return from the investment. The higher amount of risk assumed should always be compensated by the higher return expected from the investment. Investors always try to maximize the return per unit of risk that they assume. Considering the fact that higher expected returns are desirable but higher risks are not; how investors can choose between an investments with a lower expected return and lower risk is the moot question. The Sharpe Ratio devised by Prof. William Sharpe, Nobel Prize Laureate in Economics, helps investors find out how effectively an investment utilizes risk, and compares various investments with different risk profile.The Sharpe Ratio is calculated by dividing the excess return of an asset by its standard deviation of returns. The excess return is Calculated by the asset’s return in excess of the risk-free rate for a given a period. In other words, the Sharpe Ratio calculates the amount of ‘reward per unit risk’ from an investment.

Return on the Asset - Treasury Bill RateSharpe Ratio =

Standard Deviation

Significance of Sharpe Ratio

Sharpe Ratio is very useful to investors for comparing the different investment avenues, and is particularly used to evaluate the performance of mutual fund managers. It becomes a useful tool when it is used to compare the performance of different equity funds. If Sharpe Ratio is higher, the fund’s historical risk-adjusted performance will be better. A high number indicates investors get more return per unit of risk. An investor, who invests in mutual funds, would expect the fund manager to construct a portfolio with the highest possible expected rate of return as regards to the maximum level of risk the fund assumed. So, investors would like to park their funds with those mutual funds with the most able managers, that is, the one who consistently obtains the highest Sharpe Ratio and it is assumed that the fund manager has the real forecasting ability. This is applicable to all investors regardless of his or her degree of risk aversion. After identifying the most performing manager in its risk class, the investors will then decide the

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fraction of his investment corpus to allocate to this mutual fund and placing the remaining funds in risk-free securities.

Graphically, the Sharpe Ratio is the slope of the line formed by joining risk-free rate and portfolio returns in the mean/volatility space, the line obtained is know as capital allocation line or CAL. A ‘good’ fund manager is one who’s CAL is steeper than the CAL represented by the passive strategy of holding a market index portfolio. Actually, by finding out the efficient portfolio in the Markowitz’s mean-variance framework with a risk-free security is equivalent to maximizing the Sharpe ratio of the portfolio.

Common Pitfalls

Though the Sharpe Ratio is a fantastic toll for measuring risk, it is not perfect. The traditional Sharpe Ratio helps us to choose between two or more investment alternatives, provided the returns from the assets are normally distributed and uncorrelated with the returns to an investor’s existing portfolio.One of the biggest pitfalls of the traditional Sharpe Ratio is that it assumes each prospective fund’s return to be uncorrelated with the return of the existing portfolio. Prof.

Sharpe himself acknowledged the fact that the ratio may not give a reliableRanking if one or more of the assets involved are correlated with the rest of the portfolio. If fund X has a lower Sharpe Ratio than, fund Y, this ratio would suggest that we prefer Y to X. However, if X’s return is negatively correlated with the existing portfolio of the investor and Y’s return is perfectly positively correlated with the investment in fund X would reduce total portfolio risk; whereas, the investment in fund Y would add to the portfolio risk. In that case the investor’s decision will be choosing fund X rather than Y, as one will take these correlation effects into account. Correlation between the funds in question and the existing portfolio means that the traditional Sharpe Ratio cannot be relied upon to help in choosing the desired investment alternative.This problem can easily be corrected by just redefining the investment alternatives. Instead of constructing Sharpe Ratios of alternative investments considered separately, one can calculate Sharpe Ratio for each of the alternative portfolios by combining the existing portfolio with the new investment alternatives being considered, and then choose the investment whose combined portfolio has the highest Sharpe Ratio. By this modification one can achieve the basic tenet of the Sharp Ratio, which demands that the new investments being considered are uncorrelated with the rest of the portfolio as one has constructed the alternatives in such a way that there is nothing else in the portfolio.

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The difference between the traditional Sharpe Ratio and this modified version can also be illustrated in terms of the required returns to investment alternatives. If two or more investment alternatives have no correlation with the existing portfolio return, the two different Sharpe Ratios should produce identical and correct rankings, assuming that returns are normally distributed. However, if returns and positively correlated with the existing portfolio, the traditional Sharpe Ratio will understate the correct level of risk since it ignores the correlation and, hence, it will lead to an underestimation of the required, return on each investment. The higher the correlation, greater the underestimation of required returns on the new portfolio; and the probability of incorrect decisions being taken regarding the new investment are greater. Conversely, if returns are negatively correlated with the existing portfolio, the traditional Sharpe ratio will overestimate the actual level of risk and will lead to an overestimation of required return on the new portfolio. Further the correlation from zero, greater the error in our estimated required return, and greater the probability is to reject the better investment alternatives. The modified version proposed here is superior to the traditional Sharpe Ratio as it is valid regardless of the correlations of the investment alternatives being considered with the rest of the portfolio.

Negative Sharpe RatioIn practice, these may be the situations in which mutual funds underperforms treasury bills and, hence, can have negative Sharpe Ratio. The Sharpe Ratio gives correct rankings of investment opportunities when the excess returns are positive. But negative Sharpe Ratios are difficult to interpret, since in such case a fund with greater standard deviation of returns and worse average performance may have a higher Sharpe ratio, and this will be considered as a better investment opportunity. In the past few years, we can see instances in the Indian market that in the short-run returns have been negative, it is during these times Sharpe Ratio give conflicting results.Modified Sharpe\Ratio, Omega has the highest Sharpe ratio and Theta has the lowest ratio, which is correct logically.

When their Sharpe Ratio does ranking of funds, the funds will be correctly ranked when the Sharpe ratio is positive. However, if the Sharpe Ratio, the funds will be correctly ranked when the Sharpe ratio is positive. However, if the Sharpe Ratio is negative, the ranking of the funds as per the traditional measure will be misleading. So calculating the Sharpe Ratio using the modified denominator will avoid this anomaly.

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RESEARCH METHODOLOGY

Objective:

Comparing “excess return per unit of risk” of equity and GOLD for the long term, medium term, and short term.Methodology:

For the calculation of study we take S&P CNX NIFTY which is benchmark of the equity. Excess return per unit of risk calculated using the modified sharp ratio of the S&P CNX NIFY and GOLD for the long term, medium term and short term. In short term we take period of one year, for medium term we take period of three years and for long term we take period of five years and our null hypothesis is that gold gives better per unit of risk than S&P CNX NIFTY was tested for its significance.

Sample Selection:

The sampling method used was non probability sampling. It was decided to choose monthly closing price data from 1997 to 2005 for gold and S&P CNX NIFTY.

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1) Comparing return per unit risk of Gold and S&P CNX NIFTY in

short term (one year).

Null Hypothesis: The proportion of sample observations with positive difference between sharp’s measure on Gold return and S&P CNX NIFTY is at least 70%

To test the hypothesis, modify sharpe’s performance measure was chosen as the appropriate measure of return per unit risk. Modified Sharpe’s measure can be modified for our use as follows:

Modified Sharpe Ratio = (Rg-Rf) / SD (ER/absER)

Or, (Rg-Rf) / SD (ER/absER)

Where,Rg = Return of Gold for one yearRs = Return of Nifty for one yearRf = Risk free rate of return for 365 t-billER = (Rg-Rf) or (Rs-Rf)SD = Standard deviation of monthly returns for one year

Calculation:Take the monthly closing price of Gold and S&P CNX NIFTY and find the Standard Deviation for one year.Computing the return of Gold and S&P CNX NIFTY return for period one year.Measuring modified Sharpe’s ration for both Gold and S&P CNX NIFTY for 97 periods. Take the difference between two modified Sharpe’s ratios.

50

One tail z test short term (1year) Hypothesis TestingH0: P=0.70 The proportion of sample observations with

positive difference between sharp’s measure on Gold return and S&P CNX NIFTY is at least 70%

H1 : P<0.70 The proportion of the sample observation with positive differences is less than 70%

=0.01 Level of Significance for testing of Hypothesis.

PH0=0.70 Hypothesized value of population proportion that give positive difference.

qH0 = 0.30 Hypothesized value of population proportion that does not give positive difference.

n=97 Sample Size

P = 55/970.556701

Sample proportion that give positive difference.

q = 43/970.443299

Sample proportion that not give positive difference

S.E=((PH0*qH0)/n)1/2

0.046529

Zcal = P - PH0

/S.E-3.07978

Ztab -2.33

Findings:Zcal < ZtabThe sample proportion falls outside the acceptance region.Thus, the null hypothesis should be rejected.Finally, we conclude that the difference between Modified Sharp’s ratio of Gold and S&P CNX NIFTY is positive for less than 70% in short term

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Comparing return per unit risk of Gold and S&P CNX NIFTY in medium term (three year).

Null Hypothesis: The proportion of sample observations with positive difference between sharp’s measure on Gold return and S&P CNX NIFTY is at least 70%To test the hypothesis, modify sharpe’s performance measure was chosen as the appropriate measure of return per unit risk. Modified Sharpe’s measure can be modified for our use as follows:Modified Sharpe Ratio = (Rg-Rf) / SD (ER/absER)

Or, (Rg-Rf) / SD (ER/absER)

Where,Rg = Return of Gold for one yearRs = Return of Nifty for one yearRf = Risk free rate of return for 365 t-billER = (Rg-Rf) or (Rs-Rf)SD = Standard deviation of monthly returns for one year

Calculation:Take the monthly closing price of Gold and S&P CNX NIFTY and find the Standard Deviation for one year.Computing the return of Gold and S&P CNX NIFTY return for period one year.Measuring modified Sharpe’s ration for both Gold and S&P CNX NIFTY for 73 period. Take the difference between two modified Sharpe’s ratio.

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One tail z test short term (3 year)Hypothesis TestingH0: P=0.70 The proportion of sample observations with positive

difference between sharp’s measure on Gold return and S&P CNX NIFTY is at least 70%

H1: P<0.70 The proportion of the sample observation with positive differences is less than 70%

=0.01 Level of Significance for testing of Hypothesis.

PH0=0.70 Hypothesized value of population proportion that give positive difference.

qH0 = 0.30 Hypothesized value of population proportion that does not give positive difference.

n=73 Sample Size

P = 44/730.60274

sample proportion that give positive difference.

q = 29/730.39726

sample proportion that not give positive difference

S.E=((PH0*qH0)/n)1/2

0.046529

Zcal = P - PH0 /S.E -2.09031

Ztab -2.33

Findings:

Zcal < ZtabThe sample proportion falls within the acceptance region.Thus, the null hypothesis should be accepted.Finally, we conclude that the difference between Modified Sharp’s ratio of Gold and S&P CNX NIFTY is positive for more than 70%. In medium term

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Comparing return per unit risk of Gold and S&P CNX NIFTY in long term (five year).

Null Hypothesis: The proportion of sample observations with positive difference between sharp’s measure on Gold return and S&P CNX NIFTY is at least 70%To test the hypothesis, modify Sharpe’s performance measure was chosen as the appropriate measure of return per unit risk. Modified Sharpe’s measure can be modified for our use as follows:Modified Sharpe Ratio = (Rg-Rf) / SD (ER/absER)

Or, (Rg-Rf) / SD (ER/absER)

Where,Rg = Return of Gold for five yearRs = Return of Nifty for five yearRf = Risk free rate of return for long term Treasury bondER = (Rg-Rf) or (Rs-Rf)SD = Standard deviation of monthly returns for five year

Calculation : Take the monthly closing price of Gold and S&P CNX NIFTY and find the Standard Deviation for five year.Computing the return of Gold and S&P CNX NIFTY return for period five year.Measuring modified Sharpe’s ration for both Gold and S&P CNX NIFTY for 49 periods. Take the difference between two modified Sharpe’s ratios.

54

One tail z test short term (5 year)Hypothesis TestingH0: P=0.70 The proportion of sample observations with positive

difference between sharp’s measure on Gold return and S&P CNX NIFTY is at least 70%

H1: P<0.70 The proportion of the sample observation with positive differences is less than 70%

=0.01 Level of Significance for testing of Hypothesis.

PH0=0.70 Hypothesized value of population proportion that give positive difference.

qH0 = 0.30 Hypothesized value of population proportion that does not give positive difference.

n=49 Sample Size

P = 37/490.755102

sample proportion that give positive difference.

q = 12/490.244898

sample proportion that not give positive difference

S.E=((PH0*qH0)/n)1/2

0.046529

Zcal = P - PH0 /S.E 1.184251

Ztab -2.33

Findings :

Zcal < ZtabThe sample proportion falls within the acceptance region.Thus, the null hypothesis should be accepted.Finally, we conclude that the difference between Modified Sharp’s ratio of Gold and S&P CNX NIFTY is positive for more than 70%. In long term

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CONCLUSION

On the basis of short term period (1year) analysis that gold dose not give consistence performance compare to equity. Our test prove that in short term equity is better option than gold for the purpose of investment when consider the return per unit of risk

On the basis of medium term period (3 year) and long term period (5 years) analysis that gold gives consistence performance compare to equity. Our test prove that in medium term and long term gold is better option than equity for the purpose of investment when consider the return per unit of risk

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RESEARCH PLAN

Research Objectives:

To study the purpose of investor for investing into the Gold.To study whether investor are concerned about the cost of trading or not.

To study the objectives the sample size of 50 investors was taken across Ahmedabad city.

Research Design:

In order To study the purpose of investor for investing into the Gold and to study whether investors are concerned about the cost of trading or not, the ‘exploratory research’ was done. The basic purpose of this exploratory study was exploratory reach’ was done. The basic purpose of this exploratory study was to explore the various issues related to investment purpose.

Data collection:

The data collected by the researcher is primary, collected on field from the various investors across Ahmedabad region. The data has been collected through personal interview by getting questionnaire filled.Secondary data includes newspaper articles, magazine and through Internet.

Sampling Method:

For this survey, probability-sampling methods were used. The investors across Ahmedabad region were included for the study purpose.SO for this purpose simple random sampling method was used. The list of the investors was self-generated.

Sample size:

The sample size for this study was 50 investors who are investing into the Gold.

Analysis ToolsFor the analysis of collected data, following analysis tools were used:

Percentage Analysis (using pie charts)Value Analysis (using bar charts)Hypothesis Testing (using z-test)

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ANALYSIS AND INTERPRETATION

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1. Do you include gold in your portfolio?

Yes 50

No 0

From the above graph it can be seen that all the respondents that we have selected for the survey prefer to invest in the gold as an investment.

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2. How long do you invest in gold?

Short Term 22

Medium Term 11

Long Term 17

As from the above stratum out of the total 50 respondents that we have selected for the survey, 22 invest for the short term period, 11 invest for the medium term period and 17 invest for the long term period.

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3. Which parameter do you consider most while investing in gold?

Safety 23

Liquidity 7

Growth 6

Diversification 5

Volatility 9

As from the above graph out of the 50 respondents surveyed, 23 of them consider investing into the gold for the safety purpose, and 9 are for the volatility, followed by 18 respondents who consider factors other than the safety purpose for investment like liquidity, growth and diversification.

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4. Which of the following best describes you?

Institutional investor 2

Professional advisor 18

Active trader 6

Retail investor 24

From the above graph it can be clearly seen that out of the total respondent’s surveyed majority of them (48%) consider themselves as Retail investor followed by professional advisor (36%). And 12% consider themselves as an Active trader.

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5. What prompted you to invest in gold?

Attention given by media

Recommendation by friends/Relatives

Negative returns in another financial market

Instructed by you advisor

Personal research

Rank 1

9 19 22

Rank 2

9 15 3 18 5

Rank 3

12 13 9 13 3

Rank 4

14 5 17 14

Rank 5

15 8 21 6

From the above graph it can be seen that the first rank is given to the personal research by the respondents followed by instructed by your advisor as the second rank, recommendation by friends/relatives is given the third rank, negative returns in another financial market is given the fourth rank and the last rank is given to attention given by media.

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6. How much gold would you say is appropriate in a generalized

portfolio?

1%-5% 8

6%-10% 14

11%-15% 19

16%-20% 6

21% and more 3

From the above graph it can be seen that, out of the 50 respondents, 19 are investing 11-15% of their generalized portfolio into the gold. Followed by 14 respondent who invest 6-8% into the gold.

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7. What is your estimate of trading charges for buying and selling?

<0.5% 4

0.51%-1% 17

1.01%-1.5% 19

1.51%-2% 8

>2% 2

From the above graph 38% of the total respondents are paying 1.01%-1.5% as a trading charge for buying and selling of Gold followed by 34% respondents paying 0.51%-1% for the same.

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8. Which of the following method have you used to invest in gold?

Futures 18

Physical purchase 26

Both 6

Out of the 50 respondents surveyed 26 are investing through Physical purchase, 18 through futures and 8 people are investing by both futures and physical purchase.

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9. How much return do you expect, if invested into the gold?

1%-5%6%-10% 1411%-15% 2416%-20% 7Above 20% 5

Most of the respondents are expecting 11%-15% return per annum by investing into the Gold followed by 28% respondents expecting 6%-10% return per annum.

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10. How much risk do you consider, if invested in to the gold?

Low 24

Medium 17

High 9

From the above graph 24 respondents consider very low risky if invested into the gold and 17 respondents replied that they perceive it as a medium risky and rest of the respondent take it as high risky investment.

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11. Do you agree with the following statement?

I am interested in gold because I don’t trust financial assets.

Strongly disagree 15Disagree 17Neutral 13Agree 5Strongly Agree 0

From the above graph it can be seen that when respondent were asked whether they prefer to invest into the gold because they do not trust financial asset, they were strongly disagree with the statement.

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I am very sensitive to cost of trading..

Strongly disagree 2Disagree 9Neutral 17Agree 14Strongly Agree 8

From the graph it can be seen that 22 respondent are sensitive to the cost of trading. 17 respondents are neutral about statement and 11 are disagree about the statement.

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Statistical Analysis using Z-test

To study whether the investors are sensitive to cost of trading in Gold here we use Hypothesis testing using Z-test tool to analyze the collected data.

H0: People are sensitive to cost of trading.

H1: People are not sensitive to cost of trading..

InvestorH0=4H1<4A=0.1, n=50FACTOR Zeal ZtabCost -1.38323 -1.66 Accept

Result:Since, Zcal < Ztab, the null hypothesis is accepted.

Conclusion:Investors are satisfied with the cost of trading into the Gold.

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FINDINGS

From the survey it was found that main purpose of investing in the gold was safety, and another main purpose was volatility.

Professional advisors are investing in the gold through the future, and for the short term.

The retail investors are investing in the gold through physical purchase, and for the long term.

Respondent are investing in the gold by the personal research and followed by the instructed by their advisor, recommendation by friends/relatives.

In the survey we found that most of the respondents estimate the trading cost of buying and selling between 1.01 percent to 1.5 percent.

From the survey it is found that almost 50 percent expect 11 percent to 15 percent annual return by investing into the Gold.

In the survey of 50 respondents, 24 respondents associate low risk with the investment in the Gold followed by 17 respondents who associate medium risk to the investment in the Gold.

In the survey we found that people are very sensitive to the cost of trading.

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RECOMMENDATION

We recommend in short term equity is better option than gold for the purpose of investment when consider the return per unit of risk as in short term gold had been unable to give consistent return.

We recommend in medium term and long term gold is better option than equity for the purpose of investment when consider return per unit of risk as in long term and medium term gold and given consistent return.

As per our opinion it is preferable to use gold in portfolio to reduce the overall risk in portfolio as in investor increase the proportion of gold in portfolio overall risk of portfolio is reduced.

As the correlation between gold and equity is very low investment decision regarding invest in gold is not affected by equity market volatility.

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BIBLIOGRAPHY

Web Sites:

www.mcxindia.com

www.nseindia.com

www.gold.org

www.usagold.com

www.bulliondesk.com

www.nirmalbang.com

www.nsel.com

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ANNEXURES

ANNEXURE-1QUESTIONNAIRE

Do you include gold in your portfolio? a) Yes b) No

How long do you invest in gold?a) Short Term b) Medium Term c) Long Term

Which parameter do you consider most while investing in gold?a) Safety b) Liquidity c) Growth d) Diversificatione) Volatility f) Other ___________

Which of the following best describes you?a) An institutional investorb) A professional advisorc) An active traderd) Someone who works in gold industrye) A retail investorf) Other ________

What promoted you to invest in gold?a) Attention given by mediab) Recommendation by friends/Relativesc) Negative returns in another financial marketd) Instructed by your advisore) Personal researchf) Other ________How much gold would you say is appropriate in a generalized portfolio?a) 1%-5% b) 6%-10% c) 11%-15%d) 15%-20% e) 21% and more

What is your estimate of trading charges for buying and selling?a) <0.5% b) 0.51%-1% c) 1.01%-1.5%d) 1.51%-2% e) >2%

Which of the following method have you used to invest in gold?a) Furniture b) Options c) Physical purchased) Shares of gold related companies e) Others__________

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How much return do you expect, if invested into the gold?a) 1%-5% b) 6%-10% c) 11%-15%d) 16%-20% e) Above 20%

How much risk do you consider, if invested in to the gold?a) Low b) Medium c) High

Do you agree with the following statements?(Please mark your answer)I am interested in gold because I don’t trust financial assts.

Strongly Disagree

Disagree Neutral Agree Strongly Agree

I am very sensitive to cost of trading.Strongly Disagree

Disagree Neutral Agree Strongly Agree

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ANNEXURE-2

TABLE 1Short Term

DateModify sharpe ratio

Modify sharpe ratio

Gold Nifty DiffJan-97 -55.79 1.05 -56.84Feb-97 -41.56 -91.73 50.17Mar-97 -39.29 -48.56 9.27Apr-97 -38.95 0.41 -39.36May-97 -29.39 -28.86 -0.53Jun-97 -33.46 -82.18 48.72Jul-97 -24.41 -235.5 211.09Aug-97 -4.08 -242.72 238.64Sep-97 -12.14 -235.69 223.55Oct-97 -12.3 -221.93 209.63Nov-97 -5.19 -256.97 251.78Dec-97 0.77 -219.28 220.05Jan-98 -0.71 -223.32 222.61Feb-98 -7.1 -83.38 76.28Mar-98 -12.34 -140.51 128.17Apr-98 -12.72 -106.71 93.99May-98 -15.91 -206.01 190.1Jun-98 -19.78 -41.32 21.54Jul-98 -35.01 1.86 -36.87Aug-98 -37.8 3.54 -41.34Sep-98 -33.22 7.11 -40.33Oct-98 -34.25 5.86 -40.11Nov-98 -19.21 6.74 -25.95Dec-98 -52.83 7.95 -60.78Jan-99 -70.28 7.86 -78.14Feb-99 -56.02 6.99 -63.01Mar-99 -21.95 8.26 -30.21Apr-99 -47.9 4.1 -52May-99 -57.76 4.51 -62.27Jun-99 -49.86 1.81 -51.67Jul-99 0.5 2.11 -1.61Aug-99 0.62 -55.12 55.74Sep-99 0.41 71.82 -71.41Oct-99 -5.14 -137.48 132.34Nov-99 -59.09 -150.98 91.89Dec-99 -36.88 -132.12 95.24

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Jan-00 -19.72 -171.2 151.48Feb-00 -31.19 -157.31 126.12Mar-00 -40.45 -192.81 152.36Apr-00 -25.64 -273.52 247.88May-00 -19.45 -222.29 202.84Jun-00 -9.74 -193.55 183.81Jul-00 -19.27 -253.72 234.45Aug-00 -18.88 -209.59 190.71Sep-00 -15.61 -237.46 221.85Oct-00 -6.76 -281.69 274.93Nov-00 -3.16 -203.56 200.4Dec-00 -8.48 -198.55 190.07Jan-01 -13.73 -199.29 185.56Feb-01 0.36 -221.02 221.38Mar-01 3.72 -177.68 181.4Apr-01 2.97 -63.7 66.67May-01 4.9 -73.72 78.62Jun-01 4.89 -122.57 127.46Jul-01 6.74 -70.73 77.47Aug-01 5.19 -114.98 120.17Sep-01 3.97 -68.22 72.19Oct-01 3.21 -2.33 5.54Nov-01 2.44 -43.96 46.4Dec-01 3.94 -43.36 47.3Jan-02 5.57 -19.35 24.92Feb-02 6.59 -53.55 60.14Mar-02 4.6 -73.52 78.12Apr-02 2.28 -113.58 115.86May-02 -1.5 -116.01 114.51Jun-02 0.46 -57.01 57.47Jul-02 -1.93 0.13 -2.06Aug-02 0.07 2.68 -2.61Sep-02 0.96 3.79 -2.83Oct-02 1.55 5.78 -4.23Nov-02 1.64 8.09 -6.45Dec-02 2.34 6.99 -4.65Jan-03 2.49 8.52 -6.03Feb-03 1.03 8.8 -7.77Mar-03 0.35 8.14 -7.79Apr-03 2 10.72 -8.72May-03 2.61 13.47 -10.86Jun-03 -3.03 4.62 -7.65Jul-03 0.82 3.16 -2.34

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Aug-03 2.9 3.65 -0.75Sep-03 2.62 1.87 0.75Oct-03 1.16 2.23 -1.07Nov-03 2.65 1.22 1.43Dec-03 2.68 1.99 0.69Jan-04 -0.57 0.82 -1.39Feb-04 -18.64 1.18 -19.82Mar-04 -10.63 1.7 -12.33Apr-04 -2.14 1.47 -3.61May-04 0.7 0.23 0.47Jun-04 0.42 6.85 -6.43Jul-04 0.14 8.05 -7.91Aug-04 -10.81 7.18 -17.99Sep-04 -7.48 8.09 -15.57Oct-04 0.58 8.42 -7.84Nov-04 1.19 4.29 -3.1Dec-04 1.46 4.59 -3.13Jan-05 3.82 4.51 -0.69

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TABLE 2Medium Term

DateModify sharpe ratio

Modify sharpe ratio

Gold Nifty DiffJan-97 -221.8 1.63 -223.43Feb-97 -175.18 1.85 -177.03Mar-97 -165.42 2.25 -167.67Apr-97 -189.9 1.26 -191.16May-97 -186.53 -130.16 -56.37Jun-97 -200.29 -142.33 -57.96Jul-97 -157.75 -155.97 -1.78Aug-97 -114.62 -223.34 108.72Sep-97 -121.12 -95.11 -26.01Oct-97 -130.59 -207.28 76.69Nov-97 -120.38 -227.07 106.69Dec-97 -97.24 -86.36 -10.88Jan-98 -104 -170.4 66.4Feb-98 -135.16 -8.53 -126.63Mar-98 -157.08 -136.11 -20.97Apr-98 -141.99 -303.17 161.18May-98 -160.09 -349.49 189.4Jun-98 -154.73 -276.05 121.32Jul-98 -155.41 -189.08 33.67Aug-98 -158.83 -204.3 45.47Sep-98 -149.66 -154.47 4.81Oct-98 -133.34 -327.84 194.5Nov-98 -153.34 -223.62 70.28Dec-98 -158.44 -122.84 -35.6Jan-99 -157.95 -203.27 45.32Feb-99 -130.92 -248.42 117.5Mar-99 -113.1 -221.3 108.2Apr-99 -103.37 -285.67 182.3May-99 -92.91 -249.18 156.27Jun-99 -52.85 -355.58 302.73Jul-99 -15.77 -367.06 351.29Aug-99 -16.27 -458.6 442.33Sep-99 -32.05 -472.07 440.02Oct-99 -30.63 -488.19 457.56Nov-99 -89.84 -476.93 387.09Dec-99 -58.83 -451.36 392.53Jan-00 -35.71 -465.52 429.81

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Feb-00 -15.06 -507.39 492.33Mar-00 -19.97 -485.11 465.14Apr-00 -31.63 -507.75 476.12May-00 -38.18 -481.57 443.39Jun-00 -3.46 -442.69 439.23Jul-00 -34.94 -447.78 412.84Aug-00 -51.33 -383.63 332.3Sep-00 -33.28 -325.69 292.41Oct-00 -17.95 -229.41 211.46Nov-00 -18.57 -75.64 57.07Dec-00 0.29 -100.52 100.81Jan-01 1.23 0.85 0.38Feb-01 3.51 -68.7 72.21Mar-01 5.19 -6.76 11.95Apr-01 4.44 2.82 1.62May-01 3.28 3.67 -0.39Jun-01 0.76 -46.55 47.31Jul-01 3.06 0.67 2.39Aug-01 4.89 3.01 1.88Sep-01 5.28 3.66 1.62Oct-01 3.79 9.16 -5.37Nov-01 4.78 8.18 -3.4Dec-01 7.07 8.02 -0.95Jan-02 5.99 9.72 -3.73Feb-02 2.88 9.16 -6.28Mar-02 -0.05 7.94 -7.99Apr-02 2.54 7.94 -5.4May-02 0.45 7.04 -6.59Jun-02 -33.35 10.26 -43.61Jul-02 -24 11.57 -35.57Aug-02 -16.94 16.66 -33.6Sep-02 0.04 15.92 -15.88Oct-02 1.64 21.32 -19.68Nov-02 3.96 17.58 -13.62Dec-02 4.94 17.85 -12.91Jan-03 6.53 18.98 -12.45

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TABLE 3Long Term (5 year)

DateModify sharpe ratio

Modify sharpe ratio

Gold Nifty DiffJan-97 -326.84 -600.8 273.96Feb-97 -274.33 -590.16 315.83Mar-97 -265.84 -595.89 330.05Apr-97 -275 -584.4 309.4May-97 -243.29 -671.34 428.05Jun-97 -225.68 -685.8 460.12Jul-97 -193.79 -693.94 500.15Aug-97 -153.23 -717.93 564.7Sep-97 -167.76 -629.9 462.14Oct-97 -170.67 -692.26 521.59Nov-97 -154.72 -635.16 480.44Dec-97 -120.38 -502.44 382.06Jan-98 -118.6 -546.65 428.05Feb-98 -138.75 -587.53 448.78Mar-98 -149.08 -638.66 489.58Apr-98 -157.74 -677.76 520.02May-98 -197.44 -722.93 525.49Jun-98 -172.03 -642.59 470.56Jul-98 -180.57 -449.41 268.84Aug-98 -211.5 -427.21 215.71Sep-98 -191.94 -210.08 18.14Oct-98 -171.4 -221.36 49.96Nov-98 -194.86 -4.56 -190.3Dec-98 -172.16 1.27 -173.43Jan-99 -146.09 3.28 -149.37Feb-99 -133.38 -16.51 -116.87Mar-99 -147.11 -41.3 -105.81Apr-99 -125.26 -141.12 15.86May-99 -140.27 0.04 -140.31Jun-99 -135.52 -372.25 236.73Jul-99 -91.72 -406.82 315.1Aug-99 -62.8 -415.77 352.97Sep-99 -54.32 -467.2 412.88Oct-99 -65.43 -403.18 337.75Nov-99 -114.57 -320.02 205.45Dec-99 -67.65 -259.42 191.77Jan-00 -57.52 -264.72 207.2

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Feb-00 -79.62 -307.89 228.27Mar-00 -93.93 -328.2 234.27Apr-00 -61.11 -282.04 220.93May-00 -45.55 -242.04 196.49Jun-00 -55.99 -140.4 84.41Jul-00 -75.49 -161.04 85.55Aug-00 -96.13 -46.75 -49.38Sep-00 -85.32 -75.51 -9.81Oct-00 -60.6 3.5 -64.1Nov-00 -34.06 3.21 -37.27Dec-00 -6.43 4.53 -10.96Jan-01 3.28 7.17 -3.89

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THANK YOU

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