A project report on commodity market with special reference to gold at karvy stock exchange
1. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO
GOLD
S.NO Table of Contents Page
No
1 Executive Summary 1-4
Company Profile
2
• History 5-14
• Overview
• About Karvy Group
• Stock Broking Services
• About Karvy Commodities Broking Limited
• KARVY Advantage
• Organization Chart
Introduction to commodity market
3 15-25
Research Methodology
4 26-29
5 Indian Commodity Futures Market 30-46
• Introduction
• Commodity trading contracts
• Future market mechanisms
• Participants in futures market & trading procedure
• Limitations of commodity future market
Gold Commodity Future Market Introduction
6 • Gold in Indian Scenario 47-60
• World Markets
• Gold an Independent Asset
BABASAB PATIL PROJECT REPORT OF FINANCE
2. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO
GOLD
• Turning to demand
• What makes Gold Special?
• Fixing of spot gold prices
• Sources Of Gold For The Goldsmiths
Investor Awareness And Their Perception
7 61-65
• Investment
• Aware
• Investment in commodity future
• Future investment and services expectation
8 Impact of Spot Gold Market on Future Gold Market 66-69
9 Factors Affecting Future Gold Market 70-78
10 FINDINGS 79-80
11 SUGGESTIONS 81
12 CONCLUSION 82
13 BIBLIOGRAPHY 83
Executive Summary
BABASAB PATIL PROJECT REPORT OF FINANCE
3. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO
GOLD
Investing in various types of assets is an interesting activity that
attracts people from all walks of life. Investors who are having extra cash
could invest it in securities like shares or any other assets like gold,
which comes under commodity futures market. Commodity Futures are
contracts to buy specific quantity of a particular commodity at a future
date. It is similar to the index futures and stock futures but the
underlying happens to be commodities instead of stocks.
Now days, the commodity market is in growth stage and the Karvy
Finapolis Belgaum; working as a broking firm wants to expand and for
extensive reach thinking of establishing branches in various cities of
Karnataka.
I have taken the commodity futures, to study and analyze, as it is the
emerging trend in the market, at Karvy Finapolis Belgaum, I have
taken Gold as the commodity to study the Impact of present gold price
on future gold market and its trading mechanism.
Title: “Study of Commodity Market with Special Reference to
Gold.” at KARVY Finapolis Belgaum
Objectives:
• To study the mechanism of commodity market.
• To study the spot gold market.
• To study whether the goldsmiths of Belgaum city aware of
commodity market and their perception.
• To analyses the impact of spot gold market on future gold
market.
BABASAB PATIL PROJECT REPORT OF FINANCE
4. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO
GOLD
• To study the factors such as economic factors of US, world
political and other factors affect on future market.
Research methodology:
SAMPLE SIZE: 100 random sample size
SAMPLE TYPE: Simple random sampling
SAMPLE AREA: Belgaum city
TOOL USED FOR ANALYSES:
1. Graphical Representation of Analysis:
Pie charts
Line Chart
2. SPSS
3. Correlation
SOURCES OF DATA COLLECTION:
Primary Data-
• Questionnaire
• Observation and personal discussion with gold traders.
Secondary data-
• Information collected from different websites likes Gold
World, MCX etc.
• From various text books, journals, magazines, news
papers and booklets from company.
LIMITATION OF THE STUDY:
Spot prices are varying from shop to shop.
BABASAB PATIL PROJECT REPORT OF FINANCE
5. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO
GOLD
Commission has not included spot prices of the
commodity.
Study of awareness and perception of the investor is
only based on sample size.
The study of awareness is limited to Belgaum city.
Findings:
• There is positive correlation between both market traders
can easily predict the future prices of the commodities and hedge
their positions.
• Most of the respondents are interested in investing in equity
(i.e. 49%) when compared to the other investment alternatives
because they feel investing in equity will provide more returns to
them.
• 82% of Investors are aware about commodity future market.
• 67% of Investors have not invested as they have a perception
that it is risky and they even do not have much knowledge about
trading mechanism.
• For gold price fluctuation main reasons are
• Dollar depreciation / appreciation
• World distress
• Increase in money supply
• Inflation
BABASAB PATIL PROJECT REPORT OF FINANCE
6. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO
GOLD
Suggestions:
Both the markets are positively correlated the traders have
knowledge about the commodity demand and supply and their
price fluctuations. So Karvy can approach these traders and they
can easily convince them so these people are the targeted
customers for Karvy.
More Awareness program has to be conducted by Karvy
consultants so that already aware investor takes the challenge to
invest in this commodity future market. Because since this was
new to the market and also risky but gives good return. so it can
be done through by giving advertisements in local channels, News
papers, by sending E-mail to present customers etc
From survey it is found that most of the potential customers are
concerned about the genuine information and moderate brokerage
so Karvy can look upon this. If it can give good information and
charge moderate brokerage it will help to attract more and more
customers.
Conclusion
Capital market is already matured and reached at high level, every
investor interested to invest but not in commodity Future Market due to
lack of awareness. As per Data analysis most of the investors do not have
much idea of commodity market in Belgaum they are required to be
given awareness training and knowledge with the help of workshops and
seminars, as investors are willing to know more about commodity
market. There exists a high degree of positive correlation between Spot
Commodity Market and Commodity Future Market. If an amount of
small change in the spot gold market prices has the direct impact on the
future prices of gold in commodity market.
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COMPAN PROFILE
The birth of Karvy was on a modest scale in 1981. It began with
the vision and enterprise of a small group of practicing Chartered
Accountants who founded the flagship company …Karvy Consultants
Limited. We started with consulting and financial accounting
automation, and carved inroads into the field of registry and share
accounting by 1985. Since then, we have utilized our experience and
superlative expertise to go from strength to strength…to better our
services, to provide new ones, to innovate, diversify and in the process,
evolved Karvy as one of India’s premier integrated financial service
enterprise.
Thus over the last 20 years Karvy has traveled the success route,
towards building a reputation as an integrated financial services
provider, offering a wide spectrum of services. And we have made this
journey by taking the route of quality service, path breaking innovations
in service, versatility in service and finally…totality in service.
Our highly qualified manpower, cutting-edge technology, comprehensive
infrastructure and total customer-focus has secured for us the position
of an emerging financial services giant enjoying the confidence and
support of an enviable clientele across diverse fields in the financial
world.
Our values and vision of attaining total competence in our
servicing has served as the building block for creating a great financial
enterprise, which stands solid on our fortresses of financial strength -
our various companies.
BABASAB PATIL PROJECT REPORT OF FINANCE
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GOLD
With the experience of years of holistic financial servicing behind
us and years of complete expertise in the industry to look forward to, we
have now emerged as a premier integrated financial services provider.
And today, we can look with pride at the fruits of our mastery and
experience – comprehensive financial services that are competently
segregated to service and manage a diverse range of customer
requirements.
Overview:
KARVY, is a premier integrated financial services provider, and ranked
among the top five in the country in all its business segments, services
over 16 million individual investors in various capacities, and provides
investor services to over 300 corporate, comprising the who is who of
Corporate India. KARVY covers the entire spectrum of financial services
such as Stock broking, Depository Participants, Distribution of financial
products - mutual funds, bonds, fixed deposit, equities, Insurance
Broking, Commodities Broking, Personal Finance Advisory Services,
Merchant Banking & Corporate Finance, placement of equity, IPO,
among others. Karvy has a professional management team and ranks
among the best in technology, operations and research of various
industrial segments.
Value and Vision of Karvy Stock Broking Ltd:
“Our values and vision of attaining total competence in our servicing has
served as the building block for creating a great financial enterprise,
which stands solid on our fortress of financial strength – our various
companies”.
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About KARVY Group
Karvy has traveled the success route, towards building a
reputation as an integrated financial services provider, offering a wide
spectrum of services for over 20 years.
Karvy, a name long committed to service at its best. A fame
acquired through the range of corporate and retail services including
mutual funds, fixed income, equity investments, insurance ……… to
name a few. Our values and vision of attaining total competence in our
servicing has served as a building block for creating a great financial
enterprise.
The birth of Karvy was on a modest scale in the year 1982. It
began with the vision and enterprise of a small group of practicing
Chartered Accountants based in Hyderabad, who founded Karvy. We
started with consulting and financial accounting automation, and then
carved inroads into the field of Registry and Share Transfers.
Since then, we have utilized our quality experience and superlative
expertise to go from strength to strength to provide better and new
services to the investors. And today, we can look with pride at the fruits
of our experience into comprehensive financial services provider in the
Country.
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KARVY Group companies are:
Karvy Consultants Limited
Karvy Stock Broking Limited
Karvy Investor Services Limited
Karvy Computershare Private Limited
Karvy Global Services Limited
Karvy Comtrade Limited
Karvy Insurance Broking Private Limited
Karvy Mutual Fund Services
Karvy Securities Limited
Stock Broking Services:
It is an undisputed fact that the stock market is unpredictable and
yet enjoys a high success rate as a wealth management and wealth
accumulation option. The difference between unpredictability and a
safety anchor in the market is provided by in-depth knowledge of market
functioning and changing trends, planning with foresight and choosing
one & rescue’s options with care. This is what we provide in our Stock
Broking services.
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GOLD
We offer services that are beyond just a medium for buying and
selling stocks and shares. Instead we provide services, which are multi
dimensional and multi-focused in their scope. There are several
advantages in utilizing our Stock Broking services, which are the reasons
why it is one of the best in the country.
We offer trading on a vast platform; National Stock Exchange,
Bombay Stock Exchange and Hyderabad Stock Exchange. More
importantly, we make trading safe to the maximum possible extent, by
accounting for several risk factors and planning accordingly. We are
assisted in this task by our in-depth research, constant feedback and
sound advisory facilities. Our highly skilled research team, comprising of
technical analysts as well as fundamental specialists, secure result-
oriented information on market trends, market analysis and market
predictions. This crucial information is given as a constant feedback to
our customers, through daily reports delivered thrice daily ; The Pre-
session Report, where market scenario for the day is predicted, The Mid-
session Report, timed to arrive during lunch break , where the market
forecast for the rest of the day is given and The Post-session Report, the
final report for the day, where the market and the report itself is
reviewed. To add to this repository of information, we publish a monthly
magazine. The Finapolis, which analyzes the latest stock market trends
and takes a close look at the various investment options, and products
available in the market, while a weekly report, called Karvy Bazaar
Baatein keeps you more informed on the immediate trends in the stock
market. In addition, our specific industry reports give comprehensive
information on various industries. Besides this, we also offer special
portfolio analysis packages that provide daily technical advice on scripts
for successful portfolio management and provide customized advisory
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services to help you make the right financial moves that are specifically
suited to your portfolio.
Our Stock Broking services are widely networked across India,
with the number of our trading terminals providing retail stock broking
facilities. Our services have increasingly offered customer oriented
convenience, which we provide to a spectrum of investors, high-net worth
or otherwise, with equal dedication and competence.
About Karvy Commodities Broking Limited:
Commodities market, contrary to the beliefs of many people, has
been in existence in India through the ages. However the recent attempt
by the Government to permit Multi-commodity National levels exchanges
has indeed given it, a shot in the arm. As a result two exchanges Multi
Commodity Exchange (MCX) and National Commodity and derivatives
Exchange (NCDEX) have come into being. These exchanges, by virtue of
their high profile promoters and stakeholders, bundle in themselves,
online trading facilities, robust surveillance measures and a hassle-free
settlement system. The futures contracts available on a wide spectrum of
commodities like Gold, Silver, Cotton, Steel, Soya oil, Soya beans, Wheat,
Sugar, Channa etc., provide excellent opportunities for hedging the risks
of the farmers, importers, exporters, traders and large scale consumers.
They also make open an avenue for quality investments in precious
metals. The commodities market, as the movements of the stock market
or debt market do not affect it provides tremendous opportunities for
better diversification of risk. Realizing this fact, even mutual funds are
contemplating of entering into this market.
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Karvy Commodities Broking Limited is another venture of the
prestigious Karvy group. With our well established presence in the
multifarious facets of the modern Financial services industry from stock
broking to registry services, it is indeed a pleasure for us to make foray
into the commodities derivatives market which opens yet another door
for us to deliver our service to our beloved customers and the investor
public at large.
With the high quality infrastructure already in place and a committed
Government providing continuous impetus, it is the responsibility of us,
the intermediaries to deliver these benefits at the doorsteps of our
esteemed customers. With our expertise in financial services, existence
across the lengths and breadths of the country and an enviable
technological edge, we are all set to bring to you, the pleasure of
investing in this burgeoning market, which can touch upon the lives of a
vast majority of the population from the farmer to the corporate alike. We
are confident that the commodity futures can be a good value addition to
your portfolio.
The company provides investment, advisory and brokerage services
in Indian Commodities Markets. And most importantly, we offer a wide
reach through our branch network of over 225 branches located across
180 cities.
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KARVY Advantage:
Trade from anywhere in India Karvy, with its network of branches across
the length and breadth of the country, is always within your reach, no
matter where you are. This gives you the facility to trade from anywhere
in India.
Reliable research
Karvy has a dedicated team of research analysts who work round the
clock to provide the best research newsletters and advices. We reach
your desk daily, weekly and monthly.
Personalized Services
Karvy, with its wide array of personalized services from registry to stock
broking takes the pleasure of adding one more service, commodities
broking with the same personal touch
State of Infrastructure
The strong IT backbone of Karvy helps us to provide customized direct
services through our back office system, nation-wide connectivity and
website.
Round the clock operations in commodities trading
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Indian commodities market, unlike stock market keeps awake till 11 in
the night and Karvy is all poised to offer round the clock services
through its dedicated team of professionals.
The account opening forms are available at our branch offices and
with our business associates. You are requested to kindly contact a
branch nearby your area and complete the account opening formalities
for commodities trading at the branches.
Also you can take a print out and fill out a simple account opening
form from our website and complete the necessary documentation as per
the checklist enclosed in the form. The form after duly filled up may be
deposited at the nearest Karvy Branch or Associate along with a
cheque/DD favoring “Karvy Commodities Broking Private Limited”
payable at Hyderabad towards initial margin. Please remember the
Member-Client agreement has to be executed on a non-judicial stamp
paper, as per the applicable by the ‘Stamp Duty Act’ of the relevant state.
Deposit Initial Margin:
You need to deposit an initial upfront margin as specified by the
exchange (usually between 5-10% of the contract value).The cheque/DD
should be in favour of “Karvy Commodities Broking Private Limited”
Mark to Market Margin:
In addition to initial margin, you also need to keep a mark to
market margin for taking care of the adverse price movements, if any.
Achievements
• Among the top 5 stock brokers in India (4% of NSE volumes)
• India's No. 1 Registrar & Securities Transfer Agents
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• Among the to top 3 Depository Participants
• Largest Network of Branches & Business Associates
• ISO 9002 certified operations by DNV
• Among top 10 Investment bankers
• Largest Distributor of Financial Products
• Adjudged as one of the top 50 IT uses in India by MIS Asia
• Full Fledged IT driven operations
Organization Chart
Managing Director
Chief Managing Director
Vice-President Vice-President Vice-President Vice-President
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Karvy Karvy Karvy Karvy
Securities Ltd. Stock Broking Ltd Consultants Ltd. Investors Services Ltd.
Deputy Deputy Deputy Deputy
General General General General
Manager Manager Manager Manager
Senior Manager Senior Manager Senior Manager SenoirManager
Branch Manager
Number of Team Leaders
N number of Executives
Introduction to commodity market
Ever since the drawn of civilization, commodity trading has become
an integral part of mankind. The first and foremost reason is that
commodity represents the fundamental elements of lifestyle of human
beings. In the early days, people used to exchange goods for goods,
which was called as ‘Barter System’. With the advancement of
civilization, trading system has gone through various changes and has
now entered into an era of Future trading besides existence physical
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trading across the world. The history of Commodity Future trading can
be traced back to 1688 with the introduction of Future trading in rice in
Japan. This was followed by an increased participation in commodity
derivatives, especially in Futures, in the industrialized countries like
America and Britain. All the countries opened the avenue for
introduction of Future trading in commodities in 19th century. Major
commodity Future trading platforms opened in the world are Chicago
Board of Trade (NYBOT) and New York Mercantile Exchange (NYMEX).
A Commodity derivative is a contract which derives its value from
an underlying commodity. The main purpose of Future market is to
provide a mechanism for successfully managing the price risk associated
with commodities. Future markets provide a platform for buyers and
sellers to trade in a huge number of diverse commodities such as
agricultural products, metals and energy. These markets are not only
meant for hedgers, speculators and arbitrages, but also for retail
investors who want to trade in booming commodity market.
Indian scenario
The commodity derivatives markets in India are as old as those of
the US. The origin of commodity derivatives markets in India can be
traced back to 1875, when Bombay Cotton Trade Association Ltd., was
set up to start trading in cotton Futures. Subsequent to this, many other
associations have started Future trading in commodities at different
places. For example, the Futures trading in oilseeds started in 1900 at
Bombay, raw jute and jute products in 1912 in Calcutta, wheat in Hapur
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in 1913, bullion in Bombay in 1920. However, in 1939, the Option
trading in cotton was banned by the government of Bombay to restrict
the speculative activity in the cotton market. in subsequent years,
forward trading in various commodities like oilseeds, food grains,
vegetable oil, sugar cloth were also prohibited.
India’s commodity exchanges have come a long way since their
opening up in the early twenty first century. In India, three national level
exchanges namely Multi Commodity Exchange of India (MCEX), National
Commodity and Derivatives Exchange (NCDEX) and National Multi
Commodity Exchanges are operating to cater to the needs of Indian
investors. Apart from these national level exchanges, nearly 20 regional
exchanges are in operation, to deal with specified commodities in that
region.
Present Scenario
Over the last 20 years, the prices of commodities have generally
been bearish. Even as recently as 2002-03, the outlook on the recovery
in the global economy and world trade was generally subdued due to
depressed equity markets, weakening US dollar and geopolitical
concerns. Commodity market across the world was impacted by these
developments. However, of late, the scenario has completely changed as
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the global economy recovered from its slump aided by the boom in the
US markets and increased demand from developing economies like India
and China. In the global investment market, the newly hailed, attractive,
asset class is commodities. So, investors are being attracted to this new
booming market for investment.
Meaning of commodity derivative market
FCRA Forward Contracts (Regulation) Act, 1952 defines “goods” as
“every kind of movable property other than actionable claims, money and
securities”. Futures’ trading is organized in such goods or commodities
as are permitted by the Central Government. At present, all goods and
products of agricultural (including plantation), mineral and fossil origin
are allowed for futures trading under the auspices of the commodity
exchanges recognized under the FCRA.
A commodity derivative is a contract which derives its value from
an underlying commodity. The main purpose of future market is to
provide a mechanism for successfully managing the price risks
associated with commodities. Future market provides a platform for
buyer and seller to trade in a huge number of diverse commodities such
as agriculture products, metals and energy. These markets are not only
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meant for hedgers, speculators and arbitrages, but also for retail
investors who want to trade in booming commodity market.
Commodity derivatives market trade contracts for which the
underlying asset is commodity. It can be an agricultural commodity like
wheat, soybeans, rapeseed, cotton, etc or precious metals like gold,
silver, etc.
Difference between Commodity and Financial derivatives
The basic concept of a derivative contract remains the same
whether the underlying happens to be a commodity or a financial asset.
However there are some features which are very peculiar to commodity
derivative markets. In the case of financial derivatives, most of these
contracts are cash settled. Even in the case of physical settlement,
financial assets are not bulky and do not need special facility for storage.
Due to the bulky nature of the underlying assets, physical settlement in
commodity derivatives creates the need for warehousing. Similarly, the
concept of varying quality of asset does not really exist as far as financial
underlings’ are concerned. However in the case of commodities, the
quality of the asset underlying a contract can vary at times.
Why are Commodity Derivatives Required
India 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
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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.
It is unfortunate that the policies of FMC during the most of 1950s
to 1980s suppressed the very markets it was supposed to encourage and
nurture to grow with times. It was a mistake other emerging economies
of the world would want to avoid. However, it is not in India alone that
derivatives were suspected of creating too much speculation that would
be to the detriment of the healthy growth of the markets and the farmers.
Such suspicions might normally arise due to a misunderstanding of the
characteristics and role of derivative product.
It is important to understand why commodity derivatives are
required and the role they can play in risk management. It is common
knowledge that prices of commodities, metals, shares and currencies
fluctuate over time. The possibility of adverse price changes in future
creates risk for businesses. Derivatives are used to reduce or eliminate
price risk arising from unforeseen price changes. A derivative is a
financial contract whose price depends on, or is derived from, the price of
another asset.
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Spread trade in commodities
In Future trading, a spread trade refers to the act of buying one
commodity or Futures contract and selling a related one, in an attempt
to profit from the price difference between the two. Basically, it is an act
of entering long (buying) as well as short (selling) position simultaneously
in an attempt to make profit.
There can be three types of spread one can enter in Commodity
Derivative Market.
1. A spread can be established between different months of the same
commodity (called an inter delivery spread).
2. Between the same related commodities, usually for the same
month (inter commodity spread).
3. Between the same or related commodities traded on two different
exchanges (inter market spread).
Spread trading can be done at the market price or at desired difference
level between the commodities. For example, Buy one contract of
February of December Gold and at the same time sell one contract of
February Gold when the February Gold contract is 100 points higher
than the December contract.
In this case first and foremost thing that need to be observed is the
liquidity present in both the contracts. The benefits that can be arrived
from entering in spread trading is the lower margin requirement, because
these strategies normally carry less risk. Spreads are usually less volatile
and prices move less quickly, which can be good for beginners who may
be intimated by the speed and price fluctuations of a single outright
trade in Future Market.
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Myths on commodities trading
In recent past, we notice that the regulators banned trading in few
commodities, thereby creating misconception in the minds of traders
about the commodities market. Hence, the following is an attempt to
demystify the common myths prevailing among the investors.
1) Commodity market is too complex to understand:
Commodities markets are not complex as the product dealt in are
natural and therefore cannot be artificially manipulated. The demand
and supply also depends upon economic factors. It is easier to
understand commodities as in our daily life we are familiar with
commodities, we know the ruling prices of these commodities in the
market, while in stocks, we are not fully aware about internal affairs of
the company.
2) Only farmers are interested In trading and also only they
should be trading:
It is in correct to say that farmers would use this market. Actually, the
farmers only use the commodity future prices as a tool to decide which
crop to grow and to what extent and some large formers would use this
market to hedge their risk through an intermediary. These intermediaries
would normally be the same commission agents who help formers to sell
their crop in cash market. Apart from farmer, others related to
commodity trading either directly or indirectly can participate in trading
to hedge their price risk.
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3) Commodity markets are operating to serve the needs of
speculators and not of the real investors:
Commodities markets existence serves for price discovery and price
risk management. Through this platform everybody related to
commodities can find better price discovery mechanism. Producers and
consumers of the commodity can minimize their price risk by way of
hedging. However, speculators constitute only one dimension the market.
they can work only because someone is hedging their risk in the market.
this market provides the price signals to producers as well as consumers
to meet their long term requirement. These price signals are not available
to users unless there is a commodity futures exchange and in its
absence, the markets have price fluctuations. Price stabilization comes
from the price discovery process when market participants react
positively to the information available to decide a price.
4) Large membership is required to run commodity exchanges:
It is a misconception that to be a successful commodity exchange it
needs large number of members. Success of any commodity exchange
depends upon good and well-spread brokerage houses and there
penetration levels. Once the commodity futures trading is well
established, then the services will be broadened to many intermediaries
with separate trading rights and have few members with separate trading
rights and have few members with clearing rights like banks.
5) Commodities are only cash settled contracts:
Unlike equity market, commodities traded through exchanges are
deliverable on expiry. To facilitate smooth delivery process, the Forward
Markets Commission (FMC) has categorized the delivery mechanism into
three dimensions viz., compulsory delivery contracts, sellers’ option
contracts. On expiry of the contracts, the open positions will be either
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settled by delivery or cash depending upon sellers and buyers. Since the
delivery process takes long time to materialize and one has to keep track
of all the delivery process transactions, nobody wants to take burden of
delivery handling process.
Note:
Compulsory delivery option- it is an option where on the expiry of
contract of a particular commodity, all the open outstanding positions
are closed out by way of delivery. Heavy penalties are levied in case of
default in delivery.
Seller option – it is an option where the sellers has right to deliver the
particular commodity on the expiry of the contract. In this option seller
has to give his intention 5 working days prior to the expiry of the
contract. The client who has not delivery intention and having open
position at the expiry of the contract has to bear a stipulated penalty.
Both Option/Intention Matching – in both the option contract the
delivery happens only case of where the intention from buyer as well as
seller received for a prescribed commodity to the extent of matched
quantity. These contracts are generally cash selected and there is no
penalty for open position.
6) The quality of produce stored in godown is guaranteed by
depository/warehouse:
Quality of produce is stored in exchange designated warehouse is not
guaranteed by anyone until the standards in warehousing management
improve to ensure preservation of the quality of goods stored. If the
quality is not assured no benefit accrues to the user. Therefore, the
exchange should provide a system, whereby the seller must ensure
quality certification before tendering delivery and the buyer must have
option to recheck the at the time of collecting delivery and in case of any
discrepancies compare to the contract specifications, they should have
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an option to reject it. Worldwide no demat delivery is operational in
commodity.
7) Commodity future markets are more risky and so it is not
advisable to trade in commodities:
While scrip price can go down even by 30-40 percent in a single trading
session, it cannot happen in commodity futures price is based on the
intrinsic value of the commodity. For instance, a scrip future can go
down from Rs.4000 to Rs.2800 in a trading session, but Gold Feb 2004
contract would normally not come down from Rs.10300 to Rs.8400 in a
single trading session, because the inherent value of the gold would not
fall so drastically. Therefore it would volatile than stocks.
What can commodity market offer?
If you are an investor, commodities futures represent a good form of
investment because of the following reasons..
• High Leverage – The margins in the commodity futures market
are less than the F&O section of the equity market.
• Less Manipulations - Commodities markets, as they are governed
by international price movements are less prone to rigging or price
manipulations.
• Diversification – The returns from commodities market are free
from the direct influence of the equity and debt market, which means
that they are capable of being used as effective hedging instruments
providing better diversification. If you are an importer or an exporter,
commodities futures can help you in the following ways…
• Hedge against price fluctuations – Wide fluctuations in the
prices of import or export products can directly affect your bottom-line as
the price at which you import/export is fixed before-hand. Commodity
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futures help you to procure or sell the commodities at a price decided
months before the actual transaction, thereby ironing out any change in
prices that happen subsequently.
If you are a producer of a commodity, futures can help you as follows:
• Lock-in the price for your produce – If you are a farmer, there is
every chance that the price of your produce may come down drastically
at the time of harvest. By taking positions in commodity futures you can
effectively lock-in the price at which you wish to sell your produce
• Assured demand – Any glut in the market can make you wait
unendingly for a buyer. Selling commodity futures contract can give you
assured demand at the time of harvest. If you are a large scale consumer
of a product, here is how this market can help you.
• Control your cost – If you are an industrialist, the raw material
cost dictates the final price of your output. Any sudden rise in the price
of raw materials can compel you to pass on the hike to your customers
and make your products unattractive in the market. By buying
commodity futures, you can fix the price of your raw material.
• Ensure continuous supply – Any shortfall in the supply of raw
materials can stall your production and make you default on your sale
obligations. You can avoid this risk by buying a commodity futures
contract by which you are assured of supply of a fixed quantity of
materials at a pre-decided price at the appointed time.
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Research Methodology
TOPIC:
“ Study of Commodity Market with Special Reference to
Gold.” at KARVY Finapolis Belgaum for fulfillment of requirement of
MBA IVth semester in Institute of Management Education and research.
It was an opportunity to learn the practical aspects of the firm.
OBJECTIVES:
• To study the mechanism of commodity market.
• To study the spot gold market.
• To study whether the goldsmiths of Belgaum city aware of
commodity market and their perception.
• To analyses the impact of spot gold market on future gold
market.
• To study the factors such as economic factors of US, world
political and other factors affect on future market.
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SAMPLE SIZE:
The sample size is consisting of goldsmiths and gold traders
of Belgaum city. 100 random sample sizes have taken to identify the
awareness level of gold commodity market in Belgaum city and to know
the spot gold market.
SAMPLE TYPE:
Simple random sampling is adopted to select respondent.
SAMPLE AREA:
Belgaum City
DURATION OF PROJECT:
1st Phase - December to January
2nd Phase - January to April (weekly two days)
TOOL USED FOR ANALYSES:
1. Graphical Representation of Analysis:
a. Pie charts
b. Line Chart
2. SPSS
3. Correlation coefficient: It measures the intensity or the
magnitude of linear relationship between two variables.
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N∑XY-(∑X) (∑Y)
Correlation(r) =
[N∑X2 –(∑X)2]1/2[N∑Y2 –(∑Y)2]1/2
Probability Error: It is an old measure of testing the reliability of an
observed value of correlation coefficient in so far as it depends upon the
condition of the random sampling.
Probable Error = 0.6745* (1-r2)
√n
Rules:
If, PE *6 > r then correlation is not significant.
If, PE < r then correlation is significant.
In other situation, nothing can be concluding with certainty.
DATA COLLECTION APPROACH:
Primary data is important data for successful research. It has
collected through questionnaire and personal discussion with brokers
and gold traders. And also secondary data which act like key for
successful research is collected from MCX, Gold World website and
articles in newspapers such as Business Line, Economic Standards. Spot
prices were collected from business line news paper and confirm it from
gold smith and future prices were collected from MCX.
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SOURCES OF DATA COLLECTION:
Primary and secondary data are collected from following sources…
Primary Data-
• Questionnaire
• Observation and personal discussion with gold traders.
Secondary data-
• Information collected from different websites likes Gold World,
MCX etc.
• From various text books, journals, magazines, news papers and
booklets from company.
LIMITATION OF THE STUDY:
• Spot prices are varying from shop to shop.
• Commission has not included spot prices of the commodity.
• Study of awareness and perception of the investor is only based
on sample size.
• The study of awareness is limited to Belgaum city.
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INDIAN COMMODITY FUTURES MARKET
India has a long history of commodity futures market, extending
over 125 years. Still, such trading was interrupted suddenly since the
mid seventies in the fond hope of ushering in an elusive socialistic
pattern of society. As the country embarked on economic liberalization
policies and signed the GATT agreement in the early nineties, the
government realized the need for futures trading to strengthen the
competitiveness of Indian agriculture and the commodity trade and
industry. Futures trading began to be permitted in several commodities,
and the ushering in of the 21st century saw the emergence of new
‘National Commodity Exchanges’ with countrywide reach for trading in
almost all primary commodities and their products.
There have been over 20 exchanges existing for commodities all
over the country. However these exchanges are commodity specific and
have a strong regional focus. The Government, in order to make the
commodities market more transparent and efficient, accorded approval
for setting up of national level multi commodity exchanges. Accordingly
two widest exchanges are there which deal in a wide variety of
commodities and which allow nation-wide trading. They are:
1) National Commodity & Derivatives Exchange (NCDEX)
2) Multi Commodity Exchange of India (MCX)
3) National Multi Commodity Exchange (NMCX)
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1) National Commodity & Derivatives Exchange (NCDEX):
NCDEX is a public limited company incorporated on April 23, 2003
under the Companies Act, 1956. NCDEX is a technology driven
commodity exchange with an independent Board of Directors and
professionals not having any vested interest in commodity markets. It is
committed to provide a world-class commodity exchange platform for
market participants to trade in a wide spectrum of commodity derivatives
driven by best global practices, professionalism and transparency.
Forward Market Commission regulates NCDEX in respect of
futures trading in commodities. Besides, NCDEX is subjected to various
laws of the land like the Companies Act, Stamp Act, Contracts Act,
Forward Commission (Regulation) Act and various other legislations,
which impinge on its working. NCDEX is located in Mumbai and to start
with would offer facilities in about 40 cities throughout India. The reach
will gradually be expanded to other cities.
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2) Multi Commodity Exchange of India (MCX):
Multi Commodity Exchange of India Limited (MCX), is an Exchange
with a mandate for setting up a nationwide, online multi-commodity
marketplace, offering unlimited growth opportunities to commodities
market participants. As a true neutral market, MCX has taken several
initiatives to usher in a new-generation commodities futures market in
the process, become the country's premier Exchange. MCX has started
operations from November 10, 2003.
Statutory framework for regulating commodity futures
Commodity futures contracts and the commodity exchanges
organizing trading in such contracts are regulated by the Government of
India under the Forward Contracts (Regulation) Act, 1952 (FCRA), and
the Rules framed there under. The nodal agency for such regulation is
the Forward Markets Commission (FMC), situated at Mumbai, which
functions under the aegis of the Ministry of Consumer Affairs, Food &
Public Distribution of the Central Government.
Forward Markets Commission (FMC)
Forward Markets Commission (FMC) headquartered at Mumbai is
a regulatory authority, which is overseen by the Ministry of Consumer
Affairs and Public Distribution, Govt. of India. It is a statutory body set
up in 1953 under the Forward Contracts (Regulation) Act, 1952.
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"The Act Provides that the Commission shall consist of not less
then two but not exceeding four members appointed by the Central
Government out of them being nominated by the Central Government to
be the Chairman thereof. Currently Commission comprises three
members among whom Dr. Kewal Ram, IES, is acting as Chairman and
Smt. Padma Swaminathan, CSS and Dr. (Smt.) Jayashree Gupta, CSS,
are the Members of the Commission."
The functions of the Forward Markets Commission are as follows:
To advise the Central Government in respect of the recognition or
the withdrawal of recognition from any association or in respect of
any other matter arising out of the administration of the Forward
Contracts (Regulation) Act 1952.
To keep forward markets under observation and to take such
action in relation to them, as it may consider necessary, in exercise
of the powers assigned to it by or under the Act.
To collect and whenever the Commission thinks it necessary, to
publish information regarding the trading conditions in respect of
goods to which any of the provisions of the act is made applicable,
including information regarding supply, demand and prices, and to
submit to the Central Government, periodical reports on the
working of forward markets relating to such goods;
To make recommendations generally with a view to improving the
organization and working of forward markets;
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To undertake the inspection of the accounts and other documents
of any recognized association or registered association or any
member of such association whenever it considerers it necessary.
Commodities selected in Phase I
Bullion
Gold
Silver
AFGRI commodities
Soya bean
Soya oil
Rapeseed/Mustard
Seed Rapeseed/
Mustard Seed Oil
Crude Palm oil
RBD Palmolein
0 Commodities introduced in Phase II
∗ Rubber
∗ Jute
∗ Pepper
∗ Chana (Gram)
∗ Guar
∗ Wheat
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COMMODITY TRADING CONTRACTS
All the commodities are not suitable for futures trading & for being
suitable for futures trading the market for commodity should be
competitive, i.e., there should be large demand for and supply of the
commodity no individual or group of persons acting in concert should be
in a position to influence the demand or supply, and consequently the
price substantially. There should be fluctuations in price. The commodity
should have long shelf life and be capable of standardization and
gradation.
A commodity futures contract is essentially a financial
instrument. Following the absence of futures trading in commodities for
nearly four decades, the new generation of commodity producers,
processors, market functionaries, financial organizations, broking
agencies and investors at large are, unfortunately, unaware at present of
the economic utility, the operational techniques and the financial
advantages of such trading. Commodity future market involves
particularly different types of forward contracts.
Forward contracts
FCRA defines forward contract as "a contract for the delivery of
goods and which not a ready delivery contract is".
All contracts in commodities providing for delivery of goods and/or
payment of price after 11 days from the date of the contract are "forward"
contracts. Forward contracts are of three types –
1) Specific Delivery & Ready Delivery Contracts
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2) Futures Contracts
3) Option Contracts
Specific Delivery/Ready Delivery contracts:
Specific delivery contracts provide for the actual delivery of specific
quantities and types of goods during a specified future period, and in
which the names of both the buyer and the seller are mentioned.
Under the Act, a ready delivery contract is one, which provides for
the delivery of goods and the payment of price therefore, either
immediately or within such period not exceeding 11 days after the date of
the contract, subject to such conditions as may be prescribed by the
Central Government. Already delivery contract is required by law to be
fulfilled by giving and taking the physical delivery of goods. In market
parlance, the ready delivery contracts are commonly known as "spot" or
"cash" contracts.
Futures Contract:
A commodity futures contract is essentially a financial instrument.
Following the absence of futures trading in commodities for nearly four
decades, the new generation of commodity producers, processors, market
functionaries, financial organizations, broking agencies and investors at
large are, unfortunately, unaware at present of the economic utility, the
operational techniques and the financial advantages of such trading.
A futures contract is a legally binding agreement between two
parties to buy or sell in the future, on a designated exchange, a specific
quantity of a commodity at a specific price. The buyer and seller of a
futures contract agree now on a price for a product to be delivered, or
paid, for at a set time in the future, known as the "settlement date."
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Although actual delivery of the commodity can take place in fulfillment of
the contract, most futures contracts are actually closed out or "offset"
prior to delivery.
A commodity futures contract is a tradable standardized contract,
the terms of which are set in advance by the commodity exchange
organizing trading in it.
The futures contract is for a specified variety of a commodity,
known as the "basis”, though quite a few other similar varieties, both
inferior and superior, are allowed to be deliverable or tender-able for
delivery against the specified futures contract.
The parties to the contract are required to negotiate only the
quantity to be bought and sold, and the price. The Exchange prescribes
everything else. Because of the standardized nature of the futures
contract, it can be traded with ease at a moment’s notice.
Option Contract:
An option on a commodity futures contract is a legally binding
agreement between two parties that gives the buyer, who pays a market
determined price known as a "premium," the right (but not the
obligation), within a specific time period, to exercise his option. Exercise
of the option will result in the person being deemed to have entered into
a futures contract at a specified price known as the "strike price." In
some cases, an option may confer the right to buy or sell the underlying
asset directly, and these options are known as options on the physical
asset.
Commodity future trading contracts rarely are for the actual or
physical delivery allowed to be settled otherwise than by issuing or giving
deliveries. Therefore, speculators use these futures contracts to benefit
from changes in prices and are hardly interested in either taking or
receiving deliveries of goods.
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FUTURE MARKET MECHANISMS
1) Price Discovery through Future Market:
In an active futures market, the demand for information by traders
is enormous. Futures exchanges tend to become collection centers for
statistics on supplies, transportation, storage, purchases, exports,
imports, currency values, interest rates, and other pertinent information.
These data, which are compiled and distributed throughout the exchange
community on a continuous basis, are immediately reflected in the
trading pits as traders digest the new information and adjust their bids
and offers accordingly. As a result of active buying and selling of futures
contracts, the market determines the best estimate of today and
tomorrow's prices for the underlying commodity. In effect, prices are
discovered at futures exchanges. Prices determined via this open and
competitive process are considered to be accurate reflections of the
supply and demand for a commodity, and for this reason they are widely
used as today's best estimate of tomorrow's cash market prices for a
standardized quantity of a commodity.
Price discovery is the process of arriving at a figure at which one
person will buy and another will sell a futures contract for a specific
expiration date. In an active futures market, the process of price
discovery continues from the market's opening until its close. Futures
contracts are standardized as to quantity, quality, and location so buyers
and sellers only bargain over price. Because of this standardization,
commercial interests are better able to compute local cash prices. In
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many commodities, futures prices have earned a role as key reference
prices for those who produce, process, and merchandise the commodity.
2) Transferring Risk: Hedging through future market
Commodity production and marketing involve sizable price risks,
and risk represents a cost that affects the value of a commodity. While
there is no way to eliminate uncertainty, futures markets provide a
competitive way for commodity producers, merchandisers, processors,
and others who may own the actual commodity to transfer some price
risk to speculators who will willingly assume such risk in hopes of
making a profit.
The process of hedging involves the concurrent use of both cash
and futures markets. Since futures and cash prices tend to move
together (that is, parallel to each other), and at contract expiration
converge to one price, it is possible for a cotton merchant, for example, to
hedge an unsold inventory of cotton with a sale of an equivalent amount
of futures contracts. Since the merchant owns the commodity, he would
have a loss if prices fell. To hedge, the merchant would sell futures
contracts. Now if prices drop, the cash market loss will be at least
partially offset by a gain on the futures contract. When the merchant
sells his inventory at the lower cash market price, he will simultaneously
lift his hedge by buying back his futures contracts at the lower price. The
gain on his futures contracts should roughly equal the merchant's loss in
the cash market.
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Here are three examples of how hedging helps the cash market
work better:
1) Hedging stretches the marketing period. For instance, a livestock
feeder does not have to wait until his cattle are ready to market
before he can sell them. The futures market permits him to sell
futures contracts to establish the approximate sale price at any
time between the time he buys his calves for feeding and the time
the fed cattle are ready to market, some four to six months later.
He can take advantage of good prices even though the cattle are
not ready for market.
2) Hedging protects inventory values. A merchandiser with a large,
unsold inventory can sell futures contracts that will protect the
value of the inventory, even if the price of the commodity drops.
3) Hedging permits forward pricing of products. A jewelry
manufacturer can determine the cost for gold, silver or platinum
by buying a futures contract, translate that to a price for the
finished products, and make forward sales to stores at firm prices.
Having made the forward sales, the manufacturer can use its
capital to acquire only as much gold, silver, or platinum as may be
needed to make the products that will fill its orders.
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These are just a few ways that commodity owners use futures
markets. It requires skill and knowledge acquired that comes only by
study and experience.
PARTICIPANTS IN FUTURES MARKET & TRADING
PROCEDURE
The Futures market participants comprise of:
Farmers
Traders
Producers
Processors
Exporters
Importers
Industries associated with commodities.
The futures market is used for hedging the price risk and for
trading or arbitrage. Brokers of all commodity exchanges, who are
located all across the country, serve the futures market users directly
through their own branch offices' network or through the network of
their franchisees or sub-brokers.
Procedure for Individual investor to start trading in Commodity
Futures Market can be as follows:
Selection of Broker:
A trustworthy, reliable, efficient, effective & innovative broker,
having membership to any of the Exchange like MCX / NCDEX etc.
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would be in Investor’s interest. Broker should be such that recognizes
investors’ needs & aspirations & work as a dedicated team to deliver
highly effective & customized solutions to investors risk management
needs.
Information about Self:
After selecting a broker, investor will be asked to provide
information that is personal & financial. A member client agreement
should be signed between the broker & investor. Investor should give
photographs, bank details & should possess normal DMAT Account or
broker opens that account for him/her. If trading is intended with
delivery of commodities then Commodity DMAT Account is been opened.
Depositing the Margin:
In order to trade futures contracts, investor has to deposit margins
in cash with broker. There are two types of margins, namely; initial
margin & mark to market margin.
i) Initial Margin-
Initial Margin is set by the exchanges on basis of volatility in the
particular commodity & is a percentage of the contract.
ii) Mark to market Margin-
At the end of the day, the contract is marked to market; meaning
trader’s account is credited or debited based on the profit/ loss made
during the session. On this profit or loss there broker can charge margin
that is nothing but mark to market margin.
Intraday Trading:
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Then as per individual investors wish he can buy or sell
commodities online. Just he has to specify which commodity & what
price is he going to buy or sell. Electronic terminals are used for this
trading at various broking offices that provides the same information
countrywide. This trading process is called as, “Intraday Trading”.
Benefit of this online trading is that it provides a secure,
transparent, fast and user-friendly system. It leads to better price
discovery of commodities like Bullion, Metals and Agro products by
bringing large number of Buyers and Sellers on a common National and
International platform.
Clearing Trades on Commodity Exchange
All trades on Commodity Exchange are supported by an initial
margin. At the End-of day Commodity Exchange does mark-to-market of
all the open positions. This activity results into final position of all
members in respect to booked losses or losses on open positions.
Members make the shortfalls good by way of pay-ins to Commodity
Exchange by next day and the members in profit on such positions are
given the necessary credits. These payments are processed electronically
through a countrywide network of clearing banks.
Settlement of the Contract and Delivery
A contract has a life cycle of two months. At Commodity Exchange,
5 days before the expiry of a contract, the contract enters into a tender
period. At the start of the tender period, both the parties must state their
intentions to give or receive delivery, based on which the parties are
supposed to act or bear the penal charges for any failure in doing so.
Those who do not express their intention to give or receive delivery at the
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beginning of tender period are required to square-up their open positions
before the expiry of the contract. In case they do not their positions are
closed out at 'due date rate'. The links to the physical market through
the delivery process ensures maintenance of uniformity between spot
and futures prices.
Tendering Delivery to a Buyer by Exchange Seller
Sellers intimate the exchange at the beginning of the tender period
and get the delivery quality certified from empanelled quality certification
agencies. They also submit the documents to the Exchange with the
details of the warehouse within the city, chosen as a delivery center.
Sellers are free to use any warehouse, as they are responsible for
the goods until the buyer picks up the delivery, which is a practice
followed in the commodities market globally.
Seller would receive the money from the exchange against the
goods delivered, which happens when the buyer has confirmed its
satisfaction over quality and picked up the deliveries within stipulated
time.
Receiving Delivery of Commodities by Buyer
Buyers intending to take delivery will receive it, if there are sellers
willing warehouse at the designated delivery centers on the designated
delivery days.
There are commission agents who help the brokers with handling
of the delivery, logistic support, and associated quality certification
through to give delivery. The Buyer will have to make the payment within
three days after the delivery is allotted. The buyer will take actual
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delivery from the empanelled agencies and associated billings due to tax
implications. This support is required as the buyer may be in a different
city than the place where the delivery is being received.
Utility of Physical Delivery of Commodity to Client of Buyer
The client of a buyer may use this delivery for his
consumption in the industry, or for exports, or he may sell in the spot
market or may sell in futures market in the subsequent contract, if he is
a regular trader. Generally, the commodities available in the physical
form are consumed by the industry and, rarely, commodities, are stored
in the warehouse for a longer period.
Percentage of Delivery in the Futures Market
Though, Exchanges have specified the deliverable grades in the
contract specifications, which are notified before commencement of
trading in a contract. The seller is required to submit the quality
certification issued by empanelled quality certification agencies, like,
SGS, Geo Chem. etc. Thus, quality of a commodity is ensured, the
percentage is delivery in such market is fairly low. Generally, the futures
markets all over the world are used for hedging where actual delivery
percentage is about 1% any user in the commodities ecosystem unlike
the physical spot or forward market does not use these markets for
regular consumption.
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LIMITATIONS OF COMMODITY FUTURE MARKET
• Commodity market is very difficult to predict. Commodity prices
depend upon region, monsoon, transportation cost, demand-
supply theory, import/ export policies & Global market trends. So
commodity market experience volatility that cannot be predicted
easily.
• Without knowing the spot market for commodities it is very
difficult to play with Future market. In capital market it depends
upon Companies performance, decisions, long run plans, mergers,
etc. there are definite regions to move up & down in the market,
but in the case of Commodity market there are so many regions for
the market movement, it is like a game of luck to the investor.
• Customer has to deposit the margin amount that is based on
volatility of commodity plus brokerage that is deducted from total
losses made. So if at all there is a loss, the total loss amount will
be very huge. In this aspect it is very risky market.
• Commodity market not yet developed in India so it is less reliable.
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• Commodity market gives high return but with multiplier of high
risk.
Gold commodity Future Market
Introduction
Gold is a unique asset based on few basic characteristics. First, it
is primarily a monetary asset, and partly a commodity. As much as two
thirds of gold’s total accumulated holdings relate to “store of value”
considerations. Holdings in this category include the central bank
reserves, private investments, and high-cartage 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 dependent
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.
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51. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO
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Gold in Indian Scenario:
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 jewelry (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 lent a great desirability to anonymity. Indian people are
renowned for saving for the future and the financial savings ratio is
strong, with a ratio of financial assets-to-GDP of 93%.
Gold’s circulates within the system and roughly 30% of gold
jewelry 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 jewelry 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 jewelry off take is
sensitive to price increases and even more so to volatility, although this
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GOLD
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).
The distinction between gold and commodities is important. Gold
has maintained its value in after-inflation terms over the long run, while
commodities have declined.
Some analysts like to think of gold as a “currency without a
country’. It is an internationally recognized asset that is not dependent
upon any 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.
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GOLD
World Markets
Today's gold market is a round-the-world, round-the-clock
business, played out largely on dealers' trading screens. The core of the
business, however, remains in the key markets of London, as the great
clearing house, New York as the home of futures trading, Zurich as
physical turntable, Istanbul, Dubai, Singapore and Hong Kong as
doorways to important consuming regions and Tokyo where the
Commodity Exchange (TOCOM) sets the mood of Japan. Even Paris still
has a small market, a reminder of the days when the French were great
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GOLD
hoarders, while Mumbai has increasing importance under India's
liberalized gold regime that permits official imports through local
markets.
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GOLD
Gold an Independent Asset
It’s not difficult to understand why the gold price moves
independently from the economic cycle when one considers the diversity
of its demand and supply base, the ultimate determinants of price
movements.
There are three sources of gold supply: mine production, official
sector sales and scrap or recycled gold. Mine production is by far the
largest element, accounting for 70% of total supply last year. Changes in
annual mine supply bear no relation to changes in US or even global
GDP growth. The upward trend in mine production that was underway in
the late 1980s was not arrested by 1990 recession (the US economy
suffered an outright contraction, while world GDP growth slowed to 1.6%
from 2.9% the previous year). Nor was the downtrend in mining output
that began in 2001 reversed by the sharp acceleration in world growth.
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GOLD
Mine production is influenced by very specific factors, such as the
level of exploration spending, the success or otherwise in discovering new
gold deposits and the cost of extraction (some new discoveries may not
be economically viable). Lead times in gold mining are often very long. It
can take years to re-open a closed mine, let alone find and mine new
reserves.
The decision to build a mine shaft (and often an entire
infrastructure) is a long term one that will often see business cycles
comes and goes. Central bank decisions to buy or sell gold (they remain
net sellers) are also usually strategic in nature, rather than reactive to
the economic cycle. The decision to buy or sell gold is often made years
in advance and then carried out over a period of years. In Switzerland,
for example, the proposition to sell gold (the first gold sales programmed)
was first recommended by a group of experts in 1997. However, the
actual sales programmed did not commence until May 2000, with the
sales then taking place over a period of five years.
Scrap supply is influenced by many factors, perhaps the most
important being price and price volatility, but recessions and periods of
economic distress have also had an impact. The most dramatic example
is when Korea was pushed into recession during the 1998 Asian
currency crisis; its scrap supply increased by almost 200 tonnes as the
government bought gold from the local populace in exchange for won-
denominated bonds. It then sold the gold on the international market in
order to raise the dollars necessary to avoid defaulting on its external
debt.
Similarly, in Indonesia the 1998 recession saw scrap supply
increase by 72 tonnes in the first quarter of the year, in this instance
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GOLD
purely for independent reasons rather than at the behest of the
government.
Turning to demand
Conventional wisdom argues that recessions are bad for
commodity prices. The reasoning goes that as consumer and business
confidence falls, demand for goods and services is cut back and hence
the materials used in the production of those goods or in the provision of
services (many of which are commodities) declines, thereby depressing
their price.
The argument is logical. However, a few points are worth bearing
in mind with respect to gold. Demand for gold as an intermediate good is
relatively small in comparison to many other commodities. Last year, just
14% of gold demand came from the industrial sector (mainly electronics).
This is in stark contrast to base metals and even other precious metals,
where the vast majority of demand comes from industry. As a result, gold
is much less vulnerable to the vagaries of the economic cycle. That said,
demand for gold in electronics is likely to fall if the economy falls into
recession as consumer spending on non-essential electronics goods
declines. A US recession would undoubtedly have negative implications
for gold jewelry demand in America, as consumer spending slows.
However, this negative implication could be at least partially offset by the
higher share of gold jewelry in the retail market that gold jewelry has
enjoyed in recent years. Moreover, gold is much less vulnerable than
other jewelry materials, such as diamonds or platinum, to a US recession
as far more demand for gold comes from outside of the US – 70% of
diamond jewelry demand comes from the US market, compared with just
10% for gold.
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GOLD
India is in fact the single largest consumer of gold jewellery in the
world in tonnage terms. Last year, Indian households bought 558 tonnes
of gold jewelry, more than double their US counterparts (Chart 7).
Chinese consumers rank second, having bought 331 tonnes. US
consumers are third in tonnage terms, although US demand remains
highest in retail value terms due to its higher trade margins. The extent
to which worldwide gold jewelry demand suffers from a US recession will
depend partly on the spill-over effects to other countries. If proponents of
“decoupling” prove to be correct (they argue that emerging market
economies are now strong enough domestically to withstand a US
slowdown) then worldwide jewelry demand need not fare badly.
The final source of demand comes from investors. Investors buy
gold for many reasons. Chief among these are gold’s inflation and dollar-
hedging properties, both of which have been proven over long periods of
time. How a recession affects investment demand would depend, in part,
on how inflation and the dollar react.
The brewing recession has so far been positive for gold on both
fronts. The dollar has continued its downward trajectory, while inflation
has (unusually) headed higher. US consumer prices increased at an
annual rate of 4.0% in February this year, up from 2.4% just a year
earlier. If these trends continue, investment demand for gold as an
inflation and dollar hedge is likely to remain strong. And if the recession
deepens concerns over the health of the US banking sector, demand for
gold as a safe haven asset is also likely to remain robust.
In summary, statistical analysis suggests there is no relationship
between changes in US GDP growth and changes in the gold price. This
reflects gold’s unique and diverse demand and supply base, which as for
any freely-traded good ultimately determine the price. Consequently, a
US recession does not have negative implications for the gold price. The
only element of demand likely to be affected by a recession is investment
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59. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO
GOLD
demand, but that in turn will depend on the “type” of recession. So far,
the brewing recession has been positive for gold, as it has been
accompanied by a rise in inflation and a falling dollar, which has boosted
demand for gold as a dollar and inflation hedge.
Largest Gold Belts:
• The famous Witwatersrand in South Africa - the world's largest
gold belt.
• The Tian Shan Gold Belt - the second largest belt in the world.
Largest Gold Producing Country in the World
• South Africa
• Australia
• United States
Important world market:
• London is the biggest and the oldest gold market in the world.
• Mumbai is India’s liberalized gold regime.
• New York is the home of gold future trading.
• Istanbul, Dubai, Singapore and Hong Kong are doorways to
important consuming regions.
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What makes Gold Special?
• 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 generation 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
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61. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO
GOLD
corporations. Gold is also more liquid than 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 or other needs.
• 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.
What makes Gold different from other commodities?
The flow demand of commodities is driven primarily by exogenous
variables that are subject to the business cycle, such as GDP or
absorption. Consequently, one would expect that a sudden unanticipated
increase in the demand for a given commodity that is not met by an
immediate increase in supply should, all else being equal, drive the price
of the commodity upwards. However, it is our contention that, in the
case of gold, buffer stocks can be supplied with perfect elasticity. If this
argument holds true, no such upward price pressure will be observed in
the gold market in the presence of a positive demand shock.
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62. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO
GOLD
The existence of a sophisticated liquid market in gold has, over the
past 15 years, provided a mechanism for gold held by central banks and
other major institutions to come back to the market. Although the
demand for gold as an industrial input or as a final product (jewelry)
differs across regions, it is argued that the core driver of the real price of
gold is stock equilibrium rather than flow equilibrium. This is not to say
that exogenous shifts in flow demand will have no influence at all on the
price of gold, but rather that the large supply of inventory is likely to
dampen any resultant spikes in price. The extent of this to dampening
effect depends on the gestation lag within which liquid inventories can be
converted in industrial inputs. In the gold industry such time lags are
typically very short.
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 convert bullion into producer inventory is
short, relative to other commodities which may be less liquid and less
homogenous than 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 holding.
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63. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO
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Fixing of spot gold prices:
spot price
Cumulative
Frequency Percent Valid Percent Percent
Valid Investors 41 41.0 41.0 41.0
Daily Trading
59 59.0 59.0 100.0
Bases/Future Market
Total 100 100.0 100.0
spot price
Investors
41.0%
Daily Trading Bases/
59.0%
Interpretation:
In all 100 sample size 59 respondents are gold smiths. All are
fix the price according to daily bases, which are displays in TV time to
time. In a day in spot market three times price is changes.
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64. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO
GOLD
Sources Of Gold For The Goldsmiths:
Cumulative
Frequency Percent Valid Percent Percent
Valid Investors 41 41.0 41.0 41.0
Local supplier 5 5.0 5.0 46.0
Wholesaler 54 54.0 54.0 100.0
Total 100 100.0 100.0
commodities
Investors
41.0%
Wholesaler
54.0%
Local supplier
5.0%
Interpretation:
Above Pie chart shows that out of 100 sample size, 54% of
respondents get gold from wholesalers, 5% are from local suppliers and
remaining are investors. So most of them get the gold from wholesalers.
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65. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO
GOLD
• To study whether the goldsmiths of Belgaum city aware
of commodity market and their perception.
♦ Where do you prefer to invest?
invest
Cumulative
Frequency Percent Valid Percent Percent
Valid Gold 9 9.0 9.0 9.0
Bank/Fixed Deposit 10 10.0 10.0 19.0
Equity 49 49.0 49.0 68.0
Mutual Funds 28 28.0 28.0 96.0
Real Estate 4 4.0 4.0 100.0
Total 100 100.0 100.0
invest
Real Estate
4.0%
Mutual Funds
28.0%
Gold
9.0%
Bank/Fixed Deposit
10.0%
Equity
49.0%
Interpretation:
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66. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO
GOLD
The Graph clearly shows that most of the respondents are interested in
investing in equity (49%) when compared to the other investment
alternatives because they feel investing in equity will provide more
returns to them.
♦ Are you aware about commodity market?
aware
Cumulative
Frequency Percent Valid Percent Percent
Valid Yes 82 82.0 82.0 82.0
No 18 18.0 18.0 100.0
Total 100 100.0 100.0
aware
No
18.0%
Yes
82.0%
Interpretation:
The above pie chart describes that 82% of the investors (goldsmiths or
gold traders) are aware about the Commodity Future market and 18% of
them are not aware about Commodity Future Market. So there is a need
to create awareness about the commodity future market and its benefits.
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67. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO
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There is a lot of potential is there to create customer and influence them
to invest in Commodity Future market.
♦ Have you invested in commodity future market?
commodity
Cumulative
Frequency Percent Valid Percent Percent
Valid Not aware 17 17.0 17.0 17.0
Yes 16 16.0 16.0 33.0
No 67 67.0 67.0 100.0
Total 100 100.0 100.0
commodity
Not aw are
17.0%
Yes
16.0%
No
67.0%
Interpretation:
The pie chart shows that, even though the investors are aware about
commodity future market only 16% of them have actually invested in this
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68. A STUDY OF COMMODITY MARKET WITH SPECIAL REFERENCE TO
GOLD
market where as the remaining have not invested because among them
17% are not aware and remaining 67% investors have not invested as
they have a perception that it is risky and they even do not have much
knowledge about trading mechanism.
♦ In future do you want to trade in commodity future
market?
future
Cumulative
Frequency Percent Valid Percent Percent
Valid Investors 16 16.0 16.0 16.0
Yes 61 61.0 61.0 77.0
No 23 23.0 23.0 100.0
Total 100 100.0 100.0
future
No
23.0%
Investors
16.0%
Yes
61.0%
Interpretation:
BABASAB PATIL PROJECT REPORT OF FINANCE