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.

Why gold is "good as gold" is an intriguing question. However, we think that the more
pragmatic ancient Egyptians were perhaps more accurate in observing that gold's value was a
function of its pleasing physical characteristics and its scarcity.
• Gold is primarily a monetary asset and partly a commodity.
• More than two thirds of gold's total accumulated holdings account as 'value for investment'
with central bank reserves, private players and high-carat Jewellery.
• Less than one third of gold's total accumulated holdings is as a 'commodity' for Jewellery in
Western markets and usage in industry.
• The Gold market is highly liquid and gold held by central banks, other major institutions
and retail Jewellery keep coming back to the market.
• Due to large stocks of Gold as against its demand, it is argued that the core driver of the
real price of gold is stock equilibrium rather than flow equilibrium.
• Economic forces that determine the price of gold are different from, and in many cases
opposed to the forces that influence most financial assets.
• South Africa is the world's largest gold producer with 394 tons in 2001, followed by US
and Australia.
• India is the world's largest gold consumer with an annual demand of 800 tons

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.

1
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.

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 (jewellery)
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 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 to 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.

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

Using the gold price and US macroeconomic and financial market quarterly data
from January 1975 to December 2001, the following conclusions may be drawn:

• There is no statistically significant correlation between returns on gold and changes in

macroeconomic variables, such as GDP, inflation and interest rates; whereas returns on other
financial assets, such as the Dow Jones Industrial Average, Standard & Poor’s 500 index and
10-year government bonds, are highly correlated with changes in macroeconomic variables.

• Macroeconomic variables have a much stronger impact on other commodities (such as

aluminum, oil and zinc) than they do on gold.

• Returns on gold are less correlated with equity and bond indices than are returns on other
commodities.

2
 Global Scenario

Demand
Demand for gold is widely spread around the world. East Asia, the Indian sub-continent and the
Middle East accounted for 72% of world demand in 2007. 55% of demand is attributable to just
five countries - India, Italy, Turkey, USA and China, each market driven by a different set of
socio-economic and cultural factors. Rapid demographic and other socio-economic changes in
many of the key consuming nations are also likely to produce new patterns of demand.
This buying is likely to be centered in those countries where the investment element of the
jewellery sector is strongest. The constraints surrounding mine output are unlikely to ease, and
in fact, have the potential to worsen as credit conditions continue to cause problems for some
miners and explorers. Furthermore, net selling by the central bank sector should remain at
relatively low levels. However, as we saw in Q4, much will depend on the direction of the gold
price and the scrap response. Continued high levels of the gold price could see scrap levels
increase further.

Table: Identifiable Gold Demand (tones)

3
Jewellery

Gold jewellery demand declined during the fourth quarter as the global economic crisis began to
bite and prices continued to fluctuate around relatively high levels. Total tonnage off-take, at
538.9 tones, was down 6% on Q4 2007, while the year-on-year decline was a more marked
4
11%. Meanwhile, the $US value measure of demand reveals that Q4 demand of $US13.8bn was
4% below year-earlier levels, with the result that 2008 annual demand – at $US59.7bn – was
11% higher than 2007 levels.

The main factor affecting jewellery demand was the difficult economic environment that has
taken hold in most countries. Consumers are facing issues such as rising unemployment and
falling house prices and stock markets and are focusing their spending decisions on necessities.
Once again however, it is worthy of comment that the value measure of jewellery demand
confirms that spending on gold jewellery remains relatively robust. Although the severity of the
economic climate took its toll in the fourth quarter, for calendar 2008 the primary value of gold
jewellery demand increased by $US6.1bn.

Movements in the price of gold were also a key factor in quashing demand. Although the gold
price dipped sharply in October, it soon recovered lost ground and this higher price level,
together with a rise in volatility, discouraged purchases in many of the more price sensitive
markets. In contrast however, some markets, e.g. mainland China, Russia and the Middle East,
benefited from elevated levels of investment-related demand for gold jewellery, as the intrinsic
value of gold lent a stronger investment perspective to jewellery purchases.

Industrial

Electronics demand was profoundly affected by the global economic slowdown and subsequent
lack of confidence across the supply chain, slipping 15%. Elsewhere, the other industrial and
decorative sector recorded a modest 2% increase on the back of a significant rise in Indian off
take, while gold used in dental applications continued its secular decline, falling 7%. Looking
more closely at the electronics sector reveals an industry that, for the most part, is currently
undergoing a crisis on the back of steadily deteriorating economic conditions. The decline of
15% relative to year-earlier levels took tonnage to its lowest level since Q4 2004. Waning
consumer spending resulted in sharp declines in both production and exports from the world’s
largest producers.
Demand from the other industrial and decorative segment was relatively stable Italy recorded a
6% rise relative to year-earlier levels as a result of increased GPC (gold potassium cyanide)
production, much of which is used in the electro-forming of jewellery (a process geared to
producing low weight jewellery items) and in the plating of accessories. Lastly, gold used in
dental applications is estimated to have declined 7% relative to Q4 2007 as ongoing substitution
to more affordable and cosmetically pleasing applications continued to limit the use of the
precious metal.

Investment

Net retail investment drove the result, rising from 61.4 tons in Q4 2007 to 304.2 tons in Q4
2008 (an astonishing 243 tones or 396%) and accounting for 94% of the tonnage increase in
identifiable investment. Net investment in Exchange Traded Funds (ETFs) and similar products
also made a notable contribution to the increase in investor inflows, up 18% or 15 tones. All
components of net retail investment recorded extremely strong growth. Bar hoarding, which
5
largely covers the non-western markets, increased from 30.2 tonnes in Q4 2007 to 126.6 tonnes
in Q4 2008, a rise of 318%? Official coins also enjoyed impressive growth, more than tripling
from 22.4 tons to 67.9 tones. However, the highlight of the quarter was the 92.3 tone
improvement in "other identified retail investment" to 92.6 tons from just 0.3tonnes. This
category reflects the impact of “western” investor activity in the secondary retail investment
market, predominantly Europe and North America i.e. it includes western demand for bars and
secondary demand for official coins.

These dramatic retail investment inflows reflect the extreme uncertainty that surrounds the
global economy and financial system. In an environment where investors are more concerned
about the loss of capital than they are about the return on capital, the absence of default risk or
counterparty risk has been a key attraction for gold Combining identifiable investment (largely
investors with a medium and long term focus) with inferred investment (largely investors with a
more speculative focus) gives us total investment flows. In Q4 2008, total investment was up
22% on the levels of Q4 2007. For the year as a whole, total investment was up 44%, equivalent
to a 69% rise in $US value terms from $14.7bn to $24.8bn. These investment flows help explain
why the gold price rose 25% from an average of $US695/ oz in 2007 to $US872 in 2008.

Notably, the annual increase in identifiable investment (which excludes speculative flows)
exceeded that of total investment (which includes them). It is also clear that while those
speculative flows were reasonably volatile on a quarter-to quarter basis, the main source of total
investment flows during the quarter were, in fact, investors with a medium to longer term focus.

Table : Identifiable Gold Demand ($USmn)

6
Table : Investment demands (in tonnes except where specified)

7
Table: Consumer demand in selected countries 2007 & 2008 (tonnes)

8
Above table clearly shows that demand for gold in India is gradually decreasing because of very
high price and also in India jewelry are made out of recycled or scrap gold. But we can find out
that there is increasing in demand of gold from Greater china, China, Hong Kong and Vietnam.
In Indonesia and USA there is tremendous increase for demand for net retail investment. Totally
there is overall 3% increase in gold demand of gold but jewellery demand decreased 11%
compare to 2007 and gold for net retail investment had reached 87% increase peoples are more
interested keeping gold bars as asset.

Supply
9
Table: Gold Supply and Demand

Chart:Gold supply tonnes Q1 05 – Q4 08

10
Mine Productions

1. South Africa: 275mt (11.0%)

2. United States: 260mt (10.5%)
3. Australia: 251mt (10.2%)
4. China: 240mt (9.7%)
5. Peru: 203mt (8.2%)
6. Indonesia: 167mt (6.8%) (2005)
7. Russia: 152.6mt (6.2%)
8. Canada: 104mt (4.2%)
9. Papua New Guinea 66.7mt (2.7%)
(2005)
10. Ghana 63.1mt (2.6%) (2005)
Other: 699mt
TOTAL: 2469mt
1. China: 276mt

11
 2. South Africa: 254.7 mt
3. Australia: 246mt
4. United States: 238mt
5. Peru: 170mt
6. Russia: 144.5mt
7. Indonesia: 118mt
8. Canada: 101mt
9. Uzbekistan 85mt
10. Ghana 78mt
Other: 821mt
TOTAL: 2444mt

1. China: 288mt (1)

2. United States: 234mt (1)
3. South Africa: 232mt (1)
4. Australia: 225mt
5. Peru: 175mt
6. Russia: 163.9 mt
7. Canada: 100mt
8. Indonesia: 90mt
9. Uzbekistan 85mt
10. Ghana 81mt
Other: 660mt TOTAL: 2356mt

World Gold Production Vs South Africa (Million Ounces)

12
World gold mine production is gradually decreasing from 2004 due to less supply and more
demand the price of gold had shot up in the in te international market and also there tremendous
increasing in cost of production of gold that also contributed for more price. The share of south
Africa which was ones time is major gold producer its share start decreasing from 1995, from
2007 China became major gold producer in the world.

Central banks and supranational organizations (such as the International Monetary Fund)
currently hold just over one-fifth of global above-ground stocks of gold as reserve assets
(amounting to around 29,000 tones, dispersed across 110 organizations). On average,
governments hold around 10% of their official reserves as gold, although the proportion varies
country-by-country. They hold gold has a monetary supplement to fight against fluctuations in
US $ it actas hedging agent which secures international trade of counties.

Indian Scenario
13
India is the world’s largest consumer of gold in tonnage terms. In 2005, India accounted for
22% of global gold jewellery demand and 35% of all net retail investment (coins and bars).
Gold demand has grown at an average annual rate of 10% since the repeal of the Gold Control
Act in 1990, which had forbidden the holding of gold in bar form1. Although estimates vary,
India is now thought to hold close to 15,000 tons or 10% of the world’s entire above-ground
gold stocks.

Origin of gold demand

Indian gold demand is firmly embedded in cultural and religious traditions. The country has one
of the most deeply religious societies in the world, the most widespread faith being Hinduism,
which is practiced by around 80% of the population. Gold is seen as a symbol of wealth and
prosperity in the Hindu religion. The goddess Lakshmi, who symbolizes fertility, productiveness
and prosperity, is said to have been bathed by elephants that carried pure water in golden
vessels. She is depicted as a beautiful woman of golden complexion, dressed in gold-
embroidered red clothes, with gold coins flowing from her hands. Since it is suggested that
those who worship her gain wealth, Hindus consider gold an auspicious metal, which they like
to buy or gift during religious festivals. The most important of these is Diwali, which marks the
beginning of the Hindu New Year and usually takes place in October or November.

Akshaya Thrithiya, falling in April or May, has also become an important day to buy gold.
Purchases on this day are considered auspicious (it is the third most auspicious day in the Hindu
calendar). The association between gold and “auspiciousness” has been used in recent years to
promote the idea of buying gold. Over the past five years, Akshaya Thrithiya has become a
major gold-buying occasion in the South of India, especially in the State of Tamil Nadu, where
sales have reached record levels. Since 2005, the idea has been promoted across the North and
West of the country, which has also resulted in a significant rise in gold sales in these regions.

Gold also plays an important role in the marriage ceremony, where brides are often adorned
from head to toe in gold jewellery. Most of this will be a gift from her parents as a way of
giving her some inheritance, as Hindu tradition dictates that the family’s assets are only passed
down to sons. The gold (and other gifts) the bride receives or her “Streedhan” (“Stree” meaning
woman and “dhan” meaning wealth) mean her parents can make sure she is financially secure
and enjoys at least the same standard of living to which she was accustomed in her childhood.
Gold is especially important in this respect as it remains directly under her control, whereas she
may not be privy to the family’s other financial affairs. With an estimated 10 million marriages
a year taking place in India, wedding-related demand is big business. Much of this demand
takes place in the wedding season, which falls between October and January, and April and
May, though a good many purchases will be made well in advance of the wedding. Indeed, it is
customary for the parents of a baby girl to start accumulating gold for this purpose soon after
the child is born.

Not all gold demand is allied with cultural and religious beliefs. Gold is also viewed as a secure
and easily accessible savings vehicle by the rural community, where around 70% of the
population lives. Gold has the added virtue of being an inflation hedge. An investor who had
14
bought gold in 1970, for example, would have been more than protected against inflation
(Figure 3). Gold is also one of the limited ways in which Indian investors can diversify their
currency exposure. This is because the Rupee is not yet fully convertible – Indians are only
allowed to hold financial assets in Rupees – whereas they have been allowed to hold gold since
1990 when the Gold Control Act was repealed.

Gold demand and prices

The past decade can be split into two distinct periods as far as the value of gold sales is
concerned: 1996-2001, when sales were broadly stable in value terms, and 2002-2005, when
sales accelerated strongly. During the first period, spending averaged Rs. 284 billion per annum
and fluctuated in a relatively narrow range of Rs. 224 316 billion a year. Spending was
especially strong in 1998 thanks to the release of pent up demand following the removal of
import controls in November 1997. Gold sales were broadly stable in the three years that
followed, held back by relatively weak income growth. Sales in tonnage were more volatile
over the period, averaging 709 tones and fluctuating between 506-810 tonnes. The higher
variability of volume as oppose to value spending is a function of both the retail price setting
mechanism in Indian, as well as the origins of demand. The price of jewellery changes in line
with changes in the international market price in India, with each item weighed then priced
according to the prevailing daily market rate. The retail mark up is also normally relatively
small in relation to the value of the piece.

Chart : Indian Gold (tonnes) and Prices (rupees)

15
Chart: Indian Gold Demand in tones and rupee gold price

Major Indian markets

Traditionally most investment has taken the form of physical gold. In 2005, Indians bought 102
tons of gold coins and bars. But there are new ways to invest in gold. Since October 2003 the
government has allowed futures trading and there are now three futures exchanges, the two
largest being the Multi Commodity Exchange of India Ltd (MCX) and the National Commodity
and Derivatives Exchange Ltd (NCDEX). The next major development is likely to be the arrival
of Exchange Traded Funds (ETFs), expected before the end of 2006.
UTI Asset Management Company Ltd and Benchmark Asset Management Ltd are currently
seeking regulatory approval to sell gold ETF. These instruments give investors a relatively cost
efficient and secure way to access the gold market. They are listed securities that are backed by
allocated gold held in a vault on behalf of investors and are intended to offer investors a means
of participating in the gold bullion market without the necessity of taking physical delivery of
gold, and to buy and sell that interest through the trading of a security on a regulated stock
exchange.

16
Role of RBI in Gold

The Reserve Bank is required to hold a fixed amount of gold under the Reserve Bank of India
Act. The original RBI Act (1934) obliged the Reserve Bank to hold 40% of its assets in gold
coin, gold bullion and foreign securities, with not less than Rs. 400 million in value held in
gold. The system was later amended, under the Reserve Bank of India Amendment Act 1956, to
the minimum reserve system, that required the bank to hold at least Rs.1150 million of its assets
in gold (this did not imply the need to acquire additional gold, as the value of existing gold
reserves were revised up at the time). Rs.1150 million equates to just $24.7 million at today’s
exchange rate and is tiny in comparison to India’s total foreign exchange reserves of $151.6
billion.
India mobilized its gold reserves during the 1991 balance of payments crisis. Between May and
July, India shipped a total of 47 tones of the country’s gold reserves (the RBI is allowed to hold
up to 15% of its total gold reserves outside the country) to the Bank of England as collateral
against a $400 million loan and leased a further 20 tons of confiscated gold (not included in the
reserve figures) to Union Bank of Switzerland with a six-month buyback option to raise a $200
million loan. The funds were used to help India meet its short-term debt obligations and import
bill. The RBI bought back all 67 tons of gold later that year. It also revalued its gold reserves
from Rs. 28 billion to Rs. 72 billion, as it moved from using an outdated gold price4 to valuing
its reserves at close to the international market price. The move vastly improved India’s reported
import coverage ratio. The RBI currently holds 357.7 tons of gold, which though small in
comparison to total reserves (4.4% as at September 2006), is still the fifteenth highest of central
banks in tonnage terms in the world.

Supply from Indian mines

There is a huge mismatch between demand and primary supply in India, the balance being made
up by imports. The only major gold mine currently in production is the Hutti mine, owned by
state owned Hutti Gold Mines Company Limited, which produces around 3 tons of gold a year.
The other major operation – the Kolar Gold Fields – closed in April 2000 having produced a
total of 800 tons of gold. Hindustan Copper also produces some gold as a by-product, but its
output is small, at just 0.2 tons a year. Still, there is scope for some catch up in the future, as the
geological terrain of India is very similar to other major gold producing countries, like South
Africa and Australia, and as the government has now opened the mining sector to foreign direct
investment.

In summary, India looks poised to remain the world’s foremost gold consumer in tonnage terms
for many years to come. Its dynamic population growth and strong cultural and religious
affinity to gold will continue to underpin structural demand. Meanwhile, rapid income growth,
thanks to the influx of foreign capital, should, in tandem with new successful marketing
campaigns, continue to boost discretionary spending on gold, notwithstanding temporary
fluctuations associated with spikes in price volatility. India’s demand will continue to be
satisfied almost entirely from imports, as aside from the scrap market, very little supply comes
from domestic sources.
17
 Seasonality Pattern of Gold Demand
There are seasonal patterns to jewellery demand, although the pattern varies from one country
to another. Global demand is usually strongest in the fourth quarter of the year, followed by first
quarter demand. The main elements governing this are:

Western world: Christmas

Islamic world: Eid Al Fitr at the end of Ramadan is a major gold giving occasion. Since the
Islamic year is ten or eleven days shorter than the calendar year, the date of Ramadan moves
each year. In 2006 the Eid Al Fitr was on October 23rd. Eid Al Adha (Feast of Sacrifice) takes
place seventy days after the Eid Al Fitr and is also a significant gold-giving occasion. In 2006
Eid Al Adha fell on December 31st. Pilgrims going to Mecca and Medina may also buy gold;
the main pilgrimage period, the Haj, culminates around the time of the Eid Al Adha.

India: gold buying peaks during the wedding season and at the times of various festivals that
vary from region to another. The biggest festival is Diwali, which usually falls in late October or
November. The wedding season varies from region to region but is normally from November to
May with a break from approximately mid-December to mid-January. In August, the two-week
Shrad period is inauspicious for ceremonies associated with gold buying; every three years or so
this is followed by an additional month (Adik Mas) which is also not a time for gold buying.
(Exact dates vary since the Hindu calendar is a lunar one.)

China and East Asia: Chinese New Year (last part of January or first half of February).
Turkey: Demand is highest in the third quarter due to tourist purchases. The effect of a festival
would normally show up earlier than the date in gold sales since people purchase in advance.
Also, since data often represents retail or wholesale purchases demand may often reflect
distributors stocking up for the season. The seasonal pattern does not affect price; it is well
known in the gold markets and therefore discounted. There are many other factors in addition to
demand which affect the price of gold.

18
 Generalized Mercantile Trade Relationships
PRODUCERS

CONSUMERSW
MAJOR TRADE CENTERS

19
 World Gold Markets
London: London Bullion Market Association (LBMA). It is world’s biggest market major
clearing house of gold.
New York: New York Mercantile Exchange Comdex Division (NYMEX) begins trading on
31st December 1974. It is spot market also but majorly considered as “home of future trading”
Zurich: It is also one of the major spot and future market in Europe mainly known as a
“Physical Turntable”.

Istanbul: Istanbul Gold Exchange begins trading on 26th July 1995. Major gold spot and
future market in Turkey and Middle East.

Dubai: Dubai Gold & Commodities Exchange (DGCX) begins trading in June 2005. Major
spot gold market for Saudi and gulf countries. It is also one of the famous jewelers market.

Singapore: It is doorway to South East Asian consuming countries major spot and future
market.

Hong Kong: It is doorway to China now one of the major gold consuming country in the
world it is both spot and future market.

Tokyo: Tokyo Commodities Exchange (TOCOM) begins trading on 23rd March 1982 major
spot and future market in Japan.

Shanghai: began trading on 26th July 1995. It is one of the major future centres in China.
Mumbai: Major market for Indian consumer two trade centers Multi Commodity exchange
(MCX) began trading on 10th Nov 2003 and National Commodities and Derivatives Exchange
(NCDEX) began trading in 15th Dec 2003. Both are spot as well as future mabkets.

20
21
Gold Exchange Traded Funds
Exchange Traded Funds are passively managed funds tracking a benchmark index and reflect
the performance of that index. They have the flexibility of trading on stock exchanges like a
share and offer best features of open and close end funds.
A new entrant in the market has been the category of Exchange Traded Funds (ETF). These are
schemes that have the features of both mutual funds as well as stocks and are listed on the stock
exchange. The investor can buy and sell units in these schemes as per their convenience on the
stock exchange, just like they do with stocks.
An important feature of gold ETF is that they track the gold prices live. This is suitable for
investors who want to use gold as an investment option. By buying a gold ETF, the investor
takes a position on the price of the gold as the price of the ETF is directly linked to the price of
gold prevailing in the market.
There are a lot of gold ETFs present in the Indian market and the performance of these schemes
will be similar, as all of them track the same asset. Due to this reason, the investor should be
buying ETFs when they feel that the price of gold will rise from the current level. The idea here
is that the investor will buy the fund at a lower level and then sell it when the price of gold
moves up, taking up the ETF price along with it.
5 points someone should remember while investing in GTEF
1) Cost of one unit of GETF = Cost of one gram of gold on the date of allotment. Most
mutual fund schemes impose a kind of tax called 'load' while buying or selling units.
The former is called 'entry load' and the latter is called 'exit load'.
22
 2) Trading in GETF: Just like you trade in shares. You will need to have a demat account.
Also, you need to register yourself with a broker having membership of the NSE. Once
these GETFs are listed the daily movement in their prices can be checked online like the
way you keep track of your equity portfolio. The price of GETF unit will track the price
of physical gold in the international market like the London Bullion Market association.
Listing on the NSE will help the buyers and sellers meet on a single platform for trading
in GETFs. This will enable them convert their units into cash easily.
3) Brokerage charges; your broker will not let you trade in GETFs for free. You will have
to pay a small brokerage fee for using his trading platform. Thankfully, the brokerage
charges here are not too high. They will range from 0.4 per cent to 0.6 per cent of your
transaction value. You will be paying Rs 4 to Rs 6 as brokerage charges if you buy units
worth Rs 10,000.
4) Tax; Yes we have to pay since GETFs are being sold as non-equity (there is no
buying/selling of shares) schemes there will be dividend distribution tax (DDT) you will
have to contend with. That is dividend will be taxable in the hands of investors if and
when these GETFs declare dividends. Simply put, dividend is money distributed to unit
holders if the scheme declares a profit. Current law stipulates DDT of a shade over 14
per cent for individual investors and a shade below 22.5 per cent for corporate investors.
This tax is inclusive of surcharge and education cess (a type of tax).
However, the good news is there will be no wealth tax or securities transaction tax, STT,
to contend with when you sell your GETFs. There is no STT because this is a non-equity
scheme. STT is applicable only when shares are bought or sold. The case for wealth tax would
have existed if you were in possession of gold in physical form. The magic of GETFs lies in
this. They convert your money into gold which again is converted into units in demat form. So
as a matter of fact you don't own gold in physical form. Hence there is no wealth tax.
5) Guarantee for Purity of Gold; It will be the custodians appointed by both Benchmark
Mutual Fund and UTI Mutual Fund. Both the mutual funds have appointed the Bank of
Nova Scotia as the custodian (safe keeper) for the gold bought on behalf of investors.
The amount of physical gold held by the custodians in both these schemes will be of
fineness (purity) of 99 parts per 1000. In other words, this gold will be 99.5 per cent
pure. We call this degree of purity as 24 carat gold in general parlance. What's more the
gold held with the custodian will be fully insured and will not be used for lending.
Rating Asset NAV 1 wk 1 3 6 1 yr 2 yr 3 yr 5 yr
(Rs. cr.) mth mth mth
Benchmar 302.86 1,501.4 -2.4 -2.2 16.7 15.6 22.5 59.4 -- --
Not
k Gold 0
Rated
BeES
Quantum 8.28 748.25 -2.6 -4.7 8.7 13.2 22.5 -- -- --
Not
Gold Fund
Rated

Kotak Gold Not 54.35 1,504.7 -2.6 -4.7 8.9 13.3 22.4 -- -- --
ETF Rated 2
UTI Gold Not 197.60 1,502.5 -2.7 -4.7 8.7 13.2 22.3 58.2 -- --
Exchange Rated 3
23
Traded
Fund
Reliance Not 204.52 1,462.5 -2.6 -4.7 8.5 12.2 20.6 -- -- --
Gold ETF Rated 3
DSP-BR 1,699.1 12.63 2.6 13.8 18.0 11.2 -12. -- -- --
World Not 8 2
Gold - RP Rated
(G)
AIG World 281.01 9.35 2.8 12.5 19.0 15.1 -- -- -- --
Not
Gold Fund
Rated
(G)

24
 Market Influencing Factors
➢ Above ground supply from sales by central banks, reclaimed scrap and
official gold loans:
This is mainly concern with supplies other than mining due to continuous decrease in mine
production and also increase in the cost of mining but no decrease in demand had tremendous
demand for supply from this above ground reserve holdings this lead to more price of gold due
to supply and demand mismatch. In India due to more price of gold now it’s mainly jewelries
are made out of the scrap gold. Official sales by central banks will result in priced fluctuation in
market. (Refer to table 1 of Global scenario)

➢ Producer / miner hedging interest;

It is mainly driven by producer were they are having chance to deposit there produced gold
in their stock in anticipation of more price. Otherwise it will also happen like due to fewer
prices at today market they will have future contracts with trade exchanges to supply gold at
particular date at particular price so that they can hedge their risk. It is largely effect the market
of prices of gold.

➢ World macro-economic factors - US Dollar, Interest rate

It is directly related to change in the exchange rate of currency due to macro economic
factors at world level. Gold is traded in terms of US$ for that if our Indian rupee will become
weak against US$ than the gold prices will automatically move up in our country vice versa is
also true.

➢ Comparative returns on stock markets

If stock market is giving better results than more money will be invested in share market
rather than in gold. Due recession stock market has collapsed it started from 2008 and still
continuing from that day the more investor are interested toward investing in gold. People fear

25
about investing in stock market had lead to more demand of gold that intern had pushed to the
price of gold.

➢ Domestic demand based on monsoon and agricultural output

In our country economy is driven by monsoon and agricultural output if year has very good
rainfall and output than there will be price stabilization in the market due to which farmer get
good price for his produce and consumer also have good purchase price due to which people
have more money to invest in the gold it will increase the demand for gold simultaneously
prices also. We can find that during continuous three year drought from 2001 to2004 there
decrease in the price of gold due to less demand from India. It is mainly depend upon income
generating of the country.

Bar Types and Purities

.Gold bars are normally classified into two broad categories of weight. A large bar weighs more
than 1000 g; a small bar weighs 1000 g or less.
Bars are manufactured in different millesimal gold purities (or fineness), most ranging between
965 and 999.9.

UNITS OF WEIGHT;
Around the world, bars can be denominated or traded in different units of weight to
accommodate the preferences of regions or countries. The most prominent units are the gram,
troy ounce, tola, tael, baht, chi (or cay or luong), don and mesghal.

Although the London Good Delivery 400 oz bar, the world’s most important large bar, is traded
in troy ounces on the London Bullion Market, and the international gold price is quoted in US
dollars per troy ounce, there is a worldwide trend for small cast and minted bars to be
denominated in grams. Although the table below provides a broad indication of where the listed
units of weight for small bars are widely used, in many countries a variety of units is used.

26
LARGE BARS
There are three prominent large bars:
400 oz: Approximate weight. London Good Delivery, if manufactured by a LBMA-accredited
refiner.

100 oz: Approximate weight. COMEX Good Delivery, if the brand is accredited to COMEX.

3000 g: Shanghai Gold Exchange Good Delivery, if manufactured by a SGE-accredited refiner.

Some refiners advise that other large bars are also occasionally made to precise or approximate
weights. For example, in ounces (250 oz and 50 oz) and in grams (2 kg, 5 kg and 10 kg).

SMALL BARS;

Among surveyed manufacturers, small bars around the world are available in a diverse range of
more than 50 different cast or minted weights. However, by far the most important small bar,
widely used by fabricators and investors around the world, is the cast kilo bar (1000 g).

27
BAR PURITIES;

The declared purity (or fineness) of a bar’s gold content is important as it enables its weight of
“fine gold” to be calculated. The purity is normally marked in parts gold per 100, 1,000 or
10,000 parts.
For example, the same gold purity (99.99% by weight) can be expressed as follows;

9999 9,999 parts gold in 10,000 parts

999.9 999.9 parts gold in 1,000 parts
99.99 99.99 parts gold in 100 parts

Although there is generally a widespread preference for small bars with a precise millesimal
purity of 995 or 999.9, bars are also manufactured in other purities.

Large bars
In the case of some large bars, the gold fineness can vary. For example, as London Good
Delivery 400 oz bars and COMEX Good Delivery 100 oz bars are permitted to vary between
995.0 and 999.9, a mark of 995.8 or 998.7 or 999.6 might be stamped on a bar.

Small bars
Although there is generally a widespread preference for small bars with a fineness of 999.9 or
995, bars are also manufactured in other purities. Although the table below broadly indicates
where specific purities for small bars are popular, in many countries bars are available in a
variety of purities.

28
29
 BIS,
Carat, Hallmarking, Weighing
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
certification of goods and attending to connected matters in the country.

Carat
30
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.

Table: Fineness of gold

Hallmarking
Bureau of Indian Standards (BIS), national standards body in India, formulated a scheme of hall
marking in 1998, as a Voluntary Certification Scheme, with a combination of quality
certification and BIS Laboratory recognition schemes. The BIS-recognized laboratories would
affix/stamp/hall mark jewellery manufactured by BIS certified jewellers. BIS launched the
scheme of hallmarking in April 2000 under the BIS Act, 1986. Under the Scheme, 12 firms of
jewellers (MMTC Ltd., New Delhi; Bharat Assayers, Chennai; Calicut Assay and Hallmarking
Centre Pvt Ltd., Chennai; Chemmanur Gold Refinery (P) Ltd., Cochin; VIMTA Labs,
Hyderabad; Emerald Testing (India) Pvt. Ltd., Coimbatore; Geekay Exim (India) Ltd., Mumbai;
Gujarat Gold Centre, Ahmedabad; J. J. Hallmarking Centre, Kolkata; Jalan and Co., New Delhi;
Jewel Metallochem Laboratory, Mumbai; MICRO Assaying & Hallmarking Centre, New Delhi)
have been certified as assaying and hallmarking centers so far. Consumer awareness campaign
highlighting the advantages of going in for hallmarking jewellery is being conducted by BIS.

The major objectives of introducing a proper assaying and hallmarking system in the country
are enabling consumer protection, developing export competitiveness of the gold jewellery
industry, introducing gold based financial products, which will help in mopping up the vast
dormant gold resources with the domestic sector and developing India into a leading gold
market centre in the world. The objectives behind instituting a credible system of Assaying and
Hallmarking can be enumerated as under:
• To protect consumer against victimization of irregular gold quality.
31
• To develop export competitiveness of gold jewellery industry and thus provide strong impetus
For gold jewellery exports
• To develop gold based financial products which will help in mopping up of the vast dormant?
Gold resources lying with the household sector.
• To develop India as a leading gold market centres in the world commensurate with its status as
top most customer.

Weighing
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 troy.. Other bars include tola bars and Tael bars. Gold is traditionally weighed in Troy
Ounces (31.1035 grammas). With the density of gold at 19.32 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'').the topmost
consumer.

Constraints in development of Commodity Gold

Gold is an international traded commodity its price is fixed interms of dollars. And payment is
also made interms of dollars due to which price is mainly determined on the basis of dollar only.

➢ Fluctuation in exchange rates: It is main factor which govern the entire gold
economy due to its price is determined interms pf dollar that’s why. Any change in exchange
rates it will directly affect Gold prices domesticaly.

➢ Gold purity: It is mainly jewellery making where they will add impurity due to which
purity of gold is lost. Government had taken some initiatives but the lot of customers does not
aware of those facilities. Due to which Goldsmiths exploite the customer and they will earn
huge profit on that.

32
 ➢ Seasonality of Demand: Every where world during certain seasons Gold demand
will be hire due to which gold traders create artificial rise in price domestically. This will result
in inadequate price realisation in the market.

➢ Malpractises of Goldsmiths:During Jewellery making gold smiths add more

impurity which will leads to impure gold. Due to which they will earn very huge profit but
consumer will be in very huge losses.

➢ Official reserves of Gold: If cental banks and other govornment institute start
holding golds in their deposit means they will create short supply in the market due to which
prices may go up in the market.

➢ Consumer awareness regarding gold jewelleries: Consumer awareness is very

minimum in deciding a purity of gold. They always purchase from the nearest or close
Goldsmiths they will the customer buy selling 20 carat Gold telling that it is 24 carat.
Government had taken initiatives to educate the peoples regarding this issues but that are not
adequate and majority of the customer are still in that trap.

Future Contract Specifications by NCDEX

Future Contract Specification Gold 1 kg. Updated as on 16 July 08.
( Applicable for contract’s expiry upto March 2009 )
Type of Contract Futures Contract Specifications
Name of Commodity Gold
Ticker symbol GLDPURMUMK
Trading System NCDEX's Trading System
Ex-Mumbai inclusive of Customs Duty and Octroi,
Basis
exclusive of Sales Tax/VAT
Unit of trading 1 kg
Delivery unit 1 kg
33
Quotation/base value
Tick size
Quality specification
Quantity variation
Delivery center
Additional delivery centres
Trading hours
Tender Period
Rs per 10 Grams of Gold with 995 fineness
Re 1
Not more than 999.9 fineness bearing a serial
number and identifying stamp of a refiner approved
by the Exchange.
List of approved refiners is available at:
http://www.ncdex.com/downloads/refiners_gold_new
.pdf
None
Mumbai
Ahmedabad
Location Premium/Discount as notified by the
Exchange from time to time.
As per directions of the Forward Markets
Commission from time to time, currently -
Mondays through Fridays:10:00 AM to 11:30 PM
Saturdays: 10:00 AM to 02:00 PM
On the expiry date, contracts expiring on that day
will not be available for trading after 5 PM.
The Exchange may vary the above timing with due
notice.
Tender Date –T
Tender Period:
Tender period would be of 5 working days during
trading hours prior to and including the expiry date
of the contract.
Pay-in and Pay-out: on a T+1 basis. If the tender
date is T then, pay-in and pay-out would happen on
T + 1 day. If such a T + 1 day happens to be a
Saturday, a Sunday or a holiday at the Exchange,
clearing banks or any of the service providers, Pay-
in and Pay-out would be effected on the next
working day.
34
 There would be 5 pay-in & pay-outs starting T +1
the 5th being the Final Settlement.
Expiry date of the contract:

20th day of the delivery month. If 20th happens to

be a holiday, a Saturday or a Sunday then the due
date shall be the immediately preceding trading
day of the Exchange, which is other than a
Due date / Expiry Date
Saturday.

The settlement of contract would be by a staggered

system of 5 Pay-ins and Pay-outs including the 5th
Pay-in and Pay-out which would be the Final
Settlement of the contract.
Upon expiry of the contracts all the outstanding
open positions should result in compulsory delivery.

The penalty structure for failure to meet delivery

obligations will be as per circular no.
NCDEX/TRADING-086/2008/216 dated September
16, 2008.
Delivery specification

During the Tender period, if any delivery is

tendered by seller, the corresponding buyer having
open position and matched as per process put in
place by the Exchange, shall be bound to settle by
taking delivery on T + 1 day from the delivery
centre where the seller has delivered same.
Clearing and settlement of contracts will
commence with the commencement of Tender
Period by compulsory delivery of each open
position tendered by the seller on T +1 to the
Closing of Contracts
corresponding buyer matched by the process put in
place by the Exchange. Upon the expiry of the
contract all the outstanding open position should
result in compulsory delivery.
Opening of Contracts Trading in the far month contract will open on the
10th day of the month in which the near month
contract is due to expire. If the 10th happens to be
35
 a non-trading day, contracts would open on the
next trading day.
No. of active contracts As per launch calendar
Base daily price fluctuation limit is (+/-)3%. If the
trade hits the prescribed base daily price limit, the
limit will be relaxed up to (+/-)6% without any
break/ cooling off period in the trade. In case the
daily price limit of (+/-)6% is also breached, then
after a cooling off period of 15 minutes, the daily
Price limit price limit will be further relaxed up to (+/-) 9%.
Trade will be allowed during the cooling off period
within the price band of (+/-)6%.
In case of price movement in International markets
which is more than the maximum daily price limit
(currently 9%), the same may be further relaxed in
steps of 3% with the approval of FMC.
Member wise : As per Annexure 1 or 15% of
market wide open position whichever is higher
Client-wise : As per Annexure 1
Position limits
The above limits will not apply to bonafide hedgers.
For bonafide hedgers the Exchange will decide the
limits on a case-to-case basis.
Gold bars of 999.9 / 995 fineness

A premium will be given for fineness above 995.

Quality allowance (for
The settlement price for more than 995 fineness
Delivery)
will be calculated at (Actual fineness/995) * Final
Settlement Price. Premium of 0.49% would be given
for gold delivered of 999.9 purity.
In case of additional volatility, a special margin at
such other percentage, as deemed fit by the
Regulator/Exchange, may be imposed on either the
Special Margin
buy or the sell side in respect of all outstanding
positions. Removal of such Margins will be at the
discretion of the Regulator/Exchange.
Additional Margin In addition to the above margins the
Regulator/Exchange may impose additional margins
on both long and short side at such other

36
 percentage, as deemed fit. Removal of such
Margins will be at the discretion of the
Regulator/Exchange.

Bibliography
➢ World Gold Coucil reports

➢ Commodity India Magazine

➢ http://www.gfms.co.uk/

➢ http://www.lbma.org.uk/

➢ http://www.nymex.com/

➢ http://www.tocom.com.jp/

➢ http://www.gold.org/

➢ http://www.kitco.com/
37
➢ http://www.thebulliondesk.com

➢ http://www.mcx.com

➢ http://www.ncdex.com

➢ http://www.mmtc.com

➢ Interaction with Gold smiths and brokers

38