FUNDAMENTAL AND TECHNICAL ANALYSIS

ON GOLD

Project report submitted in

Partial fulfillment for the award of

MASTER OF BUSINESS ADMINISTRATION

(FINANCE)
FROM

SIKKIM MANIPAL UNIVERSITY

BY

SUPRIYA DAS GUPTA

(2008-2010)

AIM COMPUTER EDUCATION

SIKKIM MANIPAL UNIVERSITY
M-39, OLD DLF, SECTOR- 14,
GURGAON- 122001

1
 DECLARATION

I Mr. Supriya Das Gupta bearing ROLL NO 530840563 student of

SIKKIM MANIPAL UNIVERSITY, hereby declare that the project
report titled “A STUDY ON FUNDAMENTAL AND
TECHNICAL ANALYSIS OF GOLD” AT “PURE GOLD
JEWELLERY” submitted for the partial fulfillment of the requirement
of the award of degree in MASTER OF BUSINESS
ADMINISTRATION, is a bona fide work done by me and it is not
submitted to any other university or Institution for the award of any
Degree, Diploma Certificate or published any time before.

Date: 06/06/2010
Place: GURGAON SUPRIYA DAS GUPTA

2
 ABSTRACT

Aim: An empirical study on GOLD based on fundamental and technical analysis.

Abstract: We study the gold and silver prices based on fundamental analysis like
inventories in the entire globe, central bank reserves and currency fluctuations. We
study the Inventories which will effect due to strikes, political conditions and demand
& supply mismatch. According to central Bank policies and central agreements
reserves will various. Currency trading on Dollar verses Euro or Dollar verses sterling
pound causes volatility which leads to gold/silver price fluctuations.

We forecast the gold and silver prices with advanced technical analysis tools
by using lead &lag indicators, Elliot wave analysis and Fibonacci series. We applied
lag indicators on trending markets and lead indicators for trading markets. Lag
indicators (like MACD or moving averages) smoothens the price trends so that we
can find out prices are in the trending zone or not. We can apply this method on both
bullish as well as bearish markets. Lead indicators are like oscillators for find out the
trading ranges on sideways markets. We apply Elliot wave for gold and silver prices
forecast for long term analysis. We combine the Fibonacci series with Elliot wave for
better results and absolute forecast.

In this study we are applying both fundamental and technical

analysis for predicting the future price actions based on historical data and previous
trends.

3
 ACKNOWLEDGEMENT

Words never seemed so inadequate to acknowledge anybody’s

cooperation and guidance, as now. Many people have tended their ability
and timely support and it’s because of them that this study was made
possible.

I extend my sincere thanks to, CENTRE FACULTY of the SIKKIM

MANIPAL UNIVERSITY for her continuous guidance.

I also express my heartfelt thanks to MR CHITAMBARAM

Finance Director of “PURE GOLD JEWELLERS LLC” for his
constant help in guiding providing me the necessary information
throughout the preparation of this project.

Finally, many thanks to all of them not mentioned who have contributed
their bit towards the study.

SUPRIYA DAS GUPTA

4
 Page
Chapter No Content No
1 Introduction 7-11
2 Objectives 12-13
3 Research and Methodology 14-15
4 Review of literature 16-38
5 Company Profile 39-44
Data Analysis and
6 Interpretation 45-60
7 Findings and Suggestions 61-63
8 Conclusion 64-67
9 Bibliography 68-70

TABLE OF CONTENT

5
 LIST OF TABLES

TABLE PAGE NO.

Fibonacci Ratio Table 33

LIST OF FIGURES

FIGURES PAGE NUMBERS

1.FIVE WAVE PATTERN 23
2.WAVE MODE 24
3.ESSENTIAL DESIGN 27
4.PRICE TREND 38
5.DEMAND AND CONSUMPTION OF GOLD 47
6.GOLD LONG TERM TREND 54
7.GOLD SHORT TERM TREND 56
8.CORRELATION BETWEEN GOLD AND CURRENCY 57

6
 CHAPTER - I

INTRODUCTION

7
 Introduction: The high Volatility in equity market with high-
risk and the arrival of low interest rates have increased the investor
presence in alternative investments such as gold and silver. In India,
gold has traditionally played a multi-faceted role. Apart from being
used for armament purpose, it has also served as an asset of the
last resort and a hedge against inflation and currency depreciation.
But most importantly, it has most often been treated as an
investment.

Gold and silver supply primarily comes from mine production,

official sector sales of global central banks, old gold scrap and net
disinvestments of invested gold. Out of the total supply of 3870 tons
last year, 66% was from mine production, 20% from old gold scrap
and 14% from official sector sales. Demand globally generate from
fabrication (jewellery and other fabrication), bar hoarding, net
producer hedging and Implied investment.

The following factors have been predominantly responsible for the

surge in the yellow metal:

 Geopolitical tensions across the world particularly in the

Middle East and Nigeria, the threat of further attacks from Al
Qaeda in the oil rich Middle East continues. The continued
stand off between Iran and the west over Tehran’s resumption
of its nuclear program is likely to underpin price.

 Any rallies in crudeoil futures are likely to see fresh buying

interest emerge as gold is considered as hedge against
inflation.

 Another crucial factor supportive of demand is the faster GDP

growth in developing countries particularly India as compare
the industrialized nations.

8
  Expectations of an increase in demand for the marriage
season in India could see emergence of physical buying
interest.

HISTORY OF GOLD

Gold has a history of more than 7000 years in India, which can be
find in religious book of Hindu, where it is considered as a metal of
immense value. But looking at the history of world, gold is found at
the Egypt at 2000 B.C., which is the first metal used by the humans
value for ornament and rituals.
Gold has long been considered one of the most precious metals, and
its value has been used as the standard for many currencies (known
as the gold standard) in history. Gold has been used as a symbol for
purity, value, royalty, and particularly roles that combine these
properties.

As a tangible investment gold is held as part of a portfolio by the

countries as a reserves because over the long period gold has an
extensive history of maintaining its value. It has in gained ground in
relation to currencies owing to inflation. However, gold does become
particularly desirable in times of extremely weak confidence and
during hyperinflation because gold maintains its value even as fiat
money becomes worthless when the value of currency depreciates.

But above all comment; it has a special role in India and in certain
countries, gold Jewelry is worn for ornamental value on all social
functions, festivals and celebrations. It is the popular form of
investment in rural areas between the farmers after having bumper
crop or after harvesting, this all factor makes India as largest
consumer (18.7% of world total demand in 2004) and importer of
9
gold due to its low production, which is negligible, and untapped
gold reserves. This is due to lack of new technology in finding gold
reserves and low interest shown by government in financing,
encouraging for exploration programs in gold mines.

HISTORY OF GOLD TRADING

Gold future trading debuted first at Winnipeg Commodity Exchange

(know is Comex) in Canada in 1972. The gold contract gain popularity
among traders, led to many countries had too started gold future
trading. Which include London gold future, Sydney future exchange,
Singapore International Monetary Exchange (Simex), Tokyo Commodity
Exchange (Tocom), Chicago Mercantile Exchange, Chicago Board of
Trade (CBOT), Shanghai Gold Exchange, Dubai Gold and Commodity
Exchange are some of the world Top recognized exchange, and in India,
National Commodity and Derivative Exchange (NCDEX) and Multi-
Commodity Exchange (MCX), and National Board of Trade (NBOT) are
some Indian exchanges where Gold are traded. History of gold trading
in India is dates back to 1948 with Bombay Bullion Association, which is
formed by the group of Merchants.

PRODUCTION OF GOLD

Till know the total gold is extracted from the mines is about $1
trillion dollar, which is accumulated in physical form is enough to
built Eiffel tower.

Annual gold production worldwide is about US$35 billion and by far

the one of the largest-trading world commodity. Worldwide, gold
mines produce about 2,464 tones in the year 2004 from total supply
of 3328 tones but unable to meet identifiable demand of 3497 tones.
Gold is mined in more than 118 countries around the world, with the
large number of development projects in these countries expected
10
to keep production growing well into the next century. Currently,
South Africa is the largest gold producing country, followed by the
United States, Australia, Canada, Indonesia, Russia and others, some
of these countries also account for highest gold reserves from
potential 50,000 tones of world-wide reserves.

GLOBAL GOLD PRODUCTION

2004 (metric tons)

South Africa: 343

United States: 262

Australia: 258

China: 217

Canada: 129

Indonesia: 114

Ghana: 58

Guyana: 15

Source: GFMS

11
 CHAPTER - 2

OBJECTIVE AND LIMITATIONS

12
Objective: The main objective of this project is to forecast gold
and silver prices with advanced technical analysis tools by using
lead &lag indicators, Elliot wave analysis and Fibonacci series. We
applied lag indicators on trending markets and lead indicators for
trading markets. We apply Elliot wave analysis with gold and silver
prices forecast for long term .We combine the Fibonacci series with
Elliot wave for better results and absolute forecast. We also analyze
gold and silver prices based on fundamental analysis like
inventories, central bank reserves and dollar fluctuations.

LIMITATION OF STUDY

The study is based on the parameters of following factors.

1. It is based on Research done by authors and organizations like

WGC, GFMS, News, Articles and its affect on gold.

2. Technical Analysis is done on Two methods by taking 7 & 14

day moving averages (DMA) & Relative Strength Index (RSI)
and price movement, Buy and Sell signal suggests on the basis
of this study characteristic of this methods.

3. The suggestion is based on the study on Fundamental and

Technical Analysis such as price movement, Relationship of
gold with other factors, Volumes and Open Interest (OI).

13
4. This analysis will be holding good for a limited time period that
is based on present scenario and study conducted, future
movement on gold price may or may not be similar.

CHAPTER - 3

RESEARCH AND METHODODLOGY

14
RESEARCH OF THE STUDY

 TYPE OF RESEARCH

The research is basically a descriptive research. In this

project Descriptive research methodologies i s us e d . The
research methodology will be used for gathering details
of different aspects of GOLD ANALYSIS.

 SOURCE OF DATA COLLECTION

Secondary data will be collected from articles in journals

and magazines. The database of MCX, FMC, GOLD COUNSIL
and COMEX will be taken. As this topic is very new, article
from other w e b s i t e l i n k s i s required. Report submitted
b y MCX/FMC committee is used.

METHODOLOGY OF THE STUDY

Data collection instrument:

Secondary Data:

The data that is used in this project is also in the

form of secondary nature. The data is collected from secondary
sources such as various websites, journals, newspapers, books,
etc. the analysis used in this project has been done using
selective technical tools. In Equity market, risk is analyzed and
trading decisions are taken on basis of technical analysis. It is

15
collecting share prices of selected companies for a period of
five years.

TOOLS USED:

1. Win quote is using for charts building

2. Ms –excel is suing for demand and supply graphs.

CHAPTER - 4

REVIEW OF LITERATURE

16
 Why central banks hold gold
Monetary authorities have long held gold in their reserves. Today
their stocks amount to some 30,000 tones - similar to their holdings
60 years ago. It is sometimes suggested that maintaining such
holdings is inefficient in comparison to foreign exchange. However,
there are good reasons for countries continuing to hold gold as part
of their reserves. These are recognized by central banks themselves
although different central banks would emphasize different factors.

Diversification
Economic security
Physical security
Unexpected needs
Confidence
Income
Insurance
How much gold to hold?

Diversification

In any asset portfolio, it rarely makes sense to have all your eggs in
one basket. Obviously the price of gold can fluctuate - but so too do
the exchange and interest rates of currencies held in reserves. A
strategy of reserve diversification will normally provide a less
volatile return than one based on a single asset.

Gold has good diversification properties in a currency portfolio.

These stem from the fact that its value is determined by supply and
demand in the world gold markets, whereas currencies and
government securities depend on government promises and the
variations in central banks’ monetary policies. The price of gold
therefore behaves in a completely different way from the prices of
currencies or the exchange rates between currencies.
17
 Economic Security

Gold is a unique asset in that it is no one else's liability. Its status

cannot therefore be undermined by inflation in a reserve currency
country. Nor is there any risk of the liability being repudiated.

Gold has maintained its value in terms of real purchasing power in

the long run and is thus particularly suited to form part of central
banks' reserves. In contrast, paper currencies always lose value in
the long run and often in the short term as well.

Physical Security

Countries have in the past imposed exchange controls or, at the

worst, total asset freezes. Reserves held in the form of foreign
securities are vulnerable to such measures. Where appropriately
located, gold is much less vulnerable. Reserves are for using when
you need to. Total and incontrovertible liquidity is therefore
essential. Gold provides this.

Unexpected needs

If there is one thing of which we can be certain, it is that today’s

status quo will not last forever. Economic developments both at
home and in the rest of the world can upset countries’ plans, while
global shocks can affect the whole international monetary system.

Owning gold is thus an option against an unknown future. It provides

a form of insurance against some improbable but, if it occurs, highly
damaging event. Such events might include war, an unexpected
surge in inflation, a generalized crisis leading to repudiation of
foreign debts by major sovereign borrowers, a regression to a world
of currency or trading blocs or the international isolation of a
country.

In emergencies countries may need liquid resources. Gold is liquid

and is universally acceptable as a means of payment. It can also
serve as collateral for borrowing.

Confidence

The public takes confidence from knowing that it’s Government

holds gold - an indestructible asset and one not prone to the
inflationary worries overhanging paper money. Some countries give
18
explicit recognition to its support for the domestic currency. And
rating agencies will take comfort from the presence of gold in a
country's reserves.

The IMF's Executive Board, representing the world's governments,

has recognized that the Fund's own holdings of gold give a
"fundamental strength" to its balance sheet. The same applies to
gold held on the balance sheet of a central bank.

Income

Gold is sometimes described as a non income-earning asset. This is

untrue. There is a gold lending market and gold can also be traded
to generate profits. There may be an "opportunity cost" of holding
gold but, in a world of low interest rates, this is less than is often
thought. The other advantages of gold may well offset any such
costs.

Insurance

The opportunity cost of holding gold may be viewed as comparable

to an insurance premium. It is the price deliberately paid to provide
protection against a highly improbable but highly damaging event.
Such an event might be war, an unexpected surge of inflation, a
generalized debt crisis involving the repudiation of foreign debts by
major sovereign borrowers, a regression to a world of currency and
trading blocs, or the international isolation of a country.

How much gold?

This is a matter for countries and central banks to decide in the light
of their particular circumstances. The international average is about
10.2% at current market prices but, in the EU it is over 50% and the
USA holds around 75% of its reserves in gold. Countries facing
particular volatility in their economic and/or political circumstances
will want to consider the level of gold in their reserves.

As per technical analysis concern we approached various methods

like Elliot wave with Fibonacci serious, Exponential moving average
and price channel. We described briefly over here.
Although it is the best forecasting tool in existence, the Wave
Principle is not primarily a forecasting tool; it is a detailed
description of how markets behave. Nevertheless, that description
does impart an immense amount of knowledge about the market's
19
position within the behavioral continuum and therefore about its
probable ensuing path. The primary value of the Wave Principle is
that it provides a context for market analysis. This context provides
both a basis for disciplined thinking and a perspective on the
market's general position and outlook. At times, its accuracy in
identifying, and even anticipating, changes in direction is almost
unbelievable. Many areas of mass human activity follow the Wave
Principle, but the stock market is where it is most popularly applied.
Indeed, the stock market considered alone is far more important
than it seems to casual observers. The level of aggregate stock
prices is a direct and immediate measure of the popular valuation of
man's total productive capability. That this valuation has form is a
fact of profound implications that will ultimately revolutionize the
social sciences. That, however, is a discussion for another time.

R.N. Elliott's genius consisted of a wonderfully disciplined mental

process, suited to studying charts of the Dow Jones Industrial
Average and its predecessors with such thoroughness and precision
that he could construct a network of principles that covered all
market action known to him up to the mid-1940s. At that time, with
the Dow in the 100s, Elliott predicted a great bull market for the
next several decades that would exceed all expectations at a time
when most investors felt it impossible that the Dow could even
better its 1929 peak. As we shall see, phenomenal stock market
forecasts, some of pinpoint accuracy years in advance, have
accompanied the history of the application of the Elliott Wave
approach.

Elliott had theories regarding the origin and meaning of the patterns
he discovered, which we will present and expand upon in Lessons
16-19. Until then, suffice it to say that the patterns described in
Lessons 1-15 have stood the test of time.

Often one will hear several different interpretations of the market's

Elliott Wave status, especially when cursory, off-the-cuff studies of
the averages are made by latter day experts.

However, most uncertainties can be avoided by keeping charts on

both arithmetic and semi logarithmic scale and by taking care to
follow the rules and guidelines as laid down in this course. Welcome
to the world of Elliott.

20
Elliot wave:

In the Elliott Wave Principle — A Critical Appraisal, Hamilton Bolton

made this opening statement:

As we have advanced through some of the most unpredictable

economic climate imaginable, covering depression, major war, and
postwar reconstruction and boom, I have noted how well Elliott's
Wave Principle has fitted into the facts of life as they have
developed, and have accordingly gained more confidence that this
Principle has a good quotient of basic value.

"The Wave Principle" is Ralph Nelson Elliott's discovery that social,

or crowd, behavior trends and reverses in recognizable patterns.
Using stock market data as his main research tool, Elliott discovered
that the ever-changing path of stock market prices reveals a
structural design that in turn reflects a basic harmony found in
nature. From this discovery, he developed a rational system of
market analysis. Elliott isolated thirteen patterns of movement, or
"waves," that recur in market price data and are repetitive in form,
but are not necessarily repetitive in time or amplitude. He named,
defined and illustrated the patterns. He then described how these
structures link together to form larger versions of those same
patterns, how they in turn link to form identical patterns of the next
larger size, and so on. In a nutshell, then, the Wave Principle is a
catalog of price patterns and an explanation of where these forms
are likely to occur in the overall path of market development.
Elliott's descriptions constitute a set of empirically derived rules and
guidelines for interpreting market action. Elliott claimed predictive
value for The Wave Principle, which now bears the name, "The Elliott
Wave Principle."

1.2 Short History

Although it is the best forecasting tool in existence, the Wave

Principle is not primarily a forecasting tool; it is a detailed
description of how markets behave. Nevertheless, that description
does impart an immense amount of knowledge about the market's
position within the behavioral continuum and therefore about its
21
probable ensuing path. The primary value of the Wave Principle is
that it provides a context for market analysis. This context provides
both a basis for disciplined thinking and a perspective on the
market's general position and outlook. At times, its accuracy in
identifying, and even anticipating, changes in direction is almost
unbelievable. Many areas of mass human activity follow the Wave
Principle, but the stock market is where it is most popularly applied.
Indeed, the stock market considered alone is far more important
than it seems to casual observers. The level of aggregate stock
prices is a direct and immediate measure of the popular valuation of
man's total productive capability. That this valuation has form is a
fact of profound implications that will ultimately revolutionize the
social sciences. That, however, is a discussion for another time.

R.N. Elliott's genius consisted of a wonderfully disciplined mental

process, suited to studying charts of the Dow Jones Industrial
Average and its predecessors with such thoroughness and precision
that he could construct a network of principles that covered all
market action known to him up to the mid-1940s. At that time, with
the Dow in the 100s, Elliott predicted a great bull market for the
next several decades that would exceed all expectations at a time
when most investors felt it impossible that the Dow could even
better its 1929 peak. As we shall see, phenomenal stock market
forecasts, some of pinpoint accuracy years in advance, have
accompanied the history of the application of the Elliott Wave
approach.

Elliott had theories regarding the origin and meaning of the patterns
he discovered, which we will present and expand upon in Lessons
16-19. Until then, suffice it to say that the patterns described in
Lessons 1-15 have stood the test of time. Often one will hear several
different interpretations of the market's Elliott Wave status,
especially when cursory, off-the-cuff studies of the averages are
made by latter day experts.

However, most uncertainties can be avoided by keeping charts on

both arithmetic and semi logarithmic scale and by taking care to
follow the rules and guidelines as laid down in this course. Welcome
to the world of Elliott.

1.3 Basic Tenets

22
Under the Wave Principle, every market decision is both produced
by meaningful information and produces meaningful information.
Each transaction, while at once an effect enters the fabric of the
market and, by communicating transactional data to investors, joins
the chain of causes of others' behavior. This feedback loop is
governed by man's social nature, and since he has such a nature,
the process generates forms. As the forms are repetitive, they have
predictive value.

Sometimes the market appears to reflect outside conditions and

events, but at other times it is entirely detached from what most
people assume are causal conditions. The reason is that the market
has a law of its own. It is not propelled by the linear causality to
which one becomes accustomed in the everyday experiences of life.
Nor is the market the cyclically rhythmic machine that some declare
it to be. Nevertheless, its movement reflects a structured formal
progression.

That progression unfolds in waves. Waves are patterns of directional

movement. More specifically, a wave is any one of the patterns that
naturally occur under the Wave Principle, as described in Lessons 1-
9 of this course.

The Five Wave Pattern

In markets, progress ultimately takes the form of five waves of a

specific structure. Three of these waves, which are labeled 1, 3 and
5, actually effect the directional movement. They are separated by
two countertrend interruptions, which are labeled 2 and 4, as shown
in Figure 1-1. The two interruptions are apparently a requisite for
overall directional movement to occur.

23
 Figure 1-1

R.N. Elliott did not specifically state that there is only one overriding
form, the "five wave" pattern, but that is undeniably the case. At any
time, the market may be identified as being somewhere in the basic
five wave pattern at the largest degree of trend. Because the five
wave pattern is the overriding form of market progress, all other
patterns are subsumed by it.

1.4 Wave Mode

There are two modes of wave development: motive and corrective.

Motive waves have a five wave structure, while corrective waves
have a three wave structure or a variation thereof. Motive mode is
employed by both the five wave pattern of Figure 1-1 and its same-
directional components, i.e., waves 1, 3 and 5. Their structures are
called "motive" because they powerfully impel the market.
Corrective mode is employed by all countertrend interruptions,
which include waves 2 and 4 in Figure 1-1. Their structures are
called "corrective" because they can accomplish only a partial
retracement, or "correction," of the progress achieved by any
preceding motive wave. Thus, the two modes are fundamentally
24
different, both in their roles and in their construction, as will be
detailed throughout this course.

In his 1938 book, The Wave Principle, and again in a series of

articles published in 1939 by Financial World magazine, R.N. Elliott
pointed out that the stock market unfolds according to a basic
rhythm or pattern of five waves up and three waves down to form a
complete cycle of eight waves. The pattern of five waves up followed
by three waves down is depicted in Figure 1-2.

Figure 1-2

One complete cycle consisting of eight waves, then, is made up of

two distinct phases, the motive phase (also called a "five"), whose
sub waves are denoted by numbers, and the corrective phase (also
called a "three"), whose sub waves are denoted by letters. The
sequence a, b, c corrects the sequence 1, 2, 3, 4, 5 in Figure 1-2.

At the terminus of the eight-wave cycle shown in Figure 1-2 begins a

second similar cycle of five upward waves followed by three
downward waves. A third advance then develops, also consisting of
five waves up. This third advance completes a five wave movement
of one degree larger than the waves of which it is composed. The
result is as shown in Figure 1-3 up to the peak labeled (5).

25
 Figure 1-3

At the peak of wave (5) begins a down movement of correspondingly

larger degree, composed once again of three waves. These three
larger waves down "correct" the entire movement of five larger
waves up. The result is another complete, yet larger, cycle, as shown
in Figure 1-3. As Figure 1-3 illustrates, then, each same-direction
component of a motive wave, and each full-cycle component (i.e.,
waves 1 + 2, or waves 3 + 4) of a cycle, is a smaller version of itself.

It is crucial to understand an essential point: Figure 1-3 not only

illustrates a larger version of Figure 1-2, it also illustrates Figure 1-2
itself, in greater detail. In Figure 1-2, each sub wave 1, 3 and 5 is a
motive wave that will subdivide into a "five," and each sub wave 2
and 4 is a corrective wave that will subdivide into an a, b, c. Waves
(1) and (2) in Figure 1-3, if examined under a "microscope," would
take the same form as waves [1]* and [2]. All these figures illustrate
the phenomenon of constant form within ever-changing degree.

1.5 Essential Design

The market's compound construction is such that two waves of a

particular degree subdivide into eight waves of the next lower
degree, and those eight waves subdivide in exactly the same
manner into thirty-four waves of the next lower degree. The Wave
Principle, then, reflects the fact that waves of any degree in any
series always subdivide and re-subdivide into waves of lesser degree
and simultaneously are components of waves of higher degree.
Thus, we can use Figure 1-3 to illustrate two waves, eight waves or
26
thirty-four waves, depending upon the degree to which we are
referring.

Now observe that within the corrective pattern illustrated as wave

[2] in Figure 1-3, waves (a) and (c), which point downward, are
composed of five waves: 1, 2, 3, 4 and 5. Similarly, wave (b), which
points upward, is composed of three waves: a, b and c. This
construction discloses a crucial point: that motive waves do not
always point upward, and corrective waves do not always point
downward. The mode of a wave is determined not by its absolute
direction but primarily by its relative direction. Aside from four
specific exceptions, which will be discussed later in this course,
waves divide in motive mode (five waves) when trending in the
same direction as the wave of one larger degree of which it is a part,
and in corrective mode (three waves or a variation) when trending in
the opposite direction. Waves (a) and (c) are motive, trending in the
same direction as wave [2]. Wave (b) is corrective because it
corrects wave (a) and is countertrend to wave [2]. In summary, the
essential underlying tendency of the Wave Principle is that action in
the same direction as the one larger trend develops in five waves,
while reaction against the one larger trend develops in three waves,
at all degrees of trend.

*Note: For this course, all Primary degree numbers and letters
normally denoted by circles are shown with brackets.

Essential Concepts

27
 Figure 1-4

The phenomena of form, degree and relative direction are carried

one step further in Figure 1-4. This illustration reflects the general
principle that in any market cycle, waves will subdivide as shown in
the following table.

28
2.1 Introducing Fibonacci

Statue of Leonardo Fibonacci, Pisa, Italy.

The inscription reads, "A. Leonardo Fibonacci, Insigne
Matematico Piisano del Secolo XII."
Photo by Robert R. Prechter, Sr.

HISTORICAL AND MATHEMATICAL BACKGROUND OF THE

WAVE PRINCIPLE

29
The Fibonacci (pronounced fib-eh-nah´-chee) sequence of numbers
was discovered (actually rediscovered) by Leonardo Fibonacci da
Pisa, a thirteenth century mathematician. We will outline the
historical background of this amazing man and then discuss more
fully the sequence (technically it is a sequence and not a series) of
numbers that bears his name. When Elliott wrote Nature's Law, he
referred specifically to the Fibonacci sequence as the mathematical
basis for the Wave Principle. It is sufficient to state at this point that
the stock market has a propensity to demonstrate a form that can
be aligned with the form present in the Fibonacci sequence. (For a
further discussion of the mathematics behind the Wave Principle,
see "Mathematical Basis of Wave Theory," by Walter E. White, in
New Classics Library's forthcoming book.)

In the early 1200s, Leonardo Fibonacci of Pisa, Italy published his

famous Liber Abacci (Book of Calculation) which introduced to
Europe one of the greatest mathematical discoveries of all time,
namely the decimal system, including the positioning of zero as the
first digit in the notation of the number scale. This system, which
included the familiar symbols 0, 1, 2, 3, 4, 5, 6, 7, 8 and 9, became
known as the Hindu-Arabic system, which is now universally used.

Under a true digital or place-value system, the actual value

represented by any symbol placed in a row along with other symbols
depends not only on its basic numerical value but also on its position
in the row, i.e., 58 has a different value from 85. Though thousands
of years earlier the Babylonians and Mayas of Central America
separately had developed digital or place-value systems of
numeration, their methods were awkward in other respects. For this
reason, the Babylonian system, which had been the first to use zero
and place values, was never carried forward into the mathematical
systems of Greece, or even Rome, whose numeration comprised the
seven symbols I, V, X, L, C, D, and M, with non-digital values
assigned to those symbols. Addition, subtraction, multiplication and
division in a system using these non-digital symbols is not an easy
task, especially when large numbers are involved. Paradoxically, to
overcome this problem, the Romans used the very ancient digital
device known as the abacus. Because this instrument is digitally
based and contains the zero principle, it functioned as a necessary
supplement to the Roman computational system. Throughout the
ages, bookkeepers and merchants depended on it to assist them in
the mechanics of their tasks. Fibonacci, after expressing the basic
principle of the abacus in Liber Abacci, started to use his new
system during his travels. Through his efforts, the new system, with
30
its easy method of calculation, was eventually transmitted to
Europe. Gradually the old usage of Roman numerals was replaced
with the Arabic numeral system. The introduction of the new system
to Europe was the first important achievement in the field of
mathematics since the fall of Rome over seven hundred years
before. Fibonacci not only kept mathematics alive during the Middle
Ages, but laid the foundation for great developments in the field of
higher mathematics and the related fields of physics, astronomy and
engineering.

2.2 Introducing Fibonacci

Although the world later almost lost sight of Fibonacci, he was

unquestionably a man of his time. His fame was such that Frederick
II, a scientist and scholar in his own right, sought him out by
arranging a visit to Pisa. Frederick II was Emperor of the Holy Roman
Empire, the King of Sicily and Jerusalem, scion of two of the noblest
families in Europe and Sicily, and the most powerful prince of his
day. His ideas were those of an absolute monarch, and he
surrounded himself with all the pomp of a Roman emperor.

The meeting between Fibonacci and Frederick II took place in 1225

A.D. and was an event of great importance to the town of Pisa. The
Emperor rode at the head of a long procession of trumpeters,
courtiers, knights, officials and a menagerie of animals. Some of the
problems the Emperor placed before the famous mathematician are
detailed in Liber Abacci. Fibonacci apparently solved the problems
posed by the Emperor and forever more was welcome at the King's
Court. When Fibonacci revised Liber Abacci in 1228 A.D., he
dedicated the revised edition to Frederick II.

It is almost an understatement to say that Leonardo Fibonacci was

the greatest mathematician of the Middle Ages. In all, he wrote three
major mathematical works: the Liber Abacci, published in 1202 and
revised in 1228, Practica Geometriae, published in 1220, and Liber
Quadratorum. The admiring citizens of Pisa documented in 1240
A.D. that he was "a discreet and learned man," and very recently
Joseph Gies, a senior editor of the Encyclopedia Britannica, stated
that future scholars will in
time "give Leonard of Pisa his due as one of the world's great
intellectual pioneers." His works, after all these years, are only now
being translated from Latin into English. For those interested, the
book entitled Leonard of Pisa and the New Mathematics of the
31
Middle Ages, by Joseph and Frances Gies, is an excellent treatise on
the age of Fibonacci and his works.

Although he was the greatest mathematician of medieval times,

Fibonacci's only monuments are a statue across the Arno River from
the Leaning Tower and two streets which bear his name, one in Pisa
and the other in Florence. It seems strange that so few visitors to
the 179-foot marble Tower of Pisa have ever heard of Fibonacci or
seen his statue. Fibonacci was a contemporary of Bonanna, the
architect of the Tower, who started building in 1174 A.D. Both men
made contributions to the world, but the one whose influence far
exceeds the others is almost unknown.

2.3 The Fibonacci Sequence

In Liber Abacci, a problem is posed that gives rise to the sequence of

numbers 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, and so on to infinity,
known today as the Fibonacci sequence. The problem is this:

How many pairs of rabbits placed in an enclosed area can be

produced in a single year from one pair of rabbits if each pair gives
birth to a new pair each month starting with the second month?

In arriving at the solution, we find that each pair, including the first
pair, needs a month's time to mature, but once in production, begets
a new pair each month. The number of pairs is the same at the
beginning of each of the first two months, so the sequence is 1, 1.
This first pair finally doubles its number during the second month, so
that there are two pairs at the beginning of the third month. Of
these, the older pair begets a third pair the following month so that
at the beginning of the fourth month, the sequence expands 1, 1, 2,
3. Of these three, the two older pairs reproduce, but not the
youngest pair, so the number of rabbit pairs expands to five. The
next month, three pairs reproduce so the sequence expands to 1, 1,
2, 3, 5, 8 and so forth. Figure 3-1 shows the Rabbit Family Tree with
the family growing with logarithmic acceleration. Continue the
sequence for a few years and the numbers become astronomical. In
100 months, for instance, we would have to contend with
354,224,848,179,261,915,075 pairs of rabbits. The Fibonacci
sequence resulting from the rabbit problem has many interesting
properties and reflects an almost constant relationship among its
components.

32
The sum of any two adjacent numbers in the sequence forms the
next higher number in the sequence, viz., 1 plus 1 equals 2, 1 plus 2
equals 3, 2 plus 3 equals 5, 3 plus 5 equals 8, and so on to infinity.

The Golden Ratio

After the first several numbers in the sequence, the ratio of any
number to the next higher is approximately .618 to 1 and to the next
lower number approximately 1.618 to 1. The further along the
sequence, the closer the ratio approaches phi (denoted f) which is
an irrational number, .618034.... Between alternate numbers in the
sequence, the ratio is approximately .382, whose inverse is 2.618.
Refer to Figure 3-2 for a ratio table interlocking all Fibonacci
numbers from 1 to 144.

33
Phi is the only number that when added to 1 yields its inverse: .618
+ 1 = 1 ÷ .618. This alliance of the additive and the multiplicative
produces the following sequence of equations:

.6182 = 1 - .618,

.6183 = .618 - .6182,

.6184 = .6182 - .6183,

.6185 = .6183 - .6184, etc.

or alternatively,

1.6182 = 1 + 1.618,

1.6183 = 1.618 + 1.6182,

1.6184 = 1.6182 + 1.6183,

1.6185 = 1.6183 + 1.6184, etc.

Some statements of the interrelated properties of these four main

ratios can be listed as follows:

1) 1.618 - .618 = 1,

34
2) 1.618 x .618 = 1,

3) 1 - .618 = .382,

4) .618 x .618 = .382,

5) 2.618 - 1.618 = 1,

6) 2.618 x .382 = 1,

7) 2.618 x .618 = 1.618,

8) 1.618 x 1.618 = 2.618.

Besides 1 and 2, any Fibonacci number multiplied by four, when

added to a selected Fibonacci number, gives another Fibo-nacci
number, and so on

Exponential Moving Average (EMA)

In order to reduce the lag in simple moving averages, technicians
often use exponential moving averages (also called exponentially
weighted moving averages). EMA's reduce the lag by applying more
weight to recent prices relative to older prices. The weighting
applied to the most recent price depends on the specified period of
the moving average. The shorter the EMA period, the more weight
will be applied to the most recent prices. For example: a 10-period
exponential moving average weighs the most recent price 18.18%
while a 20-period EMA weighs the most recent price 9.52%. As we'll
see, the calculating and EMA is much harder than calculating an
SMA. The important thing to remember is that the exponential
moving average puts more weight on recent prices. As such, it will
react quicker to recent price changes than a simple moving average.
Here's the calculation formula.

Exponential Moving Average Calculation

Exponential Moving Averages can be specified in two ways - as a
percent-based EMA or as a period-based EMA. A percent-based EMA
has a percentage as its single parameter while a period-based EMA
has a parameter that represents the duration of the EMA.
35
The formula for an exponential moving average is:

EMA (current) = ( (Price(current) – EMA (prev) ) x Multiplier)

+ EMA (prev)

For a percentage-based EMA, "Multiplier" is equal to the EMA's

specified percentage. For a period-based EMA, "Multiplier" is equal
to 2 / (1 + N) where N is the specified number of periods.

For example, a 10-period EMA's Multiplier is calculated like this:

(2 / (Time periods + 1) ) = (2 / (10 + 1) ) = 0.1818 (18.18%)

This means that a 10-period EMA is equivalent to an 18.18% EMA.

Note: StockCharts.com only supports period-based EMA's.

Below is a table with the results of an exponential moving average

calculation for Eastman Kodak. For the first period's exponential
moving average, the simple moving average was used as the
previous period's exponential moving average (yellow highlight for
the 10th period). From period 11 onward, the previous period's EMA
was used. The calculation in period 11 breaks down as follows:

(C - P) = (57.15 - 59.439) = -2.289

(C - P) x K = -2.289 x .181818 = -0.4162
( (C - P) x K) + P = -0.4162 + 59.439 = 59.023

36
The 10-period simple moving average is used for the first calculation
only. After that the previous period's EMA is used.

37
Note that, in theory, every previous closing price in the data set is
used in the calculation of each EMA that makes up the EMA line.
While the impact of older data points diminishes over time, it never
fully disappears. This is true regardless of the EMA's specified
period. The effects of older data diminish rapidly for shorter EMA's.
Than for longer ones but, again, they never completely disappear.

Price Trend

As per Gold candlestick charts are prices are in the bullish phase. If
we are look in to the price trend for past couple of days 7 bullish
candles out of 10 candles has formed which means prices are more
positive and trend would be expected to continue.
As per the moving averages concern EMA (5) is above the
EMA (6) which shows prices are positive territory. Open interest is
negative which positive divergence for prices concern is.
As per MACD histogram, the histogram is in positive zone
which leads trend is intact. Of course already the trend confirms
bullish so prices would be in bullish zone for the next couple of days.

38
39
 CHAPTER - 5

COMPANY PROFILE

40
 Religare Enterprises Limited
Religare Enterprises Limited (REL) is one of the leading integrated
financial services groups of India. REL's businesses are broadly
clubbed across three key verticals, the Retail, Institutional and
Wealth spectrums, catering to a diverse and wide base of clients.

The vision is to build Religare as a globally trusted brand in the

financial services domain and present it as the 'Investment Gateway
of India'. All employees of the group guided by an experienced and
professional management team are committed to providing financial
care, backed by the core values of diligence and transparency.

REL offers a multitude of investment options and a diverse bouquet

of financial services with its pan India reach in more than 1550
locations across more than 460 cities and towns. REL also currently
operates from 10 countries globally following its acquisition of
London's oldest brokerage & investment firm, Hichens, Harrison &
Co. plc.

With a view to expand, diversify and introduce offerings

benchmarked against global best practices, Religare operates its Life
Insurance business in partnership with the global major – Aegon. For
its wealth management business, Religare has partnered with
Australia based financial services major-Macquarie. Religare has also
partnered with Vistaar Entertainment to launch India's first SEBI
approved Film Fund offering a unique alternative asset class of
investments.

Vision and Mission

Vision - Build Religare as a globally trusted brand in the financial services
domain and present it as the ‘Investment Gateway of India'.

Mission - Providing complete financial care driven by the core values of

diligence and transparency.

41
Brand Essence - Core brand essence is Diligence and Religare is driven by
ethical and dynamic processes for wealth creation

Group Structure
Religare COMMODITIES Limited
• Equity Broking
• Online Investment Portal
• Portfolio Management Services
• Depository Services

Religare Commodities Limited

• Commodity Broking

Religare Capital Markets Limited

• Investment Banking
• Proposed Institutional Broking

Religare Realty Limited

• In house Real Estate Management Company

Religare Finevest Limited

• Lending and Distribution business
• Proposed Custodial business

Religare Insurance Broking Limited

• Life Insurance
• General Insurance
• Reinsurance

Religare Arts Initiative Limited

• Business of Art

42
 • Gallery launched - arts-I

Religare Venture Capital Limited

• Private Equity and Investment Manager

Religare Asset Management*

* Religare Asset Management Company (P) Limited is a wholly

owned subsidiary of Religare COMMODITIES Limited (RSL), which
in turn is a 100% subsidiary of Religare Enterprises Limited.

** Religare Hichens, Harrison plc. (RHH) is a part of Religare

Enterprises Limited (REL) – a leading integrated financial services
group of India. Hichens, Harrison & Co. plc. (HH), established in
1803 is London’s oldest brokerage and investment firm with a
global footprint. Post its acquisition through REL’s indirect
subsidiary - Religare Capital Markets International (UK) Limited,
HH has been rechristened as Religare Hichens Harrison plc.

Our Joint Ventures

AEGON Religare Life Insurance Company

Life Insurance business (AEGON as a partner)
For more information log on to
www.aegonreligare.com

43
 Religare Macquarie Wealth Management Ltd.
Private Wealth business (Macquarie, Australian
Financial Services major as a partner)
For more information log on to
www.religaremacquarie.com
Vistaar Religare -The Film Fund
India's first SEBI approved Film Fund

Brand Identity
Name

Religare is a Latin word that translates as 'to bind together'. This

name has been chosen to reflect the integrated nature of the
financial services the company offers.

Symbol

The Religare name is paired with the symbol of a four-leaf clover.

Traditionally, it is considered good fortune to find a four-leaf clover
as there is only one four-leaf clover for every 10,000 three-leaf
clovers found.

For us, each leaf of the clover has a special meaning. It is a symbol
of Hope, Trust, Care and Good Fortune.

For the world, it is the symbol of Religare.

The first leaf of the clover represents Hope. The aspirations

to succeed. The dream of becoming. Of new possibilities. It
is the beginning of every step and the foundation on which a
44
person reaches for the stars.

The second leaf of the clover represents Trust. The ability to

place one’s own faith in another. To have a relationship as
partners in a team. To accomplish a given goal with the
balance that brings satisfaction to all, not in the binding, but
in the bond that is built.

The third leaf of the clover represents Care. The secret

ingredient that is the cement in every relationship. The truth
of feeling that underlines sincerity and the triumph of
diligence in every aspect. From it springs true warmth of
service and the ability to adapt to evolving environments with
consideration to all.

The fourth and final leaf of the clover represents Good

Fortune. Signifying that rare ability to meld opportunity and
planning with circumstance to generate those often looked
for remunerative moments of success.

Hope. Trust. Care. Good Fortune. All elements perfectly

combine in the emblematic and rare, four-leaf clover to
visually symbolize the values that bind together and form the
core of the Religare vision.

45
 CHAPTER - 6

DATA ANALYSIS &

INTERPRETATION

46
Fundamental analysis
DEMAND AND CONSUMPTION OF GOLD

Gold produced from different sources and demanded for

consumption in form of Jewellery, Industrial applications,
Government & Central bank Investment and Private Investor, which
has been worth US$ 38 billion on average over the past five years in
world.

Total of world gold produced is mostly consumed by different sectors

are Jewellerys 80%, Industrial application 11.5% and rest of gold is
used as investment purpose 8.5%.

Considering the situation in India, the demand for Gold consumption

is far more ahead than its availability through production, scrap or
recycled gold. Where gold production in India is only 2tonnes, where
demand is 18.7% of world gold consumption, which make India a
leading consumer of gold followed by Italy, Turkey, USA, China,
Japan. According to Countries wise demand, the following graph
shows the demand in each country. Large part constitute by Jewelry
consumption with 85.56% during 2004 by Indian consumers, who
seem to spend a disproportionate percentage of their disposable
income on gold and gold jewelry.

47
Gold fabrication for domestic and international market, also formed
large part of business in India with 527 tones of gold fabricated in
India in 2004, making world largest fabricator which is 60% more
than its closet competitor Italy, Turkey, USA. But this Jeweler
Fabrication is unable to generate much revenue, as most of its
consumed in India (479 tones).

GOLD CONSUMPTION IN INDIA

India consumed around 18% of world Gold produced. Even though it

18.70%

India
Italy
42.20% 11.10% Turkey
US
China
Jap an
Rest of world

8.50%

7.30%
5.30%
6.90%

only contribute 1.6% of Global GDP.

“Traditionally, Gold has been a good safety net for Indian

households. However, the sharp rise in gold imports over the last
48
three years when the rupee has started appreciating, inflation is
relatively low, banking facilities are improving And economic can
confidence has picked up, is surprising” say Market watchers.
(Source: -Economic Times, Article, “ Forget sensex, the Gold rush is
on”, July 18 ‘05)

The demand is much that it consumed more than 1.5 times of US

consumption of gold. Increasing by nearly 60% in 2003-04, but
during this fiscal Gold imports increased by another 58%, with
Import of gold and silver account around $11 billion consumption
increased by 88% during March’05quarter.

Uses of Gold

1) Jewellery Fabrication: The largest source of demand is the

jewelry industry. In new years, demand from the jewelry industry
alone has exceeded Western mine production. This shortfall has
been bridged by supplies from reclaimed jewelry and other industrial
scrap, as well as the release of official sector reserves. Gold's
workability, unique beauty, and universal appeal make this rare
precious metal the favorite of jewelers all over the world.

India is the world's foremost gold jewellery fabricator and consumer

with fabricator and consumption annually of over 600 tons according
to GFMS. Measures of consumption and fabrication are made more
difficult because Indian

jewellery often involves the re-making by goldsmiths of old family

ornaments into lighter or fashionable designs and the amount of
gold thus recycled is impossible to gauge. Estimates for this
recycled jewellery vary between 80 tons and 300 tons a year. GFMS

49
estimates are that official gold bullion imports in 2001 were 654
tons. Exports have increased dramatically since 1996, and in 2001
stood at over 60 tons. The US accounted for about one third of total
official exports. Manufacturers located in Special Export Zones can
import gold tax-free through various registered banks under an
Export Replenishment scheme.

2) Industrial applications: Besides jewelry, gold has many

applications in a variety of industries including aerospace, medicine,
electronics and dentistry. The electronics industry needs gold for the
manufacture of computers, telephones, televisions, and other
equipment. Gold's unique properties provide superior electrical
conducting qualities and corrosion resistance, which are required in
the manufacture of sophisticated electronic circuitry. In dentistry,
gold alloys are popular because they are highly resistant to
corrosion and tarnish. For this reason gold alloys are used for
crowns, bridges, gold inlays, and partial debenture.

3) Governments and central banks: The third source of gold

demand is governments and central banks that buy gold to increase
their official reserves. Central banks holds 28,225.4 tons, the
holdings of Reserve Bank of India are only a modest 397.5 tons.

4) Private investors: Finally, there are private investors.

Depending upon market circumstances, the investment component
of demand can vary substantially from year to year.

50
 NEWS FROM THE DEMAND AND SUPPLY
SIDE

 The increase in investment demand is likely to offset the

slowdown in demand for jewelry fabrication.

 World investment demand has more than doubled to over 600

tones in 2005.

 A recent report by GFMS said the investment demand for gold

likely to continue until 2009 that could see global prices hitting
new highs. GFMS expects jewellery
demand that represents 72% of total gold demand to decline
352 tones to 1485 tons in the first half of 2007

 On the supply side mine production is expected to increase 56

tones to1236 tones while gold scrap is expected to increase 52
tones to 451 tones.

 The increase in demand is likely to see dips being utilized as

buying opportunities, particularly as there have been no
significant fresh discoveries of gold deposits.

 Most gold manufacturing of electrical components takes place

in North America, Western Europe and East Asia. A significant
factor that could see an increase in demand from East Asia in
increased number of companies shifting to the region due to
the cost benefits on offers.

 Newer uses of gold include increased usage as an industrial

metal, the Yellow metal being increasingly looked as a catalyst
in fuel cells, chemical processing and controlling pollution.

 Another avenue that could be focused upon is in the field of

Nanotechnology gold nanorods can be used to improve LCD
displays in mobile phones and laptops. However gold futures
continue to be vulnerable to sharp slides due to several
factors.
51
GOLD DEMAND TRENDS

Third quarter 2009

• Gold demand, in tonnage terms, rebounded strongly in Q3 after

several quarters of weakness.

Identifiable demand totaled 1,133.4 tons, up 170.1 tones (18%) on

the levels of a year earlier. In US$ value terms, this represented a
51% rise to $31.8 billion, an all-time record high and a 45% leap
from the previous record set in Q2. The recovery in demand was
triggered by a fall in the gold price, which coincided with sharply
escalated levels of economic and financial uncertainty.

• After briefly testing levels above US$950/oz early in the quarter,

the gold price fell back, briefly touching levels under $750/oz in mid-
September. Nevertheless, the average for the quarter, at $872/oz,
was 28% higher than Q3 2007’s $680/oz.

• The biggest contributor to the increase in total identifiable demand

in Q3 was identifiable investment, up 137.5 tones (56%) relative to
year-earlier levels. Jewellery demand rose 45.5 tones or 8%, while
industrial and dental demand declined 11%.

• The strong recovery in jewellery demand to a record quarterly

value of over US$18 billion reflected significantly higher demand in
some countries, partly offset by sharply lower demand in others. In
US dollar terms, demand in India surged by 65%, while the Middle
East, Indonesia and China all enjoyed rises of more than 40%. At the
other extreme, the US and UK were down by 9% and 5%
respectively (declines of more than 25% in tonnage terms).
52
• Driving the improvement in identifiable investment was net retail
investment, which rose 121% from 105.1 tons to 232.1 tones.
Switzerland, Germany, India and the US enjoyed the biggest surge in
demand, although shortages of bars and coins were reported among
bullion dealers in many parts of the world.

• Gold Exchange Traded Funds (ETFs) enjoyed a record net quarterly

inflow of 150.0 tones, boosted by extreme levels of economic and
financial uncertainty. The peak in inflows occurred in the latter part
of the September, triggered by the collapse of Lehman Brothers and
a fear of banking sector collapses. Net inflows surged by an
unprecedented 111.0 tones during 5 consecutive trading days,
equivalent to US$7bln.

• The strong rise in identifiable investment demand was offset by a

significant outflow in the “inferred investment” category. Inferred
investment is calculated as a statistical residual and is therefore
subject to statistical uncertainty. It covers most institutional
investment outside ETF’s. Several key factors contributed to the
large outflow, including gold’s inclusion in commodity indices; the
recovery in the US dollar and unwinding of long gold/short dollar
trades; and a round of selling by hedge funds that were forced to
raise cash to fund significant redemptions and margin calls i.e. the
selling reflects gold’s better performance relative to other assets

• The significant outflow in inferred investment explains why the

gold price did not perform better during the quarter in the face of
very strong jewellery buying and investment in ETFs and bars and
coins. Notably, this category largely reflects investors with a short-
term focus. In contrast, the more fundamental, long-term sources of
demand were very strong.

• Industrial and dental demand declined 11% relative to year-earlier

levels. Electronics, the largest component of industrial demand, was
hampered by the downturn in the global economy and a lack of
confidence within world markets.

• Gold supply was down 10% on year-earlier levels, the biggest

contributor being a significant reduction in official sector sales. For
the year to September, sales by signatories to the Central Bank Gold
Agreement totaled a provisional 357.0 tones, the lowest level of
annual sales since the first agreement was signed in 1999.

53
Outlook for Q4 2009
The strong level of demand for jewellery, bars, coins and ETFs that
was evident in Q3 appears to have continued into early Q4. ETF
holdings broke record highs yet again in October, bar and coin
shortages have continued and anecdotal reports suggest that India
enjoyed buoyant sales during the mid-October Diwali Festival.
Offsetting these positive factors, though, is an outlook of continued
weak jewellery demand in Europe and the US.

Given the uncertainty that surrounds the global economy, gold’s

safe haven appeal should continue, but so too will the possibility of
heightened levels of activity in the speculative side of the gold
market. While the commodity price related and margin call related
selling appears to have abated, it is too soon to call an end to
market volatility.
The downward effect on total gold supply caused by de hedging is
abating and this is set to continue. However, the effect on total
supply is likely to be offset by other factors. In particular, net central
bank sales should remain at subdued levels and the constraints on
mine supply are unlikely to ease. The credit crisis will continue to
affect both explorations Activity and potentially mine expansion,
particularly among the smaller players

54
 TECHNICAL ANALYSIS

GOLD LONG TERM TREND

For the Gold, progress ultimately takes the form of five waves of a specific
structure. Three of these waves, which are labeled 1, 3 and 5, actually effect the
directional movement. They are separated by two countertrend interruptions, which
are labeled 2 and 4, as shown in chart. The two interruptions are
apparently a requisite for overall directional movement to occur.
55
 Motive mode is employed by both the five wave pattern on Gold
chart and its same-directional components, i.e., waves 1, 3 and 5.
Their structures are called "motive" because they powerfully impel
the market. This is trend wave which is any wave that trends in the
same direction as the wave of one larger degree of which it is a part.

As per chart fibonacci lines are drawn which is, the ratio of any
number to the next higher is approximately .618 to 1 and to the next
lower number approximately 1.618 to 1. The further along the
sequence, the closer the ratio approaches phi (denoted f) which is
an irrational number, .618034.... Between alternate numbers in the
sequence, the ratio is approximately .382, whose inverse is 2.618.
As per Elliotwave theory Prices are in the 5th wave which is motive
wave. To find the target of 5th wave we can combine elliotwave
with fibonacci on 3 rd wave.

The length of 3 rd wave is : Rs 13000 – Rs 8600

= Rs 4400

The 3rd wave approximately correct at Rs 11300 which is 38.2 %

= Rs 1700

5 th wave would be 11300 + 4400+1700

= Rs 17400

So the long term price target is Rs 17400

56
GOLD SHORT TERM TREND

 As per gold chart shown prices are in the ‘bullish price

channel’ and prices are near to the resistance line. Prices are
touches high and open interests is negative which leads to
positive divergence. The break above channel line resistance
marked an acceleration of the advance. This might consider the
Gold overextended after this move, but the advance was powerful
and the trend never turned bearish. Once it crosses the resistance
line (Rs. 15600) then the immediate resistance at around
Rs16000, which is channel width. For Short term 1st
Resistance at Rs 15,600 /-

2nd Resistance at Rs 16,000 /-

57
Indian Rupees Vs Gold

Correlation between Gold and currencies

The US dollar and the gold price

Recall from last week that the PVE Gold Index consists of the GDP-
weighted gold price in thirty-six countries, including the United
States. Since nine of the countries in the index use the euro, twenty-
eight currencies are represented. For convenience, I copied last
week’s chart below; let’s see what we can glean from it.

58
The PVE Gold Index gives us an idea of how the average gold price
in the world is changing. When the gold price in any given currency
deviates from the PVE Gold Index it implies a change in the
exchange rate of that currency with respect to the other currencies
in the index.

We can therefore see that the US dollar exchange rate was relatively
stable from January 1990 to the middle of 1992, when the dollar
started to strengthen. We know the dollar strengthened because the
gold price, in dollars, started to drop below the PVE Gold Index
indicating that the dollar’s purchasing power was increasing. But
why did the dollar strengthen?

In 1992 the Brazilian real collapsed and capital in search of safety

made its way, mainly, to the United States. The real was devalued to
practically nothing; it was replaced by the new real on July 1, 1994.
As a result of the Brazilian currency crisis the demand for US dollars
soaked up US currency that would otherwise have been used for
settlement of international trade. The dollar, therefore, increased

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not only against the real, but against many other currencies as well.
Between 1992 and 1994 the dollar increased by about ten percent
against the other currencies in the PVE Gold Index.

This increase in the dollar’s exchange rate on foreign currency

markets is represented in the chart above by the decline in the US
dollar gold price relative to the PVE Gold Index that started in 1992.

The Brazilian real crisis was hardly behind us when, in 1995, the
Mexican peso dropped more than fifty percent against the dollar.
This was the worst financial crisis in Mexico since the Mexican
Revolution. More capital flowed into the United States, competing for
dollars on foreign exchange markets and keeping the dollar strong.

Between 1995 and 1996 the Japanese yen lost about twenty-five
percent against the dollar. More demand for dollars meant that the
dollar continued to strengthen on foreign currency markets, further
increasing the gap between the average, worldwide gold price and the
US dollar-gold price. Japan set the stage for the big one, the Southeast
Asian currency crisis.

Between 1996 and 1997, the Indonesian rupiah dropped seventy-six

percent; the South Korean won fell fifty-six percent and both the
Malaysian ringgit and the Philippine peso lost forty percent of their
value against the dollar. This was a financial catastrophe and its
effect was felt across the globe. Since the US dollar was performing
well on foreign currency markets, thanks to the Brazilian, Mexican
and Japanese devaluations earlier in the decade, a tidal wave of
capital made its way to the United States.

Still shaken from the events of 1996 and 1997, Russia defaulted on
its foreign debt in 1998, sending the ruble down seventy percent in
just one year. In conjunction with the Southeast Asian crisis the
mood is grim, and international capital pours into the US seeking
refuge.

The increase in the US dollar following the Southeast Asian currency

crisis crushed the US dollar-gold price and was large enough to be
evident in the PVE Gold Index. The US dollar represents twenty-eight
percent of the Index and contributed to the Index’ decrease of more
than twenty percent during 1996 and 1997. As you can see though,
the US dollar-gold price declined much more and for much longer.
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When the euro was launched in January 1999 it collapsed almost
twenty-five percent, on average (PVE Euro Index), and about thirty-
five percent against the dollar. As if this was not enough, the
Argentine peso had trouble in 1998; in 2000 it was the Turkish lira
and in 2002 it was back to Brazil for another round.

As an aside, all the currency devaluations mentioned are examples

of how the dollar’s exchange rate affects the US dollar-gold price.
Even though the world is currently fascinated by the euro’s
exchange rate as a leading indicator for the US dollar gold price we
cannot ignore the impact of other currencies. Collectively, they could
be more important.

The compounding effect of capital flight during all these currency

crises can be seen in the increasing deviation between the US dollar
gold price and the PVE Gold Index. The index is currently more than
sixty percent higher than it was in 1990 while the US dollar-gold
price has only recently recovered to its January 1990 level.

The dollar’s strength stemmed from the weakness in other

currencies. It had very little to do with America’s productivity, or a
“New Era”. Because most major currencies in the world had already
devalued against the dollar it was obvious that the dollar could not
continue to increase indefinitely. A PVE Dollar Index, using the same
GDP-weighted currency data as for the PVE Gold Index, shows that
the US dollar gained 112% from January 1990 to February 2002 (its
peak) and has since declined by fourteen percent.

We have seen that the decline in the US dollar-gold price, and its
under-performance relative to the rest of the world, is a reflection of
the US dollar’s exchange rate. It is my belief that the US dollar gold
price will again catch up with the PVE Gold Index as a result of
continued weakness in the dollar to correct America’s enormous
trade deficit. This correction of the dollar has only just begun and is
likely to increase the US dollar-gold price by approximately thirty-
five to forty percent more than the concurrent average increase in
the gold price in other currencies.

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As the Rupee start strengthening Gold prices start strengthening. As
per charts the data we analyze from Sept 2008 to Feb 2009. From
Oct middle onwards the rupee starts weakening and the gold is
almost all flat but on Nov middle onwards when the rupee starts
strengthen up Gold is also starts rises. The means Gold prices are
correlated to INR vs. Dollar currency.

CHAPTER - 7
62
 FINDINGS
AND
SUGGESTIONS

FINDINGS:
1. The forward Market Commission should be measure and take
steps to create awareness among the traders about the commodity
exchanges and their working.

2. The Government is better advised to give investors the options

derivative contracts in the commodity market like in the equity
markets.

63
3. The factors other than the economic factors such as the geo
political circumstances have to be tracked constantly.

4. In case of Gold US dollar rate is of great significance and thus the

US dollar rate has to be tracked constantly

a) Forward market Commission needs to re-look at its margin

payment policy and make it more investor friendly so that
more and more people are encouraged to invest in
commodities market.

b) Banks, FII’s and Mutual funds should be allowed to invest in

commodities market as part of their portfolio. This will be shot
in the arm for the growth of the commodities market in India.

c) The investor in the commodity market should take decision

based on in depth analysis of the particular commodity in
scientific manner rather than the market rumors and
gimmicks.

d) All social, economic and political factors have to be taken in to

considerations apart from the demand and supply scenario
before trading in commodities.

e) Forward Market commission should initiate measure so that

some of the major regional commodity exchanges can be
improved and brought up as the national level commodity
exchanges.

f) The members of the commodity exchanges must set up

research wings in order to give constructive advise its clients
based on reason rather than the clients depending upon
rumors and gimmicks in the market.

g) Regulator should bring out policies which are more investor

friendly so that investors come to the exchanges to trade
more in commodities and feed back with all the player of the
commodities market.

h) All exchanges should follow uniform norms as regard to

margining system, delivery mechanism and collateral
mechanism.

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i) Tax uniformity and simplification to facilitate easier delivery of
goods. Creation of physical infrastructure to facilitate the
same.

j) Commodities trading should be treated on par with equities.

The income generated from commodity trading should be
treated as capital gain rather than as income from business
and profession as the later attracts higher rates of taxation
than the former.

k) Mutual funds must be permitted to launch commodity

schemes so that small investors can reap the benefits of
diversification with in the arena commodities.

65
 CHAPTER - 8

RECOMONDATIONS
AND CONCLUSIONS

Recommendations
For Short Term: (2 to 4 weeks)

Buy Gold (Max) above 14600 levels with stop loss of 14200 for Target
16000.
66
 Buy gold above Rs14600
Stop loss Rs14200
1st Resistance Rs15200
2nd Resistance Rs16000
1st Support Rs14200
2nd Support Rs14000

For Long Term: (1 month to 6 months)

Buy Gold at current levels (14100) with s/l of 13000 for Target of
Rs17400

Buy Gold at Rs 15100

Stop loss Rs 15000

1st resistance Rs 16000

2nd Resistance Rs 17400

1st Support Rs 14600

2nd Support Rs 14000

CONCLUSION:

1.Commodities market, contrary to the benefits of the many people

has been existence in India through the ages, However , the
government permission t set up national level commodity exchanges
has indeed comes as a shot in the arm.

67
2. Price movements are more predictable, purely based on demand
on and supply of that particular commodity unlike the equity
markets and bond markets which are based on different types of
financial data like actions of different central banks on interest rates,
quarterly rates of companies, and sales of companies and so on. To
that extent, price risk is reduced in commodity market.

3. Contrary to the myth, that the volume of the commodity markets

is very low the volumes of commodity market in India are likely to
touch 16 lakh corers in 2009 according to the estimates of forward
commission.

4. Through both futures and options derivatives contracts are

available in world commodity markets, but in India options contracts
have not been permitted by the government.

5. Commodites prices are less volatile when compared to the stock

and bond markets. Thus it is relatively safer to trade in commodities,
however all investments are subject to markets risk and commodity
market risk and commodity futures are not different.

6. Another conclusion is that the farmers and traders are not fully
aware of the existence of the commodity exchanges in India.

7. In commodity markets though there is a possibility of physical

delivery of the contracts are squared off well before the expiry of the
contract.

8. Most of the trading that takes places in the commodity markets

takes place in the nearest month contract rather than the far month
contract.

9. In commodity markets as there is a possibility of delivery, there

arises the requirement of warehouse facility which is not required in
case of equity markets.

10. The initial margin payment and its very rigid and strict
implementation though necessary have found some times
discouraging investors from investing in commodity markets.

11. Though volumes are huge in commodity market, these volumes

are mostly in precious metals like Gold and Silver.

68
12. Most of the trading now taking place in the commodities is being
done by the speculators only traders are not fully aware of the
commodities market.

13. As the commodities market are working virtually round the clock,
any drastic news is digested by the market which is not so with
equity market like the September incident when equity markets all
over the world opened far down the next day morning and the
investors were left hanging.

14. Most of the trading takes place in the commodities market is of

in trade nature and thus mist of the traders are offset day only.

15. The future market contracts available on a wide spectrum of

commodities like Gold and Silver provide excellent opportunities for
hedging risk for importers, traders and large-scale consumers.

16. The price movements of certain commodities like Gold, Silver,

Natural and crude oil are not only dependant on the demand and
supply but also depend on a host of social, political and economic
circumstances.

17. The prices of the Gold and Silver are subject to variety of
reasons such as US Dollar rates, festival demand in India and other
geo political circumstances.

18. In spite of the high prices on Gold the demand for these
commodities is still bullish and remained so in the recent months
also.

19. Gold is treated as most secured and is safe haven buy for
investor as the world is surrounded by geopolitical tensions, energy
prices and instability in currency rates.

20. Long-term outlook of Gold remain bullish even at this point of

high price and will invite significant buying interest at every lower
levels. Every correction on lower side of the market is expected to
invite significant buying interest.

69
 CHAPTER - 9

BIBLIOGRAPHY

BIBLIOGRAPHY

BOOKS:

70
• Investment management
-V.K.Bhalla
• Investment management
-Preeti Singh
• Security Analysis And Portfolio Management
-V.A.Avadhani
• Marketing of Financial Services
-V.A.Avadhani
• Indian Financial System
-M.Y.Khan

WEBSITES:

• www.geojit-financialservices-ltd.com
• www.bseindia.com
• www.sebi.gov.in
• www.moneycontrol.com
• www.economictimes.com
• www.nseindia.com
• www..icicidirect.com
• www.indiabulls.com
• www.hdfcsecurities.com
• www.5paisa.com

BOOK:

71
NCFM MODULE FOR COMMODITY MARKET

NEWS PAPERS:
BUSINESS STANDARD

BUSINESS LINE

72