Commodity Market Report

1

A PROJECT REPORT ON COMMODITY MARKET

Project Submitted in partial fulfillment of Post Graduate Diploma in Management

Submitted by: PANKAJ KUMAR Roll No. 528 Batch 2007-2009

Under the guidance of: Dr. Shashidharan Kutty - Dy. Director (Banking, Finance & Insurance)

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S.No. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30

INDEX Introduction Commodity Commodity Market Structure of Commodity Market Different Types of Commodity Traded Turnover of Indian Commodity Exchange Market Share of Commodity Exchanges in India Different Segments in Commodities Market Leading Commodity Markets of World Regulators Leading Commodity Markets of India Volumes in commodity Derivatives Worldwide Commodity Futures Trading in India  Introduction  Benefits to Industry From Futures Trading  Benefits to Exchange Member  Why Commodity Futures?  What makes commodity trading attractive? NCDEXs Trading System Gold  Introduction  What makes Gold special  Market characteristics  Demand & Supply  Indian Gold Jewellery Market  MCX contract specifications of gold  FAQ on Gold  Gold Terminology Conclusion Bibliography

Page No. 4 6 7 8 9 10 10 11 12 13 14 14 15 15 16 16 17 18 20 22 22 22 22 23 24 25 32 35 36 37

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India Commodity Market “We are moving from a world in which the big eat the small to one in which the fast eat the slow”. -Klaus Schwab, 2000 (founder of the World Economic Forum)

“A strong and vibrant cash market is a pre-condition for a successful and transparent futures market.” INTRODUCTION The vast geographical extent of India and her huge population is aptly complemented by the size of her market. The broadest classification of the Indian Market can be made in terms of the commodity market and the bond market. The commodity market in India comprises of all palpable markets that we come across in our daily lives. Such markets are social institutions that facilitate exchange of goods for money. The cost of goods is estimated in terms of domestic currency. India Commodity Market can be subdivided into the following two categories: •

Wholesale Market

•

Retail Market

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The traditional wholesale market in India dealt with whole sellers who bought goods from the farmers and manufacturers and then sold them to the retailers after making a profit in the process. It was the retailers who finally sold the goods to the consumers. With the passage of time the importance of whole sellers began to fade out for the following reasons: 

The whole sellers in most situations, acted as mere parasites who did not add any value to the product but raised its price which was eventually faced by the consumers.



The improvement in transport facilities made the retailers directly interact with the producers and hence the need for whole sellers was not felt.

In recent years, the extent of the retail market (both organized and unorganized) has evolved in leaps and bounds. In fact, the success stories of the commodity market of India in recent years has mainly centered on the growth generated by the Retail Sector. Almost every commodity under the sun both agricultural and industrial is now being provided at well distributed retail outlets throughout the country. Moreover, the retail outlets belong to both the organized as well as the unorganized sector. The unorganized retail outlets of the yesteryears consist of small shop owners who are price takers where consumers face a highly competitive price structure. The organized sector on the other hand are owned by various business houses like Pantaloons, Reliance, Tata and others. Such markets are usually selling a wide range of articles both agricultural and manufactured, edible and inedible, perishable and durable. Modern marketing strategies and other techniques of sales promotion enable such markets to 5

draw customers from every section of the society. However the growth of such markets has still centered on the urban areas primarily due to infrastructural limitations. Considering the present growth rate, the total valuation of the Indian Retail Market is estimated to cross Rs. 10,000 billion by the year 2010. Demand for commodities is likely to become four times by 2010 than what it presently is.

COMMODITY A commodity may be defined as an article, a product or material that is bought and sold. It can be classified as every kind of movable property, except Actionable Claims, Money & Securities. Commodities actually offer immense potential to become a separate asset class for market-savvy investors, arbitrageurs and speculators. Retail investors, who claim to understand the equity markets, may find commodities an unfathomable market. But commodities are easy to understand as far as fundamentals of demand and supply are concerned. Retail investors should understand the risks and advantages of trading in commodities futures before taking a leap. Historically, pricing in commodities futures has been less volatile compared with equity and bonds, thus providing an efficient portfolio diversification option. In fact, the size of the commodities markets in India is also quite significant. Of the country's GDP of Rs 13, 20,730 crore (Rs 13,207.3 billion), commodities related (and dependent) industries constitute about 58 per cent.

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Currently, the various commodities across the country clock an annual turnover of Rs 1, 40,000 crore (Rs 1,400 billion). With the introduction of futures trading, the size of the commodities market grows many folds here on. COMMODITY MARKET Commodity market is an important constituent of the financial markets of any country. It is the market where a wide range of products, viz., precious metals, base metals, crude oil, energy and soft commodities like palm oil, coffee etc. are traded. It is important to develop a vibrant, active and liquid commodity market. This would help investors hedge their commodity risk, take speculative positions in commodities and exploit arbitrage opportunities in the market. Turnover in Financial Markets and Commodity Market (Rs in Crores) S No.

Market segments

2002-03

2003-04

2004-05 (E)

1

Government Securities Market

2

Forex Market

3

Total Stock Market Turnover (I+ II) 1,374,405 (56) 3,745,507 (136)

4,160,702 (133.8)

I

National Stock Exchange (a+b)

3,641,672 (117.1)

658,035 (27) 2,318,531

(84)

1,057,854 (43) 3,230,002 (117) 617,989

1,099,534

1,147,027

b)Derivatives

439,865

2,130,468

2,494,645

a)Cash b)Derivatives Commodities Market

316,551 (13) 515,505

(18.7)

519,030

314,073

503,053

499,503

2,478

12,452

19,527

NA

130,215

(4.7)

(91)

3,867,936 (124.4)

a)Cash II Bombay Stock Exchange (a+b)

4

1,544,376 (63) 2,518,322 (91.2) 2,827,872

500,000

(16.7)

(16.1)

Note: Fig. in bracket represents percentage to GDP at market prices Source: Sebi bulletin

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STRUCTURE OF COMMODITY MARKET Ministry of Consumer Affairs

FMC (Forwards Market Commission)

Commodity Exchange

National Exchange

NCDEX

MCX

Warehouses

Clearing Bank

Regional Exchange

NMCE

Quality Certification Agencies

Commodities Ecosystem MCX

Transporters/ support agencies

Consumers (Retail/Institutio -nal)

NBOT

20 other regional exchanges

Hedger (Exporters / Millers Industry)

Producers (Farmers/Cooperatives/Ins titutional)

Traders (speculators)arbi -trageurs/client)

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DIFFERENT TYPES OF COMMODITIES TRADED World-over one will find that a market exits for almost all the commodities known to us. These commodities can be broadly classified into the following:

METAL

Aluminium, Copper, Lead, Nickel, Sponge Iron, Steel Long (Bhavnagar), Steel Long (Govindgarh), Steel Flat, Tin, Zinc

BULLION

Gold, Gold HNI, Gold M, i-gold, Silver, Silver HNI, Silver M

FIBER

Cotton L Staple, Cotton M Staple, Cotton S Staple, Cotton Yarn, Kapas

ENERGY

Brent Crude Oil, Crude Oil, Furnace Oil, Natural Gas, M. E. Sour Crude Oil

SPICES

Cardamom, Jeera, Pepper, Red Chilli

PLANTATIONS

Arecanut, Cashew Kernel, Coffee (Robusta), Rubber

PULSES

Chana, Masur, Yellow Peas

PETROCHEMICALS HDPE, Polypropylene(PP), PVC OIL & OIL SEEDS

Castor Oil, Castor Seeds, Coconut Cake, Coconut Oil, Cotton Seed, Crude Palm Oil, Groundnut Oil, Kapasia Khalli, Mustard Oil, Mustard Seed (Jaipur), Mustard Seed (Sirsa), RBD Palmolein, Refined Soy Oil, Refined Sunflower Oil, Rice Bran DOC, Rice Bran Refined Oil, Sesame Seed, Soymeal, Soy Bean, Soy Seeds

CEREALS

Maize

OTHERS

Guargum, Guar Seed, Gurchaku, Mentha Oil, Potato (Agra), Potato (Tarkeshwar), Sugar M-30, Sugar S-30

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TURNOVER OF INDIAN COMMODITY EXCHANGES Indian Commodity Futures Market (Rs Crores) Exchanges

2004

2005

2006

2007

Multi Commodity Exchange (MCX)

165147

961,633

1,621,803

2,505,206

NCDEX

266,338

1,066,686

944,066

733,479

NMCE(Ahmadabad)

13,988

18,385

101,731

24,072

NBOT(Indore)

58,463

53,683

57,149

74,582

Others

67,823

54,735

14,591

37,997

All Exchanges

571,759 2,155,122

2,739,340

3,375,336

Turnover on Commodity Futures Markets (Rs. In Crores) Exchange NCDEX NBOT MCX NMCE ALL EXCHANGES

2003-04

2004-05 FIRST Half

1490

54011

53014

51038

2456

30695

23842

7943

129364

170720

MARKET SHARE OF COMMODITY EXCHANGES IN INDIA

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DIFFERENT SEGMENTS IN COMMODITIES MARKET The commodities market exits in two distinct forms namely the Over the Counter (OTC) market and the Exchange based market. Also, as in equities, there exists the spot and the derivatives segment. The spot markets are essentially over the counter markets and the participation is restricted to people who are involved with that commodity say the farmer, processor, wholesaler etc. Derivative trading takes place through exchange-based markets with standardized contracts, settlements etc.

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LEADING COMMODITY MARKETS OF WORLD Some of the leading exchanges of the world are: S. No.

Global Commodity Exchanges

1

New York Mercantile Exchange (NYMEX)

2

London Metal Exchange (LME)

3

Chicago Board of Trade (CBOT)

4

New York Board of Trade (NYBOT)

5

Kansas Board of Trade

6

Winnipeg Commodity Exchange, Manitoba

7

Dalian Commodity Exchange, China

8

Bursa Malaysia Derivatives exchange

9

Singapore Commodity Exchange (SICOM)

10

Chicago Mercantile Exchange (CME), US

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London Metal Exchange

12

Tokyo Commodity Exchange (TOCOM)

13

Shanghai Futures Exchange

14

Sydney Futures Exchange

15

London International Financial Futures and Options Exchange (LIFFE)

16

National Multi-Commodity Exchange in India (NMCE), India

17

National Commodity and Derivatives Exchange (NCDEX), India

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Multi Commodity Exchange of India Limited (MCX), India

19

Dubai Gold & Commodity Exchange (DGCX)

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Dubai Mercantile Exchange (DME), (joint venture between Dubai holding and the New York Mercantile Exchange (NYMEX))

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Regulators Each exchange is normally regulated by a national governmental (or semigovernmental) regulatory agency: Country

Regulatory agency

Australia

Australian Securities and Investments Commission

Chinese mainland

China Securities Regulatory Commission

Hong Kong

Securities and Futures Commission

India Pakistan

Securities and Exchange Board of India and Forward Markets Commission (FMC) Securities and Exchange Commission of Pakistan

Singapore

Monetary Authority of Singapore

UK

Financial Services Authority

USA

Commodity Futures Trading Commission

Malaysia

Securities Commission

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LEADING COMMODITY MARKETS OF INDIA The government has now allowed national commodity exchanges, similar to the BSE & NSE, to come up and let them deal in commodity derivatives in an electronic trading environment. These exchanges are expected to offer a nation-wide anonymous, order driven, screen based trading system for trading.

The

Forward

Markets

Commission

(FMC)

will

regulate

these

exchanges. Consequently four commodity exchanges have been approved to commence business in this regard. They are: S.NO.

Commodity Market in India

1

Multi Commodity Exchange (MCX), Mumbai

2

National Commodity and Derivatives Exchange Ltd (NCDEX), Mumbai

3

National Board of Trade (NBOT), Indore

4

National Multi Commodity Exchange (NMCE), Ahmadabad

VOLUMES IN COMMODITY DERIVATIVES WORLDWIDE

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Source: FMC Commodity Futures Trading in India INTRODUCTION Derivatives as a tool for managing risk first originated in the Commodities markets. They were then found useful as a hedging tool in financial markets as well. The basic concept of a derivative contract remains the same whether the underlying happens to be a commodity or a financial asset. However there are some features, which are very peculiar to commodity derivative markets. In the case of financial derivatives, most of these contracts are cash settled. Even in the case of physical settlement, financial assets are not bulky and do not need special facility for storage. Due to the bulky nature of the underlying assets, physical settlement in commodity derivatives creates the need for warehousing. Similarly, the concept of varying quality of asset does not really

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exist as far as financial underlyings are concerned. However in the case of commodities, the quality of the asset underlying a contract can vary largely. This becomes an important issue to be managed. BENEFITS TO INDUSTRY FROM FUTURES TRADING 

Hedging

the

price

risk

associated

with

futures

contractual

commitments. 

Spaced out purchases possible rather than large cash purchases and its storage.



Efficient price discovery prevents seasonal price volatility.



Greater flexibility, certainty and transparency in procuring commodities would aid bank lending.



Facilitate informed lending.



Hedged positions of producers and processors would reduce the risk of default faced by banks. * Lending for agricultural sector would go up with greater transparency in pricing and storage.



Commodity Exchanges to act as distribution network to retail agrifinance from Banks to rural households.



Provide trading limit finance to Traders in commodities Exchanges.

BENEFITS TO EXCHANGE MEMBER 

Access to a huge potential market much greater than the securities and cash market in commodities.



Robust, scalable, state-of-art technology deployment.



Member can trade in multiple commodities from a single point, on real time basis.

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

Traders would be trained to be Rural Advisors and Commodity Specialists and through them multiple rural needs would be met, like bank credit, information dissemination, etc.

WHY COMMODITY FUTURES? One answer that is heard in the financial sector is "we need commodity futures markets so that we will have volumes, brokerage fees, and something to trade''. We have to look at futures market in a bigger perspective -- what is the role for commodity futures in India's economy? In India agriculture has traditionally been an area with heavy government intervention. Government intervenes by trying to maintain buffer stocks, they try to fix prices, and they have import-export restrictions and a host of other interventions. Many economists think that we could have major benefits from liberalization of the agricultural sector. In this case, the question arises about who will maintain the buffer stock, how will we smoothen the price fluctuations, how will farmers not be vulnerable that tomorrow the price will crash when the crop comes out, how will farmers get signals that in the future there will be a great need for wheat or rice. In all these aspects the futures market has a very big role to play. If we think there will be a shortage of wheat tomorrow, the futures prices will go up today, and it will carry signals back to the farmer making sowing decisions today. In this fashion, a system of futures markets will improve cropping patterns. Next, if I am growing wheat and am worried that by the time the harvest comes out prices will go down, then I can sell my wheat on the futures 17

market. I can sell my wheat at a price, which is fixed today, which eliminates my risk from price fluctuations. These days, agriculture requires investments - farmers spend money on fertilizers, high yielding varieties, etc. They are worried when making these investments that by the time the crop comes out prices might have dropped, resulting in losses. Thus a farmer would like to lock in his future price and not be exposed to fluctuations in prices. The third is the role about storage. Today we have the Food Corporation of India, which is doing a huge job of storage, and it is a system, which -- in my opinion -- does not work. Futures market will produce their own kind of smoothing between the present and the future. If the future price is high and the present price is low, an arbitrager will buy today and sell in the future. The converse is also true, thus if the future price is low the arbitrageur will buy in the futures market. These activities produce their own "optimal" buffer stocks, smooth prices. They also work very effectively when there is trade in agricultural commodities; arbitrageurs on the futures market will use imports and exports to smooth Indian prices using foreign spot markets. In totality, commodity futures markets are a part and parcel of a program for agricultural liberalization. Many agriculture economists understand the need of liberalization in the sector. Futures markets are an instrument for achieving that liberalization. WHAT MAKES COMMODITY TRADING ATTRACTIVE? 

A good low-risk portfolio diversifier



A highly liquid asset class, acting as a counterweight to stocks, bonds and real estate.



Less volatile, compared with, equities and bonds. 18



Investors can leverage their investments and multiply potential earnings.



Better risk-adjusted returns.



A good hedge against any downturn in equities or bonds as there is



Little correlation with equity and bond markets.



High co-relation with changes in inflation.



No securities transaction tax levied.

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The NCDEX System Every market transaction consists of three components i.e. trading, clearing and settlement. A brief overview of how transactions happen on the NCDEX’s market. TRADING The trading system on the NCDEX provides a fully automated screen based trading for futures on commodities on a nationwide basis as well as online monitoring and surveillance mechanism. It supports an order driven market and provides complete transparency of trading operations. Order matching is essential on the basis of commodity, its price, time and quantity. All quantity fields are in units and price in rupees. The exchange specifies the unit of trading and the delivery unit for futures contracts on various commodities. The exchange notifies the regular lot size and tick size for each of the contracts traded from time to time. When any order enters the trading system, it is an active order. It tries to finds a match on the other side of the book. If it finds a match, a trade is generated. If it does not find a match, the order becomes passive and gets queued in the respective outstanding order book in the system. Time stamping is done for each trade and provides the possibility for a complete audit trail if required. NCDEX trades commodity futures contracts having one month, two month and three month expiry cycles. All contracts expire on the 20th of the expiry month. Thus a January expiration contract would expire on the 20th of January and a February expiry contract would cease trading on the 20th of February. If the 20th of the expiry month is a trading holiday, the contracts shall expire on the previous trading

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day. New contracts will be introduced on the trading day following the expiry of the near month contract. CLEARING National Securities Clearing Corporation Limited (NSCCL) undertakes clearing of trades executed on the NCDEX. The settlement guarantee fund is maintained and managed by NCDEX. Only clearing members including professional clearing members (PCMs) only are entitled to clear and settle contracts through the clearing house. At NCDEX, after the trading hours on the expiry date, based on the available information, the matching for deliveries takes place firstly, on the basis of locations and then randomly, keeping in view the factors such as available capacity of the vault/warehouse, commodities already deposited and dematerialized and offered for delivery etc. Matching done by this process is binding on the clearing members. After completion of the matching process, clearing members are informed of the deliverable/ receivable positions and the unmatched positions. Unmatched positions have to be settled in cash. The cash settlement is only for the incremental gain/loss as determined on the basis of final settlement price. SETTLEMENT Futures contracts have two types of settlements, the MTM settlement which happens on a continuous basis at the end of each day, and the final settlement which happens on the last trading day of the futures contract. On the NCDEX, daily MTM settlement and the final MTM settlement in respect of admitted deals in futures contracts are cash settled by debiting/crediting the clearing accounts of CMs with the respective clearing bank. 21

All positions of a CM, brought forward, created during the day or closed out during the day, are market to market at the daily settlement price or the final settlement price at the close of trading hours on a day. On the date of expiry, the final settlement price is the spot price on the expiry day. The responsibility of settlement is on a trading cum clearing member for all trades done on his own account and his client’s trades. A professional clearing member is responsible for settling all the participants’ trades, which he has confirmed to the exchange. On the expiry date of a futures contract, members submit delivery

information

through

delivery

request

window

on

the

trader

workstations provided by NCDEX for all open positions for a commodity for all constituents individually. NCDEX on receipt of such information matches the information and arrives at delivery position for a member for a commodity. The seller intending to make delivery takes the commodities to the designated warehouse. These commodities have to be assayed by the exchange specified assayer. The commodities have to meet the contract specifications with allowed variances. If the commodities meet the specifications, the warehouse accepts them. Warehouse then ensures that the receipts get updated in the depository system giving a credit in the depositor’s electronic account. The seller the gives the invoice to his clearing member, who would courier the same to the buyer’s clearing member. On an appointed date, the buyer goes to the warehouse and takes physical possession of the commodities.

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Gold 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 highcaratage jewellery 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 jewellery 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. What makes gold special? 

Timeless and Very Timely Investment



Gold is an effective diversifier



Gold is the ideal gift



Gold is highly liquid 23



Gold responds when you need it most

Market Characteristics 

The gold market is highly liquid. Gold held by central banks, other major institutions, and retail jewellery is reinvested in market.



Due to large stock of gold, against its demand, it is argued that the core driver of the real price of gold is stock equilibrium rather than flow equilibrium.



Effective portfolio diversifier: This phrase summarizes the usefulness of gold in terms of “Modern Portfolio Theory”, a strategy used by many investment managers today. Using this approach, gold can be used as a portfolio diversifier to improve investment performance.



Effective diversification during “stress” periods: Traditional method of portfolio diversification often fails when they are most needed, that is during financial stress (instability). On these occasions, the correlations and volatilities of return for most asset class (including traditional diversifiers, such as bond and alternative assets) increase, thus reducing the intended “cushioning” effect of the diversified portfolio.

Demand and supply 

China produced 276 metric tons of gold last year, equal to about 9.7 million ounces, said London precious metals consultancy GFMS Ltd. That's up 12% from the year-ago and represented just over one-tenth of the world's supply.



The ranking pushes South Africa into second place, the first time the gold giant has lost its top ranking since 1905. South Africa, whose late 24

19th century gold rush led to the founding of mining heavyweight Anglo American Plc and is home to global producers Gold Fields Ltd and AngloGold Ashanti Ltd, saw its production decline 8% to 272 metric tons. 

India is world largest gold consumer with an annual demand of 800 tonnes. Demand and Supply of Gold in India (in tonnes)

Supply Mine Production Net Producer Hedging Total mine supply Official sector sales Old gold Scrap Total Supply Demand Fabrication Jewellery Industrial & Dental Subtotal of above fabrication Bar & coin retail investment Other retail investment ETFs and similar Total Demand Inferred Investment

2006

2007

% change

573 -140 430 93 303 826

580 -129 451 95 262 808

1 5 2 -13 2

519 111 630 89 -3 113 829 -3

568 112 680 116 -5 36 827 -19

9 1 8 31 -68 0 -

Source: GFMS Ltd.

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Indian Gold Jewellery Market



Plain 22 carat jewellery is the core of consumption especially in the rural areas, where gold is so important in judging a family's status at a marriage. A basic marriage set for a bride is two earrings, one nose pin, one ring, one necklace and two bangles, all in 22 carat gold and weighing up to 200 grams (6.2 oz).



Studded (i.e. gem-set) 18 carat jewellery is increasingly popular in the cities and is estimated to have used 31 tonnes (1 million oz) in 2001.



Medallions, charms and small gift items account for up to half of what is loosely called jewellery. These items are popular as gifts at weddings and other family events.



Gold thread, known as Jari used in high quality saris worn at weddings and special occasions requires somewhere in the region of 20 tonnes (0.6 m oz) annually.



The market is highly fragmented with an estimated 100,000 workshops supplying over 300,000 retailers, mostly family-owned, single shop operations. The industry is beginning to be modernised with large factories, installing the latest equipment, in centres such as Mumbai, Ahmadabad and Bangalore.



Hallmarking

does

not

exist

in

India

and

under-caratage

is

commonplace. The Bureau of Indian Standards has introduced a voluntary scheme which, although not yet widely used, is becoming more popular. The minimum legal caratage is 9 carat. 

The number of retail jewellery outlets has increased greatly since the abolition of gold control, as has the number of Indians possessing gold jewellery. 26

MCX Contract Specifications of Gold: GOLD Name of Commodity Ticker Symbol Trading System Trading Period Trading Session TRADING Trading Unit Price Quote

Maximum order size Tick Size Daily price limit Initial Margin Special Margin

Maximum Allowable DELIVERY Delivery unit Delivery period margin Delivery center(s)

Delivery Logic SETTLEMENT PERIOD Tender Period Delivery Period Pay-in of commodities (delivery by seller member)

Pay-in of funds Pay-out of funds and commodities (delivery to

Gold GLDPURMUMK MCX Trading System Monday to Saturday Monday to Friday: 10:00a.m. to 11:30 p.m. Saturday: 10:00a.m. to 2:00 p.m. 1 kg Rs. Per 10 g, ex-Ahmedabad (inclusive of all taxes and levies relating to import and custom duty, but excluding sales tax/VAT, any other additional tax or surcharge on sales tax, local taxes and octroi) 10 kg Re. 1 per 10 g (minimum price movement) 3% 4% In case of initial volatility, a special margin at such percentage (as deemed fit), will be imposed immediately on both buy and sell side in respect of all outstanding positions, which will remain in force for next 2 days, after which the special margin will be relaxed. For individual client: 2 MT For members collectively for all clients: 6 MT or 15%of the market position, whichever is high 1 kg 25% of the value of the open position during the delivery period At designated clearing house facilities of Group 4 Securitas at these centers and at additional delivery centers at Chennai, New Delhi and Hyderabad. Compulsory 1st to 6th day of the contract expiry month. 1st to 6th day of the contract expiry month. On any tender days by 6.00 p.m. except Saturdays, Sundays and Trading Holidays. Marking of delivery will be done on the tender days based on the intentions received from the sellers after the trading hours. On expiry all the open positions shall be marked for delivery. Delivery pay-in will be on E + 1 basis. By 11.00 a.m. on Tender day +1 basis By 05.00 p.m. on Tender day +1 basis.

27

buyer member) INFORMATION RELATED TO DELIVERY Delivery Logic Compulsory Delivery. Any seller having open position on the expiry date fails to deliver then the penalty as per the penal provision will be imposed to the defaulting seller. Mode of Communication Fax or Courier Tender Period Margin 5% incremental margin for last 5 days on all outstanding positions. Such margin will be addition to initial, additional and special margin as applicable. Margin during delivery 25% on the marked quantity. period Exemption from margin Margin is exempted on receipt of documentary during tender and delivery evidence (viz., Warehouse Receipt and Quality period Certificate) of tendering delivery with the Exchange during tender days. Delivery order rate (DOR) Settlement/closing price on the respective tender days except on expiry date. On expiry date the delivery order rate shall be the Due Date Rate (DDR) and not the closing price. Penal Provision A penalty of 2.5% of DOR will be imposed on defaulting buyer / seller out of which 2% will be credited to IPF and 0.5% will be credited to the counter party. Additionally, 4% of DOR as a replacement cost will be charged from defaulting buyer / seller out of which 90% will be given to the counter party and 10% will be retained by the Exchange as administrative expenses. Delivery Centers Ahmedabad and Mumbai at designated Clearing House facilities of Group 4 Securitas at these centers and at additional delivery centers at Chennai, New Delhi and Hyderabad Deliverable grade of The selling members tendering delivery will have underlying commodity the option of delivering such grades as per the contract specifications. The buyer has no option to select a particular grade and the delivery offered by the seller and allocation by the Exchange shall be binding on him. Verification by the Buyer At the time of taking delivery, the buyer can at the time of release of check his delivery in front of Group 4 personnel. delivery If he is satisfied with the quantity, weight and quality of material, then he will issue receipt of the metals instantly. If he is not satisfied with the metal, he can insist for assaying by any of the approved assayers available at that center. If the buyer chooses for assaying, Group 4 person will carry the goods to the assayers facilities, get it assayed and bring it back to Group 4 facilities along with assayer’s certificate. If the assayer’s 28

Validation Process

Delivery Process

certificate differs from the certificate submitted by the seller in respect of quality or weight materially, then the buyer and seller have to mutually negotiate the final settlement proceeds within 1 day from receipt of assayer’s report, however if they do not agree on any mutually acceptable amount within 1 day, then the Exchange will send the goods to a second assayer and in that case, the report received from such assayer will be final and binding on both buyer and seller. The cost of first assaying as well as cost of transportation from Group 4 to assayer’s facilities to and fro will be born by the buyer, while the cost of second assaying, if any, will be equally divided between the buyer and seller. The vault charges during such period of first and second assaying, if any, will be born by both the buyers and sellers equally. If the buyer does not opt for assaying at the time of lifting delivery, then he will not have any further recourse to challenge the quantity or quality subsequently and it will be assumed that he has received the quantity and quality as per the bill made by the seller. On receipt of delivery, the Group 4 personnel will do the following validations: a. whether the person carrying Gold is the designated clearing agent of the member. b. whether the selling member is the bonafied member of the Exchange. c. whether the quantity being delivered is from Exchange approved refinery d. whether the serial numbers of all the bars is mentioned in the packing list provided. e. whether the original certificates are accompanied with the Gold Bars Any other validation checks, as they may desire. In case any of the above validation fails, the Group 4 Securitas will contact the Exchange office and take any further action, only as per instructions received from the Exchange in writing. If all validations are through, then the Group 4 Securitas personnel will put the Gold in the vault. Then the custodian of Group 4 will cut a serially numbered Group 4 receipt (in triplicate consisting of White, Pink and Yellow slips), get the signature of the seller’s clearing agent and signing the same for authorization, hand over the Pink slip to seller’s clearing agent, send by courier the third copy (Yellow Colour slip) while retaining the White for the records of Group 4 Securitas. Group 4 in 29

Quality Adjustment

Procedure of taking delivery from the Vault

Taxes, duties, cess and levies

Endorsement of delivery order

front of the selling member’s clearing agent will deposit the said metal into their vault. The price of gold is on the basis of 995 purity. In case a seller delivers 999 purity, he would get a premium. In such case, the sale proceeds will be calculated by way of delivery order rate * 999/ 995 For the purpose of taking delivery of goods fully or partially, the Member shall send to the Exchange an Authority letter on his letter head, authorising a representative on his behalf to take the delivery. The Authority letter sent by the Member shall consist of the following details: a. Name of the authorised representative. b. Name of the Commodity along with quantity. c. Name of the Vault along with the location. d. Signature of the authorised representative. e. Proof of Identity viz. PAN card, driving license, Election ID. f. Photo identity proof duly attested by the Member. The above-mentioned details are required to be sent to the Exchange. Once the Exchange receives the above-mentioned details, the Exchange will send Delivery Order (DO) to the Vault authorities directly. Based on the Delivery Order received, the Vault will issue the requested quantity to the authorised representative who has to present himself personally at the Vault along with the requisite photo identity proof in original, the copy of which was sent/communicated to the Exchange by its Member. The Vault officials will, upon final scrutiny/checking of the identity, deliver goods to the representative of the Member. The Vault officials in case of any discrepancy or doubt or any other reason may refuse to issue the goods to the representative under the intimation to the Exchange. The delivery given to the representative shall be final & binding to the Member at all times. Ex-Ahmedabad. Inclusive of all charges / levies relating to import duty, customs to be borne by Seller. But excluding Sales Tax / VAT, any other additional tax or surcharge on sales tax, local taxes and octroi to be borne by the Buyer. The buyer member can endorse delivery order to a client or any third party with full disclosure given to the Exchange. Responsibility for 30

contractual liability would be with the original assignee. Vault, Insurance and Borne by the seller till the date of pay-out of Transportation charges delivery and the buyer after the date of pay-out. Extension of delivery As per Exchange decision due to a force majeure period or otherwise. Due date rate (DDR) DDR is calculated on 5th day of the contract month. This is calculated by way of taking simple average of last 5 days of the spot market of Ahmedabad. Legal obligation The members will provide appropriate tax forms wherever required as per law and as customary and neither of the parties (seller member and buyer member) will unreasonably refuse to do so. Applicability of Business The general provisions of Byelaws, rules and Rules Business Rules of the Exchange and decisions taken by Forward Markets Commission, Board of Directors and Executive Committee of the Exchange in respect of matters specified above will form and integral part of this contract. The Exchange or FMC as the case may be further prescribe additional measures relating to delivery procedures, warehousing, quality certification, margining, risk management from time to time. (The interpretation or clarification given by the Exchange on any terms of this contract shall be final and binding on the members and others.) STEPS TO BE FOLLOWED FOR DELIVERY Intention to take delivery On any tender days by 6.00 p.m. by buyers Dissemination of The Exchange will inform members through TWS information on tendered regarding tender notice and delivery intentions of delivery and buyers the seller’s members and the buyers respectively interest by 7.00 p.m. on the respective tender days and on Saturdays by 1:00 p.m. Evidence of stocks in At the time of issuing delivery order, the Member possession must satisfy the Exchange that he holds stocks of the quantity and quality specified in the Delivery Order at the declared delivery center by producing warehouse receipt. Tender notice by seller The seller will issue tender notice along with evidence of delivery to the Exchange in a specified format by 6:00 p.m. and on Saturdays by 12:00 noon. Buyer’s obligation The buyer shall not refuse taking delivery and such refusal will entertain penalty as per the penal provision. Allocation of delivery As per the closing price on the respective tender days.

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Source: MCX Gold Report 1

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Frequently Asked Questions on Gold Q1. What is Gold and why is its chemical symbol Au? Gold is a rare metallic element with a melting point of 1064 degrees centigrade and a boiling point of 2808 degrees centigrade. Its chemical symbol, Au, is short for the Latin word for gold, 'Aurum', which literally means 'Glowing Dawn'. It has several properties that have made it very useful to mankind over the years, notably its excellent conductive properties and its inability to react with water or oxygen. Q2. Where does the word Gold come from? The word gold appears to be derived from the Indo-European root 'yellow', reflecting one of the most obvious properties of gold. This is reflected in the similarities of the word gold in various languages: Gold (English), Gold (German), Guld (Danish), Gulden (Dutch), Goud (Afrikaans), Gull (Norwegian) and Kulta (Finnish). Q3. How much gold is there in the world? At the end of 2001, it is estimated that all the gold ever mined amounts to about 145,000 tonnes. Q4. Why is gold measured in carats? This stems back to ancient times in the Mediterranean /Middle East, when a carat became used as a measure of the purity of gold alloys (see next Question 5). The purity of gold is now measured also in terms if fineness, i. e. parts per thousand. Thus 18 carats is 18/24th of 1000 parts = 750 fineness. Q5. What is a Carat? A Carat (Karat in USA & 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 33

is defined as 24 carats. How and when this change occurred is not clear. It does involve the Romans who also used the name Siliqua Graeca (Keration in Greek, Qirat in Arabic, now Carat in modern times) for the bean of the Carob tree. The Romans also used the name Siliqua for a small silver coin, which was one-twentyfourth of the golden solidus of Constantine. This latter had a mass of about 4.54 grammes, so the Siliqua was approximately equivalent in value to the mass of 1 Keration or Siliqua Graeca of gold, i.e the value of 1/24th of a Solidus is about 1 Keration of gold, i.e 1 carat. Q6. Who owns most gold? If we take national gold reserves, then most gold is owned by the USA followed by Germany and the IMF. If we include jewellery ownership, then India is the largest repository of gold in terms of total gold within the national boundaries. In terms of personal ownership, it is not known who owns the most, but is possibly a member of a ruling royal family in the East. Q7. If all the gold was laid around the world, how far would it stretch? If we make all the gold ever produced into a thin wire of 5 microns (millionths of a metre) diameter – the finest one can draw a gold wire, then all the gold would stretch around the circumference of the world an astounding 72 million times approximately! Q8. How much new gold is produced per year? In 2001, mine production amounted to 2,604 tonnes or 67% of total gold demand in that year. Gold production has been growing for years, but the real acceleration took place after the late 1970s, when output was in the region of 1,500tpa. This year output will fall short of production levels in 2001. This is partly for specific operational reasons at some of the larger mines (Grasberg and Porgera), along with lower grades at some of the operations in Nevada. The reduction in exploration and development expenditure over the past five years is leading a number of analysts to suggest that, with other operations nearing the end of their lives, global production is likely to drop slightly over the next two to three years subject always of course to price.

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Q9. How much does it cost to run a gold mine? Gold mining is very capital intensive, particularly in the deep mines of South Africa where mining is carried out at depths of 3000 meters and proposals to mine even deeper at 4,500 meters are being pursued. Typical mining costs are US $238/troy ounce gold average but these can vary widely depending on mining type and ore quality. Richer ores mined at the surface (open cast mining) is considerably cheaper to mine than underground mining at depth. Such mining requires expensive sinking of shafts deep into the ground. Q10. How does a gold mine work? The gold-containing ore has to be dug from the surface or blasted from the rock face underground. This is then hauled to the surface and milled to release the gold. The gold is then separated from the rock (gangue) by techniques such as flotation, smelted to a gold-rich doré and cast into bars. These are then refined to gold bars by the Miller chlorination process to a purity of 99.5%. If higher purity is needed or platinum group metal contaminants are present, this gold is further refined by the Wohlwill electrolytic process to 99.9% purity. Mine tailings containing low amounts of gold may be treated with cyanide to dissolve the gold and this is then extracted by the carbon in pulp technique before smelting and refining. Q12. How big is a tonne of gold? Gold is traditionally weighed in Troy Ounces (31.1035 grammes). With the density of gold at 19.32 g/cm3, a troy ounce of gold would have a volume of 1.64 cm3. A tonne of gold would therefore have a volume of 51, 760 cm3, which would be equivalent to a cube of side 37.27cm (Approx. 1' 3'').

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Gold Terminology For the purpose of this standard, the following definitions shall apply:



Assaying: The method of accurate determination of the gold content of the sample expressed in parts per thousand (%). Carat: One-twenty fourth part by mass of the metallic element gold.



Fineness: The ratio between the mass of gold content and the total



mass expressed in parts per thousand (%). 

Find Gold: It is gold having fineness 999 parts per thousand (5) and above without any negative tolerance.



Gold: The metallic element gold, free from any other element.



Standard Gold: Gold having fineness 995 parts per thousand (%) and above without any negative tolerance.



Grain: One of the earliest weight units used for measuring gold. One grain is equivalent to 0.0648 grams.



Hallmark: Mark, or marks, which indicate the producer of a gold bar and its number, fineness, etc.



Karat: Unit of fineness, scaled from one to 24. 24 karat gold (or pure gold) has at least 999 parts pure gold per thousand; 18-karat has 750, parts pure gold and 250 parts alloy, etc.



Kilo Bar: A bar weighing one kilogram – approximately 32.1507 troy ounces.



Legal Tender: The coin or currency which the national monetary authority declares to be universally acceptable as a medium of exchange; acceptable for instance in the discharge of debts.



Liquidity: The quality possessed by a financial instrument of being readily convertible into cash without significant loss of value.



Troy Ounce: A unit of weight, equal to about 1.1 avoirdupois (ordinary) ounces. The word ounce when applied to gold refers to a troy ounce. 1 troy ounce is equivalent to 31.1034768 grams.

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CONCLUSION After almost two years that commodity trading is finding favour with Indian investors and is been seen as a separate asset class with good growth opportunities.

For diversification of portfolio beyond shares, fixed deposits

and mutual funds, commodity trading offers a good option for long-term investors and arbitrageurs and speculators.

And, now, with daily global

volumes in commodity trading touching three times that of equities, trading in commodities cannot be ignored by Indian investors. Online commodity exchanges need to revamp certain laws governing futures in commodities to make the markets more attractive.

The national multi-

commodity exchanges have unitedly proposed to the government that in view of the growth of the commodities market, foreign institutional investors should be given the go-ahead to invest in commodity futures in India. will deepen and broad base the commodity futures market.

Their entry

As a matter of

fact, derivative instruments, such as futures, can help India become a global trading hub for select commodities. Commodity trading in India is poised for a big take-off in India on the back of factors like global economic recovery and increasing demand from China for commodities. Considering the huge volatility witnessed in the equity markets recently with the Sensex touching 21000 level commodities could add the required zing to investors' portfolio.

Therefore, it won't be long before the

market sees the emergence of a completely redefined set of retail investors.

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Bibliography www.mcxindia.com www.indiamba.com www.commodityindia.com www.business.mapsofindia.com www.bseindia.com www.ncdex.com www.sebi.gov.in, SEBI Bulletin www.indiaexpress.com www.nmce.com www.nbotind.org www.gold.org

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