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GOLD FUNDAMENTALANALYSIS

International Workshop on CommodityTrading6th October 2004

-Bhargava N. Vaidyae-mail bnv@vsnl.com

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Whatis Gold

COMMODITY

OR

CURRENCY ?

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GOLD Hedge against Inflation

Gold as an Investment

Gold as a safe haven

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History

Gold Currency

(1890 - 1913)

Gold Standard

(1925 - 1931)

1968 Split in European Gold Market

Bretton Wood

Fixed exchange rate collapsed in 1973

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Freedom

1974 Private Ownership ofGold Legalised

in USA

COMEX 31.12.1974 Gold future introduced

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Gold Price Turn of previous century around $ 20

1934 - 1968 Fixed at $ 35

1979 1982 Bull Market Years

on 21 /1/1980 $ 855

Average Price 2002 $ 310

Average Price 2003 $ 363

September 2004 $390 - $ 421

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Recent

Highlights

May99 : BOE decides to halve itsGold reserves

September99 : Washington Agreement

1/1/2000 : VAT Abolished onBullion throughout Europe.

May 2000 : SNB begins sale ofGoldfrom its reserves.

2003 : Central BankGold agreement

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Size of Market

LBMA Daily clearance volumes

488 tonnes Comex - 152 tonnes (per day)

Other Exchanges

Indian market size 1000 tonnes (per annum)

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LONDON19 th Century: Great Britain first country to adopt

the full Gold standard.1919 : Formation of the London Gold Fixing

Up to 1968: No Competition in London Gold

MarketAfter 1968 : Londons Monopoly ends after

temporary closure ofGold Market.

1987 : The LBMA Incorporated as on

14/12/872000 : Associate Members

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USA

1792 : US assigned a formal monetary role Currency Backing

with AU and AG

1848 : Large Gold discovery in California

North America became the worlds

major supplier

1944 : Bretton Woods agreement -tied gold to the US $

1971 : President Nixon ended the convertibility of the US $

into gold

1974 : Lifting the ban ofGold Ownership31.12.74: Gold futures opened for trading on COMEX (today

a subdivision of NYMEX)

1982 : COMEX started operating a market in Gold options

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Other Markets

ZURICH

TOKYO

TURKEY

HONGKONG

SHANGHAI

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SUPPLY2002 2003

MINE PRODUCTION 2590 2593

OFFICIAL SECTOR

SALE545 606

OLD GOLD SCRAP 836 943

NET - PRODUCER

HEDGING---

Source:----

GFMS

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DEMAND2002 2003

FABRICATION 3163 3049

BARHOARDING 250 183

NET - PRODUCER

HEDGING

437 310

IMPLIED

INVESTMENT122

SOURCE600

: GFMS

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GoldHedging Environment

1980s 2000s

High Interest rates

Low lease costs

small to medium costmines

High % of resources asreserves

Continuity of cash flow

required to underwritecapital

Low Interest rates

More Volatile leasecosts

Larger more maturemines

Lower % of reservesto resources

LowerGold Price

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GoldHedging Products

1980s 2000s

Gold Loans

Spot def, fixed and flatforwards

Short term products

Less Gold Loans

Longer datedproducts

Structured OptionProducts

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Official SectorH

olding

Over 31,822 tonnes

Large holders

USA 8,135 tonnes

Germany 3,440 tonnesFrance 3,025 tonnes

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OFFICIAL SECTOR

SALE

GOLD LOANS

GOLD AS SECURITY FOR

BORROWING

CURRENCY MANAG

EMENT

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OTH

ER

FACTOR

S

POLITICAL INSTABILITY

TERRORISM

CURRENCY INSTABILITY

SURPLUS MANAGEMENT

INFLATION

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Importance of Gold (India)

Largest item in portfolio

(Rs.13,02,000+ Crores)

Major forex asset

($ 280+ Billion)

Legend - Gold & Age

Liquidity

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PR

ESENT INDIAN SCENAR

IO

LARGEST MARKET FORGOLD

ONE OF THE MOST IMPORTANT MARKET FOR

SILVER LARGE HOLDING OF BULLION IN PRIVATE

SECTOR

LARGEST SOURCE OF BULLION

IMPORTS

RECYCLING - A DISTANT SECOND

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Indian Position WHAT POSITION WE HAVE IN WORLD

MARKET

ANALOGY WITH SAUDI ARABIA IN OIL

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H

ISTOR

Y Net Gold Surplus for years

1962 - Gold Control Act.

Development 1990 Abolition ofGold Control Act

1992 NRI Imports

1994 SIL Import 1997 Authorised agencies / Banks

2003 - Future/Forward trading in bullion

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Authorised Bank / Agency

|

Bullion Dealer (large) ______| |

Bullion Dealer (small) |

| | |

Jeweller | Jeweller

| | |

Consumer Consumer Consumer

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InterestArbitrage

LC Imports

Banking Facilities

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External Benefits

Export of Coins / Crude

Jewellery

Other Arbitrage

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Local Taxes Sales tax

- Rajasthan

- Gujarat- Delhi

Octroi

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