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Transcript of Precious Metals Final
8/9/2019 Precious Metals Final
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Precious metals
Derivatives
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Eff orts by
KAVITA SALI
M EER A CHAUHAN
SM R ITA KACH R U KI R AN SINGH
SADNA PATIL
VIK R ANT SINGH
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Precious metals
GOLD
SILV ER
PLATINUM
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Market
In India precious metals are
traded in
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Indian government policy f or bullion
1947 - Complete ban on Import o f Bullion
1962 - Ban on Forwarding Trading
1963 - Declaration o f Gold holding made compulsory f or
individual. R estriction on manu f acturing o f jewellery above 14 Ct.
1965 - Floating o f 15 years 7% Gold Bonds (6.1 MT Gold
Collected)
1966 - Ceiling on holding o f Gold by individual
1978 - Govt. auctioned Gold through R BI to control in f lation
and banned f urther auction
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Cont«
1991 - Amendment brought into Gold Control Act permitting holding o f Gold not only in the f orm o f jewellery but also in the f orm o f bars
1991 - N R I to bring 5-Kgs Gold against payment o f Custom duty @ R s.220/= per 10 Gram
1992 - R ecommendation by R BI to Govt f or Formation o f Gold Management corporation
1993 - 41 MT o f Gold mobilized under gold Bond Scheme
1997 - Gold import by N R I increased to 10 Kgs.
2003 ² Custom duty reduced to R s.100/- per 10
2009 gold price reached to record high
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Pre liberalisation
Bullion imports and exports were also banned but restrictions on import
o f gold into the country resulted in the f lourishing o f smuggling and
uno ff icial transactions in f oreign exchange.
Various schemes f or mobilisation o f idle gold holdings have been
implemented by the Government and R BI in the past, but with little
success.
gold import is permitted through three o ff icial channels viz., special
import licences,non-resident Indians and authorized banks and
institutions .
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Post liberalisation
The liberalized gold policy has certainly brought to the o ff icial sector what originally was an uno ff icial sector.
the government permitted non-resident Indians to bring 5kg o f gold into the country twice yearly on the payment o f import tax o f R s. 250 per 10 grammes
The allowance was raised to 10 kg per trip in January 1997.
allow import and export o f gold under OpenGeneral Licence
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Cont«
In 2001 uno ff icial imports f ell because o f a reduction in
import duties,
In the 2003 budget the Finance Minister reduced the
customs duty on ¶serially numbered bars, or«. gold
coins· f rom R s. 250 per 10 grammes to R s. 100 per 10g.
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Gold production
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Global gold demand
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Gold supply
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Indian gold jewellery consumption
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Dollar and gold price
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Gold v/s crude oil
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W hy to invest in gold«? W hy to invest in gold«?
Eff ective Port f olio Diversi f ier Eff ective Port f olio Diversi f ier
Eff ective Hedge against in f lation Eff ective Hedge against in f lation
Eff ective hedge against currency Eff ective hedge against currency
Superior to other alternative asset classes
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Eff ective Port f olio Diversi f ier Eff ective Port f olio Diversi f ier
Portfolio Without Gold:Same Risk, Lower Return
Small Cap Stocks
10%
Bonds
30%
T-bills
5%
Large Cap Stocks
55%
Portfolio With Gold: Same Risk, Greater Return
Gold
5
¡ onds
25
¢ a £ g¤
Ca ¥ ¦
§
ocks
70
otal turn: 14.30%
otal turn: 16.1%
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Eff ective Hedge against in f lation Eff ective Hedge against in f lation
A study conducted by W GC
in UK shows that one ounce
o f Gold would consistently
purchase the same amount o f goods & services as it would
have done 400 years ago,
making it the per f ect hedge
against in f lation over a long
period o f time
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Eff ective hedge against currency Eff ective hedge against currency
Inverse relationship between gold and US dollar
If value of dollar falls in market
Price of a gold rises
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Superior to other alternative asset classes
0
4
8
12
16
20
Bonds Stocks Gold Real Estate venture
Capital
T i m e t a k e n t o
Risk Low High Low Medium V High
Rtn. Low High Low Medium High
30 ̈
©
n.2 ̈
©
n.1 ̈
©
n.
6-9 ¨ s 1
y
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Trend in gold prices
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Factors in f luencing gold price
Demand and supply
Low or negative real interest rate
W ar, crisis
Indian and Chinese market
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Cont«
Gold mining production
US and global macro economics
Investment demand
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W hy Gold Futures in India?
The Indian gold market has always been linked to
international gold market in view o f large requirements
o f imported gold. Given the inevitable integration
between the global and local gold markets, there is considerable merit in f ollowing the global practice o f
integration o f gold markets with f inancial markets and
introducing f orward trading.
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Hedging in gold
Per f ect hedging model
Suppose a jeweler f irm have a stock o f 100 kg o f gold which they want to sell in next two months. The
current price o f gold is R s.5000 /kg. to eliminate the risk the f irm enter in to a f uture short contract o f gold o f 100 kg at FP at 5100/kg
Scene
1. Price rise to R s.5200/kg 2. Price f all to R s.4900/kg
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Cont«
Scene 1
Sp = 5,20,000
Loss 5100-5200= -100{ loss o f R s.10000} Net revenue R s.5,10,000
Scene 2
Sp = 4,90,000
Pro f it 5100-4900=200 {pro f it o f R s.20000}
Net revenue R s.5,10,000
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Ncdex gold f uture contract
Type o f Contract Futures Contract Speci f ications Name o f Commodity Gold
Ticker symbol GLDPU R AHM
Trading System NCD EX' s Trading System
Basis E x- Ahmedabad inclusive o f Customs
Duty, exclusive o f Sales Tax/VAT, and
any other charges or levies
Unit o f trading 1 kg
Tick size R e.1
Quotation/base value R s per 10 Grams o f Gold with 995 f ineness
Quality speci f ication Not more than 999.9 f ineness
Delivery center Ahmedabad
Due date / E xpiry Date 20th day o f the delivery month
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Tender Period Tender period would be o f 5 working
days during trading hours prior to and including the expiry date o f the contract
Delivery speci f ication Upon expiry o f the contracts all the
outstanding open positions should
result in compulsory delivery.
Closing o f Contracts Clearing and settlement o f contracts will commence with the commencement
o f Tender Period
Opening o f Contracts Trading in the f ar month contract will
open on the 10th day o f the month in
which the near month contract is due to expire.
Position limits 6 MT or 15% o f market wide open
position whichever is higher
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Price limit +/-3%, max +/-6%, or +/-9%
(Daily price f luc.limit)
Special Margin In case o f additional volatility, a
special margin at such other percentage,
as deemed f it by the
R egulator/ E xchange
Additional Margin may impose additional margins on both
long and short side at such other
percentage, as deemed f it
Gold NOV-09 14,705
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Bene f its f rom gold f utures
Development o f gold f utures would help in e ff icient price discovery and emergence o f healthy and transparent practices in the market.
The demand driven gold market o f India may well become the dictator o f gold
prices over a period o f a f ew years displacing the supplier driven international market.
Futures in gold apart f rom o ff ering jewellery manu f acturers and exporters the chance o f hedging their inventories would provide many other investors or speculators with a cheap and highly e ff icient way o f getting into gold.
Development o f f utures market would make a positive contribution to the protection o f consumerand improvement o f the industry by setting the benchmark quality f or trading.
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Gold contract traded in NCD EX
MONTH T R AD E D CONT R ACTS (Lots)
Jan09 3463904
Feb 09 3632601
Mar 09 4176328 Apr 09 2710372
May 09 2331799
June 09 2117538
July 09 1584550
Aug09 1302700
Sep09 524116
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R eal time gold contracts
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Most active contract (volume)
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Most active contract in NCD EX
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Investment v/s jewellery
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Fundamental R easons f or bullish run o f Gold
Global Currency Debasement
Investment Demand f or Gold is Accelerating
Alarming Financial Deterioration in the US
Negative R eal Interest R ates in R eserve Currency (US dollar)
Mine Supply is Anticipated to Decline in the next Three to Four Years
Large Short Positions
R ising Geopolitical Tensions
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Gold bonds
Gold bonds or gold-convertible bonds are debt
instruments that are typically issued by gold mining
f irms. These bonds are secured by a stored quota o f gold
and their yield depends heavily upon f luctuations in global gold prices.
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How gold bonds work?
Typically issued by gold mining companies
Purchased by investors who wish to gain exposure to
f luctuations in gold prices without physically buying the
metal
Gold bonds typically o ff er low interest rates
The gold bonds also act as potential gold sales at a f uture
date.
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Advantages
Convenience: One can gain exposure to gold without physically
buying the metal. The investor, thus, does not need to store or
insure gold.
High liquidity: Gold bonds o ff er instant conversion to physical
gold or hard cash. Also, this easy conversion boosts the demand f or
these bonds.
Sa f ety: Unlike other bonds, the returns on gold bonds are shielded
f rom geopolitical turbulences in a country.
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Drawbacks
Strong f luctuations in gold prices will result in substantial
f luctuations in the price o f gold bonds.
The mining company might stop the production o f gold when mining costs exceed global gold prices. In such cases, the
redemption o f existing gold bond will yield lower returns.
These bonds have a lower rate o f return than do other variable- income debt instruments.
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Silver
Futures
On 5 th aug,2009 a silver utensil maker needs silver. Current price
o f silver is R s.15000/kg. he buys 5 th
October 2009 an silver f utures at R s.16000/kg
On oct 2009 silver spot price was R s.17000/kg
Silver utensil maker makes a pro f it o f R s.1000/kg. this is the bene f it o f f uture contract.
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Cross hedging in silver
Suppose a silver utensil manu f acturer have a 10 kg o f an
antique utensil ware. the f irm is in concerned that price
may f all in near f uture. To sa f eguard this the f irm will
take short position in silver f utures. The current price o f silver f utures is R s.10000.
The relation between silver f utures and utensils are silver utensils = 100+1.50(silver f utures) +e
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Size o f silver f uture position=Beta*size o f cash position
1.5 x 10 = 15 kg
Condition
Futures price is R s.9000/kg
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1. W hen e= -10
Utensil value
10 kg{100+1.5(9000)-10} = 135900
Future pro f it
15(10000-9000) = 15000
Hedge value
135900+15000 = 150900
All figures in rupees
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2. W hen e = 0
Utensil value
10kg{100+1.5(9000)+0} 136000
Future pro f it
15(10000-9000) = 15000
Hedge value
136000+15000 = 151000
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3. when e = +10
Utensil value
10kg{100+1.5(9000) +10} = 136100
Future pro f it
15(10000-9000) = 15000
Hedge value
136100+15000 = 151100
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i-gold is a plat f orm which f acilitates systematic investment in
gold with an option o f Physical or Demat holding
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Advantage to investor
An ideal plat f orm to f or systematic investment in gold.
Transparent screen based price at par with the prevailing spot price.
Options o f loan against Demat gold f rom Financial Instituions.
Convenience o f buying gold at the investors discretion - without visiting the outlet unlike today
Assured Quality & Purity ² 24 k,995 & 999 f ineness gold bars imported f rom LBMA approved overseas suppliers
E asily accessible through an existing stock broker who is a member o f MC X
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How does it work? How does it work?
Day 1 ² 6: Buy /sell depending on margin money with the broker /exchange based on Mark To Market (MTM)
Day 7- Intimate the status o f their respective position to Buyers & Sellers
Day 8- Seller members MUST deposit the physical gold with custodian / Deliver through Demat
Day 9- Pay-in o f f unds by Buyer members against their delivery commitments (obligation).
Day 9- Pay-out o f commodity - Physical delivery o f gold (Authorisation f orm with the photograph o f the investor/ authorized person, proo f o f identity -photo id
Demat account (Commodity Deposit Form &Original Allocation Letter)
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Costs structure Costs structure
Brokerage (Buy / sell) - 0.50 ² 1.00% o f transaction value
Service Tax on brokerage - 12.24% on brokerage
Demat & R emat - R s.100/- 200/-per transaction
Custody & Insurance - R s.7,200p.a. per (1k.g)
VAT - 1% o f transaction value
Sales Tax agency charge - 0.50% - 1.00% (required f or selling physical gold)
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Conclusion
Over the next year economic conditions will continue on
balance to be good f or gold. Government and central
bank policy responses to recession and exploding debt
obligations could well prolong the bull market in gold and result in f ar higher prices than the peaks experienced
over the rally to to-date.
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Thank you«.