Role of Sebi Saurabh

8/2/2019 Role of Sebi Saurabh

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PROJECT ON

COMMODITY MARKETS

BACHELOR OF COMMERCE

FINANCIAL MARKETS

SEMESTER V

(2011-12)

SUBMITTED BY:

RIDDHI J. DOSHI

ROLL NO.06

PROJECT GUIDE:

PROF. HARESH PARPIANI

K.J.SOMAIYA COLLEGE OF ARTS, & COMMERCE,

VIDYAVIHAR (EAST), MUMBAI - 400077


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K.J.SOMAIYA COLLEGE OF ARTS, & COMMERCE, VIDYAVIHAR

(EAST), MUMBAI - 400077

PROJECT ON:

COMMODITY MARKETS

BACHELOR OF COMMERCE

FINANCIAL MARKETS

SEMESTER V

(2011-2012)

Submitted

In Partial Fulfillment of the requirements

For the Award of the Degree of

Bachelor of CommerceFinancial Markets

By

RIDDHI J. DOSHI

ROLL NO.06


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K.J.SOMAIYA COLLEGE OF ARTS, & COMMERCE, VIDYAVIHAR (EAST),

MUMBAI400077

CERTIFICATE

This is to certify that MISS. RIDDHI J. DOSHIof B.Com. Financial Markets Semester V (Academic Year) 2011-2012

has successfullyCompleted Project On COMMODITY MARKETSunder the guidance

of PROF. HARESHPARPIANI.

_________________ __________________

Course Coordinator Principal(Mrs. HARESH PARPIANI) (Dr. Mrs. SUDHA VYAS)

_________________ __________________

Internal ExaminerExternal Examiner

_________________

Project Guide(PROF.HARESH PARPIANI)


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DECLARATION

I, MISS. RIDDHI J. DOSHI the student of B.Com-Financial Markets

Semester V (2011-2012) hereby declares that I have completed Project

on COMMODITY MARKETS.

Wherever the data/information has been taken from any book or other

sources have been mentioned in bibliography.

The information submitted is true and original to the best of my

knowledge.

Students Signature

_______________

RIDDHI J. DOSHI

(Roll No. 06)


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ACKNOWLEDGEMENT

On the event of completion of my projectCOMMODITY MARKETSI take the

opportunity to express my deep sense of gratitude towards all those people without

whose guidance, inspiration, & timely help this project would have never seen the

light of day.

Heartily thanks to Mumbai University for giving me the opportunity to work on

this project. I would also like to thank our principalDr.Mrs.SUDHA. VYASfor

giving us this brilliant opportunity to work on this project.

Any accomplishment requires the effort of many people and this project is not

different. I find great pleasure in expressing my deepest sense of gratitude towards

my project guide PROF.HARESH PARPIANI, whose guidance & inspiration

right from the conceptualization to the finishing stages proved to be very essential &

valuable in the completion of the completion of the project.

I would like to thank Library staff, all my classmates, and friends for their invaluable

suggestions & guidance for my project work.

Lastly I would like to thank My Parents without whose consent & support it would

have not been possible for me to complete this project.

Students Signature

_______________

RIDDHI J. DOSHI

(Roll No. 06)


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EXECUTIVE SUMMARY

This project is based on commodity markets, their significance in the economy

& their contribution towards the GDP of the country. Commodity markets are now

the buzz word all the investors are looking at the commodity market as a revenue

generator.

In includes FMC i.e. Forward Market Commissions & the Government played

in the markets, the global commodity dynamics as all these influence the Indian

commodity Markets their repercussions are seen in the local bourses.

It also throws light on highly traded commodities their volumes, margins & more

importantly volatility. It contains analysis of 3 commodities, demand & supplyscenario etc.

The soul of the project is the commodity boosters the reasons who will drive

the commodity bourses ahead.

Hence this project has covered the recognized exchanges & their

organizational trading & the regulatory setup for future trading in commodities.

Finally it covers all important points on the bases of which a person can

understand the commodity market & start trading in them.


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RESEARCH METHODOLOGY

The method of data collection for my project is based on both primary as well as

secondary data collection. I have adopted the following methodology of study

throughout the project.

Various internet websites. Opinion of experts. Reference books. Newspaper magazines.

Objectives

The objective of this study is to understand.

1. What is commodity market?2.Need & scope of commodity market?3.How it trade in stock market of India & other countries?4. Present status of commodity market in India?5. Future of commodity market?


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INDEX

Sr. No. Topic Page No

1 Commodity Market Basics 1-15

2 Leading Commodity Markets Of World 16

3 Regulator

4 Leading Commodity Markets Of India 18

5 Commodity Future Trading in India 19-21

6 What makes Commodity Trading Attractive? 22

7 Commodity Trading 23

8 Need for Commodity Derivatives for India 23

9 History Of Development of Commodity Markets 24-26

10 Relevance & Potential Of Commodity Markets in India 27-28

11 Commodity Market Ecosystem 29-30

12 Indias place in World Market 31

13 Working of Commodity Market 32-34

14 Trading of Commodity Market 35-38

15 Merits & Demerits of Commodity Market 38-39

16 Study of Single Commodity Gold 40-45

17 Questionnaire on Gold 46-49

17 Gold Terminology 50

18 MCX Contract Specifications of Gold 51-57

19 Regulatory Body 58-59

20 Role Of Government in Commodity Market 60

21 National Multi-Commodity Exchange Of India 61-63

22 Multi-Commodity Exchange Of India 64-65

23 National Commodity & Derivatives Exchange LTD. 66-71

24 Suggestions

25 Conclusion 26 Bibliography


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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 & vibrant cash market is a pre-condition for a successful & transparent

futures market.

INTRODUCTION

India, a commodity based economy where two-third of the one billion

population depends on agricultural commodities, surprisingly has an under

developed commodity market. Unlike the physical market, futures markets trades in

commodity are largely used as risk management mechanism on either physical

commodity itself or open positions in commodity stock.

For instance, a jeweler can hedge his inventory against perceived short term

downturn in gold prices by going short in future markets.

The article aims at understanding commodity market & how are the

commodities traded on exchange. The idea is to study the importance of commodity

derivatives & learn about the market from an Indian point of view. The development

& growth was shunted due to numerous restriction in the early 70s which resulted in

vibrant market.

COMMODITY

A commodity may be defined as an article, a product or material that is bought

& sold. It can be classified as every kind of movable property, except actionable

claims, money & securities. Commodity actually offers immense potential to become

a separate asset class for market-savvy investors, arbitrageurs & speculators. Retail

investors, who claim to understand the equity markets, may find commodities an


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unfathomable market. But commodities are easy to understand as far as

fundamentals of demand & supply are concerned. Retail investors should understand

the risk & advantages of trading in commodities futures before taking a leap.

In fact, the size of the commodities market in India is also quite significant. Of

the countrys GDP ofRs 13, 20,730 crore (Rs 13, 20 billion), commodities related (&

dependent) industries constitute about 58%.

Currently, the various commodities across the country clock an annual

turnover of Rs 1, 40,000 crore (1,400 Billion). With the introduction of futures

trading, the size of the commodities market grows many folds here on.

COMMODITY MARKET

Commoditymarketisanimportantconstituentofthefinancialmarketsof any

country. It isthemarketwherea widerangeofproducts, viz.,

preciousmetals,basemetals,crudeoil,energyandsoftcommoditieslike

palmoil,coffeeetc.aretraded.Itisimportanttodevelopavibrant,active and

liquidcommoditymarket. This would help investors hedge their

commodityrisk,take speculative positions in commoditiesand

exploitArbitrageopportunities inthe market.

Turnover inFinancialMarkets andCommodityMarket

(Rs inCrores)

S No. Marketsegments 2002-03 2003-04 2004-05(E)

1 GovernmentSecuritiesMarket 1,544,376 (63) 2,518,322 (91.2) 2,827,872 (91)

2 ForexMarket 658,035 (27) 2,318,531 (84) 3,867,936 (124.4)

3 TotalStockMarketTurnover(I+II

1,374,405 (56) 3,745,507 (136) 4,160,702 (133.8) I NationalStockExchange(a+b) 1,057,854 (43) 3,230,002 (117) 3,641,672 (117.1)

a)Cash 617,989 1,099,534 1,147,027

b)Derivatives 439,865 2,130,468 2,494,645

II BombayStockExchange(a+b) 316,551 (13) 515,505 (18.7) 519,030 (16.7)

a)Cash 314,073 503,053 499,503

b)Derivatives 2,478 12,452 19,527

4 CommoditiesMarket NA 130,215 (4.7) 500,000 (16.1)

Note:Fig.inbracketrepresentspercentagetoGDP atmarketprices

Source:Sebi bulletin


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Ministry of

ConsumerAffairs

FMC(Forwards

MarketCommission)

Commodity

Exchange

NationalExchange

NCDEX MCX NMCE

RegionalExchange

NBOT

20 otherregional

exchanges


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Commodities

Ecosystem

MCX

Quality

CertificationAgencies

Hedger

(Exporters /Millers Industry)

Producers(Farmers/Co-operatives/Ins

titutional)

Traders

(speculators)arbi

-trageurs/client)

Consumers

(Retail/Institutio

-nal)

Transporters/

support agencies

Clearing Bank

Warehouses


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DIFFERENTTYPESOFCOMMODITIESTRADED:

World-overonewillfindthatamarketexitsforalmostallthecommodities known

to us . These comm odit ies ca nb e broadlyclassifiedintothefollowing:

METAL Aluminium, Copper, Lead, Nickel, Sponge Iron, Steel

Long

BULLION Gold,GoldHNI,GoldM,i-gold,Silver,SilverHNI,SilverM

FIBER CottonL Staple,CottonM

Staple,CottonSStaple,CottonYarn,

ENERGY BrentCrudeOil,CrudeOil,FurnaceOil,NaturalGas,M.E.

SPICES Cardamom,Jeera,Pepper,RedChilli

PLANTATIONS Arecanut,CashewKernel,Coffee (Robusta),Rubber

PULSES Chana,Masur,YellowPeas

PETROCHEMICAL

HDPE, Polypropylene(PP),PVC

OIL &OIL SEEDS CastorOil,CastorSeeds,CoconutCake,CoconutOil,Cott

on

Seed,CrudePalmOil,GroundnutOil,KapasiaKhalli,Mu

stard Oil, Mustard Seed (Jaipur), Mustard Seed

(Sirsa), RBD

Palmolein,RefinedSoyOil,RefinedSunflowerOil,RiceB

ran DOC,RiceBranRefinedOil,Sesame

CEREALS Maize

OTHERS Guargum, Guar Seed, Gurchaku, Mentha Oil, Potato

(Agra),

Potato(Tarkeshwar),SugarM-30,SugarS-30


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TURNOVEROFINDIANCOMMODITYEXCHANGES

Indian CommodityFuturesMarket(RsCrore)

Exchan es 2004 2005 2006 2007 Multi Commodit 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

AllExchan es 571 759 2 155 122 2 739 340 3 375 336

MARKET SHARE OFCOMMODITYEXCHANGES ININDIA


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DIFFERENT SEGMENTSINCOMMODITIESMARKET

ThecommoditiesmarketexitsintwodistinctformsnamelytheOverthe

Counter(OTC)marketandthe Exchangebasedmarket.Also,asin

equities,thereexiststhespotandthederivativessegment.Thespotmarkets

areessentiallyoverthecountermarketsandtheparticipationisrestrictedto peoplewho

areinvolvedwiththatcommoditysaythefarmer,processor, wholesaler etc. Derivative

trading takes place throughexchange-basedmarketswithstandardizedcontracts,

settlements etc.

EVOLUTION OF COMMODITY MARKET IN INDIA

Bombay Cotton Trade Association Ltd., set up in 1875 was the 1storganized

Futures Market. Bombay Cotton Exchange Ltd. was established in 1893 following

the widespread discontent amongst leading cotton mill owners merchants over

functioning of Bombay Cotton Trade Association. The Futures trading in oilseed

started in 1900 with the establishment of Gujarati Vyapari Mandali, which carried

on futures trading in groundnut, castor seed & cotton. Futures trading in wheat

were existent at several places in Punjab & Uttar Pradesh. But the most notable

futures exchange for wheat was Chambers Of Commerce at Hapur set up in 1913.

Futures trading in bullion in Mumbai began in 1920. Calcutta Hessain Exchange

Ltd. was established in 1919 for futures trading in raw jute & jute goods. But

organized futures trading in raw jute began only in 1927 with the establishment of

East Indian Jute Association Ltd. These two associations amalgamated in 1945 to

form East India Jute & Hessain Ltd. to conduct organized trading in both Raw Jute

& Jute goods. Forward Contracts (Regulation) Act was enacted in 1952 & the FMC

was established in 1953 under the Ministry of Consumer Affairs & Public

Distribution. In due course, several other exchanges were created in the country to

trade in diverse commodities.


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LEADING COMMODITYMARKETSOFWORLD

Someoftheleading exchanges oftheworldare:

S.No. GlobalCommodityExchanges

1 NewYorkMercantileExchange(NYMEX)

2 LondonMetalExchange(LME)

3 Chicago BoardofTrade(CBOT)

4 NewYorkBoardofTrade(NYBOT)

5 KansasBoardofTrade

6 WinnipegCommodityExchange,Manitoba

7 DalianCommodityExchange,China

8 Bursa MalaysiaDerivatives exchange

9 SingaporeCommodityExchange(SICOM)

10 Chicago MercantileExchange(CME), US

11 LondonMetalExchange

12 Tokyo CommodityExchange(TOCOM)

13 ShanghaiFutures Exchange

14 SydneyFutures Exchange

15 London InternationalFinancialFutures and Options

16 NationalMulti-CommodityExchangeinIndia(NMCE),India

17 NationalCommodityand Derivatives Exchange(NCDEX),India

18 MultiCommodityExchangeofIndiaLimited(MCX),India

19 DubaiGold&CommodityExchange(DGCX)

20 DubaiMercantileExchange(DME),(jointventurebetweenDubai

holding and the NewYorkMercantileExchange(NYMEX))


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REGULATORS:

Eachexchangeisnormallyregulatedbyanationalgovernmental(orsemi-

governmental) regulatoryagency:

Country Regulatoryagency

Australia AustralianSecurities and Investments Commission

Chinesemainland China Securities RegulatoryCommission

HongKong Securities and Futures Commission

India Securities and ExchangeBoardofIndiaandForward

MarketsCommission (FMC)

Pakistan Securities and Exchange Commission ofPakistan

Singapore MonetaryAuthorityofSingapore

UK FinancialServices Authority

USA Commodity Futures Trading Commission

Malaysia Securities Commission


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LEADING COMMODITY MARKETSOFINDIA

Thegovernmenthasnowallowednationalcommodityexchanges,similarto

theBSE&NSE,tocomeupandletthemdealincommodityderivativesinan electronic

tradingenvironment. These exchangesareexpectedtooffera nation-wide

anonymous, order driven, screen based trading system for

trading.TheForwardMarkets Commission (FMC)willregulatethese exchanges.

Consequentlyfourcommodityexchangeshavebeenapprovedtocommencebusinessint

his regard.Theyare:

S.NO. CommodityMarketinIndia

1 MultiCommodityExchange(MCX),Mumbai

2 National Commodity and Derivatives Exchange Ltd (NCDEX),

Mumbai

3 NationalBoardofTrade(NBOT),Indore

4 NationalMultiCommodityExchange(NMCE),Ahmadabad


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COMMODITY FUTURES TRADING IN MARKET

DerivativesasatoolformanagingriskfirstoriginatedintheCommodities

markets.Theywerethenfoundusefulasahedgingtoolinfinancialmarkets

aswell.Thebasicconceptofaderivativecontractremainsthesamewhether

theunderlyinghappenstobeacommodityorafinancialasset.Howeverthere

aresomefeatures,whichareverypeculiartocommodityderivativemarkets.

Inthecaseoffinancialderivatives,mostofthesecontractsarecashsettled.

DerivativesasatoolformanagingriskfirstoriginatedintheCommodities

markets.Theywerethenfoundusefulasahedgingtoolinfinancialmarkets

aswell.Thebasicconceptofaderivativecontractremainsthesamewhether

theunderlyinghappenstobeacommodityorafinancialasset.Howeverthere

aresomefeatures,whichareverypeculiartocommodityderivativemarkets.

Inthecaseoffinancialderivatives,mostofthesecontractsarecashsettled.

Eveninthecaseofphysicalsettlement,financialassetsarenotbulkyanddo

notneedspecialfacilityforstorage.Duetothebulkynatureoftheunderlyingassets,physicalsettlementincommodity derivativescreatestheneedfor

warehousing.Similarly,theconceptofvaryingqualityofassetdoesnotreally

existasfarasfinancial underlyingareconcerned.Howeverinthecaseof

commodities,thequalityoftheassetunderlyingacontractcanvarylargely. This becomes

animportantissueto bemanaged.

Hedging the price risk associated with futures contractual commitments.

Spacedoutpurchasespossibleratherthanlargecashpurchasesandits storage.

Efficientpricediscoveryprevents seasonalpricevolatility.

Greaterflexibility,certaintyandtransparencyinprocuringcommoditieswouldaidbank lending.

Introduction

Benefitstoindustryfromfuturestrading


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Facilitate informedlending.

Hedgedpositionsofproducersandprocessorswouldreducetheriskof

defaultfacedbybanks.*Lendingforagriculturalsectorwouldgoup

withgreatertransparencyinpricing and storage.

mmodityExchangestoactasdistributionnetworktoretailagri- financefromBanks

toruralhouseholds.

Providetrading limitfinanceto Traders incommodities Exchanges.

Accesstoahugepotentialmarketmuchgreaterthanthesecuritiesand

cashmarketincommodities.

Robust,scalable,state-of-arttechnologydeployment.

Membercantradeinmultiplecommoditiesfromasinglepoint,onreal timebasis.

Traderswouldbe tr a i n e d tobe Ru r a l AdvisorsandCommodity

Specialistsandthroughthemmultipleruralneedswouldbemet,like bankcredit,

information dissemination, etc.

Oneanswerthatisheardinthefinancialsectoris"weneedcommodity

futuresmarketssothatwewillhavevolumes,brokeragefees,andsomething

totrade''.Wehavetolookatfutures marketinabigger perspective--whatis

theroleforcommodityfutures inIndia's economy?InIndiaagriculturehastraditionallybeenanareawithheavygovernment

intervention.Governmentintervenesbytryingtomaintainbufferstocks,they

trytofixprices,andtheyhaveimport-exportrestrictionsandahostofother

interventions.Manyeconomiststhinkthatwecouldhavemajorbenefitsfrom

liberalization oftheagriculturalsector.

Inthiscase,thequestionarisesaboutwhowillmaintainthebufferstock,howwillwesmoothenthepricefluctuations,howwillfarmersnotbevulnerable

Benefitstoexchangemember

Why commodityfutures?


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thattomorrowthepricewillcrashwhenthecropcomesout,howwillfarmers

getsignalsthatinthefuturetherewill beagreatneedforwheatorrice.Inall theseaspects

thefutures markethas averybigroleto play.

Ifwethinktherewillbeashortageofwheattomorrow,thefuturespriceswill goup

today,anditwillcarrysignalsbacktothefarmermakingsowing decisions today.

Inthisfashion,asystemoffuturesmarketswillimprove cropping patterns.

Next,ifIamgrowingwheatandamworriedthatbythetimetheharvest

comesoutpriceswillgodown,thenIcansellmywheatonthefuturesmarket.Icansellmywhe

atataprice,whichisfixedtoday,whicheliminates

myriskfrompricefluctuations.Thesedays,agriculture requiresinvestments-

-Farmersspendmoneyonfertilizers,highyieldingvarieties,etc.Theyare

worriedwhenmakingtheseinvestmentsthatbythetimethecropcomesout

pricesmighthavedropped,resultinginlosses.Thusafarmerwouldliketo lockinhis

futurepriceand notbe exposedto fluctuations inprices.

Thethirdistheroleaboutstorage.TodaywehavetheFoodCorporationof

India,whichisdoingahugejobofstorage,andit,isasystem,which--inmy opinion--

doesnotwork.Futuresmarketwillproducetheirownkindofsmoothingbetweenthepresentandthefuture.Ifthefuturepriceishighand

thepresentpriceislow,anarbitrager willbuytodayand sell inthefuture.The

converseisalsotrue,thusifthefuturepriceislowthearbitrageurwillbuyin

thefuturesmarket.Theseactivitiesproducetheirown"optimal"bufferstocks, smooth

prices. They

alsoworkveryeffectivelywhenthereistradeinagriculturalcommodities;arbitrageursonthefuturesmarketwilluseimports and exports to smoothIndianprices using

foreignspot markets.

Intotality,commodityfuturesmarketsare apartandparcelofaprogramfor

agricultural liberalization.Many agricultureeconomistsunderstandtheneedof

liberalizationinthesector.Futuresmarketsareaninstrumentforachieving

thatliberalization.


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WHATMAKES COMMODITYTRADINGATTRACTIVE?

Agoodlow-riskportfolio diversifier

Ahighlyliquidassetclass,acting asacounterweighttostocks, bonds and

realestate.

Less volatile,comparedwith,equities and bonds.

Investors canleveragetheirinvestments and multiplypotential earnings.

Betterrisk-adjustedreturns.

Agoodhedgeagainstanydownturninequities or bonds as thereis

Littlecorrelationwithequityand bondmarkets.

Highco-relation withchanges ininflation.

No securities transaction taxlevied.

COMMODITY TRADING


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Commodity Trading in India is regulated by FMC headquartered at Mumbai; it

is a regulatory authority which is overseen by the Ministry of Consumer Affairs &

Public Distribution, Govt. Of India. It is a statutory body set up in 1953 under the

Forward Contract (Regulation) Act, 1952.

After Equity trading, commodity trading is going to be the next big thing for

investors. In India people have a love for Gold & Silver, trading is also going to pick

up in Gold & Silver. Globally, the commodity market is about three times the size of

equities trade market. In India, presently, the commodity market is still is the nascent

stage & is gradually picking up taking a cue from the global market.

NEED OF COMMODITY DERIVATIVES FOR INDIA:

India is among top 5 producers of most of the commodities, in addition to beinga major consumer of bullion & energy products. Agriculture contributes about 22% of

the GDP of Indian economy. It employees around 57% of the labor force on total of

163 million hectors of land. Agriculture sector is an imp factor in achieving a GDP

growth of 8-10%. All this indicates that India can be promoted as a major centre for

trading of commodity derivatives.

HISTORY OF THE DEVELOPMENT OF COMMODITY MARKETS


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It is widely believed that the futures trade first started about approximately

6,000 yrs ago in China with rice as a commodity. Futures trade first started in the 17th

century. In ancient Greece, Aristotle described the use of call options by Thales ofMiletus on the capacity of olive oil presses. The first organized futures market was the

Osaka Rice Exchange, in 1730.

Historically, organized trading in futures began in the US in the mid-19 th

century with maize contracts at the Chicago Board Of Trade (CBOT) & a bit later

cotton contracts in New York. In the first few yrs of COBT, weeks could go by without

any transaction taking place & even the weeks could go by without any transactiontaking place & even the provision of a daily free lunch did not entice exchange

members to actually come to the exchange! Trade took off only in 1856, when new

management decided that the mere provision of a trading floor was not sufficient &

invested in the establishment of grades & standards as well as nationwide price

information system. CBOT preceded futures exchanges in Europe.

In the 1840s Chicago had become a commercial centre since it had good

railroads & telegraph lines connecting it with the east. Around the same time good

agriculture technologies were developed in the area, which lead to higher wheat

production. Midwest farmers, therefore, used to connect to Chicago to sell their wheat

to dealers who, in turn, transports it to all over the country.

Farmers usually brought their wheat to Chicago hoping to sell at a good price. The

city had very limited storage facility & hence, the farmers were often left at the mercy

of the dealers. The situation changed for the better in 1848 when a central marketplace

was opened where farmers & dealers could meet to deal in CASH grain i.e. to

exchange cash for immediate delivery of wheat.

Farmers (sellers) & dealers (buyers) slowly started entering into contract for

forward exchanges of grain for cash at some particular future date so that farmers

could avoid taking the trouble of transporting & storing wheat (at very high costs) if

the price was not acceptable. This system was suitable to farmers as well as dealers.

Global Scenario:


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The farmer knew how much he would be paid for his wheat, & the dealer knew his

costs of procurement well in advance.

Such forward contracts became common & were even used subsequently as

collateral for bank loans. The contracts slowly got standardized on quantity &

quality of commodities being traded. They also began to change hands before the

delivery date. If the dealer decided he didnt want the wheat, he would sell the contract

to someone who needed it.Also, if the farmer didnt want to deliver his wheat, could

pass on his obligation to another farmer. The price would go up & down depending on

what was happening in the wheat market.

Slowly, even those individuals who had no intention of ever buying or selling

wheat began trading in these contracts expecting to make some profits based on their

knowledge of the situation in the market for wheat. They were called speculators. They

hoped to buy contracts at low price & sell them at high price or sell the contracts in

advance for high price & buy for lower price. This is how the future market in

commodities developed in US. The hedgers began to efficiently transfer their market

risk of holding physical commodity to these speculators by trading in future exchange.

History of trading in commodities in India dates back to several centuries. But

organized futures market in India emerged in 1875 when the Bombay Cotton Trade

Association was established. The futures trading in oilseed started in 1900 when

Gujarati Vyapari Mandali (todays NMCX, Ahmadabad) was established. The futures

trading in Gold began in Mumbai in 1920. During the 1sthalf of the 20th century, there

were many commodity futures exchanges, including the Calcutta Hessain Exchange

Ltd. that was established in 1927. Those exchanges traded in jute, pepper, potatoes,

sugar, turmeric, etc.However, Indias history of commodity futures market has been

turbulent. Options were banned on cotton in 1939 by the Government of Bombay to

curb widespread speculation. In mid-1940s, trading in forwards &futures became

difficult as a result of price control by Government. The Forward Contract Regulation

Act was passed in 1952. This put a regulatory guideline on forward trading. In 1960s,

Indian Scenario:


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the Government of India suspended forward trading in several commodities jute,

edible oil, seeds, cotton, etc. due to fears of increase in commodity prices. However,

the government offered to buy agricultural products at Minimum Support Price (MSP)

to ensure that the farmers benefited. The Government also managed storage,

transportation & distribution of agricultural products. These measures weakened the

agricultural commodity markets in India.

The Government appointed four committees (Shroff Committee in 1950,

Dantwala Committee in 1966, Khusro Committee in 1979 & Kabra Committee in

1993) to go into the regulatory aspects of forward & futures trading in India. In 1996,

the World Bank in association with United Nations Conference on Trade &

Development (UNCTAD) conducted a study on Indian Commodities Market.

In the post-liberalization era of the Indian economy, it was the Kabra

Committee & the World Bank-UNCTAD study that finally assessed the scope for

forward & futures trading in commodities markets in India & recommended steps to

revitalize futures trading.

RELEVANCE & POTENTIAL OF COMMODITY MARKETS IN INDIA


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Majority of commodities traded on global commodity exchanges are agri-based.

Commodity Markets therefore are of great importance & hold a great potential in case

of economies like India, where more than 65% of the population are dependent on

agriculture.

There is huge domestic market for commodities in India since India consumes a

major portion of its agricultural produce locally. Indian Commodities Market has an

excellent growth potential & has created good opportunities for market players. India

is Worlds leading producer of more than 15 agricultural commodities & is also the

worlds largest consumer of edible oils & gold. It has major markets in regions of

urban conglomeration (Cities & Towns) & nearly 7,500 + Agricultural Produce

Market Cooperative (APMC) mandis. To add to this, there is a network of over

27,000+ haats (Rural Bazaars) that are seasonal market places of various

commodities. These marketplaces play host to a variety of commodities every day. The

commodity trade segment employs nearly five million plus traders.

The potential of the sector has been well identified by the Central Government

& the State Government & they have invested substantial resources to boost

production of agricultural commodities. Many of these commodities would be traded

on the futures markets as food-processing industry grows at a phenomenal pace.

The Government also has recognized three national level commodity exchanges,

which are trading in more than 85 commodities at present, & the list continues to

expand. According to the experts in commodity markets, global trends indicate that the

volume in futures trading trends to be 5-7 times the size of commodities spot trading in

the country (Internationally, the multiple for physical versus derivatives is much higher

at 15-20 times). Many nationalized & private sector banks have announced plans to

disburse substantial amounts to finance commodity-trading business. The Government

of India has initiated several measures to stimulate active trading interest in

commodities. Steps like lifting the ban on futures trading in commodities, approving

new exchanges, developing exchanges with modern infrastructure & systems such as

online trading, & removing legal hurdles to attract more participants have increased

the scope of commodities derivatives trading in India. The trading volumes are


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increasing as the list of commodities traded on NCE also continues to expand. The

volumes are likely to surge further as a result of the increased interest from the

international participants in Indian Commodity Markets. If these international

participants are allowed to participate in the markets (like in case of capital markets),

the growth in commodity futures can be expected to be phenomenal. It is expected that

Foreign Institutional Investors (FIIs), mutual funds & banks may be able to participate

in commodity futures is also expected after the amendments to the FCR Act, 1952.

Commodity Trading & commodity financing are going to be a rapidly growing

business in the coming years in India.

With the liberalization of the Indian economy in 1991, the commodity prices

(especially international commodities such as base metals & energy) have been subject

to price volatility in international markets, since India is largely a net importer of such

commodities. Commodity derivatives exchanges have been established with a view to

minimize risk associated with such price volatility.

COMMODITY MARKETS ECOSYSTEM


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After studying the importance of commodity markets & trading in commodity

futures, it is essential to understand the different components of the commodity markets

ecosystem. The following illustration shows the different components in the commodity

markets ecosystem:

Thecommodity markets ecosystem includes the following components:

1)Buyers/Sellers or Consumers/Producers: Farmers, manufacturers,wholesalers, distributors, farmers co-operatives, APMC mandis, traders,

State Civil Suppliers Corporations, Importers, Exporters, Merchandisers,

Oil producing companies, etc.

2)Logistics Companies: Storage & transport Companies/operators, qualitytesting & certifying companies, etc.

3)Markets & Exchanges: Spot Markets (mandis, bazaars, etc.) &Commodity Exchanges (national & regional level)

4) Support Agencies: Depositories/de-materializing agencies, Central &State Warehousing Corporations & Private Sector Warehousing

Companies.

5)Lending Agencies: Banks & Financial Institutions.

The users are the producers & consumers of different commodities. They have


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exposure to the physical commodities market, thus, exposing themselves to price risk.

In turn, they depend on logistic companies for transportation of commodities,

warehouses for storage, & quality testing & certification agencies for assessment &

evaluation of commodity quality standards. Commodity derivatives exchanges provide

a platform for hedging against price risk for these users.

INDIAS PLACE IN WORLD MARKET

Logistic Companies

Testing & Certifying

Companies

Farmers & Farmers

Co-operatives

APMC Mandis

Traders

State Civil Suppliers

Cooperation

Central & State

Warehousing

Corporation

Private Sector

Warehousing

Companies

Spot Market

Commodity Market

Warehouse Receipt System

Lending Agencies

Users Support Agencies

Storage & Transport Requirements & Quality

Certification Requirements


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The following table shows the position of Indian Commodity Market in the

International Commodity Market with respect to certain significant commodities.

Commodity India World Share Rank

Rice(Paddy) 240 2049 11.17 3rd

Wheat 74 599 12.35 2nd

Pluses 13 55 23.64 1st

Groundnut 6 35 17.14 2nd

Rapeseed 6 40 15.00 3rd

Sugarcane 315 1278 24.65 2nd

Tea 0.75 2.99 25.08 1st

Coffee(Green) 0.28 7.28 3.85 8th

Jute & Jute

Fibers

1.74 4.02 43.30 2nd

Cotton(Lint) 2.06 18.84 10.09 3rd

WORKING OF COMMODITY MARKET


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There are two kinds of trades in commodities. The first is the spot trade, in

which one pays cash and carries away the goods. The second is futures trade. The

underpinning for futures is the warehouse receipt. A person deposits certain amount of

say, goods X in a warehouse and gets a warehouse receipt. Which allows him to ask

for physical delivery of the goods from the warehouse? But someone trading in

commodity futures need not necessarily possess such a receipt to strike a deal. A

person can buy or sale a commodity future on an exchange based on his expectation of

where the price will go. Futures have something called an expiry date, by when the

buyer or seller either closes (square off) his account or give / take delivery of the

commodity. The broker maintains an account of all dealing parties in which the daily

profit or loss due to changes in the futures price is recorded. Squiring off is done by

taking an opposite contract so that the net outstanding is nil.

For commodity futures to work, the seller should be able to deposit the

commodity at warehouse nearest to him and collect the warehouse receipt. The buyer

should be able to take physical delivery at a location of his choice on presenting the

warehouse receipt. But at present in India very few warehouses provide for specific

commodities.

Following diagram gives idea about working of the Commodity market.

Today Commodity trading system is fully computerized.

Traders need not visit a commodity market to speculate. With online commodity

trading they could sit in the confines of their home or office and call the shots.

The commodity trading system consists of certain prescribed steps or stages as

follows:

1. Trading:- At this stage the following is the system implemented --Order receiving

-Execution

-Matching

-Reporting

-Surveillance


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-Price limits

-Position limits.

2. Clearing: - This stage has following system in place -

-Matching

-Registration

-Clearing

-Clearing limits

-Notation

-Margining

-Price limits

-Position limits

-Clearing house.

3. Settlement: - This stage has following system followed as follows-

-Marking to market

-Receipts and payments

-Reporting

-Delivery upon expiration or maturity.

The future trading in commodities has emerged as a major investment option in India.

Commodity market performances are equal to that of the stock market and analysts

predict that the commodities market will overtake the capital market in trade volumes

sooner than later. But since commodities futures market is a relatively new entrant in

India, not many investors know how to tap and benefit from trading in various

commodities.

Here are 10 steps that you need to know to invest in commodities market.

Step 1: Locate a brokerage house with a reputation for service.

10 STEPS TO INVEST IN COMMODITY MARKET:


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Step 2: Fill a demat account opening form with a registered brokerage house and a

member with the national commodity exchanges. You could require PAN card,

address proof and passport size photos.

Step 3: Be clear of the rules and regulations especially transaction costs.

Step 4: Choose the right brokerage plan that optimizes your costs, brokerage fees

ranging from 0.03% to 0.08% on contract value.

Step 5: Be clear of the service deliverables from your broker.

Step 6: Insist on regular reports and special knowledge / training opportunities.

Step 7: Set aside funds for commodity investing, but remember not at the cost of other

traditional investing avenues.

Step 8: Focus on a few commodities, gather requisite knowledge and pay up the initial

amount for margin money, account opening charges and annual maintenance

charges.

Step 9: Clear any or all doubts now - set stop loss and book profit levels.

Step 10: Get ready for investing and track your success and losses all the time.

TRADING OF COMMODITY MARKET


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Money making is not a commodity, but commodity trading could earn you money!


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The future market in commodities offers both cash and delivery-based settlement.

Investors can choose between the two. If the buyer chooses to take delivery of the

commodity, a transferable receipt from the warehouse where goods are stored isissued in favour of the buyer. On producing this receipt, the buyer can claim the

commodity from the warehouse. All open contracts not intended for delivery are cash-

settled. While speculators and arbitrageurs generally prefer cash settlement,

commodity stockiest and wholesalers go for delivery. The option to square off the deal

or to take delivery can be changed before the last day of contract expiry. In the case of

delivery-based trades, the margin raises to 0-25% 0f the contract value and the seller

is required to pay sales tax on the transaction.

Trading in any contract month will open on the twenty first day of the month, three

months prior to the contract month. For example, the December 2004 contracts open

on 21 September 2004 and the due date is the 20-day of the delivery month. All

contracts settling in cash will be settled on the following day after the contract expiry

date. Commodity trading follows a T+1 settlement system, where the settlement date is

the next working day after expiry. However, in case of delivery-based traders,

settlement takes place five to seven days after the expiry.

Commodity investment can be done in a number of ways:

By investing in companies that produce commodities. Many investors alreadyhold shares in such companies or hold units in collective investment schemes

such as unit trusts which invest all or part of the fund assets into such

companies.

By purchasing, or selling, the commodities themselves on the spot market forimmediate delivery. This involves high transaction costs and is not a suitable

Investors choice:

Investing in Commodities:


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method of investment for individual investors.

By purchasing, or selling via the commodities exchanges for later delivery.Most trading in commodities is done through futuresand options. Taking

positions in individual commodities is essentially speculative and should only

be undertaken by professional investors who can afford to lose large sums of

money if things go wrong.

It seems an obvious statement but commodities make a return for investors if

price rise after purchase. They generate losses if prices fall. Unlike financial assets,

commodities offer no gain from interest income or dividends.

Absolute returns from stocks and bonds are definitely higher than pure

commodities. But commodity trading carries a lower downside risk than other asset

classes, as pricing in commodity future is less volatile compared to equities and bonds.

While the average annual volatility is 25-30% in benchmark equity indices like the

BSE Sensex or NSEs Nifty, it is 12-18% in gold, 15-25% in silver, 10-12% in cotton

and 5-10% in government securities.

According to study, if an investor had put his money only in silver and bonds

from 1997-2003,his absolute returns would have been above 24%. Commodities are

also good bets to hedge against inflation. Gold offers good protection against

exchange rate fluctuations, and in particular, against fluctuations in the value of the

US dollar against other leading currencies.

However, unlike stocks, commodity prices are dependent on their demand-

supply position, global weather patterns, government policies related to subsidies and

taxation and international trading norms as guided by the World Trade Organisation

(WTO).

Returns from Commodity trading:


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A soft interest rate regime and a weak US dollar have increased the demand for

the commodities. In a short span of over a year, online commodity markets are

witnessing good growth in India. The daily volume of trading of Rs.2500 crore at

NCDEX alone has surpassed that of Rs.2000 crore on the Bombay Stock Exchange

(BSE). It registered a record daily traded volume of Rs.2617 crore on 8 December

2004. Commodities like chana, urad, soya bean oil, sugar, pepper, mustard seeds and

wheat contributed to the balance trading volume. MCX, on the other hand, has

achieved a peak daily turnover of Rs.1889 crore. Though the most popular

commodities for trading in India are gold, silver, soya bean and guar gum, the market

is divided equally between bullion and agricultural commodities in terms of trading

volumes.

Expecting the turnover on the three online commodity exchanges to spurt to

Rs.10000 crore per day, banks are keen to tap the commodity trade-financing front.

Commercial banks are chasing the commodity industry with attractive lending rates

between 8% and 8.5% as against the normal lending rate between 11% and 14%.

On Aug. 01, 2009; 432 members (1,851 users) participated in trading and put through

more than 99,198 trades. The volume for the trading session till 02:00 p.m. was Rs.

26.68 billion (one-way). Active trades were high in among others Guar seed, Turmeric,

Chana, Rape Mustard seed and Soya oil. The daily turnover volume at the National

Commodity and Derivative Exchange (NCDEX) stood at Rs.39.39 billion (one- way).

There were 457 members (1,970 users) users participated in trading on Aug 3, 2009

up to 5:00 p.m. There were more than 93,638 trades put through by them. Active

trades were high among others Guar seed, Soya oil, Chana, Turmeric and Soybeans.

Growth of commodity trading:


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ADVANTAGES & DISADVANTAGES OF COMMODITY MARKETS.

Advantages:

The commodity markets try to integrate the fragmented rural markets. Multiple commodities can be procured at one centre. Efficient spot price can be discovered and disseminated. The bargaining power of the farmers would be increased. Transportation and warehousing facilities would be increased. There would be guarantees for trade and also payments.

Considering all these advantages, economic experts say that if the farmer and

the consumer are to be benefitted then future trading and spot trading in the rural

commodity markets should be encouraged.

Disadvantages:

Globally commodity markets are criticized for their part in indulging in

speculation and thus increasing the prices. Another major criticism is that the farm

gate price is very low when compared to the price paid by the consumer. Small

producers have no say in the market and traders dominate.


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STUDY ON SINGLE COMMODITY:

GOLD:


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GOLD

Goldis auniqueassetbasedon few basic characteristics.First, itis primarilya

monetaryasset,andpartlyacommodity.Asmuchastwothirdsofgoldstotal

accumulatedholdingsrelatetostoreofvalueconsiderations. Holdingsinthis category

include thecentralbankreserves,privateinvestments,andhigh- caratage

jewlleryboughtprimarilyindevelopingcountriesasavehiclefor savings. Thus, goldis

primarilya monetaryasset. Less thanonethirdofgolds total

accumulatedholdingscanbeconsideredacommodity,thejewellery

boughtinWesternmarkets foradornment,and goldusedinindustry.

The dis ti nc ti on b et w ee n gold an d co mm o d it ie s is important. Gold has

maintained its value in after-inflation terms over the long run, while commodities

havedeclined.

Some analystslike tothink ofgoldasacurrency withoutacountry.Itis an

internationallyrecognizedassetthatisnotdependentuponanygovernments promise

topay. This is an important feature when comparing gold to conventional

diversifierslikeT-billsorbonds,whichunlikegold,dohave counter-partyrisk.

Timeless and VeryTimelyInvestment

Goldis aneffectivediversifier

Goldis theidealgift

Goldis highlyliquid

Goldresponds when youneeditmost

Introduction

Whatmakes gold special?


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Thegoldmarketishighlyliquid.Goldheldbycentralbanks,other majorinstitutions,and retailjewelleryis reinvestedinmarket.

Dueto largestockofgold,againstitsdemand,itisarguedthatthecoredriveroftherealpriceofgoldisstockequilibriumratherthanflow

equilibrium.

Effectiveportfoliodiversifier:Thisphrasesummarizestheusefulnessof goldintermsofModernPortfolioTheory,astrategyusedbymany

investmentmanagerstoday. Usingthisapproach,goldcan beusedas a portfolio

diversifierto improveinvestmentperformance.

Effectivediversificationduringstressperiods:Traditionalmethodofportfoliodiversificationoftenfailswhentheyaremostneeded,thatis

duringfinancialstress(instability).Ontheseoccasions,thecorrelations and

volatilities of return for most asset class (including traditional diversifiers,

such as bond and alternative assets) increase, thus reducing

theintendedcushioningeffectofthediversified portfolio.

Market Characteristics


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Chinaproduced276metrictonsofgoldlastyear,equaltoabout9.7 millionounces,saidLondonpreciousmetalsconsultancyGFMSLtd.

That'sup12%fromtheyear-agoandrepresentedjustoverone-tenth oftheworld's

supply.

TherankingpushesSouthAfricaintosecondplace,thefirsttimetheGoldgianthaslostitstoprankingsince1905.SouthAfrica,whoslate

19thcentury goldrushledtothe foundingofminingheavyweightAnglo

AmericanPlcandishometoglobalproducersGoldFieldsLtdandAngloGoldAshantiLtd;sawitsproductiondecline8%to272metric tons.

Indiaisworldlargestgoldconsumerwithanannualdemandof800 tonnes.

Demand andSupplyofGoldinIndia(intonnes)

2006 2007 %chan eSu l MineProduction 573 580 1 NetProducerHed in -140 -129 -Totalminesu l 430 451 5O icialsectorsales 93 95 2Old oldScra 303 262 -13TotalSu l 826 808 2

DemandFabrication - - -

Jeweller 519 568 9

Industrial&Dental 111 112 1

Subtotalo above abrication 630 680 8 Bar&coinretail investment 89 116 31Otherretailinvestment -3 -5 -

ETFs and similar 113 36 -68TotalDemand 829 827 0

In erredInvestment -3 -19 -Source: GFMSLtd.

Demand and supply


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The return from investments in gold may be compared with the return on

investment inGovernment bonds in the Indian markets. Illustratively, if gold had been

purchased at end-February 1996 and sold at end-February 2002 at the prevailing

rates in the local bullion market,the average annualized return would work out to be

negative. On the contrary, investment in aliquid risk-free Government security on the

same date would have fetched a comfortable positivereturn, and in case capital gains

through marked to market is also taken into account, theannualized average return

could be as high as 15 per cent.

Plain22caratjewelleryisthecoreofconsumptionespeciallyintheruralareas,wheregoldissoimportantinjudgingafamily'sstatusata

marriage.Abasicmarriagesetfora brideistwoearrings,onenosepin, onering,one

necklaceand two bangles,allin22 caratgoldand weighing up to 200grams

(6.2oz).

Studded(i.e.gem-set)18caratjewelleryisincreasinglypopularinthe cities and isestimatedto haveused31tones (1million oz)in 2001.

Medallions,charmsandsmall giftitemsaccountforup tohalfofwhatislooselycalledjewellery.Theseitemsarepopularasgiftsatweddings and

otherfamilyevents.

Goldthread,knownasJariusedinhighqualitysariswornatweddings andspecialoccasionsrequiressomewhereintheregionof20tones (0.6m oz) annually.

Themarketishighlyfragmentedwithanestimated100,000workshopssupplyingover300,000 retailers, mostlyfamily-owned, single shop operations. The

Risk and Return on Gold Investments

IndianGoldJewelleryMarket


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industry isbeginningtobemodernizedwithlargefactories,installingthe

latestequipment,incenterssuchasMumbai, Ahmadabad andBangalore.

Hallmarking does notexistinIndiaandunder-caratageiscommonplace. TheBureauofIndianStandardshasintroducedavoluntaryschemewhich,a

lthoughnotyetwidelyused,isbecoming morepopular.Theminimum

legalcaratageis 9carat.

Thenumberofretailjewelleryoutletshasincreasedgreatlysincetheabolitionofgoldcontrol,ashasthenumberofIndianspossessinggoldjewellery.

FrequentlyAskedQuestionsonGold

Q1.Whatis Goldandwhyis its chemicalsymbolAu?


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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,isshortfortheLatinwordforgold,'Aurum',whichliterallymeans'GlowingDa

wn'.Ithasseveralpropertiesthathavemadeitveryusefulto

mankindovertheyears,notablyitsexcellentconductivepropertiesandits inabilityto

reactwithwateroroxygen.

Q2.Wheredoes thewordGoldcomefrom?

ThewordgoldappearstobederivedfromtheIndo-Europeanroot'yellow',

reflectingoneofthemostobviouspropertiesofgold.Thisisreflectedinthe similarities

ofthe word goldinvariouslanguages: Gold (English), Gold

(German),Guld(Danish), Gulden(Dutch),Goud(Afrikaans),Gull(Norwegian) and

Kulta(Finnish).

Q3.Howmuchgoldis thereintheworld?

Attheendof2001,itisestimatedthatallthegoldeverminedamountsto about

145,000tonnes.

Q4.Whyis goldmeasuredincarats?

ThisstemsbacktoancienttimesintheMediterranean/MiddleEast,whena carat

becameused asa measureofthepurityofgoldalloys(seenext

Question5).Thepurityofgoldisnowmeasuredalsointermsiffineness,i.e.

partsperthousand.Thus 18caratsis 18/24thof 1000parts=750fineness.

Q5.WhatisaCarat?


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ACarat(KaratinUSA&Germany)wasoriginallyaunitofmass(weight) based on the

CarobseedorbeanusedbyancientmerchantsintheMiddle

East.TheCarobseedisfromtheCaroborlocustbeantree.Thecaratisstill usedassuchfor

the

weightofgemstones(1caratisabout200mg).Forgold,ithascometobeusedformeasuringt

hepurityofgoldwherepuregold

isdefinedas24carats.Howandwhenthischangeoccurredisnotclear.It

doesinvolvetheRomanswhoalsousedthenameSiliquaGraeca(Kerationin

Greek,QiratinArabic,and nowCaratinmoderntimes)forthebeanoftheCarob

tree.TheRomansalsousedthenameSiliquaforasmallsilvercoin,which wasone-twenty-

fourthofthegoldensolidusofConstantine.Thislatterhada

massofabout4.54grammes,sotheSiliquawasapproximatelyequivalentin

valuetothemassof1Kerationor SiliquaGraecaofgold,i.e.thevalueof 1/24thofaSolidus

is about1Keration ofgold,i.e.1carat.

Q6.Whoowns mostgold?

Ifwetakenationalgoldreserves,thenmostgoldisownedbytheUSA followed

byGermanyandtheIMF.Ifweincludejewelleryownership,then

Indiaisthelargestrepositoryofgoldintermsoftotalgoldwithinthenational boundaries.In

termsofpersonalownership,itisnotknownwhoownsthe most, butis possiblya

memberofaruling royalfamilyintheEast.

Q7.Ifallthegoldwas laidaroundtheworld,howfarwoulditstretch?

Ifwemake allthegoldeverproducedintoathinwireof5microns(millionths

ofameter)diameterthefinestonecandrawagoldwire,thenallthegold

wouldstretcharoundthecircumferenceoftheworldanastounding72million times

approximately!


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Q8.Howmuchnewgold is producedperyear?

In2001,mineproductionamountedto2,604tonnesor67%oftotalgold

demandinthatyear. Goldproductionhasbeengrowingforyears,butthe real

accelerationtookplaceafterthelate1970s,whenoutputwasintheregionof1,500tpa.Thisy

earoutputwillfallshortofproductionlevelsin2001.Thisis

partlyforspecificoperationalreasonsatsomeofthelargermines(Grasberg

andPorgera),alongwithlowergradesatsomeoftheoperationsinNevada.

Thereductioninexplorationanddevelopmentexpenditureoverthepastfive

yearsisleadinganumberofanalyststosuggestthat,withotheroperations

nearingtheendoftheirlives,globalproductionislikelytodropslightlyoverthenexttwoto

threeyears subjectalwaysofcourseto price.

Q9.Howmuchdoes itcosttorunagold mine?

Goldminingisverycapitalintensive,particularlyinthedeepminesofSouth

Africawhereminingiscarriedoutatdepthsof3000metersandproposalsto mineeven

deeperat4,500metersarebeingpursued.Typicalminingcosts

areUS$238/troyouncegoldaveragebutthesecanvarywidelydependingon

miningtypeandore quality.Richeroresminedatthesurface(opencast

mining)isconsiderablycheapertominethanundergroundminingatdepth. Suchmining

requires expensive sinking ofshaftsdeepinto the ground.

Q10.Howdoesagoldminework?

Thegold-containingorehastobedugfromthesurfaceorblastedfromthe rock

faceunderground.This isthenhauledto thesurfaceand milledto release thegold.

Thegoldisthenseparatedfromtherock(gangue)bytechniques

suchasflotation,smeltedtoagold-richdorandcastintobars.Thesearethenrefinedtogold


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barsbytheMillerchlorinationprocesstoapurityof99.5%.Ifhigherpurityisneededorplatin

umgroupmetalcontaminantsare present,

thisgoldisfurtherrefinedbytheWohlwillelectrolyticprocessto

99.9%purity.Minetailingscontaininglowamountsofgoldmaybetreated

withcyanidetodissolvethegoldandthisisthenextractedbythecarbonin

pulptechniquebeforesmelting and refining.

Q12.Howbig isatonneof gold?

GoldistraditionallyweighedinTroyOunces(31.1035grammes).Withthe

densityofgoldat19.32g/cm3,atroyounceofgoldwouldhaveavolumeof1.64cm3.Atonneo

fgoldwouldthereforehaveavolumeof51,760cm3,whichwould be equivalentto

acubeofside37.27cm(Approx.1 3)?

GoldTerminology


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Forthepurposeofthis standard,thefollowing definitions shallapply:

Assaying:Themethodofaccuratedeterminationofthegoldcontentof thesampleexpressedinpartsperthousand(%).

Carat:One-twenty fourthpartbymass ofthemetallic elementgold. Fineness:Theratiobetweenthemassofgoldcontentandthetotal mass

expressedinpartsperthousand(%).

FindGold:Itisgoldhavingfineness999partsperthousand(5)andabovewithoutanynegativetolerance.

Gold:Themetallic elementgold,freefromanyotherelement. StandardGold:Goldhavingfineness995partsperthousand(%)and

abovewithoutany negativetolerance.

Grain:Oneoftheearliestweightunitsusedformeasuringgold.One grainisequivalentto 0.0648 grams.

Hallmark:Mark,ormarks,whichindicatetheproducerofagoldbar anditsnumber,fineness,etc.

Karat:Unitoffineness,scaledfromoneto24.24karatgold(orpuregold)hasatleast999partspuregoldperthousand;18-karathas750, partspuregoldand

250partsalloy,etc.

KiloBar:Abarweighingonekilogramapproximately32.1507troy ounces. Legal Tender: The coin or currency which the national monetary authority

declares to be universally acceptable as a medium of exchange;

acceptableforinstance inthedischargeofdebts.

Liquidity:Thequalitypossessedbyafinancialinstrumentofbeingreadilyconvertibleinto cash withoutsignificantloss of value.

Troy Ou n ce :A uni t ofw eig ht ,equaltoabout1.1avoirdupois(ordinary)ounces.Thewordounce

whenappliedtogoldrefers to atroy ounce.1troyounceis

equivalentto31.1034768grams.

MCX Contract specifications of gold:


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GOLD

Nameof Commodity Gold

TickerSymbol GLDPURMUMK

Trading System MCXTrading SystemTrading Period Mondayto Saturday

Trading Session Mondayto Friday: 10:00a.m.to 11:30p.m.

Saturday: 10:00a.m.to 2:00p.m.

TRADINGTrading Unit 1kg

PriceQuote Rs.Per 10 g, ex-Ahmadabad (inclusive of all

taxesandleviesrelatingtoimportandcustom duty, but

excluding sales tax/VAT, any other

additionaltaxorsurchargeonsalestax,local taxes and

Maximum ordersize 10kg

TickSize Re.1per10g(minimumpricemovement)

Dailypricelimit 3%

InitialMargin 4%

SpecialMargin Incaseofinitialvolatility,aspecialmarginatsuchpercentage(asdeemedfit),will beimposed

immediatelyonbothbuyandsellsideinrespect

ofalloutstandingpositions,whichwillremainin force

fornext2days,afterwhichthespecial marginwillberelaxed.

Maximum Allowable Forindividualclient: 2MT

Formemberscollectivelyforallclients:6MTor

15%ofthemarketposition, whicheveris high

DELIVERY

Delivery unit 1kg

Deliveryperiod margin 25%ofthevalueoftheopenpositionduringthe deliveryperiod


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Deliverycenter(s) AtdesignatedclearinghousefacilitiesofGroup4Securitas

atthese centers andatadditionaldelivery centers at

Chennai, New Delhi and Hyderabad.

DeliveryLogic Compulsory

SETTLEMENT PERIOD

Tender Period 1stto 6thdayofthecontractexpirymonth.

DeliveryPeriod 1stto 6thdayofthecontractexpirymonth.

Pay-inofcommodities

(deliverybyseller

member)

On any tender days by 6.00 p.m. except

Saturdays,Sundaysand Trading Holidays. Markingof

deliverywillbedoneonthetender daysbasedon

theintentionsreceivedfromthe

sellersafterthetradinghours.Onexpiryallthe open

p o s i t i o n s s h a l l b e m a r k e d f o r d e l i v e r y .

Deliverypay-inwillbeon E+1basis.

Pay-inof funds By 11.00a.m.on Tender day+1basis

Pay-outof fundsand

commodities (deliveryto

buyer member)

By 05.00p.m.on Tender day+1basis.

INFORMATIONRELATED TODELIVERY

DeliveryLogic Compulsory De l i v e r y . Any

s e l l e r ha v i ng o p e n positionontheexpirydatefailstodeli

verthen thepenaltyasperthepenalprovisionwillbe

imposedto thedefaulting seller.

ModeofCommunication FaxorCourier

Tender Period Margin 5%incremental marginforlast5daysonall outstanding

positions. Such margin will be

additiontoinitial,additionalandspecialmargin as

Marginduring delivery

period

25%on themarkedquantity.


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Exemption frommargin during

tenderand delivery

period

Marginisexemptedonreceiptofdocumentary evidence(viz.,

WarehouseReceiptandQuality

Certificate) of tendering delivery with the

Exchangeduring tenderdays.

Deliveryorderrate(DOR) Settlement/closingpriceontherespectivetenderdaysexceptonexpirydate.Onexpirydatethe delivery

orderrateshallbetheDueDateRate (DDR) and nottheclosing

price.

PenalProvision Apenaltyof2.5%ofDORwillbeimposedon

defaultingbuyer/selleroutofwhich2%will be

creditedtoIPFand0.5%willbecreditedtothe counter party.

Additionally,4%ofDORasareplacementcost

willbechargedfromdefaultingbuyer/sellerout

ofwhich90%willbegiventothecounterparty

and10%willberetainedbytheExchangeas administrative

DeliveryCenters AhmadabadandMumbaiatdesignatedClearingHousefacilit

iesofGroup4Securitasat these centers and at additional

delivery centers at Chennai,NewDelhiand Hyderabad

Deliverablegradeof

underlying commodity

Thesellingmemberstenderingdeliverywillhave the

optionofdeliveringsuchgradesasperthe

contractspecifications.Thebuyerhasnooption to select

apart icula rgrade andthedelivery offered by the seller

and allocation by the Exchangeshallbebinding on him.


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Verification bytheBuyer

atthetimeofrelease of

delivery

Atthetimeoftaking delivery,thebuyercan

checkhisdeliveryinfrontofGroup4personnel. If

heissatisfiedwiththequantity,weightand

qualityofmaterial,thenhewillissuereceiptofthemetals

instantly.Ifheis notsatisfied withthe metal,he

caninsistforassayingbyanyofthe

approvedassayersavailableatthatcenter.Ifthe

buyerchoosesforassaying,Group4personwill

carrythegoodstotheassayersfacilities,getit

assayedandbringitbacktoGroup4facilities along with

assayerscertificate.Iftheassayers certificate differs from

the certificate submitted by the seller in respect of

quality or weightmaterially, then the buyer and seller

have to mutually negotiate the final settlement proceeds

within 1 day from receipt of assayers 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 assayers facilities to and

fro will be borne 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 borne 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.


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Validation Process 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.

Delivery Process 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

sellers clearingagent and signing the same for

authorization, hand over the Pink slip to sellers 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 front of the selling members

clearing agent will Deposit the said metal into their vault.

Quality Adjustment 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


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Procedure of taking delivery

from the Vault

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, authorizing 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 authorized representative.

b. Name of the Commodity along with quantity. c. Name of

the Vault along with the location.

d. Signature of the authorized representative.

e. Proof of Identity viz. PAN card, driving license, Election

ID.

f. Photo identity proof duly attested by the

Member.

Taxes, duties, cess and levies Ex-Ahmadabad.

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.

Endorsement of delivery

order

The buyer member can endorse delivery order to a client

or any third party with full disclosure given to the

Exchange. Responsibility for contractual liability would be

with the original assignee.

Vault, Insurance and

Transportation charges

Borne by the seller till the date of pay-out of delivery and

the buyer after the date of pay-out.

Extension of delivery period As per Exchange decision due to a force majeure 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 Ahmadabad.

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.


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Applicability of Business

Rules

The general provisions of Byelaws, rules and

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 an 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, and 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.)

STEPSTOBEFOLLOWED FORDELIVERYIntention to takedelivery

bybuyers

Onanytender days by 6.00p.m.

Dissemination of

information on tendered

deliveryand buyers interest

The Exchange will informmembersthroughTWS

regardingtendernoticeanddeliveryintentionsof

thesellersmembersandthebuyersrespectively

by7.00p.m.ontherespectivetenderdaysand on Saturdays

by 1:00p.m.

Evidenceofstocks in

possession

Atthetimeofissuingdeliveryorder,theMember

mustsatisfytheExchangethatheholds stocksof

thequantityandqualityspecifiedintheDeliveryOrder at the

declared delivery center by producing warehousereceipt.

Tendernoticebyseller The sellerwillissuetendernoticealongwithevidence of

delivery to the Exchange in a

specifiedformatby6:00p.m.andonSaturdays by 12:00noon.

Buyers obligation Thebuyershallnotrefusetakingdeliveryand such

refusalwillentertainpenaltyasperthepenalprovision.

Allocation ofdelivery Aspertheclosingpriceontherespectivetender days.


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REGULATORY BODY

At present there are three tiers of regulations of forward/future trading system exists

in India, namely, Government of India, Forward Markets Commission & Commodity

Exchanges. The need for regulation arises on account of the fact that the benefits offutures markets accrue in competitive conditions. The regulation is needed to create

competitive condition. In the absence of regulation, unscrupulous participants could

use these leveraged contracts for manipulating prices. This could have undesirable

influence on spot prices, thereby affecting the interest of appropriate risk

management system. In the absence of such a system, a major default could create a

reaction. The reluctant financial crisis in a futures market could create systematicrisk. Regulation is also needed to ensure fairness & transparency in trading,

clearing. Settlement & management of exchange so as to protect & promote the

interest of various stakeholders, particularly non-member users of the market. Hence

there is a need of regulatory functions to be exercised by an exchange.

Ministry Of Consumers Affairs

FMC

Commodity Market


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FMC headquartered at Mumbai, is a regulatory authority which is overseen by

theMinistry Of Consumer Affairs & Public Distribution,Govt. of India.It is a

statutory body set up in 1953 under the Forward Contract (Regulation) Act, 1952.

The functions of the FMC are as follows:

1. To advise the Central Govt. in respect of the recognition or withdrawalrecognition from any association or in respect of any other matter

arising out of the administration of Forward Contract(Regulation) Act,

1952.

2. To keep forward markets under observation & to take such action inrelation to them, as it may consider necessary, in exercise of the powers

assigned to it by or under the Act.

3. To collect & whenever the commission thinks it necessary, to publishinformation regarding the trading conditions in respect of goods to

which any of the provisions of the act is made applicable, including

information regarding demand, supply & prices, & to submit to the

Central Government, periodical reports on the working of forward

markets relating to such goods.

4. To make recommendations generally with a view to improving theorganization 7 working of forward markets.

5. To undertake the inspection of the accounts & other documents of anyrecognized association or registered association or any member of such

association whenever it considers necessary.

Forward Market Commission


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ROLE OF GOVERNMENT IN COMMODITY MARKET

The Government, too, may enter the game. The Government of India reckons

that it could create a minimum support price like mechanism using commodity futuresby entering into contracts for purchase of commodities covered under its programme

at the prescribed minimum support price.

Union consumer affairs secretary Labanyendu Mansingh believes this will help

the Government save on procurement 7 shortage cost of food grains, estimated to cost

it close to Rs 25,000 crore annually. Mansingh believes the Government could ferret

back a part of these savings to farmers to help pay for the cost of delivering & storingfood grains from the farms exchange accredited warehouses.

In the process, the Government will minimize corruption in the grains

management operations, give a major boost to commodity futures trading & take the

farmers to the e-age. Legislative changes have been proposed to enable farmers to get

loans against the receipt for goods deposited at accredited warehouses. If those

proposals become law, then farmers could get finance, which would enable them toavoid distress sales of their produce at times of unfavorable market conditions.

With 45% of Indias GDP (or RS 11lakh crore) coming from commodities,

exchanges hope that eventually everyone involved in commodities trade across the

value chainfrom the farmer to the processorwill be hedging their positions using

futures. To encourage large companies to trade in commodity futures, NCDEX has set

up a network of 100 warehouses where commodities are graded & certified & wheresuch commodity balances can be held electronically in demat form. Already, around

1,500 depository participant accounts have been opened with 32 depository

participants. The exchanges tieing with other players to provide warehouses services

to the traders 7 now NCDEX is to built 1,100 warehouses with all the facilities.


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NATIONAL MULTI-COMMODITY EXCHANGE OF INDIA

NMCE is the 1stdemutualized, Electron Multi-Commodity Exchange in India.

NMCE was promoted by:

1.Neptune Overseas Ltd. (NOL)2. Central Warehousing Corporation (CWC)3.National Agricultural Co-operative Marketing Federation Of India

(NAFED)

4.National Institute Of Agricultural Marketing (NIAM)5. Gujarat Agro-Industries Corporation Ltd. (GAICL)6. Gujarat State Agricultural Marketing Board (GSAMB) (It got its

recognition in Oct 02)

7.NMCE facilitates electronic derivatives trading through robust & testedtrading platform, Derivatives Trading Settlement System (DTSS).

It is the only Commodity Exchange in the world to have received ISO9001:2000 certification from British Standard Institutions (BSI).

NMCE was the 1stcommodity exchange to provide trading facility through

internet, through VIRTUAL PRIVATE NETWORK (VPN).

NMCE follows best international risk management practices. The contracts are

marked to market on daily basis. The system of upfront margining based on value at

Riskis followed to ensure financial security of the market. In the event of highvolatility in prices, special intra-day clearing & settlement is held.

NMCE was the 1stto initiate process of dematerialization& electronic transfer

of warehoused commodity stocks.

The unique strength of NMCE is its settlement via Delivery Backed System, an

imperative in the commodity trading business. These deliveries are executed through

a sound & reliable Warehouse Receipt System, leading to guaranteed clearing &

settlement.


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NMCE would bring about the converge of large-scaleprocessors, traders

andfarmers along with banks. NMCE would provide a common ground for fixation of

future prices of a number of commodities enabling efficient price discovery / forecast.

In addition, hedging using different and diverse commodities would also be possible

with help of NMCE.

In short, NMCE is leading transition of highly fragmented, controlled and

restricted commodity economy to globally integrated, efficient and competitive

environment in the 21st

century.

On 25th

July, 2001, the NMCEIL has been granted in-principle approval by the

Government to organize futures trading in the edible oil complex. The exchange is

operationalised from November 26, 2002.

NMCES Vision & Mission.

National Multi-Commodity Exchange of India Limited is committed to provide

world class services of on-line screen Futures trading of permitted commodities and

efficient Clearing and guaranteed settlement, while complying with Statutory

/Regulatory requirements. We shall strive to ensure continual improvement of

customer services and remain quality leader amongst all commodity exchanges.

Continual Improvement in Customer Satisfaction. Improving efficiency of marketing through on-line trading in Dematerialization

form.

Minimization of settlement risks. Improving efficiency of operations by providing best infrastructure and latest

technology.

Rationalizing the transaction fees to optimum level. Implementing best quality standards of warehousing, grading and testing in

INFORMATION:

Vision

Mission


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tune with trade practices.

Improving facilities for structured finance. Improving quality of services rendered by suppliers. Promoting awareness about on-line features trading services of NMCE across

the length and breadth of the country.

Innovation is the way of life atNMCE


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MCX

MCX an independent and de-mutulised commodity exchange has permanentrecognition from Government of India for facilitating online trading, clearing and

settlement operations for commodity futures markets across the country. Key

shareholders of MCX are Financial Technologies (India) Ltd., State Bank of India,

Union Bank of India, Corporation Bank, Bank of India and Canara Bank.

Headquartered in Mumbai, MCX is led by an expert management team with

deep domain knowledge of the commodity futures markets. Through the integration ofdedicated resources, robust technology and scalable infrastructure, since inception

MCX has recorded many first to its credit.

Inaugurated in November 2003 by Shri Mukesh Ambani, Chairman &

Managing Director, Reliance Industries Ltd., MCX offers futures trading in the

following commodity categories: Agri Commodities, Bullions, Metals- Ferrous &

Non Ferrous, Pulses, Oils & Oilseeds, Plantations, Spices and other softcommodities.

MCX has built strategic alliances with some of the largest players in

commodities eco-system, namely Bombay Bullion Association, Bombay Metal

Exchange, Solvent Extractors Association of India, Pulses Importers Association and

Shetkari Sanghatana.

Today MCX is offering spectacular growth opportunities and advantages to alarge cross section of the participants including Producers / Processors, Traders,

Corporate, Regional Trading Centers, Importers, Exporters, Cooperatives, Industry

Associations, amongst others MCX being nationwide commodity exchange, offering

multiple commodities for trading with wide reach and penetration and robust

infrastructure, is well placed to tap this vast potential.


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Top Commodity futures traded across exchanges

Commodity Value of futures traded (Rs crore)

Guar seed 129,522.98

Silver 116,267.99

Soy oil 101,527.66

Gold 62,784.85

Mustard seed 19,422.46

Castor seed 14,327.34

Gaur gum 13,412.08

Pepper 8,334.28

Gur 7,891.49

Rubber 2

Crude oil 1,900.14

Cotton 779.16

Other metals 618.22

Jute

Sources: Forward Market Commission

SHOOTING STARS


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NATIONAL COMMODITY AND DERIVATIVES EXCHANGE LTD.

The NCDEX Commodity Index is an equal-weighted spot price index of 20

agricultural commodities covering different groups such as oils and oilseeds, fibres,

etc.

It is the first such index to be launched in India. Based on the components of the

spot price index, NCDEX also displays the national index futures-essentially, the no-

arbitrage price if one were to buy futures on the spot index. This price is derived by

tracking the futures prices of the index components at the same weightage as the spot

index. Currently, index futures are not allowed in India under the FCRA (Forward

Contracts Regulation Act, 1952), which requires compulsory physical settlement of

future contracts.

National Commodity & Derivatives Exchange Limited (NCDEX) is an online

commodity exchange based in India. It was incorporated as a private limited company

incorporated on April 23, 2003 under the Companies Act, 1956. It obtained its

certificate for Commencement of Business on May 9, 2003. It has commenced its

operations on December 15, 2003. NCDEX is a closely held private company which is

promoted by national level institutions and has an independent Board of Directors

and profes

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