An Empirical Study on Gold as a Commodity Derivative Essay Example

as an asset of the last resort and a hedge against inflation and currency depreciation. But most importantly, it has most often been treated as an investment due to the below reasons: lGold supply primarily comes from mine production, official sector sales of global central banks, old gold scrap and net disinvestments of invested gold. Out of the total supply of 3385. 8 tons last year, 59% was from mine production, 40% from old gold scrap and 1% from official sector sales1. Demand globally generate from fabrication (jewellery and other fabrication), bar hoarding, net producer hedging and implied investment.

Gold continues to occupy a prominent part in rural India economy and a significant part of the rural credit market revolves around bullion as security.India is the largest consumer of gold in the world accounting for more than 26. 25% of the total world demand annually due to the sustained rural buying and heavy demand from retail investors. According to unofficial estimates, India has more than 15000 tonnes of hoarded gold, which translates to around $200 billion.

Bullion trading in India received a major fillip. Government of India announced the changes in the gold policy in 1997 under export-import Policy (1997-2002). As per the policy, scheduled commercial banks are authorized by the Reserve Bank of India (RBI) to import gold and silver for sale in domestic market without an importer license or surrendering the Special Import License (SIL). Bullion is imported into India by banks and four designated trading agencies acting as canalizing agents and consignees for overseas suppliers, who in turn sell to domestic wholesale traders, fabricators, etc.The price risk is borne either by the fabricator or

the retail consumer.

The wholesale traders, fabricators and investors do not have any effective tool to hedge their price risk in gold/silver. India being the largest consumer of gold in the world, with minimal domestic supply, the demand is met mainly from imports. Above facts certainly make the gold study, investment in gold a good opportunity for generating revenue to the broking firm dealing in commodities trading (like Anagram stock holding corporation) in gold and other commodities.This study certainly discuss the various effecting gold price movements in commodity exchange especially MCX vis-a-vis comparing it with International prices of gold.

All the gold ever mined would easily fit under the Eiffel Tower, forming a cube of nearly 19 m each side. Annual gold production world wide is about US$90 billion and by far the one of the largest trading world commodity. Worldwide, gold mines produce about 2,554 tonnes in the year 2009 from the total supply of 3,890 tonnes which was sufficient to meet the demand of 3,386 tonnes (Figure1). Gold is mined in more than 125 countries around the world, with the large number of development projects in these countries expected to keep production growing well into the next century.

Currently, China is the largest gold producing country, followed by USSR, South Africa, Uzbekistan, Indonesia, Papua and others. Mine production provides the lion's share of gold supplied to the market each year – 66% but recycled gold – gold scrap – accounts for 2/5th, with the sales of gold by central banks and similar organizations making a balance of 1%. India is also the largest importer of the yellow metal; in 2008, India imported around 400 tonnes of

gold. Gold Fabrication for domestic and international market also formed large part of business in India with 375 tonnes of gold fabricated in India in 2009, making world largest fabricator which is 17% of the total world gold fabrication.

Some of the Indian gold mines are Deccan gold mine, Hutti gold mines, Bharat gold mines, Kolar, Gadag and many more. Demand and Consumption of Gold Demand for Gold for the year of 2010 will be underpinned by the following market forces: l The largest source of demand is the jewelry industry. In recent years, demand from the jewelry industry alone has exceeded Western mine production.

This shortfall has been bridged by supplies from reclaimed jewelry and other industrial scrap, as well as the release of official sector reserves.Gold's workability, unique beauty, and universal appeal make this rare precious metal the favorite of jewelers all over the world3. Because of the softness of pure (24k) gold, it is usually alloyed with base metals for use in jewelry, altering its hardness and ductility, melting point, color and other properties. Alloys with lower cartage, typically 22k, 18k, 14k or 10k, contain higher percentages of copper, or other base metals or silver or palladium in the alloy. Copper is the most commonly used base metal, yielding a redder color.

Eighteen-carat gold containing 25% copper is found in antique & Russian jewelry.It has a India and China will continue to provide the main thrust of overall growth in demand, particularly for Gold jewellery, for the remainder of 2010. A report recently published by The People's Bank of China and five other organizations to foster the development of the domestic gold market will add

impetus to the growth in gold ownership among Chinese consumers. l Retails investment will continue to be a substantial source of gold demand in Europe. The largest contribution of the demand of gold came from the ETF segment of investment demand in Q2 2010.

Gold produced from different sources and demanded for consumption in form of Jewellery, Industrial applications, Government ; Central bank investment and Private investors. Total of world gold produced is mostly consumed by different sectors such as Jewellery (52%), Industrial ; Dental application (11%) and rest of gold is used as investment purpose i. e. , (37%).

Considering the situation in India, the demand for gold consumption is far more ahead than its availability through production, scrap or recycled gold. India is the world's largest consumer of gold, as Indians buy about 25% of the world's gold, purchasing approximately 800.