tradersinvestors perspective on commodity market

7/30/2019 TradersInvestors Perspective on Commodity Market

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Table of Contents

LIST OF TABLES .............................................................................................................. 4

LIST OF FIGURES ............................................................................................................ 5

EXECUTIVE SUMMARY ................................................................................................. 6

PARTI GENERAL INFORMATION ............................................................................ 7

CHAPTER-1 ....................................................................................................................... 7

OVERVIEW OF COMMODITY MARKET..................................................................... 7

1.1 DEFINITION .............................................................................................................. 81.2 COMMODITY MARKET........................................................................................... 81.3 HISTORY ................................................................................................................... 91.4 DEFINITION OF AN EXCHANGE.......................................................................... 101.5 COMMODITY EXCHANGES IN INDIA ................................................................. 101.6 PARTICIPANTS IN DERIVITIVES MARKET........................................................ 141.7 REGULATORY FRAMEWORK .............................................................................. 191.8 STRUCTURE OF COMMODITY MARKET ........................................................... 23

CHAPTER 2 ...................................................................................................................... 24

INDUSTRY PROFILE ..................................................................................................... 24

2.1 EVOLUTION OF COMMODITIES MARKET ........................................................ 25

2.2 EVOLUTION OF COMMODITIES TRADING IN INDIA....................................... 252.3 HEDGING ................................................................................................................ 28

CHAPTER 3 ...................................................................................................................... 29

BULLION MARKET ....................................................................................................... 29

3.1 INTRODUCTION ..................................................................................................... 303.2 GOLD AN INVESTMENT AVENUE ...................................................................... 323.3 INTRODUCTION OF GOLD ................................................................................... 323.4 OVERVIEW ............................................................................................................. 333.5 HISTORY OF GOLD IN INDIA ............................................................................... 343.6 GOLD AND ITS BULL RUN ................................................................................... 343.7 MINE PRODUCTION .............................................................................................. 353.8 INDIA ....................................................................................................................... 363.9 MARKET MOVING FACTORS FOR GOLD IN INDIA .......................................... 363.10 FACTORS THAT MAY CAUSE THE PRICES OF GOLD TO INCREASE .......... 373.11 MAJOR TRADING CENTERS OF GOLD ............................................................. 373.12 SILVER PROFILE .................................................................................................. 383.13 SALIENT CHARACTERISTICS ............................................................................ 383.14 GRADING OF SILVER .......................................................................................... 383.15 PRODUCTION OF SILVER IN INDIA .................................................................. 403.16 INDIAN SILVER MARKET ................................................................................... 41

3.17 MARKET INFLUENCING FACTORS FOR INDIA .............................................. 41


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PART - 2 PRIMARY STUDY .......................................................................................... 43

CHAPTER 4 ...................................................................................................................... 43

INTRODUCTION OF THE STUDY ............................................................................... 43

4.1 LITERATURE REVIEW .......................................................................................... 44

4.2 BACKGROUND OF THE STUDY ........................................................................... 454.3 STATEMENT OF PROBLEM .................................................................................. 464.4 PURPOSE OF THE STUDY ..................................................................................... 464.5 RESEARCH OBJECTIVES ...................................................................................... 464.6 SIGNIFICANCE OF THE STUDY ........................................................................... 474.7 HYPOTHESIS .......................................................................................................... 47

CHAPTER 5 ...................................................................................................................... 48

RESEARCH METHODOLOGY ..................................................................................... 48

5.1 RESEARCH DESIGN ............................................................................................... 49

5.2 SOURCES OF DATA ............................................................................................... 495.3 METHODS OF DATA COLLECTION ..................................................................... 495.4 POPULATION .......................................................................................................... 505.5 SAMPLE DESIGN .................................................................................................... 505.6 DATA COLLECTION INSTRUMENT .................................................................... 50

CHAPTER-6 ..................................................................................................................... 52

DATA ANALYSIS AND INTERPRETATION ............................................................... 52

6.1 ANALYSIS AND INTERPRETATION OF THE PRIMARY RESEARCH .............. 536.2 ANALYSIS OF SURVEY ......................................................................................... 546.3 HYPOTHESIS TESTING ......................................................................................... 67

CHAPTER-7 ..................................................................................................................... 76

RESULTS AND FINDINGS ............................................................................................. 76

7.1 FINDINGS AND RESULTS ..................................................................................... 77

CHAPTER-8 ..................................................................................................................... 80

LIMITATIONS OF THE STUDY .................................................................................... 80

8.1 LIMITATIONS ......................................................................................................... 81

CHAPTER-9 ..................................................................................................................... 82

CONCLUSIONS / SUGGESTIONS ................................................................................. 82

9.1 SUGGESTIONS........................................................................................................ 839.2 CONCLUSION ......................................................................................................... 83

APPENDIX AND ANNEXURE........................................................................................ 85

ANNEXURE-I ................................................................................................................ 85ANNEXURE-II ............................................................................................................... 89ANNEXURE-III ............................................................................................................. 90

REFERENCES .................................................................................................................. 91


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LIST OF TABLES

Table

No. Table Title

Page

No.

1 Commodities Traded in MCX 122 Commodities Traded in NCDEX 12

3 Measurement Weight Conversion Table 32

4 Silver Grading 37

5 Demographic Profile or Characteristics of the Respondents 52

6 Respondents Investing in Commodity Market 53

7 Risk Perception about Commodity Market 54

8 Volatility Perception for Various Commodities 54

9 Factors Affecting Volatility in the Market 56

10 Sources of Information Influences for Trade in Commodities 5711 Purpose for Investment 59

12 Savings Invested in Commodity Market 59

13 Expected Return from Commodity Market 60

14 Association with the Market 61

15 Preferred Commodities 62

16 Types of Deals 63

17 Different Brokers 64

18 Statements of Commodity Market 65

19 Age * Risk Perception about Commodity Market 66

20 Education * Risk Perception about Commodity Market 67

21 Annual Income * Risk Perception about Commodity Market 68

22 Profession * Risk Perception about Commodity Market 69

23Traders or Investors Volatility Perception forVarious Commodities and their Association with the Market 70

24 Impact of the Factors Affecting Volatility of the Commodity Market 71

25Sources of Information that InfluencesRespondents Decision to Trade 73

26 Global Commodities Derivatives Exchanges 88

27 Development of Commodity Futures Exchanges 89


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LIST OF FIGURES

Figure No. Figure Title Page No.

Figure 1 Types of Contracts 15Figure 2 Structure of Commodity Market 22

Figure 3 Mine Production of Gold in 2011 34

Figure 4 Risk Perception about Commodity Market 54

Figure 5 Volatility Perception for Various Commodities 55

Figure 6 Factors Affecting Volatility in the Market 56

Figure 7 Sources of Information 58

Figure 8 Purpose for Investment in Commodity Market 59

Figure 9 Savings Invested in Commodity Market 60

Figure 10 Expected Return from Commodity Market 61Figure 11 Association with the Market 61

Figure 12 Preferred Commodities 62

Figure 13 Types of Deals 63

Figure 14 Different Brokers 64


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EXECUTIVE SUMMARY

In this report we would try and look what are commodity markets, how they function and all

about commodities and traders and investors risk perception about the commodity market.

For this the report is divided in two sections. In the first section, we would see what is

commodity & why is there need for commodities markets, what are the different

factors that affect the commodity prices, we would see what are commodities markets

and what are different types of commodities traded on exchanges. In this section we will

also look at the different commodity exchanges in India and the commodities

traded there. We would also look at the functioning of commodities market. Wewould see how the commodities are traded in commodity exchanges, how the

delive ry o f co mmodit ies is do ne a nd how the issue s re lated to quality of assets and

warehousing of commodity are carried out. We would also see the price trends of various

commodities traded on NMCE. We would see the regulatory frame work for commodities

market.

In the second section, we would see the risk perception about the commodity

market and its impact on different commodities. We would also see types of

trading done by different traders to earn high returns in commodity market. We

would see which sources of information influence traders or investors in

commodity market. We would also see the different factors affecting the

commodity market.

The experience that I gathered from this project report over the two semesters has certainly

provided the orientation, which I believe will help me in shouldering any responsibility in

future.


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PARTI GENERAL INFORMATION

CHAPTER-1

OVERVIEW OF COMMODITY MARKET


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1.1 DEFINITION

A commodity derivative derives its value from an underlying asset, which is necessarily a

commodity. Commodities, in simple words are any goods that are common and unbranded.

Gold, silver, rubber, pepper, jute, wheat, sugar, cotton etc., are some of the common

commodities. For e.g. apple juice can be a commodity whereas the Real apple juice cannot

be called a commodity. One may be surprised to know that in the US commodities markets

there are futures available even on cattle.

Commodity includes all kinds of goods. FCRA defines "goods" as "every kind of movable

property other than actionable claims, money and securities". Futures' trading is organized in

such goods or commodities as are permitted by the Central Government. At present, all goodsand products of agricultural (including plantation), mineral and fossil origin are allowed for

futures trading under the auspices of the commodity exchanges recognized under the FCRA.

The national commodity exchanges have been recognized by the Central Government for

organizing trading in all permissible commodities which include precious (gold & silver) and

nonferrous metals; cereals and pulses; ginned and unpinned cotton; oilseeds, oils and

oilcakes; raw jute and jute goods; sugar and Gur; potatoes and onions; coffee and tea; rubber

and spices, etc.

Commodities market essentially represents another kind of organized market just like the

stock market and the debt market. However, commodities market, because of its unique

nature lends to the benefits of a wide spectrum of people like investors, importers, exporters,

producers, corporate etc.

1.2 COMMODITY MARKET

Commodity markets are markets where raw or primary products are exchanged. These raw

commodities are traded on regulated commodities exchanges, in which they are bought and

sold in standardized contracts.

This article focuses on the history and current debates regarding global commodity markets.

It covers physical product (food, metals, and electricity) markets but not the ways that

services, including those of governments, nor investment, nor debt, can be seen as a

commodity. Articles on reinsurance markets, stock markets, bond markets and currency


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markets cover those concerns separately and in more depth. One focus of this article is the

relationship between simple commodity money and the more complex instruments offered in

the commodity markets.

1.3 HISTORY

Commodity futures trading has been first recorded in the 17thcentury in Japan. The futures

trading was basically done with the seasonal agricultural products so as to ensure their

continuous supply all the year around. Japanese merchants used to store rice in the

warehouses for their future use and used to sell receipts against such stored rice. These

receipts were called as rice tickets which then eventually became the basis for their

commercial currency. The rules which were established during this time for trading these rice

tickets are similar to the rules set for American futures trading. In the United States, the

commodity futures trading first started in the middle of the 19th century with the help of the

Chicago Board Of Trade set up in the year 1848.Gradually then about 10 commodity

exchanges were set up with a wide variety of agricultural products being traded.

Commodity derivative market first started in India in cotton in the 1875 and in the oilseeds in

1900 at Bombay. Forward trading in raw jute and jute goods started at Calcutta in the year

1912. But however, within few years of their establishment, the forwards trading in these

commodities was banned in the year 1960. Recently, in the year 2003, such ban on trading

was lifted and the trading in commodity futures was started. Permission was given to

establish online multi-commodity exchange in order to facilitate trading. The long period of

prohibition of forward trading in major commodities like cotton and oilseeds complex has an

enduring impact on the development of the commodity derivative markets in India and the

futures market in commodities find themselves left far behind the derivative markets in thedeveloped countries, which have been functioning uninterruptedly. Thus, today the challenge

before the commodity markets is to make up for the loss of growth and development during

the three decades of government policies, which had the effect of restricting the growth of the

derivative markets.


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1.4 DEFINITION OF AN EXCHANGE

A futures or derivatives exchange is defined as a trading forum that links a central

marketplace, where all those with buying and selling interests in a product designed to permit

the shifting risk can meet, with a mechanism (such as clearing house), for intermediating,

validating, and enhancing the credit of anonymous counterparts. Key to a successful

exchange is the efficient transfer of risk among the exchange participants. This requires

efficient trading systems, settlement and clearing mechanisms, membership structures and

viable products.

What is Exchange?

A commodities exchange is an exchange where various commodities and derivatives

products are traded. Most commodity markets across the world trade in agricultural products

and other raw materials (like wheat, barley, sugar, maize, cotton, cocoa, coffee, milk

products, pork bellies, oil, metals, etc.) and contracts based on them. These contracts can

include spot prices, forwards, futures and options on futures. Other sophisticated products

may include interest rates, environmental instruments, swaps, or ocean freight contracts. Steel

contracts started to be traded for the first time on the London Metal Exchange in 2008.

1.5 COMMODITY EXCHANGES IN INDIA

Commodity exchanges are places which trade in particular commodities, neglecting the trade

the trade of securities, stock index futures and options etc. Exchanges are the centralized

places which provide a platform for both the buyers and the sellers to meet, set quality

standards and establish the rules of businesses. Commodity exchanges in India plays an

important role as it offers a tool for efficient risk management and price transparency.

In India, there are about 25 recognized regional exchanges (Annexure-1- List of all the

Regional Commodity Exchanges), of which three are national level multi-commodity

exchanges. These three national level multi-commodity exchanges are,

National Commodity and Derivative Exchange Limited( NCDEX)

Multi-Commodity Exchange Of India( MCX)

National Multi-Commodity Exchange Of India Limited ( NMCEIL)


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All the above exchanges have been set up under the overall control of Forward Market

Commission of Government of India. The other 22 exchange are given below.

National Commodity & Derivative Exchange Limited (NCDEX)

National Commodity & Derivative Exchange Limited (NCDEX) located in Mumbai is a

public limited company incorporated on April 23, 2003 under the Companies Act, 1956 and

had commenced its operations on December 15, 2003. This is the only commodity exchange

in the country promoted by the national level institutions. It is promoted by ICICI Bank

Limited, Life Insurance Corporation of India (LIC) , National Bank for Agriculture and Rural

Development (NABARD) and National Stock Exchange (NSE) .It is a professionally

manages online multi- commodity exchange. NCDEX is regulated by Forward Market

Commission and is subject to various law of land like the Companies Act, Stamp Act,

Contracts Act, Forward Commission (Regulation) Act and various other legislations.

Multi Commodity Exchange of India Limited (MCX)

Multi Commodity Exchange is headquartered in Mumbai and is an independent, de-

mutualised exchange with the permanent recognition from Government of India. 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. MCX facilitates online

trading, clearing and settlement operations for commodity futures market across the

country.MCX started offering trade in November 2003 and has built strategic alliances with

Bombay Bullion Association, Bombay Metal Exchange, Solvent Extractors Association of

India, Pulse Importers Association and Shetkari Sanghatana.

National Multi-Commodity Exchange of India Limited (NMCEIL)

National Multi-Commodity Exchange of India Limited (NMCEIL) is the first de-mutualised,

Electronic Multi-commodity Exchange in India. On 25 th July, 2001, it was granted approval

by the government to organize trading in the edible oil complex. It has been operationalised

from November 26 2002. It has been supported by Central Warehousing Corporation Ltd.

Gujarat State Agricultural Marketing Board and Neptune Overseas limited. It has got itsrecognition in October 2002.


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The other 22 exchanges include are as follows:

1. Bhatinda Om & Oil Exchange Ltd., Bhatinda.

2. The Bombay Commodity Exchange Ltd.Mumbai

3. The Rajkot Seeds oil & Bullion Merchants` Association Ltd

4. The Kanpur Commodity Exchange Ltd., Kanpur

5. The Meerut Agro Commodities Exchange Co. Ltd., Meerut

6. The Spices and Oilseeds Exchange Ltd.

8. Ahmedabad Commodity Exchange Ltd.

8. Vijay Beopar Chamber Ltd., Muzaffarnagar

9. India Pepper & Spice Trade Association. Kochi

10. Rajdhani Oils and Oilseeds Exchange Ltd. Delhi

11. National Board of Trade. Indore.

12. The Chamber Of Commerce, Hapur

13. The East India Cotton Association Mumbai.

14. The Central India Commercial Exchange Ltd, Gwalior

15. The East India Jute & Hessian Exchange Ltd,

16. First Commodity Exchange of India Ltd, Kochi

18. Bikaner Commodity Exchange Ltd., Bikaner

18. The Coffee Futures Exchange India Ltd, Bangalore.

19. Esugarindia Limited.

20. Surendranagar Cotton oil & Oilseeds Association Ltd,

21. Haryana Commodities Ltd., Hissar

22. e-Commodities Ltd.


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COMMODITIES TRADED IN THE DIFFERENT EXCHANGE

MCX:-

Table 1

Commodities Traded in MCX

Gold, Gold M, Gold HNI, Silver, Silver M, Silver HNI

Castor Seeds, Soy Seeds, Castor Oil, Refined Soy Oil, Soymeal, RBD

Palmolein, Crude Palm Oil, Groundnut Oil, Mustard Seed, Mustard Seed

Oil, Cottonseed Oilcake, Cottonseed

Pepper, Red Chilli, Jeera, Turmeric

Steel Long, Steel Flat, Copper, Nickel, Tin

Kapas, Long Staple Cotton, Medium Staple Cotton

Chana, arad, Yellow Peas, Tur

Rice, Basmati Rice, Wheat, Maize, Sarbati Rice

Crude Oil

Rubber, Guar Seed, Gur, Guargum Bandhani, Guargum, Cashew Kernel,

Guarseed Bandhani

NCDEX:-

Table 2 Commodities Traded in NCDEXArabica Coffee Cashew

Medium Staple Cotton Mulberry Green Cocoons

Castor Seed Chana

Chilli Common Raw Rice

Common Parboiled Rice Crude Palm Oil

Cotton Seed Oilcake Expeller Mustard Oil

Grade A Parboiled Rice Grade A Raw Rice


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Agro Products

Guar gum Guar Seeds

Gur Jeers

Jute Sacking Bags Lemon Tur

Long Staple Cotton Maharastra Lal TurMulberry Raw Silk Mustard Seed

Pepper Raw Jute

RBD Palmolein Refined Soy Oil

Robusta Coffee Rubber

Sesame Seeds Soyabean

Yellow Soybean Meal Sugar

Turmeric UradWheat Yellow Peas

Yellow Red Maize

Base Metals

Mild Steel Ingots

Bullion

Gold, Silver

1.6 PARTICIPANTS IN DERIVITIVES MARKET

Participants who trade in the commodity market can be classified under three broad

categories namely, Hedgers, Speculators and Arbitragers. These can be discussed as

follows

HEDGERS:

A hedger is a person who enters the derivatives market to lock-in their prices to avoid

exposure to adverse movements in the price of an asset. While such locking may not be

extremely profitable the extent of loss is known and can be minimized. They are in the

position where they face risk associated with the price of an asset. They use derivatives to

reduce or eliminate risk.


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As an example of a hedger, you might be a large corn farmer wanting to sell your product at

the highest possible price. However, unpredictable weather may create risk, as well as excess

supply that could drive prices down. You could take a short position in corn futures, and if

prices fall, you could then buy back the futures at a lower price than you previously had sold

them. This would help you offset the loss from your cash crop and help minimize your risk.

Of course, if prices rose, you'd lose money on the futures transaction, but the idea is to use

futures as a hedge.

A perfect hedge is almost impossible. While hedging Basis risk could arise. Basis = Spot

price of asset to be hedgedFutures price of the contract used. Basis risk arises as a result of

the following uncertainties. The exact date when the asset will be bought or sold may not be

known. The hedge may require that the futures contract be closed before expiration.

SPECULATORS:

Speculators are those people who participate in the market for the profits and are ready to

face the risk involved in the market. A speculator can be anyone from an individual who has

a small surplus income to treasury desks of banks and corporate.

ARBITRAGEURS:

Arbitrageur are the market participants who make profit using price differences in two

different markets without exposing oneself to any type of risk. Arbitraging is a very

profitable business. It is possible to arbitrage between two different future markets or

between the futures market and the spot market. However, in an efficient market arbitraging

is not possible, because any price gap is closed immediately as soon as the arbitragers enter

the market.

All the market participants use commodity futures to hold a position in the market to achieve

a pre-determined objective. Commodity futures are a type of derivative contract. So, in order

to understand what commodity futures are? It is important to know what derivatives are:


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DERIVATIVES:-

A derivative contract is enforceable agreement whose value is derived from the underlying

asset; the underlying asset can be a commodity, precious metal, currency, bond, stock, or

indices. Four most common examples of derivative instruments are forwards, futures, optionsand swaps/ spreads.

Figure 1 Types of Contracts

TRADING INSTRUMENTS:-

Derivatives in the times have become very popular because of their wide application. The

most common types of derivative instruments are

Forward contracts

Future contracts

Swaps

Warrants

Contracts/ Agreements

Cash Derivatives

Forward Others like SWAPS, FRA

MerchandizeCustomized Futures Options


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FORWARD CONTRACTS:-

A forward contractor forwardis an OTC derivative. A forward contract is an

agreement between two parties to buy or sell an asset at a specified point of time in the

future. The price of the underlying instrument, in whatever form, is paid before control of the

instrument changes. This is one of the many forms of buy/sell orders where the time of trade

is not the time where the securities themselves are exchanged.

The forward price of such a contract is commonly contrasted with the spot price, which is the

price at which the asset changes hands on the spot date. The difference between the spot and

the forward price is the forward premium or forward discount, generally considered in the

form of a profit or [loss] by the purchasing party. This process is used in financial operations

to hedge risk, as a means of speculation, or so as to allow a party to take advantage of a

quality of the underlying instrument which is time-sensitive.

FUTURES CONTRACT:-

A futures contract is an agreement between two parties to buy or sell an asset at a certain

time in the future at a certain price. The futures contracts are standardized and exchange

traded. To facilitate liquidity in the futures contracts, the exchange specifies certain standard

features of the contract. It is a standardized contract with standard underlying instrument, a

standard quantity and quality of the underlying instrument that can be delivered, (or which

can be used for reference purposes in settlement) and a standard timing of such settlement.

The future date is called the delivery date or final settlement date. The pre-set price is called

the futures price. The price of the underlying asset on the delivery date is called the

settlement price.

A futures contract may be offset prior to maturity by entering into an equal and opposite

transaction. More than 99% of futures transactions are offset this way. The both parties of a

"futures contract" must fulfill the contract on the settlement date. Futures can be thought of as

forwards that are transferable, standardized, and designed to reduce the probability of, and

costs of, a default. The futures market was developed to solve the problems existing in the

forwards market.


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SWAPS:-

Swaps were developed as a long-term risk management instrument available on the over-the

counter market. Swaps are private agreements between two parties to exchange cash flows in

the future according to a pre-arranged formula. These agreements are used to manage risk in

the financial markets and exploit the available opportunity for arbitrage in the capital market.

The swaps market offers several advantages like, these agreements are undertaken privately

while transactions using exchange traded derivatives are public. Since the swaps products are

not standardized, the counter parties can customize cash-flow streams to suit their

requirements.

WHAT COMMODITIES MARKET OFFERS:-

For an investor, commodities futures represent a good form of investment because of

the following reasons.

High Leverage The margins in the commodity futures market are less than the

F&O section of the equity market.

Less Manipulations - Commodities markets, as international price movements

govern them are less prone to rigging or price manipulations.

Diversification The returns from commodities market are free from the direct

influence of the equity and debt market, which means that they are capable of being

used as effective hedging instruments providing better diversification.

For an importer or an exporter, commodities futures can help them in the following

ways

Hedge against price fluctuations Wide fluctuations in the prices of import or

export products can directly affect their bottom-line as the price at which they

import/export is fixed beforehand. Commodity futures help them to procure or sell the

commodities at a price decided months before the actual transaction, thereby ironing

out any change in prices that happen subsequently.


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For producers of a commodity, futures can help as follows:

Lock-in the price for your produce For farmers, there is every chance that the

price of their produce may come down drastically at the time of harvest. By taking

positions in commodity futures they can effectively lock-in the price at which they

wish to sell your produce

Assured demand Any glut in the market can make them wait unendingly for a

buyer. Selling commodity futures contract can give them assured demand at the time

of harvest.

For large-scale consumers of a product, here is how this market can help them:

Cost Control For an industrialist, the raw material cost dictates the final price of

their output. Any sudden rise in the price of raw materials can compel them to pass on

the hike to their customers and make their products unattractive in the market. By

buying commodity futures, you can fix the price of your raw material.

Ensures continuous supplyAny shortfall in the supply of raw materials can stall

their production and make them default on their sale obligations. They can avoid this

risk by buying a commodity futures contract by which they assured of supply of a

fixed quantity of materials at a pre-decided price at the appointed time.

1.7 REGULATORY FRAMEWORK

At present, there are three tiers of regulations of forward/futures trading system in

India, namely, government of India, Forward Markets Commission (FMC) and commodity

exchanges. The need for regulation arises on account of the fact that the benefits of futures

markets accrue in competitive conditions. Proper regulation is needed to create competitive

conditions. In the absence of regulation, unscrupulous participants could use these leveraged

contracts for manipulating prices. This could have undesirable influence on the spot prices, thereby

affecting interests of society at large. Regulation is also needed to ensure that the market has

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

create a chain reaction. The resultant financial crisis in a futures market could create systematic

risk. Regulation is also needed to ensure fairness and transparency in trading, clearing,

settlement and management of the exchange so as to protect and promote the interest of variousstakeholders, particularly non-member users of the market.


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Rules governing commodity derivatives exchanges

Forward Markets Commission (FMC) regulates the trading of commodity derivatives. Under

the Forward Contracts (Regulation) Act, 1952, forward trading in commodities notified under

section 15 of the Act can be conducted only on the exchanges, which are granted recognition by

the central government (Department of Consumer Affairs, Ministry of Consumer Affairs, Food and

Public Distribution). All the exchanges, which deal with forward contracts, are required to obtain

certificate of registration from the FMC. Besides, they are subjected to various laws of the land like the

Companies Act, Stamp Act, Contracts Act, Forward Commission (Regulation) Act and various other

legislations, which impinge on their working. Forward Markets Commission provides regulatory

oversight in order to ensure financial integrity (i.e. to prevent systematic risk of default by one major

operator or group of operators), market integrity (i.e. to ensure that futures prices are truly aligned

with the prospective demand and supply conditions) and to protect and promote interest of

customers/ non-members. It prescribes the following regulatory measures:

a. Limit on net open position as on the close of the trading hours. Sometimes limit is alsoimposed on intra-day net open position. The limit is imposed operator-wise, and in some

cases, also member wise.

b. Circuit-filters or limit on price fluctuations to allow cooling of market in the event of abruptupswing or downswing in prices.

c. Special margin deposit to be collected on outstanding purchases or sales when pricemoves up or down sharply above or below the previous day closing price. By making

further purchases/sales relatively costly, the price rise or fall is sobered down. This

measure is imposed only on the request of the exchange.

d. Circuit breakers or minimum/maximum prices: These are prescribed to prevent futuresprices from falling below as rising above not warranted by prospective supply and demand

factors. This measure is also imposed on the request of the exchanges.e. Skipping trading in certain derivatives of the contract, closing the market for a specified

period and even closing out the contract: These extreme measures are taken only in

emergency situations.

Besides these regulatory measures, the F.C(R) Act provides that a client's position cannot be

appropriated by the member of the exchange, except when a written consent is taken within three

days time. The FMC is persuading increasing number of exchanges to switch over toelectronic trading, clearing and settlement, which is more System Friendly. The FMC has also


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prescribed simultaneous reporting system for the exchanges following open out-cry system. These

steps facilitate audit trail and make it difficult for the members to indulge in malpractices like

trading ahead of clients, etc. The FMC has also mandated all the exchanges following open outcry

system to display at a prominent place in exchange premises, the name, address, and telephone

number of the officer of the commission who can be contacted for any grievance. The website of

the commission also has a provision for the customers to make complaint and send comments and

suggestions to the FMC. Officers of the FMC have been instructed to meet the members and

clients on a random basis, whenever they visit exchanges, to ascertain the situation on the

ground, instead of merely attending meetings of the board of directors and holding discussions

with the office-bearers.

Rules Governing Intermediaries:

In addition to the provisions of the Forward Contracts (Regulation) Act 1952 and rules framed

there under, exchanges are governed by its own rules and byelaws (approved by the FMC). In

this section we have brief look at the important regulations that govern Exchange. For the sake of

convenience, these have been divided into two main divisions pertaining to trading and clearing.

BRIEF ABOUT FORWARD MARKETS COMMISSION (FMC):

Forward Markets Commission (FMC) headquartered at Mumbai, is a regulatory authority,

which is overseen by the Ministry of Consumer Affairs and Public Distribution, Govt. of

India. It is a statutory body set up in 1953 under the Forward Contracts (Regulation) Act,

1952.

The functions of the Forward Markets Commission are as follows:

a. To advise the Central Government in respect of the recognition or the withdrawal ofrecognition from any association or in respect of any other matter arising out of the

administration of the Forward Contracts (Regulation) Act 1952.

b. To keep forward markets under observation and to take such action in relation tothem, as it may consider necessary, in exercise of the powers assigned to it by or

under the Act.


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c. To collect and whenever the Commission thinks it necessary, to publish informationregarding the trading conditions in respect of goods to which any of the provisions of

the act is made applicable, including information regarding supply, demand and

prices, and to submit to the Central Government, periodical reports on the working of

forward markets relating to such goods;

d. To make recommendations generally with a view to improving the organization andworking of forward markets;

e. To undertake the inspection of the accounts and other documents of any recognizedassociation or registered association or any member of such association whenever it

considerers it necessary.

Economic Benefits of the Futures Trading and its Prospects:

Futures contracts perform two important functions of price discovery and price risk

management with reference to the given commodity. It is useful to all segments of economy.

It is useful to producer because he can get an idea of the price likely to prevail at a future

point of time and therefore can decide between various competing commodities, the best that

suits him. It enables the consumer get an idea of the price at which the commodity would be

available at a future point of time. He can do proper costing and also cover his purchases by

making forward contracts. The futures trading is very useful to the exporters as it provides an

advance indication of the price likely to prevail and thereby help the exporter in quoting a

realistic price and thereby secure export contract in a competitive market. Having entered into

an export contract, it enables him to hedge his risk by operating in futures market. Other

benefits of futures trading are:

I. Price stabilization-in times of violent price fluctuations - this mechanism dampens thepeaks and lifts up the valleys i.e. the multitude of price variation is reduced.

II. Leads to integrated price structure throughout the country.III. Facilitates lengthy and complex, production and manufacturing activities.IV. Helps balance in supply and demand position throughout the year.V. Encourages competition and acts as a price barometer to farmers and other trade

functionaries.


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1.8 STRUCTURE OF COMMODITY MARKET

Figure 2 Structure of Commodity MarketMinistry of consumer

Affairs

FMC

CommodityExchan e

National exchange Regional exchange

NCDEX MCX NBOT Other exchange


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CHAPTER 2

INDUSTRY PROFILE


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2.1 EVOLUTION OF COMMODITIES MARKET

Nothing has ever been static-it has always evolved. Necessarily, the present-day shape and

contents of futures trading is a product of history.

The first recorded instance of futures trading occurred with rice in 17 th century Japan, where

merchants stored rice in warehouses for future use. In order to raise cash, warehouse holders

sold receipts against stored rice. These were known as rice tickets. Eventually such rice

tickets became accepted as a kind of general commercial currency. Rules evolved to

standardize the trading in rice tickets and warehouse storage facilities.

In the middle of 19th century, futures trading started in the United States in the grain markets.

The Chicago Board of Trade was established in 1848 and introduced the first tradedderivatives contract in 1859 in agricultural products.

The first (non-precious) metals contract began trading at the London Metal Exchange (LME)

in 1878 and over the few next decades a number of commodities exchanges sprang up. Today

as well as the LME, the largest exchanges include the Chicago Board Of Trade (CBOT), the

Chicago Mercantile Exchange (CME), the New York Mercantile Exchange (NYMEX), and

the Brazilian Mercantile & Futures Exchange (BM&F). Futures exchange trading is to be

found in more than 25 countries, including the US, Canada, UK, France, India, China,

Singapore, South Africa, Japan, Australia and New Zealand. The products traded range from

agricultural staples like corn and wheat to rubber, gold and energy.

The development of many emerging markets has recently given rise to the establishment of

new exchanges, which have allowed market participants to access local terminal markets.

These new exchanges have lowered transaction costs, enhanced the transfer of local

information, and facilitated the geographical transfer of risk and cross-border transactions.

2.2 EVOLUTION OF COMMODITIES TRADING IN INDIA

The inception of organized commodity Derivatives markets in India took place way back in

the year 1875 with cotton being first commodity to be traded. Trading in oilseeds in the year

1900 followed this. In the year 1912, forwards trading in raw jute and jute goods come into

being. In those years volumes traded in those markets were bleak and investors awareness

was under scrutiny. Today, the scenario has changed radically and trading in commodities is

considered to be the next biggest bet in the investor fraternity. Commodities prices are


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believed to have also benefited from the falling dollar. It is to be noted that in few months

investor will be able to trade in options in the commodity derivatives market.

Organized futures market evolved in India by the setting up of "Bombay Cotton Trade

Association Ltd." in 1875. In 1893, following widespread discontent amongst leading

cotton mill owners and merchants over the functioning of the Bombay Cotton Trade

Association, a separate association by the name "Bombay Cotton Exchange Ltd." was

constituted. Futures trading in oilseeds were organized in India for the first time with the

setting up of Gujarati Vyapari Mandali in 1900, which carried on futures trading in

groundnut, castor seed and cotton. Before the Second World War broke out in 1939

several futures markets in oilseeds were functioning in Gujarat and Punjab.

Futures trading in Raw Jute and Jute Goods began in Calcutta with the establishment of

the Calcutta Hessian Exchange Ltd., in 1919. Later East Indian Jute Association Ltd. was

set up in 1927 for organizing futures trading in Raw Jute. These two associations

amalgamated in 1945 to form the present East India Jute & Hessian Ltd., to conduct

organized trading in both Raw Jute and Jute goods. In case of wheat, futures markets were in

existence at several centers at Punjab and U.P. The most notable amongst them was the

Chamber of Commerce at Hapur, which was established in 1913. Other markets were located

at Amritsar, Moga, Ludhiana, Jalandhar, Fazilka, Dhuri, Barnala and Bhatinda in Punjab and

Muzaffarnagar, Chandausi, Meerut, Saharanpur, Hathras, Gaziabad, Sikanderabad and

Barielly in U.P.

Futures market in Bullion began at Mumbai in 1920 and later similar markets came up at

Rajkot, Jaipur, Jamnagar, Kanpur, Delhi and Calcutta. In due course several other exchanges

were also created in the country to trade in such diverse commodities as pepper, turmeric,

potato, sugar and gur (jaggory).

After independence, the Constitution of India brought the subject of "Stock Exchanges and

futures markets" in the Union list. As a result, the responsibility for regulation of commodity

futures markets devolved on Govt. of India. A Bill on forward contracts was referred to an

expert committee headed by Prof. A.D.Shroff and Select Committees of two successive

Parliaments and finally in December 1952 Forward Contracts (Regulation) Act, 1952, was

enacted. The Act provided for 3-tier regulatory system;


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I. An association recognized by the Government of India on the recommendation ofForward Markets Commission,

II. The Forward Markets Commission (it was set up in September 1953) andIII. The Central Government.

Forward Contracts (Regulation) Rules were notified by the Central Government in July 1954

The Act divides the commodities into 3 categories with reference to extent of regulation, viz:

a. The commodities in which futures trading can be organized under the auspicesof recognized association,

b. The Commodities in which futures trading is prohibited,c. Those commodities that have neither been regulated for being traded under the

recognized association nor prohibited are referred as Free Commodities and the

association organized in such free commodities is required to obtain the certificate of

registration from the Forward Market Commission.

In the seventies, most of the registered associations became inactive, as futures as well as

forward trading in the commodities for which they were registered came to be either

suspended or prohibited altogether.

The Khusro Committee (June 1980) had recommended reintroduction of futures trading in

most of the major commodities, including cotton, kapas, raw jute and jute goods and

suggested that steps may be taken for introducing futures trading in commodities, like

potatoes, onions, etc. at appropriate time. The government, accordingly initiated futures

trading in Potato during the latter half of 1980 in quite a few markets in Punjab and Uttar

Pradesh.

After the introduction of economic reforms since June 1991 and the consequent gradual trade

and industry liberalization in both the domestic and external sectors, the Govt. of India

appointed in June 1993 one more committee on Forward Markets under Chairmanship of

Prof. K.N. Kabra. The Committee submitted its report in September 1994. The majority

report of the Committee recommended that futures trading be introduced in

1. Basmati Rice2. Cotton and Kapas


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3. Raw Jute and Jute Goods4. Groundnut, rapeseed/mustard seed, cottonseed, sesame seed, sunflower seed,

safflower seed, copra and soybean, and oils and oilcakes of all of them.

5. Rice bran oil6. Castor oil and its oilcake7. Linseed8. Silver9. Onions.

The committee also recommended that some of the existing commodity exchanges

particularly the ones in pepper and castor seed, may be upgraded to the level of international

futures markets.

The liberalized policy being followed by the Government of India and the gradual withdrawal

of the procurement and distribution channel necessitated setting in place a market mechanism

to perform the economic functions of price discovery and risk management.

The National Agriculture Policy announced in July 2000 and the announcements of

Honorable Finance Minister in the Budget Speech for 2003-2004 were indicative of the

Governments resolve to put in place a mechanism of futures trade/market. As a follow up the

Government issued notifications on 1.4.2004 permitting futures trading in the commodities,

with the issue of these notifications futures trading is not prohibited in any commodity. An

option trading in commodity is, however presently prohibited.

2.3 HEDGING

Hedging is a mechanism by which the participants in the physical market can cover their

price risk. Theoretically, the relationship between the futures and the cash prices is

determined by the cost of carry. The two prices therefore move in tandem. This enables the

participants in the physical market to cover their price risk by taking opposite positions in the

futures market.


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CHAPTER 3

BULLION MARKET


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3.1 INTRODUCTION

Bullion is defined as a bulk quantity of precious metals consisting of gold, silver and others

that can be assessed by weight and cast as a lump. The bullion reserve of a country is the

indicator of the amount of wealth a country possesses. Bullion is valued by its purity and

mass rather than its face value which is applicable in the case of money. India Bullion Market

is a recognizable index that highlights the economic growth of the nation.

Indian Bullion Market Association

IBMA or the Indian Bullion Market Association is a national level body that represents the

Indian Bullion Trade and Industry. This body is an association of all leading bullion dealers

and jewelry merchants who have tied up with the National Spot Exchange Limited. The idea

of this association is to promote a professional organizational dedication towards the

development and growth of the bullion industry in India.

London Bullion Market

London is the world's largest market for gold and silver trading. Market makers mainly quoteprices in US dollars per troy ounce for spot and forward delivery. It is operated by the

London Bullion Market Association (LBMA), whose primary task is to ensure that refiners

of gold and silver meet the required standards of quality. The Association maintains close

links with the Bank of England, which is responsible for the supervision of the market and for

publishing its code of conduct

Trading System

The best five buy and sell orders for every contract available for trading are visible to the

market and orders are matched based on price time priority logic. Orders can be placed with

time conditions and/ or price conditions Time related ConditionsDAY order- A Day order

is valid for the day on which it is entered. If the order is not matched during the day, the order

gets cancelled automatically at the end of the trading day.


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GTC - A Good Till Cancelled (GTC) order is an order that remains in the system until the

expiry of the respective contract in which it is entered or until when the same is cancelled by

the member.

GTD - A Good Till Date (GTD) order is valid till the date specified by the member. After the

specified date the unexecuted orders get automatically cancelled by the system.

IOC - An Immediate or Cancel (IOC) order allows a member to execute the orders as soon as

the same is placed in the market, failing which the order will get cancelled immediately

Price ConditionsLimit OrderThe order wherein the price is to be specified while placing

the same.

Market OrderThe order at the best available price at the time of placing the same.

Trade Timings

Special Session:

Monday to Saturday: 9:45 a.m. to 9:59 a.m.

Special Session (order cancellation session) is held to cancel the pending orders prior to

opening of market.

Normal Session:

Monday through Friday: 10:00 a.m. to 11:30 p.m.

(Up to 11:55 p.m. on account of day light savings typically between every November and

March of the following year)

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

Agri-commodities are available for futures trading up to 5:00 p.m. whereas non agri-

commodities (bullions, metals, energy products) are available up to 11:30 pm / 11.55pm.


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3.2 GOLD AN INVESTMENT AVENUE

Global Inflation ---------------------------

Dollar and its traded Dollar Index ----

Investment Demand ----------------------

Production of Gold ------------------------

3.3 INTRODUCTION OF GOLD

Gold is the oldest precious metal known to man. Therefore, it is a timely subject for several

reasons. It is the opinion of the more objective market experts that the traditional investment

vehicles of stocks and bonds are in the areas of their all-time highs and may be due for a

severe correction

To fully appreciate why 8,000 years of experience say gold is forever", we should review

why the world reveres what England most famous economist, John Maynard Keynes, has

cynically called the "barbarous relic. Why gold is "good as gold" is an intriguing question.

However, we think that the more pragmatic ancient Egyptians were perhaps more accurate in

observing that gold's value was a function of its pleasing physical characteristics and its

scarcity.

Gold is primarily a monetary asset and partly a commodity.

More than two thirds of gold's total accumulated holdings account as 'value for

investment' with central bank reserves, private players and high-carat Jewellery.

Less than one third of gold's total accumulated holdings are as a 'commodity' for

Jewellery in Western markets and usage in industry.

Due to large stocks of Gold as against its demand, it is argued that the core driver of

the real price of gold is stock equilibrium rather than flow equilibrium.


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South Africa is the world's largest gold producer with 394 tons in 2001, followed by

US and Australia.

India is the world's largest gold consumer with an annual demand of 800 tons.

Table 3 MeasurementWeight Conversion Table

To Convert from To Multiple by

Troy Ounce Grams 31.1035

Grams Troy Ounce 0.0321507

Kilograms Troy Ounce 32.1507

Kilograms Tolas 85.755

Purity: Gold purity is measured in terms of karats and fineness.

Karat: Pure gold is defined as 24 karat.

Fineness: Parts per thousand. Thus, 18 karat = (18/24) th of 1000 parts = 750 fineness.

3.4 OVERVIEW

Worlds largest gold producing country is South Africa with 394 tons in 2001. On the other

hand, world's largest gold consuming country is India with an annual demand of 843.2 tones

comprising of 26.2% of total world demands. Worlds gold demand is constantly increasing

and it is nearing record levels at 4000 tons per year while the mine production is constant at

2250 tons per annum (Source: World Gold Council)

The gold prices are moving upwards due to the reduction in production level as compared to

the demand and also due to the weakening economy of the US.

It has been found out the total world gold production would decline about 30% over the next

7 years as the new discoveries in the major gold producing countries have become difficult,

expensive and time consuming according to the studies done by The World Bank and Beacon

Group.


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3.5 HISTORY OF GOLD IN INDIA

Prior to 1962, India was the world's largest gold market and the main trading center was

Bombay. In 1962, the government enacted the Gold Control Act, which prohibited the

citizens of India from holding pure gold bars and coins due to loss of reserves during the

indo-china war. It was declared that the old holdings in pure gold had to be compulsorily

converted into jewelry. Pure gold bars and coins were to be dealt only by licensed dealers.

In 1990, India was on a verge of default of external liabilities as it had a major foreign

exchange problem. It had to give up the concept of controlling and licensing as it led to

nothing more than corruption and shortages. As a result, the Indian government pledged 40

tones from their gold reserves with the Bank of England. India had to adopt the concept of

liberalization. The government abolished the 1962 Gold Control Act in 1992 and liberalized

the import of gold in India for a duty payment of Rs. 250 per 10 grams. The government

made up for the foreign exchange problem by allowing free imports and earning the taxes.

This step expanded the gold market and it also waved off the unofficial trade i.e. smuggling

and black marketing. This makes India the most price- sensitive.

3.6 GOLD AND ITS BULL RUN

Gold has had a great run from 2001 to the current year 2011. The reason for gold spot prices

to increase so much is the new demand for gold futures as a form of investment .It is used :-

As a hedge against inflation.

As a hedge against a declining dollar.

As a safe haven in times of geopolitical and financial market instability.

As a commodity, based on golds supply and demand fundamentals.

As a store of value.

As a portfolio diversifier; gold can act as portfolio insurance.


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3.7 MINE PRODUCTION

Mining of gold takes place in every continent except for Antarctica, where mining is

forbidden. According to recent figures, there are around 400 operating gold mines worldwide.

The production of gold has reached a stable level, averaging approximately 2550 tons per

year over the last five years. New mines that are being developed are serving to replace

current production, rather than to cause any significant expansion in the global total.

Gold mines take a longer time to set up usually 10 years for a mine to be up and running.

Since the price of Gold was at a real low in 2001 China which is the largest producer of gold

in the world did not explore enough for new mine sites and is estimated to run out of ore in

2014. South Africa the once largest producer of gold and now the worlds second largest has

seen its output decline due to hazardous environmental conditions and an acute power

shortage which started recently when the economy opened up a bit.

Figure 3 Mine Production of Gold in 2011


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1. China: 13.1% 2. Australia: 10%

3. United States: 8.8% 4. Russia: 7.4%

5. South Africa: 7% 6. Peru: 5.6%

8. Indonesia: 4.4% 8. Canada: 4.1%

9. Ghana: 3.7% 10. Uzbekistan: 3.3%

3.8 INDIA

Indian love of gold and silver is deep-rooted and embedded in historical, cultural and

religious traditions. As it has never mind more than a small amount of gold itself, gold

holdings were built up as a result of trade. India consumes around 1000 metric tons of gold in

2011.In the third quarter of 2011, year-on-year gold demand in India is up 15% in tones and

46% in value (US$), as reported by the World Gold Council in November 2011.

The degree of economic prosperity is inevitably a key determinant of gold demand. Rapidly

rising incomes have been a supportive factor for the growing level of spending on gold

jeweler. Nevertheless this is not a one-way factor since rising prosperity also brings a wider

choice of goods and services for consumers and hence more competition. In India, as

elsewhere, it has proven important to provide attractive and well-marketed products to satisfy

the more demanding and sophisticated consumer. So we could say if the Indian economy

keeps on growing there will always be a growing demand for Gold and this could be a factor

in increasing prices.

3.9 MARKET MOVING FACTORS FOR GOLD IN INDIA

Reclaimed scrap and official gold loans (Above ground supply from sales by central

banks).

Producer / miner hedging interest.

World macro-economicfactors - US Dollar, Interest rate.Comparative returns on stock markets.

Domestic demand based on monsoon and agricultural output.


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3.10 FACTORS THAT MAY CAUSE THE PRICES OF GOLD TO INCREASE

An under supply of newly-mined gold.

Global inflation is the main factor that can cause the price of the gold to increase.It's a natural hedge against the US dollar

Dollar Price Gold is typically quoted in Dollars, and if the dollar begins to falls then the

value of Gold tends to increase and vice-versa.

Market Fear: Whenever the stock markets or political situations look bad then people

tend to fly towards Gold. Stock market crashes, terrorist attacks, or wars will all tend to

push the value of Gold up.

3.11 MAJOR TRADING CENTERS OF GOLD

London (clearing house)

New York (home of futures trading)

Zurich (physical turntable)

Istanbul, Dubai, Singapore and Hong Kong Tokyo

Mumbai (India's liberalized gold regime)

Hong Kong Gold Market, Zurich Gold Market, London Gold Market and New York Market

are the 24-hour gold markets.

In India the gold is traded thought the well know exchange mainly MCX and NCDEX, but

most of the traders favor trading through MCX. If a particular trader wants to take the

physical delivery of the Gold then he can do so as per the specifications set by the respective

exchange. The trading in Gold is available in 1kg, 100 Grams and Gold Guinea which

consists of 8 Grams. The increase in 1 rupee of gold is termed a 1 tick which stands for Rs

100, Rs10 and Rs 8 respectively. The margin amount which is supposed to be paid by the

traders is set by the exchange depending upon the fluctuation in the prices. Initially the

margin was set @4% for every month, and this may vary depending upon the volatility.


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3.12 SILVER PROFILE

Silver has been known since ancient time and has been long valued as a precious metals used

to make jewellery and high value tableware. Apart from its former uses its now an important

metal in the industrial use. The property of a good conductor of electricity has enhanced the

appeal of the metal for various industrial purposes. The silvers antimicrobial properties have

made the foray for use of the metal into the food industry, solar panels, new soaps and

medicinal purposes.

3.13 SALIENT CHARACTERISTICS

Silver is a very ductile and malleable (slightly harder than gold) monovalent coinage metal

with a brilliant white metallic luster that can take a high degree of polish. It has the highest

electrical conductivity of all metals, even higher than copper, but its greater cost and tarnish

ability have prevented it from being widely used in place of copper for electrical purposes.

Another notable exception is in high-end audio cables, although the actual benefits of its use

in this application are questionable. Among metals, pure silver has the highest thermal

conductivity, the whitest color, and the highest optical reflectivity Silver also has the lowest

contact resistance of any metal. Silver halides are photosensitive and are remarkable for their

ability to record a latent image that can later be developed chemically. Silver is stable in pure

air and water, but tarnishes when it is exposed to air or water containing ozone or hydrogen

sulfide.

3.14 GRADING OF SILVER

Silver that is found with some percentage of other elements in it is called impure silver. That

is why it is graded upon its fineness. According to the Indian standards, silver is graded into

six categories:

Table 4 Silver GradingGrade 9999 9995 999 970 925 916

Fineness 999.9 999.5 999 970 925 916


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TOP 10 SILVER PRODUCING COUNTRIES IN 2011

1. Mexico:

In the last 500 years, Mexico silver industry provided one-third of the world. In Mexico, the

production of silver is 128.6 million ounces. It has two of the top silver miners, industries

Penoles and Grupo which together produce 66% silver. It is the pillar of world production of

silver.

2. Peru:

Mexico and Peru are the two pillars of silver production in the world. It produces 116.1

million ounces silver in Peru. In silver output, companies were more active and produce more

than the last year. It exports about $479 million silver compared with $281 million in 2005.

3. China:

The production of silver in china is 99.2 million ounces. It supplies 29,000 tons silver to the

world. The domestic price of Chinas silver market is higher than international market price.

The demand of silver in china is high .

4. Australia:

Its production is 59.9 million ounces. It has the largest share of the worlds economic silver

resources. Australias silver production ranks after Mexico, Peru and the china. About 25%

its mine output is refined to silver metal and sent to Japan.

5. Chile:

The productions of silver in Bolivia and in Chile are same. It also produces 41.0 million of

ounces silver. It is very old silver production country and remains among the fifth number.

6. Bolivia:

The production of silver in Bolivia is 41.0 million. San Cristobal is the top silver mine in

Bolivia producing some 620,000 tons of the silver. San Cristobal mine is the third largest

producers in the world.

7. United States:

The United state is the major producers of the production silver in the world. In United State,

silver produce 1,200 metric tons silver. 35% of the silver it used. The 65% is imported from

Mexico, Canada, Peru and Chile.

8. Poland:

The production of silver is 37.7 million in Poland. The production of silver increases in 2011

compared with their average production from 1998 to 2006 is 14.4%. The situation of Poland

is close because a majority of the production is handled by a single mine.


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9. Russia:

It produces 36.8 million of ounces silver. Russias biggest silver producing regions are the

Krasnoyarsk territory, Bashkortostan, Chelyabinsk region, Orenburg region Primorye

territory. Over the past Russia was produce 60% silver. Now it produce 90% silver.

10. Argentina:

Argentina has jumped 55% in silver output in 2009 to 15.5% million ounces over the

previous year. It produces 20.6 million of ounces silver. Only one mine at this time is in

production and producing revenues. The pirquitas mine in Argentina.

Thecountries that are the major consumers of silver are: -

United states

Canada

Mexico

United Kingdom

France

Germany

Japan

India

3.15 PRODUCTION OF SILVER IN INDIA

India hardly produces any silver and is basically a silver importing country. It holds the 20th

place in the list of silver producing countries. The three major silver producing states in India

are: -

Rajasthan

Gujarat

Jharkhand

Rajasthan was the leading silver producing state in India with a production of around 32

thousand tons. Gujarat follows on the second place with a production of around 20 thousand

tons.


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3.16 INDIAN SILVER MARKET

As we know that, India is primarily a silver importing country, as the production of India is

not sufficient to satisfy the ever-growing domestic demand. The production of silver in India

stands out at the figure of around 2.1 million ounces placing it at the 20th position in the list

of major silver producing countries. The import of silver in India hovers over 110 million

ounces that shows the huge size of Indian domestic demand.

However, this import level fell sharply as a result of the decline in demand due to rise in

silver prices and inconsistent monsoon on which the income of the rural sector depends. But,

even this sharp decline could not affect Indias reputation of being one of the largest

consumer countries of silver in the world. India stands third after United States and Japan

among the leading consumers of silver in the world. The countries from which India imports

silver and maintain the flow of silver in the market are: -

China

United Kingdom

European Union

Australia

Dubai

Over 50% share of import of silver in India is held by Chinese silver. The major importing

center of silver in India was Mumbai but now it has been shifted to Ahmedabad and Jaipur

due to high sales tax and octroi charges.

3.17 MARKET INFLUENCING FACTORS FOR INDIA

Price movements of other metals.

Income level of the rural sector of the economy.

Available supply verses Fabrication demand.

Fluctuation in deficits and interest rates.

Inflation.

Major trading centers of silver

London

Zurich

New York (COMEX)


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Chicago (CBOT)

Hong Kong

Tokyo Commodity Exchange (TOCOM)

In India, silver is traded at the following places:

Delhi

Indore

Rajasthan

Madhya Pradesh

Mathura (Uttar Pradesh)

Rajkot (Gujarat)

In India the Silver is traded through the well know exchange mainly MCX and

NCDEX, but most of the traders favor trading through MCX. If a particular trader wants to

take the physical delivery of the silver then he can do so as per the specifications set by the

respective exchange. The trading in Silver is available in 1kg and 100Grams. The increase in

1rupee of Silver is termed a 1 tick which stands for Rs100 and Rs10 respectively. The margin

amount which is supposed to be paid by the traders is set by the exchange depending upon

the fluctuation in the prices. Initially the margin was set @4% for every month, and this may

vary depending upon the volatility.


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PART - 2 PRIMARY STUDY

CHAPTER 4

INTRODUCTION OF THE STUDY


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4.1 LITERATURE REVIEW

Commodity Derivatives Market in India: Development, Regulation and Future

Prospects by Dr. Narender L. Ahuja in 2005India is one of the top producers of a large number of commodities, and also has a long

history of trading in commodities and related derivatives. The commodities derivatives

market has seen ups and down, but seem to have finally arrived now. There is a great need

and vast scope of commodity derivative market in India provided the mistakes of the past are

not repeated and the Government promptly addresses the serious problems facing the market.

Among issues that need immediate resolution are those related to introduction of commodity

options, warehousing, cash settlement at maturity and standardization?

Growth in Commodity Investment: Risks and Challenges for Commodity Market

Participants by Emmet Doyle, Jonathan Hill and Ian Jack in March 2007

Past and continued future growth in the level of commodities investment, a raft of new

products, and a changing user base have combined to create a significantly different

commodities market environment in recent years, giving rise to a number of challenges and

risks for those who participate in these markets. The risks identified in this paper should not

come as a surprise to those active in the market, but none-the-less serve to focus attention on

those areas we consider to be most important. Firms should consider how they have

addressed these risks and ensure they continue to mitigate them in an appropriate manner.

Issues and Concerns of Commodity Derivative Markets in India by Niranjan Ghosh in

November 2009

Indian academics abroad have turned their shoulders to Indian markets, citing reasons of low

publication potential. Even from the policymakers perspective, there seems to be a less than

sufficient attempt to promote research on market microstructure in commodity markets, while

financial economists have rarely attempted to understand commodity market microstructure.

It is a fact that commodity market research (while talking of agro-commodities) has been

dominated by agricultural economists. This has resulted in less than optimum appreciation of

the nuances of financial economics associated with this area. On the other hand, sole

intervention of financial economists in commodity market can result in reductionist

frameworks that might not be applicable for commodity derivative research. For issues on


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emerging markets like environmental resources, the intervention of environmental

economists trained in neoclassical valuation frameworks would be a welcome new breath in

commodity market research. They further need to collaborate with researchers from the space

of financial economics. At the same time, the important role of institutionalists cannot be

over emphasized.

Commodity Market Review by Alexander Sarris in May2010

Volatile prices have significant negative effects on developing countries. Price surges induce

substantial income risks and can be particularly detrimental to developing countries welfare

and growth prospects. The papers contribute towards analyzing the empirical behaviour of

food prices during the recent price surge and provide a systematic examination on a number

of issues. The main drivers of agricultural price volatility are discussed. The role of

speculators in the food futures markets and the effect of national food reserve and trade

policy responses are examined, illustrating the implications for developing countries. Most of

these issues are controversial, but at the same time raise a variety of important policy

questions. Should food price volatility increase, concerted effort at the international level will

be necessary in order to shield low income food importing developing countries from the

negative effects of sudden and unpredictable increases.

4.2 BACKGROUND OF THE STUDY

The price and the price volatility of basic commodities matter enormously to economies and

to populations all over the world. Energy prices often linked to oil prices are a major

element of most economies. The prices of basic foodstuffs from wheat to corn are crucial not

only to budgets in developed countries where they average about 10% of household spending

but, in particular, to millions in developing countries where they can be all about survival and

account for as much as 80% of household spending. Base metals like copper, aluminium and

iron are key inputs to many industries and thus critically important to both developing and

developed countries alike.

Such prices matter not only to those who consume these products either directly or as an

input to other production- but also to those who have to decide whether to invest in exploring

for more oil or in alternatives to oil or to plant more of a particular product next year and gearup to grow more the year after.


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4.3 STATEMENT OF PROBLEM

The commodity market is still new and growing in India and it has a bright scope to

develop, on that view this research study is taken.

The Research main intention is to know the various price drivers that determine the

price of commodity. The main problem in the commodity market is to know the risk

perception of the traders or investors of commodity market. Especially this research

on Gold and silver because these two commodities have global market with high

volatility. The price of gold and silver are highly affected by the various factors

happening in and around the world. In order to know behavior of this to commodity to

that factor, researcher referred past reacts of commodity market.

4.4 PURPOSE OF THE STUDY

To understand the trading and investment perspective of commodity traders and other

investors.

To understand how commodity market will affect the local market.

4.5 RESEARCH OBJECTIVES

To analyze the view of commodity traders.

To make understand the process of commodity trading in India.

To know the investment pattern of commodity traders and investors.

To learn about the Indian commodity market.

To study different price drivers affect the Gold and silver.

To find out how price of Gold and silver fluctuate in Indian Commodity market.

To analyze the perception of investors towards commodities futures

To Study the Factors considered by the Investors and those, which ultimately

influence him while investing.

To study the volatility of the market.


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4.6 SIGNIFICANCE OF THE STUDY

Hedging the price risk associated with futures contractual commitments.

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

Efficient price discovery prevents seasonal price volatility.

Greater flexibility, certainty and transparency in procuring commodities would aid

bank lending.

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

commodities.

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

4.7 HYPOTHESIS

In this research study, Chi-Square, Annova and One Sample T-Test has used for data analysis

and interpretation.

1) H0: There is no significant relationship between Age of the Respondent and theirRisk Perception of Commodity Market.

2) H0: There is no significant relationship between Education of the Respondent andtheir Risk Perception of Commodity Market.

3) H0: There is no significant relationship between Annual Income of the Respondentand their Risk Perception of Commodity Market.

4) H0: There is no significant relationship between Profession of the Respondent andtheir Risk Perception of Commodity Market.

5) H0: There is no significant difference in Traders or Investors Volatility Perceptionfor Various Commodities and their Association with the Market.

6) H0: The impact of the factors affecting volatility of the commodity market is lessthan or equal to moderate value ( 3).

7) H0: The sources of informationwhich influences respondents decision to trade incommodity market is less than or equal to moderate value ( 3) .


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CHAPTER 5

RESEARCH METHODOLOGY


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5.1 RESEARCH DESIGN

Descriptive research is used in this study because it will ensure the minimization of bias and

maximization of reliability of data collected. The researcher had to use fact and information

available through questionnaire and analyze this information to make critical evaluation.

Quantitative research has been carried out through questionnaire in order to get the data into

figurative terms for analysis.

5.2 SOURCES OF DATA

The Sources of data are from Brokers, Internet, Reference Books, Surveyors Responses and

Commodity Traders or Investors.

5.3 METHODS OF DATA COLLECTION

Primary data delivers more specific results than secondary research, which is an especially

important consideration when one launching a new product or service. In addition, primary

research is usually based on statistical methodologies. The tiny sample can give an accurate

representation of a particular market.

Primary data was collected through a survey in the twin cities of Ahmedabad & Gandhinagar.

A sample of 103 traders and investors were surveyed. They were all asked to answer a

questionnaire true to their knowledge. The feedback obtained from the customer was

instrumental, gauging the perception of the investors towards commodity futures or capital

market. It also throws light on the factors, which influence them to make decisions while

investing.

Primary Sources:

1. Questionnaire2. Personal interview

Secondary data is based on information gleaned from studies previously performed by

government agencies, chambers of commerce, trade associations and other organizations.

This includes census bureau information. Much kind of this information can be found in

libraries or on the web, but looks on business publications, as well as magazines and

newspapers.


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The main sources of secondary data are the various web sites like Sharekhan Commodities

Pvt. Ltd., Multi Commodity Exchange (MCX), National Commodity and Derivatives

Exchange (NCDEX), Chicago Board of Trade (CBOT), New York Mercantile Exchange

(NYMEX) and more such organizations.

Secondary Sources:

1. Magazines.2. Newspapers3. Websites4. Books

5.4 POPULATION

Population is the traders or investors of Commodity Market in Ahmedabad and

Gandhinagar.

5.5 SAMPLE DESIGN

Sampling type: In this project convenient sampling method is used for the selection

of traders and investors.

Sampling unit: To define sampling unit, one must answer the question that who is to

be surveyed. In this project sampling units are commodity traders and other investors.

Sample size: The sample size of the survey was 103 people.

5.6 DATA COLLECTION INSTRUMENT

Primary Data Collection Method:

The main instrument of this research is Structured Questionnaire method. Questionnaire is

the heart of the survey operation. This is structured questionnaire,

tradersinvestors perspective on commodity market

Documents