GOLD FUNDAMENTAL ANALYSIS International Workshop on Commodity Trading 6 th October Bhargava N. Vaidya

What is Gold COMMODITY OR CURRENCY ?

GOLD Hedge against Inflation Gold as an Investment Gold as a safe haven

History Gold Currency ( ) Gold Standard ( ) 1968 Split in European Gold Market Bretton Wood Fixed exchange rate collapsed in 1973

Freedom 1974 Private Ownership of Gold Legalised in USA COMEX Gold future introduced

Gold Price Turn of previous century around $ Fixed at $ – 1982 Bull Market Years on 21 /1/1980 $ 855 Average Price 2002 $ 310 Average Price 2003 $ 363 September 2004 $390 - $ 421

Recent Highlights May’99 : BOE decides to halve its Gold reserves September’99 : Washington Agreement 1/1/2000 : VAT Abolished on Bullion throughout Europe. May ‘ 2000 : SNB begins sale of Gold from its reserves : Central Bank Gold agreement

Size of Market LBMA – Daily clearance volumes 488 tonnes Comex tonnes (per day) Other Exchanges Indian market size 1000 tonnes (per annum)

LONDON 19 th Century: Great Britain first country to adopt the full Gold standard : Formation of the London Gold Fixing Up to 1968: No Competition in London Gold Market After 1968 : London’s Monopoly ends after temporary closure of Gold Market : The LBMA Incorporated as on 14/12/ : Associate Members

USA 1792 : US assigned a formal monetary role Currency Backing with AU and AG 1848 : Large Gold discovery in California North America became the worlds major supplier 1944 : Bretton Woods agreement -tied gold to the US $ 1971 : President Nixon ended the convertibility of the US $ into gold 1974 : Lifting the ban of Gold Ownership : Gold futures opened for trading on COMEX (today a subdivision of NYMEX) 1982 : COMEX started operating a market in Gold options

Other Markets ZURICH TOKYO TURKEY HONGKONG SHANGHAI

SUPPLY MINE PRODUCTION OFFICIAL SECTOR SALE OLD GOLD SCRAP NET - PRODUCER HEDGING --- Source: ---- GFMS

DEMAND FABRICATION BAR HOARDING NET - PRODUCER HEDGING IMPLIED INVESTMENT 122 SOURCE 600 : GFMS

Gold Hedging Environment 1980’s 2000’s High Interest rates Low lease costs small to medium cost mines High % of resources as reserves Continuity of cash flow required to underwrite capital Low Interest rates More Volatile lease costs Larger more mature mines Lower % of reserves to resources Lower Gold Price

Gold Hedging Products 1980’s 2000’s Gold Loans Spot def, fixed and flat forwards Short term products Less Gold Loans Longer dated products Structured Option Products

Official Sector Holding Over 31,822 tonnes Large holders USA 8,135 tonnes Germany 3,440 tonnes France 3,025 tonnes

OFFICIAL SECTOR SALE GOLD LOANS GOLD AS SECURITY FOR BORROWING CURRENCY MANAGEMENT

OTHER FACTORS POLITICAL INSTABILITY TERRORISM CURRENCY INSTABILITY SURPLUS MANAGEMENT INFLATION

Importance of Gold (India) Largest item in portfolio (Rs.13,02,000+ Crores) Major forex asset ($ 280+ Billion) Legend - Gold & Age Liquidity

PRESENT INDIAN SCENARIO LARGEST MARKET FOR GOLD ONE OF THE MOST IMPORTANT MARKET FOR SILVER LARGE HOLDING OF BULLION IN PRIVATE SECTOR LARGEST SOURCE OF BULLION IMPORTS RECYCLING - A DISTANT SECOND

Indian Position WHAT POSITION WE HAVE IN WORLD MARKET ANALOGY WITH SAUDI ARABIA IN OIL

HISTORY Net Gold Surplus – for years Gold Control Act. Development 1990 – Abolition of Gold Control Act 1992 – NRI Imports 1994 – SIL Import 1997 – Authorised agencies / Banks Future/Forward trading in bullion

Authorised Bank / Agency | Bullion Dealer (large) ______ | | Bullion Dealer (small) | | | | Jeweller | Jeweller | | | Consumer Consumer Consumer

Interest Arbitrage LC Imports Banking Facilities

External Benefits Export of Coins / Crude Jewellery Other Arbitrage

Local Taxes Sales tax - Rajasthan - Gujarat - Delhi Octroi