1. GOLD FUNDAMENTAL ANALYSIS International Workshop on Commodity Trading 6 th October 2004 -Bhargava N. Vaidya e-mail bnv@vsnl.com

2. What is Gold COMMODITY OR CURRENCY ?

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

4. History Gold Currency (1890 - 1913) Gold Standard (1925 - 1931) 1968 Split in European Gold Market Bretton Wood Fixed exchange rate collapsed in 1973

5. Freedom 1974 Private Ownership of Gold Legalised in USA COMEX 31.12.1974 Gold future introduced

6. Gold Price Turn of previous century around $ 20 1934 - 1968 Fixed at $ 35 1979 – 1982 Bull Market Years on 21 /1/1980 $ 855 Average Price 2002 $ 310 Average Price 2003 $ 363 September 2004 $390 - $ 421

7. 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. 2003 : Central Bank Gold agreement

8. Size of Market LBMA – Daily clearance volumes 488 tonnes Comex - 152 tonnes (per day) Other Exchanges Indian market size 1000 tonnes (per annum)

9. LONDON 19 th Century: Great Britain first country to adopt the full Gold standard. 1919 : 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. 1987 : The LBMA Incorporated as on 14/12/87 2000 : Associate Members

10. 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 31.12.74: Gold futures opened for trading on COMEX (today a subdivision of NYMEX) 1982 : COMEX started operating a market in Gold options

11. Other Markets ZURICH TOKYO TURKEY HONGKONG SHANGHAI

12. SUPPLY 20022003 MINE PRODUCTION 25902593 OFFICIAL SECTOR SALE 545606 OLD GOLD SCRAP 836943 NET - PRODUCER HEDGING --- Source: ---- GFMS

13. DEMAND 20022003 FABRICATION 31633049 BAR HOARDING 250183 NET - PRODUCER HEDGING 437310 IMPLIED INVESTMENT 122 SOURCE 600 : GFMS

14. 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

15. 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

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

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

18. OTHER FACTORS POLITICAL INSTABILITY TERRORISM CURRENCY INSTABILITY SURPLUS MANAGEMENT INFLATION

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

20. 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

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

22. HISTORY Net Gold Surplus – for years 1962 - Gold Control Act. Development 1990 – Abolition of Gold Control Act 1992 – NRI Imports 1994 – SIL Import 1997 – Authorised agencies / Banks 2003 - Future/Forward trading in bullion

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

24. Interest Arbitrage LC Imports Banking Facilities

25. External Benefits Export of Coins / Crude Jewellery Other Arbitrage

26. Local Taxes Sales tax - Rajasthan - Gujarat - Delhi Octroi