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GOLD FUNDAMENTAL ANALYSIS

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  1. GOLD FUNDAMENTALANALYSIS International Workshop on Commodity Trading 6th 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

  13. DEMAND

  14. 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 Environment1980’s 2000’s

  15. Less Gold Loans Longer dated products Structured Option Products Gold Hedging Products1980’s 2000’s • Gold Loans • Spot def, fixed and flat forwards • Short term 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. Gold Pipeline in India • 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

  27. ** My Dream** Full Fledged Metal Bourse Mumbai Bullion Fix

  28. MY DREAM FULL FLEDGED METAL BOURSE MUMBAI BULLION FIX