BBA E book

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10 www.bombaybullion.com August 2011

Market Summary

Bullion markets were dominated by two most important events during last month. Euro zone debt crisis with regards to Greece dominated in the

first part and the second part the focus was on raising of US debt ceiling before August 2nd deadline to avoid potential default and on threat to downgrading of US AAA rating and on renewed prospects of quantitative easing in the US.

US Fed Chairman Bernanke in its last month testimony to US congress said that the Fed stands by to provide additional monetary stimulus (i.e QE3) if economic conditions warrant it. This in turn boosted the market sentiment and helped gold to breach the May 2011 record highs.

European leaders have agreed a new €109bn bail-out of Greece on July 21st, 2011 under which private bondholders will be called on to participate for the first time, contributing a target of a further €37bn.

In addition to the €109bn in new loans from international lenders, the agreement includes a commitment from Europe’s leaders to support Greece until it is able to return to the financial markets.

The House of Representatives on August 1st finally approved a deal to raise the U.S. borrowing limit, after weeks of uncertainty in the financial markets, thus averting a catastrophic debt default by the world’s largest economy. A day before the deadline to lift the debt ceiling, the passage by the Republican-controlled House of the $2.1 trillion deficit-cutting plan hammered out over the weekend cleared the way for the Senate to approve it.

The overall scenario in the euro zone is complicated by an ugly run of data including weaker-than-expected growth

figures and a worrying drop in economic confidence, and by an unexpected slowdown in inflation. Moreover there are question marks whether ECB would continue to hike the interest rates in the fourth quarter of this year.

Precious metals may stay at current elevated levels on the back of US economic slow down, which may delay in Fed hiking the interest rates for an extended period of time and on moderating manufacturing activity across the globe and more importantly on uncertainties over debt concerns in the euro zone and US. Hence any correction in gold is temporary and unlikely to drag for a longer duration.

Economic IndicatorsThe US economy continued to face one problem or other. Some improvement was seen in labour market and mixed trend witnessed in housing markets. But on the other hand manufacturing activity deteriorates and US GDP growth slowed down substantially.

Initial unemployment insurance claims dropped to 398,000 in the week ending July 23, 2011, which were 24,000 below the previous week’s upwardly revised 422,000 level. The four-week moving average, which normally provides a better indication of the underlying trend in labour markets, dipped to 413,750 from 422,250 the previous week and it has fallen for four consecutive weeks and now stands at the lowest since late April 2011.

The housing markets in US witnessed a mixed trend with the sale of new home sales in US fell 1 percent in the month of June to an annualized rate of 312000 units, the lowest in three months. At the same time US pending home sales unexpectedly rose in June by 2.4%, followed by an 8.2% gain in the month of May, as buyers tried to take advantage of lower prices and borrowing costs.

Spot Market Review

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11August 2011 www.bombaybullion.com

The United States real gross domestic product increased at an annual rate of 1.3 percent in the second quarter of 2011, according to the advance estimate released by the Bureau of Economic Analysis. First-quarter growth was revised down sharply to a 0.4 percent from the previous estimate of 1.9 percent.

Manufacturing activity in the U.S. almost stalled in July, threatening to undermine the two-year recovery of one of its main drivers. The Institute for Supply Management’s factory index slumped to 50.9, the lowest since July 2009, from 55.3 a month earlier. Figures less than 50 will signal contraction.

U.K., Russian and Australian manufacturing shrank, while the pace of factory growth slowed in Europe and China, according to latest reports. India’s manufacturing growth fell to a 20-month low of 53.6 in July, due to more expensive inputs, according to HSBC’s Purchase Manager’s Index (PMI).

Commitment of Traders (COT) report (Futures and Options combined)COMEX Gold July 26 June 28 % ChangeCombined Open Interest 791632 703831 12.48Combined Commercial Long 240699 241949 -0.52Combined Commercial Short 557631 481806 15.74Combined Non-Commercial Long 300143 232841 28.91Combined Non-Commercial Short 30654 38284 -19.93

Overall open interest in Gold climbed by 12.48% when compared with last month. Interestingly commercials increased their short position significantly by more than 15.50%. Speculative long positions increased by close to 29% have resulted in recent sharp bullish momentum in gold prices. Based on the latest cot report gold overall up trend is intact.

COMEX Silver July 26 June 28 % Change

Combined Open Interest 178162 159867 11.45

Combined Commercial Long 41998 47650 -11.86

Combined Commercial Short 94586 83417 13.39

Combined Non-Commercial Long 37049 28692 29.13

Combined Non-Commercial Short 5182 7129 -27.32

Silver net combined open interest increased by 11.45%. Commercial long declined by close to 12%. But non-commercial long positions increased by 29.13 resulted in recent upward bias in silver. Speculative short positions trimmed by more than 27%.

Note:1) Commercial trader is a classification used by the Commodity Futures Trading Commission (CFTC) to describe traders that use the futures market primarily to hedge their business activities.

Note:2) Non-commercial refers to a trader on a futures exchange who conducts transactions on commodities for speculative reasons.

Indian Spot Market

GoldGold spot Mumbai prices after having reached the low of Rs 21700 on July 1st bounced back sharply and touched the new historic high of Rs 23357 on August 2nd, 2011. Prices continued to trade within the multi year broader ascending channel signalling room for further upward bias and Rs 24000 is not far away. In case sustains above Rs 24000 for more than a week or so then one can’t rule out Rs 24500-Rs 25000 levels in the medium term. At the Same time on the lower side strong support is seen at around Rs 22500 and most probably to hold that support level. Overall bullish momentum in gold is all set to continue and any intermediate correction should be considered as good levels to accumulate.

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Disclaimer: The given outlook is based on the research done at Foretell Business Solutions Private Limited, Bangalore. Foretell will not be responsible for any kind of losses incurred by any party either

directly or indirectly based on this report.

SilverSilver spot Mumbai prices after two months of consolidation settled substantially well above the triangle formation in the last few weeks signalling resumption of the bullish momentum. In the last one month silver prices traded in the range of Rs 51967 and Rs 59107. One can anticipate silver prices to retest the April highs of Rs 64000 initially and above to extend till Rs 67000 levels. At the same time on the lower side strong support is seen at around Rs 57000 and then at Rs 55000 and unlikely to drop lower.

Silver spot is most likely to trade in the broader range of Rs 55000 and Rs 67000 levels in the coming one to two months time period.

COMEX and MCX GoldCOMEX Gold futures October’11 contract made a new historic high of $1675.3/oz as on August 3rd, 2011. In the last one month or so gold prices have gained by nearly 14%. Technically prices continued to hold the multi-year trend line signalling overall bullish momentum in gold to continue in the coming months. On the higher side one can expect prices to face stiff resistance in the range of $1720 and $1750 levels. Only if the price sustains above $1750 on a weekly basis then one can’t rule out $1800 and above in the coming few months time period. At the same time on the lower side $1550 to act as strong support and only below one can expect some sort of correction till $1480-$1460 levels.

In MCX Gold Octover’11 contract in the last few weeks continued to trade well above the symmetric triangle formation signalling room for further upward bias in the coming one to two months time period. In the last one month or so prices traded in the range of Rs 21885 and Rs 24245 and in the process breached the April month historic high Rs 23511 levels. Expect the current bullish trend to continue and to hit the break out target of Rs 24700 levels in the coming few weeks time period. At the same time strong support is seen at around Rs 23080 and below to

drop till Rs 22880-Rs 22650 levels. Technical indicator Price ROC-12 reading is weall above the mid-point and moreover consolidating above the W-formation signalling room for further strength in gold prices.

COMEX and MCX SilverCOMEX Silver December’11 contract after two months of consolidation once settled well above $40/oz indicating further appreciation in silver prices. After having reached the low of close to $33.40/oz silver prices bounced back strongly and are currently trading well above $41/oz as on August 3rd, 2011. On the higher side one can foresee silver to trade as high as $46-$48 levels and only if it settles well above the historic highs of $50 and above to signal continuation of the bullish trend. On the lower side strong support is seen at $38 and then at $35 levels. Overall expect silver to trade in the broader range of $35 and $48 levels in the coming one to two months time period.

MCX Silver Dec’11 contract prices continued to hold support around Rs 52000 levels on a weekly basis and in particular in the last two weeks settled well above Rs 60000 signalling room for further appreciation in silver prices. In the weekly chart prices are trading within the ascending channel hinting the possibility of further bullish sign and to touch as high as Rs 65300 initially and then to move higher towards Rs 68000 levels. As far as Rs 53700 is not violated, then expect the current bullish move to stay and to trade in the broader range of Rs 53700 and Rs 68000 levels.

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Six Month Gold Forecast________________

Chris Vermeulen & David Banister www.MarketTrendForecast.com

Gold has been on a torrid rally since the October 2008 lows of $683 per ounce and is likely to top out around $1733 to $1805 per ounce according to

our forecasts and crowd behavioral based patterns we use. Back in August of 2009 we had forecasted a coming five year massive rally in Gold and Gold stocks from the $900 per ounce level, and since that forecast Gold has rallied about 78% in just under two years of time! Our methodology centers around my personal interpretation of what are called Elliott Wave patterns or waves. This is a behavioral based theory developed by R.N. Elliott in the 1920’s and 1930’s way before we had charting software or anything close. The problem is interpreting the patterns is very difficult and much like a combination of both art and science.

With that said, Elliott Waves tend to go upwards in a 5 wave pattern and correct in a 3 wave pattern during bull cycles. There are many variations on the theme, but that is the simplest of explanations. Gold in my opinion is now completing the final 5th wave of a 5 wave bull pattern that began in October of 2008 at $683. After a suspected and projected $1000 plus rally topping out at $1733 on the low end to $1805 on the high end, it should form an intermediate peak in Gold and begin a multi-month correction that will be largely sideways with a few startling drops along the way. The one caveat being that 5th and final terminal waves in a 5 wave sequence can be notoriously difficult to forecast ahead of time. They can extend and go much higher than typical, so our forecasted levels near term are $1643 and $1689 which would be very typical pivot points followed by pullbacks, and then onward to the higher 1733 to 1805 levels.

Below is our long term chart for Gold and where we stand in the wave patterns. Over the next 6 months it’s likely that Gold will be no higher than $1805 and probably lower. Gold is in a 13 year Fibonacci rally cycle and still has about three years left to run, but soon should pause in the upward trajectory:

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It is not often that a company, in a very short span of time, rubs shoulders with some of the existing giants in the industry. Having said that, RiddiSiddhi Bullions

Limited (RSBL) is certainly one such company. Established in the year 1994, it has been amongst the market leaders in providing wholesale and retail level bullion delivery in the spot, forwards and futures markets in India. Today, RSBL is India’s largest bullion trading company with an annual turnover of over Rs 22,900 crore (US$ 5bn) and a credit rating of SME 1 from CRISIL Ltd, which is the highest rating on the SME rating scale. The company’s promoters have a combined experience of over 100 man-years in the industry.

RSBL has consistently been ranked amongst the top 10 unlisted public companies in India by Business Standard 1000. It is also one of the largest delivery participantsacross major Indian commodity exchanges and is awarded STAR TRADING House status under the EXIM policy of Ministry of Commerce, Government of India. RSBL is one of the only ten nominated agencies for import of bullion in India and also one of the few Indian companies to associate with the London Bullion Market Association (LBMA) and Bombay Bullion Association (BBA). RSBL holds reputation amongst LBMA’s good delivery members, international suppliers and banks.

RSBL - Name with Vision

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RSBL is an ‘Authorised Participant’ (AP) with all the Gold Exchange Traded Funds (ETFs) in India and ensures liquidity in each of them. It is also the largest creator and redeemer of such Gold ETF units in the country.

Our expertise, brand equity and vast presence, have helped us successfully launch numerous products. Our flagship product ‘RSBL Spot’ is India’s first fully electronic over-the-counter (OTC) delivery based bullion-trading system and arguably the most successful in the world. It has over 1500 online clients and numerous delivery centres across India including Ahmedabad, Surat, Rajkot, Indore, Pune, Kolkata, Hyderabad, Bangalore, Chennai, Coimbatore, Vizag, Vijayawada, Coimbatore etc. with the head office

located in Mumbai. Over 90% of its bullion sales take place through RSBL Spot.

An extension to the dominant RSBL Spot, has been an online distribution and pricing system for coins in India, ‘RSBL Coins’. It’s a one of its kind system providing delivery of gold and silver coins through an online network. Pricing is most competitive and quotes are always given two-way. Parallel to that, RSBL also continues to run its classic model of retail coin distribution and it is a leader in that. These coins are available in different shapes and sizes to meet individual requirements and can also be customized to meet gifting/corporate requirements. RSBL Coins have been randomly certified by RBI and hallmarked by BIS.The packaging comes with a tamper proof seal and meets international packaging doctrine. We also offer buybackfacility of our coins at the ongoing market rates.

RSBL’s Optionally Convertible Debentures (OCDs) is another innovative product, which takes advantage of the price differences between gold spot/forward and futures prices of the commodity. The product has been a huge success and besides capital protection, has consistently provided the investors with a return of over 15% per annum since its launch in 2007.

RSBL recently launched ‘Bullion++’, a revolutionary product that would generate an additional lending income for the investors of gold and silver. As people buy apartments and give them on rent, they can buy gold or silver and lend them. Thus, it provides the investors with an opportunity for dual income: from the likely price appreciation and from the lending income. Moreover, the investors need not worry about purity, storage charges, theft and insurance hassles. Investors can also choose non-lease model where the bullion is just stored.

Promoters of RSBL have lent their expertise to the physical bullion market. One of the most important feats achieved was that of the INR denominated Bullions. Since it is purely based on spot international prices, it drowned the markets with a greater liquidity. One of the promoters, Mr. Prithviraj Kothari was recently elected as the President of Bombay

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Bullion Association (BBA). He is also on the Advisory Board of National Commodity & Derivative Exchange Ltd. (NCDEX) and Multi-Commodity Exchange of India Ltd. (MCX). RSBL has played a key role in the success of MCX by suggesting the implementation of gold and silver alternate trading month contracts.

RSBL is a prestigious member of the Export Promotion Council for EOUs and SEZs with units based in Surat’s Special Economic Zone (SEZ).

RSBL has received ‘ISO 9001:2008 Certification’ from Moody International for Quality Management System.

RSBL has received ‘Golden Arm Award’ from MCX for highest volumes of gold delivery given and taken on MCX since inception.

RSBL had also been bestowed with ‘Best Bullion Dealer’ award for the year 2009 by Bombay Bullion Association.

RSBL Sales Turnover

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Can you summarise the reforms in Indian bullion markets during the last 15 years?Indian bullion markets have seen significant

changes, in phases, since 1992-93, beginning with placement of gold import under Special Import Lisence (SIL) and then permitting ‘nominated agencies’ such as MMTC, STC, HHEC, PEC and select banks to import gold for export purposes in 1997. Later, Star Trading Houses and Premier Trading Houses meeting certain qualifying criteria were also given nominated agency status. Regulated commodity marketplaces were created to permit futures trading in gold and silver in 2002. Permission to launch Gold ETF under the supervision of SEBI was given in 2007. Lastly, in the last budget, the anomaly in the customs duty structure in dore and gold bullion bars was set right, paving way for resurgence in bullion refining. In all, the government has executed a very well thought out plan of ‘calibrated reform’.

Going forward, what needs to be done so as to make Indian Bullion industry a global reference market? First and foremost thing to do is to waive duty on bullion

BBA President

Speaks

import. Internationally, bullion is considered as a currency and hence not taxed. Duty is imposed only on jewellery. Secondly, permit export of bullion through banks without the mandatory 3% value-addition criterion (for bullion only). This would ensure two-way movement of gold bullion through proper channel and help Indian markets integrate with the global markets. So, to make India a global reference market, there should be no duty so that bullion traders can import and export freely, or there must be some specialized system through which they can offset the duty.

Opportunities for gold/silver minted products in India. Growth rate, growth drivers, players in the market; value proposition; challenges

At present, all minted products in India is coming from imported gold. May be, one or two tons of gold is coming

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from domestic mines, but basically most of it is imported. We import gold and then convert it to small bars / coins and then sell it to the market. In the past, 85 – 90 % of the purchase used to be plain gold jewellery, while bullion bars and studded jewellery formed the rest 10 %. The trend is changing now. Jewellery sale has come down to 70 percent, while the purchase of bullion bars/coins has gone up to 25 percent. People are changing their purchase practice also because of the high making charges involved in jewellery (wastage/making charges amount to 8 to 10 % of cost of purchase).

What is your opinion on bonded warehouse in India?For the amount of gold that we consume and the unpredictability in the demand, there is need for opening LBMA approved bonded warehouse. It will help us save 50 cents to each ounce of gold purchased and when the country is importing 950 plus tons of gold in a year, the saving will be huge. This will also facilitate Indian traders to export bullion to neighbouring countries like Singapore, Bangladesh, China etc. There is a huge opportunity for opening Indian market to international as India is the biggest consumer of bullion products. So if the logistics are available in India, it is a huge opportunity for the country to export.

Your view on Gold ETF market in IndiaGold ETF is one of the best segments to invest. If one has money and demat account, one can invest in Gold ETF. This is hassle free, easy to buy and sell and cheaper than physical gold. It is a paper gold and hence there is no need to store it physically. In India, however, the rural people are not participating in this segment because they have no demat account. Globally, ETF market is growing 100 percent year-on-year. We have to be patient and encourage people to invest in gold ETF.

What are the reforms you would like to see in Silver markets?To develop silver market, first of all, introduce silver ETF.

Silver is an extremely volatile commodity. To carry silver from one place to another is problematic and then storage is another issue. Hence, for retail investors, silver ETF is the best product as it provides systematic investment of small amount without having to encounter storage problem.

RSBL also has minted product. What is the difference between your product and products offered by banks or other nominated agencies?Unlike jewellery, bullion is priced only on the basis of purity of 0.999 or 0.995. As long as purity is assured, it does not matter as to who is selling it. Whatever RSBL sells or banks sell are all imported gold. Branding is applicable only in jewellery. Secondly, banks sell minted products on consignment basis, as they are not permitted to take direct exposure. Besides, they have a higher cost structure and hence higher mark-up. Lastly, banks are not allowed to hedge. That is, why banks do not buy back. In RSBL platform, people can buy or sell minted gold at any point of time. This is RSBL’s uniqueness.

Who should regulate silver ETF, SEBI or FMC?It does not matter who regulates silver ETF. Thing is, the industry and the investors require silver ETF and so it should come under either of the regulators. If silver ETF is considered as a commodity, then it should come under FMC; if it is considered as paper product, then it should come under SEBI.

As President of BBA, what you want to do?Our goal is to make Mumbai ‘the global hub for bullion’. Towards this, I request the government to give industry status to bullion. We should be permitted to import and export of bullion freely through banks, with transparency and full tax compliance.

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A Banker’s Perspective on the Indian Bullion IndustryScotia Bank________________Johnson Lewis

Market Scenario:

India imports around 700-800 tonnes of gold each year and it is estimated that India owns over 18,000 tonnes of above ground stocks, worth approximately

USD 900 billion. The majority of this gold is imported via nominated agencies and Banks like Scotiabank. Most of this gold reaches the end consumer in the form of jewellery via jewellers big and small. The jewellers have been an important part of India’s financial and socio-economical landscape, providing an investment avenue in the form of gold/gold jewellery that can be readily liquidated anywhere and anytime.

The supply of gold bullion in India is dependent on nominated banks and agencies. The Banks cater to bullion dealers, jewellery manufacturers and retailers. The largest amount of physical gold is procured by the bullion dealers and resold in the market. This gold reaches the end consumer via the value chain. The industry at the bottom of the pyramid is largely disorganized and fragmented. GJF, (All India Gems & Jewellery Trade Federation) estimates the number of licensed gold dealers at 250,000 and 450,000 certified gold smiths spread across India.

With the rise in disposable income in households, and growing consumer preference for gold both as an investment and adornment, jewellers will need

to expand their retail outlets ...

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The jewellers segment includes large national brands • like, Tanishq, TBZ, and very strong regional players like GRT, Prince, Joy Alukas etc. This segment of jewellers has been well serviced by the banking system hence these customers enjoy pricing power due to fierce competition amongst banks.

The financial crisis of 2008 has lead to banks • becoming stricter in terms of compulsory external rating, increasing capital etc. This tightening has lead to re-rating of jewellery business and to new standards being set by professionally managed companies. The traditional family-owned businesses are now catching up and improving their balance sheets.

With the rise in disposable income in households, • and growing consumer preference for gold both as an investment and adornment, jewellers will need to expand their retail outlets and increase their inventory holdings to be able to capitalize on the market. This change will entail increasing working capital financing from banks either as cash credit or as gold loans which are more cost effective. There is increased awareness about various banking products and utilizing banking channel for financing working capital and project financing.

Challenges:The bullion banking industry is faced with a unique situation. Some of which are listed below:

Financial strength on paper: Balance sheets of these clients are a challenge as they are never a true reflection of their flourishing business, net worth or liquidity positions.

The low disclosures on the balance sheets mean that the customer is not bankable as per current credit norms from the banks’ perspective. This adversely affects the ability of the company to expand their business.

Gold price appreciation: Many clients feel that they have not been able to gain from the gold price appreciation. If they had bought the same gold using cash credit, their liability to the bank would have remained the same and they could have benefited from the gold price appreciation.

Logistics: On the vaulting agent’s front, there are problems with respect to setting-up vaults in Tier 2 cities as the Vaulting Agents do not have a significant presence and other ancillary business to support their operations. The Tier 2 cities account for a major portion of the business given the increasing affluence and preference for branded and quality products. The vaulting and logistic providers will need to review their strategy to see how they can capitalize on this segment which is expected to drive growth over the next decade.

Policy Action: Over the past decade the Indian bullion industry has significantly matured. The market currently has several participants from Bullion Banks, Government Agencies, Premier Trading Houses, Precious Metal Exchanges, Gold ETF’s, However, the market needs policy action from the regulators for further growth of bullion industry in India. This regulatory support must be complemented by the jewellers taking proactive steps to re-examine their business models and make changes to make the business more robust and transparent.

Appropriate steps to standardize conduct and professionalism between market practitioners themselves and their clients will go a long way in augmenting the industry’s ability to strengthen its status as a major provider of service and revenues to the government.

Nominated Agencies

Bullion Dealers

Jewellery Manufacturers

Retail Jewellers

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1) Could you share with our readers the types of gold bars circulating in the world gold market currently? For Dubai Good Delivery (DGD), the bars range from minimum 100 grams moving up to 1 kg bars (kilobars), 3 kg (COMEX 100oz bars) and 12.5 kg bars (large bars). Large bars are widely circulated in the world gold market and are regarded as the standard denomination for physical delivery on most international derivative exchanges. There are many other denominations in circulation, which can vary basis local or regional preferences, eg – 10 Tola bar, 5 Tael bar

2) What is "Good delivery bars" in gold? What are the primary criteria for meeting the ‘good delivery’? Good delivery bars in relation to DGCX contracts are Gold bars which confirm to DGCX contract specifications (1 kg bar of .995 purity as per Dubai Good Delivery Standards) and are of the brand and refinery approved by the exchange (Details of approved brand/refinery is available at http://www.dgcx.ae/Clearing.aspx ).

3) How many gold refineries are approved under the ‘good delivery’ system?As of date, there are 20 DGCX registered refineries ( http://

www.dgcx.ae/Clearing.aspx ) producing Good Delivery bars. The bars produced by these refineries which confirms to DGCX contract specifications can be used for physical delivery against the DGCX Gold Contract.

4) What is the total production of ‘good delivery bars’ annually? What is the estimated market size at present?Specifically for DGD, we have 20 refineries, each of whom produce at least 10 tonnes of gold annually, therefore it is safe to assume that minimum production of at least 10 tonnes of DGD gold bars on an annual basis from each of these approved refineries. (It is not possible to determine the total production or the estimated market size at this stage)

5) Why ‘good delivery bars’ are only confined to professional ‘bullion’ market?DGD bars (i.e. refineries that produce DGD Gold) are regulated by the DMCC rules and regulations. The DGD rules provide strict guidelines for the production of good gold and silver. Refineries that are accredited to DGD are subject to stringent checks on annual and ad-hoc basis with regards to environmentally friendly methods of production and consistent quality of gold/silver bars.

The DGD rules and DMCCA monitoring of refineries establish trust and confidence amongst professional bullion market participants to utilize DGD bars for their day-to-day trading activities for gold traders, bullion banks, derivative exchange participants, etc.

6) What role do professional ‘vaults’ play in retaining the integrity of ‘good delivery bars’?Professional vaults ensure proper safe keeping, recording/accounting and storage of Gold without any damage to its quality and ensures proper tracking of gold. DGCX has four approved vaults (http://www.dgcx.ae/Clearing.aspx ) for Gold which facilitate physical delivery of the DGCX Gold Contract.

Dubai Good Delivery Bars

Eric Hasham, CEO, DGCX

August.indd 24 8/9/2011 4:34:27 PM


When all Hell goes wrong…..Thereis Haven to rely

upon!!!!!!________________ Mr. Ram Pitre (Head- Research)

Ms. Pinky Shah (Analyst) ITI Investor Services Ltd

Gold is unique commodity due to its properties such as physical demand, reserve currency, safe haven, inflation hedge, technical application and

so on. This makes it most sought after commodities. Hence, there are various factors that drive the gold prices. Gold had a eleven consecutive day of gains, something it has not achieved since mid-October 2006, when it rose for nine days in a row. Gold prices have hit a high of $1623.95/oz and are on record high. We all know that gold is the fall back position when the world markets are struggling. Investors love gold in times of turbulence and in time of financial crisis gold is the king of investments.

Gold prices are highly correlated to movement in currency market. Over the past few months there has been a growing amount of interest in the currency markets, especially the pound, the euro and the dollar. There are two major factors driving the value of the euro; interest rate differentials and the European debt crisis. At this stage, only the debt crisis is having an impact on Forex trading. The Euro has been dragged through fresh skepticism by the Greek crisis, and the dollar continues to be questioned as the reserve currency of choice. Market has become highly sensitive to market rumors, happening. Lots of events occurred. However, focus still continues to be the euro zone and its crisis, its bail out and the US debt situation also leaves the dollar in a growing state of uncertainty.

Money Pouring into Safe Havens in Q2’2011

Source: Bloomberg

There has been lots of uncertainty across the globe. Tensions are building as Greece’s sovereign crisis, US debt situation and legislative inaction in US is keeping the market on toes. Hence, money keeps flowing into the safe havens like Swiss Franc, Japanese Yen and king of crisis situation- Gold.

Risk appetite of investors has been falling. Investors have withdrawn from the riskier assets and currencies of Emerging Markets.

Correlation of Currency and GoldGold is widely regarded as a currency in its own right and thus, during times of US dollar weakness, gold often increases in value as many investors choose to own gold rather than US dollars. Australia’s role as a major producer of gold and other commodities means the Australian dollar is seen globally as a ‘commodity currency’”. Currently the correlation of Australian Dollar and Gold is at 87%

Source: Bloomberg

August.indd 25 8/9/2011 4:34:28 PM


With the currency volatility and the debt-contagion risk in Europe, investors are gravitating toward something tangible like gold. Dollar has been weakening on back of US fiscal deficit and prospects of QE-3. Euro fundamentals don’t appear to be too strong either. Fears of sovereign crisis spreading to Italy, Portugal and

Ireland remain high. However, rising of rates by ECB from 1.25% to 1.5% is giving support to euro. Also, ECB and EU remain united in efforts to avoid default of any euro zone nations. This is taking Euro higher and in turn supporting gold.

Euro zone Crisis Continuous on and off of euro zone crisis has been supporting gold since the year end 2010. As the credibility of sovereign-debt situations continues to worsen, the credibility of the underlying fiat currencies will continue to come into question which will keep supporting Gold. With Italy, Spain, Ireland and Portugal worries intensifying and Greece bailout still a huge question investors are fleeing to gold. Added to the mix, Moody’s rating agency unexpectedly slashed Irish government bonds to junk status which sent borrowing costs to the highest levels since Ireland joined the Euro zone. The International Monetary Fund and European Union rescued Ireland last year with an enormous emergency loan. Since then, fellow debt-laden euro zone nation Portugal has also been forced to seek an EU-IMF bailout, while Greece’s rescue has been deemed insufficient.

European leaders have agreed a new €109 billion bailout package for Greece under which private bondholders will be called on to participate for the first time, contributing a target of further €37 billion. Ireland has won from euro zone leaders a reduction of around two percentage points in the loans it gets from the European Financial Stability Fund, and greater flexibility in how it uses the bailout money, Irish Prime Minister Kenny said. This has given temporary relief to the crisis. However, markets are somewhat disappointed with the lack of details on reform of the EFSF.

US Debt Issue and Prospects of QE-3The debt situation also leaves the dollar in a growing state of uncertainty. If Congress is forced to make serious cuts in the Obama administration’s proposed budget, it should strengthen the U.S. currency — but further legislative inaction and the very real specter of a U.S. debt default could just as easily provoke a run on the dollar. President Barack Obama failed to win agreement from the U.S. Congress to reduce the government deficit. Lawmakers are working on budget cuts as they attempt to prevent an American default before an Aug. 2 deadline. Congress is in talks aimed at raising the $14.3 trillion U.S. debt ceiling before Aug. 2, the date when the government is projected to exhaust its borrowing authority. The dollar fell as a bipartisan Senate plan to cut the U.S. deficit and increase the debt limit faced resistance from House Republicans.

The United States may lose its top-notch credit rating in the next few weeks if politicians fail to increase the country’s legal borrowing limit and the government misses debt payments, Moody’s rating agency has warned. Standard & Poor’s placed the US rating on negative outlook on April 18th which meant a downgrade is likely in 12-18 months.

Cont’d on page no 28

August.indd 26 8/9/2011 4:34:28 PM

August.indd 27 8/9/2011 4:34:28 PM


This week S&P said there’s at least a 50 percent chance it will cut the AAA rating within 90 days on risks a stalemate will endure beyond any near-term deal to raise the U.S.’s debt limit. . A lower credit rating would cause havoc in financial markets around the world and increase borrowing costs for the US government and businesses, further harming public finances and weighing on the economic recovery.

US Labour MarketLack of recovery in US labor market is further lending support to gold. Non Farm payrolls does not show sign of recovery and US Unemployment rate has risen to 9.2% from 8.8% in early 2011. The US economy added just about 18,000 new jobs in June even as the unemployment increased marginally, a government report showed. The rise in payrolls was significantly lower than the 105,000 forecast by economists. Meanwhile, the unemployment rate rose to 9.2% last month from 9.1% in the preceding month, the Department of Labor said. The data for April and May were revised down by 44,000. Overall, the gain for May was revised downward to 25,000 from the initial report of 54,000.

Source: ITI Research and Bloomberg

Inflation and GoldInflation pressures among advanced as well as developing nations remain high. Higher inflationary pressure lends support to gold prices. Inflation in China accelerated to a three-year high in June as the consumer price index (CPI) increased 6.4 percent, according to the National Bureau of Statistics. The CPI had risen 5.5 percent year-on-year in May. Inflationary pressures over the Euro zone remain mostly unchanged as the year-on-year figure held at 2.7% in June while the monthly result was flat. The core CPI figure over the year however edged up to 1.6% from a previous 1.5%.

Source: Bloomberg and ITI Research

Currency and Gold Outlook: More than rupee strengthening it has been the Dollar weakness which is holding INR appreciation. As long as US government doesn’t come up with the concrete solution for its debt problems dollar will be hammered. But it looks unlikely that US will let it default. It will find solution on its debt problem and that would give some support to dollar. Euro region leaders have found some solution to their crisis but still whole mechanism has to be worked out. Hence, it will be the swiftness in action of the decision makers that would determine which currency will hold strong in the long run. For shorter duration, moving with the markets would be advisable.

Aussie Dollar continues to be strong as Gold keeps hitting new records. Producer prices rose 0.8% q/q and 3.4% y/y, but signaling continued pipeline pressures for the Australian economy, despite the firmer AUD, and would imply that the Reserve Bank of Australia’s attention should be on hiking rather than cutting rates. This also should support Aussie Dollar.

Cont’d from page no 26

August.indd 28 8/9/2011 4:34:29 PM


Trend Support ResistanceStrong Stronger Strongest Strong Stronger Strongest

USD/INR Bearish – On a Break & Close below 44.15 44.15 43.20 42.97 44.71 45.68 47.21

AUD/USD Bullish as long as price trade above 0.9830 1.0112 0.9548 0.8637 1.1023 1.1587 1.1935

EUR/USD Bullish as long as prices remain above 1.3698 1.4145 1.3698 1.3145 1.4592 1.5172 1.5503

Gold Bullish 1573 1541 1491 1623.95 1693.83 1731.08

EUR/USD (SPOT) – Monthly Chart

AUD/USD (SPOT) – Monthly Chart

August.indd 29 8/9/2011 4:34:30 PM

August.indd 30 8/9/2011 4:34:31 PM

August.indd 31 8/9/2011 4:34:31 PM


“Gold is the ultimate form of payment in the world” – so said Alan Greenspan a few years ago. In fact, gold has been acceptable as currency, sought after as a security and invested in for returns ever since history

was first recorded. During exceptional times, like today, investors are ploughing in huge amounts of money into gold in all its forms – bars, coins, ETFs, structured products, even in gold mining companies. As long as the health of the global financial ecosystem remains suspect, this trend is likely to continue. In fact, several western countries have wait times of up to a month after ordering because of the huge demand for gold coins, especially American Eagles and South African Krugerrands. Oneof the key reasons for this unprecedented gold rush is the lack of investment alternatives. Global interest rates are touching zero and there is a lack of confidence in other markets such as equities and real estate. Add the fear of inflation and the debasement of the US Dollar due to quantitative easing and you have a situation tailor made for investment into gold. Retail participation is clear from the fact that at the end 2010 ETFs and similar products held a substantial 2,177 tonnes of bullion. In India too, gold ETFs are growing at 100% yoy but the base is small yet we have several listed on our exchanges.

Of the several ways to invest in gold, one of the popular ones in western countries is via structured products which typically have a pre-set formula for calculating risk as well as returns and are therefore popular with a large set of the investing public abroad. The investment is structured i.e. the investor knows the upside as well as the potential downside at the time of investment. Even the time period of investment is clearly spelled out. Consider this against a simple position in the futures market where neither the time horizon, gains, losses nor the investment (MTM) is known beforehand. Normally, full or partial capital protection on investments linked to returns on

Potential for Gold Based Structured

ProductsJayant Manglik, President, Religare Commodities Ltd

gold is a standard feature of such structured products and clients find this characteristic of the product particularly appealing. So investors looking for downside protection along with gains from the upside are attracted towards this product. This addresses concerns of the risk-averse investor set. While indices are the most common underlying for this product, the rush towards gold investment has made many companies use gold as the underlying in response to customer demand. Though these can be customized for

August.indd 32 8/9/2011 4:34:31 PM


Investors are quickly latching on because it provides a

combination of exposure to gold fluctuation, yield and

principal protection and has received good reviews from

existing users.

large clients, the popularity in the retail space has led to standard off-the-shelf products. In practice, structured products would have variable exposure to debt and gold (or equity) but it would be pre-fixed at the time of sale. The underlying could also be derivatives, and frequently is. With gold being the hottest asset class today, some structured products have already been launched and many more are on the anvil. In India, mostly equity-linked and gold-based structured products are sold to HNIs. The major issuers of structured notes in India include Barclays Capital, Citibank, JP Morgan, JM Financial, Edelweiss Capital and Kotak Securities. And while there is no official data about the size of this industry, it has been variously estimated to be currently between Rs 4000 and Rs 6000 Cr – and growing fast.Of course, the sustained upward movement in gold has helped in no small measure. The product itself can be very simple – about 80% of the money is put in bonds so as to reach 100% in, say, three years and the rest is invested in a derivative position (like options) so that you can participate in gold movement. The tenure is generally 18 months to a few years and the ratio of the investment in bonds and options can vary depending on your risk appetite.

Investor demand will decide which products turn out to be most successful – those with zero or low risk with limited returns or those with lower capital protection but higher potential returns. The complexity of the payoff and the structure will vary with the product design and different products will appeal to different client segments depending on their risk profile. Structured products not only let you benefit from rising rates and prices; they even let you optimize returns when the markets are moving sideways. And you can even make money in falling markets. Various products can be used for this, depending on market expectations.

Inevitably, as the situation evolves, new regulatory issues will be thrown up. Besides, clients will have to be aware of the fees they are paying to the seller even though it may be embedded in the structure itself. Eventually a structured product also includes a call on the market and if only the capital is protected at the end of the product tenure, then there is a clear opportunity loss in terms of deploying the money elsewhere to get fixed returns e.g. in banks. Also, the inability to cash out in between effectively means that your money is locked in and exit options can be expensive.India has seen some interest in gold-based structured products and though reliable data is not available, it is a market which will grow exponentially at first and then maintain steady growth. But investors are quickly latching on because it provides a combination of exposure to gold fluctuation, yield and principal protection and has received good reviews from existing users.

A few years ago, ETFs and stocks of mining companies were identified by smart investors as vehicles to participate in the gold boom. Today structured products are in favour because they are widely seen to compare favourably with other investment vehicles in gold. As more investors participate in this market, it is evident that we are looking at continued growth at least

for the next several years and are likely to exceed double-digit percentage of total retail investment demand in gold within a short period. In times of volatility, structures which provide capital protection address a widely felt market need. And the lure of a product which can potentially give high returns with minimal risk is undeniable. Investors will actively look to participate in this new investment option and likely to go with companies which are more transparent on the investment pattern and have the credibility and balance sheet to provide capital protection as promised.

August.indd 33 8/9/2011 4:34:32 PM

August.indd 34 8/9/2011 4:34:32 PM


Bullion Market In South India

Nothing fascinates a South Indian woman more

than gold. No function- religious, family or

social would be complete without the dazzle of

gold. Marriages would demand generous gifting of gold

to the bride, befitting the status of the family in the society.

In olden times, when banks were yet to reach semi-urban

and rural areas, gold alone provided liquidity. Even today,

when banks are everywhere, people find it easier to access

cash through gold than banks. What has added to the love

of gold in recent times is the galloping inflation. With

the rise in incomes of the middle and upper middle class

families, consumption of gold in the country and South

India in particular has shown a steady growth in the past

decade. The investment option which attracted mainly

the rich rural populace in the past has invaded the urban

population with surplus incomes, thanks to lower interest

rates on bank deposits and uncontrolled inflation.

Gold Market Of South India:

The South Indian market for gold is said to account for about

45% of the country’s total consumption of about 900 tons

annually. Besides the State capitals Chennai, Bangaluru,

Hyderabad and Trivandrum, the tier II cities in the southern

states have also been emerging growth centres. Notable

among them are Coimbatore and Madurai in Tamil Nadu;

Trichur, Ernakulam and Kozhikode in Kerala; Hubli,

Mangalore and Belgaum in Karnataka and Vijayawada and

Visakhapatnam in Andhra Pradesh. With improvement in

infrastructure like communication and banking, bullion

traders have increased in number. Another pointer is the

growing number of non-hereditary entrants in the jewellery

trade. According to informal estimates, these centres have

been seeing an annual growth rate of about 10% steadily.

Falling rates of interest on bank deposits, rising inflation

and unprecedented annual increase in gold price from 2001

have pedaled the growth in the volumes of investments in

gold, pulling down the demand for jewellery. Jewellery

accounted for more than 90% of the demand a decade ago.

Today, this has dropped to less than 70% in many places.

Investment in bars and medallions has risen to 30% of the

total demand. State-wise breakup of annual consumption is:

With the rise in incomes of the middle and upper middle class families, consumption of gold in the country and South India in

particular has shown a steady growth in the past decade.

S. Guruswamy,Director (Marketing)

Surana Corporation Limited, Chennai

August.indd 35 8/9/2011 4:34:33 PM


Tamil Nadu - 180 tonsKerala - 60 tonsKarnataka - 70 tonsAndhra Pradesh - 95 tons

Here is an overview of the southern states individually:

Tamil Nadu:The state of Tamil Nadu accounts for about 20% of the country’s gold demand or about 180 tons. The largest centre for gold and jewellery is the state capital, Chennai. In fact, Chennai is the largest centre in South India. The city consumes about 120 tons per annum. Other major centres are Coimbatore and Madurai, accounting for about 30 tons each annually. Jewellery continues to hold its sway, but, the unprecedented spurt in gold prices in the last few years is undoubtedly tempting investment in gold bars and medallions.

The style, size and shape of jewellery showrooms in the city have changed dramatically. The cramped dingy showrooms of the past are disappearing giving way to swanky multi-level outlets with soothing ambience. Many large format retail outlets have sprung up with stunning interiors. Jewellery catalogues have gone electronic. The retailers pay more attention now than ever to quality and finish. The customers are aware of the means to ensure quality. Thus, most of the showrooms display the sign “BIS Approved Showroom”. With the country slowly moving towards mandatory assaying and hallmarking, the retailers are equipping themselves to meet the expected standards of quality. Most of the big retail showrooms also offer online shopping.

But online shopping of jewellery is yet to take off.

The tier-II cities Madurai and Coimbatore have seen remarkable growth in retail space, coupled with a large presence of bullion dealers, in the recent past. Many large showrooms have sprung up in the recent past. Coimbatore is the most preferred place for many big retailers in Kerala for expansion. Presence of a very large and rich clientele in Coimbatore apart, the forbidding 4% vat on jewellery in Kerala is said to be the key reason for more and more Kerala based retailers opening shop in Coimbatore.

Karnataka:The southern state of Karnataka accounts for about 70 tons of gold consumption per year. The state capital, Bengaluru, is the biggest centre for bullion trading as well as jewellery.

While Bengaluru alone would account for about 50 tons, the other tier-II cities like Hubli, Belgaum, Karwar and Mangalore together would consume about 20 tons.

Bengaluru has always been cool to gold and jewellery. But, especially, when bank interest rates started falling in the past, people who had a dislike for stock market

turned to gold. The surplus incomes of the ever increasing middle class, though too small for investment in real estate, are good enough for gold. It is estimated that forty

percent of the consumption goes into investment in gold bars and medallions. But, of late, with the entry of branded jewellery offering ‘chic designs’ for daily and office wear, the middle and upper middle class women in the cities have started spending on them.

Falling rates of interest on bank deposits, rising inflation and unprecedented annual

increase in gold price from 2001 have pedalled the growth in the volumes of

investments in gold, pulling down the demand for jewellery.

August.indd 36 8/9/2011 4:34:33 PM


The tier-II cities like Hubli, Belgaum, Karwar and Mangalore draw their bullion supplies from Bengaluru and feed jewellery not only to the local showrooms but also those in Bengaluru and neighboring states.

Kerala:Kerala’s tradition is steeped in great love for gold. The recent findings of enormous volumes of gold articles in the cellars of Sree Padmanabhaswamy Temple in Trivandrum should be proof enough. It is estimated that the State of Kerala consumes 60 tons of gold annually. Major chunk goes into ornaments. About 20% of the consumption is in gold bars and medallions. Like anywhere else, in Kerala too, people today look to gold for investment to beat inflation. Another major factor is said to be saving for the future of the children as well as family. Here, gold seems to have edged out options like bank deposits and equity market. A sizeable volume of gold flows into the State through the NRIs in the gulf. It is well known that some of the leading jewellery retail chains in the gulf, especially Dubai, have been set up by NRIs from Kerala. All of them have their jewellery showrooms in Kerala as well, in Kochi, Trivandrum, Kozhikode and Trichur.

The main source for gold is imports through nominated agencies and personal carriage by NRIs. Trivandrum and Kochi are the airports of entry. Gold flows from these two airports to other major bullion centres like Kottayam, Kozhikode and Trichur. The largest jewellery making hub in Kerala is Trichur, which accounts for about 20 tons of gold per annum. While marriages pick

up the traditional designs, the daily wear is in appealing contemporary price friendly designs.

Kerala is the first state in the country to tap the gold loan market in a big way. The Kerala based Non-Banking Finance Companies are quite popular across the country. They offer the highest amount of loan per gram of gold and also keep the interest rate

competitive. Not only that, they also offer interest rates far above those offered by banks on the deposits they take from the public. No wonder, their volumes are leaping. The Reserve Bank of India has recently come very hard on lending on gold. But the NBFCs need not worry if they are able to attract enough cash deposits from the public to handle their gold loans. The hidden but a very welcome complement of the gold loans is that an idle asset is brought into the economy. Another thirst is the annual month-long shopping festival in Kochi, Trivandrum and all other major cities. This is a replica of the annual Dubai Shopping Festival.

Andhra Pradesh:Andhra Pradesh accounts for about 95 tons of gold consumption annually. While the state capital Hyderabad is the biggest bullion trading centre, there are other major centres at Vijayawada and Visakhapatnam. These three centres together feed the rest of the smaller centres in the state. Investment

in gold as an asset class has all along been prevalent in the

Most of the showrooms display the sign “BIS Approved Showroom”. With the country slowly moving

towards mandatory assaying and hallmarking, the retailers are

equipping themselves to meet the expected standards of quality.


August.indd 37 8/9/2011 4:34:34 PM

August.indd 38 8/9/2011 4:34:34 PM

August.indd 39 8/9/2011 4:34:34 PM


state, especially among the agricultural gentry. Side-by-side, there exists a passion for jewellery to meet demands of dowry in marriages. While the urbanites choose jewellery of daily wear in exquisite designs and go for a little investment with their surplus incomes, the rural sector with rich farmers buys huge amounts of traditional jewellery and also spends large amounts on gold investment. With increase in demand, number of jewellery retailers and bullion traders has increased manifold. A special characteristic of Andhra Pradesh in gold consumption is its preference for 100 gm bars, while the rest of the country opts for kilo bars.

Like other cities, the twin cities of Hyderabad and Secunderabad have seen, in the recent past, remarkable expansion of retail space. Leading brands have opened shop. Hyderabad is famous for jewellery studded with coloured stones and pearls. Clusters of jewellery manufacturing plants are operating in other smaller cities/towns viz., Vijayawada, Visakhapatnam, Rajahmundry, Kakinada, Nellore, Poddutur and Kurnool. These centres draw their requirement of gold from Hyderabad, Visakhapatnam and Vijayawada.

SILVER:South India accounts for about 1300 tons of annual consumption. The country’s annual consumption is 3500 tons. While about 200 to 300 tons would come from the recycled market, a very small proportion also comes from the copper refineries as by-product. The rest is imported. The biggest Silver trading centre in the south is Chennai, with a share of 800 tons a year. While Andhra Pradesh comes next with 300 tons,

Karnataka would consume 200 tons per annum. Silver use in Kerala is said to be negligible. The tier-II cities in the south which have emerged major trading centres are Salem in Tamil Nadu, Vijayawada and Visakhapatnam in Andhra Pradesh and Bellary in Karnataka. Industrial application and utensil manufacture are the two major segments of consumption. But, recently, in the last one year, investment in silver has grown phenomenally, riding on the back of unprecedented price rise. But this trend vanished as fast as its appearance, with the roller coaster tendency of the silver price. Some investors reaped unexpected returns and many others went broke unable to square their positions.

Overview of The South Indian Market:Corporate Entry: There are quite a few jewellers and bullion dealers in the corporate sector. The transformation from proprietorship and partnership to corporate entity began in the last decade. The key reasons for the change are resource crunch for expansion and the reluctance of the banks to adequately fund such expansions. Most of these corporate entities are listed companies with annual business volumes in excess of Rs.5000 crores. With corporate governance, these companies have brought transparency and quality into their operations, building up customer confidence. Quite a few large jewellery firms are in the process of entering the corporate sector. With more and more embracing the corporate entity structure, one can hope, before long, jewellery and bullion trade would emerge as a strong industry with its own voice.

Branding and QualityStandards:Branding of jewellery is catching up with the consumers. The last decade has seen the launch of many brands in the South. With branding comes not only an identity to the retailer but also quality assurance

to the consumer. Competition between jewellery brands is not as fierce as other consumer goods. This is because of the enormously limitless range of designs and the after sales service. The scope of growth for all the brands is very bright.

Electronic Trading and Automation: With theadvancement of technology in the last decade, almost all

i ll h i l l id b

It is the fond hope of everyone that

introduction of GST in the country

would remove all tax/duty barriers

and offer a borderless trading region

across the whole country.


August.indd 40 8/9/2011 4:34:35 PM


traders and jewellery retailers in the South (as in the country) use cutting edge softwares for maintaining their accounts, networking of their branches and other allied activities. Some of the bullion traders offer over-the-counter (OTC) electronic platform for trading. Most of the jewellery retailers have installed online shopping facilities for the customers. A number of bullion dealers and jewellers extensively use the Multi Commodity Exchange (MCX) for price hedge. While some welcome MCX as a boon for hedging their price risk, some others blame the speculative trading on the MCX for the price fluctuation in the physical market. This is however debatable.

Tax and Infrastructure Barriers: The bullion trade continues to be regional even after introduction of VAT in the country. The tax rates are not uniform across the country. Kerala has a VAT of 4% on gold jewellery, Karnataka 2% while most other States follow 1%. There are state specific levies like octroi and other duties. The bullion traders and jewellers would need to have separate VAT registrations in every state. Even then, they would not be able to enjoy input tax credit for VAT paid in other states. Thus, effectively, they have to operate within the borders of their own states. This acts as a formidable barrier to operations at national level. It is the fond hope of everyone that introduction of GST in the country would remove all tax/duty barriers and offer a borderless trading region across the whole country.

Promotional Efforts: The concept of jewellery exhibitions has come to stay in all major cities of the south. They are so popular that more and more international participants eagerly wait for such shows. They are also appropriately named “International Jewellery Shows”. Some cities have them twice a year. Some of these are B2C and some B2B. Whatever the nature, the general public and the jewellery traders give them a great thumbsup. While the consumers are happy to buy from a very wide range of designs, national and international, at competitive prices, the wholesalers and retailers endorse that they are able to clock very high volumes and also widen their respective clientele at the same time. As these shows bring on display the latest machinery and tools for jewellery making from international firms, the local participants get an easy opportunity for upgrading their technology without travelling abroad.

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Established in the year 1997, Khemka Group of Companies has been amongst the market leaders in providing wholesale and retail level bullion delivery in the spot, forward and future markets in India. Khemka Group of Companies is the biggest importer of bullion in North India and one of the top bullion importers in the country.

Mayank Khemka is the Managing Director of Khemka Group of Companies.

Bullion Market In North India

What is total import figure of gold in north India?I don’t have the exact figure. But it is

approximately 25-30% of total import in India. India

imported around 900 tons last year and that transforms around 225 to 275 tons in north India.

Imports in north India is basically for consumption in north India only. In north India there are two types of demands - jewellery and investment.

What is the nature of investment?North Indians buy gold bars as investment. They buy 1 kg bar for that purpose. Jewelry does not come as mode of investment. There is also demand for silver bars for investment, but investors are more inclined to gold bars. Silver bars are too bulky to carry, so investors prefer gold 1kg bars for investment.

June and July months are traditionally lean season in South India. Is that it true also with north India?Yes, that is also true in north India. June and July is the sowing season and agriculture community in north India does not have much cash to deploy on investment, they put all their money in agriculture.

In north India what are the important bullion centres?In north India Delhi is the biggest market. It covers around 55% of the total bullion sales. Around 25% will be Jaipur and in the remaining 25% are many small centers like Agra, Kanpur, Lucknow etc.

Apart from direct bullion investment, investors are even interested to invest in products like gold ETFs, gold funds?ETF is not so popular in north India because it is not so transparent. The increase in price of gold ETF is not fully transferred to gold value. Moreover they like physical feel of gold, hence ETFs are not very popular in north India.

Do Investors buy gold directly from bank or bullion importers?They prefer to buy gold from bullion importers as they buy

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in small quantities and its random purchases and they also need an option to sell the gold which only the importers can buy.

During Akshya Tritiya there was media report that banks sold lot of gold during that time in south India. Is that true in north India?See what happens with banks they are just bullion points. In north India MMTC is well popular in the same category of bullion points. They sell quite amount of gold through these points.

In north India what investors prefer - coins or bars?It depends upon investors’ profile. If the investment amount is small, then they go for gold coins as coins are available in small denominations. But if the investment amount is high like 20 to 50 lakhs, then they go for bullion bars. So we have both sections of investors – small as well as large investors.

How is the competition in bullion trading in north India?There are lot of bullion traders in north India and so competition is very high. Also in north India, there is tradition of dealing in cash. What is practice in south India traders prefer transaction more on cheque. But traditionally customers here prefer cash dealings. So it is very difficult market to operate.

In jewelry sector what kind of growth you are seeing at this point of time in north India?The growth was pretty strong last year and it is expected to remain firm this year too compared with 2008 and 2009. Last year bullion imports touched more than 900 tons from 700 tons previous year. So this is pretty 25 to 30% growth and jewellery segment contributed good portion into this growth. In 2008 and 2009, there was recession and investors did not have surplus money to invest. But now

stock market is doing well, economy is growing, real estate and other sectors are performing, so people have money to spend on luxury items like jewellery.

Do you think this growth will remain or there will be some slowdown in coming future?Growth is expected to remain firm, but all depends upon prices. If the prices do not shoot up too much, we expect growth to remain intact.

RBI is hiking the interest rate aggressively. Do you think it would have negative impact on bullion industry as well?There are some concerns, but I don’t think rate hike would have any strong impact on bullion market. Yes, what can create difference is the attractive deposit rate. All banks are offering attractive rate of interest in fixed deposits. But investors nowadays basically invest through portfolio allocations. They divide their portfolio in segments like fixed deposits, real estate, stock, bullion and so on. I think 15 to 20 percent of portfolio allocation will go to bullion investment.

What bullion industry expects from government in policy reforms? Government in its budget to promote gold and silver refining in India had allowed import of gold dore bars at concessional rate of duty. But the policy is still not clear as to whether refiners can directly import dore bars or it has to be done through nominated agencies. We have made many representations to the government and urgent action is needed from the government to clear the uncertainty regarding this.

Policy reform in silver is also awaited allowing silver forwards and silver loans to jewellers like it happens in gold. Similary silver ETF’s should also be allowed.

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Global Scrap Supplyand its

Importance:An Overview

Jeffrey RhodesGlobal Head of Precious Metals & CEO INTL Commodities DMCC

“What exactly is scrap gold?” as it can mean different things to different people in different parts of the world and this brief article will follow the same

format. I spoke to my good friends at GFMS, considered by many to be the world’s leading gold research house, and they regard all gold supply, that doesn’t come directly from gold mines, to be scrap. Other definitions gleaned from the websites of scrap gold merchants state that:

“Scrap gold includes any piece of metal that is entirely or partly gold. Some common items sold as scrap gold include broken gold jewellery, gold coins, gold dental bridges, gold wire and gold shot”

Or“The term "scrap gold" usually refers to karat gold

jewellery that is at least 10K that is broken, damaged, or out of fashion and no longer worn. Typically includes chains, earrings, bracelets, anklets, charms, rings, watches, money clips, lockets... any item made out of gold.”

And“Scrap Gold is the term used for the process of recycling broken jewellery, coins and other items that are no longer wanted”

Scrap Supply – East Versus West

Tonnes 2000 2005 2009 2010 2010 v 2000

2010 v 2000

EAST East Asia 143.0 207.8 447.7 443.2 210% -1%Middle East 202.5 325.3 487.6 369.3 82% -24%Indian Sub-Continent 102.1 129.9 176.9 137.7 35% -22%Total 447.6 663.0 1,112.2 950.2 112% -15%

WESTEurope 62.2 99.8 269.2 338.6 444% 26%North America 58.1 65.4 133.2 154.1 165% 16%Latin America 20.0 31.2 101.5 123.2 516% 21%Africa 12.3 17.7 41.1 43.9 257% 7%CIS 17.2 23.5 35.3 32.8 91% -7%Oceania 2.2 1.9 2.2 2.7 23% 23%Total 172.0 239.5 582.5 695.3 304% 19%

Source: GFMS Gold Survey 2011

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The Eastern markets as a geographic bloc accounted for 950 tons of secondary gold supply last year representing a gain of 112% over the year 2000 with East Asia geographically the most important region for scrap flows, followed the Middle East, which includes Turkey, with the Indian sub-Continent also quite significant.

The West has shown significant growth of 304% in total since 2000 with 695 tons in 2010 with Europe, led by the UK, recording growth of 44% to reach 339 tons, with North America coming in with 154 tons (a gain of 165%), while Latin America rose by over 516% to 123 tons.

Now lets take a more detailed look at each of the geographic regions.

Scrap Supply – Europe & The AmericasTonnes 2000 2005 2009 2010 2010 v 2000 2010 v 2009United States 53.6 60.4 124.0 143.0 167% 15%Italy 24.6 46.7 78.0 98.0 298% 26%UK & Ireland 3.7 4.5 59.4 69.8 1786% 18%Mexico 3.8 7.2 50.3 58.0 1426% 15%Germany 4.9 7.6 32.4 44.1 800% 36%Spain 2.5 3.7 20.1 31.9 1176% 59%France 5.9 12.1 24.9 29.7 403% 19%Source: GFMS Gold Survey 2011

The United States became the largest scrap gold market in the world in 2010 with secondary supply of 143 tons, which was 167% more than at the turn of the century with Italy the second most important market in the West and the biggest in Europe with 98 tons.

However the UK and Ireland with almost 70 tons is coming up fast on the rails with scrap flows exploding in the last five years, a point that I will consider in a bit more detail later in this paper, while Germany, France and Spain have also posted large gains since 2005.

Mexico has been the key driver of the growth in scrap flows in Latin America between 2000 and 2010, ranking only second behind the UK in percentage growth terms.

Scrap Supply – The Middle East & IndiaTonnes 2000 2005 2009 2010 2010 v 2000 2010 v 2009Turkey 56.0 67.7 217.2 122.0 118% -44%India 79.0 94.0 115.5 81.0 3% -30%Egypt 34.0 72.7 65.0 48.0 41% -26%Saudi Arabia & Yemen 60.8 92.5 57.3 43.1 -29% -25%

Pakistan 20.0 30.9 53.9 49.8 149% -8%Iraq & Syria 3.5 14.4 35.6 36.4 940% 2%Iran 11.0 16.1 32.2 32.7 197% 2%United ArabEmirates 10.6 28.2 27.1 26.8 153% -1%


Looking at the Middle East and Indian sub-Continent, it is clear that Turkey is today the most important source of scrap gold supply in the emerging markets of The East with 122 tons in 2010, up by 118% from the levels posted in 2000, although this was sharply lower than the 217 tons reached in 2009.

Scrap Supply – East AsiaTonnes 2000 2005 2009 2010 2010 v 2000 2010 v 2009China 24.0 41.7 102.8 138.2 476% 34%Indonesia 36.0 67.0 79.9 64.9 80% -19%Thailand 13.5 12.4 66.0 44.7 231% -32%Vietnam 6.0 7.8 51.5 64.8 980% 26%Japan 13.5 24.5 35.3 44.1 227% 25%Taiwan 10.8 13.0 30.1 27.5 155% -9%Malaysia 4.7 11.0 19.3 22.2 372% 15%Korea 11.8 17.5 21.3 18.0 53% -15%Source: GFMS Gold Survey 2011

Turning to East Asia, it is surely not a great surprise to see China as the leading source of secondary gold supply with 138 tons followed by Indonesia, Thailand and Vietnam, with the latter rising by 980% since the year 2000.

Scrap Supply – Top 10 Ranked By VolumeTonnes 2000 2005 2009 2010 2010 v 2000 2010 v 2009United States 53.6 60.4 124.0 143.0 167% 15%China 24.0 41.7 102.8 138.2 476% 34%Turkey 56.0 67.7 217.2 122.0 118% -44%Italy 24.6 46.7 78.0 98.0 298% 26%India 79.0 94.0 115.5 81.0 3% -30%UK & Ireland 3.7 4.5 59.4 69.8 1786% 18%Indonesia 36.0 67.0 79.9 64.9 80% -19%Vietnam 6.0 7.8 51.5 64.8 980% 26%Mexico 3.8 7.2 50.3 58.0 1426% 15%Pakistan 20.0 30.9 53.9 49.8 149% -8%Source: GFMS Gold Survey 2011


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As you can see the United States rose to number one spot with 143 tons in 2010, closely followed by China with 138 tons while Turkey fell from the top spot in 2009 to 3rd last year.

Now if we take a look at global gold scrap flows in terms of percentage changes, over since the new millennium began you can see that by far the fastest growing market in the world is the UK & Ireland which has risen by a staggering 1786% from 2000 to 2010 with most of that increase occurring over the last five years. Mexico is one of the other big stories with its market, changing from a regional gold jewellery fabrication centre to a major hub for scrap gold flows in Latin America. It has recorded the second biggest growth in percentage terms over the last eleven years rising by 1426% to over 58 tons in 2010. Flows from Spain have grown by 704%. Vietnam by 980% and Iraq & Syria have grown by 940%. These are truly staggering results and perhaps should serve as a warning to the gold bulls that secondary supplies can be mobilized from sources around the world “if the price is right” and economic conditions remain challenging.

Key Drivers of Scrap Flows

2000 2005 2009 2010 2010 v 2000

2010 v 2009

Average Gold Price USD/oz $279.11 $444.45 $972.35 $1,224.52 339% 26%

Average Gold Price Euro/kg € 9,734 € 11,521 € 22,512 € 29,739 206% 32%

Average Gold Price Yen/g ¥967 ¥1,577 ¥2,920 ¥3,444 256% 18%

Average Gold Price Yuan/g ¥74.29 ¥117.09 ¥213.87 ¥266.15 258% 24%

Average Gold Price Rs/10g Rs4,518 Rs6,454 Rs15,233 Rs18,304 305% 20%


And now to perhaps the most important section this article, what are the key drivers of secondary gold scrap supplies in today’s global markets?

Obviously, and as with all financial and commodity markets, the key focus for everyone has been, and will be, for the foreseeable the future outlook for the global

economy in general, and the US in particular. Shrinking disposable incomes and concerns over job security in the developed markets in the US and Europe not only inhibits new jewellery demand but also is a key factor in selling old or unwanted gold for much needed cash. This combined with gold prices reaching all time records highs, not just in dollars but also in a range of local currencies, has also been an important factor in the rapid growth of scrap gold flows over the last few years.

However looking ahead it is actually price expectations that hold the key for potential scrap gold sellers, certainly at a wholesale level. For example looking at India, despite a 20% increase in the Rupee price of gold in 2010 scrap sales in the world’s largest physical gold offtake market actually fell by 30% last year as local traders anticipated, and still anticipate much higher dollar and rupee gold prices. This is a key point and one that I will return to in my closing comments.

Finally, the global physical gold market is one of the last bastions of real physical arbitrage left in a world dominated by paper financial markets. This arbitrage can be driven by a wide combination of factors that could include regional rules and regulations; import and export tariffs and quotas; volatile local exchange rates and interest rates; regional rates of inflation and capital flows that might lead to Governments acting to stop protect their economies. In recent years we have seen this type of arbitrage occurring in places such as Turkey and Vietnam, with the former being particularly fickle and where the market can change from being a source of scrap supply to good offtake back to a supply market within a short period of time.

Scrap Supply versus Primary Production

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Since the start of the new millennium, the nominal gold price in USD terms has risen from an average of $279 in 2000 to $1,224 in 2010, a gain of 339%. Gold has also posted impressive gains in local currency terms in the major gold producing countries with averages prices rising by 258% in China, 362% in South Africa and 177% in Australia.

Despite this impressive growth in the value of gold across the world primary gold production has increased by just 3% from 2,620 tons in 2000 to 2,689 tons last year. This highlights the complete inelasticity of the gold mining sector to the record advance in the gold price in all currencies and even if the current historic price does prompt a new wave of exploration the “time to market’ for new primary gold supply will be measured in years not months. With hedging no longer an acceptable practice the influence of gold mine supply on the gold price has become nominal at best.

Now compare the way scrap gold flows have risen over the same time period with secondary supplies rising from 620 tons in 2000 to 1645 tons in 2010, representing a gain of 165%. This elasticity of supply from the scrap gold sector and the ability of scrap gold merchants to adapt to changing markets conditions is crucial and a key factor in today’s market.

ConclusionsDespite the unprecedented growth in the value of the yellow metal in all currencies since 2000 the gold producer community has been completely unable to react and take advantage this extra-ordinary rally with primary gold production barely showing any increase, amazing really and perhaps this explains why share values of the major gold mining companies have not kept pace with the rising gold price. Surely this inability to increase gold production to meet the surge in investment flows into the yellow metal has been one of the key factors behind gold’s meteoric rise over the last five years.

Also the” H” (hedging) word is firmly persona non grata in polite producer circles even if profit margins over production costs are now at a level not even the most optimistic treasurer could have hoped for back at the start of the millennium.

On top of this Central Banks, for so long sellers into any major rallies (or in the case of Gordon Brown dumping the UK’s gold into weakness), now seem to have stepped aside despite the IMF sales program and in 2010 the Official Sector became a net buyer for the first time since the 1970’s.

With primary gold production shown to be completely inelastic, hedging non-existent and the Official Sector no longer a source of metal, scrap gold supply is now clearly the only credible counter to the seemingly never ending waves of investment buying. And even scrap flows have waned last year despite further impressive gains in the gold price over 2009 as bullish sentiment has intensified amid growing economic uncertainty and a lack of confidence in the major currencies.

Despite all the fundamental and technical analysis in the world when it comes down to it the only real reason to buy gold, which is a very low yielding asset, was because you believed that the price would be higher later in the day, or tomorrow, or next week, or next month, or next year! Clearly this is the prevailing sentiment behind the current stampede into gold as a safe haven and speculative fund buying in futures markets, and it is this psychology that could inhibit potential scrap gold sellers.

However remember that potentially there is a lot of scrap gold that could enter the market. According to GFMS there is 165,000 tons of above ground stocks in the world, with 55% or 90,000 tons held in the form of gold jewellery. Even if just 10% of this relatively price elastic source of supply were mobilized it would be over four times greater than total current ETF holdings and more than the total amount of gold held by the US.

As I have said the same motivation behind the record level of investment fund buying of gold applies equally to the scrap market causing traders to move to the sidelines, i.e. they everyone ‘expects’ the gold price to move higher, or in the case of the “Armageddon Brigade” that gold as an asset class will lose less than paper financial assets. However once sentiment changes, as it surely will one day because “trees don’t grow to heaven”, we could see a perfect storm of selling as investment fund managers and scrap gold merchants hit their sell buttons at the same time. You really do not want to be in the way of the resulting Tsunami of gold sales when it hits the market.

Could this happen? Yes in my view. When could this happen? Impossible to tell and we may have to wait for longer than anyone expects but the first signal will be when the FED acts to reverse its easy money policy and raise real interest rates.

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It’s Gold that Shines!Chirag MehtaFund Manager – Quantum Gold Fund ETF and Quantum Gold Savings Fund

Whether it’s a wedding, a festival or any auspicious beginning, no celebration is ever complete without the purchase of Gold.

This yellow metal has always been viewed as a symbol of success, affluence and authority. Especially in India, gold plays an important role in cultural and religious events. For instance, during festivals such as Diwali, gold coins imprinted with the image of Goddess Laxmi are gifted to loved ones as a token of luck. Gold, as a symbol of status, is even mentioned in the epics – the Ramayana and the Mahabharata. Throughout history, it was gold that represented the splendour and status of the kings and their empires.

Owing to its prominence in our culture, gold is considered a must-have by Indians. Every family has its own little

hoard of jewellery, coins and souvenirs – all handed down from one generation to the other with their respective stories and sagas.

So, yes, Indians are partial to gold. We love the yellow metal and will buy it even though prices continue to rise. To us, gold is more than an alloy and owning it is beyond just adding to our treasure chests - it is the realization of our aspirations and an assurance that the future of our loved ones will be secure.

And hence, it is not surprising that India recorded the highest purchases of gold in history

last year. Yes, the Indian gold market is evolving, but it still needs to be organized. Today, each gold outlet offers customers a price suited to their profit margins – No Price Standardization! Lower the denomination, more expensive it gets – Not suited for smaller customer pockets! The Bureau of Indian Standards surveys still raise concerns on purity – Is your Gold Pure? Increasing cases of Gold theft; even from bank lockers – Safes are Unsafe!

Almost as an answer to these problems, Gold Exchange Traded Funds (ETFs) were launched in India in 2007. Gold ETFs offer a convenient platform to tap into the safe haven asset. But of course, investors still wonder: Are ETFs safe? Do these funds invest in real gold? Are they cost effective? Here’s the logic behind gold ETFs and why your investment in ETFs is really as good as gold.

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Gold ETF- As Good as GoldGold ETFs are probably one of the best financial innovations. A Gold ETF is a simple product that passes on the efficiency of a wholesale market to a retail investor.

By investing in Gold ETFs, retail investors are able to buy small amounts of gold at prices which almost match those at which hundreds of tonnes of gold are transacted between a producer/refiner and a bullion bank or any other big institutional investor. There’s high transparency and standardization in the pricing system. The gold is stored in secure vaults and is completely insured (a fact that I can assure you of with regards to the Quantum Gold ETF).

Investors can buy and sell their Gold ETF units on the National Stock Exchange without worrying about the physical delivery of gold. Hence, concerns about purity and safe keeping of the gold are taken care of right away.

Gold ETFs give you a convenient, hassle-free, tax efficient and above all, secure means to own gold.

However, even though the medium was brilliant, Gold ETFs mandated the ownership of a demat account to invest in them. Unfortunately, that caused a large set of investors to be left out. All those without a demat account were not able to make most of this efficient form of buying gold.

But, the investor is king! And so, for the benefit of those without a demat account, an extension of Gold ETFs was brought in to play – the Gold Fund of Funds.

The Extension to ETFsGold Fund of Funds predominantly invests in Gold ETFs and endeavors to track gold prices (just like Gold ETFs). Through Gold ETFs investors could invest in denominations

as low as half gram; Gold Fund of Funds further increased affordability by lowering the investment threshold to Rs. 500 at a time.

Gold Fund of Funds also brought with them the added benefit of Systematic Investment Plans (SIP) which is an investment option that allows you to set aside money in regular installments, instead of investing one big lump sum amount. SIPs are ideal for those with modest salaries, long term goals, and in want of financial discipline. Say you decide to accumulate gold for your daughter’s marriage. You would need to ensure that your allocation to gold follows a disciplined calendar. However, you might sometimes face challenges on this path. For instance, someone may intrude

your systematic purchase with their ingenious opinion on prices, resulting in you missing your round of allocation. Chances are that you could end up buying at higher rates or even miss out on your gold accumulation plan. This is the very challenge that Gold Fund of Funds helps you address through their SIP facility. You can instruct your fund house to regularly allocate a fixed amount (say Rs 500) to gold at a particular date (say 15th of every

month) for a particular period (say 5 years). Using the SIP facility, you can invest little by little regularly, which will go a long way in creating a sizeable corpus of gold over time. The SIP facility offers you the best of both worlds – allows you to compound your investments and also helps you average out your buying costs.

Gold Fund of Funds are tax efficient as well when compared to investments in conventional physical gold. The long term capital gains creep in just after one year as opposed to three years for physical gold. Also, they do not attract any wealth tax as physical gold investments do for every year that you own gold.

Investors can buy and sell their Gold ETF units on the National

Stock Exchange without worrying about the physical

delivery of gold. Hence, concerns about purity and safe keeping of the gold are taken

care of right away.

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There ain’t such thing as a free lunch, all this convenience comes at an extra marginal cost. Take for instance the Quantum Gold Savings Fund. Here you would be paying 0.25 % p.a. as expenses, over and above the prevailing charge of 1% p.a. for Gold ETF. Thus, all in all you would have to pay an expense ratio of 1.25% p.a. But before you start considering this cost in isolation, do take a look at the heavy premiums that you would have to pay if you buy physical gold. The difference between the two is quite an eye opener. If you compound the premiums you pay for physical gold over the years, you will end up with a huge figure. The 1% p.a. expense ratio charged for Gold ETFs goes towards safe keeping, insurance, audit of the gold and a part of it also to the fund house as management fees. Not a bad deal, right? Some would wonder why invest in a Gold Fund of Funds and pay an extra cost of 0.25% p.a. over and above the expense of the elementary gold ETF; wouldn’t it be better to just own the gold ETF directly? This would depend largely on what you, as an investor, are looking for while investing in gold. For e.g. : an investor without a demat account or one looking for automated systematic investment plans would be better suited for the Fund of Funds. While an investor who is comfortable with

trading on the stock exchanges and is well versed with the brokerage dynamics would probably prefer to invest in Gold ETFs directly. Speaking about brokerages, it helps to know that a retail investor is usually charged a high brokerage, while an institutional investor like a Fund of Fund would likely pay a lower brokerage.

The Way forward:The awareness of ETFs is slowly gaining ground and the acceptance of this mode of owning gold is increasing by the day. Still, we don’t see much participation from the bullion industry towards the development of the same. Going forward, the market would likely force the industry to accept and complement this efficient form of owning gold.

There have been some initiatives like offering gold loans against Gold ETFs, buying jewelry in exchange of gold ETFs, etc. But, it’s just a handful of players keen to make the first move. Slowly but surely, there would be a unanimous acceptance of Gold ETFs within the bullion industry as free markets always strive for efficiency.

Tax Gold Fund of Funds Physical Gold

Long Term Capital Gains Tax After 1 year After 3 years

Wealth Tax Not Applicable Applicable for every year of holding

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Gold, silver and other precious

metals are traditionally

considered as ‘safe haven’

assets which serve as flight-to-safety for

investors when there is global turbulence

and uncertainty. The advantage of these

assets is that because of their tangible

nature they serve as a ready store of

value and investors are able to readily

identify with them. Of them all, gold is a

commodity that is most easily understood

as it has stood the test of time as a medium

of exchange and a store of value. As an

investment asset gold enjoys a distinct

advantage as it has a weak correlation with

stocks and bonds adding to the breadth of

an investment portfolio.

In the last few months the role of gold as

a ‘safe haven’ asset has come to the fore

thanks to the global uncertainty caused

by debt problems in the euro zone and

the US. The main problem plaguing the

euro zone for more than a year now has

been that of the Greek debt. Very simply

Global Uncertainty and the Trajectory of Precious MetalsTanushree Mazumdar Senior Economist and Vice President- Knowledge Management, NCDEX

put the Greek debt problem is nothing but

a case of a country having lived beyond

its means and having to bridge this gap

between income and expenditure through

borrowings which it has to then repay.

This borrowing or debt became a burden

for Greece as it stood at almost 160 per

cent of its GDP!

Why does indebtedness become a

problem? For markets and financial

institutions the threat of a sovereign credit

rating downgrade by credit rating agencies

is enough to send them into a nervous

frenzy. A downgrade makes it difficult for

business in a country to raise money from

overseas markets and puts a stress on its

banking sector and those of banks in other

countries as they have exposure to this

government debt which could simply end

up being on their books as non-performing

assets thus eating into their capital.

At the time of writing this, debt concerns

in both the US and the euro zone have

This borrowing or

debt became a

burden for Greece

as it stood at

almost 160 per

cent of its GDP!

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been allayed to an extent as at the 11th

hour lawmakers in the US agreed to cut

its deficit by $2.1 trillion and raising the

debt ceiling to enable US to pay its bills

till November 2010. The resolution came

after weeks of political theatre which saw

the Republicans and Democrats engaged

in a bitter struggle to arrive at a consensus

to raise US’s debt level (effectively its

ability to borrow) as well as cutting

deficit (curtailing expenditure). There was

respite on the euro zone front as well with

the new package in place for Greece. The

new package will mean that Greece will

get additional support of € 160 billion (i.e.

over and above the support of € 110 billion

that it had received in 2010). How does

all the above affect gold? Through two

channels: currency and investment. The

latest announcement of the Greek rescue

package saw the euro appreciate against

the dollar by close to 2 per cent on a single

day! As most commodities including gold

are denominated in dollar, a stronger euro

(and a weaker dollar) makes commodities

cheaper. An additional factor is at work

in the case of gold: that of a safe-haven

asset. As the uncertainties regarding the

euro zone have not completely dissipated

and the markets have yet to digest the

full import of the debt deal in the US,

perceived riskiness would increase the

appetite for gold investment. This has

been proven with gold crossing the $ 1620

per ounce mark at the time of writing.

What about silver and other precious

metals? Unlike gold, these metals are not

stubborn ‘safe haven’ investment and are

often subject to unexplained volatility.

Silver, for example, recently has seen a

rally and touching new records. Markets

believe that silver follows gold or more

importantly its ratio to gold in price.

Currently the gold to silver ratio is about

40. The norm in the past several years is

for the gold-silver ratio to hover between

55 and 60 i.e. the price of an ounce of gold

was 55 to 60 greater than the price of an

ounce of silver. The very long-term gold-

silver ratio is said to be around 16.

What would be the outlook for precious

metals in the unfolding global scenario? To

a great extent this would depend on how

the market finally thinks the resolution

of the debt ceiling through spending cuts

(without any plan to raise taxes) will

affect the growth in the US. The Federal

Reserve’s response too will determine the

market sentiment. If a threat to growth

seems imminent, markets moving to a

‘risk on’ mode cannot be ruled out which

could lead increased investment in gold.

If the Fed responds by increasing money

supply (QE 3) to prop up growth then the

quantum of dollar flow would decide the

exchange rate vis-à-vis other currencies,

especially the euro. And, of course, finally

all will depend on how much the markets

believe in government’s and central bank’s

ability to deliver their countries from the

throes of debt and put them on the path

of sustainable recovery! In markets,

perception is everything!

As the uncertaintiesregarding the

euro zone have not completely dissipated and

the markets have yet to digest the full import of the debt deal in the

US, perceived riskiness would

increase the appetite for gold

investment.

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Gold touched new high last month on global economic concern. Both US and European Union economies are struggling, investors are

seeking respite in gold. Here comes the real problem. As no investment is safe at this point of time and so investors are buying gold, in Indian market, the extreme high prices have created less demand in the physical market. Usually, month of June and July is lean season. Still, sales hampered all over the country more than as usual. Only in Hyderabad, demand was said to be usual.

Bullion traders with whom we talked this time are mostly bullish on gold for rest of the year. They are not seeing much of downside from the current level. But by the time we are writing this report, silver had fallen 2 dollar in single day and all commodities including gold had fallen viciously in single day. So tough days may be ahead!

Kanpur MarketMr.Ambrish Agarwal, Director, Radha Mohan Purshotam Das Jewels Pvt Ltd. explains that, current scenario is quite unexpected, July sales fell down by more than 80%. At

large, customers perceiving this as a rampant speculation. Normally, gold imports in Delhi region (Caters Northern states) will be around 1 tons /per day, but imports in July declined to 100 kg/day and even below at times. He expects the gold price to rise above $1700/oz and a long stay at this range may push the prices to $1800/oz.Courtesy: Radha Mohan Purshotam Das Jewels Pvt. Ltd

Salem MarketIn Salem, Mr.N.Vijay, Proprietor, Vijay bullion, informed that, Market sentiment is weak and sales in Salem region are below normal. In last month, Bullion sales in Salem region were around 450 kg. He explained that, both dollar and gold values are heading towards north against market dynamics. If the trend continues, gold prices may touch newer highs in near short term. He expects gold prices to find resistance at R1 $1692/oz, R2 $1824 and any correction at this range may seek support at $1610/oz, $ 1578. Courtesy: Vijay Bullion

Mumbai MarketMr.V.K.Agarwal, Director, Shirpur Gold Refinery Ltd,

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shortly quoted that, he expects gold sale to be on downside till august end. Buying spree among retail customers seems to be affected by the rise in price. He expects gold price to be range bound at $1600-1700/0z.Courtesy: Shirpur Gold Refinery Ltd,

Kanyakumari MarketMr. T.R. Vino kumar, Partner, Ramayya Jewellers, told that jewellery demand declined on mounting prices. He added that customer sentiment is not so favorable and it eventually reflected on the jewellery sales .On gold he opines that prices may slide down to Rs.20,000/10 gm to test the support levels. In this bull trend, Kanyakumari did business of 100 kg of gold in the month of July.Courtesy: Ramayya Jewellers

Hyderabad MarketMr. Deepak Agarwal, Director, Manokamana Gold, positively said that, in spite of huge momentum in gold prices, normal sales were witnessed in the Hyderabad market. In July, total gold sales in Hyderabad region stood around 700-800 kg and silver sales were around 10,000-15,000 kg. He expects Gold prices to hover around $1690-$1575 /oz. Courtesy: Monokamana Gold

Ahmedabad MarketMr.Haresh J.Acharya, Director, Parker Bullion Pvt

Ltd, informed that, weak sentiment was observed in the month of July. Being a sowing month, July sales will be comparatively lower than August to December sales. Increased prices have further pulled down the sales. For July, overall gold sales in Ahmedabad region stood around 4 tons and imports were at 8-10 tons. He feels that gold price is likely to be around 22,580-25,000/10 gm. Courtesy: Parker Bullion Pvt Ltd

New Delhi MarketMr. Saurabh Sharma, Director, Delhi Spot Bullion Trading Co.Pvt Ltd. informed that, mounting prices has decreased the interest in bullion investment among the customers. July Gold Sales stood at 500-600kg.He opines gold prices in India will find resistance at 24,800. On any correction prices would find support around 22,800. Courtesy: Delhi Spot Bullion Trading Co.Pvt Ltd

All depend on how agricultural production would turn around this year. On the other hand, real estate becomes expensive as banks have raised the interest rate on borrowing. At the same time, Indian banks are offering attractive rate of interest on deposits. Now it is to be seen what Indian investors would decide – invest in FD now and wait for correction in gold to buy or the ‘gold rush’ will continue? Festive season will kick off shortly. So altogether, very interesting time is waiting for us. Keep our fingers crossed!

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RSBL SPOTAn Overview

Gold continued to glitter at all time high

RSBL Gold Spot made a joyful ending after keeping the prices in dark red in the previous two months, mainly due to various uncertain economic conditions across the world. Initially it plunged to the low of Rs 21473 per 10 gram. This correction was brief and it bounced back after taking notch at 38.2% from the high of Rs 22752 levels. Recent movement has eclipsed the previous two-month movement to suggest that the traders’ appetite is very much on the higher side. A fresh rally has cleared the upside hurdle at Rs 22752 levels without much effort. Eventually this could elaborate to the ascending channel resistance of Rs 24710 levels. There may not be any hurdle from the fundamental front to hold back the prices. The current movement is also matching up with the global news on economic conditions. This could sustain the price on a royal ride.

RSBL Silver prices too joined the party after deep correction from the peak of Rs 74700 per 1 kg. Bears lost against the bulls at Rs 50521 levels after silver price stumbled to crack the rising trendline support at Rs 50520 barricade. Within no time, prices made through the previous month high of Rs 57578 levels. Lavish takeoff has given 38.2% return to the loyalist of white metal in the previous month. Current movement may not end here, after looking at the recent movement. On upside silver price could flare up to Rs 62230 levels and 65492 successively to matchup with royal gold rally.

RSBL SilverMonthly Chart

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Gold Spot Market, International (Per Troy Ounce)

Spot gold 01st July 29th July %changeAustralia(AUD) 1380.63 1438.33 4.09%Britain(GBP) 925.06 989.88 6.77%Canada(CAD) 1554.31 1425.00 -8.69%Europe(Euro) 1023.71 1129.33 9.82%Japan(Yen) 120183.00 124858.00 3.82%Switzerland(CHF) 1258.18 1277.16 1.50%USA(USD) 1487.17 1626.29 8.94%

Bullion - Data & Statistics

Monthly Exchange Data (Gold) (From From July 01-29)Exchange Commodity Open High Low Close % Ch.MCX 1 Gold Oct’11 22177.00 23649.00 21885.00 23543.00 5.96NCDEX1 Gold Aug’11 21949.00 23447.00 21844.00 23332.00 5.41ICEX1 Gold Aug’11 21910.00 23356.00 21613.00 23185.00 5.69COMEX2 Gold Oct’11 1503.00 1636.30 1479.60 1629.90 8.05TOCOM3 Gold Oct’11 3905.00 4078.00 3854.00 4018.00 2.881- Rs/10 gms, 2- $/oz, 3- Jpy/gm

Gold Spot Market, India Rs/10gm

Spot Gold 01st July 29th July % chgDelhi 22060.00 23400.00 5.90Mumbai 21700.00 23162.50 6.52Bangalore 21982.00 23517.00 6.75Chennai 21872.50 23335.00 6.47Kolkata 21980.00 23525.00 6.79Hyderabad 21630.93 23215.00 7.07Ahmedabad 21615.00 23142.00 6.83

GOLD Forward Offer Rate (GOFO) 01st July 29th July

1m 0.2200 0.26602 m 0.2340 0.28203 m 0.2460 0.30006 m 0.3140 0.34001 y 0.4100 0.4160

Currency01st July 29th July

Euro/USD 1.45 1.43USD/JPY 80.83 76.76USD/INR 44.58 44.19USD/AUD 0.92 0.91USD/GBP 1.60 1.64

Silver Spot Market, International (Per Troy Ounce)

Spot Silver 01st July 29th July % ChangeAustralia(AUD) 31.39 36.24 14.36%Britain(GBP) 21.03 24.26 14.28%Canada(CAD) 32.41 38.09 16.17%Europe(Euro) 23.28 27.68 17.33%Japan(Yen) 2732.61 3060.25 11.32%Switzerland(CHF) 28.61 31.30 9.00%USA(USD) 33.81 39.86 16.45%

Monthly Exchange Data (Silver) (From July 01-29)Exchange Commodity Open High Low Close % Ch.MCX1 Silver Sep’11 52394.00 60819.00 58144.00 59111.00 12.22NCDEX1 Silver Sep’11 52133.00 60795.00 50800.00 58898.00 10.82ICEX1 Silver Sep’11 52050.00 60830.00 50806.00 59118.00 12.24COMEX2 Silver Sep’11 34.74 41.47 33.47 40.11 14.10TOCOM3 Silver Aug’ 11 89.40 102.50 88.30 98.60 9.131- Rs/kg, 2- $/oz, 3- Jpy 0.1/gm

Silver Spot Market, India Rs/kgSpot Gold 01st July 29th July % chgMumbai 51967.50 58660.00 12.11

Silver Forward Offer Rate (SIFO)01st July 29th July

1m 0.1400 0.27002 m 0.1500 0.24003 m 0.1400 0.20406 m 0.0900 0.11201 y -0.0200 -0.0220

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GOLD LEASE RATE 01st July 20th July

1m -0.03495 -0.054422 m -0.01725 -0.039083 m -0.00025 -0.025336 m 0.08325 0.099671 y 0.32400 0.32458

SILVER LEASE RATE 01st July 20th July

1m 0.04505 0.055582 m 0.06675 0.072583 m 0.10575 0.114676 m 0.30725 0.348001 y 0.75400 0.76625

LONDON FIXING (Per Troy Ounce)

GOLD AM GOLD PM SILVER PM

DATE USD GBP EUR USD GBP EUR DATE USD/cent GBP/Pence EUR/cent

07/01/2011 1492.75 932.10 1027.71 1483.00 926.07 1025.87 07/01/2011 3385 2112.98 2336.90

07/04/2011 1495.25 927.69 1029.36 1495.00 930.82 1029.97 07/04/2011 3410 2118.01 2349.29

07/05/2011 1498.75 930.79 1035.76 1510.00 937.02 1042.82 07/05/2011 3476 2157.67 2401.38

07/06/2011 1515.80 946.31 1056.23 1527.25 954.11 1066.37 07/06/2011 3538 2209.87 2467.22

07/07/2011 1526.25 954.80 1066.86 1527.50 955.76 1066.62 07/07/2011 3586 2244.76 2510.32

07/08/2011 1526.00 956.86 1069.08 1541.50 960.08 1076.17 07/08/2011 3628 2273.18 2541.51

07/11/2011 1543.50 966.32 1092.12 1555.50 976.71 1106.88 07/11/2011 3636 2279.62 2576.90

07/12/2011 1544.50 973.96 1106.38 1550.50 977.00 1107.34 07/12/2011 3491 2208.79 2507.90

07/13/2011 1571.50 984.71 1114.62 1579.00 988.36 1121.05 07/13/2011 3675 2304.80 2614.73

07/14/2011 1592.50 987.54 1119.04 1590.50 984.83 1117.32 07/14/2011 3940 2445.69 2778.56

07/15/2011 1578.50 979.64 1115.00 1587.00 985.35 1124.42 07/15/2011 3817 2367.87 2697.53

07/18/2011 1598.25 992.83 1136.33 1599.00 994.28 1136.70 07/18/2011 4033 2507.30 2870.46

07/19/2011 1602.00 994.11 1129.04 1601.00 992.99 1129.45 07/19/2011 4032 2501.24 2842.44

07/20/2011 1584.25 982.12 1116.77 1586.00 982.96 1117.85 07/20/2011 3859 2390.95 2713.78

07/21/2011 1600.50 992.44 1131.10 1601.00 985.11 1117.24 07/21/2011 3978 2460.87 2806.35

07/22/2011 1588.00 974.83 1103.01 1602.00 984.33 1118.09 07/22/2011 3967 2431.50 2753.90

07/25/2011 1618.50 995.02 1126.62 1613.50 991.28 1124.86 07/25/2011 4078 2503.38 2838.84

07/26/2011 1610.00 982.61 1112.26 1612.75 984.59 1114.93 07/26/2011 4034 2459.76 2785.91

07/27/2011 1621.00 987.69 1118.32 1625.00 991.76 1124.88 07/27/2011 4081 2490.69 2819.34

07/28/2011 1617.50 988.63 1125.53 1613.50 988.97 1129.27 07/28/2011 4019 2461.87 2810.49

07/29/2011 1613.75 991.67 1129.76 1628.50 992.08 1133.11 07/29/2011 3963 2435.02 2783.01

Disclaimer: Every care has been taken to present correct information. However, Bullion Bulletin & BBA are not responsible for any divergence.

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Gold & Silver Historical Price In USD/TroyounceGold SilverYear Rate Year Rate1968 38.691969 41.091970 35.94 1970 1.6351971 40.8 1971 1.3941972 58.16 1972 1.9761973 97.32 1973 3.1371974 159.26 1974 4.3911975 161.02 1975 4.0851976 124.84 1976 4.3471977 147.71 1977 4.7061978 193.22 1978 5.931979 306.68 1979 21.7931980 612.56 1980 16.3931981 460.03 1981 8.4321982 375.67 1982 10.5861983 424.35 1983 9.1211984 360.48 1984 6.6941985 317.26 1985 5.8881986 367.66 1986 5.3641987 446.46 1987 6.791988 436.94 1988 6.1081989 381.44 1989 5.5431990 383.51 1990 4.0681991 362.11 1991 3.9091992 343.82 1992 3.711993 359.77 1993 4.9681994 384 1994 4.7691995 384.17 1995 5.1481996 387.77 1996 4.731997 330.98 1997 5.9451998 294.24 1998 5.5491999 278.88 1999 5.2182000 272.65 2000 4.5752001 276.5 2001 4.522002 342.75 2002 4.6652003 417.25 2003 5.9652004 435.6 2004 6.772005 513 2005 8.832006 632 2006 12.842007 834.90 2007 14.922008 883.60 2008 11.292009 1095.20 2009 16.852010 1421.20 2010 30.93

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MUMBAI SPOT PRICESJuly' 2011 Opening Closing Opening Closing Opening Closing

Date 999. Gold 999. Gold 999. Silver 999. Silver 995. Gold 995. Gold

01.07.11 21875 21735 52225 51710 21770 21630

02.07.11 21690 51585 21585

04.07.11 21730 21720 51660 51645 21625 21615

05.07.11 21745 21825 51585 52415 21640 21720

06.07.11 22025 22005 53905 53310 21935 21890

07.07.11 22255 22180 54370 53915 22150 22080

08.07.11 22195 22155 54405 54220 22090 22050

09.07.11 22380 54590 22275

11.07.11 22415 22460 54570 54555 22310 22350

12.07.11 22630 22560 53785 53035 22530 22455

13.07.11 22820 22855 54635 54885 22715 22750

14.07.11

15.07.11 23000 23010 56690 56775 22895 22890

16.07.11

18.07.11 23225 23285 58590 59135 23120 23180

19.07.11 23370 23290 59670 59030 23265 23185

20.07.11 23080 23075 58000 57445 22975 22965

21.07.11 23260 23245 59270 58855 23155 23140

22.07.11 23010 23105 57960 58430 22905 22995

23.07.11 23230 58995 23125

25.07.11 23430 23445 59620 59670 23325 23340

26.07.11 23355 23265 59445 59455 23250 23160

27.07.11 23295 23315 59615 59520 23185 23205

28.07.11 23270 23260 59175 59105 23165 23150

29.07.11 23250 23295 58605 58715 23140 23185

30.07.11 23415 59035 23300June’2011 Opening Closing Opening Closing Opening Closing

HIGHEST 23430 23445 59670 59670 23325 23340

LOWEST 21730 21690 51585 51585 21625 21585

AVERAGE 22745 22728 56320 56203 22641 22621

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