Precious Metals Final

54
Precious metals Derivatives 

Transcript of Precious Metals Final

Page 1: Precious Metals Final

8/9/2019 Precious Metals Final

http://slidepdf.com/reader/full/precious-metals-final 1/54

Precious metals 

Derivatives 

Page 2: Precious Metals Final

8/9/2019 Precious Metals Final

http://slidepdf.com/reader/full/precious-metals-final 2/54

Eff  orts by 

KAVITA SALI 

M EER   A CHAUHAN 

SM R  ITA KACH R  U  KI R   AN SINGH 

SADNA PATIL 

VIK R   ANT SINGH 

Page 3: Precious Metals Final

8/9/2019 Precious Metals Final

http://slidepdf.com/reader/full/precious-metals-final 3/54

Precious metals 

GOLD 

SILV ER  

PLATINUM 

Page 4: Precious Metals Final

8/9/2019 Precious Metals Final

http://slidepdf.com/reader/full/precious-metals-final 4/54

Market 

In India precious metals are 

traded in 

Page 5: Precious Metals Final

8/9/2019 Precious Metals Final

http://slidepdf.com/reader/full/precious-metals-final 5/54

Indian government policy  f  or bullion 

1947 - Complete ban on Import o  f  Bullion 

1962 - Ban on Forwarding Trading 

1963 - Declaration o  f  Gold holding made compulsory  f  or 

individual. R  estriction on manu  f  acturing o  f  jewellery above 14 Ct.

1965 - Floating o  f  15 years 7% Gold Bonds (6.1 MT Gold  

Collected) 

1966 - Ceiling on holding o  f  Gold by individual  

1978 - Govt. auctioned Gold through R  BI to control in  f  lation 

and banned   f  urther auction 

Page 6: Precious Metals Final

8/9/2019 Precious Metals Final

http://slidepdf.com/reader/full/precious-metals-final 6/54

Cont«

1991 - Amendment brought into Gold Control Act permitting holding o  f  Gold not only in the  f  orm o  f  jewellery but also in the  f  orm o  f  bars 

1991 - N R  I to bring 5-Kgs Gold against payment o  f  Custom duty @ R  s.220/= per 10 Gram 

1992 - R  ecommendation by R  BI to Govt  f  or Formation o  f  Gold  Management corporation 

1993 - 41 MT o  f  Gold mobilized under gold Bond Scheme 

1997 - Gold import by N R  I increased to 10 Kgs.

2003 ² Custom duty reduced to R  s.100/- per 10 

2009 gold price reached to record high 

Page 7: Precious Metals Final

8/9/2019 Precious Metals Final

http://slidepdf.com/reader/full/precious-metals-final 7/54

Pre liberalisation 

Bullion imports and exports were also banned but restrictions on import 

o  f  gold into the country resulted in the  f  lourishing o  f  smuggling and  

uno  ff  icial transactions in  f  oreign exchange.

Various schemes  f  or mobilisation o  f  idle gold holdings have been 

implemented by the Government and  R  BI in the past, but with little 

success.

 gold import is permitted through three o  ff  icial channels viz., special  

import licences,non-resident Indians and authorized banks and  

institutions .

Page 8: Precious Metals Final

8/9/2019 Precious Metals Final

http://slidepdf.com/reader/full/precious-metals-final 8/54

Post liberalisation 

The liberalized gold policy has certainly brought to the o  ff  icial  sector what originally was an uno  ff  icial sector.

the government permitted non-resident Indians to bring 5kg o  f    gold into the country twice yearly on the payment o  f  import tax o  f   R  s. 250 per 10 grammes 

The allowance was raised to 10 kg per trip in January 1997.

allow import and export o  f  gold under OpenGeneral Licence 

Page 9: Precious Metals Final

8/9/2019 Precious Metals Final

http://slidepdf.com/reader/full/precious-metals-final 9/54

Cont«

In 2001 uno  ff  icial imports  f  ell because o  f  a reduction in 

import duties,

In the 2003 budget the Finance Minister reduced the 

customs duty on ¶serially numbered bars, or«. gold  

coins·  f  rom R  s. 250 per 10 grammes to R  s. 100 per 10g.

Page 10: Precious Metals Final

8/9/2019 Precious Metals Final

http://slidepdf.com/reader/full/precious-metals-final 10/54

Gold production 

Page 11: Precious Metals Final

8/9/2019 Precious Metals Final

http://slidepdf.com/reader/full/precious-metals-final 11/54

Global gold demand  

Page 12: Precious Metals Final

8/9/2019 Precious Metals Final

http://slidepdf.com/reader/full/precious-metals-final 12/54

Gold supply 

Page 13: Precious Metals Final

8/9/2019 Precious Metals Final

http://slidepdf.com/reader/full/precious-metals-final 13/54

Indian gold jewellery consumption 

Page 14: Precious Metals Final

8/9/2019 Precious Metals Final

http://slidepdf.com/reader/full/precious-metals-final 14/54

Dollar and gold price 

Page 15: Precious Metals Final

8/9/2019 Precious Metals Final

http://slidepdf.com/reader/full/precious-metals-final 15/54

Gold v/s crude oil  

Page 16: Precious Metals Final

8/9/2019 Precious Metals Final

http://slidepdf.com/reader/full/precious-metals-final 16/54

W  hy to invest in gold«? W  hy to invest in gold«? 

Eff  ective Port  f  olio Diversi  f  ier Eff  ective Port  f  olio Diversi  f  ier 

Eff  ective Hedge against in  f  lation Eff  ective Hedge against in  f  lation 

Eff  ective hedge against currency Eff  ective hedge against currency 

Superior to other alternative asset classes 

Page 17: Precious Metals Final

8/9/2019 Precious Metals Final

http://slidepdf.com/reader/full/precious-metals-final 17/54

Eff  ective Port  f  olio Diversi  f  ier Eff  ective Port  f  olio Diversi  f  ier 

Portfolio Without Gold:Same Risk, Lower Return

Small Cap Stocks

10%

Bonds

30%

T-bills

5%

Large Cap Stocks

55%

Portfolio With Gold: Same Risk, Greater Return

Gold 

5  

¡  onds

25  

¢  a £  g¤ 

Ca ¥   ¦ 

§ 

ocks

70

  

otal  turn: 14.30%

otal  turn: 16.1%

Page 18: Precious Metals Final

8/9/2019 Precious Metals Final

http://slidepdf.com/reader/full/precious-metals-final 18/54

Eff  ective Hedge against in  f  lation Eff  ective Hedge against in  f  lation 

 A study conducted by W  GC 

in UK shows that one ounce 

o  f  Gold would consistently 

 purchase the same amount o  f    goods & services as it would  

have done 400 years ago,

making it the per  f  ect hedge 

against in  f  lation over a long 

 period o  f  time 

Page 19: Precious Metals Final

8/9/2019 Precious Metals Final

http://slidepdf.com/reader/full/precious-metals-final 19/54

Eff  ective hedge against currency Eff  ective hedge against currency 

Inverse relationship between gold and US dollar 

If value of dollar falls in market

Price of a gold rises

Page 20: Precious Metals Final

8/9/2019 Precious Metals Final

http://slidepdf.com/reader/full/precious-metals-final 20/54

Superior to other alternative asset classes 

0

4

8

12

16

20

Bonds Stocks Gold Real Estate venture

Capital

  T  i  m  e  t  a  k  e  n  t  o

Risk Low High Low Medium V High

Rtn. Low High Low Medium High

30  ̈  

© 

n.2   ̈  

© 

n.1  ̈  

© 

n.

6-9  ¨    s 1

y  

 

Page 21: Precious Metals Final

8/9/2019 Precious Metals Final

http://slidepdf.com/reader/full/precious-metals-final 21/54

Trend in gold prices 

Page 22: Precious Metals Final

8/9/2019 Precious Metals Final

http://slidepdf.com/reader/full/precious-metals-final 22/54

Factors in  f  luencing gold price 

Demand and supply 

Low or negative real interest rate 

W  ar, crisis 

Indian and Chinese market 

Page 23: Precious Metals Final

8/9/2019 Precious Metals Final

http://slidepdf.com/reader/full/precious-metals-final 23/54

Cont«

Gold mining production 

US and global macro economics 

Investment demand  

Page 24: Precious Metals Final

8/9/2019 Precious Metals Final

http://slidepdf.com/reader/full/precious-metals-final 24/54

W  hy Gold Futures in India? 

The Indian gold market has always been linked to 

international gold market in view o  f  large requirements 

o  f  imported gold. Given the inevitable integration 

between the global and local gold markets, there is considerable merit in  f  ollowing the global practice o  f   

integration o  f  gold markets with  f  inancial markets and  

introducing  f  orward trading.

Page 25: Precious Metals Final

8/9/2019 Precious Metals Final

http://slidepdf.com/reader/full/precious-metals-final 25/54

Hedging in gold  

Per  f  ect hedging model  

Suppose a jeweler  f  irm have a stock o  f  100 kg o  f  gold  which they want to sell in next two months. The 

current price o  f  gold is R  s.5000 /kg. to eliminate the risk the  f  irm enter in to a  f  uture short contract o  f  gold  o  f  100 kg at FP at 5100/kg 

Scene 

1. Price rise to R  s.5200/kg 2. Price  f  all to R  s.4900/kg 

Page 26: Precious Metals Final

8/9/2019 Precious Metals Final

http://slidepdf.com/reader/full/precious-metals-final 26/54

Cont«

Scene 1

Sp = 5,20,000 

Loss 5100-5200= -100{ loss o  f   R  s.10000} Net revenue R  s.5,10,000 

Scene 2 

Sp = 4,90,000 

Pro  f  it 5100-4900=200 {pro  f  it o  f   R  s.20000} 

Net revenue R  s.5,10,000 

Page 27: Precious Metals Final

8/9/2019 Precious Metals Final

http://slidepdf.com/reader/full/precious-metals-final 27/54

Ncdex gold    f  uture contract 

Type o  f  Contract Futures Contract Speci  f  ications Name o  f  Commodity Gold   

Ticker symbol GLDPU R   AHM 

Trading System NCD EX' s Trading System 

Basis  E x- Ahmedabad inclusive o  f  Customs 

Duty, exclusive o  f  Sales Tax/VAT, and  

any other charges or levies 

Unit o  f  trading 1 kg 

Tick size  R  e.1

Quotation/base value  R  s per 10 Grams o  f  Gold with 995  f  ineness 

Quality speci  f  ication Not more than 999.9  f  ineness 

Delivery center Ahmedabad   

Due date / E xpiry Date 20th day o  f  the delivery month 

Page 28: Precious Metals Final

8/9/2019 Precious Metals Final

http://slidepdf.com/reader/full/precious-metals-final 28/54

Tender Period Tender period would be o  f  5 working 

days during trading hours prior to and  including the expiry date o  f  the contract 

Delivery speci  f  ication Upon expiry o  f  the contracts all the 

outstanding open positions should  

result in compulsory delivery.

Closing o  f  Contracts Clearing and settlement o  f  contracts will commence with the commencement 

o  f  Tender Period  

Opening o  f  Contracts Trading in the  f  ar month contract will  

open on the 10th day o  f  the month in 

which the near month contract is due to expire.

Position limits 6 MT or 15% o  f  market wide open 

 position whichever is higher 

Page 29: Precious Metals Final

8/9/2019 Precious Metals Final

http://slidepdf.com/reader/full/precious-metals-final 29/54

Price limit +/-3%, max +/-6%, or +/-9%

(Daily price  f  luc.limit) 

Special Margin In case o  f  additional volatility, a 

special margin at such other percentage,

as deemed   f  it by the 

R  egulator/ E xchange 

  Additional Margin may impose additional margins on both 

long and short side at such other 

 percentage, as deemed   f  it 

Gold NOV-09 14,705

Page 30: Precious Metals Final

8/9/2019 Precious Metals Final

http://slidepdf.com/reader/full/precious-metals-final 30/54

Bene  f  its  f  rom gold   f  utures 

Development o  f  gold   f  utures would help in e  ff  icient price discovery and emergence o  f  healthy and transparent practices in the market.

The demand driven gold market o  f  India may well become the dictator o  f  gold  

 prices over a period o  f  a  f  ew years displacing the supplier driven international  market.

Futures in gold apart  f  rom o  ff  ering jewellery manu  f  acturers and exporters the chance o  f  hedging their inventories would provide many other investors or speculators with a cheap and highly e  ff  icient way o  f  getting into gold.

Development o  f    f  utures market would make a positive contribution to the  protection o  f  consumerand improvement o  f  the industry by setting the benchmark quality  f  or trading.

Page 31: Precious Metals Final

8/9/2019 Precious Metals Final

http://slidepdf.com/reader/full/precious-metals-final 31/54

Page 32: Precious Metals Final

8/9/2019 Precious Metals Final

http://slidepdf.com/reader/full/precious-metals-final 32/54

Page 33: Precious Metals Final

8/9/2019 Precious Metals Final

http://slidepdf.com/reader/full/precious-metals-final 33/54

Gold contract traded in NCD EX 

MONTH T    R   AD E D CONT  R   ACTS (Lots) 

Jan09 3463904  

Feb 09 3632601

Mar 09 4176328   Apr 09 2710372  

May 09 2331799  

June 09 2117538  

July 09 1584550  

 Aug09 1302700  

Sep09 524116  

Page 34: Precious Metals Final

8/9/2019 Precious Metals Final

http://slidepdf.com/reader/full/precious-metals-final 34/54

R  eal time gold contracts 

Page 35: Precious Metals Final

8/9/2019 Precious Metals Final

http://slidepdf.com/reader/full/precious-metals-final 35/54

Most active contract (volume) 

Page 36: Precious Metals Final

8/9/2019 Precious Metals Final

http://slidepdf.com/reader/full/precious-metals-final 36/54

Most active contract in NCD EX 

Page 37: Precious Metals Final

8/9/2019 Precious Metals Final

http://slidepdf.com/reader/full/precious-metals-final 37/54

Investment v/s jewellery 

Page 38: Precious Metals Final

8/9/2019 Precious Metals Final

http://slidepdf.com/reader/full/precious-metals-final 38/54

Fundamental  R  easons  f  or bullish run o  f  Gold  

Global Currency Debasement 

Investment Demand   f  or Gold is Accelerating 

 Alarming Financial Deterioration in the US 

Negative R  eal Interest R  ates in R  eserve Currency (US dollar) 

Mine Supply is Anticipated to Decline in the next Three to Four Years 

Large Short Positions 

R  ising Geopolitical Tensions 

Page 39: Precious Metals Final

8/9/2019 Precious Metals Final

http://slidepdf.com/reader/full/precious-metals-final 39/54

Gold bonds 

Gold bonds or gold-convertible bonds are debt 

instruments that are typically issued by gold mining 

 f  irms. These bonds are secured by a stored quota o  f  gold  

and their yield depends heavily upon  f  luctuations in  global gold prices.

Page 40: Precious Metals Final

8/9/2019 Precious Metals Final

http://slidepdf.com/reader/full/precious-metals-final 40/54

How gold bonds work? 

Typically issued by gold mining companies 

Purchased by investors who wish to gain exposure to 

 f  luctuations in gold prices without physically buying the 

metal  

Gold bonds typically o  ff  er low interest rates 

The gold bonds also act as potential gold sales at a  f  uture 

date.

Page 41: Precious Metals Final

8/9/2019 Precious Metals Final

http://slidepdf.com/reader/full/precious-metals-final 41/54

 Advantages 

Convenience: One can gain exposure to gold without physically 

buying the metal. The investor, thus, does not need to store or 

insure gold.

High liquidity: Gold bonds o  ff  er instant conversion to physical  

 gold or hard cash. Also, this easy conversion boosts the demand   f  or 

these bonds.

Sa  f  ety: Unlike other bonds, the returns on gold bonds are shielded  

 f  rom geopolitical turbulences in a country.

Page 42: Precious Metals Final

8/9/2019 Precious Metals Final

http://slidepdf.com/reader/full/precious-metals-final 42/54

Drawbacks 

Strong  f  luctuations in gold prices will result in substantial  

 f  luctuations in the price o  f  gold bonds.

The mining company might stop the production o  f  gold when mining costs exceed global gold prices. In such cases, the 

redemption o  f  existing gold bond will yield lower returns.

These bonds have a lower rate o  f  return than do other variable- income debt instruments.

Page 43: Precious Metals Final

8/9/2019 Precious Metals Final

http://slidepdf.com/reader/full/precious-metals-final 43/54

Silver 

Futures 

On 5 th aug,2009 a silver utensil maker needs silver. Current price 

o  f  silver is  R  s.15000/kg. he buys 5 th 

October 2009 an silver  f  utures at R  s.16000/kg 

On oct 2009 silver spot price was R  s.17000/kg 

Silver utensil maker makes a pro  f  it o  f   R  s.1000/kg. this is the bene  f  it o  f    f  uture contract.

Page 44: Precious Metals Final

8/9/2019 Precious Metals Final

http://slidepdf.com/reader/full/precious-metals-final 44/54

Cross hedging in silver 

Suppose a silver utensil manu  f  acturer have a 10 kg o  f  an 

antique utensil ware. the  f  irm is in concerned that price 

may  f  all in near  f  uture. To sa  f  eguard this the  f  irm will  

take short position in silver  f  utures. The current price o  f   silver  f  utures is R  s.10000.

The relation between silver  f  utures and utensils are silver utensils = 100+1.50(silver  f  utures) +e 

Page 45: Precious Metals Final

8/9/2019 Precious Metals Final

http://slidepdf.com/reader/full/precious-metals-final 45/54

Size o  f  silver  f  uture position=Beta*size o  f  cash position 

1.5 x 10 = 15 kg 

Condition 

Futures price is R  s.9000/kg 

Page 46: Precious Metals Final

8/9/2019 Precious Metals Final

http://slidepdf.com/reader/full/precious-metals-final 46/54

1. W  hen e= -10 

Utensil value 

10 kg{100+1.5(9000)-10} = 135900 

Future pro  f  it 

15(10000-9000) = 15000 

Hedge value 

135900+15000 = 150900 

 All figures in rupees

Page 47: Precious Metals Final

8/9/2019 Precious Metals Final

http://slidepdf.com/reader/full/precious-metals-final 47/54

2. W  hen e = 0 

Utensil value 

10kg{100+1.5(9000)+0} 136000 

Future pro  f  it 

15(10000-9000) = 15000 

Hedge value 

136000+15000 = 151000 

Page 48: Precious Metals Final

8/9/2019 Precious Metals Final

http://slidepdf.com/reader/full/precious-metals-final 48/54

3. when e = +10 

Utensil value 

10kg{100+1.5(9000) +10} = 136100 

Future pro  f  it 

15(10000-9000) = 15000 

Hedge value 

136100+15000 = 151100 

Page 49: Precious Metals Final

8/9/2019 Precious Metals Final

http://slidepdf.com/reader/full/precious-metals-final 49/54

i-gold is a plat  f  orm which  f  acilitates systematic investment in 

 gold with an option o  f  Physical or Demat holding 

Page 50: Precious Metals Final

8/9/2019 Precious Metals Final

http://slidepdf.com/reader/full/precious-metals-final 50/54

 Advantage to investor 

 An ideal plat  f  orm to  f  or systematic investment in gold.

Transparent screen based price at par with the prevailing spot price.

Options o  f  loan against Demat gold   f  rom Financial Instituions.

Convenience o  f  buying gold at the investors discretion - without visiting the outlet unlike today 

 Assured Quality & Purity ² 24 k,995 & 999  f  ineness gold bars imported   f  rom LBMA approved overseas suppliers 

E asily accessible through an existing stock broker who is a member o  f   MC  X 

Page 51: Precious Metals Final

8/9/2019 Precious Metals Final

http://slidepdf.com/reader/full/precious-metals-final 51/54

How does it work? How does it work? 

Day 1 ² 6: Buy /sell depending on margin money with the broker /exchange based on Mark To Market (MTM) 

Day 7- Intimate the status o  f  their respective position to Buyers & Sellers 

Day 8- Seller members MUST deposit the physical gold with custodian / Deliver through Demat 

Day 9- Pay-in o  f    f  unds by Buyer members against their delivery commitments (obligation).

Day 9- Pay-out o  f  commodity - Physical delivery o  f   gold (Authorisation  f  orm with the photograph o  f  the investor/ authorized person, proo  f  o  f  identity -photo id  

Demat account (Commodity Deposit Form &Original Allocation Letter) 

Page 52: Precious Metals Final

8/9/2019 Precious Metals Final

http://slidepdf.com/reader/full/precious-metals-final 52/54

Costs structure Costs structure 

Brokerage (Buy / sell)  - 0.50 ² 1.00% o  f  transaction value 

Service Tax on brokerage -  12.24% on brokerage 

Demat & R  emat -  R  s.100/- 200/-per transaction 

Custody & Insurance -  R  s.7,200p.a. per (1k.g) 

VAT -  1% o  f  transaction value 

Sales Tax agency charge -  0.50% - 1.00% (required   f  or selling  physical gold) 

Page 53: Precious Metals Final

8/9/2019 Precious Metals Final

http://slidepdf.com/reader/full/precious-metals-final 53/54

Conclusion 

Over the next year economic conditions will continue on 

balance to be good   f  or gold. Government and central  

bank policy responses to recession and exploding debt 

obligations could well prolong the bull market in gold  and result in  f  ar higher prices than the peaks experienced  

over the rally to to-date.

Page 54: Precious Metals Final

8/9/2019 Precious Metals Final

http://slidepdf.com/reader/full/precious-metals-final 54/54

Thank you«.