gold as an asset class
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TRANSCRIPT
1
Gold as an Asset Class
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Contents
1. Introduction to GoldGold Market.
2. Gold Demand & Supply Trends.
3. Why invest in GoldGold ?
4. How to take an exposure in GoldGold.
5. Is the price of GoldGold getting real ?
6. GoldGold at NCDEX
3Forward-looking statement (disclaimer)
The information and opinions contained in this presentation have been obtained from sources believed to be reliable, but no representation or warranty, express or implied, is made that such information is accurate or complete and it should not be relied upon as such. This presentation does not purport to make any recommendation or provide investment advice to the effect that any gold related transaction is appropriate for all investment objectives, financial situations or particular needs. Prior to making any investment decisions investors should seek advice from their advisors on whether any part of this presentation is appropriate to their specific circumstances. This presentation is not, and should not be construed as, an offer or solicitation to buy or sell gold or any gold related products. Expressions of opinion are those of the NCDEX only and are subject to change without notice.
4Above the Ground Stocks of Gold
Global Stocks - 1,55,500 tons
(end 2005) = Rs 148,00,000 cr = $ 3,200,000 mn.
of which,Indian Public holds 10% or 15,000 tons += Rs 14,00,000 cr
compared to,Rs 800,000 cr in banksRs 90,000 cr in Mutual Funds
Gold Price: Rs 9,500$ Price: Rs 46
J ewellery52%
Govt & Banks 18%
Private Investment
(Bars & Coins)16%
Industrial & Dental12%
Lost & Unallocated
2%
5Annual demand for Gold exceeds primary supply
Mine Production and Total Demand for Gold
0
500
1000
1500
2000
2500
3000
3500
4000
4500
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Tonn
es
0
50
100
150
200
250
300
350
400
450
500
US$/oz.
Mine ProductionTotal DemandGold price (annual average) US$/oz
Data: GFMS Ltd.
Newly mined gold does not satisfy the demand for gold jewellery each year
6Steadily increasing Gold jewellery demand
• The top 7 countries account for 60% of the total Jewellery consumption. • Jewellery consumption increased by 10% over last 5 yrs & 18% in the last 3
yrs
-
5,000
10,000
15,000
20,000
25,000$ mio.
1992 1994 1996 1998 2000 2002 2004
Italy
UAE
SaudiArabiaTurkey
China
USA
India
7Investment demand for Gold fuelling the price increases
• Investment Demand up by 35% over last 5 yrs & 56% in the last 3 yrs (in US$ terms)
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• Currency hedge– Inverse relationship
between gold and dollar
• Effective portfolio diversifier
• Currency hedge
• Gold is a deflation & inflation hedge
– Maintains purchasing power over the long term
Why Invest in Gold ?Gold vs inverse of trade-
weighted dollar
0.1
1
10
100
1800 1840 1880 1920 1960 2000
Gold price
Consumer prices
USA: gold and consumer price indices (log scale; 1800=1)
60
80
100
120
140
93 94 95 96 97 98 99 00 01 02 03
GoldUS$
9Risk – Return Analysis on a portfolio with Gold
Equity Gold Returns Risk
100% 104% 7.10%
100% 118% 3.60%
90% 10% 105% 6.50%
80% 20% 107% 5.90%
70% 30% 108% 5.30%
Source: Financial Express Research
Tracking of performance of Equity portfolio with gold over a 7 yrs period:
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Bullion Market in India
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Introduction of Bullion market in India
• Size of Market– Physical - India imports 600 tonnes gold per annum
& 3500 tonnes of silver(approx). – Private holding of gold approx. 14000 tons– Futures (Derivatives) – the total average daily
quantity being traded in futures market in India is 15000 Kgs of gold & 1000 tonnes of silver
• Major Centers for Physical Gold TradingMumbai, Ahmedabad, Delhi, Jaipur, Chennai,
Hyderabad, Bangalore & Kolkatta
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NCDEX bullion contracts
13Gold Futures ContractContract Size 1 kgTick Size Rs 1 per 10 gramPrice Quote Rs per 10 gramContract Months All months Active contracts 3Last trading day 20th of the monthDeliverable Size 1 kg Deliverable grades Not less than 995 fineness,
bearing a serial number and
identifying stamp of a LBMA refiner
approved by NCDEXTrading Hours 10 am - 11:30 pm Delivery Location MumbaiMargin 5-7%
14Gold Futures Contract cont’d…
• Daily Settlement Prices • Gold Bars from approved list of importers
along with a refiners certificate• Minimum Deliverable Quality 995 fineness• Proportional price adjustment against
deliveries of minimum deliverable quality
15Silver Futures ContractContract Size 30 kg Tick Size Rs 1 per kg Price Quote Rs per kgContract Months All months Active contracts 3Last trading day 20th of the monthDeliverable Size 30 kg Deliverable grades Not less than 999 fineness, bearing
a serial number and identifying stamp of a
LBMA refiner approved by NCDEXTrading Hours 10 a.m. to 11:30 p.m.Delivery Location DelhiMargins 8-10 %
16Silver Futures Contract Contd…
• Daily Settlement Prices • Silver Bars from approved list of importers
along with a refiners certificate• Minimum Deliverable Quality 999 fineness• No discounts or price adjustment against
qualities
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Arbitrage opportunities in Bullion Contracts
• Calendar spread arbitrage.
• Arbitrage between NCDEX and MCX.
• Arbitrage between Bank costing and NCDEX.
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Arbitrage opportunities in Bullion Contracts• Calendar spread arbitrage.
– 3 important parameters to be kept in mind while doing Calendar Spread :• Landed Cost of Gold/Silver.• Parity Price of Gold/Silver.• Trend in Bullion Prices- Whether the market
is in Contango /Backwardation.
19Arbitrage between NCDEX & MCX
• Arbitrage between NCDEX and MCX.• NCDEX-Pure Gold fineness 999.9 & exclusive
Sales Tax.• MCX –Gold- 995 .0 fineness & exclusive of
Sales Tax paid Ahmedabad.• Purity Difference- 0.49 %.• Net Difference -0.49 % premium on NCDEX
Gold.
20Value Conversion – Gold & SilverGold Parity
SheetSilver Parity
sheet
Spot Rate International(A) 628 Spot rate International(A) 11
Add: Commission(B) 1 Commission(B) 0.04
CIF ---( C) 629 CIF =(A+B) 11.04
Multiply Exchange Rate (D) 46.8 Exchange Rate © 46.8
CIF(E) = Rs (C * D) 29437.2 CIF IN Rupees (D) 516.672
Multiply this with E Conversion Rate 0.321457 Conversion Rate(E) 32.1507
(F)-Rs Per 10 grams= (D*E) 9462.794 Rs per Kg(F)= D*E 16611.36647
Customs duty 110 Customs duty 510
Landed cost (G) 9572.794 Final wholesale price per Kg 17121.36647
Add Octroi (0.10%of landed cost) 9.572794
Final Wholesale price per 10 grams 9582.36679
21How to get an exposure to Gold?
• GoldGold coins & Bars– Jewellers– Banks
• GoldGold Mutual Funds (ETF) – Expected to be launched
• GoldGold Futures – Futures Exchanges
22The price of Gold: getting real
0
100
200
300
400
500
600
700
800
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
US$
/oz.
Gold, London PM fix (monthly average)
Real gold price, constant 1968 prices
Real gold price, constant 1975 prices
Real price facts:In real terms, current price levels correspond to those of the early 1990s
$600 in 1980 corresponds to about $1500 in nominal 2006 dollars
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