Capital Markets

GOLD INVESTMENT
Chapter 1 Introduction
Gold the Seed of Desire
Welcome to a world! That is so limited that it can be contained in a web, measuring 24 inches on each side, yet it is so immense that it enrolls each one of us. A world in which generations of men and women have fought for died for and slaved for. It is a world of generations of infinite possibilities of its own. Gold, the yellow metal, has captured mans interest everywhere and at all times. As a symbol of perfection, immorality and prosperity, gold is the substance that myths and legends are made of. Gold is a very ductile and malleable, precious metal that is resistant to air and water corrosion. It is a precious metal that is very soft when pure (24 Kt.). Gold is the most malleable (hammer able) and ductile (able to be made into wire) metal. Gold is alloyed (mixed with other metals, usually silver and copper) to make it less expensive and harder. The purity of gold jewelry is measured in karats. Traditionally a major market for gold, India has once again retained its position as the largest market for the yellow metal. The Geneva based World Gold Council, the marketing arm of the gold mining industry, also identifies India as the fastest growing market for this precious metal. Unlike the Westerners who invest largely in stocks and other options, Indians believe in gold as an all time safe investment. For one, gold gives the security against any financial crisis because of its easy liquidity. Besides the investment angle, what makes Indians duck the globe trend is the traditional values attached to the yellow metal. Gold, in Hindu culture is considered auspicious and is symbolic of Goddess Lakshmi (Goddess of wealth).
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Chapter 2 History
Since ancient times, gold has always been an important asset and a value store. Gold was used as an exchange medium even before the Roman Empire existed. The gold was also used for currency by Chinese and Hindu cultures. This shows that the gold was used not only by the western cultures but the eastern cultures also. Great Britain started the suit by adopting a gold-backed paper currency and the rest of the industrialized world followed this. The United States also started using gold in its currency and by the end of 1933. Gold backed up the United States Dollar under an agreement known as the Bretton Woods agreement. Under this agreement, a specific value of gold tied the Dollar and also the other global currencies. This specific value was $35/oz of gold from 1934 to 1968. That made it illegal for the citizens of the US to own gold so that the level of gold and subsequently the value of dollar could be protected. When the Gold Standard was evocated, it became a popular investment medium. Since then, no matter whatever happened, be it famines, floods or even world wars, golds importance as a savings and investment medium hasnt changed at all in the economy. Since 17th century, London has been the center of gold trading. It was because the gold was brought to London for refining and distribution purposes. Meanwhile, it began a method for disseminating the price of Gold known as the "Fix" in 1919 as the center of distribution. The price, at which the most buy and sell orders, of the members or Fixing Seat Holder's, matched, or balances, is known as the Fix. A large volume of physical Gold can be bought or sold at a single, clearly posted price, the fix. The fix is a benchmark price for many transactions worldwide, whether for mines, fabricators or central banks, because it is undisputed prices at which all six of the largest Gold trading houses are willing do business. 2 NANAK KHALSA COLLEGE GURU
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Indian History of Gold

Mythological Origin It is interesting to trace this fascination for gold. The Satapatha Brahmana, an ancient Hindu text describes as the seed of Agni, the God of Fire. Gold came to be called Hiranya, derived from the root Hri meaning imperishable. The Dharmashastra, another ancient Indian text says. This universe was enveloped in darkness. He (the Lord) desiring to produce various creatures from his own body, first created the waters and in the deposited a seed. This seed became a golden egg, resplendent as the sun, in which He himself was born as Brahma. Brahma is therefore called Hiranyagarbha or born of gold. Gold is seen to be the reference point in mythology whenever the highest form of prayer, perfection or beauty is described. The Goddess Lakshmi, symbolizes fertility, productiveness and prosperity, is said to have been bathed by elephants that carried pure water in golden vessels. Urvashi, believed to be one of the most beautiful women in Hindu mythology, is supposed to have complexion of golden hue. The golden colored deer plays an important role in the famous Indian epic, The Ramayana. It is said that lord Shiva taunted his wife Parvati saying her skin was dark. So offended was Parvati that she performed penance to gain access to Lord Brahma, the creator in Hindu pantheon. Lord Brahma granted her the boon she was seeking. Parvati was reborn as Gauri, or the woman with golden colored skin. It is not only the Hindu tradition that extols gold. In the Bible, there is a mention of a river flowing out of the Garden of Eden. And a river went out of Eden, parted and became into four heads. The name of the first is Pison, that is which compasses the whole land of Havilah, where there is gold. The Islamis religion describes the fifth heaven to
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GOLD INVESTMENT be made of gold. The Buddha is often portrayed in gold and Buddhist ceremonial objects are made of gold. Astrologically, Jupiter represents gold.
Historical References
The value of gold has been appreciated in daily life too. The Rig Veda, Indias most ancient text, (dated approximately to 1500 B.C.) says the giver of gold receives a life of light and glory. And to receive or buy is to welcome Lakshmi. That is why during Diwali time, gold is almost invariably bought. On this festival, it is Goddess Lakshmi who is worshipped. Arthashastra, a third century A.D text, lays down the various rules to be followed by goldsmiths and the different kinds of alloys that can be made with it. By the fifth century, ornaments were exquisitely fashioned and Kalidasa, a famous Sanskrit poet, describes when and how each ornament should be worn. The evidences and designs of ancient Indian jewellery are also found in sculptures.
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Chapter 3 Properties of Gold
Gold is one of the most precious metals in the world. It is present in the rivers, seas and the earths crust and trace amounts are present in plants and animals. It is, however, difficult and expensive to extract. In modern mining operations approximately 3 tonnes of ore are needed to extract one ounce (31.1 gms) of gold. The many desirable qualities found in gold, along with its scarcity, have made it the most popular metal for use in jewellery today.
Gold in its Purest State

Has a melting point of 1945 degrees Fahrenheit (1063 degrees celcius). When alloyed (chemically combined) with other base metals the melting temperature of the resulting alloy is changed. 18K yellow gold has a melting point of 1675 degrees Fahrenheit and 14K yellow gold has a melting point of about 1550 degrees Fahrenheit. Has a specific gravity of 19.33. it is relatively heavy compared to most metals, such as silver (SG 10.7) or iron (SG 7.8). a notable exception is platinum (SG 21.4). It is more malleable than any other metal and can be hammered into foil so thin that it is almost transparent. Has a unique ductility property allowing it to be drawn into wire so fine it can barely be seen.
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GOLD INVESTMENT Is deep yellow in colour. Its great reflectivity properties help keep its brightness and colour from fading with time. Will not rust, tarnish or corrode. Gold jewellery recovered from ancient Egyptian tombs is in the same state as when placed there over 4000 years ago. Is softer than most other metals. On the Mohs scale of hardness (which is a measure of a gemstone or minerals resistance to scratching), gold has a hardness value of 2 to 2.5. Diamond has a value of 10. Pure gold may be easily be scratched. Fortunately, gold becomes harder when alloyed with other base metals. It is estimated that only 125,000 tons of gold have been mined the world over since the beginning of time.
Medicinal Properties
Within the human body too the colour of gold is celebrated. The human body, according to Ayurveda, is believed to have many charkas or nodal points of operation. The heart chakra is said to be golden yellow and so the colour itself is regarded as inspiring divine thoughts. Golds immunity to rust made physicians feel it had properties to cure diseases. Chakras medical treatise mentions the use of gold in medicine. The jawahar mohra of Unani medicine uses gold as one of the components of special medicines as do the many other Ayurvedic and Tibetan medicines. The thanga baspam is one such medicine that is supposed to lengthen the life span and act as an aphrodisiac. Gold has been used to fill the cavities in teeth since ancient times. In India, thanga rekha or a fine golden thread is often served with betel leaf after a sumptuous dinner or heavy lunch.
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GOLD INVESTMENT Use of gold in medicine often led to the association of certain magical properties with the metal. Gold earrings are said to improve eyesight while those suffering from mumps believe that if they wear a gold chain their problem will vanish. In fact, the ailment itself is called ponnuku vingi or swelling caused by lack of gold.
Chapter 4 Economy
A. Importance in the Economy

Gold also performs a major role in contributing to the world economy, as it earns around $400 billion throughout the globe. Now India has its upper hand in this industry as more that 20% of the total money earned is so from India i.e. its exports, and the sales within the country. This is so because India is the biggest market in the world for consumer product as well as products of this field and keep it in mind those even foreign companies make the Indian market a target for its products. Moreover, another reason for its higher earnings are that customers in India prefer quality gold i.e. either 22ct or 23ct, whereas in most of the foreign countries the ornaments are the contents of 18ct or 14ct gold. Thus we can see how important this industry is for us.
B. Value in an Economy
In a world where paper currencies come and go, where paper money can be depreciated 25% to 30% overnight, any single nation or borrower cannot manipulate the price of gold. On the contrary, gold is the foundation of todays world monetary system. No other substance on earth embodies the unique characteristics of gold. Its yellow luster and beauty are unsurpassed. Since the 7 NANAK KHALSA COLLEGE GURU
GOLD INVESTMENT earliest days of man, it has been admired, molded, shaped, and worn as a symbol of wealth and good taste. The romance and lure of gold is enhanced by its historic use as a storehouse of wealth. Golds value is intrinsic. Its value is a measure of the true wealth and the stability of national currencies the world over. Throughout history, every paper currency has become totally worthless over time, yet gold remains. The precious metal gold cannot be created, destroyed, or altered. It forever remains one of the most liquid investments with no geographic boundaries. Gold is bought, sold, traded, and stored in most parts of the free world with complete privacy.
C. Pricing of Gold
Like other precious metals, gold is measured by troy weight and by grams. When it is alloyed with other metals the term carat or karat is used to indicate the amount of gold present, with 24 carats being pure gold and lower ratings proportionally less. The purity of a gold bar can also be expressed as a decimal figure ranging from 0 to 1, known as the millesimal fineness, such as 0.995. The price of gold is determined on the open market, but a procedure known as the Gold Fixing in London, originating in 1919, provides a twice-daily benchmark figure to the industry. Historically gold was used to back currency in an economic system known as the gold standard a certain weight of gold was given the name of a unit of currency. For a long period, the United States government set the value of the US dollar so that one troy ounce was equal to $20.67 ($664.56/kg), but in 1934 the dollar was revalued to $35.00 per troy ounce ($1125.27/kg). By 1961 it was becoming hard to maintain this price, and a pool of US and European banks agreed to manipulate the market to prevent further currency devaluation against increased gold demand. On 17 March 1968, economic circumstances caused the collapse of the gold pool, and a two-tiered pricing scheme was established whereby gold was still used to 8 NANAK KHALSA COLLEGE GURU
GOLD INVESTMENT settle international accounts at the old $35.00 per troy ounce ($1.13/g) but the price of gold on the private market was allowed to fluctuate; this two-tiered pricing system was abandoned in 1975 when the price of gold was left to find its free-market level.
D. Factors Influencing Gold Prices

Today, like all investments and commodities, the price of gold is ultimately driven by supply and demand, including hoarding and dis-hoarding. Unlike most other commodities, the hoarding and dis-hoarding plays a much bigger role in affecting the price, since almost all the gold ever mined still exists and is potentially able to come on to the market at the right price. Given the huge quantity of above ground hoarded gold, compared to the annual production, the price of gold is mainly affected by changes in sentiment, rather than changes in annual production or gold jewelry demand. Central banks and the International Monetary Fund play an important role in the gold price. Sentiment It used to be said that Gold is the world's frightened bunny. Whenever crisis threatened, the demand for physical gold increased. Bank failures When dollars were fully convertible into gold, both were regarded as money. However, most people preferred to carry around the paper dollars issued by their bank rather than the somewhat heavier and less divisible gold coins. If people feared their bank would fail, a bank run might have been the result. Inflation Paper currencies pose a risk of being inflated, possibly to the point of hyperinflation. Historically, currencies have lost their value in this way over time. 9 NANAK KHALSA COLLEGE GURU
GOLD INVESTMENT In times of inflation, people seek to protect their savings by purchasing liquid, tangible assets that are valued for some other purpose. Gold is in this respect a good candidate, and producing more is far more difficult than issuing new fiat currency, and does not rely on any particular government's health.
War, invasion, looting In times of national crisis, people fear that their assets may be seized, and the currency may become worthless. They see gold as a solid asset which will always buy bread or transportation. Thus in times of great uncertainty, particularly when war is feared, the demand for gold rises.
Production According to the World Gold Council, annual gold production over the last few years has been close to 2,500 tonnes. However, the effects of official gold sales (500 tonnes), scrap sales (850 tonnes), and producer hedging activities take the annual gold supply to around 3,500 tonnes.
Demand About 3,000 tonnes goes into jewellry or industrial/dental production, and around 500 tonnes goes to retail investors and exchange traded gold funds. For the last few years, the official sector sales of around 500 tonnes have been taken up by retail investors and gold funds.
Supply and Demand Some investors consider that supply and demand factors are less relevant than with other commodities since most of the gold ever mined is still above ground and available for sale at a price. However, supply and demand do play a role. According to the World Gold Council, gold demand rose 29% in the first half of 2005. The increase came mainly from the launch of a gold exchange-traded fund, 10 GURU
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GOLD INVESTMENT but also from jewelry. Gold demand was at an all time record. Demand from the electronics industry is rising by 11% a year, jewelry by 19%, and industrial and dental by 21%.
E. Price Difference between Local and International market

The strong domestic demand for gold and the restrictive policy stance are reflected in the higher price of gold in the domestic market compared to that in the international market. During the 19 year period from 1977-78 to 1995-96, the average spread between Mumbai and London market prices (Mumbai price less than London price in rupee terms) of gold has been positive, except for a brief period during 1980-91 when the international gold price zoomed for a brief period following the oil crisis, persistent weakening of dollar resulting in flight of dollar resources into gold, and accelerating world-wide inflationary trends. The average spread was as high as 41.3% during 1986-91. In the post-liberalisation period, with changes in exchange rate regime and some relaxations on import regime of gold, the average spread between domestic and international prices has come down from 53.1% in 1991 to 20.6% in 1993, 20.1% in 1994, 19.9% in 1995. The current spread is as low as 3% and is calculated as shown in the following table: A1 A2 A3 A4 A5 B B1 B2 B3 International prices of Gold at International market CIP Premium to import in India Exchange Rate Cost of Gold landed in India (350+0.75)*47 At conversion 32.15674 Add: Indian Cost Service charges being charged by banks 0.10% Custom Duty Sales Tax 1% on (5498+5.50+100) 11 NANAK KHALSA COLLEGE $350 per ounce $0.75 per ounce Rs.47 per USD Rs. 17096 per ounce Rs. 5498 per gms Rs. 5.50/10 gms Rs.100/10 gms Rs.56/10 gms GURU
GOLD INVESTMENT B4 C Total of added cost at Indian soil Rs. 161.50/10 gms Market Price (wholesale) in India Rs.5660/10 gms Exhibit 1: Current International prices vis-a-vis local prices
Chapter 5 Gold Market

Structure of Gold Market
It consists of central banks, bullion banks (International banks with specialist skill in bullion trading such as J P Morgan, Goldman Sachs, Deutsche Bank, Chase Manhattan, Citigroup), mining companies and investors. The central banks lend gold to bullion banks at an interest rate known as the lease rate. Bullion banks, the financial intermediary, in turn sell the gold in the spot market to different segments of the market, such as jewelers and fabricators, and the resultant cash proceeds are used for investment. At the same time, bullion banks or their customers run a price risk, as there is an obligation to return the physical gold back to the central banks after the lease period. For this, they go long in the gold forward market. The counter-party in this deal is generally a gold-mining company, investor or speculator (hedge fund, for instance), which want to gain from contango. In fact, the gold forward premium has a close link with the gold lease and the money market rates. The gold forward rate is almost same as the difference between the dollar rate (Libor) and the gold lease rate. And as long the difference between the two is positive, there is a spread or contango; if the difference is negative, there is backwardation, that is, spot gold is in demand. Gold being the second largest component of central bank reserves (32,00012 NANAK KHALSA COLLEGE GURU
GOLD INVESTMENT 35,000 tonnes), having an intrinsic value link to the dollar and is often kept in a safe band by well-orchestrated efforts of central banks.
World Gold Industry

Gold is primarily a monetary asset and partly a commodity. South Africa is the world's largest gold producer followed by US and Australia. Gold is beginning to trend upwards, and has been in a bull market now for almost two years. Gold at $410 is up 61% from its low of $255 in July '99 to Nov03 now. World Gold Markets Physical - London, Zurich, Istanbul, Dubai, Singapore, Hong Kong & Mumbai Futures - NYMEX in New York, TOCOM in Tokyo London as the great clearing house New York as the home of futures trading Zurich as a physical turntable Istanbul, Dubai, Singapore and Hong Kong as doorways to important consuming regions. Tokyo where TOCOM sets the mood of Japan Mumbai under India's liberalized gold regime
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Gold producing countries - South Africa - United States - Australia - China - Canada - Russia - Indonesia - Peru - Uzbekistan - Ghana - Brazil - Chile - Philippines - Mali - Mexico - Argentina - Kyrgyzstan - Zimbabwe
The largest producer of Gold is South Africa. It accounts for an estimated 16.5 million ounces of Gold annually in the next 3 years; and produces almost 20 percent of the worlds bullion. The second largest producer of gold is United States. It produces about 12.5% of the worlds Gold supply. Due to the expansion US Mining operations, and because of the reduced profitability due to the low price of Gold, reduction in mine production is expected by 9% by the US during the next three years. The third largest producer of gold is Australia.
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GOLD INVESTMENT Nearly 45% of the world Gold supply was produced by the top three producing nations. Latin America (Mexico, Peru, Chile and Brazil) and the Far East producers are expected to increase production in the next three years. Though these countries add up to a very small share in worlds total supply, their production increase will counteract some of the production cuts made.
India in World Gold Industry (Rounded figures) Total stock Central Bank Holdings Annual Production Annual Recycling Annual Demand Annual Imports Annual Exports India (in tons) 13000 400 2 100-300 800 600 60 Exhibit 2: India in the world Gold Industry Indian Gold Market
World (in tons) 145000 28000 2600 1100-1200 3700
% Share 9 1.4 0.08 13 22
Gold is valued in India as a savings and investment vehicle and is the second preferred investment after bank deposits. India is the world's largest consumer of gold in jewellery as investment. In July 1997 the RBI authorized the commercial banks to import gold for sale or loan to jewellers and exporters. At present, 13 banks are active in the import of gold.
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This reduced the disparity between international and domestic prices of gold from 57 percent during 1986 to 1991 to 8.5 percent in 2001. Domestic consumption is dictated by monsoon, harvest and marriage season. Indian jewellery off take is sensitive to price increases and even more so to volatility.
In the cities gold is facing competition from the stock market and a wide range of consumer goods. Facilities for refining, assaying, making them into standard bars in India, as compared to the rest of the world, are insignificant, both qualitatively and quantitatively.
Chapter 6 Production and Consumption
A) How Much is Being Produced?
The geographical breakdown of major global producers (in tones) is as follows: Countries South Africa United States of America Australia China Canada Russia Peru Indonesia Production 428.3 353.0 295.7 175.0 153.8 144.0 133.0 124.6
Exhibit 3: Production of Gold 16 NANAK KHALSA COLLEGE GURU
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B) How Much is Being Consumed?

Gold is not really 'consumed' in the sense that it doesn't get used up, but its demand runs at about 3800 tonnes per year - notably faster than it is being mined (2,600 tonnes). Gold demand is very much harder to evaluate than production, because while production is concentrated in a relatively small number of mines demand is distributed throughout the world. This makes it difficult for anyone to build a statistically accurate picture. Some of the difficulties are as follows : Many buyers of gold are deliberately secretive. In particular the recycling of scrap does not lend itself to measurement because recycling can utilize scrap supply and meet a demand without going anywhere near a statistician. Unallocated gold is difficult to measure because it is often notional. So all figures that report gold demand should be reviewed skeptically. However, undeniably by far gold's major demand comes from jewellery manufacture. The main other demand comes from retail investment - i.e. from gold's use as a private reserve asset. The amount used in industry, e.g. in electronics and dental surgery combines to a further 340 tonnes. The geographical breakdown of demand illustrates its jewellery based nature. Because of its importance in Indian marriage ceremonies India leads the table. The USA is second 17 NANAK KHALSA COLLEGE GURU
GOLD INVESTMENT because of the broad affordability of gold jewellery for a large section of the world's richest society. Then comes China, SE Asia, Europe, Saudi Arabia, the Gulf States, Korea, Egypt, Turkey, Pakistan and lastly Japan.
C) How is the Production Shortfall Made Up?

There is a supply side shortage of gold bullion. Average annual demand over 5 years is about 3800 tones and mined supply is a bit less than 2600 tones. With less than 2,600 tones supplied from the mines a further 15% [600 tones] of annual demand is met from scrap jewellery and bullion and the remaining significant shortage of almost 20% [about 800 tones] is being met by sales of central bank gold reserves. More details of the reasoning behind central bank sales follow in the section on gold trading. Much of the selling is done in relative secret but some of the central banks publish details: Germany - sold 12 tons of gold in 2001, as commemorative gold coins. Holland declared a policy of selling 300 tones over 5 years from 1999. The Dutch do not advertise their sales in the market as they happen. They have sold 100 tones in year 1. 27 tones in year 2. 9 tones in year 3, and 33 tones in year 4 (so far). Portugal sold 15 tones in December 2002 and 30 tones in February 2003, apparently as a result of options taken out in 1997/8. Switzerland plans to sell 1300 tones. They have sold annual amounts of 120, 220 and 283 tones, project a further 283 tones in 2003 and will cease selling after 2004.
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GOLD INVESTMENT The UK has sold 395 tones in a public auction programme, which finished in March 2002.
D) Production of Gold in India

Gold holdings in India are estimated to be in the range of 10000-13000 tonnes and are predominantly private. Indias gold consumption is 25% of worlds total gold production. India has a very limited gold production of around 9 tonnes in 2002.The domestic production of the gold is very limited . More than 60% of Indian consumption is met through imports.
E) Consumption of Gold in India

Rural India continues to absorb more than 70% of the gold consumed in India and it has its own role to fuel the barter economy of the agriculture community. The yellow metal used to play an important role in marriage and religious festivals in India. Gold also occupies a significant position in the temple system where gold is used to prepare idol and devotees offer gold in the temple. The existing social and cultural system continues to cause net gold buyer market and the Government policies have to take note of the root cause of gold demand, which lies in the social and cultural system of India. The annual consumption of gold, which was estimated at 65 tonnes in 1982, has increased to more than 700 tonnes in late 90s. Although it is likely that, with prosperity and enlightenment, there may be deceleration in demand, particularly in urban areas, it would be made good by growing demand on account of prosperity in rural areas.
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GOLD INVESTMENT India is one of the largest consumers of gold but hardly produces any of the gold it consumes. Though millions of Indians live in poverty, India continues to be largest consumer of gold (25% of world demand). It is not just a symbol of luxury but is bought on religious occasion like marriages, Diwali (Hindu new year), Eid, Christmas etc. most of the gold in India is imported which has supported smugglers for years together due to high import duties. At one time India had the highest hoarding of gold and Mahmud of Ghazni looted the temples and shipped much of the gold to Middle East.
Chapter 7 Gold Demand and Supply
Above ground stocks end 2005
Supply flows 5 year average (2001-2005)
Demand flows 5 year average (2001-2005)
Exhibit 4: Gold Demand and Supply
Global and Domestic Demand-Supply Dynamics

The demand for gold may be categorized under two heads- consumption demand and investment demand. Consumption of gold differs according to type, namely industrial applications and jewellery. The special feature of gold used in industrial and dental 20 NANAK KHALSA COLLEGE GURU
GOLD INVESTMENT applications is that some of it cannot be salvaged and thus is truly consumed. This is unlike consumption in the form of jewellery, which remains as stock and can reappear at future time in market in another form. Consumer demand accounts for almost 90% of total gold demand for jewellery forms 89% of consumer demand. In markets with poorly developed financial systems, inaccessible or insecure banks, of where trust in the Government is low, gold is attractive as a store of value. If gold is held primarily as an investment asset, it does not need to be held in physical form. The investor could hold gold-linked paper assets or could lend out the physical gold on the market attaining a higher return in addition to savings on the storage costs. Japan has the highest investment demand for gold followed closely by India. These two countries together account for over 50% of total world demand of gold for retail investment. Investment demand can split broadly into two, private and public sector holdings. There are several ways in which investors can invest in gold either directly or through a variety of investment products like coins. Bars, gold accounts, certificates etc. which are discussed in detail in the next chapter.
Demand
The consumer demand for gold is more than 3400 tonnes per year making it whooping $40 billion worth. More than 80% of gold consumed is in the form of jewellery, which is generally predominated by women.
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Exhibit 5: Gold Fabricated Demand Breakdown The Indian demand to the tune of 800 tonnes per year is making it the largest market for gold followed by USA, Middle East and China. About 80% of the physical gold is consumed in the form of jewellery while bars and coins occupy not higher than 10% of the gold consumed.
If jewellery ownership is included, then India is the largest repository of gold in terms of total gold within the national boundaries. Regarding pattern of demand, there are no authorities estimates, the available evidence shows that about 80% is for jewellery fabrication for domestic demand, and 10% is for investor demand (which is relatively elastic to gold-prices, real estate prices, financial markets, tax policies, etc.) and rest for industrial applications and dental use. The demand for jewellery is rooted in societal preferences for a variety of reasonsreligious, ritualistic, a preferred form of wealth for women, and as a hedge against inflation. It will be difficult to prioritize them but it may be reasonable to conclude that it is a combined effect, and to treat any major part as exclusively a store of value or hedging instrument would be unrealistic. It would not be realistic to assume that it is only the affluent that creates demand for gold. There is a reason to believe that a part of investment demand for gold asset is out of black money.
Supply
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GOLD INVESTMENT Indian gold holding, which are predominantly private, is estimated to be in the range of 10000-13000 tones. One fourth of gold production is consumed in India and more than 60% of Indian consumption is met through imports. The domestic production of gold is very limited resulting more dependence on imported gold. The availability of recycled gold is price sensitive and as such the dominance of the gold supply through import is in existence. The fabricated old gold scraps are price elastic.
Chapter 8 Trading in Gold

Trading in gold is a part of commodity trading. A) Commodity Trading
In the days gone by commodity trading was more unorganized, as all traders were required to a commonplace and call out bids. It all seemed like a network of noisy numbers flying from one end to another. Nonetheless, in spite of such an environment, no one ever complained about missing bids. However, there were a few stray incidents that might have occurred in the area of errors. In those days the buyer would study the quantity of annual produce of the commodities and the sellers would calculate the approximate demands. There was speculation and dictating of terms. This was primarily because there was no research and techniques of trading speculation. It was like going to any other market and bargaining for what is needed to be purchased and sold. However, commodity trading has seen a radical change with it shifting to an organized set up in the form of the commodity exchanges. Actually futures commodity trading was banned for over forty years in this country because of varied reasons. And when this ban was lifted a couple of years ago no one could imagine the volume of trading it has invited.
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GOLD INVESTMENT Presently, the accumulative commodities derivatives trade value is estimated to have reached the equivalence of 66% of the gross domestic product (GDP). The experts claim that if this upward trend continues then the trade value could equal the GDP in times to come, which is considered a positive trend for the economy. While there is immense positivity surrounding the future of commodity trading, there are a couple of negatives that need to be kept in check. Some experts claim that a rapid and almost revolutionary climb in the volumes of commodity trading can lead to a major correction phase, causing it to crash. Another doubt that experts see gleaming is the number of commodities which are being traded, which has crossed over one hundred, in too short a period. Well, nonetheless the regulatory bodies under the aegis of the government would have to keep a keen watch on the commodity trading to avoid any kin of untoward incident that could create havoc in the economic status of the nation. Commodity Exchanges in India FMC: The Forward Market Commission (FMC), is the regulatory body set up under the Forward Contracts (Regulation) Act, 1952, to monitor forward trading in various commodities. Forward Markets Commission (FMC) regulates the trading of commodity derivatives on the NCDEX. Forward Markets Commission provides regulatory oversight in order to ensure financial integrity (i.e. to prevent systematic risk of default by one major operator of ground of operators), market integrity (i.e. to ensure that futures prices are truly aligned with the prospective demand and supply conditions) and to protect and promote interest of customers/non-members. NCDEX: National commodity and Derivatives Exchange Limited (NCDEX) is a professionally managed online multi commodity exchange promoted by ICICI 24 NANAK KHALSA COLLEGE GURU
GOLD INVESTMENT Bank Limited (ICICI Bank), Life Insurance Corporation of India (LIC), National bank for Agricultural and Rural Development (NABARD) and National Stock Exchange of India Limited (NSE). NCDEX is the only commodity exchange in the country promoted by national level institutions. This unique parentage enables it to offer a bouquet of benefits, which are currently in short supply in the commodity markets. The four institutional promoters of NCDEX are prominent payers in their respective fields and bring with them institutional building experience, trust, nationwide reach, technology and risk management skills.
NCDEX is located in Mumbai and offers facilities to its members in about 91 cities throughout India. NCDEX is regulated by Forward Market Commission in respect of futures trading in commodities. It is committed to provide a world-class commodity exchange platform for market participants to trade in a wide spectrum of commodity derivatives driven by best global practices, professionalism and transparency. NCDEX currently facilitates trading of ten commodities- gold, silver, soy bean, refined soy bean oil, rapeseed-mustard seed, expeller rapeseedmustard seed oil, RDB palmolein, crude palm oil and cotton- medium and long staple varieties. MCX: MCX, an independent and de-mutulized multi commodity exchange, has permanent recognition from Government of India for facilitating online trading, clearing and settlement operations for commodity futures markets across the country. Key shareholders of MCX are Financial Technologies (India) Ltd., State Bank of India, NABARD, NSE, HDFC Bank, State Bank of Indore, State Bank of Hyderabad, State Bank of Saurashtra, SBI Life Insurance Co. Ltd., Union Bank of India, Bank of India, bank of Baroda, Canara Bank, Corporation Bank. Headquartered in Mumbai, MCX is led by an expert management team with deep domain knowledge of the commodity futures markets. 25 NANAK KHALSA COLLEGE GURU
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MCX offers futures trading in the following commodity categories: agric commodities, bullion, metal-ferrous and non-ferrous, pulses, oils and oilseeds, energy plantations, spices and other soft commodities. MCX has built strategic alliances with some of the largest players incommodities eco-system, namely, Bombay Bullion association, Bombay Metal Exchange, Solvent Extractors Association of India, Pulses Importers Association, Shetkari Sangathana, United Planters Association of India and Pepper and Spice Trade Association. The vision of MCX is to revolutionize the Indian commodity markets by empowering the market participants through innovative product offerings and business rules so that the benefits of futures markets can be fully realized. This can be achieved by offering unparalleled efficiencies, unlimited growth and infinite opportunities to all the market participants. Gold Trading consists of OTC transactions in spot, forward and options and other exotic derivatives together with exchange traded futures and options. OTC markets operate on a 24-hour basis around the world.
B) Spot and Futures Trading

Futures are financial instruments based on a physical underlying (commodity, equities etc.). A futures contract is an agreement between two parties to buy or sell an asset at a certain time in the future for a certain price. Market participants are able to buy and sell a certain commodity at a pre-determined price at a later date as specified by the Exchange. For example, if a person wants to buy 10 gms of gold after three months when the price today is say, Rs 6000 per 10 gms (spot prices) and Rs 6050 after three months (futures prices). He enters into a contract through a member of NCDEX to buy gold. On the due date if the price in the spot market is say, Rs 6100, then he still has to pay only Rs 6050, and has hence hedged himself against the price risk. 26 NANAK KHALSA COLLEGE GURU
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Spot price is the price in the cash market (where one buys and sells goods on the spot just as we make purchases from a shop by paying cash) while future prices are prices of the same commodity at a future date. Therefore, if the spot price of gold is Rs 6000/10 gms today, the 1-month future price would be Rs 6050, while the 2-month future price would be Rs 6100. The difference between spot and futures prices is the costs of carry i.e. interest cost, storing, insurance etc. Normally futures prices are higher than spot prices. The exception is when the futures prices are lower than the spot price, which is called backwardation. This situation is more common in case of agriculture commodities where due to the arrival of crop on certain future dates, the future prices would be lower than the current spot price.
C) Exchange Traded Funds

The exchange-traded markets are essentially only derivative markets and are similar to equity derivatives in their working. I.e. everything is standardized and a person can purchase a contract by paying only a percentage of the contract value. A person can also go short on these exchanges. Also, even though there is a provision for delivery most of the contracts are squared-off before expiry and are settled in cash. As a result, one can see an active participation by people who are not associated with the commodity.
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Chapter 9 Investment in Gold
A) Gold as a Financial Asset

Gold and other precious metals are assets that are both tangible and liquid (i.e. easily traded), unlike real estate which is tangible but not liquid, or company shares and bonds which are liquid but not tangible. Considering its high density and high value per unit mass, storing and transporting gold is very easy. Gold also does not corrode. Historically, it was also very easy to verify that an offered coin had the density of gold through the use of Archimedes' principle. Today, however, some metals are denser than gold yet cheaper. While some think gold deserves special treatment based on its cultural value and use as money, others consider gold a commodity, like copper or lead.
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B) Buying Gold
1. Buying physical gold Some people, sometimes referred to as gold bugs, buy gold which they retain in their physical possession in the belief that should the monetary and financial system collapse, gold would still be considered valuable. Other reasons for doing so include the ease of hiding the gold from others, such as family members or tax authorities.
2. Buying gold for the gold price Some people buy gold not in their physical possession, but stored for them by a bank, through a gold exchange-traded fund, or in the form of a gold certificate; their motivations also apply to those who hold gold physically. Some asset allocation strategies use exposure to gold as a form of diversification, though the inclusion of gold in portfolios has largely been abandoned since the 1980s . Gold may be included in portfolios as an insurance against unforeseen calamities which may affect the price of other investments negatively. Gold is sometimes treated as the fifth world currency, along with the US dollar, euro, Japanese Yen, and the pound sterling. It is therefore bought in a process analogous to currency speculation: when it is expected that the dollar declines against other currencies, buying gold or other currency before the decline and selling it afterwards could realize a profit. Additionally speculators attempt to 29 NANAK KHALSA COLLEGE GURU
GOLD INVESTMENT make a profit by predicting the gold price, detecting market trends they believe will show them the future price direction. For centuries gold has remained a store of value. Some people believe that by buying gold, they will be most likely to maintain their wealth in the long term, protecting them against inflation and decline in the value of fiat money. These individuals believe that certain events (e.g. war or economic crisis), may have a negative influence on the value of their other investments, but the opposite effect on the value of gold.
C) Methods of Investing
1. Jewellery
Jewellery has two advantages and many big disadvantages.
9.1 Gold Jewellery and Coins 30 NANAK KHALSA COLLEGE GURU
GOLD INVESTMENT The advantages are: It is the form of gold, which gives some benefit from ownership, namely the enjoyment of being worn. It is very easy to buy. The disadvantages are: The acquisition costs are very, very high. Retail jewellery is often marked up by 300% or more in the shops. (Note that insurance valuations are a fantasy based on replacement cost at retail. No piece can be sold at this value.) The real value of jewellery is in the gemstones, the design and the craftsmanship. These greatly outrank the value of the gold. All pieces are different and their values are subjective. If you don't have experience you probably won't know a fair value - which for practitioners is part of the fun. It is by far and away the most easily stolen form of gold.
Jewellery is a profitable business for those who buy at wholesale and sell at retail. It also works for people who have a good feel for fashion, and the time to trawl through catalogues finding stuff which maybe they can re-sell. But it's a poor way of investing in gold. If - nevertheless - you choose to invest in gold through jewellery the best advice must be to avoid the retail mark-ups as far as possible by buying at auction, where buying premiums (the fee paid to the auction room) is typically 10 - 15%. Alternatively seek out parts of the world like Dubai where it is possible to buy gold not too far from its bullion value. There machine made chains are sometimes sold as little as 20% above bullion content.
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2. Bullion Coins and Small Bars
Bullion is defined as gold or silver, as well as other precious metals that are in the solid form being a biscuit, slab or coins.
9.1 Gold Coins and Biscuits Gold is considered a primary asset with high appreciation value and ready convertibility at any given point. In India, marriages are fixed in accordance to the gold the bride takes to her in-laws home. People from every stature of Indian society invest in bullion. They prefer this over property as in times of a crisis it is not all that simple to convert property to liquid cash, but the bullion can be sold within a couple of hours, and the recipient would be cash-rich, almost instantly.
Advantages Coins and bars are generally a liquid market, so you can find sellers and buyers when you need them. They are relatively accessible to smaller investors. Coins in particular can be bought with modest amounts of money. Coins are mostly recognizable, which makes them exchangeable for goods in some circumstances. This monetary characteristic makes them attractive to 32 NANAK KHALSA COLLEGE GURU
GOLD INVESTMENT people who want to take possession of gold as a means of surviving a catastrophe. It doesn't work always as they hope. Genuine coins have the added endorsement of a government mint, which provides a level of guarantee. Disadvantages The local custody problem is often the case that when gold becomes really valuable gold coin usage is made illegal by governments, or is so heavily taxed and constrained that it is nonsense to use them 'above the counter'. There are fakes, and these are usually only spotted by dealers, although there are tools which might help the less experienced. Dealers rate themselves at spotting fake coins from their surface, but because bars are generally bigger than coins they can be 'drilled out'. This obviously illegal activity leaves the serial numbered bar skin behind and fills the interior with an alternate, like lead. Next to most types of investment the difference between buying and selling price is significant. On the face of it this can cost 7%, but the reality is usually worse. Demand tends to come in waves, with the market producing a surfeit of buyers or a surfeit of sellers at any given time. With a wide spread to play with the dealer will shade high when most customers are buyers, and low when they are sellers.
3. Gold Mining Shares

Shares in gold mines are a popular way of investing in gold. These do not represent gold at all, but rather are shares in gold mining companies. If the gold price rises, the profits of the gold mining company could be expected to rise and as a result the share price may rise. However, there are many factors to take into account and it is not always the case that a share price will raise when the gold price increases. Advantages 33 NANAK KHALSA COLLEGE GURU
GOLD INVESTMENT The advantage of investing in a gold mine's shares is that its value is much more sensitive to the price of gold than even a gold bar. This is because gold mines are valued on the basis of their anticipated cash flows through the life of the mine, and these depend on the reserves, and on the relationship between production costs and the anticipated value of the gold extracted. Of course the flip side means that these gold shares would fall four times as quickly on a falling bullion price. Disadvantages The quantity of a mine's reserves is never accurately known. Reserves (and their poor relative 'resources') are assessed by miners' core drilling programs, which sample a prospective gold seam to measure gold concentrations in the rock. The amounts discovered in chemical analysis are extrapolated over a wider area to identify the likely reserve amount overall, but there is no guarantee it will be found in mining. Consequently there is a risk that recorded reserves do not reflect reality. There can also be unforeseen engineering problems in extracting ore. These can increase the production costs, and only small percentage increases can eat into the mine's profitability. Another issue is that the costs of the mine can be borne in a different currency the trading currency of the output. Exchange rate movements can greatly affect mine profitability by creating currency translation adjustments - both profits and losses. Perhaps the greatest variable is shareholder sentiment. Because of the wide attraction of gold shares in good gold markets the shares tend to greatly outperform not only gold, but also any reasonable valuation of the mine's future cash-flow. Investors are often not familiar with the yield numbers they should expect on a mine compared with - say - a supermarket, because whereas there is no reason that using a supermarket will wear it out, the mine certainly will be 34 NANAK KHALSA COLLEGE GURU
GOLD INVESTMENT worthless within a few years, once its ore is gone. So the return on a mine must pay back both the original investment and provide some profit during its life. Corporate culture is another problem. These days many companies (not just mining companies) are run more for the benefit of their managers than their shareholders. Many managers don't like paying dividends because it diminishes the cash pile remaining for staff salaries and new corporate adventures - like exploration or takeover activity. Very few mining companies could be accurately described as vehicles for the straightforward exploitation of underground ores in the interest of shareholders. Gold shares are potentially risky but simultaneously an exciting investment. They tend to be reasonably correlated to gold prices but typically much more volatile, and subject to many variations, which are independent of bullion market forces. There are far too many of them to keep track of, and anyway individual analysis is well beyond the scope of this site. Mining shares might be considered an appropriate gold vehicle investment for sums from $5,000 range upwards, but investors should remember the gearing and invest appropriately less than they would in bullion. Buying and selling costs vary from market to market.
4. Gold Backed Securities

These are a relatively new innovation. They aim to combine the benefits of physical gold bullion with the liquidity and infrastructure of traditional securities market. To create a gold backed security a company is set up which has the right to issue a paper instrument which can only be issued in direct proportion to gold deposited in a vault. The securities are then traded on a normal stock exchange, or by a broadly equivalent market mechanism.
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GOLD INVESTMENT The price of those securities actually reflects only supply and demand for the shares themselves in the relevant market for the securities, but this will tend to shadow bullion because there is usually a right of redemption, allowing them to be surrendered in return for the gold, which backs them. There will be a fee for redemption, which is fixed, and relatively high to prevent lots of nuisance redemptions, but it allows market professionals to leave a bid on the exchange consistently near the value of the gold.
Advantages of Gold Backed Securities Gold backed securities are close to owning bars in a vault. The bars should be stored on a proper allocated basis, which means they are not lent or made subject to any form of derivative transaction. Being quoted on stock markets there is an accessible market for relatively small investments - certainly more accessible than true bullion. The dealing spreads are considerably lower than coins and small bars. Typically they are 0.5%. The custody problem is resolved. A professional vault is used to store the gold, and this is statistically much safer than any form of private storage.
Disadvantages of Gold Backed Securities There is a degree of intermediation in the ownership of the gold. Although the shares confer a right on the gold it is neither owned by the investor nor in his 36 NANAK KHALSA COLLEGE GURU
GOLD INVESTMENT possession. Technically the gold is owned by the trustees whose duty it is to defend the entitlement of the beneficiaries under the trust. Although the dealing spreads are smaller the brokers in a stock exchange tend to remunerate themselves with commissions - absent when you trade direct with a gold dealer. Commission levels vary widely from stock market to stock market, and from broker to broker. Some stock exchanges impose extra charges on each transaction. Some of the advantages of private investment in shares - like tax shelters - are not applicable to securities whose purpose is to act as asset stores.
Gold backed securities have a lot to recommend them. The security of gold is more solid than the margin based security, which underpins futures. They do not incur the periodic volatility inherent in futures. The custody charges, although still quite high, are generally lower than other forms of custody available to medium sized investors and the transaction costs are no worse than with other stock market investments. These are innovations which appear to encourage private gold ownership, and with a good degree of security - but a little too much cost.
5. Gold accounts
There are two types of gold accounts: allocated and unallocated.
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GOLD INVESTMENT Holding gold in an allocated account is rather like keeping it in a safety deposit box. Specific bars (or coins, where appropriate), which are numbered and identified by hallmark, weight, and fineness, are allocated to each particular investor, who has to pay the custodian for storage and insurance. Many investors prefer to hold gold in unallocated accounts, which are conceptually similar to foreign exchange accounts. Unless investors take delivery of their gold (usually within two working days), they do not have specific bars ascribed to them. An advantage of unallocated accounts is that investors do not incur storage and insurance charges. However, they are exposed to the credit-worthiness of the bank or dealer providing the service in the same way that they would be if they had any other type of account. Eg: Gold Pool Accounts Gold pool accounts allow the customer to buy a gold liability from the account provider. Effectively the customer pays cash, and the supplier treats him as a creditor for bullion, which may or may not have been actually bought. Pool accounts are synonymous with unallocated gold.
The advantages of Gold Accounts They are easily accessible. They have relatively low dealing costs - there is usually no commission and the spreads are fairly tight - at about 1% and sometimes less.
The disadvantages of Gold Accounts -
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GOLD INVESTMENT Unallocated gold grants very substantial unsecured credit to the account provider and places the bullion 'owner' at material credit risk. The owner is benefiting from a promise, and unlike the bank's promise to repay there is no assurance underlying the promise that the provider is competent to operate in much the same way as a bank. In spite of the apparent attractions of unallocated gold [pool] accounts it is extremely hard for any serious investor to recommend them - because of the unquantifiable risks. The customer's investment rests as a liability on the provider's balance sheet and there is no obligation on the provider to buy the gold. If there were unscrupulous individuals in the gold industry, their natural service would be offering gold pool accounts. That way they can take customers' money and put it to work for their own profit, without even paying interest. A common misconception about unallocated pool accounts is that there is a physical pile of gold in a bank - or some such place - which 'belongs' to the customers even if it does not actually have their name on it. This is not true. The legal ownership of the gold in an unallocated account rests with the provider, even where there is such a pile, which in quantity perfectly matches the liabilities to gold account owners.
6. Gold Exchange-Traded Fund
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GOLD INVESTMENT Gold exchange-traded funds (GETFs) are special types of exchange-traded funds (ETFs) tracking the price of gold. Gold exchange-traded funds are traded on the major stock exchanges including London, Paris and New York.
History The idea of a gold ETF was first officially conceptualized by Benchmark Asset Management Company in India when they filed a proposal with the SEBI in May 2002. However it did not receive regulatory approval and was only launched later in March 2007. The first gold exchange-traded fund actually launched was in March 2003 on the Australian Stock Exchange under Gold Bullion Securities (ticker symbol "GOLD"). Gold Bullion Securities (GBS) are fully backed by gold which is both deposited and insured. GBS was launched to give financial institutions and private investors the ability to own gold and gain exposure to the price, without the inconvenience of storing physical bars.
Fees Typically a commission of 0.4% is charged for trading in gold ETFs and an annual storage fee is charged. The annual expenses of the fund such as storage, insurance, and management fees are charged by selling a small amount of gold represented by each certificate, so the amount of gold in each certificate will gradually decline over time. In some countries, gold ETFs represent a way to avoid the sales tax or the VAT which would apply to physical gold coins and bars.
Investing in Gold with ETF 40 NANAK KHALSA COLLEGE GURU
GOLD INVESTMENT For the smart investor, gold can do more than just glitter. It can be portfolio diversifier, offering the potential for protection in tough financial times. It can also be a speculative tool, offering an opportunity to make profits by outguessing the metals markets. In the past, people hoarded bars, coins and other forms of gold as a hedge - in case other less tangible assets such as currency or stocks were to lose much of their value. Today, exchange-traded funds offer a simpler way to gain the same kind of exposure, without figuring out how to store and protect your gold holdings. A popular form of gold ETF holds the physical metal in vaults. As more assets are invested, the fund buys more gold. Occasionally, some of the metal is sold to cover fund expenses. The first U.S. ETF of this type was the street TRACKS Gold Trust (GLD Cramer's Take - Stockpickr), which made its debut in 2004. The iShares Comex Gold Trust (IAU - Cramer's Take - Stockpickr) also invests in bullion. Many investors like the fact that physical gold ETFs are a "pure play" that invests directly in the metal. They also give you the opportunity to short the metal if you think its value is going down. However, some analysts worry ETFs invite people to trade in and out of gold on a whim, making the market more volatile. Also, these shares probably aren't going to be attractive to so-called "doomsday" investors, who want to have gold on hand in the event of a global catastrophe. Other ETFs, such as Deutsche Bank's Power Shares DB Gold (DGL - Cramer's Take Stockpickr), gain exposure to gold through the futures market. Because these funds hold a combination of contracts and cash (usually parked in treasury bills until needed), they are able to generate some interest income to offset expenses. Gains from gold futures may also be taxed at a lower rate than trades involving bullion. However, futures-based gold ETFs can run into trouble when they are forced to roll into new contracts that are more expensive than the ones that are expiring. This is called "contango.
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GOLD INVESTMENT Finally, some gold ETFs invest in the stocks of gold mining companies. Market Vectors Gold Miners (GDX - Cramer's Take - Stockpickr) takes this approach. Due to operating leverage, returns on gold miners can actually outpace returns on the metal itself when gold is going up. On the other hand, gold mining ETFs expose you to all sorts of things other than gold, including the broader equities market. If the returns gold mining stocks are not closely correlated to the price of gold, then ETFs invested in them lose value.
RELATED ARTICLE
Reliance MF to offer Gold Exchange Traded Fund (RGETF)

24 March 2006 Mumbai: Reliance Capital Asset Management Ltd has filed offer documents of a planned open-ended gold exchange traded fund (ETF) with the Securities Exchange Board of India (SEBI). Reliance Mutual Fund has launched a Gold Exchange Traded Fund - Reliance Gold Exchange Traded Fund. This open-ended fund will track domestic prices of gold through investments in physical gold. The fund will be initially available for subscription from October 15, 2007 to November 1, 2007. The fund aims to provide returns that closely correspond to the return provided by the price of gold through investment in physical gold. The performance of the scheme may differ from that of domestic price of gold due to expense and other related factors. An investor can buy/sell units of RGETF on a continuous basis on the National Stock Exchange and/or other recognised stock exchanges where units are listed and traded like any other publicly traded securities at market prices which may be close to the actual NAV of the scheme. 42 NANAK KHALSA COLLEGE GURU
GOLD INVESTMENT Around 90-100 per cent of investments would be allocated to physical gold and gold related instruments. Debt and money market component in the portfolio would be upto 10 per cent. The fund, to be called Reliance Gold Exchange Traded Fund, proposes to invest at least 90 per cent of its assets in gold and related instruments and the rest in debt and money market instruments, the company said in its offer documents filed with SEBI. Retail investors can invest a minimum of Rs5,000 in the gold-based fund, it added. Benchmark Mutual Fund launched the country's first exchange-traded gold fund, paving way for investors to invest and trade in the yellow metal just like in any other equity investment. But the scheme may not attract many investors as it is mandatory for the investor to have a demat account for investing in the ETF. Also, on redemption, the repayment is done in cash and there is no physical delivery of gold. To overcome the problem of limited number of demat account holders in the country, fund houses are tying up with depository participants (DPs) and offering demat account services to investors, said officials. India accounts for 23 per cent of the world's jewellery demand and around 35 per cent of global investment in gold comes from the country. However, a large number of investors put their money in gold, not only to see value of their investment grow, but also to use the metal for making ornaments later.
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SNAPSHOT Mutual Fund Name : Reliance Gold Exchange Traded Fund Mutual Fund Family : Reliance Mutual Fund Open Ended : Exchange Traded Fund (ETF) Scheme Objective The investment objective is to seek to provide returns that closely correspond to returns provided by price of gold through investment in physical Gold (and Gold related securities as permitted by Regulators from time to time). However, the performance of the scheme may differ from that of the domestic prices of Gold due to expenses and or other related factors. Financial Details. Minimum Investment : Rs 5000 Incremental Investment : Rs 1 Systematic Investment Plan (SIP) allowed : No NRI Investment : Yes
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7. E- Gold
The basis of e-gold is that international debts, and even some domestic debts, can be paid more efficiently in gold than in foreign currencies, which have to be converted back into host currency through the bank. So wherever a supplier and a customer both have an egold account they can transfer ownership of gold between themselves across the internet, and this constitutes payment. To get started you use your own currency to buy grams of gold. Real gold is delivered into a depository, and is credited to your own e-gold account. You then get a secure internet identity, and thereafter you can instruct your e-gold provider to debit your e-gold account in favour of your supplier - another account holder in the system. Whatever you have bought from them is delivered to you independently. It is primarily a payments system, but it doubles as a route for owning and storing gold.
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D) Types of Gold Investor

Investors may buy gold as an investment because they are either one of, or a combination of, the following: 1. Asset Allocator Traditional asset allocation strategists used to recommend exposure to gold on the grounds of diversification. Although the inclusion of gold in portfolios has largely been abandoned since the 1980s, it is once again being considered by some asset allocators. 2. Cacheur Physical gold can be anonymous, if the bullion has no serial numbers or its ownership is not recorded anywhere. Cacheurs seek to hide part of their wealth from their wives, family, tax authorities, creditors, extortionists, kidnappers, blackmailers, police, invaders or others. The density of gold allows them to store a large value in a very small space, without fear of depreciation or erosion over a long period of time. A metric tonne of gold (1,000 kg) would be equivalent to a cube of side 37.27cm (1 ft 2 in), or roughly the size of a basketball. This small cube would contain 32,150 troy ounces, and be worth about $21,000,000 (late April 2006). 3. Currency Speculator Since the main gold market is priced in US dollars, speculators who believe the dollar will decline may buy gold. They think that if the dollar declines, the gold price will remain constant in other currencies, thus rising in terms of the U.S. dollar. Gold may also be bought if they feel that a different currency will decline, since they expect the dollar price to be stable, but the foreign currency price to rise.
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4. Gold Bug Gold bugs, in the traditional sense, believe in, fear, or even hope for the Second Great Depression or Armageddon, and believe that by holding gold they will survive and prosper. Krugerrands are a popular way to invest in gold because their gold content is exactly one troy ounce each.
5. Hoarder Some investors respect gold as a long-term store of value, and seek no profit, other than to maintain their purchasing power. By buying gold and hanging on for the long term, they believe they can keep their wealth intact.
6. Inflation hedger For centuries gold has remained a store of value. It has performed this function best in times of high inflation. Investors thus buy gold to protect themselves against a rise in inflation and a decline in the value of fiat money.
7. Libertarian Libertarians may use privately issued digital gold currency, in preference to fiat currency, for reasons such as lack of trust in fractional-reserve banking or monetary policy.
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8. Portfolio hedger Similar to asset allocators, except the purpose of the investment is as an insurance against unforeseen calamities which may affect the price of other investments negatively. Portfolios that contain gold are better able to withstand market surprises than those that do not. Some recent independent studies have suggested that traditional diversifiers, such as bonds, property and hedge funds, often fail to stand up to market stress and may sell off with equities in times of uncertainty. Even a small allocation of gold to a portfolio significantly improves its performance during unstable periods. These individuals believe that certain events, if they occur (e.g. war or economic crisis), may have a negative influence on the value of their other investments, but the opposite effect on the value of their gold.
9. Speculator Speculators attempt to make a profit by predicting the gold price. They may think that macroeconomics are affecting the demand for gold, or believe they have detected a market trend showing them the future price direction.
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E) Investment Strategies
1. Fundamental analysis Investors may base their investment decisions on fundamental analysis. These investors analyse the macroeconomic situation, which includes international economic indicators, such as GDP growth rates, inflation, interest rates, productivity, and energy prices. They would also analyse the total global gold supply versus demand. Over 2005 the World Gold Council estimated total global gold supply to be 3,859 tonnes and demand to be 3,754 tonnes, giving a surplus of 105 tonnes. 2. Technical analysis Investors may base their investment decisions solely on, or partly on, technical analysis. Typically this involves analysing past price patterns and market trends, in order to speculate on the future price. Some investors try to predict the future gold price by tracking the ratio between the Dow Jones 30 and the gold price. The Dow/gold ratio has fluctuated from a low of 1.0 in 1980 (i.e. the Dow and gold price were the same) to a high of 43.7 in 1999 (i.e. the Dow was 43.7 times the gold price). 3. Using leverage Bullish investors may choose to leverage their position by borrowing money against their existing gold assets and then purchasing more gold on account with the loaned funds. In order to keep the cost of debt to a minimum, these individuals would normally seek a loan in the currency with the lowest LIBOR, which as of April 2006 was the Japanese yen. This technique is referred to as a "yen-gold carry trade". Leverage is also an integral part of buying gold derivatives. Leverage may increase
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GOLD INVESTMENT investment gains but also increases risk, as if the gold price decreases the investor may be subject to a margin call.
F) Why Invest in Gold?

Advantages: 1. Gold is a hedge against inflation: Gold has historically proved to be a good hedge against inflation. Gold is a commodity the price of which is determined by various factors apart from its demand and supply. Also, it is a commodity that is priced in US Dollars as against our local currency (the price of gold is determined in international markets; domestic prices track the international price very closely). What becomes apparent is that the factors that affect the price of gold are rather different from factors that affect other assets like say domestic fixed deposits. And therefore, if inflation in India were to dent the value of the Rupee, and consequently your wealth, it will have no impact on the price of gold (other factors remaining the same) thereby lending support to your wealth. In fact, in times of inflation, the smart money tends to move to gold, thereby driving up its price. 2. Governments will make our money worth less to pay off their record debts: Governments can print money to pay off their debts. But they cant create gold. The supply of paper money can be infinite. But the supply of gold is extremely limited. And its difficult to extract. 3. Precious metals do well in major international conflicts. The price of gold was fixed during World War I and World War II. But silver, for example, rose by over 100% in both world wars. Gold has risen for the duration of the War on Terrorism.
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GOLD INVESTMENT 4. It is liquid and can be easily converted into hard currency. Gold and other precious metals are assets that are both tangible and liquid (i.e. easily traded), unlike real estate which is tangible but not liquid, or company shares and bonds which are liquid but not tangible.
5. It has ornamental value (especially for Indians).
Other reasons why people buy gold are: In many countries gold remains an integral part of social and religious customs, besides being the basic form of saving. Shakespeare called it the saint-seducing gold. Superstition about the healing powers of gold persists. Ayurvedic medicine in India recommends gold powder and pills for many ailments. Gold is indestructible. It does not tarnish and is also not corroded by acid except by a mixture of nitric and hydrochloric acids. Gold has aesthetic appeal. Its beauty recommends it for ornament making above all other metals. Gold is so malleable that one ounce of the metal can be beaten into a sheet covering nearly a hundred square feet. Gold is so ductile that one ounce of it can be drawn into fifty miles of thin gold wire. Gold is an excellent conductor of electricity; a microscopic circuit of liquid gold printed on a ceramic strip saves miles of wiring in a computer. 51 NANAK KHALSA COLLEGE GURU
GOLD INVESTMENT Gold is so highly valued that a single smuggler can carry gold worth Rs. 50 lakh underneath his shirt. Gold is so dense that all the 90,000 tonnes estimated to have been mined through history could be transported by one single modern super tanker. Finally, gold is scam-free. So far, there have been no Mundra-type or Mehtatype scams in gold.
Thus, the lure of this yellow metal continues. On the other hand, it is interesting to note that apart from its aesthetic appeal gold has no intrinsic value. You cannot eat it, drink it, or even smell it. This aspect of gold compelled Henry Ford, the founder of Ford Motors, to conclude that gold is the most useless thing in the world.
G) Disadvantages of investing in gold:

It does not provide regular current income like in the case of debentures, which pay interest (gold bonds did not take off and lending of gold for a fee is not a viable option for retail investors). It does not offer any tax advantages e.g. investment in a infrastructure bond entitles one to certain tax advantages. There is a possibility of being cheated with respect to the purity of the metal. There is a storage cost involved in preserving gold. 52 NANAK KHALSA COLLEGE GURU
GOLD INVESTMENT The long-term returns from gold may be lower than those from investment in equity debt.
H) The Gold Deposit Scheme in India

In an attempt to mobilize the idle gold savings in households across the country, the Government announced a Gold Deposit Scheme. According to its terms, the banks were allowed to accept physical deposits of gold, and issue interest bearing certificates in return, which can be reclaimed for gold on maturity. The value of the gold deposited and the interest earned on it is exempt from wealth tax. Further, any capital gains made on these gold bonds through trading or at redemption will be exempt from capital gains tax. The returns are around 3% per annum. Certain banks, like the State Bank of India, also offer benefits like rupee loans of up to 90% of the gold deposit, with the interest rate linked to the Prime Lending Rate. The salient features of the SBI's gold deposit scheme are: Interest bearing certificates will be issued against gold deposits. Interest rate is likely to be about 3.5 % per annum. Certificates will be redeemable in gold or rupee equivalent on maturity, at the discretion of the depositor. 53 NANAK KHALSA COLLEGE GURU
GOLD INVESTMENT Minimum deposit 200 grams of gold. Certificates will be transferable by endorsement and delivery. No capital gains tax, wealth tax or income tax on the deposits. Maturity 3 to 7 years Premature redemption in gold will be permitted after the minimum lock-in of 1 year. SBI will give rupee loans against the certificates.
The State Bank of India (SBI) will sell the gold collected under the scheme in the local market and thereby reduce India's dependence on imported gold. The Central Bank will provide a forward cover to SBI at a cost. This cost plus the interest on the certificate will more or less equal the SBI's rupee borrowing rate. In other words this is an attempt by the government to convert physical gold into paper gold backed by the Indian Central Bank.
Disadvantages of Gold Deposit Scheme: Making or accepting a gold deposit is not as simple as it sounds. Nearly all the gold held by Indian households is in the form of jewelry. Jewelry deposited under the GDS would be melted down and refined to pure gold bars. Since jewelry is a value added product, its purchase price is 25% to 100% more than the value of gold content. Under the said scheme this value addition would be lost. At the time of accepting the deposit, the Bank will have to test the purity and issue the certificate based upon the exact gold content. Thereafter, the Bank will have to melt this jewelry and refine it to pure gold bars. In addition to losing the value addition, the depositor of jewelry will have to bear the cost of testing the purity and the cost of refining. This effectively means that only scrap jewelry would be available for deposit. This leads us to an important question, that is, what is the availability of scrap jewelry? Poor people do not scrap jewelry as they can get it polished very economically. 54 NANAK KHALSA COLLEGE GURU
GOLD INVESTMENT After polishing, the jewelry recovers its lost shine and is as good as new. Very rich people do exchange their old-fashioned jewelry with the latest designs.. In any case not many households will have 200 grams of scrap jewelry.
News paper Article: Gold bonds, unfair failure

Suresh Krishnamurthy THE Gold Deposit Scheme (now offered by four public sector banks) has collected a mere 4,742 kg of the yellow metal and the scheme, dubbed a failure, appears headed for the dustbin, at least for the present due to lukewarm investor response. However, lukewarm investor response appears only to be the symptom and not the disease. The Gold Deposit Scheme, which ought to have received top priority from both the government and the banks, did not receive the attention that it deserved. For example, the waiver of stamp duty which is perhaps essential to improve the return on the scheme was denied to the Gold Deposit Scheme by the Government. More important, the economics of the product was itself not been designed to attract investors. The coupon rate on the product has to change in accordance with the 55 NANAK KHALSA COLLEGE GURU
GOLD INVESTMENT movement in the price of gold. However, while gold prices in India have started inching upwards steadily since the fourth quarter of 1999 and are up by a fairly large percentage in that period, the coupon rates on gold deposit scheme have not been revised upwards. In short, the investor response has been poor because the economics of the scheme was quite poor and ranged against the investor. At the end of the day, the Gold Deposit Scheme is a product that needs to be marketed. At a time when innovative financial products are being successfully marketed by mutual funds, private sector banks and financial institutions, with out proper marketing gold deposits are not likely to attract the attention of the investor. Also, given the tax benefits accorded to Gold Deposit Scheme, it can be structured attractively to attract the high net worth investor. A return of 7 per cent, post-tax, would work out to 10.7 per cent pre-tax for a high net worth investor. For a virtually risk-free investment and an illiquid asset, this would be quite an attractive return.
I) Tax Implications
Since there is no income as such from holding gold, there is no liability for income tax. But bullion and jewellery are subject to capital gains tax and wealth tax, without any exemptions whatsoever. While determining the value of gold ornaments for the purpose of wealth tax, making charges should be ignored, unless the ornaments are studded with precious stones. The value of gold contained in the ornaments can be reduced by 15% to 20% because the dealer invariably deducts 15% of the ruling rate of standard gold when ornaments are sold in the open market.
J) The Prospects for Gold

Many investors have forgotten that when gold price went up during the late 1970s it was just trying to catch up with prices of other things which had already gone up. In 1970, 56 NANAK KHALSA COLLEGE GURU
GOLD INVESTMENT when the price of gold was $35 an ounce (due to the gold standard then followed in USA) it was unquestionably undervalued. When gold hit $850 an ounce in January 1980 it was again, unquestionably, overvalued. If the increase in gold price had kept the same pace in 1980s and 1990s as it did in 1970s, it would have become $20,000 an ounce by 2000. With a number of Central Banks selling off huge chunks of their gold reserves, the international price of gold has come down in the last few years. Timothy Green, a well-known gold expert, reminds us of a historical truth: The great strength of gold throughout history has not been that you make money by holding it, but rather you do not lose. That ought to remain its best credential. A research study on gold established a remarkable consistency in the purchasing power of gold over four centuries. Its purchasing power in the mid-twentieth century was found to be nearly the same as in the middle of the seventeenth century.
You can safely invest in gold. But take care to keep your jewellery in bank lockers. You can also raise loans on gold for your other portfolio investments. If the Indian economy continues to be liberalised and unshackled fast, several new options may emerge for investors to invest in gold bars, gold coins, gold funds, gold mining companies and gold options. It will also lead to the eventual equalisation of domestic and international prices
K) Should you invest?

Most experts agree investments in goldphysical or demat should be staggered, and for the long term. Though the long-term returns may be lower than those from investment in equity or debt, gold offers a cushion against inflation. Historically, gold has fared well when equity and debt have done badly. Over a three-five-year period, you can expect a 15-25 per cent return.
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GOLD INVESTMENT In terms of volatility, an NCDEX survey found that gold volatility was 12-18 per cent compared to the Sensex volatility of 25-30 per cent. Analysts suggest that pricing would take support at Rs 6,500 per 10 gm. The logic of what moves up shall come down makes a move beyond $500 unsustainable. Moreover, hedge funds would like to book profits over $500 to book the attractive returns made during the rally in gold prices. The best time to invest is between June and August, when prices come down by about 10-20 per cent. The peak-buying season begins in August-September and demand winds up by early June. Higher disposable incomes coupled with the steady increase in demand for gold makes it a good investment, especially if you want to beat inflation.
Chapter 10 Gold Jewellery Market of India
10.1 Gold Bracelet
10.2 Gold Bangles
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10.3 Gold Necklace
10.4 Gold Earrings
All that glitters is Indias Gold Welcome to Indias glitzy gold market in the millenniuma market where the World Gold Council believes that jewellery demand increased from 208 tons in 1991 to 586 tonnes in 2002. This jewellery is sold across 300,000 outlets across the country. At any given time in the day, Jhaveri Bazar, Mumbai is a hub of activity. Shops displaying gold, silver and assorted jewellery stand side by side on street after street, crowded by thousands of goldsmiths, retailers, and mostly women customers. The scene is repeated at Dariba Kalan, Delhis gold hub and many more places across the country. During festivals and the marriage season, shops open at 8 am and stay open till 10 pm. Many of these stores offer an exchange scheme in which old, worn-out 21 and 22carat ornaments can be bartered away for new jewellery of same carat and weight.
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A) The Gold Jewellery Market

India is a leading player in the global jewellery market. The jewellery industry occupies an important position in the Indian economy. It is a leading foreign exchange earner, as well as one of the fastest growing industries in the country. The two major segments of the sector in India are gold jewellery and diamonds. Gold jewellery forms around 80 per cent of the Indian jewellery market, with the balance comprising fabricated studded jewellery that includes diamond studded as well as gemstone studded jewellery. The largest consumer of gold worldwide, India is also the leading diamond cutting nation. The Indian gems and jewellery industry is competitive in the world market due to its low cost of production and the availability of skilled labour. The Indian gems and jewellery sector is largely unorganised at present. There are over 15,000 players across the country in the gold processing industry, of which only about 80 players have a turnover of over $4.15 million (Rs 200 million).
There are about 450,000 goldsmiths spread throughout the country. India was one of the first countries to start making fine jewellery from minerals and metals and even today, most of the jewellery made in India is hand made. The industry is dominated by family jewellers, who constitute nearly 96 per cent of the market. Organised players such as Tata with its Tanishq brand, have, however, been growing steadily to carve a 4 per cent market share.
B) Jewellery Manufacturing
India has well-established capabilities in making hand-made jewellery in traditional as well as modern designs. Indian hand-made jewellery has always had a large ethnic demand in various countries with sizeable Indian immigrant populations such as the Middle East, South-East Asian countries, the USA and Canada. In recent times, India has 60 NANAK KHALSA COLLEGE GURU
GOLD INVESTMENT also developed capabilities in machine-made jewellery. With imported or domestic processed studding, Indian machine made jewellery is expected to generate demand from non-ethnic jewellery markets as well. The current consumption of gold in India is estimated at over 900 tonnes, used mostly in 20 / 22 carat jewellery. Nearly 95 per cent of gold is used to manufacture gold jewellery for the domestic markets and the remaining 5 per cent is exported. Gold consumption in India is primarily aimed at investment. The Indian jewellery market is one of the largest in the world, with a market size of $13 billion. It is second only to the US market of $ 40 billion and is followed by China at $11 billion. The gold jewellery market is growing at 15 per cent per annum. The emergence of branded jewellery is a new trend that is shaping the Indian jewellery market. Branded jewellery is a relatively new concept in the sector, and has positioned itself on the quality, reliability and wearability factors. The branded jewellery market in India is estimated at $111.6 million per annum. Trends also show that traditional handcrafted jewellery is slowly giving way to machine made jewellery.
C) The Distribution channel in Gold Industry

Pure gold supplier: Only when new gold is required in business this person is required.
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Manuf acture r: The main person, he is the actual risk taker and has to bear a lot of debtors and along with that has to keep a proper control on the workers. Not only this, this person has to stay in touch with the current trends and the demands in the market so that the production and the designs can be up to mark and hence there is no wastage in the form of stocks.
Wholesaler: This is one of he most critical link in the industry and is a helping hand to the manufacturer. Since it is not possible for a manufacturer to reach everywhere and cater to the needs along with the production, it becomes very
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Retailer: This person is in direct contact with the end consumer and he knows what are the tastes and preferences of the customer. He plays an important role in the transformation of the information from the customers to the manufacturer. The wholesaler usually trades with the retailer; sometimes even the manufacturer comes in direct contact with the manufacturer, wholesaler and retailer are all in the queue to provide their service 99% of the customers buy their ornaments from retail shops, rest 1% buys it either from the wholesaler or directly from the manufacturer. But this strategy is wrong because the middleman is the wholesaler and instead of he being chucked it is the small retailer who is suffering.
Chapter 11 Uses of Gold
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A) Current uses of Gold

Industrial and dental uses account for around 11% of gold demand, or an annual average of just less than 400 tonnes from 2001 to 2005 inclusive. The sector accounts for a slightly higher proportion of stocks since in practice only part of industrial demand can be recuperated as scrap. Over half of industrial and dental demand around 7% of total demand - is the use of gold in electronic components due to its high thermal and electrical conductivity and its outstanding resistance to corrosion. The share of electronics in total gold demand has grown over the past decade but it also fluctuates according to global GDP and the fortunes of the electronic industry. With the arrival of industrial civilisation the use of gold has increased, phenomenally. Its virtues of malleability, ductility, reflectivity, resistance to corrosion and unparalleled ability as a thermal and electrical conductor mean it is used in a wide variety of industrial applications The prime use is in electronics; everything from pocket calculators to computers, washing machines to televisions uses some quantity of gold. A simple telephone typically contains 33 gold-plated contacts. The contact points in switches, relays, and connectors are plated with a thin layer of gold. The layer is very thin; sometimes as thin as one thousandth of a millimeter and sometimes even thinner, but this thin layer ensures rapid dissipation of heat and guarantees freedom from oxidation or tarnishing at extreme low or high temperature, thus providing an atomically clean metal surface with an electrical contact resistance close to zero. Very little gold is used in these contacts, but the usage of electronics is increasing, so put together, the consumption of gold is on the rise. A today more than one hundred tonne of gold is used in this application alone.
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11.1 Industrial Uses of Gold Most gold manufacturing of electronic components occurs in North America, Western Europe or East Asia. This last region is gaining market share as companies relocate factories there to take advantage of the lower cost base. For future industrial demand, it is clearly important that next generation electronic devices and consumer goods continue to use gold within component parts. Technically, there are good reasons why this is likely to be the case, and with consumer demand for advanced electrical goods likely to grow, this could well have a positive effect on gold demand in this area. Golds medical use has a long history; its biocompatibility, resistance to bacterial colonisation and to corrosion as well as its malleability mean that it can be used successfully inside the human body. Today various biomedical applications include the use of gold wires in heart transplants and gold-plated stents to support weak blood vessels. Its best-known and most widespread use, however, is in dentistry. Dental use currently accounts for just under 2% of gold demand, a share which is essentially stable. Japan, USA and Germany are the three leading countries manufacturing dental alloys.
Gold is also used in a number of other industrial and decorative purposes such as gold plating and coating and in gold thread (such as jari in India). Various techniques are used to enable gold to be used in decorative finishes. Other applications take advantages of 65 NANAK KHALSA COLLEGE GURU
GOLD INVESTMENT golds reflectivity of heat and lasers and its optical properties. Overall these uses of gold account for 2-3% of total demand. A small share of the amount of scrap gold generated each year comes from reclaimed industrial gold, primarily from electronics use.
B) New uses of Gold Research over the last decade has uncovered a number of possible new practical uses for gold some of which appear to have substantial potential in increasing the industrial use of the metal. This includes the use of gold as a catalyst including catalysts in fuel cells, chemical processing and controlling pollution. A number of companies are known to be developing industrial catalysts based on gold and this could lead to important new demand for the metal. In the rapidly developing field of nanotechnology there are many possible uses including improved LCD displays using gold nanorods, for example in mobile phones and laptops. The use of gold in coated superconductors could also create significant new industrial demand for gold.
Chapter 12 Case Study on ICICI Bank

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(Retail gold investment)
About ICICI Bank

ICICI Bank was originally promoted in 1994 by ICICI Limited, an Indian financial institution, and was its wholly owned subsidiary. ICICI Bank is India's second-largest bank. ICICI Bank has a network of about 614 branches and extension counters and over 2,200 ATMs. ICICI Bank offers a wide range of banking products and financial services to corporate and retail customers through a variety of delivery channels and through its specialized subsidiaries and affiliates in the areas of investment banking, life and non-life insurance, venture capital and asset management. ICICI Bank set up its international banking group in fiscal 2002 to cater to the cross border needs of clients and leverage on its domestic banking strengths to offer products internationally.
ICICI Bank
Pure Gold
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Gold has been traditionally the most favored form of investment for Indians. In fact, India, even today is amongst the highest consumers of Gold in the world. However, the Gold market remains largely unorganized with reliability and convenience remaining the key issues for gold buyers in the country. ICICI Bank is selling ICICI gold coins, at 140 branches all over India, which are the first retail gold investment products to be sold by a local Indian bank. ICICI Bank with its Pure Gold offer attempts to bridge the gap between the need of the customers for buying gold and availability of an organized avenue to satisfy that need, by taking care of the two key components Reliability and Convenience. Reliability 24 Carat ICICI Bank Pure Gold is imported from Switzerland. The gold is made by PAMP Refinery Switzerland and is imported from there. PAMP is one of the most reputed and known refineries. This Gold carries a 99.99% Assay Certification, signifying highest level of purity, as per international standards. The gold is packed in tamper proof blister packs that are see through at the manufacturing stage itself to prevent any damage/ theft during transit. Convenience 68 NANAK KHALSA COLLEGE GURU
GOLD INVESTMENT ICICI Bank Pure Gold is competitively priced based on daily prices in the international bullion market. The rates change on daily basis.
Gold Coins and Bars

After launching the coin product, ICICI Bank received the most number of enquiries for 1 gm and 2 gm. denominations. Gold coins are is available in 2.5 gram, 5 gram, 8 gram, 10 gram 20 gram and 50 gram categories. These coins are available in all the branches of ICICI Bank and can be bought from these branches. These coins are available in different types like Ganesha coin, Laxmi coin, heart shaped coins etc. Gold bars are available in a kg or 1 kg. The customers have to place an order in order to buy the gold bars. They are not readily available in the branches. They are brought once the order is placed.
Who Can Buy Gold?
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GOLD INVESTMENT Both ICICI Bank Customers and non-ICICI Bank customers are eligible to buy gold. However, ICICI Bank customers can issue a cheque from their savings account or provide a debit mandate towards purchase of gold. But, ICICI Bank does not buy the gold sold by them. Procedure

Visit the Pure gold counter and inform the mode of payment. Fill in the Gold Deposit Slip. The Gold Deposit slip will have a Specific Gold Coin account number pre printed on it. Tick the weight(s) that you want and based on daily price deliver the cash/DD to the cashier. Cashier will acknowledge the receipt and give the acknowledgment to you and send other part of the slip to the front desk for issuance of coins. Produce the acknowledgment slip at the front desk on the basis of which the gold coins will be delivered to you.
Promotional offers ICICI Bank has many promotional offers throughout the year in order to increase their sale of gold (Family vacations, buy one get one free). They advertise in the newspapers and radio on various occasions like Diwali, Rakshabandhan and Parsi New Year. The average sale on a daily basis varies completely. The sale is more during festivals and that is the time when ICICI advertises more and give promotional offers. ICICI Bank is very happy with the sales of gold coins across their branch network. They are very keen on offering many more gold related investment products, which will help the Indian investor, buy gold in a more cost efficient & convenient manner.
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Why Gold is Preferred as an Investment

The performance of Gold bullion is often compared to stocks. They are fundamentally different asset classes: gold is a store of value whereas stocks are a return on value (i.e. growth plus dividends). Stocks and bonds perform best in a stable political climate with strong property rights and little turmoil.. Since 1800, stocks have consistently gained value in comparison to gold due in part to the stability of the American political system. This appreciation has been cyclical with long periods of stock out performance followed by long periods of gold out performance. The Dow Industrials bottomed out a ratio of 1:1 with gold during 1980 (the end of the 1970s bear market) and proceeded to post gains throughout the 1980s and 1990s. The ratio peaked on January 14th, 2000 a value of 41.3 and has fallen sharply since. William Anton III wrote in the 2004 issue of Jefferson Coin and Bullion "...downward movement in the Dow/gold ratio is unlikely to stop precisely at the mean trend line. The extreme distension of the 90s will likely overshoot to the opposite extreme in the current cycle."
Technical analysis for stocks

As with stocks, gold investors may base their investment decision partly on, or solely on, technical analysis. Typically this involves analyzing chart patterns, moving averages, market trends and/or the economic cycle, in order to speculate on the future price.
Money value for gold

Historically increases in the supply of paper money or fiat currency through increased money supply would cause the demand for gold to increase. There was a time when gold was money and vice versa. If citizens felt that there may be insufficient gold to cover the paper money in circulation, they would queue up at the bank to change their paper currency back into gold. However, since the gold standard was ended on August 15, 1971, governments have been free to print as much money as they choose, without fear that their populations will come 71 NANAK KHALSA COLLEGE GURU
GOLD INVESTMENT knocking on the central bank's door demanding to change their paper money back into gold. In January 1959 US M3 money supply was $288.8 billion, and the official gold reserves of the United States was then 17,335.1 tones, or 557,336,000 ounces (there are 32,150.7 troy ounces in a tone). That means that in 1959, there was $518 in circulation for every ounce of gold reserves held by the USA. Although the actual ration of dollars to gold was $518 per ounce, the actual price, as fixed under the gold standard, was only $35 an ounce. By August 2005, the US M3 money supply had risen to $9,873.9 billion, whilst at the same time the Official Gold Holdings of the United States had fallen to just 8,133.5 tonnes, or 261.50 million Troy Ounces. This means that today, in 2005, there are $37,831 in circulation for every troy ounce of gold held by the United States. However, this increase of 75 times in the ratio of central bank gold holdings to debt does not allow for the fact that the gold standard was abandoned in 1971 and gold holdings have been deliberately and considerably reduced. Another far less dramatic way of looking at the same figures is this: In 1959 US government debt valued in gold was 8 billion Troy ounces; in 2005 US government debt was 20 billion ounces gold - an increase of only 2.5 times. The above numbers show the falling influence of gold in today's monetary system. Gold bugs believe, or hope, that one day gold's importance will return as the printing of paper money gets out of control and before we end in a hyper-inflationary fiat money collapse. The US Federal Reserve ceased publishing M3 data on 23 March 2006, with the last published data indicating a year-on-year growth rate of 8.23%. Central banks may see this as a reason to limit further increases in their reserves of dollars, and thus alternatives such as gold or the euro might be considered.
Chapter 14
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Conclusion
"There are about three hundred economists in the world who are against gold, and they think that gold is a barbarous relic - and they might be right. Unfortunately, there are three billion inhabitants of the world who believe in gold." Janos Fekete
There are many savings and investment options available in India. Although they are not provided in a much organized fashion, they can, nonetheless, be made available. Several factors are considered here: why India needs to provide gold as an investment option, what the prevailing concerns in the market in India are, and finally, what can be done to develop this marketplace. Gold is a unique risk-return matrix, a safe-haven asset, an efficient diversifier against inflation, against falls in the equity market, and against badly performing fixed securities. Gold is highly liquid in India, it is possible to sell gold in the middle of the night at any of the 300,000 jewellery shops. During the 1987 crash and the 1997 Asian crisis, selling gold proved to be the most effective way of raising cash. Gold is a currency that has no borders and does not need to be honored by any governmental obligations. Gold is a reserve asset it is a defense against domestic currency fluctuations, providing the means to tackle a debt crisis, preserving confidence in the economy, and providing a private investment portfolio, which among the Indian public is now estimated at 10,000 to 15,000 tones. Finally, gold can act as a stabilizing factor to manage Indias external crises.
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GOLD INVESTMENT Why is it so crucial for those living in rural and semi-urban parts of India to have access to gold as an investment option? The majority of people living in these areas lack knowledge of the financial markets and fail to understand them. Studies, such as that conducted by SEBI (Security Exchange Board of India), reveal that gold, either in primary or in jewellery form, still remain the second most preferred option among the Indian public after deposits in the banks. There were 850 tones of gold consumed in India last year, and it is estimated that there are 13,000 tones of gold in private hands, which is currently not part of the mainstream economy. Gold is chiefly held for its safety and liquidity. Demand for gold is seasonal, bought mainly during various festivals like Diwali, Pongal and for occasions such as marriages and birthdays. And yet, the majority of the gold purchased in India is done on an impulsive basis, driven by demand for these special occasions. Very little gold is purchased for investment purposes. There are a number of reasons for this. Liquidity is one it is very difficult to exercise large volume sales of physical gold in certain urban and rural areas without taking a hit on prices. Secondly, there are not many players involved in either the sales or purchases of gold as an investment product. Although India is still the largest consumer of physical gold, there is no benchmark price at any given point of time or on any given date. For instance, we would not know exactly how much 100gms of gold, 12gms of gold or 10gms of gold would cost in Delhi, or how much it would be worth if one wanted to sell the same amount of gold in Mumbai or in Agra or in Jaipur. Therefore, a benchmark price needs to be established. India does not have trading systems in place. It does have two exchanges dealing in equities and with some minor changes; gold could trade on those exchanges. Regarding settlement, all investment gold has to be traded in physical form at the present time. Banks should be brought into the system, thereby obviating the need for any person wishing to trade in gold from holding the gold physically themselves. It should be made as convenient as buying shares, where a few telephone calls are made, and the process is carried out with the push of a few buttons. 74 NANAK KHALSA COLLEGE GURU
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There are some other options available to the Indian public jewellery, For example, which is more a mix of an aesthetic purchase and an investment purchase. In the case of jewellery, quality is not guaranteed, and the aesthetic value takes away some of the investment quality of the product. Gold coins, though they are of assured quality, have a smaller denomination. Ten tola bars have an assured quality but are still not marketed as an investment product basically banks are selling these bars through wholesale traders. And in physical gold, storage and handling are major issues. Schemes that were launched in the post-1997 reforms by the Reserve Bank of India require little work to modify their existing structure to make them viable and available. With further modification, in this case, they can be made tradable on the stock exchange. Despite being the major consumer of gold, India has absolutely no role to play in the international functioning of this market other than the physical side. At present, as banks can only export gold, there is no exit option for the gold that comes into India. Options should include exporting gold bullion to overseas refineries, and banks should be able to lend money against gold. The existing duty and sales tax structure needs to be rationalized. More importantly, a benchmark for the price of gold should be developed. The Indian Bullion Banks Association can take steps towards having a benchmark price setting out buy and sell rates. Higher disposable incomes coupled with the steady increase in demand for gold makes it a good investment.
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Chapter 15 Related Articles
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Chapter 16 External Links

The whole project is with the courtesy of the following books, periodicals, newspaper articles and sites:
Newspapers: The Economic Times Business Standard DNA
Web sites: www.wikipedia.com www.icicibank.com www.google.com
Periodicals: Jewellery Market Of India
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GOLD INVESTMENT

1 NANAK KHALSA COLLEGE

Indian History of Gold

3 NANAK KHALSA COLLEGE

4 NANAK KHALSA COLLEGE

Chapter 3 Properties of Gold

Gold in its Purest State

5 NANAK KHALSA COLLEGE

6 NANAK KHALSA COLLEGE

A. Importance in the Economy

D. Factors Influencing Gold Prices

NANAK KHALSA COLLEGE

E. Price Difference between Local and International market

Chapter 5 Gold Market

World Gold Industry

13 NANAK KHALSA COLLEGE

14 NANAK KHALSA COLLEGE

World (in tons) 145000 28000 2600 1100-1200 3700

% Share 9 1.4 0.08 13 22

15 NANAK KHALSA COLLEGE

Chapter 6 Production and Consumption

A) How Much is Being Produced?

Exhibit 3: Production of Gold 16 NANAK KHALSA COLLEGE GURU

B) How Much is Being Consumed?

C) How is the Production Shortfall Made Up?

18 NANAK KHALSA COLLEGE

D) Production of Gold in India

E) Consumption of Gold in India

19 NANAK KHALSA COLLEGE

Chapter 7 Gold Demand and Supply

Above ground stocks end 2005

Supply flows 5 year average (2001-2005)

Demand flows 5 year average (2001-2005)

Exhibit 4: Gold Demand and Supply

Global and Domestic Demand-Supply Dynamics

21 NANAK KHALSA COLLEGE

22 NANAK KHALSA COLLEGE

Chapter 8 Trading in Gold

23 NANAK KHALSA COLLEGE

B) Spot and Futures Trading

C) Exchange Traded Funds

27 NANAK KHALSA COLLEGE

Chapter 9 Investment in Gold

A) Gold as a Financial Asset

28 NANAK KHALSA COLLEGE

9.1 Gold Jewellery and Coins 30 NANAK KHALSA COLLEGE GURU

31 NANAK KHALSA COLLEGE

2. Bullion Coins and Small Bars

3. Gold Mining Shares

4. Gold Backed Securities

35 NANAK KHALSA COLLEGE

37 NANAK KHALSA COLLEGE

The disadvantages of Gold Accounts -

38 NANAK KHALSA COLLEGE

6. Gold Exchange-Traded Fund

39 NANAK KHALSA COLLEGE

Investing in Gold with ETF 40 NANAK KHALSA COLLEGE GURU

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Reliance MF to offer Gold Exchange Traded Fund (RGETF)

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D) Types of Gold Investor