Black Gold's Yellow Relation

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Black Golds Yellow Relation:

A Study on determinants of Gold Prices

IL&FS Investsmart Commodities Ltd.

By

Kirti Tak

May-2008

Submitted To

Dr. S.P. SharmaSenior Research Analyst

IL&FS Investsmart Commodities Ltd.Laxmi Tower, B, Wing, 3rd Floor, BKC, Mumbai


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Black Golds Yellow Relation:

A Study on determinants of Gold Prices

ByKirti Tak

A Report submitted in partial fulfillment of therequirements of MBA program of ICFAI Business School,

Bangalore

Submitted To

Dr. S.P.SHARMASenior Research Analyst

IL&FS Investsmart Commodities Ltd.

Mr. SUNIL PEVEKARFaculty Guide

ICFAI Business School


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Acknowledgments

As part of the curriculum at ICFAI Business School, the Summer Internship Program

(SIP) aims at overall development of the students by providing them with an opportunityto gain corporate exposure and space to apply their theoretical knowledge in practice in a

mutually beneficial manner. No SIP can be successful without the support of the people

who keep themselves closely involved with the students undergoing the program. The

wealth of knowledge and guidance shared and provided to us by these professionals is

invaluable.

I would like to express my gratitude to my Project Guide at IL&FS Investsmart

Commodities Limited, Mumbai, Dr. S.P. Sharma, Senior Research Analyst for his

selfless support and encouragement during my entire training program. I would like to

thank my Project Faculty Guide at ICFAI Business School Bangalore, Mr. Sunil Pevekar,

for his worthy guidance and support throughout the program.

I would also like to extend my gratitude to Mr. Karun Mutha VP & Head Derivatives,

Mr. Sameer Kapoor, AVP, IICL, Mr. Sanjay Agarwal, AVP, IICL, and Mr. Dishant

Sagwaria, AVP for providing me an opportunity to carry on my internship in the

organization.

I would also like to extend my gratitude to all the present employees of IL&FS

Investsmart Mumbai, who by their patience and co-operation, have made my research a

rewarding and fun filled experience.

This project would not have been possible without the untiring support provided by my

family and friends. The inputs and guidance provided by all these people is invaluable. I

would like to express my sincere regards to all of them.

Kirti Tak


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3.3 Total reserves.....40

3.4 Exports and imports ......41

4. Major producers and consumers

4.1 Top Producers......................................42

4.2 Top Consumers........................................................................................43

5. Prices of crude oil from last 20 years..............44

6. Factors affecting Crude oil prices

6.1 Macroeconomic factors...........................46

6.2 Microeconomic factors................47

6.3 Other factors................................47

7. Michael porters analysis...........48

8. SWOT analysis..................49

III. Review of Literature................51

Section II: Data Analysis

1. Correlation analysis...72

2. Moving Averages.......77

3. Technical analysis for longer term.80

4. Gold Oil ratios............................85

5. Rising consumption for crude oil.......................................88

6. Different Economic patterns & gold prices...............................89

Section III: Statistical & Econometric tools

1. Regression Model......93

Section IV: Conclusions............104

Section V: References....................111

Annexure.............112

List of Tables:


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S.No Table Name Page No.

1. Total demand and supply of gold 20

2. Components of demand 21

3. Gold reserves in world 21

4. World total exports and imports of gold 22

5. Top 10 producers of gold 24

6. Top 10 consumers of gold 25

7. Gold prices in last 20 years 27

8. SWOT analysis on gold 33

9. World total reserves of crude oil 40

10. Major exporters of crude oil 41

11. Major importers of crude oil 42

12. Top 10 producers of crude oil 43

13. Top 10 consumers of crude oil 44

14. Prices of crude oil in last 20 years 45

15. SWOT analysis on crude oil 49

16. Summary of review of literature 65

17. Correlation of gold prices with other variables 72

18. Correlation of oil prices with other variables 73

19. Moving averages of gold prices 77

20. Moving averages of crude oil prices 78

21. Gold Oil ratios in last 20 years 85

LIST OF FIGURES:


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S. No. Figure Name Page No.

1. Gold reserves in world 22

2. Top 10 producers of gold 24

3. World gold mine production 26

4. Prices of gold in last 20 years 28

5. World demand of crude oil in last 20 years 38

6. World Supply for crude oil in last 20 years 39

7. Oil prices in last 20 years & growth rate 45

8. Frequency and range for gold prices in last 100 days 80

9. Frequency and range for gold prices in previous 100

days

81

10. Frequency and range for gold prices in previous 100

days

81

11. Frequency and range for oil prices in last 100 days 82

12. Frequency and range for oil prices in previous 100 days 82

13. Frequency and range for oil prices in previous 100 days 83

14. Gold Oil ratios in last 20 years 8615. Global economic growth & crude consumption rate 88

16. Cyclical & trend line for gold & crude oil 99

17. Trend line for gold & crude oil 99


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List of Abbreviations:

S. No. Abbreviation used Full form

1. NCDEX National Commodity & Derivatives Exchange ofIndia

2. MCX Multi Commodity Exchange of India

3. NMCEIL National Multi Commodity Exchange of India

4. GFMS Gold Fields Mineral Ltd.

5. ETF Exchange Traded Funds

6. IMF International Monetary Fund

7. WGC World Gold Council

8. WTO World Trade Organization

9. SWOT Strengths Weaknesses Opportunities Threats

10. CPI Consumer Price Index

11. BSE Bombay Stock Exchange12. OPEC Organization of Petroleum Exporting Countries

13. EIA Energy Information Administration

14. IIES Institute for International Economic Studies

15. RFE Review of Financial Economics

Abstract

Gold & Crude Oil are treated as the two most important commodities traded

internationally. Through this report we had made an effort to understand the basic

analysis for these two commodities. The project starts with the introduction about the

commodities which includes their uses, production & mining process, demand supply

statistics, exports & imports, major producers & consumers, prices movement in last 20

years, factors affecting their prices (including macro & micro economic factors,

geopolitical tensions, international factors etc.), and Michael porters analysis, SWOT

analysis for these two commodities.

Along with this we have also included a literature review in my report. In this section we

have studied around 15 reports, which are related to my topic and have presented a

summary of those reports. Review of literature is considered as important part of any

research project as it provides basic guidelines to move forward in a project. It involves

detailed study of past research reports on the related topics. In my report we have study

around 15 research studies related to gold and oil and have find out the various variables


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considered in these studies so that it can help me out in my research. These reports are

from WGC (world gold council), IMF (international monetary fund), and world oil

outlook etc.

After the literature review the project deals with the technical part, which includes

correlation analysis, moving averages, gold oil ratio etc. For the technical analysis we

have collected various data such past gold and crude monthly prices, US dollar rates, US

interest rates, GDP growth rate of India and US, CPI for India and US etc. after data

collection we have applied various statistical tools on data using Excel.

After that a regression model was developed to examine the major variable responsible

for gold prices. Various factors considered in the analysis were crude oil prices, M3, CPI,

REER, GDP growth rate, and US interest rates for US economy. Using data for these

variables regression analysis was done for different time periods to determine which

variable explains the gold prices in the best way.

About the organization

About a Brokerage Firm:

A company, corporation, partnership, or other organization which buys and sells stocks,

bonds and other investments for investors. Each brokerage firm varies with respect to the

depth of products and services it provides. Following is the overview of what a brokerage

firm can provide:

1.) Products

A brokerage firm offers a wide variety of products for its investors. It includes all the

traded securities & commodities, mutual funds, derivatives etc.

2.) Services

Various services offered by a brokerage firm are IPOs, investment banking, research,

investment information and tools, online trading etc.

Commodity

Any product that can be used for commerce or an article of commerce which is traded on

an authorized commodity exchange is known as commodity. The article should be


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movable of value, something which is bought or sold and which is produced or used as

the subject or barter or sale. In short commodity includes all kinds of goods

Commodities Market

Commodity markets are markets where raw or primary products are exchanged. These

raw commodities are traded on regulated commodities exchanges, in which they are

bought and sold in standardized contracts. A commodity exchange is an association or a

company or any other body corporate organizing futures trading in commodities for

which license has been granted by Forward Markets Commission (FMC). Globally, the

size of the commodity trade is about thrice that of equities. And judging by the way

activity in the commodity futures market is picking up, it could become as big as equities

in a while.

The three exchanges are:

1. National Commodity & Derivatives Exchange Limited. (NCDEX)

NCDEX is a professionally managed on-line multi commodity exchange. 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 institutional promoters and shareholders of

NCDEX are prominent players in their respective fields and bring with them institutional

building experience, trust, nationwide reach, technology and risk management skills.

2. Multi Commodity Exchange of India Limited. (MCX)

MCX is an independent and de-mutualized multi commodity exchange. It has permanent

recognition from the Government of India for facilitating online trading, clearing and

settlement operations for commodities futures market across the country. Today, MCX

features amongst the world's top three bullion exchanges and top four energy exchanges.

MCX offers a wide spectrum of opportunities to a large cross section of participants

including producers/ processors, traders, corporate, regional trading centre, importers,

exporters, co-operatives and industry associations amongst others. Headquartered in the


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financial capital of India, Mumbai, MCX is led by an expert management team with deep

domain knowledge of the commodities futures market.

3. National Multi-Commodity Exchange of India Limited. (NMCEIL)

NMCEIL is the first de-mutualized, Electronic Multi-Commodity Exchange in India. It

is being supported by Central Warehousing Corporation Ltd., Gujarat State Agricultural

Marketing Board and Neptune Overseas Limited. It got its recognition in October 2002.

Trading Under Commodities Market

Commodities related industries constitute about 58% of the countrys GDP. Indian

markets have recently thrown open a new avenue for retail investors and traders to

participate: commodity derivatives. Currently, the various commodities across the

country clock an annual turnover of Rs 1,400 billion. With the introduction of futures

trading, the size of the commodities market grows many folds here on. Like any other

market, the one for commodity futures plays a valuable role in information pooling and

risk sharing. The market mediates between buyers and sellers of commodities, and

facilitates decisions related to storage and consumption of commodities.

Trading in commodities market:

1.) Spot Trading

Spot markets are those in which the commodity is traded immediately in exchange for

cash or some other good. Spot trading is any transaction where delivery either takes place

immediately, or there is a minimum lag, between the trade and delivery.

2.) Commodity Derivatives

Derivatives are financial instruments whose value changes in response to the changes in

underlying variables. Derivatives are so called because they have no value of their own.

They derive their value from the value of some other asset, which is known as the

underlying. Derivatives are specialized contracts which signify an agreement or an option

to buy or sell the underlying asset of the derivate up to a certain time in the future at a

prearranged price, the exercise price. The contract also has a fixed expiry period mostly

in the range of 3 to 12 months from the date of commencement of the contract. The value


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of the contract depends on the expiry period and also on the price of the underlying asset.

Commodity derivatives have had a long and a chequered presence in India. The

commodity derivative market has been functioning in India since the nineteenth century.

The commodity derivatives market is a direct way to invest in commodities rather than

investing in the companies that trade in those commodities. They just speculate on the

direction of the price of these commodities, hoping to make money if the price moves in

their favor.

3.) Future Trading

A future contract is one of the main types of derivative contract. A futures contract is a

standardized, traded on a futures exchange, to buy or sell a certain underlying instrument

at a certain date in the future, at a specified price. The future date is called the delivery

date or final settlement date. The pre-set price is called the futures price. The price of the

underlying asset on the delivery date is called the settlement price. Futures prices reflect

not only current cash prices, but also expectations of future prices and general economic

factors. The word "contract" is used because a futures contract requires delivery of the

commodity in a stated month in the future unless the contract is liquidated before it

expires. As time passes, the contract's price changes relative to the fixed price at which

the trade was initiated. This creates profits or losses for the trader. Futures traders are

traditionally placed in one of two groups: Hedgers, who have an interest in the

underlying commodity and are seeking to hedge out the risk of price changes; and

Speculators, who seek to make a profit by predicting market moves and buying a

commodity "on paper" for which they have no practical use.

Research under Brokerage Firms:

Research is the systematic process of collecting and analyzing information to increase our

understanding of the phenomenon under study. All the brokerage firms have a separate

research department to carry out various studies which can benefit the investor.

There are two primary analytic methods used under research: fundamental analysis and

technical analysis.


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1.) Fundamental Analysis

Fundamental analysis involves using economic data relating to supply and demand to

forecast likely future price action. Fundamental analysis takes into consideration of entire

market environment. For traders, it is a method to forecast price movements of individualcommodities and/or entire markets by looking at economic indicators and government

policy, within a business cycle framework. There are hundreds of supply and demand

forces in effect at any particular time; the fundamental analysis strives to build economic

models which reduce the number of these variables to a few dominant forces. The

efficacy of these models is limited only by the analyst's ability to identify dominant

factors. Building blocks of all fundamental analysis includes:-

a.) Indicators for supply & demand forces.

b.) Government economic policies.

c.) Various activities of foreign central banks and Federal Reserve.

d.) Position of major currencies.

2.) Technical Analysis

Technical analysis is the study of market action, primarily through the use of charts, for

the purpose of forecasting future price trends. Technical analysis involves analyzing past price action of the market itself to forecast the likely future price action. Technical

analysis considers only the actual price behavior of the market or instrument, on the

assumption that price reflects all relevant factors before an investor becomes aware of

them through other channels. Technicians seek to forecast price movements such that

large gains from successful trades exceed more numerous but smaller losing trades,

producing positive returns in the long run through proper risk control and money

management. Some of the tools used in technical analysis are:-

a.) Trends - A trend can be defined as a time of consistently rising or falling prices of a

stock or security. Trend followers work on the assumption that a market trend, once

begun, tends to continue for some time. A trend line is drawn on a chart to identify long,

intermediate or short term trends.


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b.) Oscillators - An oscillator is a technical tool to identify overbought and oversold

conditions in the market .Overbought: A stock is said to be overbought when the price

has risen too long or too high or both, to such a level that it seems it must turn around

soon. Oversold: And in the opposite direction, a dramatic or prolonged drop just can't

seem to go on forever, so an oversold indication would signal unusual activity and

indicate ahigh probability of a rise in price soon.c.) Cycles - Cycle analysis is used more often in the study of commodity prices. A cycle

has several characteristics. This analysis is used to measure how strong the cycle is and

how often does the cycle repeat itself.

Comparison between Technical & Fundamental Analysis

Technical analysis is frequently contrasted with fundamental analysis; the study of

economic factors that some analysts say can influence prices in financial markets. Some

traders use technical or fundamental analysis exclusively, while others use both types to

make trading decisions. While there are differences of opinion about the relative merits of

the two approaches, almost all successful traders emphasize technical analysis. There are

a number of reasons for this. First and foremost is the difficulty of obtaining accurate

fundamental data. While various governments and private companies publish statisticsconcerning crop sizes and demand levels, these numbers are gross estimates at best. With

the current global marketplace, even if you could obtain accurate current information, it

would still be impossible to predict future supply and demand with enough accuracy to

make commodity trading decisions. Technical analysts argue that since the most

knowledgeable commercial participants are actively trading in the markets, the current

price trend is the most accurate assessment of future supply and demand.

About IL&FS Investsmart

IL&FS Investsmart Limited (IIL) is one of Indias leading financial services

organizations providing individuals and corporate with customized financial management

solutions; delivering value and innovation to over 100,000 customers through more than

300 offices across the India.


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Main Operations:

It offers a complete range of financial investment solutions for retail as well as

institutional customers:

1. Advisory products such as mutual fund advisory services, portfolio management, IPO,

insurance advisory.

2. Institutional offerings such as investment banking, institutional equity, and institutional

debt.

3. Trading products such as equity, derivatives and commodities.


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Section I: INTRODUCTION


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I. Gold

"The desire for gold is the most universal and deeply rooted commercial instinct of

the human race."

- Gerald M. Loeb

The above quote by a famous investor & author has rightly explained the importance of

gold. Some analysts think of gold as a currency without a country. It is an

internationally recognized asset that is not dependent upon any governments promise to

pay.

A very ductile and malleable, brilliant yellow precious metal that is resistant to air and

water corrosion. The purity of gold jewelry is measured in karats.

Gold has a long and complex history. From golds first discovery, it has symbolized

wealth and guaranteed power. Gold has caused obsession in men and nations, destroyed

some cultures and gave power to others. Since ancient times, gold has always been an

important asset and a value store. Gold was used asan exchange medium even before theRoman 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.

1. Production of gold

a.) The process of producing gold can be divided in to six main phases: finding the ore

body; creating access to the ore body; removing the ore by mining or breaking the ore

body; transporting the broken material from the mining face to the plants for treatment;

processing and refining.

b.) Gold mining consist of the processes and techniques employed in the removal of gold

from the ground. The two main gold mining methods are surface mining an

underground mining. This basic process applies to both the mining methods.


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c.) There are two types of mines, Open Pit and Underground, each developed to fit with

the circumstances where the ore is found and to fit with which processes are optimal to

extract gold.

d.) After this the broken material is transported from the mining face to the plants for the

treatment and further processing and refining.

In the current scenario, gold holds a very important position in the commodities market.

It is the most traded commodity in the commodity exchanges. From the past many years

the prices of gold are rising continuously. And it has reached its all time high in recent

years. The various reasons which have contributed to these rising prices are increasing

demand for gold jewelry, dollar devaluation against rupee, recessionary trends in US,

rising oil prices etc.

2. Uses of Commodity

There are various factors of which the gold is demanded and which has lead to different

uses of the commodity.

2.1 Jewelry Demand

Jewelry- the Primary use of gold. It is an important part of civilization since ancient

history. Special qualities of gold make it perfect for manufacturing jewelry. According to

the world gold council, 52% of the gold is held as Jewelry.

2.2 Investment Demand

Because gold is highly valued and in very limited supply it has long been used as a

medium of exchange or money. It includes gold coins and bullion. Today gold coins areno longer in wide use for financial transactions. In the form of gold bars is known as

Gold bullion. The use of gold bars kept manufacturing costs to a minimum and allowed

convenient handling and storage. Today many governments, individuals and institutions

hold investments of gold in the convenient form of bullion.


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2.3 Industrial Demand

a.) Use of gold in Electronics

The most important industrial use of gold is in the manufacture of electronics. Electroniccomponents made with gold are highly reliable.A small amount of gold is used in almost

every sophisticated electronic device. This includes: cell phones, calculators, personal

digital assistants, global positioning system units and other small electronic devices. Most

large electronic appliances such as television sets also contain gold.

b.) Use of gold in Dentistry

Gold is used in dentistry because of its superior performance and aesthetic appeal. Goldalloys are used for fillings, crowns, bridges and orthodontic appliances. Gold is used in

dentistry because it is chemically inert, non allergenic and easy for the dentist to work.

c.) Use of gold in Glass making

Gold has many uses in the production of glass. The most basic use in glassmaking is that

of a pigment. A small amount of gold suspended in the glass when it is annealed

produces a rich ruby color. Gold is also used when making specialty glass for climatecontrolled buildings and cases.

d.) Medical uses of gold

Gold is used as a drug to treat a small number of medical conditions. Radioactive gold is

used in diagnosis. Many surgical instruments, electronic equipment and life-support

devices are made using small amounts of gold.

e.) Use of gold in Awards and symbols of status.

Gold is associated with many positive qualities. Purity is another quality associated with

gold. For this reason, gold is the metal of choice for religious objects. Crosses,

communion ware and other religious symbols are almost always made with gold for this


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reason. Gold is also used as the first place winner's medal or trophy in almost any type of

contest.

2.4 Substitutes of the commodity

Palladium, platinum and silver have been substituted for gold. Alloys (mixtures) of gold

and other base metals are extensively used in jewelry and electronics to reduce the

amount of gold used while assuring the positive features for which gold is desired.

3.) Demand & Supply

3.1 World total demand and supply

Total demand includes demand for jewelry, industrial demand and investment demand.

Total supply includes gold mining, supply from central bank and old scrap and recycled

gold.

Table 1: Total demand and supply of gold (2007)

Particulars In terms of

value($m)

In terms of

volume(tonnes)

Deficit /

surplus

Demand 79,249 3547.3 1743 deficit (invalue)

Supply 77506 3469 78.3 deficit (involume)

Source: Gold Fields Mineral Services Ltd. (GFMS)

As we can see in the above table the total demand for gold in world was $79249 m in

2007 and against it the supply fall short by $1743 m and was $77506 m. It shows that in

spite of rising prices of gold demand is not falling short and still there is an opportunity infront of the suppliers. The producers should use the modern techniques in production to

increase their output.


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Table 2: Components of demand

Components Demand ($m) % share in total demand

Jewelry demand 54203 68.42%

Industrial and dental 10400 13.12%

Investment 8931 11.26%

ETfs and other similar products 5715 7.2%

Total 79249 100%

Source: Gold Fields Mineral Services Ltd. (GFMS)

The above table shows that jewelry consumption forms the most important component of

the gold demand in world. It account for 68% of the total demand. The net important

component is the industrial demand with 13 % of total demand. The other two

components such as investment demand and ETFs have 11% and 7% share in total

demand respectively.

3.2 Official Gold Reserves

Gold reserves (orgold holdings) are held by central banks as a store of value. Central

banks around the world are major holders of gold, but over time, their holdings are falling

as they diversify their reserve assets out of gold into income-producing investments.

Central banks and international organizations such as the IMF hold around one-fifth of

global above-ground stocks of gold as a reserve asset. The largest gold holdings in tonnes

as reported by the WGC can be seen in the table below as on Dec. 2007.

Table 3: Gold reserves in world (country wise) in 2007

S.No. Countries Gold reserves(tonnes) Reserves in %

1. USA 8133.5 76%

2. Germany 3417.4 31.9%

3. France 2622.3 24.4%

4. Italy 2451.8 23%

5. Switzerland 1166.3 10.8%

6. Japan 765.2 7.1%


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7. Netherlands 624.5 5.8%

8. China 600.0 1%

9. Russia 438.2 4%

10. India 357.7 4%

Source: www.gold.org

Figure 1:Gold reserves in world (country wise)

Gold Reserves

0

10002000

30004000

50006000

70008000

9000

USA

Germany

France

Italy

Switzerland

Japan

Netherlands

China

Russia

India

Gold Reserves

As we can see in the above table and figure US gold holdings are largest among

individual countries. Its reserves accounts for almost 76% of world s total reserves. Next

in the list is Germany with around 32% of share. In spite of having world largest gold

reserves these two countries are not the largest producers of gold.

3.3 World Total exports and imports

Table 4: Export and Import Growth of Gold in World

Export Growth Import growth

Year Value(in

US dollar

terms)

Volume Unit Value Value(in

US

terms)

Volume Unit

1990-00 7.7 10.6 8.4 8.3 12.4 7.2


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1990-95 8.1 10.9 12.6 4.6 1.9 7.6

1995-00 7.3 10.2 4.3 12.0 11.9 6.9

2000-01 21.0 23.9 3.3 1.7 -1.0 8.2

2002-02 -1.6 3.7 -1.0 1.7 5.0 1.1

2002-03 20.3 21.7 0.3 19.4 9.5 10.7

2003-04 21.1 6.0 8.5 27.3 20.9 -0.1

2004-05 30.8 17.6 8.9 42.7 14.7 21.6

2005-06 23.4 45.4 20.4 33.8 -1.6 49.0

2006-07 36.3 - - 36.3 - -

Source: www.gold.org

The table above illustrates the export and import growth from 1990 to 2007. We can see

that both exports and imports for growth are rising continuously. This is because the

global demand for gold is increasing at an accelerated rate. Imports increased at high rate

in 2005-05 to $42.7 but immediately after that it decreased to $36.3 in 2006-07. Exports

in 2006-07 were also $36.3 increased from $23.4 in 2005-06.

3.4 Seasonal demand factors

Jewelry demand is seasonal. The fourth quarter is the strongest quarter due to Diwali,

Christmas and other end of year festivals when jeweler gifts are common. The long

holidays around 1st May (Labor Day), National Day and Chinese New Year in China are

also occasions associated with the purchase of gold jewelry. The second and third

quarters are usually seasonally low with a relative absence of major gold giving

occasions. The start of the second quarter nevertheless sees wedding seasons in parts of

India while May sees the Akshaya Trithya festival in India. Tourist demand is at its peak

in Turkey in the third quarter. In contrast the third quarter sees the Shrad a fortnight

whose religious significance is not propitious for gold buying by Hindus.


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4. Major producers & consumers of Gold

4.1 Producers

Apart from Antarctica, mining takes place in all of the worlds continents. Traditional

mining countries such as the USA, Canada, Australia, South Africa and Chile dominate

the global mining scene

Table 5: Top 10 Producers of Gold

S.No. Countries %share in total supply

1. China 11.3%

2. South Africa 11%

3. United States 10.4%4. Australia 10.3%

5. Peru 7.0%

6. Indonesia 7.0%

7. Russia 6.2%

8. Canada 3.8%

9. Ghana 2.6%

10, Brazil -

Figure 2:Mine production of Gold in world in 2007(country wise)

Source: www.goldsheetslink.com


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The above table & figure shows the top 10 producers of gold in world in the year 2007.

China has emerged as a largest producer of gold by overcoming South Africa which was

the largest producer till 2005. It has around 11.3% share in total worlds production as

compare to 11% of South Africa. Major Companies in South Africa includes Anglo

American, De Beers, and BHP Billiton. After this USA takes third position with 10.4%

share. Australia is the next largest producer of gold in the world with 10.3% of

production in world. Major Companies include Rio Tinto, BHP Billiton.

4.2 Consumers

53% of demand is attributable to just five countries - India, Italy, Turkey, USA and

China, each market driven by a different set of socio-economic and cultural factors.

Table 6: Top 10 Consumers of Gold in 2007

S.No. Countries Gold Consumption (jewelry)

(tonnes)

1. India 587.1

2. China 302.2

3.. USA 260

4. Turkey 194.9

5. Saudi Arabia 146.2

6. UAE 96.0

7. Indonesia 78.0

8. Egypt 75.3

9. Italy 71.0

10. Pakistan 65.1

Source: www.commodituonline.com, www.chinaview.cn, www.gold.org

This table shows top 10 consumers of gold in world and their respective jewelry

consumption. India is the largest International Consumer for Gold with annual jewelryconsumption of 587.1 tonnes. And there is still excellent opportunity for the market to

grow. With the increasing wealth and expanding urban middle class, the market will

grow further. In the year 2007, with the declining consumption year after year in USA

China has surpassed USA in gold consumption with demand for jewelry reaching 302

tonnes up by 34% from the previous year. The US was negatively impacted with a


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combination of a weak economy, poor retail environment and record prices denting

jewelry demand which stood 14% down on 2006 figures. Apart from these countries

Turkey and Saudi Arabia are also major consumers for gold but from recent years their

consumption is falling.

5. World inventories and capacity utilization

The below shown chart depicts the world Gold mine production Y on Y from 1980 to

2005 from various countries. We can see that South Africas production share is

decreasing in total worlds production. The reason behind this is that South Africas

production has reached its peak and now its production is declining. If we look at the

total world production, it is increasing every year. But the individual production of

countries is falling resulting in inefficient capacity utilization. Their has been an sharp

decline in South Africas mining activities which result in slowdown in supply of gold

widening the gap between demand and supply.

Figure 3: World Gold Mine Production (Year wise)

Source: www.goldsheetslinks.com


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6. Prices of Gold from last 20 years and the growth rate

The below table & figure shows that in last 20 years the prices of gold had undergone

many changes. As we can see from 1987 the prices decreased to great extent till the year

2001 but after that it has been increasing continuously and it has seen a sharp hike in

prices in the year 2007.The highest growth rate has been seen in the year 2007

Table 7: Prices of Gold in last 20 year

Source: www.globalinsight.com

(Figure in bracket shows negative value)

Years Avg. Price per ounce (in Us dollars) Growth Rate (%) (in US dollars)

1987 446.28 21.36

1988 436.79 (2.12)

1989 380.74 (12.83)

1990 383.32 0.67

1991 362.10 (5.53)

1992 343.86 (5.03)

1993 360.00 4.69

1994 384.12 6.7

1995 384.05 (0.01)

1996 387.82 0.98

1997 330.98 (14.65)

1998 294.12 (11.13)

1999 278.55 (5.29)2000 279.10 0.19

2001 272.67 (2.30)

2002 309.66 13.56

2003 362.91 17.19

2004 409.17 12.74

2005 444.47 8.62

2006 603.92 35.87

2007 841.75 39.38


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Figure 4: Prices of Gold in last 20 years and growth rate

0

100

200

300

400

500

600

700

800

900

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

-20

-10

0

10

20

30

40

50

Gold prices

Growth rate

.If we look at the current prices for gold it is $985.50 per ounce as on March 08. Gold just

keeps on marching upward, gaining 40% in the last six months. This is the most vibrant

and resilient precious metals market we've ever seen. Based on current economic

fundamentals around the world, precious metals should continue to benefit from growing

inflationary pressures, devalued currencies, accumulating economic imbalances, and

international tension for several more years to come.

7. Factors Affecting Gold Prices

Gold is considered as one of the most important commodity in the market. As a result the

price of gold is affected by many factors such as Macroeconomic factors, social and

political factors.

7.1 Macroeconomic factors

a.) Demand and Supply factors

As is true of all asset prices, golds price moves in response to the changing balance

between supply and demand. Gold is a real asset. The gold market may take some time


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to adjust to a supply shock or a sudden shift in demand. The only price-responsive source

of supply in the short term is recycled gold.

Generally, jewelry demand increases with income growth and in periods of steady price

increases, and reduces in periods of price volatility or decline. Jewelry demand isseasonal; the fourth quarter is the strongest quarter due to Diwali, Christmas and other

end of year festivals when jewelry gifts are common.

Industrial demand for gold has been dominated by the electronics sector for some years

and the driver of this source of demand is effectively the demand for electronics as a

sector. Because gold is one of many inputs in electronic components, and because there

are few, if any, substitutes, this component of demand tends to be fairly price-insensitive

in the short to medium term. The key driver of industrial demand is the economic cycle

and its impact on the electronics industry.

Growing awareness of the strategic role that gold can play in multi-asset portfolios has

underpinned the increase in investment demand that has been seen over recent years.

Unlike most commodities, where there is an inverse relationship between demand and

price, most demand for gold is positively related to a rising price and to rising incomes.

The exception to this general rule is that, all things being equal, a rising price can be

expected to impact negatively on industrial demand, to the extent that substitutes for gold

are available.

b.) US Dollar

Projections about a declining dollar due to an ever-increasing twin deficit supported by

many investment veterans are met by much denial from politicians as well as from

investors. Dollar devaluation seems inevitable due to the tremendous US Current

Account deficit. US dollar is the key driver for Gold; as the dollar goes, so will gold; but

in the opposite direction. Gold is the anti-dollar with a high inverse correlation to the

dollar. Gold is priced in US dollars, therefore during the periods of dollar weakness the

prices of gold rises.


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c.) Inflation and Oil prices

Gold's most natural relationship to the general price level is what one might expect for

any good or asset: A higher general price level should be associated with higher gold

prices. A closer relationship exists between gold prices and inflation, that is, the rate of

change in the general price level. Two periods particularly stand out: The high inflation

of the early 1980s is matched by high gold prices, which definitely appear to "lead" the

CPI inflation rate by about a year, a relationship that doesn't break down until 1988. The

most recent decrease in the inflation rate also corresponds to a drop in gold prices, though

that relationship is much more synchronous, without a clear lead or lag time.

In Addition to this the oil prices are also an important driver for the gold prices. Their is

an inverse relationship between the oil price and the prices of gold shares, but this

relationship only comes to the fore during periods when the oil price is moving sharply

lower or sharply higher relative to the gold price.

7.2 International trade policies and WTO

The World Trade Organization (WTO) is the only global international organization

dealing with the rules of trade between nations. At its heart are the WTO agreements,

negotiated and signed by the bulk of the worlds trading nations and ratified in their

parliaments. The goal is to help producers of goods and services, exporters, and importers

conduct their business. The prices of gold are also affected by the trade policies issued by

WTO.7.3 Microeconomic Factors

While the price of gold, like all prices, is determined by supply and demand, many

analysts make the mistake of focusing on mine supply, rather than total supply. The price

of is determined by the demand to hold stocks of gold and the total supply of gold. Newly

mined supply has very little influence on supply because the above-ground stock is so

large in relation to annual mine production. All that annual mine production does is to

dilute the total supply by about 1% per year.


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There is a relationship between supply and the cost of mining; whatever the price of gold,

the cost of operating the marginal gold mine will rise until it is a bit less than the price of

gold. This is because a deposit that is not economic to mine at one price will become

economic to mine at a higher price. As long as "not much" gold can be mined at the

higher price, the price will be "not much" influenced by mine supply.

7.4 Other Factors

a.) Political Turmoil and Wars.

As gold is an internationally traded commodity, its prices are greatly affected by any

political disturbance in the world. The demand and supply of gold largely depends upon

import and export of the commodity; and if there is any war or turmoil between the

nations it will directly affect demand and supply of gold which will affect the prices if

gold.

Moreover the relationship among the various nations also affects the prices of gold

because gold is an internationally traded commodity.

b.) Natural Disasters

Natural disasters are beyond human control. When such disaster happens in world it

affects world trade and economy to a great extent. And as a result it affects the prices of

commodities which have international importance.

8. Michael Porters Analysis

Porter's 5 forces analysis is a framework for industry analysis and business strategy

development developed by Michael E. Porter of Harvard Business School in 1979. Porterreferred to these forces as the microenvironment, to contrast it with the more general term

microenvironment. Porter's Five Forces include three forces from 'horizontal'

competition: threat of substitute products, the threat of established rivals, and the threat of

new entrants; and two forces from 'vertical' competition: the bargaining power of

suppliers, bargaining power of customers.


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Michael Porters analysis on Gold:

Threat of Substitutes Low

a.) No perfect substitutes for this commodity.Silver is not generally valued as gold is anddiamonds are much more costly then gold.

b.) Fewer propensities for the buyers to switch toalternatives, as always gold is treated as a symbolof status in spite of high prices.

Rivalry Low

a.) The competitionlies at application ofvarious modern andnew techniques ofmining.

b.) In such a situationrivals compete on non-price dimensions

Barriers to Entry

Low

a.) Many barriers toenter in miningindustry.

b.) Restrictions suchas governmentregulations, patents,rights etc.

c.) Long gestationperiod, higher costs.

Suppliers Power High

a.) New entry is restrictedsuppliers are generallyfew in number and as aresult they play animportant role in pricedecisions.

Buying Power Low

a.) Buyers are powerful if there are few buyers withsignificant market share. But in case of gold marketthere are large numbers of buyers therefore fewselected buyers cannot really affect the prices.


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Conclusion from porters analysis:

Through Michael Porters analysis on gold we analyze that in gold market suppliers play

an important role in determining the prices. As suppliers are concentrated in world gold

market they play a key role in determining the prices. Moreover there is no threat from

new competitors as there are barriers to enter into this market. As buyers are large in

number and there are no perfect substitutes for gold their bargaining power is very weak.

Gold is a globally traded commodity and it holds an important place in international

market. Therefore its prices are highly affected by various other economic variables,

rather than the power of suppliers and consumers.

9. SWOT Analysis

Table 8: SWOT analysis on Gold

Strengths Weakness Opportunities Threats

Gold act as aninstrument forhedge againstinflation.

Free ofreligious orpoliticalaffiliation.

Government ofsome countriesoffer variousconcessions toindustriesengaged inminingactivities.

In spite ofrising pricesgold is alwaystreated as a

Labor forcein miningindustry isunskilled and

inexperienced whichresult indecreasedproductivity.

In India,miningtechnology isoutdated withpoorinfrastructural facilities.

Variousmacroeconomic policies indifferent

There existsconsiderableopportunitiesfor future

discoveriesof sub-surfacedeposits withtheapplicationof moderntechniques.

Because ofthe recessionin USeconomygold isgaining moreimportanceas aninternational

A heavy taxburdendiscouragesfurther

investment inminingindustry.

Stricterenvironmentrulesrestrictingminingactivities.

The newinnovationsas well asdiscoveries ingoldproducingnations isdifficult, time


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symbol ofstatus amongwomen.

Before 1945,

gold was tradedas a currency.Gold has beenthe foundationof monetarysystems forcenturies.

The presentworldmonetarysystem isfounded onGold held intreasuries orCentral Banks.

countrieshave theirdirect impacton gold prices and as

a result theyfluctuate alot.

In recenttimes, because ofrecession inUS goldmarket is involatile

situation

commodity.

Gold pricesare risingupwards due

to reductionin productionlevel ascompared tothe demand.There aretremendousopportunitiesfor majorgoldproducing

nations fornewdiscoveries.

consumingandexpensive.

Conclusion from SWOT analysis:

The SWOT analysis on gold shows that in spite of various strengths of gold as a

commodity there are large number of threats and weakness in the mining industry which

can be improved. For example the technological and the human resources in the mining

industry need an improvement.

If we look in the present scenario gold is an important commodity in the international

market and its demand is not decreasing in spite of the rising prices. So if the suppliers

make use of the opportunities in front of them, they can make their position more secure

in the market.


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II. CRUDE OIL

Crude oil is the most widely used energy material in the world. The edifice modern

industrial economy as well as agriculture depends upon crude oil in way or the other.

Crude oil is also a key variable in global financial markets as the largest tradedcommodity in the world.

The history of crude oil dates back to the 3rd or 4th century A.D when the presence of oil

was first discovered in China. The oil that the early Chinese people found was found to

have extremely good medicinal value and was used in the salt form. To extract that oil

from under the earths crust, first oil wells of around 243 meters were dug up in that

region with the help of bamboo poles possessing metal tools at their end. The crude oil

was also used for the lighting purposes in Ancient Persia. All this time oil had a limited

use until in 19th century; the process of distillation of kerosene with the help of coal and

rock oil was invented. Production of oil became commercialized and it started an era of

establishment of oil refineries throughout the world.

If we look at the current market scenario oil prices are also rising like gold. Oil prices

have crossed $110 per barrel in global market. The oil prices rocketed due to speculation

in raw materials market caused by devaluation of US dollar. Other reasons may include

US recession and major decisions by OPEC.

1. Production of Crude Oil The Process

Petroleum or crude oil is a naturally occurring, flammable liquid found in rock

formations in the earth consisting of a complex mixture of hydrocarbons of various

molecular weights, plus other organic compounds.

The extraction of petroleum is the process by which usable petroleum is extracted and

removed from the earth.The most common method of obtaining Petroleum is extracting it

from oil wells and oil fields.

a.) The first step in the extraction process of crude oil is locating the oil field. Geologists

use seismic surveys to search for geological structures that may form oil reservoirs.


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b.) After locating the oil field various oils extraction and recovery methods are used to

extract the oil from the oil fields. The oil recovery methods include primary recovery,

secondary recovery and tertiary recovery. The amount of oil that is recoverable is

determined by a number of factors including the permeability of the rocks, the strength of

natural drives and the viscosity of the oil.

c.) Once the oil is extracted, oil wells are created. The oil well is created by drilling a

hole into the earth with an oil rig. A steel pipe (casing) is placed in the hole, to provide

structural integrity to the newly drilled well.

2. Uses of the commodity

2.1 Usage by various sectors

a.) Transportation sector

The highest percentage of use of rude oil is in this sector. It includes all vehicles whose

primary purpose is to transport people and goods like automobiles, trucks, buses, trains,

aircrafts, ships etc. It also includes construction cranes, farming vehicles, warehouse

tractors whose primary purpose is not transportation.

b.) Residential, Commercial, Industrial and Electricity generation sectors

Crude oil is also widely used in various sectors other than transportation. Residential

sector includes water heating, air conditioning, cooking and running variety of other

appliances. Industrial sector includes consumption of oil by various manufacturing and

other industries. Crude oil is also used for the purpose of electricity generation.

2.2 Usage by product

Crude oil's biggest value is its wide use as a raw material in the chemical industry. But

modern industrial societies use it primarily to achieve a degree of mobility-on land, at

sea, and in the air-that was barely imaginable less than a hundred years ago. In addition,


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petroleum and its derivatives are used in the manufacture of medicines and fertilizers,

foodstuffs, plastic ware, building materials, paints, and cloth and to generate electricity.

a.) Gasoline is the perfect example of a consumer product: available everywhere

purchased often and in easy transactions. Its consumption accounts for almost 45 percent

of all oil use.

b.) Distillate fuel oil use ranks second behind gasoline. Unlike gasoline, which is used

almost exclusively in the transportation sector, distillate fuel oil is used in every sector:

for home heating fuel, for industrial power, for electric generation, as well as for diesel-

fueled vehicles.

c.) Jet fuel is the third-highest product in demand and, like gasoline, is largely confined

to use in the transportation sector.

3. Demand and Supply

3.1 The demand for oil

a.) Cyclical demand: There is a strong link between the demand for oil and the rate of

global economic growth because oil is an essential input into many industries when theeconomy is expanding, the demand for oil rises.

b.) Prices of substitutes: Demand for crude oil affected by the relative prices of oil

substitutes (e.g. the market price of gas). If, in the longer term, reliable and relatively

cheaper substitutes for oil can be developed, then we might expect to see a shift in

demand away from crude oil towards the emerging substitutes.

c.) Changes in climate e.g. affecting the demand for heating oil. It is often said that if

the winter in North America is fierce, then the price of crude rises as the USA and

Canadian economies raise their demand for oil to fuel household heating systems and

workplaces.


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d.) Market speculation: There is always a speculative demand for oil (i.e. purchasers

hoping for a rise in prices on world markets). Indeed one of the features of the most

recent spike in oil prices has been the high level of demand by hedge funds and other

investors pouring into the international petroleum exchanges to buy up any surplus oil

futures contracts. They hope that by the time the contracts are ready to be fulfilled, they

will have made a large profit. Speculation involves risk, prices can do down as well as

up.

Figure 5: World Demand for Crude oil for last 20 years

Source: Energy Information Administration (EIA)

Current crude oil demand stands at 85.35 mn bbls (till Dec.07) well above the 10 years

average demand of 79.17 mn bbls. Major shift in demand was seen since 2003 in absolute

terms due to rising demand from emerging markets like China and India. US which is the

highest consumer of crude oil also contributed to rise in demand for oil along with

developing nations. With global economy facing high growth rates from 2002 till 2006

demand for crude oil has rise by 7.2%.

World Crude oil Demand (mn bbls)

66.00

68.00

70.00

72.00

74.00

76.00

78.00

80.00

82.00

84.00

86.00

88.00

199

7

199

8

199

9

200

0

200

1

200

2

200

3

200

4

200

5

200

6

200

7


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3.2 The supply for oil

The Organization of Petroleum Exporting Countries (OPEC) accounts for around 40% of

current world supply. This gives OPEC a pivotal influence in shaping the direction of oil

prices but only when the cartel acts together to control production and balance supply

and demand in the international market. Non-OPEC countries account for the largest

portion of total supply. Oil is produced in nearly every corner of the world, and nearly

every region has been expanding oil production in the last decade. This includes Europe,

where Norwegian oil companies are achieving a rapid increase in oil extraction and also

Russia now one of the worlds largest oil suppliers. Saudi Arabia is the largest supplier of

oil in the world with largest oil reserves.

Figure 6: World Crude Oil Supply for last 20 years


Crude oil supply has been pretty stagnant for last 3 years. Supply has not been able to

keep up the pace with rising demand. Also no significant contribution was seen from Non

OPEC countries. Further investment in building up the refineries is necessary to catch up

with ever rising demand. Geo political tensions and Natural calamities like Hurricane had

World Total Production (mn bbls)

70.00

72.00

74.00

76.00

78.00

80.00

82.00

84.00

86.00

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007


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impacted the production for past 3 years. Many refineries are still coping up with the shut

downs due to hurricane that struck in 2005 in US.

3.3 World total reserves

Oil reserves refer to portions of oil in place that are claimed to be recoverable under

current economic constraints. Oil in the ground is not a "reserve" unless it is claimed to

be economically recoverable. Proven, probable and possible reserves are the three most

common categories of reserves used in the oil industry.

Table 9: World Total Reserves of Crude oil as in 2006

Rank Country Proved Reserves (billionbarrels)

Reserves as %of total

1. Saudi Arabia 264.3 20.4%

2. Canada 178.8 13.8%

3. Iran 132.5 10.25%

4. Iraq 115.0 8.89%

5. Kuwait 101.5 7.85%

6. Unite Arab Emirates 97.8 7.56%

7. Venezuela 79.7 6.16%

8. Russia 60.0 4.64%

9. Libya 39.1 3.02%

10. Nigeria 35.9 2.77%11. United States 21.4 1.65%

12. China 18.3 1.41%

13. Qatar 15.2 1.17%

14. Mexico 12.9 .99%

15. Algeria 11.4 .88%

16. Brazil 11.2 .86%

17. Kazakhstan 9.0 .69%

18. Norway 7.7 .59%

19. Azerbaijan 7.0 .54%

20. India 5.8 .44%Share of top 20 countries 1224.5 95%

Share of rest of the world 68.1 5%

World Total 1292.6 100%

Source: www.wikipedia.org


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The above table shows the proved crude oil reserves in the world in 2006 in descending

order of the countries. With around 20% of the world's proven oil reserves, Saudi Arabia

stands first in the list of proved oil reserves in the world. Canadas oil reserves were

178.8 billion barrels, placing it second to Saudi Arabia. After Canada the third largest oil

reserves are held by Iran in the world with around 10% of total reserves. Iran is the fourth

largest oil producer in the world and is OPEC's second-largest producer after Saudi

Arabia. .Irans Domestic consumption is increasing due to a growing population and as a

result Iran is the second biggest gasoline importer in the world after the United States.

After Iran, Iraq and Kuwait are the next countries in the list of reserves of oil with around

8% of total world reserves.

3.4 World Exports and Imports

Table 10: Major Exporters of Crude oil in World as in 2006

S.No. Countries Net oil export (million barrels)


2. Russia 6.57

3. Norway 2.54

4. Iran 2.52

5. United Arab Emirates 2.52

6. Venezuela 2.207. Kuwait 2.15

8. Nigeria 2.15

9. Algeria 1.85

10. Mexico 1.68

Source: Energy Information Administration

With the highest proven reserves and highest production in world Saudi Arabia is the

largest exporter of oil in the world with net oil export of 8.65 billion barrels per day.

Though Russias reserves are much lesser but still it stands in second position in major

exporters of oil in world, because Russia exports a major part of its production. The other

nations such as Norway, Iran, UAE, and Kuwait, Mexico are among top 10 exporters of

crude oil in world.


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Table 11: Major Importers of Crude oil in world as in 2006

S.No. Countries Net oil imports (million barrels)

1. United States 12.22

2. Japan 5.10

3. China 3.44

4. Germany 2.48

5. South Korea 2.15

6. France 1.89

7. India 1.69

8. Italy 1.56

9. Spain 1.56

10. Taiwan 0.94

Source:Energy Information AdministrationUS is the largest oil importer in the world, because of its rising needs in the transportation

sector. Japan is the second largest oil importing nation in the world. The country imports

more than 99 percent of its oil needs which makes it second largest oil importer after

USA. After Japan China is the next largest oil importing nation. With the rising

population chinas oil demands are increasing continuously. After this Germany, Korea,

India, France etc. are the countries which are among top 10 importers of oil in the world.

4. Major producers & consumers

4.1 ProducersOPEC nations accounts for the major oil production in the world. It accounts for two-

third of the worlds oil reserves and are the major exporters of oil. The Organization of

the Petroleum Exporting Countries (OPEC) is a large group of countries made up of

Algeria, Angola, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the

United Arab Emirates, Venezuela, and Ecuador .The organization has maintained its

headquarters in Vienna since 1965, hosting regular meetings between the oil ministers of

its member states.


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Table 12: Top 10 Oil producing countries

S.No. Countries Total production (millions of barrels

per day)


2. Russia 9.67


4. Iran 4.12

5. Mexico 3.71

6. China 3.84

7. Canada 3.23

8. United Arab Emirates 2.94

9. Venezuela 2.81

10. Norway 2.79


The above table shows the top 10 producers of crude oil in the world with their respective

production per day. With a quarter of the world's proven oil reserves and some of its

lowest production costs, Saudi Arabia is the largest oil producing nation in the world and

even the largest among the OPEC nations. It has also been said that Saudis fields have

already hit their peaks and their production is now declining. Russia is the worlds second

largest oil producer as well as the exporter with a production of 9.67 millions of barrels

per day. Over 70 percent of Russian oil production is exported, while the remaining 30

percent is refined locally. USA is the third largest producer for oil in the world. But with

the rising consumption every year, US reserves alone can satisfy its demand only for 3

years. This has lead to increased imports by the nation. Iran is the fourth largest oil

producer in the world with production of 4.12 millions of barrels per day. It is OPEC's

second-largest producer after Saudi Arabia. At current rates of production, Iran's oil

reserves would last 98 years if no new oil was found. After Iran, Mexico, China, Canada

are the countries which are among top 10 oil producers.


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4.2 Consumers

Table 13: Top 10 Oil Consuming Countries

S.No. Countries Total consumption (millionsbarrel per day)


2. China 7.27

3. Japan 5.22

4. Russia 3.10

5. Germany 2.63

6. India 2.22

7. Canada 2.12

8. Brazil 2.12

9. South Korea 2.07



USA is the worlds largest consumer of crude oil. The major component of the US

consumption is the transportation industry. Its total consumption is 20.59 millions of

barrels per day. Being a developing economy China is the second largest oil consuming

nation in the world and its consumption is increasing continuously. Japan is the world's

third-largest oil consumer. Japan stood as highest among the nations which are non oilproducing consumers. After this Russia stands at number fourth in top 10 consumers of

oil with consumption of 3.10 millions of barrels per day. Among the top 10 consumer of

oil other countries are Germany, India, Canada, Brazil, Korea and Saudi Arabia.

5. Crude Oil prices for last 20 years & the growth rate

As we can see in the table and graph below, the oil prices are fluctuating from last so

many years. The prices fall rapidly around 1998-89 and then gradually increased after

that. The prices are continuously increasing after that. We can see a major growth rate in

the year 2000. If we look in the current market prices it is close to $110 per barrel as in

march 2008.The prices have increased very sharply after 2007. Major reasons for

increase in oil prices are weak Dollar, OPEC decision not to increase production etc.


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Table 14: Prices of Crude Oil in last 20 years and its growth rate

Years Prices (in US dollars) Growth Rate (%) (in US dollars)

1987 19.2 27.57

1988 15.97 (16.82)

1989 19.64 22.98

1990 24.53 24.90

1991 21.54 (12.19)

1992 20.58 (4.46)

1993 18.43 (10.45)

1994 17.2 (6.67)

1995 18.43 7.15

1996 22.12 20.02

1997 20.61 (6.83)

1998 14.42 (30.03)1999 19.34 34.12

2000 30.38 57.08

2001 25.98 (14.48)

2002 26.18 0.77

2003 31.08 18.72

2004 41.51 33.56

2005 56.64 36.45

2006 66.05 16.61

2007 72.34 9.52

Source: Energy Information Administration

Figure 7: Oil prices in last 20 years and growth rate

0

10

20

3040

50

60

70

80

198

7

1989

1991

1993

199

5

199

7

1999

2001

2003

200

5

200

7

(40.00)

(30.00)

(20.00)

(10.00)

0.00

10.00

20.00

30.00

40.00

50.00

60.00

70.00

Crude oil prices

Growth rate


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6. Factors affecting Crude oil prices

6.1 Macroeconomic factors

a.) Weak US Dollar

Currency market affects oil prices to greater extent on short term basis. Recent fall in

dollar has been one of the important factors for rally in crude oil above $100. Dollar

denominated assets like crude oil; gold etc tend to rise as they have inverse correlation. A

weaker dollar makes crude oil cheaper for holders in other currencies and often lifts crude

oil demand.

b.) Increase in International energy demand

With the rising population in the developing economies, the overall demand for crude oil

has increased dramatically from last few years.Available spare oil production capacity is

currently about one percent of total worldwide demand, leaving very little room to

compensate for unanticipated supply disruptions or spikes in demand. The tenuous

balance between supply and demand is even more of a concern when you consider that

most of the world's oil is located in some of the more politically unstable parts of the

world. As such, supply disruptions, whether real or perceived, can have dramatic effects

on the price of crude oil. Chinas rapidly expanding economy has created a huge demand

boost.

c.) Oil Supply

Supply also plays an equally important role in determining the prices. However, with the

shortage of refineries to refine the crude we are in a unique situation where the price

difference between crude oil and refined product can be large. Supply remains volatile. A

number of other factors also increase uncertainty of supply and with rising demand; this

is placing tremendous pressure on pricing. Political volatility in oil producing regions has

historically impacted on crude oil prices and the political situation in the Middle East is

of global concern.


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6.2 Microeconomic factors

a.) Demand supply Imbalance

Since 2005 demand supply mismatch have led to increase in crude oil prices. With therising demand of oil in emerging economies like China, India etc. have further more

widened this gap. Moreover, major oil refineries are shutdown due to geopolitical

tensions and natural disasters.

b.) OPEC supply decisions

Any change in OPECs decision to increase or decrease the supply of crude oil affects oil

prices to greater extent. OPEC produces one third of overall total production and anyshift in supply policy led to high oil prices.

6.2 Other Factors

a.) Geo political tension

Geo political tensions in oil rich countries like Iran; Iraq, Nigeria, Venezuela have

contributed to high crude oil prices. Supply disruption from Nigeria has been higher as

compared to other war prone countries. Current on going tension between Iran and

western powers has added fire to boiling crude oil prices. Geo political tensions acts as

major factor in current rally and is expected to be dominating factor in near future as

hunger for oil continues across the globe.

b.) Climatic conditions

Historically crude oil has witnessed seasonal changes in demand for crude oil and has

affected crude oil prices in big way. Hurricane Katrina & Rita struck in 2005, freezing

cold conditions in North east US has led to high of oil prices. Production outages due to

bad weather affect the prices most. Uncertainty in weather conditions has been the

important driving factor for crude oil prices.


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7. Michael porter analysis on Crude Oil

Suppliers Power High

a.) OPEC accounts for two-third of the worlds oilreserves and is the major producers and exporters ofoil. Producing countries which accounts for majorsupplies are Saudi Arabia, Russia, and Iran; as aresult they have a strong bargaining power andaffect the prices of oil to a great extent.

Rivalry Higha.) Production iscontrolled by OPEC.Among this SaudiArabia and Iran are theleading ones.

b.) There is a lack ofinvestment inrefineries which leadto difference in

refining capacitycreating competitiverivalry.

Threat of

Substitutes

Medium

a.) Blending Ethanolwith Crude oil

b.) Bio - diesel

Barriers to entry High

a.) There are cartelbarriers in oil supply as itis mainly concentrated byOPEC.

b.) Depleting oil reservesdo not attract new

competitors.

Buying Power Low

a.) Buyers are not concentrated

b.) Large number of buyers which are spreadacross wide region and as a result the bargainingpower of customers is almost negligible.


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Conclusion from porters analysis:

The Organization of the Petroleum Exporting Countries (OPEC) is a large group of

countries made up of Algeria, Angola, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria,

Qatar, Saudi Arabia, the United Arab Emirates, Venezuela, and Ecuador. OPEC nations

accounts for the major oil production in the world. Through porters analysis we analyze

that, the international crude oil market is greatly affected by OPEC decisions. As they are

the major producers, prices are generally determined by their decisions.

Through managing the worlds oil supply, OPEC can work to increase or decrease world

oil prices to help meet the groups economic and political goals. Member governments

rely heavily on oil revenues.

On the other hand consumers do not play any important role in changing the prices asthey are large in number and there are no proper substitutes for crude oil.

8. SWOT Analysis

Table 15: SWOT Analysis on Crude Oil

Strengths Weakness Opportunities Threats

The recent

priceincreasesand also thedecision toallow oilcompaniesto increasepriceswithin a band of10% augur

well for theindustry.This step islikely toreducegovernmentinterferenceand provide

India is

one of themostinefficientcountriesamongdevelopingnations asfar asenergyusage isconcerned.

Such highcrude prices arelikely toimpactmargins ofoilmarketing

Major oil

marketingcompanies arenow venturinginto upstreamexplorationand productionactivities so asto secure crudesupply.

Natural gas has

the potential to be the fuel ofthe future withdemandoutpacingsupply bymore than twotimes. Such

Increased

competition is oneof the threats faced by energy sectorfrom privateplayers.

Continuinggovernmentinterference is alsoan important threat by oil companies.During the first six

months of thecurrent fiscal year,the oil marketingcompanies wererefrained fromincreasing product prices due to political reasons.


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someautonomyto oilcompanies.

Oil is thesingle mostimportantcommoditythat holdsthe positionof a keyfactor ineach andeveryeconomy of

the world.The worldsrichestnations areat theircurrentpositionsjust becauseof the oilfactor.

There is ahuge

demand ofcrude oil inthe worldand thedemand isnot fallingdespite ofrisingprices.

companies.

Like gold,oil is also

a globallytradedcommodity and as aresult it isaffected byvariouseconomicvariables.

Crude oil

supply ismainlyconcentrated in thehands ofOPEC.

high scarcityof natural gas provides a bigopportunity foroil companies.

Dollardenominatedassetsstrengthen andacts asdiversificationfor Hedgefunds

This affectedmargins ofdownstream players. Goingforward, if the

governmentinterferencecontinues, oil-marketingcompanies will beat a disadvantage.

Rising geo politicaltensions in oil richcountries act asspeculative buying

interest.


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Conclusion from SWOT analysis:

Crude oil is also another important commodity in the international market along with

gold. Rising oil prices is posing a serious threat to the oil companies as it is reducing the

margins of those companies. But still there is lot of opportunities in front of oil

companies in respect of increasing the global oil production. The importance of oil has

reached such a level at which there is no country in the world, which doesnt need oil and

its by-products, and if somehow it doesnt have much reserves of oil to meet their

domestic demand, these nations are ready to import the product at any cost. Many nations

have a huge share of their earnings constituted by oil exports only.

III.REVIEW OF LITERATURE

Some recent research studies related with the topic

1. Short and Long Run Determinants of the Price of Gold By Eric J. Levin

To find out the various factors that affect the price of gold in long and short run, this

research study was conducted in June 2006 by Eric J. Levin under world gold council.

Methodology followed

a.) To answer the various questions under this research, he develop a theoretical

framework based on the simple economics of supply and demand that is consistent

with the view that gold is an inflation hedge in the long-run, yet at the same time allows

the price of gold to fluctuate considerably in the short run.

b.) He use co integration techniques to analyze data from January 1976 to August 2005 to

test the hypothesis that short-run movements in the gold price are indeed related to

various factors such as political and financial turmoil, real interest rates and exchange

rates; while the long-run price of gold moves with the general price level (consumer price

index) to act as a hedge against inflation.


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Main Findings

a.) Major main findings which emerged with respect to the analysis of the long-run

determinants of the price of gold are - First, there is a long-term relationship between the

prices of gold and the US price level.

b.) Second, the US price level and the price of gold move together in a statistically

significant long-run relationship supporting the view that a one percent increase in the

general US price level leads to a one percent increase in the price of gold. This evidence

substantiates the belief that gold is a long-term hedge against inflation.

2. Commodity Prices and the Influence of Us Dollar By Nikos Kavalis

Nikos Kavalis of GFMS limited conducted a research recently in January 2006 to find out

the relation between US dollar and the commodity prices. The research also answers

many questions such as does the relation between US dollar and the commodity prices

vary with the changing circumstances in the world economy and the relevant markets?

Does the link between both of them is equally strong both during the times, when dollar

is rising and falling? If not, when it is stronger and why?

Methodology followeda.) To evaluate the relationship between the dollar and the commodity prices, there are

number of statistical approaches that can be used. This research study used the technique

of correlation coefficient to look at the correlation between the two.

b.) After this, the research study used static correlation analysis to evaluate the strength of

the correlation.

Major findings

a.) The static correlation analysis shows the various commodities along with their

correlation coefficients with the trade weighted dollar.

b.) This analysis indicates that the relation between the commodities and the dollar

becomes stronger when the dollar is weakening.


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c.) The strongest link among the various commodities was between Gold and US dollar.

The second strongest link was between Silver and US dollar.

d.) Another interesting fact was that the coefficients calculated for the different

commodities vary greatly. The majority of them seem too low to indicate a significant

link exists.

3. Why Gold, Not Oil, Is the Superior Predictor of Inflation By David Ranson

In November 2005, this research study was conducted by Economist David Ranson to

find out that which is a better predictor of inflation between gold and oil. It demonstrates

the extent to which the prices of commodities such as oil and gold serve as leading

indicators of unanticipated inflation and interest rates.

Methodology followed

Correlation between inflation rates, gold and oil prices.

Major conclusions were-

a.) Gold market provides more accurate information about future economic and capital

market performance than data from the oil market.

b.) Gold is also a powerful predictor of nominal interest rates, both long and short.

c.) When the price of gold rises, producer-price inflation tends to accelerate in the

following year; when the price of gold falls, it tends to decelerate.

d.) Gold is not just another commodity. Gold has served as money over the centuries

precisely because its properties were most conducive to playing that role. Its primary

function throughout history has been as a liquid store of wealth, notes an industrial input.

Even when gold is made into jewelry, it is still today a form of currency in large parts of

the world .Unlike other commodities, which are produced for consumption, gold is

produced for accumulation.


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4. Gold and Hedge Funds: A Comparative Analysis By Katharine

Pulvermacher

This research study was conducted for a period of 10 years ended in April 2004. The

main objective of this study was to analyze the relative advantages of investing in gold

bullion and hedge funds, with particular emphasis on the diversification benefits afforded

during periods of under-performance in stock markets.

Methodology Followed

For this research study, five stock market indices were included in the analysis. Returns

in this analysis are defined as the log monthly price change. The full period covered was

May 1994to April 2004, i.e. a total of 120 months. For the correlation analysis it has

calculated pair wise return correlations for the ten-year period ending 30th April 2004.

Major findings

a.) The results of analysis indicate that gold hedge funds, managed futures and gold

bullion offered superior diversification over the period covered. However, taking entry

barriers and liquidity constraints into account, it may have proved difficult or even

impossible for many investors to access these types of funds other than via funds of

hedge funds.

5. Gold Still Boiling In Oil By Adam Hamilton

A Study conducted by Adam Hamilton in the year 2002 stated the strong relationship

between Gold and the Crude oil over time. He arrived at the conclusion that the relatively

high oil prices at the time were exerting substantial upward pressure on gold prices.

Major findings

a.) In his study he emphasized the importance of Gold and Crude oil as Commodities. He

stated Gold as ultimate standard of value and Crude oil as the very lifeblood of the

modern civilization.


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b.) From 1950-1994, gold and oil had an even higher 0.920 positive correlation. From

1995 to today, however, gold and oil's mutual affinity drifted apart as the correlation

actually surprisingly fell negative, to -0.237. Back in June 2000 the post-1994 correlation

was approaching neutral but was still slightly positive at 0.067.

c.) The study also stated the relationship between gold, oil and inflation. Inflation is the

result as increasing amounts of dollars competes for a much more slowly expanding pool

of goods and services on which to spend them. Just like everywhere else in the economy,

the enormous distortions of fiat currency inflation also have great effects on the tangible

physical commodities of gold and oil.

d.) The late 1970s/early 1980s gold and oil spikes rocketed to phenomenal heights. Real

gold approached $1600 per ounce on a monthly basis! Real oil cost more than $85 per

barrel in the early months of 1980 in today's weakened 2002 dollars.

e.) The oil and gold markets have had a strong intimate relationship in the past and they

almost certainly will in the future as well.

6. Retail Gold Investments and Private Investor Stocks By Gold Fields Mineral

Services Limited

The main objective of this study which was conducted in November 2001 by gold fields

mineral services limited is to provide the market with a review of historical statistics on

private sector retail investment in gold bar and coin in 27 key countries throughout the

world.

Methodology Followed

a.) Firstly, they have to some extent used information obtained from a dedicated survey

of the main sellers of bullion products in the retail investment market.

b.) Secondly, they have used existing data on coin and bar production and sales that has

been obtained from the principal refiners, mints and dealers in these bullion products.


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c.) They also have used the annual and half-yearly GFMS statistics on bar hoarding

demand by country.

Major Conclusions

a.) There has not been much of an underlying decline in net retail investment during the

past eight years. Significantly, however, there has been a fall in expenditure on gold by

retail investors over the 1993-2000 periods.

b.) The ret

Black Gold's Yellow Relation

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