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TERM PAPER REPORT

ON

HOLISTIC ANALYSIS OF GOLD AS

A COMMODITY

BY:

KARISHMA GUPTA , SECTION C, A1802010202

MOHD. AAMIR KHAN, SECTION D, A1802010400

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ACKNOWLEDGEMENT

It is well-established fact that behind every achievement lays an unfathomable sea of

gratitude to those who have extended their support and without whom the project would

have never come into existence.

I express my gratitude to AIBS, Amity University, Noida for providing me an opportunity

to work on this term paper as a part of the curriculum.

I express my gratitude to Ms. Kshmata Chauhan, Prof. S. Niyogi, Ms. Nidhi Bhatia andMr. Archisman Sen for their kind cooperation.

Also, I would like to thank Ms. Areej Aftab and Ms. Payal Singh for their continuous

support.

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CONTENTS

Executive Summary. 4

Introduction.. 5

Gold Control Act.. 10

MMTC Limited 11

World Gold Council. 12

Gems and Jewellery Sector. 13

FTP 2009-14.............................................................................................. 16

Gold as an Investment. 19

Hong Kong Gold Scam 26

Risk associated with the trading of Gold... 27

Ways to curtail risk. 28

Gold Reserves... 29

Conclusion and Analysis.. 30

Bibliography. 32

EXECUTIVE SUMMARY

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Gold has been considered as one of the most precious metals, and its value has been used as the

standard for many currencies and has been pictured as a symbol for purity, value and royalty. In

the period following independence gold faced an open criticism as it was seen as an illusion, a

waste, and a relic of the cultural and economic backwardness of the past. With the passage of

time many reforms any policies were made in relation to gold, but with the enactment of Gold

Control Act in 1962, trading of Gold in any form was allowed. Moreover, liberalization in 1991

saw efforts to slowly revive the gold market in the country. MMTC Ltd. is Indias premier

bullion trader and helps in promoting exports from India by holding foreign exhibitions of Gold

and studded jewellery at chosen overseas location. The World Gold Council is a non-profit

association of the world's leading gold mining companies. It aims to stimulate demand forgold

from industry, consumers, and investors. The gems and jewellery sector is a major foreign

exchange earner and due to its importance in Indias foreign trade, the government has taken

many initiatives to boost the sector. There are different regulating bodies like GJEPC and

GJTCI. FTP 2009-14 provides the rules and regulations relating to import and export of Gold.

To promote the exports of gems and jewellery, the government has set up various SEZs with

specific incentives.

Gold is the most popular as an investment. Investors generally buy gold as a hedge against

economic, political, or social currency crisis. The history of the gold standard the role of gold

reserves in central banking, gold's low correlation with other commodity prices and its pricing in

relation to fiat currencies during the late 200s financial crisis suggest that gold behaves more

like a currency than a commodity. There are number of factors which affect the price of Gold

like short selling, war and jewellery and industrial demand. Moreover, investment in Gold can

be done in the form of bars, coins, certificates etc. Gold trading is done on different stock

exchanges like MCX, NCDEX and COMEX.

INTRODUCTION

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Since ages Gold has been considered as one of the most precious metals, and its value has been

used as the standard for many currencies (known as the gold standard) in history. Gold has been

pictured as a symbol for purity, value, royalty, and particularly roles that combine these

properties.

There is an age-old tradition of biting gold in order to test its authenticity. Although this is

certainly not a professional way of examining gold, the bite test should score the gold because

gold is considered a soft metal. The purer the gold the easier it should be to mark it. Gold was

relatively easy to obtain geologically; however, 75% of all gold ever produced has been

extracted since 1910.

During the 19th century, gold rushes occurred whenever large gold deposits were discovered,

including the California, Colorado, Otago, Australian, Witwatersrand, Black Hills, and Klondike

gold rushes. Because of its historically high value, much of the gold mined throughout history is

still in circulation in one form or another. 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.

Gold Policy Since Independence

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In the period following independence, the approach of economists and policymakers toward gold

was marked by open criticism. Much like their western counterparts, Indian intellectuals were

very much bothered by the artificialness of the value of gold. Gold by itself, it was asserted,

hardly adds much to production or productive capacity. Gold was seen as an illusion, a waste,a

relic of the cultural and economic backwardness of the past.

From an economic outlook, the process of gold accumulation by the private sector in India was

seen as resulting in loss of opportunities in two aspects, diversion of household savings from

productive assets and the consequent diversion of precious foreign exchange resources, adding

to the chronic demand-supply imbalance on the foreign exchange market. Excess demand for

gold was considered as one of the main reasons for the so-called external constraint, which

hindered development and technological progress. During most part of the period under the

British rule, there was no restriction on movement of gold and silver into and out of India.

The practice of metallic standards resulted in gold and silver flows for monetary and non-

monetary purposes. During the year 1717 and 1835, there was tri-metallism, involving gold,

silver and copper. For the next 60 years or so, silver coin was the legal tender. The silver

standard was abandoned in 1892, almost twenty years after all major countries had done so. The

gold exchange standard started from 1898 until the outbreak of the First World War in 1914.

During the First World War there was an attempt on the part of the government to control

imported gold: this was nullified after the end of the War. During the Second World War,

restrictions on import and export of gold were imposed, and prior permission of the Reserve

Bank of India (RBI, which came into existence in 1935) was made compulsory for external trade

in gold. Following the end of the Second World War, the wartime restrictions were withdrawn.

However, this phase was brought to an end with the introduction of the Foreign Exchange

Regulation Act (FERA) in 1947 by the new government of independent India.

By virtue of the provisions of this Act, a complete ban on exports and imports of gold was

imposed.

The restrictions in respect of gold fitted well in the policy regime in respect of the external

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sector, which involved a complex web of controls in respect of all external transactions. An

interesting feature of the control regime was that it prohibited all transactions between residents

and non-residents, unless specifically permitted. Gold was treated as an alternate for foreign

exchange, conservation of which was the main objective of the Act of 1947 and its successor

legislation enacted in 1973.

The next important policy actions in respect of gold were undertaken in 1956, when gold

mining/production facilities at Kolar in the southern state of Mysore were nationalized by the

provincial government. This was intended to impose government control over gold production

so that the government could directly acquire the gold output. In the same year, the proportional

reserve system was abolished and replaced by a minimum absolute level for foreign assets for

the RBI at Rs 2 billion for currency issue purposes.

Also, the gold holding of the RBI was revalued in 1956. The RBIs gold stock was revalued

once again in 1969 to reflect the effect of the 36.5% devaluation of the Indian rupee against the

US dollar in 1966. Finally in 1990, an amendment to the RBI Act was carried out for marking

the gold stock to market at regular intervals.

The policy approach toward gold was introduced with the objectives of self-reliance, planned

development using domestic resources, and import substitution with reduced priority for external

trade. Additionally, the policy on gold was intended to de-emphasize gold for the private sector,

with the following objectives:

(i) To reduce demand for, as well as availability of gold.

(ii) To alter the savings preferences of the population in favour of investments other than

gold/silver.

(iii) To stop gold smuggling.

(iv) To prevent generation of black money.

(v) To conserve foreign exchange resources.

An important policy action with regard to gold was taken in late 1962 in the wake of a border

conflict with China. Commercial banks were ordered to recall all gold loans in November 1962,

which coincided with the flotation of a 15-year 6.5% gold bond by the government, garnering

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16.3 tonnes from the public. At the same time, forward trading in gold was banned. This was

followed by the proclamation of gold control rules by the government in mid-1963 which,

among other things, banned production of gold jewellery/bars of more than 14 carat fineness. All

jewellers, big and small, were subjected to record-keeping requirements as regards purchase,

production and sales.

Individuals/families were permitted to hold gold only in the form of jewellery, subject to

quantitative ceilings. In the following year, government control over domestic transactions in

gold was more or less complete. Although in the next few years the 14 carat fineness ceiling

requirement was relaxed to some extent, the control regime took a legal shape with the passage

of the Gold (Control) Act in 1962.

The gold bond issues from time to time reflected the fiscal motive of the government. The

mobilised gold was used to raise rupee resources from the RBI. In the same vein, the

government decided to sell gold from its own stock in 1977-78 by way of auctions in order to

curb a rapidly rising fiscal deficit. However, the step faced a bombardment of criticism and sale

was abruptly stopped after only 13 tonnes were sold for Rs 870 million.

India is the largest consumer of gold in the world. Enactment of Gold Control Act in 1962promised gold trade in any form, which continued for almost 30 years. Liberalization in 1991

saw efforts to slowly revive the gold market in the country, in sync with the other sectors of

economy. Thus, since 1991, demand for gold has been increasingly met by official imports. The

results are obvious in the form of reduced smuggling, unofficial premiums and enhanced

government revenue, by way of customs and sales tariffs. The increasing gold trade deserves an

efficient bullion exchange in India, for which there is a need to develop an efficient spot and

forwards market, sufficient liquidity, regular, safe and cheap supply system with good delivery

standards.

As per the present status of gold reserve is concerned, India ranks no. 11 with reserves

upto 557.7 tonnes. Gold constitutes 8.7 per cent of the total forex reserves .

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The recent decision of the International Monetary Fund & other central bankers against selling

gold for the next five years signifies the faith placed in this metal by the leading economies of

the world. Gold will continue to play a decisive role in world economy in the next millennium.

GOLD CONTROL ACT

The Gold Control Act was legislation enacted in India in 1962. After the Indo-China War in

1962, due to loss offoreign exchange reserves, the government of India enacted the Gold

Control Act, prohibiting the citizens from holding pure gold bars and coins. The old holdings in

pure gold had to be compulsorily converted into jewellery and had to be declared. Only licensed

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either recycled or smuggled gold. This legislation killed the official gold market and a large

unofficial market bounced up dealing in cash only. The gold was smuggled in and sold through

the unofficial channel wherein, many jewelers and bullion traders traded in smuggled gold. A

huge black market developed for gold.

Gold Smith was unorganized labour force and could not cope with the new developed situation.

Only a few could get the licence to hold the gold and that too in a very small quantity i.e. only

300 gms, with the result that the people, who were depending only on their traditional

occupation of making gold ornaments, lost their business and their financial condition

deteriorated.

In 1990, India had major foreign exchange problems and was on verge of default on external

liabilities. The Indian Govt. pledged 40 tonnes gold from their reserves with the Bank ofEngland and saved itself. Subsequently, India embarked upon the path of economic

liberalization. The era of licensing gradually faded out. The gold market also benefited because

the government abolished the 1962 Gold Control Act in 1992 and liberalized the gold import

into India on payment of a duty of Rs.250 per ten grams. The government thought it safer to

allow free imports and earn the taxes rather than to lose it all to unofficial channel.

From official imports in 1991, India officially imported more than 110 tonnes of gold in 1992,

which now stands about 918 tonnes in a year.

MMTC (Minerals and Metals Trading Corporation)

The Company was incorporated on 26 September, 1963 at New Delhi. The Corporation started

functioning on 1 October. The main objective of the company was export ofmineral ores

and import of essential metals.MMTC Limited is Indias premier bullion trader, handling more

than 185 MTs of Gold and 690 MTs of Silver.

MMTCs precious metal division is into a range of activities covering exports, imports and

domestic retail trade. It helps in promoting exports from India by holding foreign exhibitions of

Gold and studded jewellery at chosen overseas location. It is an authorized agency of the

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Government of India for import of Gold, Silver, rough Diamonds and other semi-precious stones

and supplies these items to jewellers in India for domestic sales and exports.

Since the year 1996, it is into manufacturing of its own brand of Gold and Silver medallions and

also customized requirements for Corporate and Institutional orders are serviced from their unit.

MMTC supplies gold on loan and outright basis to the exporter, bullion dealers and jewellery

manufacturers on all India basis.

It is the largest international trading company of India and the first Public SectorEnterprise to

be accorded the status of FIVE STAR EXPORT HOUSE by Government of India for long

standing contribution to exports. Being the largest player inbullion trade, including retailing,

MMTC's share was 146 tonnes ofgold out of the total import of 600 tonnes of the precious

metal in 2008-09.

MMTC expects to import around 275 tonnes of Gold in 2011-12, as compared to the 245 tonnes

that it brought in a year ago. This comes in because of the volatile market conditions due to

which the yellow metals value as a safe haven has become strong. In the current fiscal year the

import of Gold by MMTC would jump by more than 40% given the brisk sales. According to

reports, India is the worlds largest consumer of Gold and Silver that buys more than 4,000

tonnes of Silver and over 960 tonnes of Gold annually.

World Gold Council

The World Gold Council is a non-profit association of the world's leading gold

mining companies. It was established in 1987 to promote the use of gold. It aims to stimulate

demand forgold from industry, consumers, and investors.

The World Gold Council is the market development organisation for the gold industry. It works

within the investment,jewellery and technology sectors, and also engages in government affairs.

It develops gold-backed solutions, services and markets, based on true market insight. It

provides insights into the international gold markets, helping people to better understand the

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wealth preservation qualities of gold and its role in meeting the social and environmental needs

of society.

It is based in the UK, with operations in India, the Far East, Turkey, Europe and the USA. The

World Gold Council is an association whose 22 members comprise the worlds leading gold

mining companies, representing approximately 60% of global corporate gold production.

The roles played by World Gold Council in various sectors are very diverse. In

the Investment sector, they make gold fundamental to investment decision making.

ForGovernments and Central Banks, they are a trusted advisor to policy makers and reserve

asset managers on all matters related to the gold market.

In the Jewellery sector, they create new ideas which increase the significance of gold when

given or worn. In the Technology sector, they work to place gold at the core of technological

advancement, and they are also the authority on innovative uses of gold in industry and society.

The key markets for jewellery of Gold according to World Gold Council are India, China and

USA. India is the largest market for gold jewellery in the world, representing a staggering 746

tonnes of gold in 2010. China is the fastest-growing market for gold jewellery in the world.

China accounted for 4000 tonnes of Gold in the year 2010. The demand for Gold jewellery in

USA has been more than 129 tonnes in the year ending 2010.

GEMS AND JEWELLERY SECTOR

The gems and jewellery sector is a major foreign exchange earner. Due to its importance in

Indias foreign trade, the government has taken many initiatives to boost the sector. The

government, for instance, has declared this sector as a thrust area for exports.

Regulating Bodies

1. Gems & Jewellery Export Promotion Council (GJEPC): Established in 1966, the GJEPC

is the apex body of the Indian gems and jewellery industry, and has around 6,500 members

across India. The primary goal of the Council is to introduce the Indian gems and jewellery to

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the international market and to promote their exports. The Council provides market information

to its members regarding foreign trade inquiries, trade and tariff regulations, rates of import

duties, and information about jewellery fairs and exhibitions. The roles played by the GJPEC

are broadly highlighted below:

a) Trade Facilitator

The Council promotes the Indian gems and jewellery industry in the international market. It

organises international jewellery shows, hosts trade delegations, and undertakes image-building

exercises through advertisements, publications and audio-visual means.

b) Advisory Role

The Council also aids better interaction and understanding between traders and government.

The Council takes up relevant issues with the government and agencies connected with exports.

It also submits documents for consideration and inclusion in the Exim Policy.

c) Nodal Agency for Kimberley Process Certification Scheme

GJEPC works closely with the Indian government and the traders to implement and oversee the

Kimberley Process Certification Scheme; in fact, the Council has been appointed as the nodal

agency in India under the Kimberley Process Certification Scheme.

d) Training and Research

The GJEPC runs many institutes that provide training in all aspects of manufacturing and

design in Mumbai, Delhi, Surat and Jaipur.

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e) Varied Interests

The Council publishes many brochures, statistical booklets, trade directories and a bi-monthly

magazine - Solitaire International, which is distributed internationally as well as to itsmembers.

2. Gem & Jewellery Trade Council of India (GJTCI): The GJTCI was founded in 2000, and

is tasked with resolving any issue arising from trade in gems and jewellery. It plays an

important role in showcasing the Indian gems and jewellery to the international as well as the

domestic market. Like the GJEPC, GJTCI also provides information to its members through a

monthly newsletter, various educative and trade-motivational events such as seminars,

workshops, exhibitions, festivals etc.

3. The Bureau of Indian Standards: The Bureau of Indian Standards (BIS), the National

Standards Body of India, is a statutory body set up under the Bureau of Indian Standards Act,

1986 and is responsible for hallmarking gold jewellery in India.

Foreign Direct Investment Policy

At present, the Indian government allows 100% foreign direct investment (FDI) in gems

and jewellery through the automatic route.

For exploration and mining of diamonds and precious stones FDI is allowed up to 74%

under the automatic route.

For exploration and mining of gold and silver and minerals other than diamonds and precious stones, metallurgy and processing, FDI is allowed up to 100% under the

automatic route.

Government Initiatives to Boost the Sector

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Customs Duty on Gold and Silver

Customs duty on serially numbered gold bars (other than tola bars) and gold coins to be

increased from Rs 200 per 10 gram to Rs 300 per 10 gram. Customs duty on silver to be increased from Rs 1000 per kg to Rs 1,500 per kg.

Export Facilitation Measures by the Ministry of Commerce and Industry

Further, in February 2009, the gems and jewellery sector got a special boost from the Ministry

of Commerce with the following announcements: Gems and jewellery, diamonds and precious

metals were given a special boost by the Ministry of Commerce and Industry, the Export

Promotion Council for Gems and Jewellery and Star Trading Houses (in the gems andjewellery sector). Besides, the Diamond India Ltd, MSTC Ltd and STCL Ltd were added under

the list of nominated agencies notified under Para 4 A.4 of foreign trade policy for the import

of precious metals.

Surat, Gujarat has been given the recognition of a town of export excellence, because it

is home to thousands of diamond units that employ many diamond workers. The authorised persons of gems and jewellery units in export-oriented units will be

allowed to carry personal carriage of gold in primary form up to 10 kg in a financial year

subject to the RBI and customs guidelines.

Import restrictions on worked corals have been removed to address the grievance of gem

and jewellery exporters.

Foreign Trade Policy 2009-2014

Foreign Trade Policy has identified the gems and jewellery sector as a thrust area with

prospects for export expansion and employment generation. The highlights of the policy are:

a. Import of gold of 8 carat and above allowed under replenishment scheme subject to

import being accompanied by an Assay Certificate specifying purity, weight and alloy

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content.

b. Duty Free Import Entitlement (based on FOB value of exports during the previous

financial year) of consumables and tools, for:

1. Jewellery made out of:

i. Precious metals (other than gold and platinum) 2%

ii. Gold and platinum 1%

iii. Rhodium finished silver 3%

2. Cut and polished diamonds 1%

3. Duty free import entitlement of consumables for metals other than gold, platinum

will be 2% of FOB value of exports during the previous financial year.

c. Duty-free import entitlement of commercial samples shall be Rs 300,000.d. Duty free re-import entitlement for rejected jewellery shall be 2% of FOB value of

exports.

e. Import of diamonds on consignment basis for certification/ grading and re-export by the

authorised offices/agencies of Gemological Institute of America (GIA) in India or other

approved agencies will be permitted.

f. To promote export of gems and jewellery products, the value limits of personal carriage

of gems and jewellery products in case of holding/participating in overseas exhibitions

increased to US$ 5 mn and to US$ 1 mn in case of export promotion tours. Further, the

limit in case of personal carriage, as samples, for export promotion tours, has been

increased from US$ 0.1 mn to US$ 1 mn.

g. Extension in number of days for re-import of unsold items in case of participation in an

exhibition in the US increased to 90 days.

h. In an endeavour to make India a diamond international trading hub, diamond bourses

will be planned.

i. Gems and jewellery units may sell up to 10% of FOB value of exports of the preceding

year in Domestic Tariff Area (DTA), subject to fulfilment of positive Net Foreign

Exchange (NFE). In respect of sale of plain jewellery, recipient shall pay concessional

rate of duty as applicable to sale from nominated agencies.

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In order to boost the gems and jewellery sector, the value addition norms were reduced in the

FTP 2009-14. Earlier, owing to abrupt fluctuation in gold prices, exporters were unable to

comply with the previous high value addition norms.

Under the scheme for export of jewellery, value addition shall be calculated as per paragraph 4

A.6 of FTP. Minimum value addition shall be:

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Special Economic Zones (SEZ)

To promote the exports of gems and jewellery, the government has set up various SEZs with

specific incentives. Some important government policies relating to SEZs in the gems andjewellery sector are highlighted below:

A gem and jewellery unit may receive plain gold or silver or platinum jewellery from the

Domestic Tariff Area or from an EOU or from a unit in the same or another SEZ in

exchange of equivalent content of gold or silver or platinum contained in the said

jewellery after adjusting permissible wastage or manufacturing loss allowed under the

provisions of the Foreign Trade Policy read with the handbook of procedures.

The DTA Unit undertaking sub-contracting or supplying jewellery against exchange of

gold or silver or platinum shall not be entitled to export entitlements.

GOLD AS AN INVESTMENT

Gold is the most popular as an investment. Investors generally buy gold as a hedge against

economic, political, or social currency crises. The gold market is subject to speculation,

especially through the use of future contracts and derivatives. The history of the gold standard

the role of gold reserves in central banking, gold's low correlation with other commodity pricesand its pricing in relation to fiat currencies during the late 200s financial crisis suggest that gold

behaves more like a currency than a commodity.

Since 1919 the most common benchmark for the price of gold has been the London gold fixing.

Furthermore, gold is traded continuously throughout the world based on the intra-day spot price,

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derived from over-the-counter gold-trading markets around the world (code "XAU").

On August 22, 2011 gold reached a new record high of $1908.00 at the London Gold Fixing.

Factors related to gold prices

The price of gold is driven by supply and demand as well as speculation. There is a huge

quantity of gold stored above-ground. The price of gold is mainly affected by changes in

demand, rather than changes in annual production (supply). According to the World Gold

Council, annual mine production of gold over the last few years has been close to 2,500

tonnes. About 2,000 tonnes goes into jewellery or industrial production, and around 500 tonnes

goes to retail investors and exchange traded gold funds.

Central banks

Central banks and the International Monetary Fundplay an important role in the gold price. At

the end of 2004central banks and official organizations held 19 percent of all above-ground

gold as official gold reserves. European central banks, such as the Bank of England and Swiss

National Bank, were key sellers of gold over this period. In 2009, this agreement was extended

for a further five years, but with a smaller annual sales limit of 400 tonnes.

In early 2006, China which only holds 1.3% of its reserves in gold, announced that it waslooking for ways to improve the returns on its official reserves.

Some people hope that this signals that Chinamight reposition more of its holdings into gold in

line with other Central Banks. India has recently purchased over 200 tonnes of gold which has

led to a surge in prices.

It is generally accepted that interest rates are closely related to the price of gold. As interest rates

rise the gold price fall, and as rates dip gold price rise. As a result, gold price can be closely

correlated to central banks via the monetary policy decisions made by them related to interest

rates.

Hedge against financial stress

Gold may be used as a hedgeagainst inflation,deflation or currency devaluation. If the return on

bonds, equities and real estate is not adequately compensating for risk and inflation then the

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demand for gold and other alternative investments such as commodities increases. An example

of this is the period ofstagflationthat occurred during the 1970s and which led to an economic

bubbleforming inprecious metals.

Jewellery and industrial demand

Jewel lery consistently accounts for over two-thirds of annual gold demand. India is the largest

consumer in volume terms, accounting for 27% of demand in 2009, followed by China and the

USA. Industrial, dentistry and medical uses account for around 12% of gold demand. Gold has

high thermal and electrical conductivity properties, along with a high resistance to corrosion and

bacterial colonization. Jewellery and industrial demand has fluctuated over the past few years

due to the steady expansion in emerging markets of middle classes aspiring to Western

lifestyles, beginning of thefinancial crisis of 20072010.

Short selling

The price of gold is also affected by various well-documented mechanisms of artificial price

suppression, arising fromfractional-reserve bankingand short selling in gold, and particularly

involving the London Bullion Market Association, the United States Federal Reserve System,

and the banks HSBC and JPMorgan Chase. Gold market observers have noted for many years

that the price of gold tends to fall artificially at the start of New York trading.

War, invasion and national emergency

When dollars were fully convertible into gold via the gold standard, both were regarded as

money. However, most people preferred to carry around paper bank notesrather than the

heavier and less divisible gold coins. If people feared their bank would fail, abank run might

result. In times of war people fear that their assets may be seized and that the currency may

become worthless. They see gold as a solid asset which will always buy food or transportation.

Thus in times of great uncertainty, particularly when war is feared, the demand for gold rises.

Investment of Gold

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Bars

The most traditional way of investing in gold is by buying bullion gold bars. In some countries,

like Canada, Argentina, Austria, Liechtenstein and Switzerland, these can easily be bought or

sold at the major banks. Alternatively, there are bullion dealers that provide the same service.

Bars are available in various sizes. For example in Europe, Good Delivery bars are

approximately 400 troy ounces (12 kg). 1 kilogram (32 ozt) are also popular, although many

other weights exist, such as the 10oz, 1oz, 10 g, 100 g, 1 kg, 1 Tael, and 1 Tola.

Bars generally carry lower price premiums than gold bullion coins. However larger bars carry an

increased risk of forgery due to their less stringent parameters for appearance. While bullion

coins can be easily weighed and measured against known values, most bars cannot, and gold

buyers often have bars re-checked. Larger bars also have a greater volume in which to create a

partial forgery using a tungsten-filled cavity, which may not be revealed by an assay.

Coins

Gold coins are a common way of owning gold. Bullion coins are priced according to theirfine

weight, plus a small premium based on supply and demand . The Krugerrand is the most widely-

held gold bullion coin, with 46,000,000 troy ounces (1,400 tonnes) in circulation.

Other common gold bullion coins include the Australian Gold Nugget(Kangaroo), Austrian

Philharmoniker (Philharmonic), Austrian 100 Corona, Canadian Gold Maple Leaf, Chinese

Gold Panda,Malaysian Kijang Emas, French Napoleonor Louis d'Or,Mexican Gold 50

Peso,British Sovereign, American Gold Eagle, andAmerican Buffalo. Coins may be purchased

from a variety of dealers both large and small. Fake gold coins are not uncommon, and are

usually made of gold-plated lead.

Exchange-traded products (ETPs)

Gold exchange-traded productsmay include ETFs, ETNs, and CEFs which are traded like

shares on the major stock exchanges. The first gold ETF, Gold Bullion Securities (ticker symbol

"GOLD"), was launched in March 2003 on theAustralian Stock Exchange, and originally

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represented exactly 0.1 troy ounces (3.1 g) of gold. As of November 2010,SPDR Gold Shares is

the second-largestexchange-traded fund(ETF) in the world by market capitalization.

ETF shares can be sold in basically two ways. Theinvestors can sell the individual shares to

other investors, or they can sell the Creation Units back to the ETF. In addition, ETFs generally

redeem Creation Units by giving investors the securities that comprise the portfolio instead of

cash. Because of the limited redeemability of ETF shares, ETFs are not considered to be and

may not call themselves mutual funds.

Certificates

Gold certificates allow gold investors to avoid the risks and costs associated with the transfer

and storage of physical bullions by taking on a different set of risks and costs associated with the

certificate itself (such as commissions, storage fees, and various types ofcredit risk).

Banks may issue gold certificates for gold which is allocated(non-fungible)

orunallocated(fungible or pooled). Unallocated gold certificates are a form offractional

reserve bankingand do not guarantee an equal exchange for metal in the event of a run on the

issuing bank's gold on deposit.

Allocated gold certificates should be correlated with specific numbered bars, although it is

difficult to determine whether a bank is improperly allocating a single bar to more than one

party.

The first paper bank notes were gold certificates. They were first issued in the 17th century

when they were used by goldsmiths inEnglandand theNetherlands for customers who kept

deposits of gold bullion in their vault for safe-keeping. Two centuries later, the gold certificates

began being issued in the United States when the US Treasury issued such certificates that could

be exchanged for gold. The United States Government first authorized the use of the gold

certificates in 1863. In the early 1930s the US Government restricted the private gold ownership

in the United States and therefore, the gold certificates stopped circulating as money. Nowadays,

gold certificates are still issued by gold pool programs inAustralia and the United States, as well

as by banks in Germanyand Switzerland.

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Accounts

Many types of gold "accounts" are available. Different accounts impose varying types of

intermediation between the client and their gold. One of the most important differences between

accounts is whether the gold is held on an allocated (non-fungible) or unallocated (fungible)

basis. Another major difference is the strength of the account holder's claim on the gold, in the

event that the account administrator faces gold-denominatedliabilities(due to a short ornaked

shortpositionin gold) for example,asset forfeiture, orbankruptcy.

Derivatives, CFDs and spread betting

Derivatives, such as gold forwards, futures andoptions, currently trade on various exchanges

around the world and over-the-counter(OTC) directly in the private market. In the U.S., gold

futures are primarily traded on the New York Commodities Exchange ( COMEX). In India, goldfutures are traded on theNational Commodity and Derivatives Exchange(NCDEX) and Multi

Commodity Exchange(MCX).

The product symbol for gold futures is GC, and it is traded in a standard contract size of 100

troy ounces. CME Globex, CME ClearPort (CME Group) and Open Outcry (New York) are the

primaryfutures exchangevenues through which it is traded. The minimum fluctuation allowed

in price is $0.10 per troy ounce, and it is held to a minimum of 995 fineness quality

specification.

MCX (Multi Commodity Exchange)

In India, the Gold trading is done through MCX i.e., Multi Commodity Exchange. It was

established in 2003 and is based in Mumbai. It offers futures trading in bullion, ferrous and non-

ferrous metals, energy and a number of agricultural commodities. It is regulated by Forwards

Market Commission. Commodity broking and clearing member agency of MCX is the

franchising partner of National Spot Exchange to provide e-gold and e-silver services.

Globally, MCX ranks no. 2 in Gold in terms of future contracts. In the year 2008, it received the

award of the Best Bullion Exchange of the Year from the Bombay Bullion Association.

NCDEX (National Commodity and Derivatives Exchange Limited)

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It is a public limited company which was incorporated on 23rd April, 2003. It started its

operation on 15th December. It is a nation-level, technology driven de-mutualised online multi

commodity exchange. Some of the shareholders are LIC, NABARD, NSE, PNB and IFFCO.

Both agricultural and non-agricultural products are traded on this exchange.

COMEX (COMMODITIES EXCHANGE)

CME Group is the worlds leading and the most diverse derivatives market place. It is

comprised of four designated contract markets that are CME, CBOT, NYMEX and COMEX.

COMEX deals in the trading of metals like Gold, Silver and Copper. It is based in New York

and has worldwide offices.

The standard COMEX gold contract is 100 troy ounces about 3.1kg. COMEX traded volume

exceeds 40,000 contracts daily - or 120 tonnes. This is about 17 times as much gold as is

produced worldwide on a typical day.

Mining companies

These do not represent gold at all, but rather are sharesingold mining companies. If the gold

price rises, the profits of the gold mining company could be expected to rise and as a result theshare price may rise. However, there are many factors to take into account and it is not always

the case that a share price will rise when the gold price increases. Mines are commercial

enterprises and subject to problems such asflooding, subsidence and structural failure, as well

as mismanagement, theft and corruption. Such factors can lower the share prices of mining

companies.

Investment Strategies

Fundamental analysis

Investors using fundamental analysis analyze the macroeconomic situations which include

economic indicators such as GDP growth rates, inflation, interest rates, productivity and energy

prices. They would also analyze the yearly global gold supply versus demand. Over 2005

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the World Gold Council estimated yearly global gold supply to be 3,859 tonnes and demand to

be 3,754 tonnes, giving a surplus of 105 tonnes.

Gold versus stocks

In the last century, during major economic crisis such as the Great Depression and World War II

many investors tried to preserve their assets by investing in precious metals, most notably gold

and silver. The performance of gold bullion is often compared to stocks due to their fundamental

differences. Gold is regarded by some as a store of value whereas stocks are regarded as a return

on value. Stocks and bonds perform best in a stable political climate with strong property rights

and little turmoil.

Technical analysis

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 trendsand/or theeconomic cyclein order to speculate on the future price.

Using leverage

Bullishinvestors may choose to leveragetheir position by borrowing money against their

existing assets and then purchasing gold on account with the loaned funds. Leverage is also anintegral part of buying gold derivatives and unhedgedgold mining company shares . Leverage

or derivatives may increase investment gains but also increases the corresponding risk of capital

loss if/when the trend reverses.

HONG KONG GOLD SCAM

In the year 2010, alarm bells rang in Hong Kong's gold industry when it was discovered that

several well-known jewelry stores were duped into buying fake gold. In this scam, the fake gold

was a mixture of about 50% real gold bullion and 50% different alloys like copper, iron and

rhodium. Normally, a jeweler will inspect scrap gold by literally scraping the gold and heating

it. If the gold changes color, that's a red flag and it is a faux . The fake gold nuggets and gold

scraps looked real because it was coated with pure gold. Jewelers did not discover the fraud until

the metal was melted down and irregularities appeared.

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The jewelers lost about HK $2- 3 million (US$260,000-$387,000) because of the scam. Among

the fakes discovered in Hong Kong was a specimen with pure gold coating that masked a

complex alloy with similar properties to the precious metal, suggesting fraudsters used

sophisticated techniques and equipment. The fakes were difficult to detect by sight or touch, and

were revealed by high-tech tests involving high temperatures and chemicals. The Luk Fook

Group, one of Hong Kong's biggest jewellers, was also tricked into buying almost 12,000 US

dollars worth of fake gold until it discovered the scam.

The scam targeted the sale of scrap gold to jewellers, not the bigger market for gold bars.

In Singapore, one measure to prevent the incidence of fraud was that sellers were required by

law to note down their identity card or passport numbers. The records were routinely checked by

authorities.

RISK ASSOCIATED WITH THE TRADING OF GOLD

Gold is one of the most precious tradable instruments that are universally accepted in any type of

economy. Moreover, there are also a lot of financial opportunities that one can enjoy if one

engages into gold trading. But at the same time there are lots of risks associated with this kind

of trading.

There are at least four risks of gold trading that must be considered and addressed accordingly.

These are all related to the scarcity of the supply of gold, which results to instability in prices,

the usual possibility of hoarding, the liquidity issue of gold as well as the risks caused by

varying forms of gold.

Thefirstcommon risk of gold trading is brought by the scarcity of its supply. It is too precious

because it is rarely found. Moreover, extracting it from the earth is too hard and costly. Just agram of it will already cost a lot of money because it will incurs thousands of money, resources

and time just to excavate it.

This aspect is one of the reasons of the secondrisk of gold trading, which is its instable price.

There are mechanisms that provide price monitoring of gold in the world market. There are

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times the its price goes up, which is beneficial for some sellers of gold, while there are also some

occasions where its price goes abnormally down. It is all because of the unpredictable

characteristic of its price.

The thirdrisk of gold trading has something to do with hoarding. There are some people who

want to take advantage of the scarcity of its supply. What some people do is actually buy some

today and get hold of it until they think the price is already high or advantageous enough for

them. This is because if the current price of gold is higher compared to the price when you

bought it that is equivalent to your profit or gain. This is also a tactic to intentionally and

artificially further affect the price of gold by making its supply more limited and scarce than

normal.

Thefourth most common risk associated with it is its liquidity. The original form of gold is the

least liquid among the financial instruments that you can trade today.

WAYS TO CURTAIL RISK

An alternative investment class or a commercial hedge, gold and silverfutures contracts can be a

viable way to curtail risk against inflation. The gold and silver futures contracts trading involves

substantial risks, and investors could lose more than they originally invested.

Hedgers use these contracts as a way to manage their price risk on an expected purchase or sale

of the physical metal. They also provide speculators with an opportunity to participate in the

markets without any physical backing.

There are two different positions that can be taken: A long (buy) position is an obligation to

accept delivery of the physical metal, while a short (sell) position is the obligation to make

delivery. The great majority of futures contracts are offset prior to the delivery date.

The exchanges in which gold/silver futures are traded offer participants no counterparty risks;

this is ensured by the exchanges' clearing services. The exchange acts as a buyer to every seller

and vice versa, decreasing the risk should either party default on its responsibilities.

The metal futures market helps hedgers reduce the risk associated with adverse price movements

in the cash market. Examples of hedgers include bank vaults, mines, manufacturers and

jewellers.

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GOLD RESERVES

A gold reserve is the gold held by a central bankor nation. It means that the gold is used as

a store of value and as a guarantee to payoff depositors, note holders (e.g., paper money), or

trading peers, or to secure a currency. Today, gold reserves are almost exclusively, used in the

settlement of international transactions. At the end of 2004, central banks and investment funds

held 19% of all above-ground gold asbank reserve assets.

The world consumption of gold is 50 percent in jewellery, 40 percent in investment and 10

percent in industry.

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Source: World Official Gold Holdings as of September 2011, World Gold Council

CONCLUSION AND ANALYSIS

Gold has been a valuable and highly sought after precious metal for coinage, jewellery and other

arts since long before the beginning of the recorded history. Since ages gold has always

maintained its worth and importance. It has been a valuable asset for both country and people.

We have seen that gold has always been on the move given its shape and weight.

The value of gold has risen over the period of time, and this metal has been the reason of worry

for many. The various regulatory bodies and the rules followed for the trading of gold is thus

very essential. All the countries have their own means and ways to control the trade of gold. All

the countries have started taking some strict actions to control the trade of gold. Gold is one of

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the reserves for any country in the world right now. The countries maintain some definite amount

of gold as a reserve to contain inflation and sudden abruptness in the economy.

There are certain tools which the country has, to overcome any sort of problem in the economy.

When the countries feel the need of foreign exchange, they trade off the gold in exchange of the

desired currency. Gold may be used as a hedge against inflation, deflation or currency

devaluation. If the return on bonds and equities does not provide adequate compensation for risk

then the demand for gold increases.

Trading of gold is done on various stock exchanges like MCX, NCDEX, COMEX and TOCOM.

If the trader wants to trade the gold then it has to enter into a futures contract or spot market

contract. An investor has a complete choice to decide in which form of gold he wants to invest,

i.e., bars, coins, ETPs, certificates and derivatives. The major risk that the investor faces is

related to the price of gold which is again driven by supply and demand, as well as speculation.

In order to minimize his risk, an investor exercises hedging and arbitration.

According to recent developments in the world market, gold has shown an exponential growth

due to certain events like US debt crisis and Euro Zone crisis. The two events have turned the

world upside down, which has forced all the countries to look into their gold reserves for help.

This sudden happening has also made gold rates volatile.

In the past few months golds price variation is directly proportional to the performance of world

market. Gold prices in India have gained 29 percent since the start of the year, compared with

just 15 percent gains in the stock market.

The council expects gold prices on India Multi Commodity Exchange to stabilise in between

27,000 rupees and 28,000 rupees ($549-$569) per 10 grams in October. This will boost demand

during Dhanteras, the biggest gold buying festival, along with Diwali.

are expected to scale record highs next year as the asset's bullish fundamentals outdo the current

macroeconomic uncertainty that led to a recent selloff in the precious metal.

Central banks are looking to diversify from the once-upon-a-time risk-free government bonds,

and gold is viewed as an attractive alternative. Not so much due to gold's own merits, but more

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by lack of a better choice. Spot gold has risen by nearly 17 per cent so far this year, having hit a

record $11,920.20 an ounce in early September before diving by over $300. It has since rallied to

trade at around $1,670. Apart from central bank buying, gold prices are also supported by the

sovereign debt crisis in Europe, a weak dollar and the Swiss franc's diminishing attractiveness as

a safe haven after the government capped the currency's rise.

The gold has been volatile for the past few months, but this has not deterred the buying behavior

of the people towards gold. Apparently, it is not just the people but the countries too which are

moving towards gold in order to overcome their grievances with the never ending situation of

speculative economic slowdown and Greece fall down. This has certainly cemented the golds

position as a brand in itself. All the countries and people are trying to strategically use this gold

brand to open their wings in this free world.

BIBLIOGRAPHY

http://www.mmtclimited.com

http://www.eouindia.gov.in/epc_cir_054.htm

http://www.livemint.com/2009/03/26162136/Gold-exports-ooze-from-India.html

http://www.eximguru.com/export-import-news/Gold-jewellery-exports-from-India-

4603.aspx

http://www.dnb.co.in/IndianGemsandJewellerySector/Regulations.asp

http://economictimes.indiatimes.com/

http://economictimes.indiatimes.com/

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http://www.hkbea.com/hk/ib/gold_margin/index.htm

http://www.investopedia.com/articles/optioninvestor/06/goldsilverfutures.asp#axzz1

awirqSKn

http://www.galmarley.com/framesets/fs_trading_gold_futures_faqs.htm