Gold as an asset class

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Gold as an Asset Class

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Contents

1. Introduction to GoldGold Market.

2. Gold Demand & Supply Trends.

3. Why invest in GoldGold ?

4. How to take an exposure in GoldGold.

5. Is the price of GoldGold getting real ?

6. GoldGold at NCDEX

3Forward-looking statement (disclaimer)

The information and opinions contained in this presentation have been obtained from sources believed to be reliable, but no representation or warranty, express or implied, is made that such information is accurate or complete and it should not be relied upon as such. This presentation does not purport to make any recommendation or provide investment advice to the effect that any gold related transaction is appropriate for all investment objectives, financial situations or particular needs. Prior to making any investment decisions investors should seek advice from their advisors on whether any part of this presentation is appropriate to their specific circumstances. This presentation is not, and should not be construed as, an offer or solicitation to buy or sell gold or any gold related products. Expressions of opinion are those of the NCDEX only and are subject to change without notice.

4Above the Ground Stocks of Gold

Global Stocks - 1,55,500 tons

(end 2005) = Rs 148,00,000 cr = $ 3,200,000 mn.

of which,Indian Public holds 10% or 15,000 tons += Rs 14,00,000 cr

compared to,Rs 800,000 cr in banksRs 90,000 cr in Mutual Funds

Gold Price: Rs 9,500$ Price: Rs 46

J ewellery52%

Govt & Banks 18%

Private Investment

(Bars & Coins)16%

Industrial & Dental12%

Lost & Unallocated

2%

5Annual demand for Gold exceeds primary supply

Mine Production and Total Demand for Gold

0

500

1000

1500

2000

2500

3000

3500

4000

4500

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Tonn

es

0

50

100

150

200

250

300

350

400

450

500

US$/oz.

Mine ProductionTotal DemandGold price (annual average) US$/oz

Data: GFMS Ltd.

Newly mined gold does not satisfy the demand for gold jewellery each year

6Steadily increasing Gold jewellery demand

• The top 7 countries account for 60% of the total Jewellery consumption. • Jewellery consumption increased by 10% over last 5 yrs & 18% in the last 3

yrs

-

5,000

10,000

15,000

20,000

25,000$ mio.

1992 1994 1996 1998 2000 2002 2004

Italy

UAE

SaudiArabiaTurkey

China

USA

India

7Investment demand for Gold fuelling the price increases

• Investment Demand up by 35% over last 5 yrs & 56% in the last 3 yrs (in US$ terms)

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• Currency hedge– Inverse relationship

between gold and dollar

• Effective portfolio diversifier

• Currency hedge

• Gold is a deflation & inflation hedge

– Maintains purchasing power over the long term

Why Invest in Gold ?Gold vs inverse of trade-

weighted dollar

0.1

1

10

100

1800 1840 1880 1920 1960 2000

Gold price

Consumer prices

USA: gold and consumer price indices (log scale; 1800=1)

60

80

100

120

140

93 94 95 96 97 98 99 00 01 02 03

GoldUS$

9Risk – Return Analysis on a portfolio with Gold

Equity Gold Returns Risk

100%                     104% 7.10%

                    100% 118% 3.60%

90%                     10% 105% 6.50%

80%                     20% 107% 5.90%

70%                     30% 108% 5.30%

Source: Financial Express Research

Tracking of performance of Equity portfolio with gold over a 7 yrs period:

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Bullion Market in India

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Introduction of Bullion market in India

• Size of Market– Physical - India imports 600 tonnes gold per annum

& 3500 tonnes of silver(approx). – Private holding of gold approx. 14000 tons– Futures (Derivatives) – the total average daily

quantity being traded in futures market in India is 15000 Kgs of gold & 1000 tonnes of silver

• Major Centers for Physical Gold TradingMumbai, Ahmedabad, Delhi, Jaipur, Chennai,

Hyderabad, Bangalore & Kolkatta

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NCDEX bullion contracts

13Gold Futures ContractContract Size 1 kgTick Size Rs 1 per 10 gramPrice Quote Rs per 10 gramContract Months All months Active contracts 3Last trading day 20th of the monthDeliverable Size 1 kg Deliverable grades Not less than 995 fineness,

bearing a serial number and

identifying stamp of a LBMA refiner

approved by NCDEXTrading Hours 10 am - 11:30 pm Delivery Location MumbaiMargin 5-7%

14Gold Futures Contract cont’d…

• Daily Settlement Prices • Gold Bars from approved list of importers

along with a refiners certificate• Minimum Deliverable Quality 995 fineness• Proportional price adjustment against

deliveries of minimum deliverable quality

15Silver Futures ContractContract Size 30 kg Tick Size Rs 1 per kg Price Quote Rs per kgContract Months All months Active contracts 3Last trading day 20th of the monthDeliverable Size 30 kg Deliverable grades Not less than 999 fineness, bearing

a serial number and identifying stamp of a

LBMA refiner approved by NCDEXTrading Hours 10 a.m. to 11:30 p.m.Delivery Location DelhiMargins 8-10 %

16Silver Futures Contract Contd…

• Daily Settlement Prices • Silver Bars from approved list of importers

along with a refiners certificate• Minimum Deliverable Quality 999 fineness• No discounts or price adjustment against

qualities

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Arbitrage opportunities in Bullion Contracts

• Calendar spread arbitrage.

• Arbitrage between NCDEX and MCX.

• Arbitrage between Bank costing and NCDEX.

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Arbitrage opportunities in Bullion Contracts• Calendar spread arbitrage.

– 3 important parameters to be kept in mind while doing Calendar Spread :• Landed Cost of Gold/Silver.• Parity Price of Gold/Silver.• Trend in Bullion Prices- Whether the market

is in Contango /Backwardation.

19Arbitrage between NCDEX & MCX

• Arbitrage between NCDEX and MCX.• NCDEX-Pure Gold fineness 999.9 & exclusive

Sales Tax.• MCX –Gold- 995 .0 fineness & exclusive of

Sales Tax paid Ahmedabad.• Purity Difference- 0.49 %.• Net Difference -0.49 % premium on NCDEX

Gold.

20Value Conversion – Gold & SilverGold Parity

SheetSilver Parity

sheet

Spot Rate International(A) 628 Spot rate International(A) 11

Add: Commission(B) 1 Commission(B) 0.04

CIF ---( C) 629 CIF =(A+B) 11.04

Multiply Exchange Rate (D) 46.8 Exchange Rate © 46.8

CIF(E) = Rs (C * D) 29437.2 CIF IN Rupees (D) 516.672

Multiply this with E Conversion Rate 0.321457 Conversion Rate(E) 32.1507

(F)-Rs Per 10 grams= (D*E) 9462.794 Rs per Kg(F)= D*E 16611.36647

Customs duty 110 Customs duty 510

Landed cost (G) 9572.794 Final wholesale price per Kg 17121.36647

Add Octroi (0.10%of landed cost) 9.572794

Final Wholesale price per 10 grams 9582.36679

21How to get an exposure to Gold?

• GoldGold coins & Bars– Jewellers– Banks

• GoldGold Mutual Funds (ETF) – Expected to be launched

• GoldGold Futures – Futures Exchanges

22The price of Gold: getting real

0

100

200

300

400

500

600

700

800

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

US$

/oz.

Gold, London PM fix (monthly average)

Real gold price, constant 1968 prices

Real gold price, constant 1975 prices

Real price facts:In real terms, current price levels correspond to those of the early 1990s

$600 in 1980 corresponds to about $1500 in nominal 2006 dollars

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