TABLE OF CONTENTS

1. Introduction 1.1 Literature Review 1.2 Objective of the Project1.3 Methodology and Data Collection 1.4 Limitation of the Project 1.5 Scope of the Project 1.6 Utility of the project 2. Conceptual Framework 2.1 Commodities- An overview 2.2 Features of Gold as a Commodity 2.2.1 Gold as Portfolio diversifier 2.2.2 Gold as Inflation hedge 2.2.3 Gold as Dollar hedge 2.2.4 Gold as Reserve Asset 2.2.5 Gold as hedge against current Macro Economic Risk 2.2.6 Gold and Liquidity 2.3 Factors affecting price of Gold 2.3.1 Rapid Economic growth in Emerging market 2.3.2 Money Supply 2.3.3 Velocity of Money 3. Analysis 3.1 Analysis Techniques 3.1.1 Fundamental Analysis 3.1.1.1 Demand 3.1.1.2 Supply 3.1.2 Technical Analysis 3.1.2.1 Relationship of Gold with Silver 3.1.2.2 Relationship of Gold with Copper

3.1.2.3 Relationship of Gold with Sensex 3.1.2.4 Relationship of Gold with Crude Oil 3.1.2.5 Regression Model 3.1.2.6 Candle S tick Bollinger Band Analysis 3.2. Portfolio Analysis with the help of hedging 3.3 Gold ETF 3.4 Gold Coin Market in India 4. Findings & Conclusion 4.1. Findings 4.2 Conclusion APPENDIX Bibliography INTRODUCTION Commodities are Real Asset, unlike Stocks and Bonds, which are Financial Assets. Commodities therefore tend to react to changing economic fundamentals in ways that are different from traditional financial assets. The potential for attractive returns is perhaps the most obvious reason for increased investor interest in commodities, but not the only factor. Commodities may offer investor other significant benefits, including enhanced portfolio diversification and a hedge against inflation and event. Gold Asset of last Resort is unique in that it does not carry credit risk. Gold is no ones liability, there is no risk that a coupon or a redemption payment will not be made as for bond or that company will go out of a business as for equity. Unlike a Currency, the value of Gold cannot be affected by the economic policies of the issuing country. Gold has been valued as a global currency, a commodity, an investment and simply an object of beauty. As financial market developed rapidly during 1980s and 1990s, gold receded into the

background and many investor lost touch with the asset but recent year have seen a striking revival in investor interest in gold. Some investors have bought Gold as a Tactical Asset in order to capitalize on the positive price outlook associated with strong Demand and tight Supply in the industry. Others have bought Gold as a long term or Strategic Asset seeking to take advantage of its unique characteristics. Gold has three crucial attribute that, combined, set it apart from other commodities: first of all gold is homogeneous; secondly, gold is indestructible and fungible; and thirdly, the inventory of above ground stocks is astronomically large relative to changes in flow demand. One consequence of these attributes is a dramatic reduction in lags, given low search costs. One would expect that the time required to convert bullion into producer inventory is short, relative to other commodities which may be less liquid and less homogeneous than gold and may require longer time scales to extract and be converted into usable producer inventory, making them more vulnerable to cyclical price volatility. Of course because of the variability of demand, the price responsiveness of each commodity will depend in part on precautionary inventory holdings. LITERATURE REVIEW LINKING GLOBAL MONEY SUPPLY TO GOLD AND TO FUTURE IN FLATION This Research Paper was published by World Gold Council at February 2010 by Juan Carlos Artigas who is an Investment Research Manager for the world Gold Council in NewYork, where he is in charge of writing strategic and research notes that put Gold in the context of global financial markets suggest that the relationship that movements in the price of gold have to inflation, focus on its root: money supply and velocity of money. He had find that positive growth in the money supply can explain increments in the price of gold from 6 to 9 months in advance, on average. Money supply can grow as a byproduct of economic growth like in an emerging economy, but it also can increase as monetary policy is used to re-activate an economy in recession like in the current economic

environment. In this case, where money supply growth is being used to prop up the financial and economic system, rather than to fuel strong economic growth, the price of gold bears a relationship to the growth of money supply and may be a leading indicator of a recovery in velocity and rise in inflation pressures. He used multiple regression model as tool to predict the effect of Money Supply. He fit a multiple regression model, using a time lag of 6 months in money supply for simplicity. Goldt=b0 + b1*US.MSt -6 + b2*EU.MSt -6 +b3*India.MSt -6 +b4*Turkeyt -6 +et Where, Goldt = year-on-year growth in United States money supply six month prior. US.MSt -6= year-on-year growth in United States money supply six month prior. EU.MSt -6=year-on-year growth in the Euro zone plus UK money supply six month prior (in US$) India.MSt -6=year-on-year growth in India money supply six month prior (in US$) Turkey.MSt -6=year-on-year growth in Turkey money supply six month prior (in US$) CONCLUSION He had found that money supply can have an effect on the price of gold. As the money supply increases, the gold prices rises. This effect has a log of about 6 months. Gold is impacted by many factors world-wide and as such, money supply changes in place like India, Europe and Turkey also have an effect on its performance. In particular, a 1% change in money supply in the US, the European Union and United Kingdom, India and Turkey tend to correlate to an increment in the price of gold by 0.9%, 0.5%, 0.7% and 0.05% respectively. OBJECTIVES OF THE PROJECT To identify the factors which lead to price volatility in Gold.

To analyse Gold price fluctuation vis--vis other related commodity like Silver, bbCopper and Crude Oil.

To analyse Gold price volatility with Dollar and different indices like Dow Jones and Sensex.

To suggest an appropriate hedging technique to investor to use Gold as a Capital Protection Tool.

To study Gold ETF which issued by different Indian Banks. To analyse Gold coin market in India.

HYPOTHESIS H0: Gold and Dollar are related to each other (NULL Hypothesis) H1: Gold and Dollar are not related to each other. (Alternative Hypothesis) H0: Gold and Dow Jones are related to each other. (Null Hypothesis) H1: Gold and Dow Jones are not related to each other. (Alternative Hypothesis) H0: Gold and Silver are related to each other. (NULL Hypothesis) H1: Gold and Silver are not related to each other. (Alternative Hypothesis) H0: Gold and Copper are related to each other. (NULL Hypothesis) H1: Gold and Copper are not related to each other. (Alternative Hypothesis) H0: Gold and Sensex are related to each other. (NULL Hypothesis) H1: Gold and Sensex are not related to each other. (Alternative Hypothesis) H0: Gold and Crude Oil are related to each other. (NULL Hypothesis) H1: Gold and Crude Oil are not related to each other. (Alternative Hypothesis)

METHODOLOGY AND DATA COLLECTION

Studying the past research on Gold (sanctioned and rejected) and analyzing the reason for their acceptance or rejection. Data Collection: Collecting the data like open price, closing price, high and lowest price related to Gold and different factor from the Secondary Sources that are: a) MCX commodity exchange b) MSN.Money c) X-rate.com Data Process: After collecting the data of Gold and related factor, find out the correlation, covariance, and beta between Gold and with the other factor and make linear regression model using SPSS. Hypothesis: With the help of Null and Alternative Hypothesis find the relationship that two variable are related to each other or not. Candle stick and Bollinger band Analysis: With the help of Candle Stick and Bollinger band Analysis predict the next day trend (either Gold prices are bullish or bearish). Inference: After processing the data find out the proper reason behind the finding.

LIMITATION OF THE PROJECT

Availability of standard data. NCDEX and MCX have different price for same commodity, so for this Research I prefer MCX data because it is more accurate and 83% of market tapped by MCX. This research considers relationship of Gold with Copper, Silver and Crude Oil. It doesnt consider any other commodity. SCOPE OF THE PROJECT The finding of this project is applicable to only Future market not with the Forward and Spot market because forward market are not standardize. In future market there is no counterparty risk thats why this study is applicable only to Future market. In this Study Gold prices are consider in Indian rupees and weight is consider in gram (10 gm Gold prices are consider). UTILITY OF THE PROJECT This project serves as comprehensive study material to understand the features of Gold as a commodity, Micro and Macro economic factors which influence the price of Gold. The reader of this report can develop a thorough understanding of Gold to use as a Capital Protection Tool. Apart from this report shows importance of Gold and can be useful for investor to make Gold as a part of their portfolio. CHAPTER 2 : CONCEPTUAL FRAMEWORK 2. MAIN TEXT 2.1 COMMODITIES AN OVERVIEW Commodities are an integral part of any economy. If we consider the construction industry, or the ornamental purposes, or the energy sector or any other sector, there is a need of commodity in each of these sectors. A commodity is basically defined as a physical substance, such as food grains, metal, energy products, which are interchangeable in terms

of quality and quantity. These are known as the derivative securities and they serve as short maturity claim on real asset. It is a basic ingredient, a building block used in the production of goods and services. Investment in commodities can be done in several ways. Investing in commodities is a type of gambling in which speculative trading is done. The investor has to do forecasting about the price of different commodities and then he has to trade accordingly. The price of the commodities keeps on fluctuating so the investors have to make the decision instantaneously and then invest accordingly. The price of the commodity in the international market is dependent upon many factors such as the law of demand and supply, the level of inventory of commodities worldwide. Investment in commodities is usually risky as the price is volatile and there is sometimes a risk of stock out. India has around 25 recognized commodity future exchanges including four national- level commodity exchanges. They are : Multi Commodity Exchange (MCX). National Commodity and Derivative Exchange (NCDEX). National Spot Exchange Limited (NSEL). National Multi-Commodity Exchange of India Limited (NMCE). All these exchanges are under the control of the Forward Market Commission (FMC) of Government of India. MCX is Indias number 1 commodity exchange with 83% market share in 2009. Globally MCX ranks number 1 in Silver, number 2 in Natural gas, Gold and Copper number 3 in Crude Oil. The commodities are mainly traded in two type of market: Spot Market: This is the market where real time trading takes place. The process of buying and selling takes place in real time. The prices are settled at the current price, order for commodity is placed, the delivery is done and the payment is made instantaneously. It is also known as cash market. This market is basically meant for agricultural commodities

especially the farmers prefer trading in this market as the market is ready to deliver their necessary commodities on current prices, thereby reducing their warehouse and transportation costs. In India spot market is mainly traded in National Spot Exchange Limited. Future Market: In this type of market, trading takes place on contract basis. The parties involved in trading, agree on the terms and conditions of the contract and the exchange takes place on a future date at a certain price. Here the commodities can be reasonably expected to be delivered within a month. This market is speculative in nature. The trade is dependent on forward prices and both the parties must fulfill the contract. The future date is called the delivery date and a final settlement date. The preset price is called the future price. The price of underlying asset on delivery date is called the settlement price. Risk Involved: Trading in future market is subjected to risk as the market conditions are highly volatile, the political condition in countries might change and also the economic factors Inflation; Interest rates etc. might have impact on future prices. So, investing in future market involves a considerable risk. There are two type of position in the market: Long Position: In this investor first buy the commodity then sell the commodity, and investor prefer this position when he is optimistic with the market condition. Short Position: In this investor first sell the commodity then buy the commodity, and the investor is pessimistic about the market condition. 2.2 FEATURES OF GOLD AS A COMMODITY Gold is fungible, indestructible and most importantly, the inventory of above ground stocks of gold is enormous relative to the supply flow. This last attribute means that a sudden surge in gold demand can be quickly and easily met through sales of existing holdings of gold jewelry or other products (either to fund new purchases or for cash), in this way increasing the amount of gold recovered from scrap. It may also be met through the mechanism of the gold leasing market allied to the trading of gold bullion Over-the-

Counter. The potential for gold to be highly liquid and responsive to price change is seen as its critical difference from other commodities. 2.2.1 Gold as Portfolio Diversifier Portfolio diversification is one of the cornerstones of modern finance theory. Investor should hold a range of asset in their portfolio that is diversely correlated to lower the risk while enhancing returns. Different asset perform well under different macroeconomic, financial and geopolitical conditions. Diversification reduces the likelihood of substantial losses arising from a change in macroeconomic condition that are particularly damaging for one asset class, or a group of asset classes that are behave in similar fashion, because changes in the price of gold do not correlate with change in the price of other mainstream financial assets. So its one of the instruments which can diversify the portfolio of investor. If we take example of last three year then average return from Sensex comes out to be 0.051897% and average return from gold in last three year comes out to be 25.0596 %, if we form portfolio which consist of equity (50 percent) as well as gold (50 percent) part of portfolio then overall return comes out to be, 0.5*0.051897+0.5*25.0596=12.5575. So gold can be used as portfolio diversifier. 2.2.2 Gold as Inflation hedge There are too many reasons why Gold acts as an Inflation hedge. First, Gold has a long history as a monetary asset, but unlike other currencies its value cannot be debased by Government or Central Banks. More recently, concern over the amount of money pumped into the economy during 2007-08 financial crises led to a strong increase in investors interest in Gold as store of value in early 2009 when the world economy started to show signs of recovery. Second, commodities are often the root cause of inflation, with increase in the price of fuels, metal and other raw materials used in the production to consumers creating Cost-push inflation. Mining gold is resource intensive business, with many commodities such as Energy, Cement and Rubber, used in the exploration, extraction and production process. As a result, a rise in commodity prices puts direct pressure on the cost of extracting Gold, which in turns puts a high

floor underneath the gold price. Table 1: Average Indian Inflation data and Average Gold price Source: All data collected from world jute, index mundi and MCX. Year 2006-07 2007-08 2008-09 2009-10 rate 5.3 6.4 8.3 9.89 price 10121.11109 13320.86683 16580.86896 19746.36604

As we can see that from table that as inflation rate increases gold price also increases so gold can be hedged against inflation. 2.2.3 Gold as Dollar hedge Gold has historically exhibited a strong inverse relationship to the Dollar or we can say whatever Global currency was dominant at that time. There are strong reason why gold trends to move in an opposite direction to the US Dollar. First, Gold is priced in Dollar and everything else being equal, weakness in the currency in which real asset is dominated tends to lead to an increase in its price, as seller demand compensation for the currency loss. Second, Golds history as a monetary asset makes it an attractive store of value in periods of high inflation or rising inflation expectations, driven by excessive money supply growth which undermines fiat currencies. Third the depreciation in the Dollar means appreciation in other currencies reduces golds price to buyers outside of the Dollar bloc, increasing demand and putting upward pressure on the price. Finally, Depreciation in the Dollar increase the cost of extracting gold overseas and often the price of other commodities used in the extraction and production process, thus gold price increases.

When we say that Gold hedge against Dollar, it can be hedge in two senses the first is a hedge against changes in the internal or domestic purchasing power of the dollar. The second is a hedge against changes in the external purchasing power of the Dollar means Exchange Rate, so in this gold hedge Dollar in the sense of Exchange Rate. Covariance between Gold and Dollar comes out to be -0.0525654 this shows that they are negatively correlated with each other. It means that when Dollar depreciates Gold prices will increase and vice versa. Beta comes out to be -0.1220014. Gold can be used as hedging instrument against Dollar. Negative Beta shows hedge ratio means if Dollar appreciate by 1% then Gold prices will decrease by 0.122%. 2.2.4 Gold as a Reserve Asset If we look at Gold in three contexts: Strategic asset allocation and the maximization of risk - adjusted returns in the investment portfolio; as a Tactical overlay to hedge against current global macro-economic risks; and as a high quality liquid asset in periods of distress, the time when central banks most need their reserves. A current global macro-economic risk, such as European sovereign debt crises and strong money supply growth argues for an additional tactical overlay to gold in reserves. The investment guidelines of emerging market and developing country central banks often limit reserves to being invested in a few key asset classes, such as deposit, high quality sovereign debt and quasi Sovereign bond. A sovereign debt downgrade to below investment grade reduces the pool of eligible investments for these central banks, while contagion risks lower the attractiveness of similar assets. Gold, which bears no counterparty or credit risk, and is permissible reserves asset in practically every central bank in the world, becomes especially attractive in the current environment. Gold can also help hedge against the risk associated with strong money supply growth. The 2007-09 financial crises clearly demonstrated the challenging of running a liquidity portfolio. Many markets that reserve manager had assumed to be deep and liquid, proved to be the exact opposite and assets could only be sold at a large discount. The Gold market remained liquid throughout the financial crises, even at the height of liquidity strains in

other markets. This reflects the depth and breadth of the gold market, as well as the fightto-quality tendency exhibited by some investors.

Average percentage Return Sensex 0.051897 Gold 18.55506

Strategic asset allocation defines the long term proposition of individual asset that should be held in a portfolio in order to maximize risk adjusted returns. Central banks portfolio will diverge from this, in some cases substantially, in order to accommodate any constraint imposed on the portfolio by the banks investment guidelines, to take into consideration the banks tactical views and to meet the banks liquidity objectives, and Gold was one of the assets which is most liquid. 2.2.5 Gold as hedge against current Macro-Economic Risks The European sovereign debt crises are arguably the biggest risk facing reserve manager at the time of mid-2010. The combination of financial sector bailouts, stimulus packages and lower tax revenues arising from the financial crises and the slump in economic activity have had a devastating effect on western public finances. Gold should continue to outperform in this type of Environment because it doesnt bears no counterparty or credit risk, and is permissible reserves asset in practically every central bank in the world, becomes especially attractive in this type of environment. There is also the issue of playing for the bailouts. Some of the money has simply been printed. Money supply growth is exceptionally high in many countries and, if exit strategies are not implemented in an effective and timely manner, risk fuelling future inflation. Gold is only universally- accepted currency whose supply cannot be increased by policy maker the equivalent of money issuance for gold is new mine production, which has been on a more or less flat trend for the past ten years.

Gold gave better result as comparison to Sensex, Gold gave return of 18.55% and Sensex gavereturn of 0.0518%. So it can be hedged against macro-economic risk. 2.2.6 Gold and Liquidity Reserve managers investment decisions are complicated still further by the need to maintain an additional liquidity portfolio, this need to be invested in high quality assets that can be readily sold in times of market stress. These portfolios need to be designed to perform in particularly challenging financial and economic circumstances, when many domestic and international markets may be facing acute liquidity strains. The 2007-09 financial crises clearly demonstrated the challenges of running a liquidity portfolio. Many markets that reserve managers had assumed to be deep and liquid proved to be the exact opposite and assets could not be sold at a large discount. This was even true of some AAA- rated assets: credit rating proved no guide to liquidity. Many central banks had to rely on bi- lateral currency agreement with other central banks. The gold market remained liquid throughout the financial crises, even at the height of liquidity strains in other markets. This reflects the depth and breadth of the gold market, as well as the flight-to-quality tendencies exhibited by some investors. Diverse range of buyer and seller is main reason behind its liquidity Golds liquidity is also underpinned by its diverse range of buyer and sellers. Unlike financial assets, the gold market is not solely dependent on investment as a source of demand. Gold has a wide range of buyer and sellers who have differing trading motivations and who react differently to price moves. In the last five year to 2010, 61% demand comes from Jewelry sector, 27% from investment and 12% from Industrial uses. Gold has a diverse range of buyers, stretching from Indian Jewelry manufactures, to electronics producers in Asia, to worldwide dentistry and endowments and central banks. 2.3 FACTORS AFFECTING PRICE OF GOLD

Inflation is root cause of price increment in gold, money supply and velocity of money is also reasons for affecting the price of gold. Money supply can grow as a byproduct of economic growth- like in an emerging economy, but it also can increase as monetary policy is used to re -active an economy in recession- like in the current economic environment. In this case, where money supply growth is being used to prop up the financial and economic system, rather than to fuel strong economic growth, the price of gold bears a relationship to the growth of money supply and may be leading indicator of a recovery in velocity and rise in inflation pressures. In either case, we observe a correlation to the price of gold. 2.3.1 Rapid Economic Growth in Emerging Market As emerging economies progress they begin to look and feel more like advanced economies with deeper and more liquid financial markets, better governance structures, and more efficient risk stabilizers. In line with these advances, and driven in some cases by vivid memories of the problems they faced during the Asian economic and financial crises of the late 1990s, many of these nations are looking to build up their external reserves in order to preserve their nations wealth in future periods of instability. Indeed, emerging market central banks as groups are significantly underweight gold, holding on average just 5% or less of their external reserves in gold, while the developing countries of Asia hold the least amount of gold- less than 4% of total the lower external reserves which is at the lower end of what portfolio optimization studies suggest would be appropriate for a central bank. Maintaining a higher ratio of gold to total reserves create a more optimal central bank portfolio as gold is uncorrelated with virtually all assets and provides an excellent hedge against US Dollar exposures. Throughout the financial crises, and how during the continuing sovereign debt concerns, emerging market central banks have increasingly turned to gold purchase programmed as a means of diversifying their reserves into an asset with no credit or counterparty risk that provides immediate liquidity in all market conditions. In addition to emerging economies plainly seeking to increase their proportion of gold reserves, many other central banks have simply been trying to rebalance their portfolios to

maintain their gold holdings as a percentage of total reserves. In January 2011, the deputy head of the Central Bank of the Russian Federation announced plans to purchase at least 100 tons of gold per year to replenish the countrys gold reserves. The proportion of gold in Russias external reserves has declined from 25% in 2000 to only 5% in 2010. The decline in gold holdings as a percentage of total reserves in emerging market central banks is in some cases consequences of the significant foreign exchange reserves growth that has taken place over the past 10 years. Between 2000 and 2010, foreign reserves across all central banks increased from $3 to $10 trillion, yet gold as a percentage of total reserves remained at 13% across all central banks. However, many countries that have fixed or managed exchange rates against the US Dollar witnessed a significant decline in their gold holdings in relation to their total reserves as they accumulated more dollars in order to maintain their pegs. Beyond Russias rebalancing efforts, in 2009 Indias purchase of 200 tones helped the country toward its goal of restoring the balance between gold and foreign currencies in its total reserves. Illustrate several examples of central banks that are in a similar position and those are either already increasing gold holdings to maintain their percentage of total reserves, or may be considering such action. Gold Reserves and GDP data of different country (December 2010). Country Qatar Uruguay Singapore Taiwan India People's Republic of China Argentina Sri Lanka GDP Growth Rate (%) 16.272 15.27 14.471 10.823 10.365 10.31 9.161 9.134 Gold Reserves(tones) 12.4 0.3 127.4 423.6 557.7 54.10 54.7 17.5

As we can see that from table countries like Qatar and Singapore they are growing rapidly and they are preserving gold so emerging economy play important role.

2.3.2 Money Supply Gold has proven to be an asset that has low correlation to most financial assets, both in expansionary and recessionary periods. There are some important relationships that can explain, in part, the behavior of gold over the short or long run. For example, gold exhibits a strong negative correlation to the Dollar. Gold can also be shown to outperform other assets such as stocks and bonds in times when inflation is on the rise. In this note, we analyze the impact that money supply has on the performance of gold, in a global context. There are two main reasons why there canbbe surge in money supply. First it can increase as a consequence of economic growth (e.g. in an emerging economy), which I turn may not result in higher inflation. Conversely, if central banks increase the money supply to induce growth- as they have done as a result of the financial crises that started unfold in 2007 and too much money is introduced into the economy for too long, this may result in inflationary pressures, according to classic economic theories of monetarism. Intuitively, a positive relationship between money supply and gold can exist in either case. First, if money supply is accompanied by economic growth, the increase in wealth and access to capital can increase demand for luxury consumer goods, including gold. Second, as excess money enters the system and the economy remain stagnant; inflation pressures may prompt investors to safeguard their wealth by increasing their exposure to hard assets, such as Gold. 2.3.3 Velocity of Money Many central banks across the globe base their monetary policies using the principle that inflation can be regulated by the amount of money supply pumped into the economy. This so- called monetarism has its root in theories developed by Milton Friedman and that continue to resonate to this day, especially when it comes to policy making. While some of the measures and models to relate inflation and money supply may up for debate, it is

mostly accepted that as the velocity of money increases, this creates inflationary pressures in the economy, holding everything else constant. When the global economy started to contract as a result of the financial crises, most central Banks needed to use unprecedented measures to veer the economy away from global depression. These included lowering benchmark rates to record lows and adopting quantitative easing in one From another However, these same measures are prompting One of the reasons why movements in the price of gold precede changes in velocity has to do with the fact that GDP is used to compute velocity. An increment in money supply to reactive the economy doesnt translate in an immediate GDP growth. As future growth starts fuelled by the availability of money, it increases velocity with a lag. Thus, creating future inflation may follow. Empirically we observe that increase in the price of gold can also be interpreted as a signal by the market that velocity may rise in the future which in turn can produce inflation forward.