GOLD FUNDAMENTALANALYSIS

International Workshop on Commodity Trading

6th October 2004

-Bhargava N. Vaidyae-mail bnv@vsnl.com

What is Gold

COMMODITY

OR

CURRENCY ?

GOLD

• Hedge against Inflation

• Gold as an Investment

• Gold as a safe haven

History

• Gold Currency

(1890 - 1913)

• Gold Standard

(1925 - 1931)

• 1968 Split in European Gold Market

• Bretton Wood

Fixed exchange rate collapsed in 1973

Freedom

• 1974 Private Ownership of Gold Legalised

in USA

• COMEX 31.12.1974 Gold future introduced

Gold Price

• Turn of previous century around $ 20

• 1934 - 1968 Fixed at $ 35

• 1979 – 1982 Bull Market Years

on 21 /1/1980 $ 855

• Average Price 2002 $ 310

• Average Price 2003 $ 363

• September 2004 $390 - $ 421

Recent Highlights

• May’99 : BOE decides to halve its Gold reserves

• September’99 : Washington Agreement • 1/1/2000 : VAT Abolished on

Bullion throughout Europe.• May ‘ 2000 : SNB begins sale of Gold

from its reserves.• 2003 : Central Bank Gold agreement

Size of Market

• LBMA – Daily clearance volumes

488 tonnes

• Comex - 152 tonnes (per day)

• Other Exchanges

Indian market size 1000 tonnes (per annum)

LONDON19 th Century: Great Britain first country to adopt

the full Gold standard.

1919 : Formation of the London Gold Fixing Up to 1968: No Competition in London Gold

Market After 1968 : London’s Monopoly ends after

temporary closure of Gold Market. 1987 : The LBMA Incorporated as on 14/12/87

2000 : Associate Members

USA1792 : US assigned a formal monetary role Currency Backing with AU and AG1848 : Large Gold discovery in California North America became the worlds major supplier

1944 : Bretton Woods agreement -tied gold to the US $1971 : President Nixon ended the convertibility of the US $ into gold1974 : Lifting the ban of Gold Ownership31.12.74: Gold futures opened for trading on COMEX (today a subdivision of NYMEX)1982 : COMEX started operating a market in Gold options

Other Markets

• ZURICH

• TOKYO

• TURKEY

• HONGKONG

• SHANGHAI

SUPPLY2002 2003

MINE PRODUCTION 2590 2593

OFFICIAL SECTOR SALE

545 606

OLD GOLD SCRAP 836 943

NET - PRODUCER HEDGING

---Source:

----GFMS

DEMAND2002 2003

FABRICATION 3163 3049

BAR HOARDING 250 183

NET - PRODUCER HEDGING

437 310

IMPLIED INVESTMENT

122SOURCE

600: GFMS

Gold Hedging Environment1980’s 2000’s

• High Interest rates• Low lease costs• small to medium cost

mines• High % of resources as

reserves• Continuity of cash flow

required to underwrite capital

• Low Interest rates• More Volatile lease

costs• Larger more mature

mines• Lower % of reserves

to resources• Lower Gold Price

Gold Hedging Products1980’s 2000’s

• Gold Loans

• Spot def, fixed and flat forwards

• Short term products

• Less Gold Loans

• Longer dated products

• Structured Option Products

Official Sector Holding

• Over 31,822 tonnes

• Large holders

USA 8,135 tonnes

Germany 3,440 tonnes

France 3,025 tonnes

OFFICIAL SECTOR

• SALE

• GOLD LOANS

• GOLD AS SECURITY FOR BORROWING

• CURRENCY MANAGEMENT

OTHER FACTORS

• POLITICAL INSTABILITY

• TERRORISM

• CURRENCY INSTABILITY

• SURPLUS MANAGEMENT

• INFLATION

Importance of Gold (India)

• Largest item in portfolio

(Rs.13,02,000+ Crores)

• Major forex asset

($ 280+ Billion)

• Legend - Gold & Age

• Liquidity

PRESENT INDIAN SCENARIO

• LARGEST MARKET FOR GOLD• ONE OF THE MOST IMPORTANT MARKET FOR

SILVER• LARGE HOLDING OF BULLION IN PRIVATE

SECTOR

LARGEST SOURCE OF BULLION• IMPORTS• RECYCLING - A DISTANT SECOND

Indian Position

• WHAT POSITION WE HAVE IN WORLD MARKET

• ANALOGY WITH SAUDI ARABIA IN OIL

HISTORY• Net Gold Surplus – for years• 1962 - Gold Control Act.Development• 1990 – Abolition of Gold Control Act• 1992 – NRI Imports• 1994 – SIL Import• 1997 – Authorised agencies / Banks• 2003 - Future/Forward trading in bullion

• Authorised Bank / Agency |• Bullion Dealer (large) ______ | | • Bullion Dealer (small) | | | |• Jeweller | Jeweller | | |• Consumer Consumer Consumer

Interest Arbitrage

• LC Imports

• Banking Facilities

External Benefits

• Export of Coins / Crude Jewellery

• Other Arbitrage

Local Taxes

• Sales tax - Rajasthan - Gujarat - Delhi

• Octroi