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Okay Hi all let us continue with our discussion
on gold and we if you recall in the session we discussed a little bit about who are the
major consumers of the gold. I discussed about the central banks and investors,
retail investors, individuals who have interest in buying gold jewelry as well as buying gold
coins and gold bars. You have industry and India specifically lot
of temples and trust are owners of the gold, so lot of people donate gold and in this context,
I also mentioned about lord Vishnu’s gold idol which was weighing around 32 kg and showed
you the picture of that and we also discussed, I also briefly mentioned about how gold ETF
are one of the gold ETFs have contributed to the demand for the gold so briefly let
us discuss what is the ETF and if you do not have much of a knowledge about the ETF, I
will advise you to go to a national stock exchange website or any other website where
they have information pertaining to ETFs. But this much I can tell today that ETFs are
nothing but mutual funds. In regular mutual funds, you have underlying
investment can be equity or bonds or combination of equity as well as bonds in case of a gold
ETFs the underlying asset is gold. So as I mentioned, gold ETFs are mutual funds
and these units of these mutual funds are backed by physical gold and every unit, ETF
unit gives the owner some specific amount of the gold and ETFs can be ETFs are normally
listed in stock exchanges. And these ETFs are traded in stock exchanges
based on the net asset value and it has got a relationship with the gold price so whenever
the gold price increases, the asset under management that is the amount of gold held
by these ETFs increase so there is a direct correlation between ETF investment in gold
and gold price. This particular picture shows this relationship. If you see, this is the red line shows the
gold price and this blue line shows the blue line shows the investment in all ETFs in terms
of troy ounce, million troy ounce so if you see, there is a positive relationship between
these 2 figures and though it is not available at this point of time, simple excel calculation
shows correlation to be 0.94 and this information, I have downloaded from the Bloomberg database
so what is this ETF, GT, GT total index so this consists of all asset under management
for all ETFs which are listed and traded in major exchanges all over the world. Now, let us go to little bit on how does the
spot price is arrived at. See, if we go to a local jeweler, we get to
see some price in fact if you go today, you get to see something Rs. 27450, next day you
go, you may end up seeing around Rs. 27920 so and so forth, so how does where does this
how what factors influence or who quotes this price. So one thing here, I would like to mention
here even if we see a price variation in these shops, India has nothing to do with price
setting, India is a price taker so gold price gets decided at LBMA that is your London Bullion
Markets Association so LBMA sets the price of the gold in US dollar, Euro and pound sterling. And this dollar price and all these prices
gets relayed to all over the world and this price multiplied by the exchange rate becomes
the price of the gold prevailing for that given day and this price gets get by LBMA
twice a day, so the probably if you go to a big jeweler, the price which is prevailing
in the morning would be different than the price which is prevailing in the afternoon. Though mostly in Indian jewelers show only
one price but in international jewelry houses, you can have two prices displayed on a given
day. Now this London Bullion Market Association
not only fixes the price for the gold, it also fixes the price of silver, palladium
and platinum. However, today, gold being our focus we will
be discussing more about the price fixation aspect of the gold and the same process is
undertaken for price fixation of silver and palladium and platinum. Now, if the importance of gold importance
of London in gold market, it is just lot of historical events behind it and London gained
importance for major trading for the gold and London Bullion Market Association is setting
the price for gold from I think around some 1600 something. Please visit this LMBA website for history
so that you get to know about the history of price fixation by LBMA. And when we talk about the word ounce, it
is equivalent to 31.1035 gram so when we are hearing that gold is around dollar 1200 per
ounce so that is 1200 is equivalent to 31.1035 gram. And in India mostly prices are quoted as per
the 10 grams so what we get to see mostly in the shops or newspaper publication is with
respect to 10 gram or a tola. And as I mentioned spot gold price gets fixed
twice daily that is morning fix and afternoon fix and let us first understand how exactly
the fix is arrived at so it is nothing but you now LBMA collecting quotations from buyers
and seller and matching it and try to identify a price in which the maximum amount of buying
and selling can be done. So this LBMA has a 5 member committee. Who are these 5 members, it is listed here. Bank of Nova Scotia, HSBC, Deutsche Bank of
London, Societe Generale and Barclays Capital, so these 5 members so how exactly this spot
price fixing is done so this spot price fixing is done. So this spot price fixing is done, morning
fix is done at 10:30 AM so at 10:30 AM London time, the chairman of the gold fixing committee
so this whoever is the chairman, he starts with calling he starts with by giving a price. Let us say he quotes around 1300 dollar, so
with this 1300 dollar or this 1300 dollar will be known as a trying price. This starting price is known as the trying
price so at dollar 1300, all these 5 members will get starting getting in touch with their
own clients who are banks are big jewelry producing mining sorry, gold mining companies,
banks and gold mining companies who are the members of these 5 banks. These banks will be collating their buy and
sell order at this 1300 US dollar per ounce price and this amount of buy and sell will
be relayed to the chairman and if the buy and sell order is within 2000 ounces then
that price will be fixed for the day. Then let us take this example, let us say
the chairman of gold fixing committee quotes a price of 1278 US dollar and this price gets
relayed to the clients by the members so these 5 member team, they relay this price to or
they inform this price to their clients, so the clients start giving buy and sell orders
so each of these 5 banks start collating the buy and sell order and let us say as given
in this particular table, at dollar this 1278 dollar US dollar price, Bank of Nova Scotia
clients gave 80091 ounces for buy and what is the sell volume, 81075 ounces. So if you see similarly HSBC, their clients
gave different buy, sell so Deutsche Bank, Societe Generale and Barclays Capital. Now, let us say what is the net volume or
how much Bank of Nova Scotia is going to inform to the chairman, chairman of the fixing committee. Bank of Nova Scotia will the net volume, that
is 984 sell volume will be informed by the Nova Scotia. HSBC will accordingly inform 3268 ounces of
sell volume, but Deutsche Bank will inform 8925 as buy volume. 15302 ounces will be informed as a buy volume
of Societe Generale and 2964 will be the buy volume of Barclays capital. Now, sum total of the sell volume which is
984 plus 3268, it is coming to around 4200 something so that is the total of the sell
volume and what is the total of the buy volume, total of buy volume is around if you sum to
all all these 3 buy volumes we add up, it is coming around 27000 something around 27000. Now, the difference between sell and buy is
more than 20000 ounces in that case, this 1278 will not be the fixing price. The sell volume is less than the buy volume,
so what the chairman will do? Chairman will reduce the price or increase
the price? There are more amount to be sorry there are
more amount to be bought as compared to the more amount to be sold, so the chairman will
be increasing the price and again announce a higher price and this price again will be
relayed by these members to their clients and different set of buy and sell volume will
be collected and collated and this process will go till the buy and sell volume difference
is within 20000 ounce. So once this limit is reached, the chairman
will be stopping the process of finding out the price and that becomes whatever price
arrived at, that becomes the price for the morning fix. The same process will be repeated in the afternoon
and the same process is also done for silver palladium and platinum. Let us go to this particular table, if you
see London gold price fix, which is at AM fix and PM fix for last 5 days. And if you see morning fix for different days
is morning and afternoon is given and one interesting observation I want all of you
to note here, on 23rd June, the morning and afternoon fix is around 1260 ounces 60 US
dollar per ounce. However on 24 June, if you see, within a 1
day, there is around 35 plus 13 so 48 dollar of price change that is delta of 48 dollar. And what is the reason, the Brexit announcement
was made on 24th June and so a if you recall gold is a self haven asset or whenever economy
is in a you now not performing well or there is uncertainty with respect to the performance
of economy or whatever is happening in the economy, most people flock the gold and it
is very clearly obviously visible from the price difference within a given day. This data again, I have taken from LBMA website
and if you see in this investors are flocking to gold and other safe haven asset after the
Brexit vote and not only the gold price has gone up, the shares of gold mining companies
have also gone up significantly. So this information is this link provides
this particular document you can you can read in detail if you are interested. And also, every year, LBMA conducts a survey
to know what is going to be the fuse of or what is the direction of a gold price, gold,
silver, platinum price for the year to come. So the survey is normally conducted in the
month of January and the survey reports are made available where important big players
in the gold and silver, palladium, platinum industry are asked regarding this views and
the interesting fact is that none of them said in the month of January that gold price
is going to be going up to dollar 1300. So I will just take couple of minutes to show
you more about this particular PDF this particular document. Please see this one so if you see this is
your AU, these are if you can I hope you are able to see this. You have your gold Adam Williams of First
Market Limited, he has predicted gold price is maximum gold price is going to be 1222
with minimum of 980 and average of 1132 so different people have different from different
banks and investment companies, they have been asked to give their views with respect
to the gold and if you see the average is lowest is 978, average is 1103 and maximum
is 1231. So none of the these none of the people could
or could foresee what is going to happen post Brexit and gold price increased to hovering
around 1365 sorry from 1265, it has gone up to 1313. Similarly, other for silver is also there
is similar kind of a prediction and platinum and palladium. And please note that I am going to make this
particular information available to you all. The link is available if you are interested,
you can download this particular document because this document is not supposed to be
freely circulated by the people who are downloading it. Now, let us go to our understanding on the
relationship between gold spot and forward and futures price. So the same cash and carry arbitrage is applicable
to the gold forward and futures price relationship. Let us take an example how gold futures price
work so let us go to this slide which is the information given in the PPT. Let us say a gold producer would like to sell
gold at a later date. What is the gold mining company’s fear? The fear is that price is going to go down. May be at this point of time some of you may
be thinking this is not a right fear but let us say if we go back to the 1990s, this is
was a very real fear that gold price remained around at 300 dollar per ounce and it progressively
went down, at time it had gone up gone down to even 250,455 dollar during 1994-95. Now, let us say the gold producer has a fear
of gold price going down so it wants to enter into a forward contract and the price at which
it should bid so what should be the forward contract price or futures contract price so
let us take an example here. So what the gold producer or gold mining company
can do, it can borrow gold at spot date so today’s price, it can borrow gold and agree
to pay interest for borrowing gold so whatever the gold borrowing rate, it will agree to
pay. It is denominated in rupee or dollar terms
but it is much lesser than the interest rate, so if you go and if you want to go and take
a loan from a bank, the rate at which you will borrow probably will be much lesser than
if you if a particular company goes and borrows gold from a body which is willing to lend
gold. Let us say a Central Bank which is holding
gold that Central Bank can lend gold to somebody and the rate which the Central Bank will be
charging will be a gold lease rate. So this producer borrows gold at on a spot
date, pays the leasing rate, simultaneously sells the gold in the spot market and makes
a fix deposit from the sale proceeds. So what is going to be the future price at
a later point of time? Let us take the numerical example mentioned
here. So gold spot rate is let us say 1313 per ounce,
gold lease rate is let us say 0.075% per annum and prevailing interest rate, that is your
LIBOR US dollar rate which is 1.20% per annum. If some of you are not aware of what is LIBOR
rate, that is LIBOR stands for London Interbank Offered Rate, so please go to the appropriate
website and find out how LIBOR is calculated so basically LIBOR is a interest rate. LIBOR is calculated in many currencies so
we are taking the LIBOR 12 month interest rate denominated in US dollar, so that is
your 1.20% per annum. Maturity is 6 months so if you take this one,
the theoretical futures price theoretical future or forward price is equivalent to 1318
so 6 months from now, the companies would be willing to or today companies would be
willing to enter into a futures or forward contract at a price of dollar 1318 per ounce. So as long as you have the prevailing interest
rate more than gold lease rate so the if the as and when the or as long as the interest
rate prevailing interest is more than the gold lease rate, the theoretical forward or
future price is going to be more than the spot price and the market is going to be in
Contango. That is, spot price is going to be less than
the future price so in case of gold, the market is supposed to be a Contango. So spot price is going to be less than future
price and far month future price should be higher than the near month futures price,
or let me put it other way around that is near month future price is going to be more
than the spot price and far month future price is going to be more than the near month futures
price. Now, let us I have downloaded some data from
Bloomberg so quickly I will just show you or briefly we will discuss this aspect so
what are the information which I have downloaded, if you see this aspect I have already shown
it to you. It is the movement of gold price per ounce,
spot gold price per ounce and if you see around July 99, it, July, June July 99, it was hovering
around dollar 250 so let me make it a little bigger so that you are able to see. June July it was hovering around 256 around
May, it was around 356 so and it remained within below 300 label for substantial number
of years, so it is around 2002 it remained less than dollar 300 and progressively it
increased and it reached 1778.95 per ounce in the year September 2011. And it has from to from a peak of this value;
it has come down around 1260 for dollar during May 2016. So I just also did some Contango backwardation
calculation and I said that gold should not exhibit gold should always have a Contango
structure but the actual data shows that it is Contango as well as backwardation and there
was lot of debate and discussion going in the media, the reasons for the backwardation
and the reasons sighted are the negative interest rate, uncertainty regarding the future economy
and future global economy and huge demand from Chinese people to hold a gold in the
current form, so the so basically strong demand in the spot market has resulted in spot prices
increasing at a higher rate as compared to the futures price. Now let us go to the gold forward curve so
what is this gold forward curve is the price movement of different maturity curve so this
is I have just randomly chosen 4 days so let me increase this size. Let us focus on this particular picture so
this gold forward curve, randomly, I have taken so the last date which I have considered,
it is 24th June. On 24th June, this shows a Contango, almost
all these days it shows a Contango structure. In fact the backwardation, gold backwardation
or gold futures price being less than the spot price has happened only at the near month
contract that is the near month contract are lesser than the spot prices but as we have
moved into the far month contract, they are more than the spot price. So this particular picture does not have the
spot price incorporated to it and this shows let us consider this particular 24th June
price so M1 price shows the contract maturing and July, August so and so forth, it has gone
up to M21. And this picture, I have already shown it
to you, the relationship between of ounces of investment by ETFs with respect to the
gold price and this is what I was mentioning the correlation of 0.94. So let me make it bigger so this gold ETF
and gold ETF investment and the gold price which has got a positive correlation of 0.94. And when it comes to gold ETF in India, we
have substantial number of gold ETFs available, listed at National Stock Exchange so which
are the which are the ETFs so you have Axis Mutual fund, Axis Gold, HDFC Mutual Fund so
and so forth, so you if you are interested to see what are the structures of these ETFs
and all, more information pertaining to these gold ETFs you can go to National Stock Exchange
website and spend some time. So this aspect, we have already discussed. Now, let us quickly go to the derivative contracts
on gold and in India, in Indian exchanges, many predominantly gold futures contracts
trade in terms of various lot sizes. So you have MCX Gold has gold futures it has
1 kg it has got Gold Mini, which has got 10 gram underlying, Gold Guinea has 8 gram as
your underlying, gold petal has 1 gram as underlying. And maximum maturity is for 12 months, this
is one of the largest longest duration contracts available. Most of the agri commodity and energy commodity
can have 6 to 8, max 6 to 8 months into the future, you can take futures position but
for gold you have a maturity running into 12 month and the final settlement price of
due date rate price is calculated based on the pole price at Ahmadabad or futures price
at international some international exchanges multiplied by the RBI reference rate and good
delivery list, this is something which is I thought of discussing a little bit. Remember in case of a crude oil or in case
of let us say soybean or any other agri commodity, the sellers will be taking the commodity,
putting it in the exchange approved warehouse, the warehouse will have some quality certifier
and assurer who will see the test the quality of the underlying and will certify whether
the underlying goods are as per the contract specification of the exchange. But in case of gold, this does not happen. No exchange takes the ownership of certifying
the quality of the gold to be delivered. What they do, they identify some of the refiners
whose gold they will be accepting as the delivery, so the responsibility of delivering quality
gold lies with the refiner and the exchanges do not have the in fact the exchanges do not
have the infrastructure or capacity to test the quality of the gold because testing, quality
testing can be quite expensive. It requires different kind of infrastructure
so no exchange all over the world takes that responsibility. Now let us go to the good delivery list so
as per the NCDEX, which are the good delivery list refiners. So these are if you can see it runs into how
many it runs into 2 and half pages so substantial number of refiner name and is given so let
us take like Boliden Commercial AB so this is the Sweden and the location of the refinery,
I am sorry I am having difficulty pronouncing this Skelleftehamn okay, so this particular
refinery so refinery of this Boliden Commercial AB can be gold bar coins produced at this
refinery can be delivered at the NCDEX platform. Interestingly only one refinery in India certifies
that. That is your MMTC PAMP India Private Limited,
this refinery is in Mewat. So with this we will come to an end on discussion
on the second session on gold and we will be resuming with the remaining part of the
gold in our third and final session so thanking all of you and we will be continuing with
our discussion from the good delivery list aspect, so looking forward to meeting you
all in the next session.

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