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Commodity
GOLD
Description | Overview | History | Gold producing countries | Indian gold market | Major trading centers | Contract specifications
Description

Gold is a brilliant yellow precious metal that is resistant to air and water corrosion. It is a very soft and pure metal (24 Kt.). Gold is the most malleable and ductile metal found on earth. That’s why it is expensive and it is alloyed with other metals, usually copper and silver to make it less expensive and harder. A karat is the unit that measures the purity of gold jewelry or else it is hallmarked with a three-digit number that indicates the parts per thousand of gold. Some countries hallmark gold with a three-digit number that indicates the parts per thousand of gold. The alloyed gold comes in many colors and may not be bright yellow all the time.

Overview

Gold is traded as a commodity but primarily it is a monetary asset. It counts up to more than 65% of gold's total accumulated holdings when it comes to 'value for investment’ by central bank reserves, private players and high-carat jewelry. The remaining accumulated gold deposits are as a 'commodity' for jewelry in Western markets and usage in industry. It is a highly liquid market. It is argued that the real price of gold is should be driven by stock equilibrium rather than flow equilibrium due to large stocks of Gold as against its demand.

World’s largest gold producing country is South Africa with 394 tons in 2001. On the other hand, world's largest gold consuming country is India with an annual demand of 843.2 tonnes comprising of 26.2% of total world demands.

  World’s gold demand is constantly increasing and it is nearing record levels at 4000 tonnes per year while the mine production is constant at 2250 tonnes per annum (Source: World Gold Council)

The gold prices are moving upwards due to the reduction in production level as compared to the demand and also due to the weakening economy of the US.

  It has been found out the total world gold production would decline about 30% over the next 7 years as the new discoveries in the major gold producing countries have become difficult, expensive and time consuming according to the studies done by The World Bank and Beacon Group.

History

Since ancient times, gold has always been an important asset and a value store. Gold was used as an exchange medium even before the Roman Empire existed. The gold was also used for currency by Chinese and Hindu cultures. This shows that the gold was used not only by the western cultures but the eastern cultures also.

Great Britain started the suit by adopting a gold-backed paper currency and the rest of the industrialized world followed this. The United States also started using gold in its currency and by the end of 1933, the United States Dollar was equal to 1/20th of an ounce of gold. Gold backed up the United States Dollar under an agreement known as the Bretton Woods agreement. Under this agreement, a specific value of gold tied the Dollar and also the other global currencies. This specific value was $35/oz of gold from 1934 to 1968. That made it illegal for the citizens of the US to own gold so that the level of gold and subsequently the value of dollar could be protected.

 
When the Gold Standard was evocated, it became a popular investment medium, and it led to risen gold prices to $800/oz from $35/oz. Since then, no matter whatever happened, be it famines, floods or even world wars, gold’s importance as an investment medium hasn’t changed at all.

Since 17th century, London has been the center of gold trading. It was because the gold was brought to London for refining and distribution purposes. Meanwhile, it began a method for disseminating the price of Gold known as the "Fix" in 1919 as the center of distribution. The price, at which the most buy and sell orders, of the members or Fixing Seat Holder's, match, or balance, is known as the Fix. A large volume of physical Gold can be bought or sold at a single, clearly posted price, the fix. The fix is a benchmark price for many transactions worldwide, whether for mines, fabricators or central banks, because it is undisputed prices at which all six of the largest Gold trading houses are willing do business.

History of gold in India

Prior to 1962, India was the world's largest gold market and the main trading center was Bombay. In 1962, the government enacted the Gold Control Act, which prohibited the citizens of India from holding pure gold bars and coins due to loss of reserves during the indo-china war. It was declared that the old holdings in pure gold had to be compulsorily converted into jewelry. Pure gold bars and coins were to be dealt only by licensed dealers.

A large unofficial market sprung up which dealt in cash only as a consequence of this legislation that adversely affected the official gold market. This also made way for smuggling and black marketing, which comprised of many jewelers and bullion traders.

In 1990, India was on a verge of default of external liabilities as it had a major foreign exchange problem. It had to give up the concept of controlling and licensing as it led to nothing more than corruption and shortages. As a result, the Indian government pledged 40 tonnes from their gold reserves with the Bank of England. India had to adopt the concept of liberalization. The government abolished the 1962 Gold Control Act in 1992 and liberalized the import of gold in India for a duty payment of Rs. 250 per 10 grams. The government made up for the foreign exchange problem by allowing free imports and earning the taxes. This step expanded the gold market and it also waved off the unofficial trade i.e. smuggling and black marketing. This makes India the most price-sensitive market for gold in the world.

Gold producing countries
 
  • South Africa
  • United States
  • Australia
  • China
  • Canada
  • Russia
  • Indonesia
  • Peru
  • Uzbekistan
  • Papua New Guinea
  • Ghana
  • Brazil
  • Chile
  • Philippines
  • Mali
  • Mexico
  • Argentina
  • Kyrgyz tan
  • Zimbabwe
  • Colombia

    The largest producer of Gold is South Africa. It accounts for an estimated 16.5 million ounces of Gold annually in the next 3 years; and produces almost 20 percent of the world’s bullion. Hoping to control its declining production trend due to the extended weakness in the price of Gold in recent years, the South African Gold Industry is working in the direction to lower its production costs and boost productivity. The second largest producer of gold is United States. It accounts for an estimated 10.4 million ounces of Gold annually by 2001 and produces about 12.5% of the world’s Gold supply. Due to the expansion US Mining operations, and because of the reduced profitability due to the low price of Gold, reduction in mine production is expected by 9% by the US during the next three years. The third largest producer of gold is Australia with an estimated 9.6 million ounces annual production by 2001.

    Nearly 45% of the world Gold supply was produced by the top three producing nations. Latin America (Mexico, Peru, Chile and Brazil) and the Far East producers are expected to increase production in the next three years. Though these countries add up to a very small share in world’s total supply, their production increase will counteract some of the production cuts made by the top three, big producers.

    Production of gold in India

  • Gold holdings in India are estimated to be in the range of 10000-13000 tonnes and are predominantly private.
  • India’s gold consumption is 25% of world’s total gold production.
  • India has a very limited gold production of around 9 tonnes in 2002The domestic production of the gold is very limited which is around 9 tonnes in 2002 including 2.940 tonnes from mines and 6.203 tonnes from Birla Copper
  • More than 60% of Indian consumption is met through imports
  • The availability of recycled Gold is price sensitive and the fabricated old Gold scraps is price elastic and was estimated to be near 450 tonnes in 2002 rose almost more than 40%.
Indian gold market

Gold comes second after bank deposits when it comes to the preference for investment in India and considered a savings and investment vehicle. India is the world's largest consumer of gold in jewelry as investment. The commercial banks were authorized to import gold from jewelers and exporters for sale or loan in 1997 by the RBI. In India 13 banks are involved in the imports of gold currently. As a result the difference in international and domestic prices is reduced from 57% during 1986 to 1991 to 8.5 percent in 2001. In Indian society the gold hoarding tendency is well ingrained. Monsoon, harvest and marriage season dictates the domestic consumption. Indian jewelry is highly volatile and sensitive. Stock market and a wide range of consumer goods are providing competition to gold in cities. As compared to the rest of the world, facilities for refining, assaying, making them into standard bars in India, are insignificant, both qualitatively and quantitatively. 

Market Moving Factors

  • Reclaimed scrap and official gold loans (Above ground supply from sales by central banks)
  • Producer / miner hedging interest.
  • World macro-economic factors - US Dollar, Interest rate.
  • Comparative returns on stock markets
  • Domestic demand based on monsoon and agricultural output.

Demand and Supply patterns in India

Gold’s total consumer demand is more than 3400 tonnes per year i.e. $40 billion worth. Predominated by females, Jewelry is form of gold in which more than 80% of the gold is consumed, while bars and coins occupy not higher than 10% of the Gold consumed. India demand about 800 tonnes of gold which makes the largest market in the world followed by USA, Middle East and China. India is also the largest repository of gold in terms of total gold within the national boundaries.
 

Years Indian demand
(Figures in metric tons)
Total World demand
(Figures in metric tons)
Indian demand as % of the total World Demand

Average price
(Rs per 10 grams)

 

1996 508 2780 18% 5191
1997 737 3054 24% 4556
1998 815 2714 30% 4182
1999 839 3284 25% 4327
2000 830 3264 25% 4518
2001 843 3218 26% 4080

Regarding pattern of demand, about 80% of gold is demanded for jewelry fabrication, and 15% for investor-demand and barely 5 % for industrial uses.

The demand for Gold jewelry is dependent on various factors- religions, rituals, preference of wealth for women, and hedging against inflation. These factors are difficult to prioritize but it can be said that the demand for jewelry is a combined effect of all the factors, and placing any one of these factors as the most important would not be realistic. More than 70% of the Gold consumed in India is consumed by the rural India.

Gold and Silver jewelry forms a major component of the gifts given to a woman at the time of marriage in the Hindu, Jain and Sikh community. That’s why gold play an important role in marriage and religious festivals in India. The average gifts estimated would not be less than 100 grams of gold per marriage. This has led to the making the Gold market to the size of 500 tonnes on an average ten millions marriage per annum. Temple system in India also occupies a significant position where gold is used to prepare idols and devotees offer gold in temple. Thus we can say that a major portion of the gold demand in India lies n the current social and cultural systems and it is taken into account in the formulation of government policies.

  According to the World Gold Institute's Annual Production report, in 2001 the world gold mine production has reached 83.5 million ounces as result of subsequent increase of one percent a year between 1998 and 2001. This is in contrast to that of increase in 1980 when mine production increased from 41 million ounces to 65 million ounces. As a consequence, production has gone slow and emphasis is on lowering the production costs. This change in emphasis is expected to reduce the total production of Gold by 15 million ounces in the next three years.

Major trading centers of gold
 
  • London (clearing house)
  • New York (home of futures trading)
  • Zurich (physical turntable)
  • Istanbul, Dubai, Singapore and Hong Kong (doorways to important consuming regions)
  • Tokyo
  • Mumbai (India's liberalized gold regime)

Hong Kong Gold Market, Zurich Gold Market, London Gold Market and New York Market are the 24-hour gold markets.

In India, gold is traded in Mumbai and Ahmedabad. It is also traded in three of India’s major commodity exchanges namely National Commodity & Derivatives Exchange ltd, Multi Commodity Exchange of India ltd and National Multi Commodity Exchange of India ltd.

Future contract specifications of gold in various commodity exchanges
 
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