1

A PROJECT REPORT
ON
COMMODITY MARKET

Project Submitted in partial fulfillment of Post Graduate Diploma in

Management

Submitted by:
PANKAJ KUMAR
Roll No. 528
Batch 2007-2009

Under the guidance of:

Dr. Shashidharan Kutty - Dy. Director
(Banking, Finance & Insurance)

2
S.No. INDEX Page
No.
1 Introduction 4
2 Commodity 6
3 Commodity Market 7
4 Structure of Commodity Market 8
5 Different Types of Commodity Traded 9
6 Turnover of Indian Commodity Exchange 10
7 Market Share of Commodity Exchanges in India 10
8 Different Segments in Commodities Market 11
9 Leading Commodity Markets of World 12
10 Regulators 13
11 Leading Commodity Markets of India 14
12 Volumes in commodity Derivatives Worldwide 14
13 Commodity Futures Trading in India 15
14  Introduction 15
15  Benefits to Industry From Futures Trading 16
16  Benefits to Exchange Member 16
17  Why Commodity Futures? 17
18  What makes commodity trading attractive? 18
19 NCDEXs Trading System 20
20 Gold 22
21  Introduction 22
22  What makes Gold special 22
23  Market characteristics 22
24  Demand & Supply 23
25  Indian Gold Jewellery Market 24
26  MCX contract specifications of gold 25
27  FAQ on Gold 32
28  Gold Terminology 35
29 Conclusion 36
30 Bibliography 37

3
 India Commodity Market
“We are moving from a world in which the big eat the small to
one in which the fast eat the slow”.

-Klaus Schwab, 2000

(founder of the World Economic Forum)

“A strong and vibrant cash market is a pre-condition for a

successful and transparent futures market.”

INTRODUCTION

The vast geographical extent of India and her huge population is aptly

complemented by the size of her market. The broadest classification of the

Indian Market can be made in terms of the commodity market and the bond

market.

The commodity market in India comprises of all palpable markets that we

come across in our daily lives. Such markets are social institutions that

facilitate exchange of goods for money. The cost of goods is estimated in

terms of domestic currency. India Commodity Market can be subdivided into

the following two categories:

• Wholesale Market

• Retail Market

4
The traditional wholesale market in India dealt with whole sellers who bought

goods from the farmers and manufacturers and then sold them to the retailers

after making a profit in the process. It was the retailers who finally sold the

goods to the consumers. With the passage of time the importance of whole

sellers began to fade out for the following reasons:

 The whole sellers in most situations, acted as mere parasites who did

not add any value to the product but raised its price which was

eventually faced by the consumers.

 The improvement in transport facilities made the retailers directly

interact with the producers and hence the need for whole sellers was

not felt.

In recent years, the extent of the retail market (both organized and

unorganized) has evolved in leaps and bounds. In fact, the success stories of

the commodity market of India in recent years has mainly centered on the

growth generated by the Retail Sector. Almost every commodity under the

sun both agricultural and industrial is now being provided at well distributed

retail outlets throughout the country.

Moreover, the retail outlets belong to both the organized as well as the

unorganized sector. The unorganized retail outlets of the yesteryears consist

of small shop owners who are price takers where consumers face a highly

competitive price structure. The organized sector on the other hand are owned

by various business houses like Pantaloons, Reliance, Tata and others. Such

markets are usually selling a wide range of articles both agricultural and

manufactured, edible and inedible, perishable and durable. Modern marketing

strategies and other techniques of sales promotion enable such markets to

5
draw customers from every section of the society. However the growth of such

markets has still centered on the urban areas primarily due to infrastructural

limitations.

Considering the present growth rate, the total valuation of the Indian Retail

Market is estimated to cross Rs. 10,000 billion by the year 2010. Demand for

commodities is likely to become four times by 2010 than what it presently is.

COMMODITY

A commodity may be defined as an article, a product or material that is

bought and sold. It can be classified as every kind of movable property,

except Actionable Claims, Money & Securities. Commodities actually offer

immense potential to become a separate asset class for market-savvy

investors, arbitrageurs and speculators. Retail investors, who claim to

understand the equity markets, may find commodities an unfathomable

market. But commodities are easy to understand as far as fundamentals of

demand and supply are concerned. Retail investors should understand the

risks and advantages of trading in commodities futures before taking a

leap. Historically, pricing in commodities futures has been less volatile

compared with equity and bonds, thus providing an efficient portfolio

diversification option.

In fact, the size of the commodities markets in India is also quite

significant. Of the country's GDP of Rs 13, 20,730 crore (Rs 13,207.3

billion), commodities related (and dependent) industries constitute about

58 per cent.

6
 Currently, the various commodities across the country clock an annual

turnover of Rs 1, 40,000 crore (Rs 1,400 billion). With the introduction of

futures trading, the size of the commodities market grows many folds here

on.

COMMODITY MARKET

Commodity market is an important constituent of the financial markets of

any country. It is the market where a wide range of products, viz.,

precious metals, base metals, crude oil, energy and soft commodities like

palm oil, coffee etc. are traded. It is important to develop a vibrant, active

and liquid commodity market. This would help investors hedge their

commodity risk, take speculative positions in commodities and exploit

arbitrage opportunities in the market.

Turnover in Financial Markets and Commodity Market

(Rs in Crores)
S Market segments 2002-03 2003-04 2004-05 (E)
No.
1 Government Securities Market 1,544,376 (63) 2,518,322 (91.2) 2,827,872 (91)
2 Forex Market 658,035 (27) 2,318,531 (84) 3,867,936 (124.4)
3 Total Stock Market Turnover (I+ II) 1,374,405 (56) 3,745,507 (136) 4,160,702 (133.8)
I National Stock Exchange (a+b) 1,057,854 (43) 3,230,002 (117) 3,641,672 (117.1)
a)Cash 617,989 1,099,534 1,147,027
b)Derivatives 439,865 2,130,468 2,494,645
II Bombay Stock Exchange (a+b) 316,551 (13) 515,505 (18.7) 519,030 (16.7)
a)Cash 314,073 503,053 499,503
b)Derivatives 2,478 12,452 19,527
4 Commodities Market NA 130,215 (4.7) 500,000 (16.1)
Note: Fig. in bracket represents percentage to GDP at market prices
Source: Sebi bulletin

7
STRUCTURE OF COMMODITY MARKET

Ministry of
Consumer Affairs

FMC (Forwards
Market Commission)

Commodity
Exchange

National Exchange Regional Exchange

NCDEX MCX NMCE NBOT 20 other regional

exchanges

Quality
Certification
Hedger
Agencies
Warehouses (Exporters /
Millers Industry)

Producers
Commodities
Clearing Bank (Farmers/Co-
Ecosystem operatives/Ins
MCX titutional)

Transporters/ Traders
support agencies Consumers (speculators)arbi
(Retail/Institutio -trageurs/client)
-nal)
8
DIFFERENT TYPES OF COMMODITIES TRADED

World-over one will find that a market exits for almost all the commodities

known to us. These commodities can be broadly classified into the

following:

METAL Aluminium, Copper, Lead, Nickel, Sponge Iron, Steel Long

(Bhavnagar), Steel Long (Govindgarh), Steel Flat, Tin, Zinc

BULLION Gold, Gold HNI, Gold M, i-gold, Silver, Silver HNI, Silver M

FIBER Cotton L Staple, Cotton M Staple, Cotton S Staple, Cotton Yarn,

Kapas

ENERGY Brent Crude Oil, Crude Oil, Furnace Oil, Natural Gas, M. E.

Sour Crude Oil

SPICES Cardamom, Jeera, Pepper, Red Chilli

PLANTATIONS Arecanut, Cashew Kernel, Coffee (Robusta), Rubber

PULSES Chana, Masur, Yellow Peas

PETROCHEMICALS HDPE, Polypropylene(PP), PVC

OIL & OIL SEEDS Castor Oil, Castor Seeds, Coconut Cake, Coconut Oil, Cotton

Seed, Crude Palm Oil, Groundnut Oil, Kapasia Khalli, Mustard

Oil, Mustard Seed (Jaipur), Mustard Seed (Sirsa), RBD

Palmolein, Refined Soy Oil, Refined Sunflower Oil, Rice Bran

DOC, Rice Bran Refined Oil, Sesame Seed, Soymeal, Soy Bean,

Soy Seeds

CEREALS Maize

OTHERS Guargum, Guar Seed, Gurchaku, Mentha Oil, Potato (Agra),

Potato (Tarkeshwar), Sugar M-30, Sugar S-30

9
TURNOVER OF INDIAN COMMODITY EXCHANGES

Indian Commodity Futures Market (Rs Crores)

Exchanges 2004 2005 2006 2007
Multi Commodity Exchange (MCX) 165147 961,633 1,621,803 2,505,206
NCDEX 266,338 1,066,686 944,066 733,479
NMCE(Ahmadabad) 13,988 18,385 101,731 24,072
NBOT(Indore) 58,463 53,683 57,149 74,582
Others 67,823 54,735 14,591 37,997
All Exchanges 571,759 2,155,122 2,739,340 3,375,336

Turnover on Commodity Futures Markets

(Rs. In Crores)

Exchange 2003-04 2004-05 FIRST Half

NCDEX 1490 54011
NBOT 53014 51038
MCX 2456 30695
NMCE 23842 7943
ALL EXCHANGES 129364 170720

MARKET SHARE OF COMMODITY EXCHANGES IN INDIA

10
DIFFERENT SEGMENTS IN COMMODITIES MARKET

The commodities market exits in two distinct forms namely the Over the

Counter (OTC) market and the Exchange based market. Also, as in

equities, there exists the spot and the derivatives segment. The spot markets

are essentially over the counter markets and the participation is restricted to

people who are involved with that commodity say the farmer, processor,

wholesaler etc. Derivative trading takes place through exchange-based

markets with standardized contracts, settlements etc.

11
LEADING COMMODITY MARKETS OF WORLD

Some of the leading exchanges of the world are:

S. No. Global Commodity Exchanges

1 New York Mercantile Exchange (NYMEX)

2 London Metal Exchange (LME)

3 Chicago Board of Trade (CBOT)

4 New York Board of Trade (NYBOT)

5 Kansas Board of Trade

6 Winnipeg Commodity Exchange, Manitoba

7 Dalian Commodity Exchange, China

8 Bursa Malaysia Derivatives exchange

9 Singapore Commodity Exchange (SICOM)

10 Chicago Mercantile Exchange (CME), US

11 London Metal Exchange

12 Tokyo Commodity Exchange (TOCOM)

13 Shanghai Futures Exchange

14 Sydney Futures Exchange

15 London International Financial Futures and Options Exchange

(LIFFE)

16 National Multi-Commodity Exchange in India (NMCE), India

17 National Commodity and Derivatives Exchange (NCDEX), India

18 Multi Commodity Exchange of India Limited (MCX), India

19 Dubai Gold & Commodity Exchange (DGCX)

20 Dubai Mercantile Exchange (DME), (joint venture between Dubai

holding and the New York Mercantile Exchange (NYMEX))

12
Regulators

Each exchange is normally regulated by a national governmental (or semi-

governmental) regulatory agency:

Country Regulatory agency

Australia Australian Securities and Investments Commission

Chinese mainland China Securities Regulatory Commission

Hong Kong Securities and Futures Commission

India Securities and Exchange Board of India and Forward

Markets Commission (FMC)
Pakistan Securities and Exchange Commission of Pakistan

Singapore Monetary Authority of Singapore

UK Financial Services Authority

USA Commodity Futures Trading Commission

Malaysia Securities Commission

13
LEADING COMMODITY MARKETS OF INDIA

The government has now allowed national commodity exchanges, similar to

the BSE & NSE, to come up and let them deal in commodity derivatives in an

electronic trading environment. These exchanges are expected to offer a

nation-wide anonymous, order driven, screen based trading system for

trading. The Forward Markets Commission (FMC) will regulate these

exchanges.

Consequently four commodity exchanges have been approved to commence

business in this regard. They are:

S.NO. Commodity Market in India

1 Multi Commodity Exchange (MCX), Mumbai

2 National Commodity and Derivatives Exchange Ltd (NCDEX),

Mumbai

3 National Board of Trade (NBOT), Indore

4 National Multi Commodity Exchange (NMCE), Ahmadabad

VOLUMES IN COMMODITY DERIVATIVES WORLDWIDE

14
Source: FMC

Commodity Futures Trading in India

INTRODUCTION

Derivatives as a tool for managing risk first originated in the Commodities

markets. They were then found useful as a hedging tool in financial markets

as well. The basic concept of a derivative contract remains the same whether

the underlying happens to be a commodity or a financial asset. However there

are some features, which are very peculiar to commodity derivative markets.

In the case of financial derivatives, most of these contracts are cash settled.

Even in the case of physical settlement, financial assets are not bulky and do

not need special facility for storage. Due to the bulky nature of the underlying

assets, physical settlement in commodity derivatives creates the need for

warehousing. Similarly, the concept of varying quality of asset does not really

15
exist as far as financial underlyings are concerned. However in the case of

commodities, the quality of the asset underlying a contract can vary largely.

This becomes an important issue to be managed.

BENEFITS TO INDUSTRY FROM FUTURES TRADING

 Hedging the price risk associated with futures contractual

commitments.

 Spaced out purchases possible rather than large cash purchases and its

storage.

 Efficient price discovery prevents seasonal price volatility.

 Greater flexibility, certainty and transparency in procuring commodities

would aid bank lending.

 Facilitate informed lending.

 Hedged positions of producers and processors would reduce the risk of

default faced by banks. * Lending for agricultural sector would go up

with greater transparency in pricing and storage.

 Commodity Exchanges to act as distribution network to retail agri-

finance from Banks to rural households.

 Provide trading limit finance to Traders in commodities Exchanges.

BENEFITS TO EXCHANGE MEMBER

 Access to a huge potential market much greater than the securities and

cash market in commodities.

 Robust, scalable, state-of-art technology deployment.

 Member can trade in multiple commodities from a single point, on real

time basis.

16
  Traders would be trained to be Rural Advisors and Commodity

Specialists and through them multiple rural needs would be met, like

bank credit, information dissemination, etc.

WHY COMMODITY FUTURES?

One answer that is heard in the financial sector is "we need commodity

futures markets so that we will have volumes, brokerage fees, and something

to trade''. We have to look at futures market in a bigger perspective -- what is

the role for commodity futures in India's economy?

In India agriculture has traditionally been an area with heavy government

intervention. Government intervenes by trying to maintain buffer stocks, they

try to fix prices, and they have import-export restrictions and a host of other

interventions. Many economists think that we could have major benefits from

liberalization of the agricultural sector.

In this case, the question arises about who will maintain the buffer stock, how

will we smoothen the price fluctuations, how will farmers not be vulnerable

that tomorrow the price will crash when the crop comes out, how will farmers

get signals that in the future there will be a great need for wheat or rice. In all

these aspects the futures market has a very big role to play.

If we think there will be a shortage of wheat tomorrow, the futures prices will

go up today, and it will carry signals back to the farmer making sowing

decisions today. In this fashion, a system of futures markets will improve

cropping patterns.

Next, if I am growing wheat and am worried that by the time the harvest

comes out prices will go down, then I can sell my wheat on the futures

17
market. I can sell my wheat at a price, which is fixed today, which eliminates

my risk from price fluctuations. These days, agriculture requires investments -

- farmers spend money on fertilizers, high yielding varieties, etc. They are

worried when making these investments that by the time the crop comes out

prices might have dropped, resulting in losses. Thus a farmer would like to

lock in his future price and not be exposed to fluctuations in prices.

The third is the role about storage. Today we have the Food Corporation of

India, which is doing a huge job of storage, and it is a system, which -- in my

opinion -- does not work. Futures market will produce their own kind of

smoothing between the present and the future. If the future price is high and

the present price is low, an arbitrager will buy today and sell in the future. The

converse is also true, thus if the future price is low the arbitrageur will buy in

the futures market. These activities produce their own "optimal" buffer stocks,

smooth prices. They also work very effectively when there is trade in

agricultural commodities; arbitrageurs on the futures market will use imports

and exports to smooth Indian prices using foreign spot markets.

In totality, commodity futures markets are a part and parcel of a program for

agricultural liberalization. Many agriculture economists understand the need of

liberalization in the sector. Futures markets are an instrument for achieving

that liberalization.

WHAT MAKES COMMODITY TRADING ATTRACTIVE?

 A good low-risk portfolio diversifier

 A highly liquid asset class, acting as a counterweight to stocks, bonds

and real estate.

 Less volatile, compared with, equities and bonds.

18
 Investors can leverage their investments and multiply potential

earnings.

 Better risk-adjusted returns.

 A good hedge against any downturn in equities or bonds as there is

 Little correlation with equity and bond markets.

 High co-relation with changes in inflation.

 No securities transaction tax levied.

19
The NCDEX System

Every market transaction consists of three components i.e. trading, clearing

and settlement. A brief overview of how transactions happen on the NCDEX’s

market.

TRADING

The trading system on the NCDEX provides a fully automated screen based

trading for futures on commodities on a nationwide basis as well as online

monitoring and surveillance mechanism. It supports an order driven market

and provides complete transparency of trading operations. Order matching is

essential on the basis of commodity, its price, time and quantity. All quantity

fields are in units and price in rupees. The exchange specifies the unit of

trading and the delivery unit for futures contracts on various commodities.

The exchange notifies the regular lot size and tick size for each of the

contracts traded from time to time. When any order enters the trading

system, it is an active order. It tries to finds a match on the other side of the

book. If it finds a match, a trade is generated. If it does not find a match, the

order becomes passive and gets queued in the respective outstanding order

book in the system. Time stamping is done for each trade and provides the

possibility for a complete audit trail if required. NCDEX trades commodity

futures contracts having one month, two month and three month expiry

cycles. All contracts expire on the 20th of the expiry month. Thus a January

expiration contract would expire on the 20th of January and a February expiry

contract would cease trading on the 20th of February. If the 20th of the expiry

month is a trading holiday, the contracts shall expire on the previous trading

20
day. New contracts will be introduced on the trading day following the expiry

of the near month contract.

CLEARING

National Securities Clearing Corporation Limited (NSCCL) undertakes clearing

of trades executed on the NCDEX. The settlement guarantee fund is

maintained and managed by NCDEX. Only clearing members including

professional clearing members (PCMs) only are entitled to clear and settle

contracts through the clearing house. At NCDEX, after the trading hours on

the expiry date, based on the available information, the matching for

deliveries takes place firstly, on the basis of locations and then randomly,

keeping in view the factors such as available capacity of the vault/warehouse,

commodities already deposited and dematerialized and offered for delivery

etc. Matching done by this process is binding on the clearing members. After

completion of the matching process, clearing members are informed of the

deliverable/ receivable positions and the unmatched positions. Unmatched

positions have to be settled in cash. The cash settlement is only for the

incremental gain/loss as determined on the basis of final settlement price.

SETTLEMENT

Futures contracts have two types of settlements, the MTM settlement which

happens on a continuous basis at the end of each day, and the final

settlement which happens on the last trading day of the futures contract. On

the NCDEX, daily MTM settlement and the final MTM settlement in respect of

admitted deals in futures contracts are cash settled by debiting/crediting the

clearing accounts of CMs with the respective clearing bank.

21
All positions of a CM, brought forward, created during the day or closed out

during the day, are market to market at the daily settlement price or the final

settlement price at the close of trading hours on a day. On the date of expiry,

the final settlement price is the spot price on the expiry day. The responsibility

of settlement is on a trading cum clearing member for all trades done on his

own account and his client’s trades. A professional clearing member is

responsible for settling all the participants’ trades, which he has confirmed to

the exchange. On the expiry date of a futures contract, members submit

delivery information through delivery request window on the trader

workstations provided by NCDEX for all open positions for a commodity for all

constituents individually. NCDEX on receipt of such information matches the

information and arrives at delivery position for a member for a commodity.

The seller intending to make delivery takes the commodities to the designated

warehouse. These commodities have to be assayed by the exchange specified

assayer. The commodities have to meet the contract specifications with

allowed variances. If the commodities meet the specifications, the warehouse

accepts them. Warehouse then ensures that the receipts get updated in the

depository system giving a credit in the depositor’s electronic account. The

seller the gives the invoice to his clearing member, who would courier the

same to the buyer’s clearing member. On an appointed date, the buyer goes

to the warehouse and takes physical possession of the commodities.

22
Gold

Introduction

Gold is a unique asset based on few basic characteristics. First, it is primarily a

monetary asset, and partly a commodity. As much as two thirds of gold’s total

accumulated holdings relate to “store of value” considerations. Holdings in this

category include the central bank reserves, private investments, and high-

caratage jewellery bought primarily in developing countries as a vehicle for

savings. Thus, gold is primarily a monetary asset. Less than one third of gold’s

total accumulated holdings can be considered a commodity, the jewellery

bought in Western markets for adornment, and gold used in industry.

The distinction between gold and commodities is important. Gold has

maintained its value in after-inflation terms over the long run, while

commodities have declined.

Some analysts like to think of gold as a “currency without a country’. It is an

internationally recognized asset that is not dependent upon any government’s

promise to pay. This is an important feature when comparing gold to

conventional diversifiers like T-bills or bonds, which unlike gold, do have

counter-party risk.

What makes gold special?

 Timeless and Very Timely Investment

 Gold is an effective diversifier

 Gold is the ideal gift

 Gold is highly liquid

23
  Gold responds when you need it most

Market Characteristics

 The gold market is highly liquid. Gold held by central banks, other

major institutions, and retail jewellery is reinvested in market.

 Due to large stock of gold, against its demand, it is argued that the core

driver of the real price of gold is stock equilibrium rather than flow

equilibrium.

 Effective portfolio diversifier: This phrase summarizes the usefulness of

gold in terms of “Modern Portfolio Theory”, a strategy used by many

investment managers today. Using this approach, gold can be used as a

portfolio diversifier to improve investment performance.

 Effective diversification during “stress” periods: Traditional method of

portfolio diversification often fails when they are most needed, that is

during financial stress (instability). On these occasions, the correlations

and volatilities of return for most asset class (including traditional

diversifiers, such as bond and alternative assets) increase, thus

reducing the intended “cushioning” effect of the diversified portfolio.

Demand and supply

 China produced 276 metric tons of gold last year, equal to about 9.7

million ounces, said London precious metals consultancy GFMS Ltd.

That's up 12% from the year-ago and represented just over one-tenth

of the world's supply.

 The ranking pushes South Africa into second place, the first time the

gold giant has lost its top ranking since 1905. South Africa, whose late

24
 19th century gold rush led to the founding of mining heavyweight Anglo

American Plc and is home to global producers Gold Fields Ltd and

AngloGold Ashanti Ltd, saw its production decline 8% to 272 metric

tons.

 India is world largest gold consumer with an annual demand of 800

tonnes.

Demand and Supply of Gold in India (in tonnes)

2006 2007 % change

Supply
Mine Production 573 580 1
Net Producer Hedging -140 -129 -
Total mine supply 430 451 5
Official sector sales 93 95 2
Old gold Scrap 303 262 -13
Total Supply 826 808 2
Demand
Fabrication - - -
Jewellery 519 568 9
Industrial & Dental 111 112 1
Subtotal of above fabrication 630 680 8
Bar & coin retail investment 89 116 31
Other retail investment -3 -5 -
ETFs and similar 113 36 -68
Total Demand 829 827 0
Inferred Investment -3 -19 -
Source: GFMS Ltd.

25
Indian Gold Jewellery Market

 Plain 22 carat jewellery is the core of consumption especially in the

rural areas, where gold is so important in judging a family's status at a

marriage. A basic marriage set for a bride is two earrings, one nose pin,

one ring, one necklace and two bangles, all in 22 carat gold and

weighing up to 200 grams (6.2 oz).

 Studded (i.e. gem-set) 18 carat jewellery is increasingly popular in the

cities and is estimated to have used 31 tonnes (1 million oz) in 2001.

 Medallions, charms and small gift items account for up to half of what is

loosely called jewellery. These items are popular as gifts at weddings

and other family events.

 Gold thread, known as Jari used in high quality saris worn at weddings

and special occasions requires somewhere in the region of 20 tonnes

(0.6 m oz) annually.

 The market is highly fragmented with an estimated 100,000 workshops

supplying over 300,000 retailers, mostly family-owned, single shop

operations. The industry is beginning to be modernised with large

factories, installing the latest equipment, in centres such as Mumbai,

Ahmadabad and Bangalore.

 Hallmarking does not exist in India and under-caratage is

commonplace. The Bureau of Indian Standards has introduced a

voluntary scheme which, although not yet widely used, is becoming

more popular. The minimum legal caratage is 9 carat.

 The number of retail jewellery outlets has increased greatly since the

abolition of gold control, as has the number of Indians possessing gold

jewellery.

26
MCX Contract Specifications of Gold:

GOLD
Name of Commodity Gold
Ticker Symbol GLDPURMUMK
Trading System MCX Trading System
Trading Period Monday to Saturday
Trading Session Monday to Friday: 10:00a.m. to 11:30 p.m.
Saturday: 10:00a.m. to 2:00 p.m.
TRADING
Trading Unit 1 kg
Price Quote Rs. Per 10 g, ex-Ahmedabad (inclusive of all
taxes and levies relating to import and custom
duty, but excluding sales tax/VAT, any other
additional tax or surcharge on sales tax, local
taxes and octroi)
Maximum order size 10 kg
Tick Size Re. 1 per 10 g (minimum price movement)
Daily price limit 3%
Initial Margin 4%
Special Margin In case of initial volatility, a special margin at
such percentage (as deemed fit), will be imposed
immediately on both buy and sell side in respect
of all outstanding positions, which will remain in
force for next 2 days, after which the special
margin will be relaxed.
Maximum Allowable For individual client: 2 MT
For members collectively for all clients: 6 MT or
15%of the market position, whichever is high
DELIVERY
Delivery unit 1 kg
Delivery period margin 25% of the value of the open position during the
delivery period
Delivery center(s) At designated clearing house facilities of Group 4
Securitas at these centers and at additional
delivery centers at Chennai, New Delhi and
Hyderabad.
Delivery Logic Compulsory
SETTLEMENT PERIOD
Tender Period 1st to 6th day of the contract expiry month.
Delivery Period 1st to 6th day of the contract expiry month.
Pay-in of commodities On any tender days by 6.00 p.m. except
(delivery by seller Saturdays, Sundays and Trading Holidays.
member) Marking of delivery will be done on the tender
days based on the intentions received from the
sellers after the trading hours. On expiry all the
open positions shall be marked for delivery.
Delivery pay-in will be on E + 1 basis.
Pay-in of funds By 11.00 a.m. on Tender day +1 basis
Pay-out of funds and By 05.00 p.m. on Tender day +1 basis.
commodities (delivery to

27
buyer member)
INFORMATION RELATED TO DELIVERY
Delivery Logic Compulsory Delivery. Any seller having open
position on the expiry date fails to deliver then
the penalty as per the penal provision will be
imposed to the defaulting seller.
Mode of Communication Fax or Courier
Tender Period Margin 5% incremental margin for last 5 days on all
outstanding positions. Such margin will be
addition to initial, additional and special margin
as applicable.
Margin during delivery 25% on the marked quantity.
period
Exemption from margin Margin is exempted on receipt of documentary
during tender and delivery evidence (viz., Warehouse Receipt and Quality
period Certificate) of tendering delivery with the
Exchange during tender days.
Delivery order rate (DOR) Settlement/closing price on the respective tender
days except on expiry date. On expiry date the
delivery order rate shall be the Due Date Rate
(DDR) and not the closing price.
Penal Provision A penalty of 2.5% of DOR will be imposed on
defaulting buyer / seller out of which 2% will be
credited to IPF and 0.5% will be credited to the
counter party.
Additionally, 4% of DOR as a replacement cost
will be charged from defaulting buyer / seller out
of which 90% will be given to the counter party
and 10% will be retained by the Exchange as
administrative expenses.
Delivery Centers Ahmedabad and Mumbai at designated Clearing
House facilities of Group 4 Securitas at these
centers and at additional delivery centers at
Chennai, New Delhi and Hyderabad
Deliverable grade of The selling members tendering delivery will have
underlying commodity the option of delivering such grades as per the
contract specifications. The buyer has no option
to select a particular grade and the delivery
offered by the seller and allocation by the
Exchange shall be binding on him.
Verification by the Buyer At the time of taking delivery, the buyer can
at the time of release of check his delivery in front of Group 4 personnel.
delivery If he is satisfied with the quantity, weight and
quality of material, then he will issue receipt of
the metals instantly. If he is not satisfied with the
metal, he can insist for assaying by any of the
approved assayers available at that center. If the
buyer chooses for assaying, Group 4 person will
carry the goods to the assayers facilities, get it
assayed and bring it back to Group 4 facilities
along with assayer’s certificate. If the assayer’s

28
 certificate differs from the certificate submitted
by the seller in respect of quality or weight
materially, then the buyer and seller have to
mutually negotiate the final settlement proceeds
within 1 day from receipt of assayer’s report,
however if they do not agree on any mutually
acceptable amount within 1 day, then the
Exchange will send the goods to a second
assayer and in that case, the report received
from such assayer will be final and binding on
both buyer and seller. The cost of first assaying
as well as cost of transportation from Group 4 to
assayer’s facilities to and fro will be born by the
buyer, while the cost of second assaying, if any,
will be equally divided between the buyer and
seller. The vault charges during such period of
first and second assaying, if any, will be born by
both the buyers and sellers equally. If the buyer
does not opt for assaying at the time of lifting
delivery, then he will not have any further
recourse to challenge the quantity or quality
subsequently and it will be assumed that he has
received the quantity and quality as per the bill
made by the seller.
Validation Process On receipt of delivery, the Group 4 personnel will
do the following validations:
a. whether the person carrying Gold is the
designated clearing agent of the member.
b. whether the selling member is the bonafied
member of the Exchange.
c. whether the quantity being delivered is from
Exchange approved refinery
d. whether the serial numbers of all the bars is
mentioned in the packing list provided.
e. whether the original certificates are
accompanied with the Gold Bars
Any other validation checks, as they may desire.
Delivery Process In case any of the above validation fails, the
Group 4 Securitas will contact the Exchange
office and take any further action, only as per
instructions received from the
Exchange in writing. If all validations are
through, then the Group 4 Securitas personnel
will put the Gold in the vault. Then the custodian
of Group 4 will cut a serially numbered Group 4
receipt (in triplicate consisting of White, Pink and
Yellow slips), get the signature of the seller’s
clearing agent and signing the same for
authorization, hand over the Pink slip to seller’s
clearing agent, send by courier the third copy
(Yellow Colour slip) while retaining the White for
the records of Group 4 Securitas. Group 4 in

29
 front of the selling member’s clearing agent will
deposit the said metal into their vault.
Quality Adjustment The price of gold is on the basis of 995 purity. In
case a seller delivers 999 purity, he would get a
premium. In such case, the sale proceeds will be
calculated by way of delivery order rate * 999/
995
Procedure of taking For the purpose of taking delivery of goods fully
delivery from the Vault or partially, the Member shall send to the
Exchange an Authority letter on his letter head,
authorising a representative on his behalf to take
the delivery. The Authority letter sent by the
Member shall consist of the following details:
a. Name of the authorised representative.
b. Name of the Commodity along with quantity.
c. Name of the Vault along with the location.
d. Signature of the authorised representative.
e. Proof of Identity viz. PAN card, driving license,
Election ID.
f. Photo identity proof duly attested by the
Member.
The above-mentioned details are required to be
sent to the Exchange. Once the Exchange
receives the above-mentioned details, the
Exchange will send Delivery Order (DO) to the
Vault authorities directly.
Based on the Delivery Order received, the Vault
will issue the requested quantity to the
authorised representative who has to present
himself personally at the Vault along with the
requisite photo identity proof in original, the copy
of which was sent/communicated to the
Exchange by its Member.
The Vault officials will, upon final
scrutiny/checking of the identity, deliver goods to
the representative of the Member. The Vault
officials in case of any discrepancy or doubt or
any other reason may refuse to issue the goods
to the representative under the intimation to the
Exchange.
The delivery given to the representative shall be
final & binding to the Member at all times.
Taxes, duties, cess and Ex-Ahmedabad.
levies Inclusive of all charges / levies relating to import
duty, customs to be borne by Seller. But
excluding Sales Tax / VAT, any other additional
tax or surcharge on sales tax, local taxes and
octroi to be borne by the Buyer.
Endorsement of delivery The buyer member can endorse delivery order to
order a client or any third party with full disclosure
given to the Exchange. Responsibility for

30
 contractual liability would be with the original
assignee.
Vault, Insurance and Borne by the seller till the date of pay-out of
Transportation charges delivery and the buyer after the date of pay-out.
Extension of delivery As per Exchange decision due to a force majeure
period or otherwise.
Due date rate (DDR) DDR is calculated on 5th day of the contract
month. This is calculated by way of taking simple
average of last 5 days of the spot market of
Ahmedabad.
Legal obligation The members will provide appropriate tax forms
wherever required as per law and as customary
and neither of the parties (seller member and
buyer member) will unreasonably refuse to do
so.
Applicability of Business The general provisions of Byelaws, rules and
Rules Business Rules of the Exchange and decisions
taken by Forward Markets Commission, Board of
Directors and Executive Committee of the
Exchange in respect of matters specified above
will form and integral part of this contract. The
Exchange or FMC as the case may be further
prescribe additional measures relating to delivery
procedures, warehousing, quality certification,
margining, risk management from time to time.
(The interpretation or clarification given by the
Exchange on any terms of this contract shall be
final and binding on the members and others.)
STEPS TO BE FOLLOWED FOR DELIVERY
Intention to take delivery On any tender days by 6.00 p.m.
by buyers
Dissemination of The Exchange will inform members through TWS
information on tendered regarding tender notice and delivery intentions of
delivery and buyers the seller’s members and the buyers respectively
interest by 7.00 p.m. on the respective tender days and
on Saturdays by 1:00 p.m.
Evidence of stocks in At the time of issuing delivery order, the Member
possession must satisfy the Exchange that he holds stocks of
the quantity and quality specified in the Delivery
Order at the declared delivery center by
producing warehouse receipt.
Tender notice by seller The seller will issue tender notice along with
evidence of delivery to the Exchange in a
specified format by 6:00 p.m. and on Saturdays
by 12:00 noon.
Buyer’s obligation The buyer shall not refuse taking delivery and
such refusal will entertain penalty as per the
penal provision.
Allocation of delivery As per the closing price on the respective tender
days.

31
Source: MCX Gold Report 1

32
Frequently Asked Questions on Gold

Q1. What is Gold and why is its chemical symbol Au?

Gold is a rare metallic element with a melting point of 1064 degrees

centigrade and a boiling point of 2808 degrees centigrade. Its chemical
symbol, Au, is short for the Latin word for gold, 'Aurum', which literally means
'Glowing Dawn'. It has several properties that have made it very useful to
mankind over the years, notably its excellent conductive properties and its
inability to react with water or oxygen.

Q2. Where does the word Gold come from?

The word gold appears to be derived from the Indo-European root 'yellow',
reflecting one of the most obvious properties of gold. This is reflected in the
similarities of the word gold in various languages: Gold (English), Gold
(German), Guld (Danish), Gulden (Dutch), Goud (Afrikaans), Gull (Norwegian)
and Kulta (Finnish).

Q3. How much gold is there in the world?

At the end of 2001, it is estimated that all the gold ever mined amounts to
about 145,000 tonnes.

Q4. Why is gold measured in carats?

This stems back to ancient times in the Mediterranean /Middle East, when a
carat became used as a measure of the purity of gold alloys (see next
Question 5). The purity of gold is now measured also in terms if fineness, i. e.
parts per thousand. Thus 18 carats is 18/24th of 1000 parts = 750 fineness.

Q5. What is a Carat?

A Carat (Karat in USA & Germany) was originally a unit of mass (weight)
based on the Carob seed or bean used by ancient merchants in the Middle
East. The Carob seed is from the Carob or locust bean tree. The carat is still
used as such for the weight of gem stones (1 carat is about 200 mg). For
gold, it has come to be used for measuring the purity of gold where pure gold

33
is defined as 24 carats. How and when this change occurred is not clear. It
does involve the Romans who also used the name Siliqua Graeca (Keration in
Greek, Qirat in Arabic, now Carat in modern times) for the bean of the Carob
tree. The Romans also used the name Siliqua for a small silver coin, which
was one-twentyfourth of the golden solidus of Constantine. This latter had a
mass of about 4.54 grammes, so the Siliqua was approximately equivalent in
value to the mass of 1 Keration or Siliqua Graeca of gold, i.e the value of
1/24th of a Solidus is about 1 Keration of gold, i.e 1 carat.

Q6. Who owns most gold?

If we take national gold reserves, then most gold is owned by the USA
followed by Germany and the IMF. If we include jewellery ownership, then
India is the largest repository of gold in terms of total gold within the national
boundaries. In terms of personal ownership, it is not known who owns the
most, but is possibly a member of a ruling royal family in the East.

Q7. If all the gold was laid around the world, how far would it stretch?

If we make all the gold ever produced into a thin wire of 5 microns (millionths
of a metre) diameter – the finest one can draw a gold wire, then all the gold
would stretch around the circumference of the world an astounding 72 million
times approximately!

Q8. How much new gold is produced per year?

In 2001, mine production amounted to 2,604 tonnes or 67% of total gold

demand in that year. Gold production has been growing for years, but the real
acceleration took place after the late 1970s, when output was in the region of
1,500tpa. This year output will fall short of production levels in 2001. This is
partly for specific operational reasons at some of the larger mines (Grasberg
and Porgera), along with lower grades at some of the operations in Nevada.
The reduction in exploration and development expenditure over the past five
years is leading a number of analysts to suggest that, with other operations
nearing the end of their lives, global production is likely to drop slightly over
the next two to three years subject always of course to price.

34
Q9. How much does it cost to run a gold mine?

Gold mining is very capital intensive, particularly in the deep mines of South
Africa where mining is carried out at depths of 3000 meters and proposals to
mine even deeper at 4,500 meters are being pursued. Typical mining costs
are US $238/troy ounce gold average but these can vary widely depending on
mining type and ore quality. Richer ores mined at the surface (open cast
mining) is considerably cheaper to mine than underground mining at depth.
Such mining requires expensive sinking of shafts deep into the ground.

Q10. How does a gold mine work?

The gold-containing ore has to be dug from the surface or blasted from the
rock face underground. This is then hauled to the surface and milled to release
the gold. The gold is then separated from the rock (gangue) by techniques
such as flotation, smelted to a gold-rich doré and cast into bars. These are
then refined to gold bars by the Miller chlorination process to a purity of
99.5%. If higher purity is needed or platinum group metal contaminants are
present, this gold is further refined by the Wohlwill electrolytic process to
99.9% purity. Mine tailings containing low amounts of gold may be treated
with cyanide to dissolve the gold and this is then extracted by the carbon in
pulp technique before smelting and refining.

Q12. How big is a tonne of gold?

Gold is traditionally weighed in Troy Ounces (31.1035 grammes). With the

density of gold at 19.32 g/cm3, a troy ounce of gold would have a volume of
1.64 cm3. A tonne of gold would therefore have a volume of 51, 760 cm3,
which would be equivalent to a cube of side 37.27cm (Approx. 1' 3'').

35
Gold Terminology

For the purpose of this standard, the following definitions shall apply:

 Assaying: The method of accurate determination of the gold content of

the sample expressed in parts per thousand (%).
 Carat: One-twenty fourth part by mass of the metallic element gold.
 Fineness: The ratio between the mass of gold content and the total
mass expressed in parts per thousand (%).
 Find Gold: It is gold having fineness 999 parts per thousand (5) and
above without any negative tolerance.
 Gold: The metallic element gold, free from any other element.
 Standard Gold: Gold having fineness 995 parts per thousand (%) and
above without any negative tolerance.
 Grain: One of the earliest weight units used for measuring gold. One
grain is equivalent to 0.0648 grams.
 Hallmark: Mark, or marks, which indicate the producer of a gold bar
and its number, fineness, etc.
 Karat: Unit of fineness, scaled from one to 24. 24 karat gold (or pure
gold) has at least 999 parts pure gold per thousand; 18-karat has 750,
parts pure gold and 250 parts alloy, etc.
 Kilo Bar: A bar weighing one kilogram – approximately 32.1507 troy
ounces.
 Legal Tender: The coin or currency which the national monetary
authority declares to be universally acceptable as a medium of
exchange; acceptable for instance in the discharge of debts.
 Liquidity: The quality possessed by a financial instrument of being
readily convertible into cash without significant loss of value.
 Troy Ounce: A unit of weight, equal to about 1.1 avoirdupois
(ordinary) ounces. The word ounce when applied to gold refers to a troy
ounce. 1 troy ounce is equivalent to 31.1034768 grams.

36
CONCLUSION

After almost two years that commodity trading is finding favour with Indian

investors and is been seen as a separate asset class with good growth

opportunities. For diversification of portfolio beyond shares, fixed deposits

and mutual funds, commodity trading offers a good option for long-term

investors and arbitrageurs and speculators. And, now, with daily global

volumes in commodity trading touching three times that of equities, trading in

commodities cannot be ignored by Indian investors.

Online commodity exchanges need to revamp certain laws governing futures

in commodities to make the markets more attractive. The national multi-

commodity exchanges have unitedly proposed to the government that in view

of the growth of the commodities market, foreign institutional investors should

be given the go-ahead to invest in commodity futures in India. Their entry

will deepen and broad base the commodity futures market. As a matter of

fact, derivative instruments, such as futures, can help India become a global

trading hub for select commodities.

Commodity trading in India is poised for a big take-off in India on the back of

factors like global economic recovery and increasing demand from China for

commodities. Considering the huge volatility witnessed in the equity markets

recently with the Sensex touching 21000 level commodities could add the

required zing to investors' portfolio. Therefore, it won't be long before the

market sees the emergence of a completely redefined set of retail investors.

37
Bibliography

www.mcxindia.com

www.indiamba.com

www.commodityindia.com

www.business.mapsofindia.com

www.bseindia.com

www.ncdex.com

www.sebi.gov.in, SEBI Bulletin

www.indiaexpress.com

www.nmce.com

www.nbotind.org

www.gold.org

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