INTRODUCTION

The greatest early surge in gold refining was followed the first voyage of Columbus. From 1492 to 1600 central and south America and Caribbean Island were contributed significant quantities of gold to world commerce. So the Commodity Futures trading have a long history. The first future market appeared in 1875. But the new standardized from of trading is an attractive package for all the people who earn money through speculation by trading in to FUTURES. It is becoming an alternative for the other investment opportunities. The amounts of investment in commodities were increasing year by year. Commodity is a consumer good various commodities are used in our daily life. Like wheat is used for our breakfast bread, cotton is for fabrication, gold is used for jewellery by humans, petroleum products are used for different purposes. Commodities futures trading have evolved from the need for ensuring continuous supply of seasonal agricultural crops. In Japan the history of organized commodity derivatives in India goes back to the nineteenth century when Cotton Trade Association started futures trading in 1875, about a decade after they started in Chicago. Over the time datives market developed in several commodities in India. Following Cotton, derivatives trading started in oilseed in Bombay (1900), raw jute and jute goods in Calcutta (1912), Wheat in Hapur (1913) and Bullion in Bombay (1920).Commodities futures trading have evolved, merchants stored rice in warehouse for future use. In order to raise case warehouse holders sold receipts against the stored rice. These were known as rice tickets. Eventually such rice tickets became accepted as a kind of general commercial currency Rules came into being, to standardize the trading in rice tickets. The futures contract, as we know it today, evolved as farmers (sellers) and dealers (buyers) began to commit to future exchanges of grain for cash. For instance, the farmer would agree with the dealer on a price to deliver to him 5,000 bushels of wheat at the end of June. The bargain suited both parties. The farmer knew how much he would be paid for his wheat, and the dealer knew his costs in advance. The two parties may have exchanged a written contract to this effect and even a small amount of money representing a Guarantee.
[2]

Such contracts became common and were even used as collateral for bank loans. They also began to change hands before the delivery date. If the dealer decided he didnt want the wheat, he would sell the contract to someone who did. Or, the farmer who didnt want to deliver his wheat might pass his obligation on to another farmer. The price would go up and down depending on what was happening in the wheat market. If bad weather had come, the people who had contracted to sell wheat would hold more valuable contracts because the supply would be lower; if the harvest were bigger than expected, the sellers contract would become less valuable. It wasnt long before people who had no intention of ever buying or selling wheat began trading the contracts. They were speculators, hoping to buy low and sell high or sell high and buy low. In the early 20th century, advanced communication & transportation, centralized warehouses built in the principal markets, to distribute goods more economically, paved the way to expanded interstate and international trade. Agricultural commodities were the most commonly traded, but it led to the fact that a market can flourish for any underlying a long as there is an active pool of buyers and sellers. In the last 25 years, derivatives have become increasingly important in the world of trading. Futures and Options are now traded actively on many exchanges.

[3]

NEED FOR THE STUDY

Today is the era of fast changing technology and business opportunities under the impact of liberalization, privatization and globalization? Advanced communication technology has rendered flexible business ideas surpassing time, place and utility constraints. This has lead to idea based businesses and markets like commodity markets, futures And options markets which are virtual in nature. Though the initiation of such markets was towards benefiting the primary suppliers or end users I the form of stabilized higher prices or guaranteed minimum price or guaranteed supplies, nowa-days such markets serve the purpose of speculators who participate in trading towards gaining profits through intelligent time tested investment programs which are fundamentally based on some sound steadfast scientific and mathematical models and analysis like technical analysis, fundamental analysis and soon. Under this context commodities market has its own significance and vital role to play in the economy. Though it is new to India it has profound impact on economy and society both positive and negative. Commodities ranging from coffee seeds to pepper, palm oil ; gold to platinum; coal to iron & steel are being traded in these markets by all types of players like hedgers, speculators, manufacturers and so on. Directly or indirectly each and every individual is being affected by this through steep hike in prices of commodities like gold and so on. Even government and other regulating no say in this respect. The system is highly complicated and has enduring impact on economy and society. Under this context it highly essential for business students, scholars and economists to explore the ground realities of such markets and understand the mechanism, systems and implications for the society and economy. The topic being latest AND needs the specific and committed attention of the researchers for profound understanding and exploration.

[4]

SCOPE OF THE STUDY

a) The study will help to identify how the commodity trading in stock market. b) The study will help to identify gold trading in stock market. c) The study will help to identify changes in gold prices regarding certain time period. d) The study will help to the commodity investors on the investment exactly on gold.

OBJECTIVES OF THE STUDY Primary objectives:

a. The study is to serve as an educational material for first time investors entering into a commodity market. b. To analyze commodity market and understand the clearance & settlement mechanism. c. To suggest the optimus pvt ltd
d. To know the investment pattern of commodity traders and people

Secondary objectives:
a. To review the mechanism of rise and fall of gold prices. b. To forecast the future position of commodity market in India. c. To understand the socio, political and cultural implications behind the market. d. To understand the psychological and market sentiment issues related to the commodity market with respect gold trading.

[5]

RESEARCH METHODOLOGY
Fundamental to the success of any research project is sound research design. A research design purely and simplify the work or plan of a study that guides the collection and analysis of the data. The study is based on only secondary sources of data

Secondary data:

Secondary data basically comprise company manuals, records, exchange broachers, web sites, and news records. After the collection of data from the primary and secondary sources was consolidated, tabulated, analysis technically interpreted and presented in the report. For the purpose of analyzing the data statistical tools like graphs, tables and percentage methods have been adequately utilized. On the basis of information generated from these historical trends historical trend analysis and statistical projection, conclusions have been drawn and suitable suggestions / recommendations made.

LIMITATIONS OF THE STUDY

The title itself is a big ocean. One cant forecast the measure of the commodity market.
The time period is limited to a span of only 45 days, so analysis is based only on the efforts of

the duration The study covers only fundamental related to MCX operations. It does not cover the hole of commodity market.
The data is based on study at Vijayawada branch.

The reliability of the study depends upon the information furnished by the officials.

[6]

HISTORY OF GOLD: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, golds importance as an investment medium hasnt 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.

[7]

Gold:
Gold is the oldest precious metal known to man and for thousands of years it has been valued as a global currency, a commodity, an investment and simply an object of beauty. Gold is a precious metal that has been valued by people since ancient times. People use gold for coins, jewelry, ornaments, and many industrial purposes. Until recently, gold reserves formed the basis of world monetary systems. Gold is a very soft metal when it is pure (24 Kt. is pure gold). Gold is the most malleable (hammerable) and ductile (able to be made into wire) metal. Gold is usually alloyed (mixed with other metals, often silver and copper) to make it less expensive and harder. The scientific abbreviation of gold is Au.

Major Characteristics:
Gold is unique as it is both a commodity and a monetary asset. Its stability and high value makes it virtually indestructible and ensures that it is almost always recovered and recycled. The economic sense as the stock of gold remains essentially constant while ownership shifts from one party to another. Although gold mine production is relatively inelastic, recycled gold (or scrap) ensures there is a potential source of easily traded supply when needed, and this helps to stabilize gold price. Economic forces that determine the price of gold are different from, and in many cases opposed to the forces that influence most financial assets.

Reasons of popularity of gold:

Large population of India lives in villages. Many of them, in recent past, were too poor to have proper living arrangements. These poor people had negligible assets. They wanted to keep it in their physical possession all the times, because they
[8]

had not even residences to keep it. Hence, wearable gold Jewelry was the only option for them. Floods and droughts were continual phenomenon of their lives. Those forced many villagers to flee to safer places. It was easy to carry gold Jewelry while fleeing in distress. They used to sell or mortgage it while in crisis and purchase it in good times. Approximately ten million marriages occur in India every year. India has a tradition of gifting gold in the marriages. Rich, middle and poor all classes bestow gold in form of Jewelry upon their daughters. Rich and middle classes also have a trend of presenting gold Jewelry to the near relatives of the bride and the groom in marriages. These marriages require about one thousand five hundred tons of gold every year. It is evident that gold demand in India cannot easily go down. Agriculture is the base of Indian economy. Gold Jewelry is popular among farmers too. Gold jewelry sales spurt after a bumper crop. There are many religious, social and cultural festivals in India. Affluent people generally present gold ornaments in these festivals to females in their family.

Melting & refining assaying facility in India:

At present, gold is mainly refined in Bombay where a few refineries like the India Government Mint and National refinery are active. Some private refineries are also operating elsewhere with limited capacity. As none of the refineries is LBMA recognized, there is a need to upgrade and also increase the refining capacity.

Market Moving Factors:

Indian gold prices are highly correlated with international prices. However, the fluctuations in the INR-US Dollar impact domestic gold prices and have to be closely followed. The global prices are driven by a host of factors with macro-economic factors like strength of the economy, rising importance of emerging markets, currency movements, interest rates being major influencing factors.
[9]

 Supply-demand is a major influencer, amid rising global investor demand and almost stable supplies. Shifts in official gold reserves, reports of sales/purchases by central banks act as major price influencing factors, whenever such reports surface. The investment in gold is influenced by comparative returns from other markets like stock markets, real estate other commodities like crude oil. Domestically, demand and consequently prices to some extent are influenced by seasonal factors like marriages. The rural demand is influenced by monsoon, agricultural output and health of the rural economy.

Price trends and factors that influence prices:

Indian gold prices follow more or less the international price trends. However, the strong domestic demand for gold and the restrictive policy stance are reflected in the higher price of gold in the domestic market compared to that in the international market at the available exchange rate. Since the demand for gold is closely tied to the production of jewelry, gold prices tend to increase during the time of year when demand for jewellery is greatest. Christmas, Mothers Day and Valentine Day are all major shopping seasons and hence the demand for metals tends to be strong a few months ahead of these holidays. Also, the summer wedding season sees a large increase in the demand for metals, so price strength in March and April is not uncommon. On the other hand in November, December, January and February prices tend to decline and jewelers tend to have holiday inventory to unwind.

Indian Standard: Scope:

This standard specifies eight grades of gold, used in the manufacture of jewellery/artifacts of gold, based on their gold content. This standard also specifies the guidelines for marking of purity and other details on tested jewellery/artifacts.

[10]

Requirements:
The fine or standard gold used for the manufacture of jewellery shall have the fineness as agreed to between the purchased and the manufacturer subject to a minimum of fineness as given in 4.1 without any negative tolerance. Solders used for the manufacture of gold jewellery/artifacts shall be of the same fineness (or caratage) as that of the jewellery/article and shall conform to the requirements as specified in IS 3095. However in case of 23 carat jewellery/artifacts where it is not possible to use solder of the same caratage, solders of immediate next lower caratage may be used provided the overall purity of the jewellery as declared conforms to the respective grade of fineness. For 9, 14, 18, 21 and 22 carat jewellery/artifacts solders shall be of the same caratage as the jewellery article. Solder compositions other than specified in IS 3095 may also be used provided their gold content is same as the respective grade as specified for the standard solder and they are free from cadmium. Solders of a fineness less than the standard fineness of article shall not be used for strengthening, weighing or filing.

Marking:
The gold, gold alloys, jewellery/artifacts shall be stamped with the Standard Mark in this case known as the Hallmark by BIS recognized assaying and hallmarking centers only which comprises of the following: As say centers symbol; The purity mark along with purity/fineness grade (indicating caratage shall not be mandatory); and Year of marking denoted by a letter symbol (as defined by BIS): Hallmarking The use of Hallmark is governed by the provisions of the Bureau of Indian Standard Act, 1986 and Rules and Regulations made their under. The details of conditions under which the license for the use of the Standard Mark may be granted to jewelers/jewellery manufacturers may be obtained from Bureau of Indian Standards. NOTE- Jewellers/ Sponsorers logo on each article shall be marked before offering the lot to BIS recognized Assaying
[11]

and Hallmarking Centre for Hallmarking.

Bureau of Indian Standards:

BIS is a statutory institution established under the Bureau of Indian Standards Act, 1986 to promote harmonious development of the activities of standardization, marking and quality certification of goods and attending to connected matters in the country.

Carat:
A Carat (Karat in USA and 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 is defined as 24 carats. How and when this change occurred is not clear. 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. 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. The most widely used alloys for jewellery in Europe are 18 and 14 carat, although 9 carat is popular in Britain. Portugal has a unique designation of 19.2 carats. In the United States 14 carat predominates, with some 10 carat. In the Middle East, India and South East Asia, jewellery is traditionally 22 carat (sometimes even 23 carat). In China, Hong Kong and some other parts of Asia, "chuk kam" or pure gold jewellery of 990 fineness (almost 24 carat) is popular. In many countries the law requires that every item of gold jewellery is clearly stamped with its caratage. This is often controlled through hallmarking, a system which originated in London at Goldsmiths' Hall in the 14th century. Today it is compulsory in such countries as Britain, France, the Netherlands, Morocco, Egypt, and Bahrain. Where there is no compulsory marking manufacturers themselves usually stamp the
[12]

jewellery both with their own individual identifying ark and the caratage or fineness.

Production:
Traditionally South Africa has been the largest producers of gold in the world accounting for almost 80% of all non-communist output in 1970. Although it retained its position as the single largest gold producing country, its share had fallen to around 17% by 1999 because of high costs of mining and reduced resources. In contrast other countries like US, Australia, Canada and China have increased their output exponentially with output from developing countries like Peru and other Latin American countries also increasing impressively.

Production of gold in India:

Mining and production of gold in India is negligible, now placed around 2 tonnes (mainly from the Kolar gold mines in Karnataka) as against a total world production of about 2,272 tonnes in 1995. Gold holdings in India are estimated to be in the range of 10000-13000 Tons and are predominantly private. Indias gold consumption is 25% of worlds 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%.

Global and domestic demand-supply dynamics:

The demand for gold may be categorized under two heads - consumption demand and investment demand. Consumption of gold differs according to type, namely industrial applications and jewellery. The special feature of gold used in industrial and dental applications is that some of it cannot
[13]

be salvaged and thus is truly consumed. This is unlike consumption in the form of jewellery, which remains as stock and can reappear at future time in market in another form. Consumer demand accounts for almost 90% of total gold demand and the demand for jewelry forms 89% of consumer demand. In markets with poorly developed financial systems, inaccessible or insecure banks, or where trust in the government is low, gold is attractive as a store of value. If gold is held primarily as an investment asset, it does not need to be held in physical form. The investor could hold gold-linked paper assets or could lend out the physical gold on the market attaining a higher return in addition to savings on the storage costs. Japan has the highest investment demand for gold followed closely by India. These two countries together account for over 50% of total world demand of gold for retail investment. Investment demand can be split broadly into two, private and public sector holdings. There are several ways in which investors can invest in gold either directly or through a variety of investment products, each of which lends it to specific investor preferences: Coins and small bars Gold accounts: allocated and unallocated Gold certificates and pool accounts Gold Accumulation Plan Gold backed bonds and structured notes Gold futures and options Gold-oriented funds

Global Supply Demand Scenario:

The total above ground stocks of gold is estimated to be around 1,63,000 tonnes by Gold Fields Minerals Services (GFMS) as on end of 2008 Out of this total stock, 51% is estimated to be present as jewellery, 18% as official reserves, 17% held as investment, 12% used for industrial purposes and 2% is unaccounted for.
[14]

Jewellery accounts for almost two-thirds of annual gold demand with investment and industry being the other main drivers. The total annual global demand for gold has averaged 3530 tonnes in the last three years (2005 - 2008). However, it is expected to dip slightly in 2009, owing to the sharp rise in prices. Five countries, viz., India, China, USA, Turkey, Saudi Arabia and UAE account for above 60% of gold demand, with each market driven by a different set of socio-economic and cultural factors.

HISTORY OF GOLD IN INDIA:

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. 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 tons 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 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.
[15]

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. Indians normally buy about 25 per cent of the world's gold, purchasing around 700 - 750 tons of gold every year. However, the sharp price increase in 2008 and 2009 has impacted demand with total demand in 2008 dipping to 660 tons. It is further expected to shrink in 2009 with demand in first three quarters of 2009 totaling only around 265 tons against 553.5 tons in the same period of the previous year. As India's domestic primary production of gold is very less, at around 2-3 tons a year, the country imports most of its domestic requirement. Thus, India is also the largest importer of the yellow metal and has averaged imports of around 600 tons a year. However, 2008 imports dipped to around 400 tons of gold and it is further expected to dip to around 200-220 tons in 2009 owing to high prices. India's gold demand is firmly embedded in cultural and religious traditions. It is also valued in India as a savings and investment vehicle and is the second preferred investment after bank deposits. Gold hoarding tendency is well engrained in the Indian society and unofficial stocks held by Indians is estimated to be well above 15,000 tons, which is around 9% of the total global gold stocks. Domestic consumption is dictated by monsoon, harvest and marriage season. Indian jewelers off take is sensitive to price increases and even more so to volatility. In the cities gold is facing competition from the stock market and a wide range of consumer goods. Facilities for refining, assaying, making them into standard bars, coins in India, as compared to the rest of the world, are insignificant, both qualitatively and quantitatively. In July 1997 the RBI authorized the commercial banks to import gold for sale or loan to jewelers and exporters. At present, 13 banks are active in the import of gold. This reduced the disparity between international and domestic prices of gold from 57 percent during 1986 to 1991 to 8.5 percent in 2001.

History of Commodity Market in India:

[16]

The history of organized commodity derivatives in India goes back to the nineteenth century when Cotton Trade Association started futures trading in 1875, about a decade after they started in Chicago. Over the time datives market developed in several commodities in India. Following Cotton, derivatives trading started in oilseed in Bombay (1900), raw jute and jute goods in Calcutta (1912), Wheat in Hapur (1913) and Bullion in Bombay (1920). However many feared that derivatives fuelled unnecessary speculation and were detrimental to the healthy functioning of the market for the underlying commodities, resulting in to banning of commodity options trading and cash settlement of commodities futures after independence in 1952. The parliament passed the Forward Contracts (Regulation) Act, 1952, which regulated contracts in Commodities all over the India. The act prohibited options trading in Goods along with cash settlement of forward trades, rendering a crushing blow to the commodity derivatives market. Under the act only those associations/exchanges, which are granted reorganization from the Government, are allowed to organize forward trading in regulated commodities. The act envisages three tire regulations: Exchange which organizes forward trading in commodities can regulate trading on day-to-day basis; Forward Markets Commission provides regulatory oversight under the powers delegated to it by the central Government. The Central Government- Department of Consumer Affairs, Ministry of Consumer Affairs, Food and Public Distribution- is the ultimate regulatory authority. The commodities future market remained dismantled and remained dormant for about four decades until the new millennium when the Government, in a complete change in a policy, started actively encouraging commodity market. After Liberalization and Globalization in 1990, the Government set up a committee (1993) to examine the role of futures trading. The Committee (headed by Prof. K.N. Kabra) recommended allowing futures
[17]

trading in 17 commodity groups. It also recommended strengthening Forward Markets Commission, and certain amendments to Forward Contracts (Regulation) Act 1952, particularly allowing option trading in goods and registration of brokers with Forward Markets Commission. The Government accepted most of these recommendations and futures trading was permitted in all recommended commodities. It is timely decision since internationally the commodity cycle is on upswing and the next decade being touched as the decade of Commodities. Commodity exchange in India plays an important role where the prices of any commodity are not fixed, in an organized way. Earlier only the buyer of produce and its seller in the market judged upon the prices. Others never had a say. Today, commodity exchanges are purely speculative in nature. Before discovering the price, they reach to the producers, end-users, and even the retail investors, at a grassroots level. It brings a price transparency and risk management in the vital market. A big difference between a typical auction, where a single auctioneer announces the bids and the Exchange is that people are not only competing to buy but also to sell. By Exchange rules and by law, no one can bid under a higher bid, and no one can offer to sell higher than someone elses lower offer. That keeps the market as efficient as possible, and keeps the traders on their toes to make sure no one gets the purchase or sale before they do. Since 2002, the commodities future market in India has experienced an unexpected boom in terms of modern exchanges, number of commodities allowed for derivatives trading as well as the value of futures trading in commodities, which crossed $ 1 trillion mark in 2006. Since 1952 till 2002 commodity datives market was virtually non- existent, except some negligible activities on OTC basis. In 2002-03, Prime Minister, Shri. A. B. Vajpayee, in his Independence Day address to the nation on 15th August 2002, demonstrated its commitment to revive the Indian agriculture sector and commodity futures markets. The GOI in that very year took two steps that gave a fillip to the commodity markets.
[18]

The first one was setting up of nation wide multi commodity exchanges and the second one was expansion of list of commodities permitted for trading under (FC(R) A).

Commodity Exchanges:
Commodity exchanges are the exchanges where the trading of futures and forwards take place, basically commodity exchange are trading in future contacts on those commodities which have some regional relevance it is not going to be as easy as a share of a company to get listed in a different exchange.

Commodity exchanges in India are expected to contribute significantly in the strengthening Indian economy to face the challenges of globalization. The Commodity Exchange makes commodity money available to all as a medium of exchange, store of wealth and unit of account. As long as the commodity exchange does not provide credit or interest, it is easily established and avoids banking regulations. As a barter exchange mechanism, there is no fiduciary responsibility. With the value India commodity economy being around Rs.3,00,000 crore a year.

In India there are 25 recognized future exchanges, of which there are three national level multi-commodity exchanges. After a gap of almost three decades, Government of India has allowed forward transactions in commodities through Online Commodity Exchanges, a modification of traditional business known as Adhat and Vayda Vyapar to facilitate better risk coverage and delivery of commodities. The three exchanges are: National Commodity & Derivatives Exchange Limited (NCDEX) Mumbai, Multi Commodity Exchange of India Limited (MCX) Mumbai and National Multi-Commodity Exchange of India Limited (NMCEIL) Ahmadabad. There are other regional commodity exchanges situated in different parts of India.

[19]

Commodity Export Scenario:

India masters the global castor oil trade with its castor seed and oil products. The yearly export of commercial castor oil from India turns out to be around 2-2.4 lakh tons. India is known to be the fifth largest producer of aluminum in the globe. Indian aluminium has export potential as its production far exceeds its domestic demand. The export market for Indian organic agricultural products in agricultural products is expanding rapidly. Indias organic tea is world- famous for its taste and flavor. Tea, coffee, spices, rice, wheat, pulses, oil seeds, fruits and vegetables, cashew nut , cotton, herbal products are the major organic products being exported from India. Thus, the commodity market in India is growing rapidly with huge export potential. Though it is temporarily lagging behind the service sector in the matter of exports, it is sure to catch up within a few years.

History of derivatives markets in gold:

Gold futures trading debuted at the Winnipeg Commodity Exchange (Comex) in Canada in November 1972. Delivery was also available in gold certificates issued by Bank of Nova Scotia and the Canadian Imperial Bank of Commerce. The gold contracts became so popular that by 1974 there was as many as 10, 00,000 contracts floating in the market. The futures trading in gold started in other countries too. This included the following: The London gold futures exchange started operations in the early 1980s.The Sydney futures exchange in Australia began functioning with a contract in 1978. This exchange had a relationship with the Comex where participants could take open positions in one exchange and liquidate them in the other. The Singapore International Monetary Exchange (Simex) was set up in 1983 by way of an alliance between the Gold Exchange of Singapore and the International Monetary Market (TMM) of Chicago.
[20]

The Tokyo Commodity Exchange (Tocom), which launched a contract in 1982, was one of the few commodity exchanges to successfully launch gold futures. Trading volume on the Tocom peaked with seven million contracts. On December 31, 1974, the Commodity Exchange, the Chicago Board of Trade, the Chicago Mercantile Exchange and the Mid-America Commodity Exchange introduced gold futures contracts. The Chinese exchange, Shanghai Gold Exchange was officially opened on 30 October 2002. Mumbai's first multi-commodity exchange, the National Commodities and Derivatives Exchange, NCDEX launched in 2003 by a consortium of ICICI Bank Limited, Life Insurance Corporation, National Bank for Agriculture and Rural Development and National Stock Exchange of India Limited, introduces gold futures contracts. Gold has a very active derivative market compared with other commodities. Gold accounts for 45 per cent of the worlds commercial banks commodity derivatives portfolio.

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 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 Ahmadabad. It is also traded in three of Indias major commodity exchanges namely National Commodity & Derivatives Exchange ltd, Multi Commodity Exchange of India ltd and National Multi Commodity Exchange of India ltd. Mumbai (India's liberalized gold regime)

Uses of Gold:
[21]

1. Electronics and Telecommunications

a. Computers/Semiconductors
b. Power chairs c. Spacecraft

d. Telephones
e. Telephone Wall Jacks

f. TVs and VCRs

2. Lasers and Optics

a. Astronomy

b. Copy Machines c. Photo CDs d. Satellites

e. Security Systems

3. Medicine and Health

a. Dentistry

b. Eye Surgery c. Rheumatoid Arthritis Treatment

d. Thermometer

e. Research

[22]

4. Industry and Aviation

a. Airbags b. Aircraft Engines c. Aircraft Windows d. Engine Systems

e. Fire Bunker Gear f. Food- Freshness Sensors g. Protection of Air Force One

HISTORY OF OPTIMUS COMMODITY FUTURES (P) LTD

[23]

Optimus is one of the leading and fast growing commodity brokers and occupied its place in the good books of investors. At Optimus we believe in Research... Reliability.... Responsibility. We are led by experienced professionals with deep domain knowledge on Commodity derivatives. Being a member of MCX, we facilitate online trading on various commodities like Bullion, Energies, Non ferrous metals, Pulses, grains, Spices, Edible oils and others. We started our journey in 2003 at Vijayawada and spread our wings to many places by establishing nearly 40 franchises in India. We are very strong in designing risk management strategies by taking advantages of spreading, hedging and Arbitraging. Its been 3 years since futures trading reemerged in India. A daily average turnover of nearly 20,000 crores is recorded in India at a growth rate of 600%. This attracts every investor and they need a right broker to serve their purpose. We are here to bridge the gap and make our clients know perfect before they start trading. We consider every client of ours as an individual while many brokerage firms consider as numbers. Our vision is to churn the advantages of commodity futures trading and justify the investments of all our clients. We look forward to see you in the trading family of Optimus.

Company services Technical & Fundamental support:

At Optimus, we believe in service and support. Analysis is said to be the major support expected by every trader and investor when it comes to Commodity trading. Analysis is two types,
[24]

Technical and Fundamental. We have a separate team of Analysts to support our valuable Clients. A team of fundamental Analyst at our office observes various developments in all domestic and international commodities. They watch the ratio of supply, demand. Weather, Government policies etc., and update the same to our clients. The other set of Analysts observe the markets by reading graphical representations of various commodities and design the trading strategies to share with our clients throughout the day. To assist our clients in terms of technical analysis we use various state of the art soft wares for better productivity. In other words, every trade executed at Optimus does have logic behind it (either technical or fundamental).

Awareness programs:
Optimus believes that knowledge is power. Online trading in Commodity futures is growing by leaps and bounds in India at the rate of 500% per annum. Still it is observed that only 20% of the traders and investors know about Commodity futures. Optimus is one company that stands first in terms of creating awareness among market players. Any prospect who walks into the Optimus will be trained and gains knowledge before they start trading. At the same time we conduct seminars and public awareness programs to support all our business associates.

Risk Management:
Our operation executives from back office keep our clients updated with their account status during the trading hours and also at the end of the day. They help our clients in terms of calculating margins, limits and trading exposures. Since we have user friendly back offices software's, it is very clear for the clients to understand their account status on a daily basis.

Analyst support:
Optimus is the first company to introduce Analyst Assisted Accounts service (AAA) service. Every account we get is assisted by a dedicated financial Analyst. What we observe from the market is every trader executes orders by taking different opinions from different people and finally it becomes a dish prepared by the too many cooks. But when we trade with the support of a dedicated financial
[25]

Analyst, the result would be the different. Our F.A's choose the combination of different Commodities and prepare Strategies on intraday, short term and medium term basis.

Technology support:
We offer online and offline accounts to our clients as per their convenience. Our clients can trade from any place of their choice. The connectivity methods we offer are internet based, point to point, CDMA technology and V-SAT, Where ever you are, you can connect to us. Our Technical executives assist our clients and business associates and help them choose the best mode of connectivity.

Advantages
Education Seminars Fundamental Analysis Technical Analysis Global commodities SMS Service Commodity Library Analysts Assisted Account Service Competitive Brokerage.

COMPANY INFORMATION NAME: OPTIMUS COMMODITY FUTURES (P) LTD MEMBERSHIP:

[26]

Commodity Derivatives:
National Commodity & Derivatives Exchange Ltd. Multi Commodity Exchange of India Ltd.

Overview of Optimus Services:

Optimus business solutions was developed for active traders (with moderate to advanced trading experience) looking for investments based on technical analysis. Optimus supplies sample hypothetical portfolios and buy-sell recommendations within these investments that clients can follow or adopt at their discretion . An optimus financial analyst initially evaluates your financial status, experience, and risk tolerance. Afterwards, a sample trading plan will be presented that contains suggestions regarding initial allocation and investment distribution. The client is solely responsible for scrutinizing any recommendations made by optimus before carefully integrating any recommendations into their personal financial plan according to advice and goals created by the client and their financial planning professionals. Optimus philosophy on investment in the commodity derivative markets is technically driven. They believe an investor can capitalize by entering and exiting the markets in anticipation of a repetition of past market and price patterns. They believe that consistent entry and exit rules with active risk management will result in successful investment growth. Optimus goal is to provide their clients with a profitable, yet basic trading system. Optimus business solutions believes that an average individual investor can efficiently manage 4 to 8 active positions in their trading account with clear guidance. Optimus strives to provide precise commodity picks with comprehensive support. Optimus Financial Analysts keep every trader updated by sending SMS at regular intervals (For every half an hour during trading hours). In spite of busy schedules their clients get the market information and messenger alerts, if they are online.

[27]

MULTI COMMODITY EXCHANGE (MCX)

Introduction
Headquartered in Mumbai, Multi Commodity Exchange of India Ltd (MCX) is a state-of-theart electronic commodity futures exchange. The demutualised Exchange set up by Financial Technologies (India) Ltd (FTIL) has permanent recognition from the Government of India to facilitate online trading, and clearing and settlement operations for commodity futures across the country. Having started operations in November 2003, today, MCX holds a market share of over 80% of the Indian commodity futures market, and has more than 2000 registered members operating through over 100,000 trader work stations, across India. The Exchange has also emerged as the sixth largest and amongst the fastest growing commodity futures exchange in the world, in terms of the number of contracts traded in 2009. The turnover of the exchange for the fiscal year 2009 was US$ 1.24 trillion. MCX offers more than 40 commodities across various segments such as bullion, ferrous and non-ferrous metals, and a number of agri-commodities on its platform. The Exchange is the world's largest exchange in Silver, the second largest in Gold, Copper and Natural Gas and the third largest in Crude Oil futures, with respect to the number of futures contracts traded. MCX has also set up in joint venture the MCX Stock Exchange. Earlier spin-offs from the company include the National Spot Exchange, an electronic spot exchange for bullion and agricultural commodities, and National Bulk Handling Corporation (NBHC) India's largest collateral management company which provides bulk storage and handling of agricultural products. MCX has been certified to three ISO standards including ISO 9001:2000 Quality Management System standard, ISO 14001:2004 Environmental Management System standard and ISO 27001:2005 Information Security Management System standard. The Exchanges platform enables anonymous trades, leading to efficient price discovery. Moreover, for globally-traded commodities, MCXs platform enables domestic participants to trade in Indian currency. The Exchange strives to be at the forefront of developments in the commodities futures industry and has forged strategic alliances with various leading International Exchanges, including Euro next-LIFFE, London Metal Exchange (LME), New York Mercantile Exchange, Shanghai Futures Exchange (SHFE), Sydney Futures Exchange, The Agricultural Futures Exchange of Thailand (AFET), among others. For MCX, staying connected to the grassroots is imperative. Its domestic alliances aid in improving ethical standards and providing services and facilities
[28]

for overall improvement of the commodity futures market. It is regulated by the Forward Markets Commission. MCX is India's No. 1 commodity exchange with 83% market share in 2009 The exchange's main competitor is National Commodity & Derivatives Exchange Ltd Globally, MCX ranks no. 1 in silver, no. 2 in natural gas, no. 3 in crude oil trading The highest traded item is gold. MCX has several strategic alliances with leading exchanges across the globe As of early 2010, the normal daily turnover of MCX was about US$ 6 to 8 billion MCX now reaches out to about 800 cities and towns in India with the help of about 126,000 trading terminals MCX COMDEX is India's first and only composite commodity futures price index. and gold in futures

Key shareholders:
Key shareholders Promoted by FTIL, MCX enjoys the confidence of blue chips in the Indian and international financial sectors. MCX's broad-based strategic equity partners include NYSE Euro next, State Bank of India and its associates (SBI), National Bank for Agriculture and Rural Development (NABARD), National Stock Exchange of India Ltd (NSE), SBI Life Insurance Co Ltd, Bank of India (BOI) , Bank of Baroda (BOB), Union Bank of India, Corporation Bank, Canara Bank, HDFC Bank, Fid Fund (Mauritius) Ltd. - an affiliate of Fidelity International, ICICI Ventures, IL&FS, Kotak Group, Citi Group and Merrill Lynch.

Technology:
MCX's ability to use and apply technology efficiently is a key factor in the development of its business. The Exchange's technology framework is designed to provide high availability for all critical components, which guarantees continuous availability of trading facilities. The robust technology infrastructure of the Exchange, along with its with rapid customization and deployment capabilities enables it to operate efficiently with fast order routing, immediate trade execution, trade reporting, real-time risk management, market surveillance and market data dissemination.
[29]

The On-line trading system of the Exchange is accessible to its members through multiple mediums of connectivity such as VSAT, Terrestrial Leased Circuits (Point to Point and Multi Protocol Label Switching (MPLS)), Integrated Services Digital Network (ISDN) and Internet. The Computer to Computer Link (CTCL) facility of the Exchange enables members to expand their business set up, using either the Trading front-end software procured from Exchange empanelled CTCL vendors or by using Exchange approved CTCL software developed in-house. MCX provides market information to various financial information service agencies on a real-time basis. The Exchange has interfaces with banks for settlements and collateral management. The system and processes of the Exchange are designed to safe guard market integrity and to enhance transparency in operations. As a part of its Business Continuity Plan (BCP), the Exchange maintains a Disaster Recovery Site (DRS). Data is backed up from the primary site to the DRS on a real time basis using the replication technology. With its rich experience in providing integrated solutions to global financial markets and implementing mission critical transaction technologies, MCX's technology service provider, FTIL, enables the Exchange to implement new products and services quickly and efficiently.

Vision:
We envision a unified Indian commodity market that is driven by market forces and continually provides a level playfield for all stakeholders ranging from the primary producer to the end-consumer; corrects historical aberrations in the system; leverages technology to achieve exceptional efficiencies and ultimately lead to a common world market. We also envision a brand image for MCX that identifies it as the Exchange of Choice not only by direct participants in the commodity ecosystem but also by the general public.

Mission:
MCX shall accomplish the above vision by relentlessly endeavoring to enhance awareness and understanding of exchange-enabled trade in commodity derivatives. The Exchange will continue to minimize the adverse effects of price volatilities; providing commodity ecosystem participants with neutral, secure and transparent trade mechanisms; formulating quality parameters and trade regulations in conjunction with the regulatory authority. Moreover, it will continue to enforce a zero-tolerance policy toward unethical trade practices-attempted or real-by any participant/s; and invest in the all[30]

round development of the commodity ecosystem.

COMMODITIES TRADED ON THE EXCHANGE (MCX DIVISION): Bullion

Gold ,Gold Guinea, Gold HNI, Gold M, Platinum, Silver, Silver HNI, Silver M

Metals
Aluminium, Copper ,Lead, Lead Mini, Mild Steel, Ingot, Billets, Nickel, Tin, Zinc, Zinc Mini Energy ATF, Brent Crude Oil, Crude Oil, Electricity Monthly & Weekly, Gasoline ,Heating Oil , Imported Thermal Coal, Natural Gas.

Oil & Oil Seeds

Crude Palm Oil, Kapasia Khalli, Refined Soya Oil, Soya Bean.

Others
Almond ,Guar Seed ,Melted Menthol Flakes, Mentha Oil ,Potato (Agra) ,Potato (Tarkeshwar), Sugar M

Pulses --Chana Fiber --Kapas Weather

Carbon(CER) ,Carbon (CFI)

Cereals
Barley ,Wheat ,Maize-Feed / Industrial Grade.

Plantations --Rubber
[31]

Spices
Cardamon, Coriander ,Turmeric.

Trading @ MCX:
The Trader Work Station (TWS) is the application through which members access the trading platform, place orders and execute trades. The TWS offers a multitude of user friendly trading features which include commodity price ticker, market watch screen displaying best buy, best sell, last traded price, volume for the day, open interest etc., top gainer and loser contracts, net position, on-line backup facility etc.

Trading system:
The best five buy and sell orders for every contract available for trading are visible to the market and orders are matched based on price time priority logic. Orders can be placed with time conditions and/ or price conditions.

Time related Conditions:

DAY order- A Day order is valid for the day on which it is entered. If the order is not matched during

the day, the order gets cancelled automatically at the end of the trading day.

GTC -A Good Till Cancelled (GTC) order is an order that remains in the system until the expiry of the

respective contract in which it is entered or until when the same is cancelled by the member.
GTD - A Good Till Date (GTD) order is valid till the date specified by the member. After the specified

date the unexecuted orders get automatically cancelled by the system.

IOC - An Immediate or Cancel (IOC) order allows a member to execute the orders as soon as the same

is placed in the market, failing which the order will get cancelled immediately.

[32]

Price Conditions:
Limit Order The order wherein the price is to be specified while placing the same. Market Order The order at the best available price at the time of placing the same.

Margins:
MCX follows a comprehensive and stringent margining system for all future contracts traded on the Exchange platform. Actual margining and position monitoring is done on an on-line basis. For the purpose of computing and levying the margins, MCX uses SPAN (Standard Portfolio Analysis of Risk) system which follows a risk-based and portfolio-based approach. The Initial Margin requirement is based on a worst-case loss scenario of portfolio at client level to cover VaR (value at Risk) over a one day horizon, subject to a minimum Base Margin defined by FMC for the respective commodity. The SPAN Risk Parameter File (RPF) is generated by the Exchange periodically at pre-defined timings and RPF files so generated are provided to the members using the FTP service and on the Exchange website. In addition to SPAN margins, MCX levies Additional margins and/ or Special margins whenever deemed necessary considering the volatility and price movement in the commodities. Such margins are also levied as per the directions of FMC Tender Period margins and Delivery Period Margins are levied on contracts nearing expiry to ensure non default in commodity delivery.

Trade Timings
Special Session: Monday to Saturday: 9:45 a.m. to 9:59 a.m. Special Session (order cancellation session) is held to cancel the pending orders prior to opening of market.

[33]

Normal Session:
Monday through Friday: 10:00 a.m. to 11:30 p.m. (up to 11:55 p.m. on account of day light savings

typically between every November and March of the following year).

Saturdays: 10:00 a.m. to 2:00 p.m.

Agri-commodities are available for futures trading up to 5:00 p.m. whereas non agri-commodities (bullions, metals, energy products) are available up to 11:30 pm / 11.55pm.

Fundamental Analysis:
Fundamental analysis is the study of the factors that affect supply and demand of any particular asset class. Gathering and interpreting information pertaining to demand and supply of commodities is important in understanding commodity price behavior. To gain a better understanding of the demandsupply dynamics, we need to know the laws of demand and supply and how these factors affect the final price. General economic principle says demand and supply determine price. This is true for the commodity market too. But factors affecting demand and supply are diverse and independent, having different origin. Therefore, prices of commodity fluctuate so often that it becomes difficult to
[34]

determine the exact price at a particular point of time. Since commodity price, for which a future trading is done, is volatile and changes on real-time basis, it is important for traders of futures market to know where price is likely to head sometime down the line. Traders, speculators, hedgers all anticipate price movements and take appropriate position in the market. Fundamental analysis of any commodity involves knowing the following facts: Production and consumption Import and export Distance between consuming centre and producing centre Cost of transportation Means of transportation Usual trade practice Cultivation period Impact of weather and technology on crop cultivation Value chain of the commodity and influence of stakeholders at different levels in value chain Taxation, such as sales tax, import tax, export tax, custom duty, octroi Import and export regulations Inflation Foreign currency exchange rate Government interference &Presence of organized institutions

Law of Demand:
The key components of this economic theory are consumer behavior, and how individual consumer responses are reflected in the market place. Understanding what factors have affected demand in the past will help to develop expectations about demand in the future and the impact on market price. Thus, demand is a relationship between price and quantity, with all other factors
[35]

remaining constant. Demand is represented chartically as a downward sloping curve.

Generally the relationship between price and quantity is negative. This means that the higher is the price level the lower will be the quantity demanded and, conversely, the lower the price the higher will be the quantity demanded. Market demand is the sum of the demands of all individuals within the marketplace. Market demand will be affected by other variables in addition to price, such as various value added services including handling, packaging, location, quality control, and financing. Thus the demand for an agricultural commodity is typically derived from the demand for finished product. Ultimately the market value for any good or service is determined by its value to the consumer. It is important to understand that a free market economy is driven not by producers but by consumers. Higher prices can lead to higher profits, which provide you with the incentive and the means to expand production of those goods and services that consumers value the most. On the other hand, when consumers are unwilling to buy what is offered at the current price, the seller will have to lower the price ultimately resulting in lower profits. Losses reduce the producers incentive to produce things that have weak demand, which will ultimately force production cuts as farmers lose more and more money. This is the discipline of the marketplace. Those who produce things that consumers are willing and able to buy are rewarded. Those who produce things that consumers dont want or cant buy are penalized. Farmers must produce for the markets. They cannot expect to find or create a profitable market for whatever they choose to produce.

Law of Supply
[36]

Supply is another important component of fundamental commodity market analysis. An understanding of the factors affecting supply in the past will help with the development of supply expectations in the future and the impact upon market price. The law of supply can be approached from two different contexts. The first is that it represents the sum total of production plus carryover stocks. The other context for supply describes the behavior of producers. The total supply is the sum of the individual quantities of product that each farmer brings to the market. Market supply is represented by an upward sloping curve with price on the vertical axis and quantity on the horizontal axis.

An increase in price in most instances will result in farmers wanting to increase the quantity of a given product they will bring to the market, therefore the relationship between the price and supply is positive. Market supply will be affected by other variables in addition to the price. Factors that have been identified as important in determining supply behavior include; the number of firms producing the product, technology, the price of inputs, the price of other commodities which could be produced, and the weather. Lower prices are the markets signal to farmers that they have produced too much of something or that it is something consumers do not want.

How Supply And Demand Determine Prices Of Commodities:

The interaction of supply and demand determines price. An exchange of goods or services will occur whenever buyers and sellers can agree on a price. When an exchange occurs, the agreed upon price is called the "equilibrium price" This can be chartically illustrated as follows.
[37]

Supply and demand are said to be in balance or equilibrium when both buyers and sellers are willing to exchange the quantity "Q" at the price "P". At any price below P, the quantity demanded is greater than the quantity supplied. In this situation consumers would be anxious to acquire the commodity, which the producer is unwilling to supply resulting in a product shortage. Consumers would have to pay a higher price in order to get the product they want; while producers would demand a higher price in order to bring more products on to the market. The end result is a rise in prices to the point P, where supply and demand is once again in balance. Conversely, if prices rise above P, there would be surplus quantity and the market would be in surplus - too much supply relative to demand. Producers would have to lower their prices in order to clear the market of excess supplies. Consumers would be induced by the lower prices to increase their purchases. Prices will fall until supply and demand are again in equilibrium at point P. When either demand or supply changes, the equilibrium price will change. For example, good weather normally increases the supply of pulses and grains, with more products being made available over a range of prices. With no increase in the quantity of product demanded, there will be movement along the demand curve to a new equilibrium price in order to clear the excess supplies off the market. Consumers will buy more but only at a lower price. Likewise a shift in demand due to changing consumer preferences will also influence the market price. With no reduction in supply, the effect on price results from a movement along the supply curve to a lower equilibrium price where supply and demand is once again in balance. Changes in supply and demand can be short run or long run technology, etc. More and more use of technology results
[38]

in nature. Weather tends to influence market prices generally in the short run. Similarly, other factors include changes in consumer preferences, in reducing the costs of production on a per unit basis, which in turn results in shift of the supply curve

rapidly. At the same time if total demand does not increase sufficiently to absorb the excess goods produced at lower costs, the long run impact of technology on the market place will be to lower prices. The rapidly shifting supply curve coupled with a slower moving demand curve has generally contributed to lower prices for agricultural output when compared to prices for industrial products.

TECHNICAL ANALYSIS
Technical analysis involves using quasi-statistical techniques and formal statistics to identify the trend and pattern of time series data. Usually price data is put on chart and inference is made out based on some principles that are called indicators. Technical Analysis involves forecasting of future financial price movements based on the study of the behaviour of historical price movements. Technical analysis does not result in absolute predictions about the future. Instead, it helps anticipating what is "likely" to happen to prices over time.

A wide variety of charts and tools are used to show price

over

time. Technical analysis is

based on patterns of historical price movement. Combining fundamental and technical analysis will give us a better understanding of the market forces that are affecting the price movements in financial markets.

Technical analyst uses following information for charting purpose Open, High, Low and Closing price Open Interest Volume A few indicators are listed below that a technical analyst often uses in analysis: Trend lines Support and Resistance Moving Average
[39]

Divergence Moving Average Convergence Divergence Elliot wave pattern Candlestick chart pattern

There are mainly three types of chart, which is popular amongst analyst. Candlestick Bar Chart Line Chart

Types of Charts
Line Chart: These are simple charts showing the closing prices of each period and connecting them as a single line. Bar Chart: The bar chart is one of the most popular types of charts used in technical analysis. It shows the intraday movements of the market. Each bar represents one period showing the Open, High Low and Close for the day. The vertical bar drawn connects the high and the low of the contract during the day and thus represents the range of movement of the price during the day.

[40]

The Trend Line:

The trend line is the simplest of all technical tools available and is the most up- to- date indicator by including the most recent price action and giving a clear path for the market to follow. It can be applied to any type of chart, whether it is a line chart, bar chart or a candlestick chart. Some basic rules on trend line applications: a) Trend lines should touch at least two points (highs or lows) and possibly be confirmed by a third point. b) The breaking of a trend line is the best signal that the market has changed direction. c) The longer the trend line stays intact and the more times the trend line is tested, it signifies the strength of the underlying trend The steepness of a trend line has a major significance. The trend line being too steep is generally not a favorable sign. It can indicate that the trend is rising too fast and cannot be held at the increasing rate. If the trend line is flat, the up trend or downtrend is generally thought to be weak with the general uncertainty of a trend less market. The 45-degree line is the most preferred. It is generally felt that the market is in balance with price and time rising and falling together. A trend line close to the above 45 degree angle signifies a more stable trend where prices are moving at the desirable / best speed.

SUPPORT AND RESISTANCE LEVELS Support and Resistance Levels are price levels at which movement should stop and reverse direction. The Support level acts as a floor whereas the Resistance level acts as a ceiling to future price
[41]

movements. Support - A price level below the current market price, at which buying interest should be able to overcome selling pressure and thus keep the price from going any lower. Resistance - A price level above the current market price, at which selling pressure should be strong enough to overcome buying pressure and thus keep the price from going any higher when a stock price reaches a support/resistance level. It can either act as a reversal point: in other words, when a stock price drops to a support level, it will go back up. On the other hand, the levels may reverse roles once they are penetrated. For example, when the market price falls below a support level, that former support level will then become a resistance level when the market later trades back up to that level.

Candlestick Charts
Method of drawing stock (or commodity) charts which originated in Japan. Requires the presence of Open, High, Low and Close price data to be drawn. There are two basic types of candles, the white body and the black body. As with regular bar charts, a vertical line is used to indicate the periods (normally daily) high to low. When prices close higher than they opened a white rectangle is drawn on top of the high-low line. A down day is drawn in black. The combination of several candles results in patterns, which give insight into future price activity.

[42]

Patterns In Candlestick Charting

Doji:

A Doji is one of the more important candlesticks and is formed when a sessions open and close are the same or almost the same. If the market is trading sideways, the doji is neutral. However a doji that emerges after a large rally or sell-off has a greater chance of signaling a reversal. At such times, doji provides hint of tops and a bottoms. A doji is not a reversal signal but only points to a

market at crossroads or in transition. Dojis that appear close to supports or resistances will more often than not hint a correction if not reversal.

Bullish Harami:

This formation acts a warning to the Bears, on an impending change of trend. If the next day closes higher, then this will confirm a change of trend. It is a bullish signal where the first day is a long black candlestick and the second day is a white candlestick where the body is completely engulfed by the black body of the first day.
[43]

Bearish Harami:

This pattern signals reversal of the uptrend. The first day is a long white candlestick The second day2nd day is a black candlestick where the body is completely engulfed by the white body of the first day The sudden change displayed by the second days small black candle indicates a change of trend. Bulls may be satisfied with the indication of lower prices in the following days.

Popular Charting Patterns: Rises to a peak and then declines, again, Rises above the former peak and declines, followed by A final rise which is more than the second peak and declines. The first and third peaks are shoulders, and the second peak forms the head. This pattern is considered a very bearish indicator.

Double Bottom: This pattern resembles a "W" and occurs when a stock price drops to a similar price level twice within a few weeks or months. When the price passes the highest point in the handle, it indicates the time to buy in a perfect double bottom; the second decline should normally go slightly lower than the first decline. The middle point of the "W" should not go into new high ground.

Moving Averages
[44]

The market does not rise or fall in a straight line. The up moves and down moves are interrupted by counted moves. Quite often, these counter moves are quite volatile making it difficult for the analyst to guage the underlying trend of the market. In such situations, one way to guage the underlying trend is to smooth the data which can be done with the help of moving averages. The moving average system of share trading is also known as the trend following system as here the analyst would be trading along the trend after it has been established. The moving average is probably the simplest, and most versatile indicator in technical analysis. It can be used with the price (high, close, etc) and can also be applied to other indicators, helping to smooth out volatility. As the name implies, the Moving Average is the average of a given amount of data. For example, a 9-day average of closing prices is calculated by adding the last 9 closes and dividing by 9. The result is noted on a chart. The next day the same calculations are performed with the new result being connected (using a solid or dotted line) to the previous days. And so forth. Variations of the Simple Moving Average are the Weighted and Exponential moving averages.

Bollinger Bands:
Trading bands can be plotted above and below a simple moving average of a particular assets prices over a continuous period of time. The standard deviation of closing prices for a period equal to the moving average employed is used to determine the bandwidth. This causes the bands to tighten in quiet markets and loosen in volatile markets. The bands can be used to determine overbought and oversold levels, locate reversal areas, project targets for market moves, and determine appropriate stop levels.

RSI - Relative Strength Index: This indicator is often used to identify price tops and bottoms by keying on specific levels (usually "30" and "70") on the RSI chart, which is scaled from 0-100. It can also help in detecting support and resistance levels. It may be noted that failure swings above 70 or below 30 can warn of coming reversals.

The formula for calculating the RSI is:

[45]

 RSI=100-(100/1-RS) RS= average of x days up closes divided by average of x days down closes

MACD (Moving Average Convergence / Divergence): The MACD is used to determine overbought or oversold conditions in the market. Written for stocks and stock indices, MACD can be used for commodities as well. The MACD line is the difference between the long and short exponential moving averages of the chosen item. The signal line is an exponential moving average of the MACD line.

Elliott Wave:
Elliott wave theory goes beyond traditional charting techniques by providing an overall view of market movement that helps explain why and where certain chart patterns develop. The three major aspects of wave analysis are pattern, time and ratio. The basic Elliott pattern consists of a 5 wave up trend followed by a three-wave correction. Each "leg" of a wave in turn consists of smaller waves. Elliott waves can be used to successfully define where the market currently is in relation to "the big picture".

[46]

TABLE 5.1: TABLE SHOWS GOLD TRADING PRICES DURING 2006-2011

Year

Open (10 Grams of Gold in rupees)

High (10 Grams of Gold in rupees)

Low (10 Grams of Gold in rupees)

Close (10 Grams of Gold in rupees)

Range= high Price-low price in rupees.

2006-07

7634

11300

7627

9430

3673

2007-08

9405

10875

8703

10845

2172

2008-09

10791

14450

10788

13646

3662

[47]

2009-10 2010-11

13700 16754

18294
20871

14234 16028

17700
20728

4060 4843

Chart 5.1 CHART SHOWS GOLD TRADING PRICES DURING 2006-2011

[48]

Interpretation:
This chart shows how much the gold prices change year by year. In 2006 10 ten grams of gold prices opened with 7634 rupees and closed at 9430 rupees. And the year 2007-08 the gold prices are opened at 9493 rupees and closed at 10845, and the next year 2008-09 the gold prices are opened at 11743 and closed at 13646 rupees. In 2009-10 the gold prices are opened at 14403 and closed at 16686 rupees. In 2010-11 the gold prices are opened at 16376 rupees and closed at 20728 rupees.

TABLE 5.2: TABLE SHOWS GOLD TRADING PRICES DURING 2006-2007

[49]

Open

High

Low

Close

Range=high Price-low price in rupees

7634 8139 8105 8410 9906 9959 9344 9725 9568 8860 9244 9610

8180 8234 8648 10099 11300 9974 10322 10022 9710 9332 9625 9660

7627 7808 7841 8350 9906 9050 9320 9328 8673 8320 9240 9156

8166 8112 8382 9808 10019 9353 9714 9554 8859 9223 9611 9430

553 426 807 1749 1394 924 1002 694 1037 1012 385 504

Chart 5.2:CHART SHOWS GOLD TRADING PRICES DURING 2006-2007

[50]

Interpretation: This chart shows the Gold prices during 2006-2007, It is better for investor to buy and sell gold whose best prices are RS.8703.00 and Rs.10950.00, so if an investor who follows this can get Margin is Rs.2247.00

TABLE 5.3: TABLE SHOWS GOLD TRADING PRICES DURING 2007-2008:

[51]

Range=high Open High Low Close Price-low price in rupees 9405 9446 9648 9261 9520 9052 8819 8826 8934 9450 10300 10477 9490 9898 9703 9902 9663 9200 9072 8960 9544 10390 10950 10875 8974 9325 9196 9230 8976 8764 8703 8774 8831 9200 10230 10210 9423 9628 9339 9578 9050 8831 8846 8935 9530 10390 10447 10845 516 573 507 672 687 436 369 156 713 1190 720 665

Chart 5.3:

CHART SHOWS GOLD TRADING PRICES DURING 2007-2008:

[52]

Interpretation: This chart shows the Gold prices during 2007-2008, It can also see that chart Gold prices opened with Rs.9405, and closed at Rs.10845. It is better for investor to buy and sell gold whose best prices are RS.8703 and Rs.10950, so if an investor who follows this can get Margin is Rs.2247.

TABLE 5.4: TABLE SHOWS GOLD TRADING PRICES DURING 2008-2009

[53]

Range= high Open High Low Close Price-low price in rupees 10791 11945 12545 11900 11403 12195 12880 12610 12201 13680 11962 13105 11975 12549 13506 12313 13032 12996 13764 12810 13792 14450 13288 13825 10788 11415 11885 11395 11205 12012 12284 11661 11572 11401 11630 11981 11743 12438 11929 11424 12206 12879 12618 12203 13611 11962 13172 13646 1187 1134 1621 918 1827 884 1480 1149 2220 3049 1658 1844

Chart 5.4 CHART SHOWS GOLD TRADING PRICES DURING 2008-2009

[54]

Interpretation: This chart shows the Gold prices during 2008-2009 ,It can also see that chart Gold prices opened withRs.10791, and closed at Rs.13346. It is better for investor to buy and sell gold whose best prices are Rs.10788 and Rs.14450, so if an investor who follows this can get Margin is Rs.3662.00.

TABLE 5.5: TABLE SHOWS GOLD TRADING PRICES DURING 2009-2010

Open

High

Low
[55]

Close

Range=

high Price-low price in rupees 13700 14350 15525 15115 14500 14527 14482 14770 15118 15672 15985 17668 14427 16040 15968 15244 15040 14953 15211 15160 16005 16066 18047 18294 12767 13915 14640 14381 14287 14234 14408 14691 15077 15514 15985 16447 14403 15504 15132 14500 14909 14505 14818 15136 15668 15957 17614 16686 1660 2125 1328 863 753 719 803 469 928 552 2062 1847

Chart5.5: CHART SHOWS GOLD TRADING PRICES DURING 2009-2010

[56]

Interpretation: This chart shows the Gold prices during 2009-2010, It can also see that chart Gold prices opened with Rs.13700, and closed at Rs.16686. It is better for investor to buy and sell gold whose best prices are RS.12767 and Rs.18294, so if an investor who follows this can get Margin is Rs.5527.

TABLE 5.6: TABLE SHOWS GOLD TRADING PRICES DURING 2010-2011 Open High Low Close Range= high

[57]

Price-low price rupees 16754 16329 16892 16428 17139

18392 19114 18095 19006 19324 20112 20636

in

17180 16959 17151 17140 18648

19332 19142 18852 19254 20105 20721 20871

16287 16028 16295 16409 17102

18151 18032 17995 18421 19221 20018 20574

16376 16866 16436 17125 18385

19231 18090 18996 19339 20092 20648 20728

893 931 856 731 1546

1181 1110 857 833 884 703 297

Chart 5.6 CHART SHOWS GOLD TRADING PRICES DURING 2010-2011

[58]

Interpretation: This year opened with Rs.16754 and closed on 31 December with Rs.20728. It is better for investor to buy and sell gold whose best prices are RS.16028 and Rs.20871, so if an investor who follows this can get Margin is Rs.4843.

FINDINGS

1. It is found that Commodities prices are less volatile when compared to stock market.

[59]

2. The price movement of the gold is depended on the movement of dollar. Gold and dollar have inverse relation. 3. Today gold prices float freely in accordance with supply and demand responding quickly to political and economical events. 4. It is found that many of the individual have sought to posses gold as insurance against the dayto-day uncertainties of paper money. 5. It is found that investors need less money to participate in this market. 6. It is found that COMEX traded volume exceeds 40000 contracts daily or 120 tons. This is about 17 times as much god as is produced worldwide on typical a day.

SUGGESTIONS

1. The growth of the commodity market is at a pace and there is possibility of expansion if future guidelines are issued such that issued details reach the general public.
[60]

2. It is suggested to bring awareness among the public about the gold features. 3. The Optimus Commodity Futures have lot of growth potential. So it is suggested that the company need to have many more strategies to gain public interest. 4. Us dollar rate has great influence on commodities like gold, silver, crude oil.
5. It is suggested that government of Indian has to bring liberal policies regarding this commodity

market. 6. The information system in India is not effective. So it is suggested that the commodity market has to improve its information system.

BIBILOGRAPHY

The study material collected from the following sources.

BOOKS
[61]

Indian Financial Market (Tata Mac-Graw hill). Commodity Trading Advisors: Risk, Performance Analysis, and Selection edited by Greg N. Gregoriou, Vassilios Karavas, Franois-Serge Lhabitant, Fabrice Douglas Rouah Commodity Markets By Chatnani (Tata Mac-Graw hill).

WEB SITES
www.gold.org www. Financialexpress .com www.google.com www.wikipedia.com www.investopedia.com www.optimus.com www.nymex.com www.indexmundi.com www.bloomberg.com

[62]