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Gold is unique as it is both a commodity and financial product. It is one of the most stable financial instruments and
hence whenever there is political turmoil or recession the prices of gold go up whereas most of the financial markets
Gold is commonly used for ornaments and is often given as gifts during marriages. Hence, an increase in the value of
the “financial instrument gold” makes buying “commodity gold” almost impossible for individuals going forward.
Keeping this nature of gold in mind, gold futures is an important tool which could help people hedge position in the
future. Thus, we as a group are interested in understanding the nature of gold as a financial instrument going forward.
2. Specification of product
Particular Specification
Traded in Comex Division of the NYMEX
SYMBOL GC
Regular Hours 12.20 pm – 5:30 pm (GMT)
month.
Quality of Gold Gold delivered under this contract shall assay to a minimum of 995
fineness
Trading at is allowed in the active contract month. The active contract months
Settlement will be February, April, June, August and December. On any given
Delivery may take place on any business day beginning on the first business day of the delivery month or any
subsequent business day of the delivery month, but not later than the last business day of the current delivery month
It should be noted that as physical delivery is allowed gold prices the quality of gold is very important. Hence the
quality of gold has been pegged at 99.99%. However, the speculators generally do not deal in gold. They prefer to
Trading at Settlement is allowed in the active contract month. The active contract months will be February, April, June,
August and December. On any given date, TAS transactions will be allowed only in a single contract month. TAS
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transactions may be executed at the current day’s settlement price or at any valid price increment ten ticks higher or
Online trading is also allowed in gold to facilitate participation from more people.
Margin requirement prevent people taking huge positions without having funds to support it. Hence this makes the
3. market movement
March 18 th
Gold Futures trading in COMEX (April 2011 contract), showed a steep fall of the observed 15 day period. According to experts
this fall was attributed to increase anxiety on the direction the market would take as recession impacts seem to lessen. However,
with the occurrence of the Japanese earthquake the stocks seemed to crash at Wall Street and this lead to further increase in
buying interest. This was accompanied with increasing volume and decreasing open intere11 `
Increase in bullion derivatives prices could be attributed to the “safe haven status” that the product enjoys. With deepening of
Middle East crisis the problem only seemed to deepen for the world economy and this saw gold prices skyrocketing. The market
The above table shows how experts believe various factors affect the price
Global Gold prices, have off late shown increased signs of rising fast, are notoriously volatile and clearly influenced by a wide
range of different factors. (Energy and Metal Survey 2009). However, the weights of the factors differ depending on the
commodity in question, and the trends and custom, over time. The survey which was conducted to determine ‘Factors Affecting
Commodity Prices' asked the “panellists to compare and rank the differing degrees of sensitivity with which the price of different
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commodities respond to a range of influences.” (Energy and Metal Survey 2009). The factors do not always have the same impact
sometimes they work in different directions, hence the strength of a factor would determine the direction in which it would move.
It should also help to determine which of them are likely to dominate. In addition to the five universal factors ranked in the table
above panellists (namely 'demand/business cycle', 'supply/production constraints', 'government trade policies', 'FX linkages/US
dollar value' and 'investment funds'), the other factors were suggested by the panellists themselves.
The returns from all commodity futures are generally said to have a positive correlation but the same cannot be said of gold...
Gold futures are positively related to the hedging pressure proxy (Peter A. Abken,2007) Gold prices change over the course of
time because of the influence of disparate economic and political forces on the market. Generally, these influences affect the gold
market simultaneously, though at times certain factors exert a greater impact on the market price than other factors (Peter A.
Abken,2007). The economic and political forces that affect the gold market fall into the following basic categories: ( 1) extreme
political and economic uncertainty, (2) flow supply and demand for gold, (3) inflation, and (4) government auction policy.
(S.Hussain 2006)
It should be noted that the gold is tracked in USD in international markets. Hence the change in the value of US currency impacts
the value of gold to a great extent.Whenever US dollar appreciates gold is inversely impacted and vice versa. (B.Eichengreen.
1985). With increase in the rate of globalization there has been an increase in the correlation between the price of gold and US
Gold has been rising continuously for quite some time as the dollar continues to weaken for around a month. This has helped
foreign investors buy same gold for fewer dollars. The demand for gold as an “alternative asset and an inflation hedge” is
increasing.
Domestic events
Gold futures had consolidated because of the economic recovery. Hence as far as domestic economy is concerned it is
important to keep growing at the pace that is desirable for ensuring increase in the value of gold.
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The US domestic Market influences the gold futures market in the following way:
“Ongoing inflationary pressures” – With the government unable to control inflationary pressure, the prices of gold has
“US Fiscal Deficits” AN attempt to control fiscal deficit has also had a similar effect on gold prices.
An attempt at curbing US dollar currency and the U.S. trade deficit seems to be having positive impact on gold prices.,
The shift of dollar from the global reserve currency would also affect the market positively. The economic recovery that
The other factors domestic events which seem to have impacted the price of gold futures include:
• On 8th of March 2011 the “U.S. President Barack Obama” sent an ominious message to the Gadaffi and his
followers. These factors played man important role in increasing the price of gold price as it lead to the
instability of the financial markets and hence investors looking for safe haven invested in the yellow metal
futures.
• Similar to most of the assets price of gold is to a great extent depends on the supply and demand factors
along with speculation by investors on the direction the market will tale in the near future..There is a unique
feature of gold and it is its use as financial instrument brings out the difference. Gold is not only bought for
• “Central banks do hold gold at times as an investment options this has been the case with the countries such as
at times announce gold purchases in advance, some, such as Russia, have expressed interest in growing their
gold reserves again In early 2006, China, which only holds 1.3% of its reserves in gold announced that it was
looking for ways to improve the returns on its official reserves. Some bulls hope that this signals that China
might reposition more of its holdings into gold in line with other Central Banks. India has recently purchased
• It is generally accepted that interest rates are closely related to the price of gold. As interest rates rise, the
general tendency is for the gold price, which earns no interest, to fall, and as rates dip, for gold price to rise. As
a result, gold price can be closely correlated to central banks via the monetary policy decisions made by them
related to interest rates. For example if market signals indicate the possibility of prolonged inflation, central
banks may decide to enact policies such as a hike in interest rates that could affect the price of gold in order to
quell the inflation. An opposite reaction to this general principle can be seen after the European Central bank
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raised its interest rate on April 7th, 2011 for the first time since 2008. The price of gold responded with a
muted response and then drove higher to hit new highs one day later
• War, invasion and national emergency: When dollars were fully convertible into gold via the gold standard,
both were regarded as money. However, most people preferred to carry around paper banknotes rather than the
somewhat heavier and less divisible gold coins. If people feared their bank would fail, a bank run might result.
Case in the point is the USA where during the Great Depression of the 1930s, President Roosevelt decided to
impose “a national emergency and issue Executive Order 6102 outlawing the ownership of gold by US
citizens. There was only one prosecution under the order, and in that case the order was ruled invalid by
federal judge John M. Woolsey, on the technical grounds that the order was signed by the President, not the
• In times of war, people are afraid that the wealth which they have amassed with great difficulty would b e
reduced to nought. Thus there is a fear that the only asset which would stand the test of the time and hence the
currency may become worthless. Hence gold is seen as an asset which has not lost its sheen over the years. It
is an asset which would continue to hold even if the value of currency is reduced to zero. “Thus in times of
great uncertainty, particularly when war is feared, the demand for gold rises”
1. Offshore events
The demand for Gold in the Asian markets especially India is well known. With marriage season fast approaching in
India the demand for gold is expected to increase exponentially in the coming future. On the other hand India, which is
already the world’s largest gold purchasing country, has seen more than 80 percent increases in demand of gold off late.
Slowing sales of gold by the central bank and the reduction of hedge positions by producers (dehedging) are creating a
solid floor price for gold. On the flipside, some central banks (Russia, Argentina, and South Africa) are beginning to
Nearly every major gold producer missed their production targets in the second and third quarters of 2005. As a result
of mine strikes and increasing production costs, global production is continuing to sag. South Africa, the leader in
global production, has shown a 15% drop in 2005 third quarter gold production, year over year.
Investment Demand
The World Gold Council reported a 66% rise in gold demand in the first and second quarters of 2005 compared to the
Earthquake in Japan:
The recent earthquake in Japan did not have any negative impact on the bullion derivatives market. Contrary, to the
behaviour of the stocks in the global markets the gold futures at COMEX held firm.
Japan is primarily a manufacturing hub and as gold is not used in the manufacturing industry and as there airs absence
of gold mines in Japan the Japan crisis did not have e any direct impact on the bullion futures market.
However there seems to be a cascading impact as the economy is going to be hit by the recession and this would affect
the market adversely. However, with Japan recovering quickly from the effect things are improving for the better. (CE
Batar, 2006).
Most of the European countries are not able to keep the inflation below the desired level of 3%. Hence there is a
possibility that the value of money would increase faster. This would make people go for gold globally as the price of
Crisis in countries such as Libya and Egypt is going to have a negative impact on the global economy. This is because
The recent military actions against the Libyan dictator Myanmar Gaddafi are likely keep gold high in the short-term as
Libya is one of the largest oil exporters and currently production has stopped
Increasing military tension in the region would significantly harm the global economy and it is unlikely that the U.S
would let its Saudi allies slip into a civil war; however the uncertainty is enough to keep the gold train going.
Meanwhile, the situation in Yemen, Bahrain and Saudi Arabia also tends to escalate with demonstrations and riots
Price of Oil
It has been generally observed that the price of oil and gold are positively linked. Hence increasing prices of oil would
definitely have a long term impact on the prices of gold. Thus it would lead to increase in the prices of gold and with
expectation of increase in gold prices the prices of gold futures is also expected to firm up. (P.K. Narayan and
S.Narayan, 2006). The graph shows the relationship between oil prices and gold prices. As mentioned above, there
The price of oil will severely impact the global economy, and hence the monetary banks will continue with their “ultra
loose monetary policy.’ • (P.K. Narayan and S.Narayan, 2006) This is a positive news for buyers of bullion futures as
Spot Price of Exponential cost of Time to maturity Price of bullion Theoretical Future Price
Model
1418 2.71 0.06 .0815 1433. 1425.108
Theoretical price of gold has been calculated based on the Black Scholes Model (F Black, 1976). In finance we believe
in one price theory hence we believe that going forward the price is going to decrease to $1425.5. Hence conventional
According to our forecast the price of gold futures will continue to increase and is going to peak soon. We believe that
the price would soon touch $ 2,000 and hover around it. This would be the time to go short on gold.
To understand the movement of gold prices it is important to understand the bigger picture with relation to the markets.
Most of the traders are possessed with the short term horizon but we believe that the short term horizon is a function of
the long term horizon. Hence we have tried to crystal gaze the prices of gold in the next three years.
We have depended on tools for “longer term trends” that are likely to emerge are the yearly Kress Cycles.
Fundamentals may be important but we believed that tools like kress cycles are also very important.
As of now our study helps us to deduce that we are in the early stages of what experts call e "runaway deflationary"
Our analysis says that this cycle will bottom out in around 5 years.
Demand for shares by investors has fallen manifold. From the time the credit crisis began. Risk bearing ability among
the retailers have taken a hit and most” large-scale equity market participation” are being done by institutions
This is a con for equities longer-term, and one with which gold doesn't have to contend.
Gold futures market as a whole is waiting for important indicators from the US Market. These indicators include “US
Unemployment, Manufacturing PMI, Construction Spending and Vehicle Sales” for the direction in the short run.
As long as the oil prices continue to be volatile due to the situation in Libya and other oil producing countries the Gold
may also be volatile. Of late Gold has defied many sound technical analysts forecasts of late and it continues to do so
Conclusion:
Gold futures are an internationally traded instrument which is at present hitting new highs every day. We believe this
will continue until and unless the US economy in particular and the global economy in general picks up.