m

6


OBJECTIVES ......................................................................................................................................... 2
INTRODUCTION .................................................................................................................................. 2
TYPE OF TRADINGS ............................................................................................................................ 3
Forex (FOREIGN CURRENCY EXCHANGE) ................................................................................... 3
EQUITY (SHARE MARKET) ............................................................................................................ 4
MCX (MULTI COMMODITY EXCHANGE) .................................................................................... 6
MCX RULES.......................................................................................................................................... 7
Applicability ....................................................................................................................................... 7
Business/Operations ............................................................................................................................ 7
Eligibility for Trading.......................................................................................................................... 7
Deposit................................................................................................................................................ 7
Trading Days....................................................................................................................................... 8
Trading Hours ..................................................................................................................................... 8
Risk Management System ................................................................................................................... 8
Brokerage.......................................................................................................................................... 10
Difference between commodity and financial derivatives ................................................................... 10
Physical settlement ............................................................................................................................ 10
Warehousing ..................................................................................................................................... 11
Quality of underlying assets............................................................................................................... 11
Commodities traded on the NCDEX platform........................................................................................ 12
Agricultural commodities .................................................................................................................. 12
Cotton ........................................................................................................................................... 12
Crude palm oil ............................................................................................................................... 14
Soy oil ........................................................................................................................................... 16
Precious metals ................................................................................................................................. 18
Gold .............................................................................................................................................. 18
Silver............................................................................................................................................. 20
How does E-Gold compare with ETF ................................................................................................ 22
Any broker who is registered with NSEL can buy or sell this or you have separate brokers for E-Gold?22
What are options available to Indian investors if they are bullish about gold? ..................................... 23
What efforts are on to make the E-Gold popular?............................................................................... 23
What are the reservations here? Why is it not taking off with Indian gold investors? ............................ 24
CONCLUSION ..................................................................................................................................... 24

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BIBLIOGRAPHY ................................................................................................................................. 24

<


1.m The prime objective of studying on MULTI COMMODITIES EXCHANGE (MCX) is to learn how to
do trading of commodities.
2.m Why common peoples are not investing in MCX as comparing to Equity and Forex (Foreign exchange
market)
3.m What are the rule to enter into MCX?
4.m What all the commodities which comes under MCX?
5.m How does E-Gold compare with ETF?
6.m What are options available to Indian investors if they are bullish about gold?
7.m What efforts are on to make the E-Gold popular?

 
<< 

The origin of Trading can be traced back to the need of farmers to protect themselves against fluctuations in the
price of their crop. From the the time it was sown to the time it was ready for harvest, farmers would face price
uncertainty. Through the use of simple derivative products, it was possible for the farmer to partially or fully
transfer price risks by locking-in asset prices. These were simple contracts developed to meet the needs of
farmers and were basically a means of reducing risk.

A farmer who sowed his crop in June faced uncertainty over the price he would receive for his harvest in
September. In years of scarcity, he would probably obtain attractive prices. However, during times of
oversupply, he would have to dispose off his harvest at a very low price. Clearly this meant that the farmer and
his family were exposed to a high risk of price uncertainty.

On the other hand, a merchant with an ongoing requirement of grains too would face a price risk - that of
having to pay exorbitant prices during dearth, although favorable prices could be obtained during periods of
oversupply. Under such circumstances, it clearly made sense for the farmer and the merchant to come together
and enter into a contract whereby the price of the grain to be delivered in September could be decided earlier.
What they would then negotiate happened to be a futures-type contract, which would enable both parties to
eliminate the price risk.

In 1848, the Chicago Board of Trade, or CBOT, was established to bring farmers and merchants together. A
group of traders got together and created the 'to-arrive' contract that permitted farmers to lock in to price upfront
and deliver the grain later. These to-arrive contracts proved useful as a device for hedging and speculation on

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price changes. These were eventually standardized, and in 1925 the first futures clearing house came into
existence.

Today, derivative contracts exist on a variety of commodities such as corn, pepper, cotton, wheat, silver, etc.
Besides commodities, derivatives contracts also exist on a lot of financial underlying like stocks, interest rate,
exchange rate, etc.

 <
 

<
 

   

Foreign Currency Exchange (Forex) Trading allows an investor to participate in profitable fluctuations of world
currencies. Forex trading works by selecting pairs of currencies, then measuring profit or loss by the
fluctuations of one one currency's market activity compared to the other. For example, fluctuations in the value
of the $ U.S. Dollar are measured against another world currency such as the British Pound, Eurodollar, and
Japanese Yen etc. Being able to discern price trends in market activity is the essence of all profitable trading
and this is what makes foreign currencies so exciting, currencies are the world's 'best trending' market. This
gives Forex investors a profit making edge that is unavailable in most other markets.

Forex Trading is being called 'today's exciting new investment opportunity for the savvy investor'. The reason is
that the Forex Trading Market only began to emerge in 1978, when worldwide currencies were allowed to 'float'
according to supply and demand, 7 years after the Gold Standard was abandoned. Up until 1995 Forex Trading
was only available to banks and large multinational corporations but today, thanks to the proliferation of the
computer and a new era of internet-based communication technologies, this highly profitable market is open to
everyone. The Forex Trading Market's growth has been unprecedented, explosive, and continues to be
unequaled by any other trading market.

Unlike traditional trading which brings buyers and sellers together in a central location (trading floors) in Forex
Trading there is no need for a centralized location. Forex is a market where worldwide traders conduct business
by high-speed Internet connections with the Interbank Foreign Currency Exchange via Forex Clearinghouses
(also called Forex Brokerage Firms). Forex has not only become the fastest growing trading market, but also the
most profitable trading marketplace in the world.

Simply stated, Forex is the most profitable because it is the world's largest marketplace. The Foreign Currency
market as a whole accounts for over 1.2 trillion dollars of trading per day (as determined by the fourth Central
Bank Survey of Foreign Exchange and Derivatives Market Activity, 1998. This figure is understood to be
significantly higher today). To put this into perspective, on any given day the Foreign Currency Exchange
Market activity is vastly greater than the Stock Market. It is 75 times greater than the New York Stock
Exchange where the average total daily value (using 1998 figures) of both foreign and domestic stocks is $16
billion, and much greater than the daily activity on the London Stock Exchange, with $11 billion.

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Furthermore, in addition to being the world's largest and most profitable market, The Foreign Currency
Exchange Market is the world's most powerful and persistent trading market regardless of negative economic
indicators. This is because currencies 'trend' better than every other market due to their macro-economic nature.
Unlike many commodities whose supply and demand fundamentals can literally change overnight (as we found
in the sudden dot com 'market adjustment' and even more abruptly on September 11, 2001), currency
fundamentals are much less random, and far more predictable. This is well illustrated in the way interest rates
are changed gradually and only in small increments.

Other examples of fundamental predictability are illustrated by the following statistics. Of the $1.2 trillion day
trading in Foreign Currency Exchange, 83% of spot foreign exchange activity and 95% of swap activity
involves US Dollars. The Euro is the second most active currency at 37%. The Japanese Yen (24%) and the
British Pound Sterling (10%) are ranked third and fourth. The Swiss Franc is 7%, and the Canadian and
Australian Dollars account for 3%.

Spot Forex is the type of forex trade in which self-traders concentrate most of their investment activity for
reasons that are self-explanatory. By definition, a Spot Forex transaction is a currency trade transaction that has
a settlement (liquidation) within a maximum of 2 working days following the closing of the trade.

 


m

The Indian Equity Market is more popularly known as the Indian Stock Market. The Indian equity market has
become the third biggest after China and Hong Kong in the Asian region. According to the latest report by
ADB, it has a market capitalization of nearly $600 billion. As of March 2009, the market capitalization was
around $598.3 billion (Rs 30.13 lakh crore) which is one-tenth of the combined valuation of the Asia region.
The market was slow since early 2007 and continued till the first quarter of 2009. A stock exchange has been
defined by the Securities Contract (Regulation) Act, 1956 as an organization, association or body of individuals
established for regulating, and controlling of securities.

The Indian equity market depends on three factors -

½m Funding into equity from all over the world

½m Corporate houses performance
½m Monsoons

The stock market in India does business with two types of fund namely private equity fund and venture capital
fund. It also deals in transactions which are based on the two major indices - Bombay Stock Exchange (BSE)
and National Stock Exchange of India Ltd. (NSE).
The market also includes the debt market which is controlled by wholesale dealers, primary dealers and banks.
The equity indexes are allied to countries beyond the border as common calamities affect markets. E.g. Indian
and Bangladesh stock markets are affected by monsoons.
The equity market is also affected through trade integration policy. The country has advanced both in foreign
institutional investment (FII) and trade integration since 1995. This is a very attractive field for making profit
for medium and long term investors, short-term swing and position traders and very intra day traders.

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The Indian market has 22 stock exchanges. The larger companies are enlisted with BSE and NSE. The smaller
and medium companies are listed with OTCEI (Over The counter Exchange of India). The functions of the
Equity Market in India are supervised by SEBI (Securities Exchange Board of India).
History of Indian Equity Market The history of the Indian equity market goes back to the 18th century when
securities of the East India Company were traded. Till the end of the 19th century, the trading of securities was
unorganized and the main trading centers were Calcutta (now Kolkata) and Bombay (now Mumbai).
Trade activities prospered with an increase in share price in India with Bombay becoming the main source of
cotton supply during the American Civil War (1860-61). In 1865, there was drop in share prices. The
stockbroker association established the Native Shares and Stock Brokers Association in 1875 to organize their
activities. In 1927, the BSE recognized this association, under the Bombay Securities Contracts Control Act,
1925. The Indian Equity Market was not well organized or developed before independence. After
independence, new issues were supervised. The timing, floatation costs, pricing, interest rates were strictly
controlled by the Controller of Capital Issue (CII). For four and half decades, companies were demoralized and
not motivated from going public due to the rigid rules of the Government.

In the 1950s, there was uncontrollable speculation and the market was known as 'Satta Bazaar'. Speculators
aimed at companies like Tata Steel, Kohinoor Mills, Century Textiles, Bombay Dyeing and National Rayon.
The Securities Contracts (Regulation) Act, 1956 was enacted by the Government of India. Financial institutions
and state financial corporation were developed through an established network.

In the 60s, the market was bearish due to massive wars and drought. Forward trading transactions and 'Contracts
for Clearing' or 'badla' were banned by the Government. With financial institutions such as LIC, GIC, some
revival in the markets could be seen. Then in 1964, UTI, the first mutual fund of India was formed.

In the 70's, the trading of 'badla' resumed in a different form of 'hand delivery contract'. But the Government of
India passed the Dividend Restriction Ordinance on 6th July, 1974. According to the ordinance, the dividend
was fixed to 12% of Face Value or 1/3 rd of the profit under Section 369 of The Companies Act, 1956
whichever is lower.

This resulted in a drop by 20% in market capitalization at BSE (Bombay Stock Exchange) overnight. The stock
market was closed for nearly a fortnight. Numerous multinational companies were pulled out of India as they
had to dissolve their majority stocks in India ventures for the Indian public under FERA, 1973.

The 80's saw a growth in the Indian Equity Market. With liberalized policies of the government, it became
lucrative for investors. The market saw an increase of stock exchanges, there was a surge in market
capitalization rate and the paid up capital of the listed companies.

The 90s was the most crucial in the stock market's history. Indians became aware of 'liberalization' and
'globalization'. In May 1992, the Capital Issues (Control) Act, 1947 was abolished. SEBI which was the Indian
Capital Market's regulator was given the power and overlook new trading policies, entry of private sector
mutual funds and private sector banks, free prices, new stock exchanges, foreign institutional investors, and
market boom and bust.

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In 1990, there was a major capital market scam where bankers and brokers were involved. With this, many
investors left the market. Later there was a securities scam in 1991-92 which revealed the inefficiencies and
inadequacies of the Indian financial system and called for reforms in the Indian Equity Market.

Two new stock exchanges, NSE (National Stock Exchange of India) established in 1994 and OTCEI (Over the
Counter Exchange of India) established in 1992 gave BSE a nationwide competition. In 1995-96, an
amendment was made to the Securities Contracts (Regulation) Act, 1956 for introducing options trading. In
April 1995, the National Securities Clearing Corporation (NSCC) and in November 1996, the National
Securities Depository Limited (NSDL) were set up for demutualised trading, clearing and settlement.
Information Technology scrips were the major players in the late 90s with companies like Wipro, Satyam, and
Infosys.

In the 21st century, there was the Ketan Parekh Scam. From 1st July 2001, 'Badla' was discontinued and there
was introduction of rolling settlement in all scrips. In February 2000, permission was given for internet trading
and from June, 2000, futures trading started.

<<  

The Mumbai-based MCX (www.mcxindia.com) is an independent, demutualized, nationwide electronic multi

commodity futures exchange set up by Financial Technologies with permanent recognition from the
Government of India for facilitating online trading, clearing & settlement operations the futures market across
the country. The Exchange started operations in November 2003. At present it has 70% market share of the total
commodity futures trading volume in the country. MCX, being among the world¶s top ten commodity
derivatives exchanges, ranks among the top three bullion, energy and copper bourses globally in terms of
contracts traded. The average daily turnover of MCX is about US$2.2 billion. MCX currently has over 1,600
members allowed to trade on its platform and transmute efficiency to the masses via spread of information.

In addition to being an ISO 9001:2000 company for quality management, it is the world¶s first and only multi-
commodity exchange to have achieved ISO 27001:2005 certification, the global benchmark for information
security management systems.

MCX offers futures trading in 58 commodities that range from bullion, energy and agric-commodities to
plastics and fibers, which are globally referable commodities benchmarked against international prices, defined
in terms of the type of contracts offered. The exchange strives to spearhead developments in the commodities
futures segment. Therefore, it has forged eleven strategic alliances across the world, including with Tokyo
Commodity Exchange, Chicago Climate Exchange, London Metal Exchange, New York Mercantile Exchange,
New York Board of Trade and Bursa Malaysia Derivatives, Berhad and ten regional alliances with the likes of
Bombay Bullion Exchange, Bombay Metal Exchange, India Pepper & Spice Trade Association and The United
Planters Association of Southern India.
m
m

Financial Technologies India Ltd, a leading provider of transaction automation technologies for equities,
derivatives, forex and commodity markets, holds 64.11% stake in MCX. Other key stakeholders include
Fidelity International, State Bank of India & its subsidiaries, National Stock Exchange (NSE) and National
Bank for Agriculture & Rural Development (NABARD).




 !"#  $%

These Rules shall be enforceable on the Sub-Brokers of the KCEL and their Client in respect of their rights and
obligations relating to trading on MCX. They shall be subject to jurisdiction as provided in MCX rules
irrespective of the place of business of the Sub-Brokers or their customers and clients in India or elsewhere.
Note : Only the members of KCEL whose name is entered in the Register of Members will be appointed Sub-
Brokers as approved by the Board of Directors or as duly constituted thereof and further approved as such by
MCX.

&' ('')<"$ ('

MCX shall facilitate trading in derivatives contracts in various commodities permitted to MCX by the
Government of India under the Forward Contracts Regulations Act, 1952, and any other Act subject to approval
of the Forward Markets Commission or any other authority as may be applicable.

 * #  $%+", (*

At MCX, only the Sub-Brokers of the KCEL(Kanpur Commodity Exchange Limited), who have been admitted
as such are eligible to participate in trading. Members who are not sub-broker of the KCEL and other persons,
can participate in trading only as clients through a Sub-Broker of the KCEL.

' $

A.m ¯
 
  : The Sub-Brokers are required to pay security deposit of Rs. 50 thousand at the
time of appointment as Sub-Broker which will be used as initial margin for giving exposure to the Sub-
Brokers linked to the percentage of the margin applicable for each commodity.

B.m à 
  : In order to increase the exposure limits for trading, the Sub-Brokers may remit
additional security deposit in multiples of Rs. 5000/- .

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C.m The initial security deposit paid by the Sub-Brokers is interest-free refundable deposit. It is treated as
his initial margin deposit, on which he gets an initial exposure limit in value terms. In case of ceasing as
sub broker, the initial security deposit is refundable subject to settlement of all pending dues, claims and
charges.

D.m The initial Security Deposit/Additional Security Deposit shall be paid either through Bank Draft or
money transfer through Clearing Bank.

E.m However, the additional security deposit can also be made by way of a FDR in the joint name of the sub
broker and KCEL issued by the clearing bank which shall be kept in safe custody by KCEL. The interest
accruing on such FDRs will be to sub brokers account. These FDRs will be used for giving Additional
Security Deposit to MCX in form of Bank Guarantee or otherwise. The bank charges/ commission for
issuing bank guarantee keeping in force levied by the clearing bank shall be borne by the concerned sub
broker. FDRs should be in the multiple of Rs.25000 and for a minimum period of six months.

", (*"%'

As fixed by MCX from time to time. At present the MCX operates on all days except Sundays and specified
holidays. A list of holidays for each calendar year will be notified by the MCX in advance.

", (*&'

As fixed by MCX from time to time. At present the MCX has following trading sessions:
©
    
India Session 10.00AM to 5.00 PM
  11.00 AM to 2.00 PM

'-"("*.($%'$.
A.m A sub-broker is allowed to trade only upon payment of minimum security deposit of Rs. 50,000 in
addition to compliance of all other requirements. On the basis of deposit of Rs. 50,000, he is allowed to
take such exposure on which the margin requirement is equal to or less than Rs. 50,000 Similarly, if a
sub-broker has paid additional deposit or margin, the system allows him exposure up to such level, up to
which the margin requirement on such exposure is equal to or less than total deposit (initial minimum
security deposit + additional deposit / margin.) As soon as a sub-broker crosses such allowed exposure
limit, he is suspended from trading. In case a member is suspended from trading due to crossing such
limit, he can still log in to the system, he can view the market, but if he attempts to submit orders, such
orders are rejected.

B.m The calculation of margin at trade level is on a real time basis, which implies that with every trade
executed by the sub-broker, his allowable exposure limit is correspondingly reduced to the extent of
limit exhausted towards execution of such trade. However, if the new trade results into reduction in his

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outstanding position, his available exposure limit increases correspondingly because of overall reduction
in his outstanding position by virtue of such offsetting trades.

C.m At end of day, the system recalculates margin requirement in respect of outstanding position of a sub-
broker (outstanding quantity multiplied by closing price). Besides, the system will also calculate the
settlement dues which would be the Mark-To-Market Margin and the profits or losses actually sustained.
All these figures are communicated to the sub-brokers through trade file downloads through FTP (File
transfer protocol). The obligation of a sub-brokers towards margin and pay-in is blocked out of his
available deposit for the purpose of MTM limit and only the rest amount is available towards MTM loss
at commencement of trading session next day. Thereafter, as soon as the pay-in of that sub-broker is
complete and a confirmation to such effect is received from the bank, the pay-in amount blocked out of
deposit is released for MTM purpose and thereafter, the sub-broker starts getting MTM limit on the
entire deposit.

D.m In order to inform the sub-broker sufficiently in advance, the system tracks the exposure limits of the
sub-broker on real time basis and alerts him at 60%, 70% and 90% level of their exposure. However, if a
sub-broker¶s exposure crosses 100% level, he is suspended by the system and in such a case, he is
debarred from submitting any new order and the existing pending orders are deleted from the system.

E.m In case a sub-broker is suspended in the manner stated above and he is interested to square-off his
outstanding position, he can send written communication through Fax/ E Mail/ Direct to the KCEL in
the specified format with a request to square off his position and in such case, the KCEL may request
MCX to square off his position, though the MCX does not take any responsibility for such squaring off.

Provided that even in absence of such request from the sub-broker, the KCEL/MCX may, if it so desire,
square-off position of such member in case of non-payment of margin as stated above.

F.m A sub-broker can anytime during the trading session pay additional security deposit by depositing funds
in his settlement account and inform the KCEL through fax or email. Thereafter, the amount will be
collected by the KCEL from the settlement account of the sub-broker and the exposure limit of the sub-
broker will be increased accordingly.

G.m The initial margin percentage will be notified in advance for respective commodities. However, in case
of abnormal volatility in any contract or in order to prevent defaults in the system, the margin percentage
can be increased by the KCEL/MCX at any point of time during the continuance of a contract. As soon
as the margin percentage is increased, the revised percentage will apply to all existing open positions as
well as fresh position to be created subsequent to such increase. The incremental margin on existing
position will be blocked out of existing margin deposit of the sub-broker and in case of any shortfall, the
sub-broker will be required to deposit the same immediately, pending which he is suspended from
trading.

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-"*

The MCX may specify the maximum and minimum brokerage rates, which shall be adhered to by the sub-
brokers of the KCEL while dealing with their clients. Such brokerage rates may be commodity specific absolute
figure or in terms of percentage on value of a contract irrespective of class of commodity. Such brokerage
amount must be shown separately in the confirmation slips to be issued by the sub-brokers to their clients. The
maximum brokerage rate for the time being shall be 1 % in case of non-delivery transactions and 

 in case of transactions resulting into delivery.

 ++(!#$/(!.., $%"(,+ ("(! ", 0"$ 0'

The basic concept of a derivative contract remains the same whether the underlying happens to be a commodity
or a financial asset. However there are some features which are very peculiar to commodity derivative markets.
In the case of financial derivatives, most of these contracts are cash settled. Even in the case of physical
settlement, financial assets are not bulky and do not need special facility for storage. Due to the bulky nature of
the underlying assets, physical settlement in commodity derivatives creates the need for warehousing. Similarly,
the concept of Ñ
  
  
 does not really exist as far as financial underlyings are concerned.
However in the case of commodities, the quality of the asset underlying a contract can vary largely. This
becomes an important issue to be managed. We have a brief look at these issues.

1%' !"'$$.($

Physical settlement involves the physical delivery of the underlying commodity, typically at an accredited
warehouse. The seller intending to make delivery would have to take the commodities to the designated
warehouse and the buyer intending to take delivery would have to go to the designated warehouse and pick up
the commodity. This may sound simple, but the physical settlement of commodities is a complex process. The
issues faced in physical settlement are enormous. There are limits on storage facilities in different states. There
are restrictions on interstate movement of commodities. Besides state level octroi and duties have an impact on
the cost of movement of goods across locations. The process of taking physical delivery in commodities is quite
different from the process of taking physical delivery in financial assets. We take a general overview at the
process flow of physical settlement of commodities. Later on we will look into details of how physical
settlement happens on the NCDEX.

Any seller/ buyer who has given intention to deliver/ been assigned a delivery has an option to square off
positions till the market close of the day of delivery notice. After the close of trading, exchanges assign the
delivery intentions to open long positions. Assignment is done typically either on random basis or first-in-first
out basis. In some exchanges (CME), the buyer has the option to give his preference for delivery location.

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The clearing house decides on the daily delivery order rate at which delivery will be settled. Delivery rate
depends on the spot rate of the underlying adjusted for discount/ premium for quality and freight costs. The
discount/ premium for quality and freight costs are published by the clearing house before introduction of the
contract. The most active spot market is normally taken as the benchmark for deciding spot prices.
Alternatively, the delivery rate is determined based on the previous day closing rate for the contract or the
closing rate for the day.

ÿ"1&' (*
One of the main differences between financial and commodity derivative is the need for warehousing. In case of
most exchange-traded financial derivatives, all the positions are cash settled. Cash settlement involves paying
up the difference in prices between the time the contract was entered into and the time the contract was closed.
For instance, if a trader buys futures on a stock at Rs.100 and on the day of expiration, the futures on that stock
close Rs.120, he does not really have to buy the underlying stock. All he does is take the difference of Rs.20 in
cash. Similarly the person who sold this futures contract at Rs.100, does not have to deliver the underlying
stock. All he has to do is pay up the loss of Rs.20 in cash.

In case of commodity derivatives however, there is a possibility of physical settlement. Which means that if the
seller chooses to hand over the commodity instead of the difference in cash, the buyer must take physical
delivery of the underlying asset. This requires the exchange to make an arrangement with warehouses to handle
the settlements. The efficacy of the commodities settlements depends on the warehousing system available.
Most international commodity exchanges used certified warehouses (CWH) for the purpose of handling
physical settlements. Such CWH are required to provide storage facilities for participants in the commodities
markets and to certify the quantity and quality of the underlying commodity. The advantage of this system is
that a warehouse receipt becomes a good collateral, not just for settlement of exchange trades but also for other
purposes too. In India, the warehousing system is not as efficient as it is in some of the other developed
markets. Central and state government controlled warehouses are the major providers of agri-produce storage
facilities. Apart from these, there are a few private warehousing being maintained. However there is no clear
regulatory oversight of warehousing services

&" $%+&(,% (*"''$'

A derivatives contract is written on a given underlying. Variance in quality is not an issue in case of financial
derivatives as the physical attribute is missing. When the underlying asset is a commodity, the quality of the
underlying asset is of prime importance. There may be quite some variation in the quality of what is available in
the marketplace. When the asset is specified, it is therefore important that the exchange stipulate the grade or
grades of the commodity that are acceptable. Commodity derivatives demand good standards and quality
assurance/ certification procedures. A good grading system allows commodities to be traded by specification.

Currently there are various agencies that are responsible for specifying grades for commodities. For example,
the Bureau of Indian Standards (BIS) under Ministry of Consumer Affairs specifies standards for processed
agricultural commodities whereas AGMARK under the department of rural development under Ministry of
Agriculture is responsible for promulgating standards for basic agricultural commodities. Apart from these,
there are other agencies like EIA, which specify standards for export oriented commodities.

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.., $ '$",,($1 "$+.

In December 2003, the National Commodity and Derivatives Exchange Ltd (NCDEX) launched futures trading
in nine major commodities. To begin with contracts in gold, silver, cotton, soyabean, soya oil, rape/ mustard
seed, rapeseed oil, crude palm oil and RBD palmolein are being offered.

We have a brief look at the various commodities that trade on the NCDEX and look at some commodity
specific issues. The commodity markets can be classified as markets trading the following types of
commodities.

1.mAgricultural products
2.mPrecious metal
3.mOther metals
4.mEnergy

Of these, the NCDEX has commenced trading in futures on agricultural products and precious metals. For
derivatives with a commodity as the underlying, the exchange must specify the exact nature of the agreement
between two parties who trade in the contract. In particular, it must specify the underlying asset, the contract
size stating exactly how much of the asset will be delivered under one contract, where and when the delivery
will be made. In this chapter we look at the various underlying assets for the futures contracts traded on the
NCDEX. Trading, clearing and settlement details will be discussed later.

* !&$&"!.., $ '

The NCDEX offers futures trading in the following agricultural commodities - Refined soy oil, mustard seed,
expeller mustard oil, RBD palmolein, crude palm oil, medium staple cotton and long staple cotton. Of these we
study cotton in detail and have a quick look at the others.

$$(

Cotton accounts for 75% of the fibre consumption in spinning mills in India and 58% of the total fibre
consumption of its textile industry (by volume). At the average price of Rs.45/ kg, over 17 million bales
(average annual consumption, 1 bale = 170 kg) of raw cotton trade in the country. The market size of raw cotton
in India is over Rs.130 billion. The average monthly fluctuation in prices of cotton traded across India has been
at around 4.5% during the last three years. The maximum fluctuation has been as high as 11%. Historically,
cotton prices in India have been fluctuating in the range of 3-6% on a monthly basis.

Cotton is among the most important non-food crops. It occupies a significant position, both from agricultural
and manufacturing sectors' points of view. It is the major source of a basic human need - clothing, apart from
other fibre sources like jute, silk and synthetic. Today, cotton occupies a significant position in the Indian
economy on all fronts as a commodity that forms a means of livelihood to over millions of cotton cultivating
farmers at the primary agricultural sector. It is also a source of direct employment to over 35 million people in
the secondary manufacturing textile industry that contributes to 14% of the country's industrial production, 27-
30% of the country's export earnings and 4% of its GDP.

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Cropping and Growth pattern

Cotton is a tropical and sub-tropical crop. For the successful germination of its seeds, a minimum temperature
of 150°C is required. The optimum temperature range for vegetative growth is 21- 270°C- It can tolerate
temperatures as high as 430°C , but does not do well if the temperature falls bellow 210°C. During the period of
fruiting, warm days and cool nights, with large diurnal variations are conducive to good boll and fibre
development. In the case of the rain-fed cotton, which predominates and occupies nearly 75% of the area under
this crop, a rainfall of 50 cm is the minimum requirement. More than the actual rainfall, a favourable
distribution is the deciding factor in obtaining good yields from the rainfed cotton. Cotton is grown on a variety
of soils. It requires a soil amenable to good drainage, as it does not tolerate water logging. It is grown mainly as
a dry crop in the black and medium black soils and as an irrigated crop in the alluvial soils. The predominant
types of soils on which the crop is grown are (l)Alluvial soils predominant in the northern states of Punjab,
Haryana, Rajasthan and Uttar Pradesh, (2)The black cotton soils, (3)The red sandy loams to loams -
predominant in the states of Gujarat, Maharashtra, Madhya Pradesh, Andhra Pradesh, Karnataka and Tamil
Nadu, and (4)Lateritic soils - found in parts of Tamil Nadu, Assam and Kerala.

Cotton is a 90-120 day annual crop. In the main producing countries of USA, China, India and Pakistan, the
crop is sown during the June-July period and harvested during September-October. Harvested Kappas (cotton
with seed) start arriving into the market (from the producing centres) from October-November onwards. Kappas
are bought by ginners, who separate the seeds from the lint (cotton fibre), a process called ginning (lint recovery
from kappas is 30-31%). The loose cotton lint so obtained is pressed and sold to the spinning mills in the form
of full pressed bales (1 bale = 170 kg cotton lint in India; in USA, it is 480 pounds). Spinned cotton yarn is used
by clothe manufacturers/ textile industry. Global and domestic demand-supply dynamics

China, USA, India and Pakistan top the list of cotton producing countries. Uzbekistan, Brazil, Turkey and
Australia are the other major producers. These eight countries produced over 80% of the world's cotton
production during 2001-02.

China, India, USA and Pakistan top the list of cotton consuming countries. These along with Turkey, Brazil,
Indonesia, Mexico, Russia, Thailand, Italy and Korea consume over 80% of the world's annual cotton
consumption. Global production of cotton during the post 1990 (till date i.e. 2002-03 forecast) has been
fluctuating in the narrow range of 16.5-21 million tons. Similarly, consumption has been in the range in the 18-
20.5 million tons. The global export and import trade of cotton during the post 1990 era has been in the range of
5.5 to 6.5 million tons.

Production of cotton in India during the post 1990 period has been fluctuating in the range of 12-17 million
bales (i.e. between 2.2-2.8 million tons), constituting about 15% of the global cotton production. Currently, the
country's cotton consumption stands at 17-19 million bales (2.7-2.9 million tons). India's position on the global
trade front has witnessed a drastic change during the post 1995 period. The country has turned from being 




to 



The country's raw cotton exports, which stood at 1.2-1.6 million bales during the pre-
1996 period have dipped to less than 100 thousand bales. Contrary to this, the imports have sharply risen from
30000-50000 bales during the pre-1995 to little over 2.2 million bales during the last three years. Among
several other reasons, it is the lack of availability of desired quality cotton that has made many Indian buyers
(particularly the export oriented units) to opt for purchases of foreign cotton despite enough domestic supply.
Most importing mills in India are ready to pay 5-10% premium for foreign cotton due to its higher quality (less
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trash, uniform lots, higher ginning out-turn) and better credit terms (3-6 months vs. 15-30 days for local). Mills
using ELS (extra long staple) have been pleased with US Pima and its fibre characteristics. US has emerged as
an important supplier in the last two seasons. Apart from US, India is also importing from Egypt, West Africa,
and the CIS countries and Australia on account of lower freight and shorter delivery periods.

Price trends and factors that influence prices

Cotton production and trade is influenced by various factors. Production (acreage under the crop) of cotton
varies from year to year based on the climatic factors that are crucial for the productivity of crop. Cotton trade
is influenced by the supply-demand scenario, production and prices of synthetic fibre (polyester, viscose and
acrylic) and prices of cotton itself, etc.

The global supply and demand statistics released by the International Cotton Advisory Committee (ICAC)
and the United States Department of Agriculture (USDA) periodically are closely watched by the trading
community.

The central government establishes minimum support prices (MSP) for Kappas at the start of each marketing
season. The CCI is responsible for establishing the price support in all States. Typically, market prices remain
well above the MSP, and CCI operations are generally limited to commercial purchases and sales (except for a
few years like 2001-02 when the prices were abysmally low).

Futures prices of cotton at the New York Board of Trade (NYBOT) serve as the reference price for cotton
traded in the international market. World cotton prices fell sharply during most part of 2001, NyBOT
witnessing a sharp downfall in prices from 61.78 US Cents/ lb (as on Jan 2, 2001) to the low of 28.20 US Cents/
lb (as on Oct 26, 2001), a sharp fall by 54.35%. Towards mid-2002, prices recovered to 53 cents, and toward
end of 2003 were currently ruling at 58.85 cents.

Cotton prices in India are therefore influenced by various demand-supply factors operating within the
country, international raw cotton prices, demand for finished readymade garments from abroad, prices of
synthetic fibre, etc. Jute, silk, wool and khadi - the other fibre sources, are less likely to have any major impact
on cotton prices in India.

&,". 
Annual edible oil trade in India is worth over Rs.440 billion, with the share of CPO being nearly 20% (Rs.80-90
billion). The country is over-dependent on CPO imports to the extent of over 50% of its annual vegetable oil
imports. There is a close inter linkage between the various vegetable oils produced, traded and consumed across
the world. The average monthly fluctuation in prices of imported CPO traded at Kandla (one of the major
importing ports in Gujarat) has been at 9.7% during the past two and a half years, the maximum monthly
fluctuation being as high as 25% during the period.

Palm oil is extracted from the mature fresh fruit bunches (FFBs) of oil palm plantations. One hectare of oil
palm yields approximately 20 FFBs, which when crushed yields 6 tons of oil (including the kernel oil, which is
used both for edible and industrial purposes). Crude palm oil (CPO), crude palmolein, RBD (refined, bleached,
deodorized) palm oil, RBD palmolein and crude palm kernel oil (CPKO) are the various forms of palm oil
traded in the market.
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Cropping and growth patterns

Oil palm requires an average annual rainfall of 2000 mm or more distributed evenly throughout the year.
Rainfall less than 100 mm for a period of more than three months is not suitable for oil palm cultivation. Oil
palm thrives well at temperatures of 22 - 33°C with at least 5 hours sunshine per day throughout the year. Oil
palm can be grown on a wide range of soil. In general, the soil should be deep, well structured and well drained.
However, in areas where rainfall is marginally suitable, the water-holding capacity of the soil is of greatest
importance. Flat or gentle undulating land is preferred. Oil palm is sensitive to pH above 7.5 and stagnant
water.

Global and domestic demand-supply dynamics

CPO is used for human consumption as well as for industrial purposes. The consumption of palm oil (both food
and industrial consumption put together) in the world is growing at the rate of 7.37% compounded annually
during the last 12 years period. While in the importing countries like China and European Union, the
consumption of palm oil is growing at the rate of 5.2% and 4.8% respectively, the consumption growth rate for
the worlds leading palm oil importer

Production of palm oil stands at 24-25 million tons (over 22% of the global vegetable oil). Palm oil
dominates the global vegetable oil export trade. The two producing countries viz. Malaysia and Indonesia
dominate the global trade in CPO. Their share in the global exports of CPO is to the tune of 90%. The major
trading centres of CPO in the world are Malaysia and Indonesia in Asia and Rotterdam in Europe. The Kuala
Lumpur based Malaysia Derivatives Exchange Bhd. (MDEX) could be considered as the price maker of palm
oil traded world over. This exchange trades only CPO among several derivatives of palm. The domestic
production of palm oil forms almost a negligible part of the total edible oil consumption in the country.

Rising consumption of palm oil in India, which could be mainly attributed to its price competitiveness
among several of its competing oils is being met through increasing imports. Palm oil supports many other
industries in India like refining, vanaspati and other industrial sectors apart from human consumption as RBD
palmolein. The major importing and trading centres for palm in India are Chennai, Kakinada, Mumbai and
Kandla. The other centers like Mundra, Kolkata, Mangalore and Karwar also play important role, but next to the
four major trading centers. Palm oil trade in India is influenced by the supply-demand scene in the domestic
market including the factors influencing various oilseed production in the country, prices of various
domestically produced and imported oils, production and trade policies of the Government, mainly the export-
import policy, overall health of the economy that has a bearing on the purchasing power of ultimate consumers,
etc. The entire industry of CPO in India is dominated by importers, large refiners, corporate involved in
wholesale and retail trade through value-addition and retail-regional level players along with a few national
level players. The industry is dominated by over 200 importing companies, who are mostly refiners too.
Domestic oilseed and edible oil industry is organised in the form of oilseed crushers, processors, solvent
extractors, technologists, commodity-specific producers and traders.

Price trends and factors that influence prices

There exists a clear trough and crest in the seasonality of CPO production, indicating a typical seasonality in the
production cycle. The production bottoms down in the months of February, March and April, while the it is at
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its peak during the months of August, September and October. Palm oil trade is influenced by various
production, market and policy related factors. Being a perennial plantation crop, acreage under palm plantation
does not vary from season to season. Production is almost evenly distributed throughout the year between 0.8-
1.1 million tons in a monthly. However, it exhibits seasonal highs and lows once in a year. Yield levels of the
plantations are influenced by climatic conditions like rainfall, temperature, etc. Factors that influence price are
market related factors viz. supply-demand scenario of palm and its competing soy oil in the global market apart
from other vegetable oil sources viz. canola/ rapeseed, coconut oil, sunflower, groundnut, etc.; supply-demand
status of various consuming/importing countries;

over-all status of the edible oil industry during the immediate past; current and a short-term forecast of the
future status of the industry in various producing and consuming countries. Production and trade related policies
of various exporting and importing nations of palm oil at the international scene have a major bearing on the
prices of palm oil.

Trade policies in India

Since oilseed is one among the major crops cultivated by millions of farmers spread across the country, and is
the major source of cooking oil to over one billion consuming populace of the country, like any other welfare
state, Government of India (Gol) adopts a protection policy with regard to production and trade in vegetable
oils, so as to protect the interests of both the producers and consumers. While the strategy of farm subsidies and
minimum support price (MSP) are on the production side, the duty structure on various forms of palm oil is the
major trade-related protectionist measure.

% 

Soy oil is among the major sources of edible oils in India. Of the annual edible oil trade worth over Rs.440
billion in the country, soy oils share is over 20-21% at Rs.90-92 billion in terms of value. Being an agricultural
commodity, which is often subjected to various production and market-related uncertainties, soy oil prices
traded across the world are highly volatile in nature. The average fluctuation in spot prices of refined soy oil
traded at Mumbai has been at 6.6% during the past two and a half years, the maximum monthly fluctuation
being as high as 17% during the period. Historically, soy oil prices in the major spot markets across the country
have been fluctuating in the range of 4.5-8.5%. This offers immense opportunity for the investors to profitably
deploy their funds in this sector apart from those actually associated with the value chain of the commodity,
which could use soy oil futures contract as the most effective hedging tool to minimise price risk in the market.

Soy oil is the derivative of soybean. On crushing mature beans, 18% oil and 78-80% meal is obtained. While
the oil is mainly used for human consumption, meal serves as the main source of protein in animal feeds. Soy
oil is the leading vegetable oil traded in the international markets, next only to palm. Palm and soy oils together
constitute around 68% of global edible oil export trade volume, with soy oil constituting 22.85%. It accounts for
nearly 25% of the world's total oils and fats production. Increasing price competitiveness, and aggressive
cultivation and promotion from the major producing nations have given way to widespread soy oil growth both
in terms of production as well as consumption.

Cropping and growth patterns

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In India, soybean is purely a Kharif crop, whose sowing begins by end-June with the arrival of southwest
monsoon. The crop, which is ready for harvest by the end of September, starts entering the market from
October beginning onwards. Crushing for oil and meal starts from October, peaking during the subsequent two-
three months.

Global and domestic demand-supply dynamics

Global consumption of soy oil during 2001-02 shot up to 29.38 million tons. It has been growing at the rate of
5.63%. Notable upward movement in consumption of soy oil is being seen in EU, Central Europe, Russia,
Egypt, Morocco, US, Mexico, Brazil, China and India. The consumption of soy oil in USA is to the extent of
90% of its production; growing at the rate of 2.95%, slightly higher than the growth rate of its production
(2.92%). The domestic consumption of soy oil in Brazil and Argentina are to an extent of 63% and 3% of their
respective domestic production of soy oil.

The current world production of soy oil stands at 29-30 million tons. It has been growing at the rate of 5.8%
compounded annually during the last decade. The production growth rate has been the highest for Argentina at
10.8%, while that of Brazil and USA has been at 5.6% and 2.9% respectively. United States is the major
producer of soy oil in the world. It accounts to approximately 29% of world soy oil production with an annual
production of 8.5 million tons. Brazil and Argentina with 5.1 and 4.1 million tons of production, contribute to
17% and 14% of world production. Of the total world exports, Argentina contributes to an extent of 40.4%,
growing at the rate of 11.36% compounded annually during the past decade.

Production of soy oil in India has been fluctuating in the range of 0.7-0.9 million tons during the last five
years, growing at the rate of 5%. In addition to domestic production, around 1.5-1.8 million tons of imports take
the country's annual soy oil consumption to 2.2-2.7 million tons, with a market value of over Rs.90 billion.
Imports constitute to the extent of over 65-68% of its annual soy oil requirement and 48% of its annual
vegetable oil imports. Imports have been growing at the rate of approximately 20% over the period of last five
years. Madhya Pradesh is considered as the soybean bowl of India, contributing 80% of the country's soybean
production, followed by Maharashtra and Rajasthan. Karnataka, Uttar Pradesh, Andhra Pradesh and Gujarat
also produce in small quantities. Indore, Ujjain, Dewas and Astha in Madhya Pradesh and Sangli in
Maharashtra are major trading centres of soybean, in and around which the crushing and solvent extraction units
are mostly located. The refining units are located at the importing ports of Mumbai and Gujarat.

In India, spot markets of Indore and Mumbai serve as the reference market for soy oil prices. While the Indore
price reflects the domestically crushed soybean oil (refined and solvent extracted), Mumbai price indicates the
imported soy oil price. Indian edible oil market is highly price sensitive in nature. Hence, the quantity of soy oil
imports mainly depends on the price competitiveness of soy oil vis-a-vis its sole competitor, palm oil apart from
prices of domestically produced oils, production and trade policies of the government - mainly me export-
import policy, over-all health of the economy that has a bearing on the purchasing power of ultimate
consumers, etc. Soy oil is among the most vibrant commodities in terms of price volatility. Its exposure in the
international edible trade scene (9-10 million tons), concentration of production base in limited countries as
against its widespread consumption base, its close link with several of its substitutes and its base raw material
soybean in addition to its co-derivative (soy meal), the nature of the existing supply and value chain, etc. throw
tremendous opportunity for trade in this commodity. The opportunity is further enhanced by the expected rise in

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consumption base and the consequent expected rise in imports of vegetable oils in the years to come. In
addition is the stiffening competition among substitutable oils under the WTO regime.

! &'.$"'
The NCDEX offers futures trading in following precious metals - gold and silver. We will look briefly at both.

,
For centuries, gold has meant wealth, prestige, and power, and its rarity and natural beauty have made it
precious to men and women alike. Owning gold has long been a safeguard against disaster. Many times when
paper money has failed, men have turned to gold as the one true source of monetary wealth. Today is no
different. While there have been fluctuations in every market and decided downturns in some, the expectation
are that gold will hold its own. There is a limited amount of gold in the world, so investing in gold is still a good
way to plan for the future. Gold is homogeneous, indestructible and fungible. These attributes set gold apart
from other commodities and financial assets and tend to make its returns insensitive to business cycle
fluctuations. Gold is still bought (and sold) by different people for a wide variety of reasons - as a use in
jewelers, for industrial applications, as an investment and so on.

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. Table 4.1
gives the country-wise share in gold production. 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.

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.

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 recognised, there is a need to upgrade and also increase the refining capacity.

Global and domestic demand-supply dynamics

The demand for gold may be categorised 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 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.
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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:

‡m Coins and small bars

‡m Gold accounts: allocated and unallocated
‡m Gold certificates and pool accounts
‡m Gold Accumulation Plan
‡m Gold backed bonds and structured notes
‡m Gold futures and options
‡m Gold-oriented funds

Demand

The Consumer demand for gold is more than 3400 tonnes per year making it whopping $40 billion worth. More
than 80% of the gold consumed is in the form of jewellery, which is generally predominated by women. The
Indian demand to the tune of 800 tonnes per year is making it the largest market for gold followed by USA,
Middle East and China. About 80% of the Physical gold is consumed in the form of jewellery while bars and
coins occupy not higher than 10% of the gold consumed. If we include jewellery ownership, then India is the
largest repository of gold in terms of total gold within the national boundaries.

Regarding pattern of demand, there are no authentic estimates, the available evidence shows that about 80%
is for jewellery fabrication for domestic demand, and 15% is for investor-demand (which is relatively elastic to
gold-prices, real estate prices, financial markets, tax-policies, etc.). Barely 5% is for industrial uses. The
demand for gold jewellery is rooted in societal preference for a variety of reasons - religious, ritualistic, a
preferred form of wealth for women, and as a hedge against inflation. It will be difficult to prioritise them but it
may be reasonable to conclude that it is a combined effect, and to treat any major part as exclusively a store of
value or hedging instrument would be unrealistic. It would not be realistic to assume that it is only the affluent
that creates demand for gold. There is reason to believe that a part of investment demand for gold assets is out
of black money.

Rural India continues to absorb more than 70% of the gold consumed in India and it has its own role to fuel the
barter economy of the agriculture community. The yellow metal used to play an important role in marriage and
religious festivals in India. In the Hindu, Jain and Sikh community, where women did not inherit landed
property whereas gold and silver jewellery was, and still is, a major component of the gifts given to a woman at
the time of marriage. The changeover hands of gold at the time of marriage are from few grams to kgs. The
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gold also occupies a significant position in the temple system where gold is used to prepare idol and devotees
offer gold in the temple. These temples are run in trust and gold with the trust rarely comes into re-circulation.
The existing social and cultural system continues to cause net gold buyer market and the government policies
have to take note of the root cause of gold demand, which lies in the social and cultural system of India. The
annual consumption of gold, which was estimated at 65 tonnes in 1982, has increased to more than 700 tonnes
in late 90s. Although it is likely that, with prosperity and enlightenment, there may be deceleration in demand,
particularly in urban areas, it would be made good by growing demand on account of prosperity in rural areas.
In the near future, therefore, the annual demand will continue to be over 600 tonnes per year.

Supply

Indian gold holding, which are predominantly private, is estimated to be in the range of 10000-13000 tonnes.
One fourth of world gold production is consumed in India and more than 60% of Indian consumption is met
through imports. The domestic production of the gold is very limited which is around 9 tonnes in 2002 resulting
more dependence on imported gold. The availability of recycled gold is price sensitive and as such the
dominance of the gold supply through import is in existence. The fabricated old gold scraps is price elastic and
was estimated to be near 450 tonnes in 2002. It rose almost more than 40% compared to the previous year
because of rise in gold price by more than 15%.

The demand-supply for gold in India can be summed up thus:

‡m Demand for gold has an autonomous character. Supply follows demand.

‡m Demand exhibits income elasticity, particularly in the rural and semi-urban areas.
‡m Price differential creates import demand, particularly illegal import prior to the commencement of
liberalization in 1990.

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 jewelers 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.

 0

The dictionary describes it as a white metallic element, sonorous, ductile, very malleable and capable of high
degree of polish. It also has the highest thermal and electrical conductivity of any substance. Silver is somewhat
harder than gold and is second only to gold in malleability and ductility. Silver remains one of the most

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prominent candidates in the metals complex as far as futures' trading is concerned. Thanks to its unique
volatility, silver has remained a hot favourite speculative vehicle for the small time traders. Though futures
trading was banned in India since late sixties, parallel futures markets are still very active in Delhi and Indore.
Speculative interest in the white metal is so intense that it is believed that combined volume of Indian punters
represent almost 40 percent of volume traded at New York Commodity Exchange. Delhi, Rajasthan, MP and
UP are the active pockets for the silver futures. Until recently, Rajkot and Mathura were conducting futures but
now players have diverted toward comex trade.

Most of the world's silver is mined in the US, Australia, Mexico, Peru, and Canada. Cash markets remain
highly unorganised in the silver and impurity and excessive speculation remain key issue for the trade. Taking
cue from gold, government of India is planning to introduce hallmarking in silver which is likely to address
quality and credibility of Indian silverware and jeweller industry. The unique properties of silver restrict its
substitution in most applications.

Production

Silver ore is most often found in combination with other elements, and silver has been mined and treasured
longer than any of the other precious metals. Mexico is the worlds leading producer of silver, followed by Peru,
Canada, the United States, and Australia. The main consumer countries for silver are the United States, which is
the worlds largest consumer of silver, followed by Canada, Mexico, the United Kingdom, France, Germany,
Italy, Japan and India. The main factors affecting these countries demand for silver are macro economic factors
such as GDP growth, industrial production, income levels, and a whole host of other financial macro economic
indicators.

Demand

Demand for silver is built on three main pillars; industrial and decorative uses, photography and jewelry &
silverware. Together, these three categories represent more than 95 percent of annual silver consumption. In
recent years, the main world demand for silver is no longer monetary, but industrial. With the growing use of
silver in photography and electronics, industrial demand for silver accounts for roughly 85% of the total
demand for silver. Jewelry and silverware is the second largest component, with more demand from the
flatware industry than from the jewelry industry in recent years. India, the largest consumer of silver, is gearing
up to start hallmarking of the white precious metal by April. India annually consumes around 4,000 tones of
silver, with the rural areas accounting for the bulk of the sales. India's demand for silver increased by 177 per
cent over the past 10 years as compared to 517 tones in 1991. According to GFMS, India has emerged as the
third largest industrial user of silver in the world after the US and Japan.

Supply

The supply of silver is based on two facts, mine production and recycled silver scraps. Mine production is
surprisingly the largest component of silver supply. It normally accounts for a little less than 2/3 rd of the total
(last year was slightly higher at 68%). Fifteen countries produce roughly 94 percent of the worlds silver from
mines. The most notable producers are Mexico, Peru, the United States, Canada and Australia. Mexico, the
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largest producer of silver from mines. Peru is the worlds second largest producer of silver. Silver is often mined
as a byproduct of other base metal operations, which accounts for roughly four-fifths of the mined silver supply
produced annually. Known reserves, or actual mine capacity, is evenly split along the lines of production. The
mine production is not the sole source - others being scrap, disinvestments, government sales and producers
hedging. Scrap is the silver that returns to the market when recovered from existing manufactured goods or
waste. Old scrap normally makes up around a fifth of supply. Scrap supply increased marginally last year up by
1.2%. The other major source of silver is from refining, or scrap recycling. Because silver is used in the
photography industry, as well as by the chemical industry, the silver used in solvents and the like can be
removed from the waste and recycled. The United States recycles the most silver in the world, accounting for
roughly 43.6 million ounces. Japan is the second largest producer of silver from scrap and recycling, accounting
for roughly 27.8 million troy ounces in 1997. In the United States and Japan, three-quarters of all the recycled
silver comes from the photographic scrap, mainly in the form of spent fixer solutions and old X-ray films.

Factors influencing prices of the silver

The prices of silver, like that of other commodities, are dictated by forces of demand and supply and
consumption. Besides, a host of social, economic and political factors have powerful bearing on silver prices.
As in the case of gold prices, political tensions, the threat affects the price of silver too. When trading and
movement of silver is restricted, within or outside national boundaries, prices move in accordance with demand
and supply conditions prevalent in mat environment Price of silver is also influenced by changes in factors such
as inflation (real or perceived), changing values of paper currencies, and fluctuations in deficits and interest
rates, etc. Although prices and incomes are important factors, they are also influenced by factors such as tastes,
technological change and market liberalization.

Approximately 70 percent of the silver mined in the western hemisphere is mined as a byproduct of other
metal products, such as gold, copper, nickel, lead, and zinc. As such, the price of these metals greatly affects the
supply of silver mined in any year. As die price of die omen metal products increases, die increased profit
margin to mine operations stimulate greater production of die omen metals, and as a result, die production of
silver increases in tandem. Because silver is a precious metal, its price is determined by die supply and demand
ratio at any given moment. As is the case with other precious metals, there is a limited amount of silver in the
world. It is not a product mat can be manufactured en masse, and, merefore, is subject to issues such as weamer
and politics mat may affect silver mining operations.

/,'2,!."/ $1
ETF is not available in the smaller slots and for units of ETFs, you cannot go to the bench mark. If you are
holding 1000 units, and want to convert them into 1 Kg bar, then that is possible which comes to around Rs. 20
lacs. Thus it is beyond reach of small investors. In case of E-Gold, we provide it in denominations of 8, 10 and
100 grams.

(%#-/1 '* '$,/ $1 !"(#&%'$1 '%&1"0'""$#-'

+2,3
The membership is one. As a member he can trade in any instrument.

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It is virtually on the same lines where the highest traded ETF is the benchmark. So with respect to ETF we are
always doing more volumes, though Benchmark Gold ETFs, sometimes we are lower some times, sometimes
they are lower so these two are comparable. When ETF was launched we bench marked it with MCX price
because MCX is the benchmark price in the Indian bullion market. So at that time, ETF price was higher than
the MCX price on per gm basis. But over a period of time say over three years, the gap has turned into negative.

E-Gold is launched recently in March 2010, whereas ETF has been operational for 4-5 years. Though we have
done the networking and have put infrastructure in place but we have not tapped media for advertising. Now
brokers have become quite active. You will appreciate that we did not have any instrument for retail investor,
and first such instrument to be launched in March 2010 was E gold. We also plan to launch E bullion where
gold and silver will be treated as two commodities. But you will admit that gold has primitive pull. So concept
of buying 1 gm of gold every month will be more popular than buying gold for Rs. 2000 every month.

MCX is .995, but MCX contract is not comparable with E Gold, because this is a future's contract. Most of the
gold which comes in our country is in the form of 1 Kg bar with .995 purity, whereas gold coins are of .999
purity.

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Indian investors cannot take the MCX route because it is future's contract, thus does not provide customers any
platform where they can park their money which can move with the price of gold. This is a leveraged product
and for leveraged product, you are paying 5% margins. If the market goes down by 5% your money is eroded,
so it is good for trading but not good for investors. By and large people lose money in future's trading, because
they cannot remain invested. Here involvement in trading is on a day- to-day basis.

So we had to create a product where people invest money on a day-to-day basis. This is how E Gold happened.
Here our idea was to develop a complete segment of commodities like in NSE where you have both the
segments NSE Cash and NSE F & O. If you want to invest money in shares you go to NSE Cash and if market
goes up you sell and off and make profits and if you are a trader you go into F & O. This does not make sense
for the retail investor who does not want to indulge in trading on a day-to-day basis. Hence we thought of
developing cash market of commodities. So if you have Rs. 2000 as surplus every month, then you can invest it
in E-Gold or alternately you can buy 1 gm of gold every month.

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MCX launched it on March 17, 2010 and currently average volume is between Rs. 5 - 10 crores on a daily basis.
The investors are attracted here because of some fundamental reasons. Till now retail investors were not
involved in MCX, so we wanted to bring retail investors on board by virtue of this investment instrument E-
Gold.

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To trade in E-Gold, the market is open from 10 AM to 11:30 PM as commodity market is more volatile during
evening because of COMEX, Chicago. The prices of gold and silver are considered internationally so prices are
aligned internationally. Same holds good for Gold ETF, if COMEX crashes then it affects the market here also.
We are currently not advertising in newspaper or magazines but going forward we are looking at print media
advertisements. Plans are on to look at Online media in the future.

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The comfort level is higher with your family / neighbourhood jeweler. For some set of people the price
differential is not really an issue. The comfort level, services offered and above all the personal terms with the
jeweler take priority. Traditionally people were buying jewellery and you had multiple objectives mixed up or
bundled in the same contract/ instrument. Then there is safety / security is imbibed in gold and commands great
importance on occasions like marriage.

Now more demand is coming for investment in gold because people who are buying at Rs.19000 are thinking
that prices will move upwards in future. So they are looking at such instruments where impact cost is low, thus
E- Gold fulfills this objective. Most of the retail broking houses are witnessing potential here. This way we
perceive that it will take off but it may take some time.
It is only a matter of time.

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