Investment and Fluctuation in the Gold Market

Someone rightly said that practical training is far better than the classroom training. During practical training, person comes to know about the actual difficulties faced during the work. Bachelor of Business Administration (Hons) {BBA(H)} imparts the student with such virtues and prepares to take the business world in their stride. The project gives a considerable exposure to students and provides them with an opportunity to see the practical aspects of working of the corporate world. This project is yet another opportunity to see the application part of what we study or learn.

Our sincere thanks to Ms. Garima Baluja (Project guide) for having the conviction to believe that the project we had undertaken might be useful to others. We wish to thank them for having taken the trouble to read the contents again and again so the project is perfect in all respects. Without her advice, support and guidance the project would never have been complete. All cannot be mentioned but none has been forgotten. Biswajit Singh Prashant vohra Ramandeep singh Gurpreet singh

INTRODUCTION

A metallic element, constituting the most precious metal used as a common commercial medium of exchange. It has a characteristic yellow color, is one of the heaviest substances, is soft, and very malleable and ductile. It is quite unalterable by heat, moisture, and most corrosive agents, and therefore well suited for its use in coin, jewelry and for other monetary uses. Gold has to compete with the stock market, investment in internet industries, and a wide range of consumer goods. In the rural areas 22 carat jewellery remains the basic investment. The government announced a new initiative in its budget to tap the hoard of private gold in India by permitting commercial banks to take gold deposits of bars, coins or jewellery against payment of interest. Interest levels can be set by each bank, and deposits must be for three to seven years. Interest and any capital gains on the gold will be exempt from tax. The banks can lend the gold to local fabricators or sell it in the Indian market or to local banks. The depositor has to declare the origin of the gold, so that metal bought illegally to hide wealth cannot be deposited. The State Bank of India was the first to accept deposits. Figure 1.1.1

Gold as investment

Indians purchased 94.0 tons of gold for investment from January to September 2004, while it was 67.8 tons during the same period in 2003. Investment in physical gold must always be in the form of coins/bars and should be in addition to the jewellery held by the household. Advantages of gold in a portfolio can be explained through the following points: Gold has a low to negative correlation with most other asset classes. An investment portfolio with an allocation to gold improves the consistency of portfolio performance during both stable and unstable periods. The price of gold is not linked to the performance of economy, industry or companies. Gold offers the benefit of diversifying portfolio risks.

Cost efficient ways of investment in gold internationally

Gold has been possible over the years in the form of mutual funds or stocks of gold mining companies. However, investors have been awaiting a more cost effective platform for owning gold. The World Gold council recognized this fact and launched the following ETF gold products across the world. Figure1.2.1

Cost efficient ways of investment in gold internationally

Gold has been possible over the years in the form of mutual funds or stocks of gold mining companies. However, investors have been awaiting a more cost effective platform for owning gold. The World Gold council recognized this fact and launched the following ETF gold products across the world.

Gold Bullion Securities

Gold was made available at the stock exchange just like an equity share to the investors through a World Gold Council initiated ETF product called Gold Bullion Securities. Each share of Gold Bullion Securities (GBS) is equal to 1/10th of an ounce of gold and is supported by physical holding of gold in the custody of HSBC. This is the first time ever that a metal has been listed on an international Stock Exchange and can be conveniently traded or invested by institutional investors as well as individuals. GBS is listed on the London Stock Exchange and also the Australian Stock Exchange. At present GBS is the most cost efficient way of investing in gold, as a potential investor has to only pay 0.3% p.a. as management fees, which includes the cost of storage and insurance apart from the 'brokerage' that they have to pay to the brokers.

TYPES OF GOLD INVESTMENT:-

1. Gold exchange-traded funds: - The recent explosion in exchange traded funds (ETFs) presents an even more interesting way to invest in gold. An ETF is a type of mutual fund that trades on a stock exchange like an ordinary stock. The ETF's exact portfolio is fixed in advance and does not change. Thus, the two gold ETFs that trade in the United States both hold gold bullion as their one and only asset. You can locate these two ETFs under the symbol "GLD" (for the streetTRACKS Gold Trust) and "IAU" (for the iShares COMEX Gold Trust). Either ETF offers a practical way to hold gold in an investment portfolio.
2. Direct ownership: - There is nothing like gold bullion, the ultimate expression of pure value. Gold is the only real money, and its value cannot be changed or controlled by government fiat-the underlying reason for governments to go off the gold standard, unfortunately. Gold's value will rise based on the pure forces of supply and demand, no matter what Mr. Greenspan decrees regarding interest rates or greenbacks in circulation. The big disadvantage to owning gold is that it tends to trade with a wide spread between bid and ask prices..
3. Gold mutual funds: - For people who are hesitant to invest in physical gold, but still desire some exposure to the precious metal, gold mutual funds provide a helpful alternative. These funds hold portfolios of gold stocks-that is, the stocks of companies like Newmont Mining that mine for gold. Newmont is an example of a senior gold stock. A senior is a large, well-capitalized company that has been around several years and has a profitable track record
4. A  Junior gold stocks: - This level of stock is more speculative. Junior stocks are less likely to own productive mines, and may be exploration plays-with higher potential profits but also with greater risk of loss. Capitalization is likely to be smaller than capitalization of the senior gold stocks. This range of investments is for investors whose risk tolerance is broader, and who accept the possibility of gold-based losses in exchange for the potential for triple-digit gains.
5. A  Gold options and futures: - For the more sophisticated and experienced investor, options allow you to speculate in gold prices. But in the options market, you can speculate on price movements in either direction. If you buy a call, you are hoping prices will rise. A call fixes the purchase price so the higher that price goes, the greater the margin between your fixed option price and current market price. When you buy a put, you expect the price to fall. Buying options is risky, and more people lose than win. In fact, about three-fourths of all options bought expire worthless. The options market is complex and requires experience and understanding

 FACTORS AFFECTING GOLD PRICE AND INVESTMENT:-

Weak US Dollar: - Projections about a declining dollar due to an ever-increasing twin deficit supported by many investment veterans are met by much denial from politicians as well as from investors. As long as foreigners are willing to pour in the amount of $2 billion dollars every working day, the dollar won't crash. But if foreign confidence were to wane, the US dollar will be heading south. No matter how you look at the US twin deficits and America's future fiscal liabilities, this problem is huge and some painful adjustments not only seem to be necessary but unavoidable as well. Growth in Demand for Jewelry: - The demand for gold jewelry has seen a regular growth year on year. Countries which are primarily responsible for this growth are India, China, Italy, Turkey and the USA. The demand for consumption of gold in jewelry was 6% higher at 735 tonnes and also comprised a new first-quarter record. The US, which accounts for 10 % of world gold demand, is also one of the markets where public taste in gold jewelry is enjoying a renaissance. The renewed interest in gold also extends to Japan, a market which showed a 19% increase in demand. Increase in demand for exchange traded paper backed products: -For the first time in history, gold can be purchased like any listed stock at select stock exchanges of the world like London Stock Exchange, Australian Stock Exchange (Gold Bullion Securities) and New York Stock Exchange. The World Gold Council initiated Electronic Traded Funds have displayed very good performance and growth in volumes since launch. Central banks reserves: - Central banks keep ignot reserves as a hedge against inflation. Other monetary policies of the central banks also affect the price of gold. Low interest rates discourage people to invest in paper money; they turn towards the golden metal in the hope of better returns. If the central banks give high interest rates, the chances are that the ignot price will fall. Gold during times of fluctuation: - Gold is purchased more during a downturn in economy. This is because; the companies might start reducing production due to declining sales. Due to this, the stock prices will start going down. In this scenario, Gold is the safest option to invest in. Thought the return on investment may not be as high as other investment options, safety and good value for money are very important in times of fluctuation

IMPORTANCE OF GOLD IN MARKET

Electronics: - Gold is highly conductive to electricity, and has been used for electrical wiring in some high-energy applications. For example, gold electrical wires were used during some of the Manhattan Project's atomic experiments. Gold is used in the connectors of the more expensive electronics cables, such as audio, video and USB cables. The benefit of using gold over other connector metals such as tin in these applications is highly debated Fine gold wires are used to connect semiconductor devices to their packages through a process known as wire bonding Aerospace: - Gold is used in hundreds of ways in every space vehicle that NASA launches. Gold is used in circuitry because it is a dependable conductor and connector. Many parts of every space vehicle are fitted with gold-coated polyester film. Gold is also used as a lubricant between mechanical parts. Gold has very low shear strength and thin films of gold between critical moving parts serves as a lubricant - the gold molecules slip past one another under the forces of friction and that provides a lubricant action. Jewelry: - Gold is found in the pure state, is very easy to work and was probably the first metal used by humans. Today, most of the gold that is newly mined or recycled is used in the manufacture of jewelry About 78% of the gold consumed each year is used in the manufacture of jewelry. Special properties of gold make it perfect for manufacturing jewelry.

These include: very high luster; desirable yellow color; tarnish resistance; ability to be drawn into wires, hammered into sheets or cast into shapes. Medicine:- Gold was often seen as beneficial for the health, in the belief that something that rare and beautiful could not be anything but healthy. Even some modern esotericisms and forms of alternative medicine assign metallic gold a healing power. Inject able gold has been proven to help to reduce the pain and swelling of rheumatoid arthritis and tuberculosis. Gold alloys are used in restorative dentistry, especially in tooth restorations, such as crowns and permanent bridges. The isotope gold-198, is used in some cancer treatments and for treating other diseases. Decoration: - Gold has the highest malleability of any metal. This enables gold to be beaten into sheets that are only a few millionths of an inch thick. These thin sheets, known as "gold leaf" can be applied over the irregular surfaces of picture frames, molding or furniture Public investment: Gold is also considered as a public investment. Many countries have huge Gold reserves. Countries like India, United States are supposed to have huge Gold reserves that can be sold in times of need. It also gives these countries an edge in various financial deals. Various banks also have huge reserves of Gold that are used at times of crisis in the economy. This Gold is sold at times of economic crisis to stabilize the economy.

GOLD INVESTMENT VECIHLE:-

Bars

Gold bars can be held either directly (i.e. held directly by you or in your own safe) or indirectly (held in a safe deposit box or bank vault on your behalf). Because of the many difficulties of transporting, storing and verifying pure gold bars, an increasingly popular method of investing in gold bars for the small investor is via allocated holdings using a gold account.

Coins

Buying gold coins is a popular way of holding gold. Typically bullion coins are priced according to their weight, plus a premium above the gold spot price. Again, the large Swiss and Liechtenstein banks buy and sell these coins over the counter.

Exchange-traded funds

Gold ETFs represent an easy way to gain exposure to the gold price, without the inconvenience of storing physical bars. Typically a small commission is charged for trading in gold ETFs and a small annual storage fee is charged. The annual expenses of the fund such as storage, insurance, and management fees are charged by selling a small amount of gold represented by each certificate, so the amount of gold in each certificate will gradually decline over time.

Certificates

A certificate of ownership can be held by gold investors, instead of storing the actual gold bullion. Gold certificates allow investors to buy and sell the security without the inconvenience associated with the transfer of actual physical gold.

Accounts

Most Swiss banks offer gold accounts where gold can be instantly bought or sold just like any foreign currency. Digital gold currency accounts and the Bullion Vault gold exchange work on a similar principle. Gold accounts are typically backed through unallocated (fungible or pooled) or allocated (also known as non-fungible) gold storage. Different accounts impose varying levels of intermediation between the client and their gold, for example through bailment or within a trust

Derivatives, CFDs and spread betting

Derivatives, such as gold forwards, futures and options, currently trade on various exchanges around the world and over-the-counter (OTC) directly in the private market. In the U.S., gold futures are primarily traded on the New York Commodities Exchange (COMEX), a division of the New York Mercantile Exchange (NYMEX), and NYSE Life US. In India, gold futures are traded on the National Commodity and Derivatives Exchange (NCDEX) and Multi Commodity Exchange (MCX).]

GOLD INVESTMENT STRATEGIES:-

Fundamental analysis

Investors using fundamental analysis analyze the macroeconomic situation, which includes international economic indicators, such as GDP growth rates, inflation, interest rates, productivity and energy prices. They would also analyze the yearly global gold supply versus demand. Over 2005 the World Gold Council estimated yearly global gold supply to be 3,859 tonnes and demand to be 3,754 tonnes, giving a surplus of 105 tonnes. While gold production is unlikely to change in the near future, supply and demand due to private ownership is highly liquid and subject to rapid changes. This makes gold very different from almost every other commodity.Identifiable investment demand for gold, which includes gold exchange-traded funds, bars and coins, was up 64 percent in 2008 over the year before.

Technical analysis

As with stocks, gold investors may base their investment decision partly on, or solely on, technical analysis. Typically, this involves analyzing chart patterns, moving averages, market trends and/or the economic cycle in order to speculate on the future price

Using leverage

Bullish investors may choose to leverage their position by borrowing money against their existing assets and then purchasing gold on account with the loaned funds. Leverage is also an integral part of buying gold derivatives and unhedged gold mining company shares (see gold mining companies). Leverage or derivatives may increase investment gains but also increases the corresponding risk of capital loss if/when the trend reverses.

GOLD VERSUS STOCK:-

The performance of gold bullion is often compared to stocks due to their fundamental differences. Gold is regarded by some as a store of value (without growth) whereas stocks are regarded as a return on value (i.e., growth from anticipated real price increase plus dividends). Stocks and bonds perform best in a stable political climate with strong property rights and little turmoil. The attached graph shows the value of Dow Jones Industrial Average divided by the price of an ounce of gold. Since 1800, stocks have consistently gained value in comparison to gold in part because of the stability of the American political system. This appreciation has been cyclical with long periods of stock outperformance followed by long periods of gold outperformance. The Dow Industrials bottomed out a ratio of 1:1 with gold during 1980 (the end of the 1970s bear market) and proceeded to post gains throughout the 1980s and 1990s. The gold price peak of 1980 also coincided with the Soviet Union's invasion of Afghanistan and the threat of the global expansion of communism. The ratio peaked on January 14, 2000 a value of 41.3 and has fallen sharply since. On November 30, 2005, Rick Munarriz of The Motley Fool posed the question of which represented a better investment: a share of Google or an ounce of gold. The specific comparison between these two very different investments seems to have captured the imagination of many in the investment community and is serving to crystallize the broader debate. At the time of writing, a share of Google's stock was $405 and an ounce of gold was one day from breaking the $500 barrier, which it did December 1. On January 4, 2008 23:58 New York Time, it was reported that an ounce of gold outpaced the share price of Google by 30.77%, with gold closing at $859.19 per ounce and a share of Google closing at $657 on U.S. market exchanges. On January 24, 2008, the gold price broke the $900 mark per ounce for the first time. The price of gold topped $1,000 an ounce for the first time ever on March 13, 2008 amid recession fears in the United States. Google closed 2008 at $307.65 while gold closed the year at $866.

The performance of gold and the US Stock Market:-

There's been an inverse relationship, such that when gold rises, the market is generally falling and vice versa. Gold is traditionally seen as a hedge against inflation, and inflation typically is seen as being negative for the stock market. Also, in uncertain economic times (especially with a falling US Dollar), gold is a more attractive investment than Stocks and so the two asset classes, much like stocks and bonds, compete for your investment capital. Gold prices in 2008 around $600 were not a problem for the stock market. As signs of recession began to emerge, and investors began to be spooked by deteriorating financial conditions, larger investors likely began rotating out of the US Stock Market and into other markets such as gold, bonds, etc. The rotation accelerate as the stock market began to fall going into 2009, when the price of gold 'skyrocketed' from just under $700 per ounce to over $1,000 per ounce in March 2009. The S&P fell from a peak of 1,575 to just above 1,250 during the same period. The recent fall of gold prices has contributed - with other factors - to a rise in the current stock market since March. While there may be some correlation between gold prices and the US Stock Market, gold prices are much more inversely correlated with the US Dollar Index.

REVIEW OF LITERATURE

Obstfeld (1997) has conducted a research on "saving, investment and gold as a reassessment of historical account data" and found that. The standard historical data sources often fail to distinguish between monetary gold exports, which are capital-account credits, and nonmonetary gold exports, which are current-account credits. The paper also adjusts historical investment data to account for changes in inventories. The revised data are used to construct estimates of saving and investment over the period from 1850 to 1945. The regression results are in broad agreement with those of Eichengreen, who found a significantly positive cross-sectional correlation between saving and investment even during some periods when the gold standard prevailed. Despite reaching broadly similar conclusions, we estimate correlations between saving and investment that are somewhat lower and less significant than those Eichengreen found. Soenem (1997) made a research on "gold as an investment assets: perspective from different countries" to know that the efficiency of gold as a portfolio component over 1978 - 1995 is examined here from the perspective of seven major industrialized countries. Gold offers diversification benefits but dismal performance in terms of a risk-return trade-off. As a result, the inclusion of gold in test portfolios did not provide any increase in risk-adjusted return over the period as a whole.

Zimmerman (2006) reveled a research on "gold as a zero-beta asset? Analysis of the investment potential of precious metal" in which Gold shows the characteristics of a zero-beta asset. It has approximately the same mean return as a Treasury Bill and bears no market risk. Silver also bears no market risk but has returns inferior to Treasury Bills. Both gold and silver show evidence of inflation-hedging ability, with the case being much stronger for gold. The prices of both metals are cointegrated with consumer prices, showing additional evidence of hedging ability. Banz (2002) had research on the concept of "Hedge fund as all that glitter is not gold" as they provided those interested in hedge funds with a series of insights into the specific risks that such investments pose. The aim of the paper is not to discourage investors but rather to assist them with a list of seven questions that need to be addressed in order to invest wisely. They examine the characteristics of hedge funds from different angles. They progress from basic issues concerning performance records to risk considerations and then to the role of hedge funds in overall asset allocation. Feldstein (1981) made a survey on topic "The Effect of Inflation on the Prices of Land and Gold" and concluded that Traditional theory implies that the relative price of consumer goods and of such real assets as land and gold should not be permanently affected by the rate of inflation.

A change in the general rate of inflation should, in equilibrium, cause an equal change in the rate of inflation for each asset price The experience of the past decade has been very different from the predictions of this theory: the prices of land, gold, and other such stores of value have increased by substantially more than the general price level. The present paper presents a simple theoretical model that explains the positive relation between the rate of inflation and the relative price of such real assets. More specifically, in an economy with an income tax, an increase in the expected rate of inflation Faugère & Erlach (2006) researched on topic "The Price of Gold: A Global Required Yield Theory" that We construct a gold valuation theory based on viewing gold as a global real store of wealth. We show that the real price of gold varies inversely to the stock market P/E and thus is a direct function of a global yield required to achieve a constant real after-tax return equal to long-term global real GDP per-capita growth. We introduce a new exchange rate parity rule based on the equalization of inverse stock market P/Es (required yields) across nations. A quarterly valuation model is constructed using concurrent economic data that is within 12% mean percentage tracking error from real U.S. gold prices from 1979- 2002. Several major world events have had a large but fleeting impact on gold prices. Riley (2009) made a research on "A New Gold Rush as Investing in Precious Metals" as Following a huge run-up in the 1970's, precious metal prices have, until recent years, been very subdued. Investors tend to overlook precious metals, except to take note of the strong correlation properties with other asset classes, which justifies only a small allocation.

However, given current macroeconomic conditions and the extreme policy response that has been initiated due to these conditions, investors should not only be looking at the correlation properties, but also the exceptional returns that precious metals will provide in the coming years Martins (1994) reveled a research on "Interests, Prices and the Barsky and Summers' Resolution of the Gibson Paradox under the Gold Standard System" and analyzed that structural monetary framework featuring a demand function for non-monetary uses of gold, such as the one drawn by Barsky and Summers in their 1988 analysis of the Gibson paradox as a natural concomitant of the gold standard period. That structural model is subject to government rules to command the money supply. Its fiduciary version obtains Fisherian relationships as particular cases. Its gold standard solution yields a model similar to the Barsky and Summers model, in which interest rates are exogenous and subject to productivity or thrift external shocks. This paper integrates government bonds in the analysis, treats interest rates endogenously, and shifts the responsibility for the shocks to the government budgetary financing policies.

Gillman & Nakov (2000) researched on the topic "A Monetary Explanation of Oil and Gold Prices During Postwar Stagflation and Recovery: 1957-1999" that the effect of the inflation on oil and gold prices in the post-war period. It presents a monetary explanation of oil and gold pricing through a cash-in-advance economy. It tests the hypothesis that the oil and gold price rises, including those during the "oil shocks" in 1974 and 1979, were a consequence rather than a cause of accelerating inflation in the developed industrial world. Granger casuality and cointegration evidence support the model's prediction that the oil and gold price behavior can be explained by money supply changes. The evidence includes support for an asset price relation derived from the model that formalizes the monetary explanation. Amir & Leyla (2005) made a research on "the factors affecting gold price and a neuro-fuzzy model of forcast" that the Traditional methods of forcast, e.g.Regresion, ARIMA, Exponential Smoothing, Moving Average, and methods of this kind have been applied. Only recently Artificial Intelligence, Neural Networks and Fuzzy Logic have been proposed as forcast models. In this paper after considering gold role in the international finance, its Demand and supply, and the relationship between gold and Dollar, factors affecting the gold price fluctuations are considered; then a Neuro-Fuzzy approach based on the Takagy-Sogno Moel is employed to forcast gold price. The results obtained by this method are compared with Regression Analysis, which show that a Neuro-Fuzzy yields a better and more promissing forcast. McCown (July 24, 2006)

Gold shows the characteristics of a zero-beta asset. It has approximately the same mean return as a Treasury Bill and bears no market risk. Silver also bears no market risk but has returns inferior to Treasury Bills. Both gold and silver show evidence of inflation-hedging ability, with the case being much stronger for gold. The prices of both metals are co integrated with consumer prices, showing additional evidence of hedging ability. Daly (May 2005) This paper finds a strong correlation between deviations in the once widely popular Fed model to the price of gold. A simple tactical asset allocation strategy can be implemented. Empirical test of the model show the implicit timing signals to be statistically significant. The degree of accuracy, including the month gold peaked in 1980, can be an extremely valuable asset for portfolio managers looking for positive alphas. Of course, building an investment theory based on one component (Fed model) can be perilous; this paper will also look at the DJIA to gold ratio as a relative value assessment. Johnson (1997) The efficiency of gold as a portfolio component over 1978 - 1995 is examined here from the perspective of seven major industrialized countries.

Gold offers diversification benefits but dismal performance in terms of a risk-return trade-off. As a result, the inclusion of gold in test portfolios did not provide any increase in risk-adjusted return over the period as a whole. It was an attractive component of a diversified portfolio only for the subperiod 1978 - 1983 and never thereafter. Jun (May 2, 2009) While most researches on the gold market are focusing on empirical studies, few researches existed about how each macroeconomic phenomenon can affect gold market. gold is rarely dealt with macroeconomic perspective, because of lack of analyzing tools. By including gold in a portfolio of risky assets and analyzing the portfolio indirectly, we can perform macroeconomic research on gold market. Specifically in this report, I focused on macroeconomic phenomena related to the global financial crisis. Callaghan (December 1991) This paper describes the structure of the world gold market, its sources of supply and demand, and how it functions. The market has three principal functions in three major locations: the New York futures market speculates on spot prices, which are largely determined in London, whereas physical gold is in large part shipped through Zurich. The market is dominated by large suppliers and gold holders, including monetary authorities. Some unique characteristics of the gold market ensure confidentiality, and as a result, there are gaps in existing knowledge and data. The paper identifies and attempts to fill these gaps.

 

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