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gold PricingPresented by Prateek Gupta Of BFIA 2B

Samarth Roy

Shubham Dhangar

Sujay Kumar

Rahul Nirwan

To Nidhi GoelAt SSCBS

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Is it a rock? Is it a fossil? Or, perhaps, a mineral?

What is GOLD?

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Gold is a soft, yellow element that reacts to very few chemicals. Those chemicals include chlorine and fluorine. 2/3 of earth’s gold comes from South Africa. Bendy gold is purer than hard gold. Gold is popular because it is so beautiful and shiny.

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What do we know about

Gold?

Melting point:

1064 0C

Boiling point:

2860 0C

Doesn’t react with water or oxygen

Soft and rare

Yellow metal

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Information on Gold

• Atomic name:Au• Atomic Number:79• Atomic Weight:196.966569• Melting point:1337 K (2856 C or 5173 F)• Phase at room temperature:Solid• Element classification:Metal

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More Information on Gold

• Density:19.282 grams per cubic centimeter• Period Number:6• Group Number:11• Group Name:No group name

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Uses and demand of

• The GLOBAL gold market can be divided into three distinct categories:

GOLD

40%50%

10%INVESTMENT

JEWELRY

TECHNOLOGY

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GOLD IN TECHNOLOGYGOLD’s properties make it a highly versatile metalIt is optimal in telecommunications, computers, defence systems medical equipment, and other mission critical technologies

Gold plating protect the Hubble telescopeAnd its electric connections from corrosion.

$1.5 bn

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41 kg of gold was used on U.S Columbia space shuttle And gold also protects astronauts from radiation

All 14000 windows are

EnergyEfficiency Royal Bank Plaza Toronto

A thin plating of GOLD GLAZING in windows provides excellent reflection of heat radiation, keeping building cool in summers and warm in winters

All 14000 windows are coated with

70kg of pure gold.

That’s worth $3,600,000 !

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NANOTECHNOLOGY

• GOLD’s unique optical properties allows it to be used on a nano scale to detect PREGNANCY, PROGRESSION of HIV, and SALMONELLA.

When on a nano scale, gold changes colour to deep crimson red or light blue. This is because tiny particles of gold interact differently with light

Gold id used around the world in catalytic convertors in cars, trucks, And heavy duty vehicles

Pollution control

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Gold in jewellery Ancient gold jewellery dates back to 6000 years ago, and has been used throughout history to symbolize power, wealth and love.

Purity of gold is measured in KARATS.

BIS CERTIFICATION SCHEME FOR HALLMARKING OF GOLD JEWELLERY.

Design of Hallmark on Gold Jewellery

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Purity/Fineness

958 Corresponding to 23 Carat916 Corresponding to 22 Carat875 Corresponding to 21 Carat750 Corresponding to 18 Carat585 Corresponding to 14 Carat375 Corresponding to 09 Carat

A Hallmark, consists of five components i.e. BIS Mark, the Fineness number (corresponding to given caratage), Assaying and Hallmarking Centre's Mark,Jeweller's identification Mark and year of Marking denoted by a code letter and decided by BIS (e.g. code letter `A' was approved by BIS for year 2000, `B' being used for the year 2001 and `C' for 2002 and 'J' for 2008). The marking is done either using punches or laser marking machine.The BIS hallmark, a mark of conformity widely accepted by the consumer bestow the additional confidence to the consumer on the purity of gold jewellery.

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CHINA VS. INDIA

INDIA AND CHINA ARE TWO MOST POPULOUS CONTRIES IN THE WORLD, TOGETHER REPRESENTING OVER HALF OF THE WORLD’S GLOBAL GOLD DEMAND

INDIANS AND CHINESE BUT MORE GOLD JEWELLRY PER PERSON

AND INDIANS, DESPITE EARNINGS LESS THAN CHINESE AND AMERICANS, IN PARTICULAR PRIZE GOLD, SPENDING MORE OF THEIR ANNUAL INCOME ON GOLD THAN THE AVERAGE AMERICAN.

50X

GRAMS OF NEW GOLD JEWELLRY BOUGHT PER CAPITA

PERCENTAGE OF INCOME SPENT ON GOL D JEWELLRY

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WHO IS BUYING

GOLD JEWELLRY

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GOLD As an INVESTMENT

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SINCE 2000, GOLD HAS OUTPERFORMED THE S&P 500 EACH YEAR 9 OF 12 TIMES

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BUYING GOLD IN 2000 WOULD HAVE YIELDED OVER A 600% RETURN AT TODAY’s PRICE

IS GOLD A COMMODITY OR CURRENCY?How does it behave as an investment?What are the fundamental of investing in gold?What are the different ways investors can get exposures to gold in their portfolio?

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Gold: commodity or currency

Gold fits the traditional definition of a commodity, but it has also been used as a currency for most of the history. As a result, gold exhibits some characteristics of both a commodity and a currency

COM:MOD:I:TY [KUH-MOD-I-TEE]“THINGS OF VALUE, OF THE UNIFORM QUALITY, THAT WERE PRODUCED IN LARGE QUANTITIES BY MANY DIFFERENT PRODUCERS; THE ITEMS FROM EACH DIFFERENT PRODUCERS ARE CONSIDERED EQUIVALENT

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GOLDINVESTINGHistory has shown gold to have several properties as an investment:GOLD HELPS DIVERSIFY PORTFOLIO Because the gold price has low correlation with most asset classes, and is driven by different factors, gold can help DIVERSIFY A PORTFOLIO.

PORTFOLIO PERFORMANCE OVER 40 YEARS(1971-2011)

AVER

AGE

ANNU

AL

RETU

RN (U

S$)

AVERAGE ANNUAL VOLATILITY (STANDAR DEVIATION)

Gold as Inflation HedgeAn investment that is considered to provide protection against decreased value of currency. An inflation hedge typically involves investing in an asset that is expected to maintain or increase its value over a specified period of time. Gold is widely considered an inflation hedge.However, certain investment might seem like a decent return, but when inflation is factored in they can actually be sold at a loss.

Inflation hedge contd. Gold supply has been quite stable over time. Gold supply

has been quite stable over time Due to inflation, all currencies lose their value over time.

However, gold retains its value, or even increases it. The value of gold has remained remarkably stable for

centuries

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GETTING EXPOSED TO GOLDTHERE ARE DIFFERENT WAYS TO GET EXPOSURE TO GOLD IN A PORTFOLIO – EACH HAVE DIFFERENT BEENFITS AND LEVEL OF RISK.

Exchange traded funds are investment funds that trade on stock exchanges, gold ETFs typically trade gold futures, store gold bullions, or represent gold equities.

GOLD ETFs

+ -

ETFs ARE SIMPLE AND VERSATILE WAYS TO GET EXPOSPURE TO GOLD IN A PORTFOLIO

ETFs HAVE MANAGEMENT FEES AND COMMISIONS FEES FOR EACH BUY AND SELL.SOME ETFs ALSO HAVE LIQUIDITY ISSUES OR COULD IN THE FUTURE

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PHYSICAL GOLD SUCH AS BARS AND COINS

+ -

GOLD BULLIONS

TANGIBLE, PRIVATE AND GIVE DIRECT EXPOSURE TO THE GOLD

STORAGE CAN BE COSTLY AND HAS RISK SUCH AS THEFT AND LIQUIDITY

GOLD MINING INVESTING IN COS. THAT ARE MINING OR EXPLORING FOR GOLD

+ -

Major gold minors are liquid, provide leverage, and can add diversification if they have exposure to other commodities, gold minors are profit seeking companies, and as with all equities can also have growth upside or pay a dividend

Junior gold minors offer tremendous upside if they find a new discovery.

All companies are not created equal and therefore management are biggest risk, political risk, currency risk and market cycle and also affect company valuations

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Rothbard Model of Gold Pricing

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Demand

Supply- above ground

0

P Market Clearing Price

P

Q

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Offer

Bid

Supply- above ground

Demand

0

P

Q

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0

Supply from mines Supply- above groundP

Q

35

0

P Total Supply

Q

36

0

P

Total Supply

Q

P1

D

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Risks of Gold Physical Risk Exchange Risk Volatility Risk Political Risk

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Physical RiskBuying gold bars and coins exposes the

investor to the risk of loss and theft. Costs are involved to limit this risk. Gold has to be kept in a personal safe at home or, better In the bank’s safety deposit box

But in bank SDBs, renting fees is incurred.A bank vault is probably the safest place for

storing gold .

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Physical Risk contd.Investors should not believe that the bank will store

gold for generations. HSBC customers had to face this situation

The bank asked ( at the end of 2009) its small retail customers to remove their gold from the banks’ New York vault .

Insurance Policies may change.

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Exchange RiskTrading at all exchanges is subject to their

rules and regulations. The exchanges can on purpose or accidentally foster market outcomes by changing their trading rules.The exchanges may temporarily restrict buying gold, thus driving the prices down

COMEX restricted silver buying in 1980.The exchanges may temporarily halt the

trading of a particular future contract.

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VolatilityThe price of gold, as of every traded asset, is subject to the ups and downs of the market The rate of this precious metal can fluctuate fundamentally . The volatility of gold must be a concern to all short- and long-term investors . Factors that make the gold price unpredictable and volatile:1.The interplay of the international financial system2.Inflation and interest rates 3.Alternative investments4.The irrationality of investors

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Political RiskThe political risk of gold investing means that the government

can change laws and regulations that may harm your investment in gold.

These government interventions can happen in the country of the investor or in another country.

Both would have an impact on the gold price.The government may prohibit the possession of gold and

require gold holders to sell their gold assets to the government at a fixed price. In 1934 Franklin D. Roosevelt passed a law that made it illegal to possess gold.

The only exception was gold for industrial and artistic purposes

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Political Risk contd.The US congress passed this law to prevent

private gold to become a competing currency. The possession of gold by private citizens with only legalized 39 years later in 1973 by the President Gerald Ford. Government could also nationalize gold mines or heavily tax companies that produce and trade in gold. In 2005 Chavez, the Venezuelan president announced the confiscation of the property held by Crystallex, a Toronto-based gold-mining company

This resulted in a drop of its share price by 50 per cent in a single day.

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Gold Fix ?• The price of gold is actually determined twice a day in London, on

the London Bullion Market by the 5 members of the London Gold price Fixing Ltd. on the premises of N.M Rothschild & Sons.

• This price which is determined is known as the London gold fix or the gold fix.

• The price is in pound sterling but is converted by various countries into their own currency.

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• It is determined twice a day, once at 10:30 am(GMT) and the other at 3:00 pm(GMT).

• Instead of the premises of NM Rothschild & Sons, since May 2004, the price is determined by dedicated telephone conferencing system

• The five participating banks are market makers and should be part of the LBMA, these are :-

• Scotia-Mocatta , Barclays, Deutsche Bank, HSBC, Société Générale

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PROCESS of Price Determination• The London Gold Fix involves gold dealers from London's five biggest bullion

banks establishing a common transaction price for a large pool of purchase and sale orders.

• The participating bullion banks will be acting both on their own behalf and for those customers of theirs who have issued limit orders for them to trade at the London Gold Fix price. No-one knows what the Gold Fix will be before it is declared.

• The Gold Fix establishes the price at which the gross amount of gold on buy orders matches the gross amount of gold on sell orders - across all the participating banks.

• The Gold Fix Chairman will start the fixing process by declaring a price - usually very near the ongoing spot market gold price.

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• Assuming this price the participant banks aggregate all the limit orders they have received - both buys and sells - and declare to the Chairman the net quantity of gold they would buy, or sell, at the proposed price.

• If the net effect across all the participant banks is in balance, then that price will become the current London Gold Fix price. More commonly the buyers and sellers are not immediately in balance. Then the Chairman will adjust the proposed price, upwards if there are too many buyers, and downwards if there are too many sellers.

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• Normally it's a 10 or 15-minute process, but it can take up to half an hour. The longest fixing actually took place back on 19th October 1987 - Black Monday.

• The London Gold Fix took two hours and 15 minutes to reach agreement that day." That was the day when the US stock market dropped 23% of its value.

Gold Imports

• At the individual level, then, the gold craze makes sense. But in aggregate it is a disaster for India.

• India is one of the largest importer of gold, only being recently surpassed by China.

• In 2011, India exported around 1000 tonnes of gold.• Imports of the bullion led to a $54bn Balance of payment in

March 2013.

• India’s CAD reached an alarming 4.8% of GDP last year and almost half of it was due to gold imports.

• Thus in order to curb these, Government imposed an import tax of 10% last year in June which led to a considerable fall in the imports.

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2010-11

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FACTORS AFFECTING GOLD PRICE INFLATION :- Inflation is regarded as the number one top factor affecting the price of gold. We said

earlier that gold didn’t have a practical business or personal use, but the one use it does have is a retainer of value and wealth. Therefore it makes sense that in an inflationary environment, where the value of paper currency is falling in regards to what other goods and services can be bought with it, that people should want another form of money (gold) that DOES retain its value.

DEMAND FOR THE CONSUMER GOODS :- Markets like India have strong demand for using gold in jewellery. Economic growth in India increases disposable income and therefore demand for gold. As gold is a luxury good (income elasticity of demand > 1) then a rise in income in India could lead to a bigger % demand for gold.

INVESTMENT :- Gold is seen as desirable element in an investment portfolio. Gold will hold its value even during inflation. At various times, investment trusts and individuals will have a greater demand for saving their wealth in the form of gold. This can lead to higher demand for gold to store wealth. This investment demand is the primary factor behind the increase in price of gold between 2006 and 2011.

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SPECULATION :- Investors can be caught up in the mood and expectations of the moment. Rising gold prices can become self-fulfilling as investors pile into gold to take advantage of rising prices. The price of gold can be highly volatile. Some argue we are in a gold bubble, when the economy returns to normal people may feel gold is highly overvalued and we could see a fall in the price of gold like the early 1980s.

SUPPLY :- Recent gold supply trends show that gold is becoming harder and more expensive to mine, which will have a upward pressure on the price as population growth and demand surpasses any new gold supply.

VALUE OF DOLLAR :- The foremost factor that governs the price of gold is the value of US Dollar. A stronger US dollar will keep the price of gold controlled and low. A weak dollar will set the price of gold to a very high price. US economy plays a major role in shaping the macroeconomics of the world. When the dollar is strong, people invest, buy and trade in dollars. The high gold reserves strengthen the national economies and act as a hedge against inflation.

Why India Has Stopped Importing Gold ?

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Why India has stopped importing gold ?

Most Indians consider gold as the safest investment haven, the best hedge against inflation that is easily and instantly redeemable. 

The whole situation will dramatically change if the people of India don't import gold for one year, if we can have this (no buying gold) for six months or one year, it will dramatically change the CAD (current account deficit) situation.

In July, gold imports slumped from 47.5 tonne,

In June, 31.5 tonne,

In May, 162 tonne

In April, 142.50 tonne

Once gold imports cease we will see its positive impact on every other index that measures the economy-the stock market, exchange rates and interest rates. The imports of gold coming down because people stopped buying gold.

Net gold imports, averaged $135 million a day in the first 13 business days of May, till the 20th. However, in the subsequent 14 business days, it averaged only $36 million, so gold imports have sharply come down.

This has come as a welcome relief as gold imports had shot up to around $7.5 billion during April this year.

The government has recently hiked the import duty on gold in the year 2013.

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