TopicArbitraging by bullion traders

Group members: Jejoy Fernandes Sachin Lohar Siddhesh Mali Siddhesh Shinde Vishesh Rane Amol Jadhav

Arbitrage
Arbitrage is the market activity of buying and selling of same security on exchanges or between spot prices of a security and its future contract. Definition: Arbitrage is the profit making market activity of buying and selling of same security on different exchanges or between spot prices of a security and its future contract. Here exchange refers to the stock market where shares are traded, like the NSE and BSE.

Description: A stock is traded in multiple stock exchanges and on each stock exchange the quoting price may be a bit different. Hence arbitrage as a practice is followed to take advantage of the price disparity. Originally arbitrage occurred in the currency market, but now it applies equally in the commodity, futures and the stock market as well.
For example: Infosys is quoting at Rs 2750 on the BSE and Rs 2760 on the NSE. Hence one can sell the stock on the NSE and buy from the BSE at the same time. This trade will lead to a profit without any risk. This process is arbitrage.

What is bullion?
Bullion refers to any precious metal in a form in which its primary value comes from the worth of the metal, not artificial currency value. Bullion is most often traded in the form of coins minted by national governments, or in bulk ingots. While government issued coins have a nominal value assigned to them upon minting, this value is virtually always overshadowed by the commodity value of the metal itself

Definition of 'Bullion Market'

A forum through which buyers and sellers trade pure gold and silver. The bullion market is open 24 hours a day and is primarily an over-the-counter market, with most trading based in London. The bullion market has a high turnover rate and most transactions are conducted electronically or by phone. Gold and silver derive their value from their industrial and commercial uses; they can also act as a hedge against inflation. The bullion market is just one of several ways to invest in gold and silver. Other options include exchange-traded funds, futures, options and mutual funds; these can be more appealing to investors, because they offer greater flexibility. Bullion offers less trading flexibility than other gold and silver investments, because it is a tangible object that comes in bars and coins of established sizes, which can be difficult to buy or sell in specific amounts. Bullion is also expensive to store and insure.

Indian Bullion Market: Current Scenario

India is the leading consumer and importer of bullion. It consumes nearly 800 MT of gold, which accounts for 20 per cent of world gold consumption. Out of this, around 600 MT of gold goes into making jewellery. The domestic bullion and jewellery market is estimated to be around US$ 16.1 billion, which is expected to grow to the size of US$25 billion within 2-3 years. Indias gem & jewellery sector commands around 80% of the jewellery trade worldwide. Total Export of jewellery in April 2009 was at Rs.5749.56 Crore. The Indian gems and jewellery industry is one of the fastest growing segments in the Indian economy. The annual growth rate is approximately 15 per cent Gems and jewellery worth US$ 17.79 billion was exported during April 2008 to February 2009. The United Arab Emirates (UAE) was the largest importer of gems and jewellery from India in 2008-09, with a share of 31 per cent. This was followed by Hong Kong with 25 per cent and the US with 20 per cent. The gem and jewellery sector accounted for 13 per cent of Indias total merchandise exports.

Gold
India is the worlds largest consumer of gold in tonnage terms. It is estimated that about 800 tonnes of gold is consumed in India last year (2007). According to World Gold Council (WGC), in 2007, India accounted for 22.9 per cent of global gold jewellery demand and 53.8 per cent of all net retail investment (coins and bars). Gold demand has grown at an average annual rate of 10% since the repeal of the Gold Control Act in 1990, which had forbidden the holding of gold in bar form.

Table 1: Annual Demand* for Gold in Tonnes: 10-year Average, 1996 to 2005 India United States China Turkey Saudi Arabia UAE 675.0 462.5 262.5 175.0 175.0 87.5

Table : India 's Imports of Gold (Quantity and Value) Year 2001 2002 2003 2004 2005 2006 2007 Imports (Tonnes) 593.61 410.29 441.93 591.92 748.04 703.91 773.60 Prices in (Rs. crore) 24156.38 19839.88 23657.52 35105.06 45811.19 61432.90 61412.50

As shown in above table, gold imports have steadily risen from 410 tonnes in 2002 to 748 tonnes in 2005 and only fractionally fallen to 704 tonnes in 2006. In value terms, the foreign exchange spent has more sharply risen from Rs 19,840 crore to Rs 61,433 crore because of the steady and sharp increases in gold prices abroad.

Domestic Demand-Supply Scenario

India was the world's largest gold consumer at 773.6 tonnes in 2007. The country's domestic gold production was abysmally low at 3.05 tonnes during the year 2006-07, compared with 3.53 tonnes during 2005-06. In Q407, however, due to rise in prices the demand declined drastically by 64 percent to generate demand of only 83.9 tonnes from 230.1 tonnes in Q406. India imported an estimated gold worth US$14,451mn in 2007. The imports would had been much more, but for the significant rise in gold prices in the last quarter of the year.

Domestic consumption is influenced by monsoon, harvest and marriage season.

Silver
India is primarily a silver importing country, as the production of India is not sufficient to satisfy the evergrowing domestic demand. The production of silver in India stands out at the figure of around 2.1 million ounces placing it at the 18th position in the list of major silver producing countries. The import of silver in India hovers over 110 million ounces that shows the huge size of Indian domestic demand. Peru is the world's leading producer of silver, followed by Mexico, China, Chile, Australia and Poland.Silver

Top 10 Silver Producing Countries in 2007 (millions of ounces) Peru Mexico 112.3 99.2

China
Chile Australia Poland

82.4
62.0 60.4 39.5

Russia
United States Canada Kazakhstan

38.0
37.3 25.8 22.7

Indian Scenario
In India, industrial demand of silver occupies a small share as compared to Japan and US. India's demand of 3000-4000 tonnes silver comes from rural India, where agriculture output is determining largely buy the June to September monsoon. Between the months of January and July 2008, India's imports were lackluster at only 54 tonnes. But with the price of silver declining by 15% in the last few months, the demand has started picking up. Most of the India's silver requirements were met through imports from China, UK, CIS, Australia and Dubai

Platinum
Platinum is a rare precious metal. It is silvery-white in appearance, lustrous, ductile, and malleable. It has several unique chemical and physical properties that make it essential in a wide range of industrial and environmental applications. It possesses high resistance to chemical attack, excellent high-temperature characteristics, and stable electrical properties. Platinum is also considered as one of the finest of all jewellery metals.

 Platinum demand in India has raised by more than 20% in 2011 from 10 tonne last year, driven by record sales by automakers, the biggest users, and as moneyed consumers spur jewellery sales. It is estimated that about 70% of India's platinum imports goes into automobiles and the rest is used in jewellery, but the consumption size is miniscule compared to the country's total gold market of 400-800 tonne.

Platinums rarity Platinum is 30 times rarer than gold as ten tons of raw ore must be mined on average to produce just one ounce of pure platinum renders it an attractive investment alternative to such competing assets as stocks, bonds, and currencies. Some investors actually acquire platinum as a surrogate for gold

Issues faced by the bullion trade and industry

Bullion trade is fragmented and unorganized. Bullion market has witnessed high degree of volatility in prices, Export of Indian gold bar is not allowed Number of restrictions on import as well as export of gold. Price of gold and silver differ from place to place in India even at the same moment There is no national level trade and industry body, which can represent the bullion trade and industry India has huge household stock of gold and silver.

Genesis of IBMA
In order to solve the issues faced by the bullion trade and industry, National Spot Exchange in association with the leading bullion dealers of India have endeavoured to set- up Indian Bullion Market Association or IBMA. Indian Bullion Market Association (IBMA) is the national level body being set-up to represent the Indian bullion trade and industry. It is a consortium of leading bullion dealers and jewellery merchants of India, who have joined hands with National Spot Exchange Limited, the pan India Electronic Spot Market for commodities. The idea is to promote a professional organization dedicated towards the growth and development of bullion trade and industry. IBMA is committed to identify the inefficiencies involved in Indian bullion market and to create a momentum to remove such inefficiencies in a gradual but steady manner

Objectives
To set up a national level trade association for representing bullion importers, dealers, traders, jewellery merchants To identify the problems faced by various stakeholders connected with bullion trade and industry To interact with the Central Government, State Governments, RBI, nominated agencies, banks and other regulators

To set up the process for approval of local refineries and domestic brands of gold and silver bars To introduce a system of sale of gold coins and silver coins made by local refineries and domestic brands
To create linkages between domestic prices and international prices To promote savings and investments in gold and silver To notify a code of conduct and ethics to be followed by bullion dealers

National Spot Exchange Limited (NSEL)

National Spot Exchange Limited (NSEL) is the national level, institutionalized, electronic, transparent spot trading platform for commodities. NSEL provides customized solution to farmers, traders, processors, exporters, importers, arbitrageurs, investors NSEL is operational in 16 States in India, providing delivery-based spot trading in 52 commodities.

e-Series products
NSEL has introduced e-Series products in commodities for retail investors. These are investment products that enable investors to buy and sell commodities in demat form and hold them in their demat account. NSEL has launched e-Gold, e-Silver, e-Copper, e-Zinc, e-Lead, eNickel and e-Platinum

Investors who wish to purchase e-Series products are required to open beneficiary accounts with NSEL-empanelled Depository Participants (DPs).National Securities Depository Ltd. (NSDL) and Central Depository Services (India) Ltd. (CDSL), are the depositories for holding commodity units in the electronic form

Symbol E-GOLD E-SILVER E-COPPER E-ZINC E-LEAD E-NICKEL E-PLATINUM

Unit 1 GRAMS 100 GRAMS 1 KGS 1 KGS 1 KGS 1 KGS 1 GRAMS

Buy Price 2621.10 4000.00 465.00 130.15 158.60 990.00 2985.00

Sell Price 2733.80 4090.00 495.00 143.70 169.90 1035.00 3020.00

Bullion traders
Bombay Bullion Association - Mumbai The Madras Jewellers & Diamond Merchants Association - Chennai West Bengal Bullion Merchants & Jewellers Association - Kolkata The Delhi Bullion & Jewellers welfare Association - Delhi The Bullion Merchants Association - Delhi

Risks involved in bullion trading:

(i) (ii) (iii) (iv) (v) (vi) (vii) (viii) Unforeseen Circumstances Market Volatility Market Risk Leverage Risk Counterparty Risk Transactions in other Jurisdictions Market Information Systems Risks

Conclusion