AN EMPIRICAL STUDY ON GOLD BASED ON FUNDAMENTAL AND TECHNICAL ANALYSIS

ABSTRACT
Aim: An empirical study on Gold based on fundamental and technical analysis. Abstract: We study the gold prices based on fundamental analysis like inventories
in the entire globe, central bank reserves and currency fluctuations. We study the Inventories which will effect due to strikes, political conditions and demand & supply mismatch. According to central ank policies and central ank agreements reserves

will varies. !urrency trading on "ollar verses #uro or "ollar verses sterling pound causes volatility which leads to gold$silver price fluctuations. We forecast the gold prices with advanced technical analysis tools by using lead & lag indicators, #lliot wave analysis and %ibonacci series. We applied lag indicators on trending markets and lead indicators for trading markets. &ag indicators 'like (A!" or moving averages) smoothens the price trends so that we can find out prices are in the trending *one or not. We can apply this method on both bullish as well as bearish markets. &ead indicators are like oscillators for find out the trading ranges on side ways markets. We apply #lliot wave for gold prices forecast for long term analysis. We combine the %ibonacci series with #lliot wave for better results and absolute forecast. +

In this study we are applying both fundamental and technical analysis for predicting the future price actions based on historical data and previous trends.

TABLE OF CONTENTS
SI:NO I II CONTENTS List !" Tab#$s List !" C%arts PG:NO i ii 1 1

INTRODUCTION
1&1 1&2 1& 1&, 1&N$$' "!r st(') Hist!r) !" *!#' Hist!r) !" *!#' tra'i+* Pr!'(cti!+ !" *!#' D$ma+' a+' c!+s(m.ti!+ !" *!#'

2 / 4 15 1222/ 24 24 24 24 24 26

1&/ G!#' '$ma+' "!r 0ari!(s (s$s 2

LITERATURE RE1IE2
2&1
2&2 F(+'am$+ta# a+a#)sis T$c%+ica# a+a#)sis

RESEARCH METHODOLOGY
&1 &2 & &, &Ob3$cti0$s !" t%$ st(') Data +$$'s Data s!(rc$s Data a+a#)sis Limitati!+s

COMPANY PROFILE
1 , ,&1 Ab!(t t%$ c!m.a+) 1 ,&2 1isi!+ a+' missi!+ 2 ,& Gr!(. str(ct(r$ 4 4 , ,, ,,4 ,6 -5

DATA ANALYSIS AND INTERPRETATION

-&1 C!rr$#ati!+ b$t7$$+ *!#' a+' !t%$r c(rr$+ci$s -&2 G!#' a+a#)sis -& G!#' .ric$s i+ s%!rt t$rm

-&, G!#' .ric$s i+ #!+* t$rm

SUMMARY AND CONCLUSIONS

/ 1& 2& Bib#i!*ra.%) A..$+'ic$s

LIST OF TABLES
0I: 12:
/&1

PARTICULARS
R$*ar'i+* t%$ c!+s(m$r '$ma+'9 tr$+'s i+ i+'i0i'(a# c!(+tri$s&

3AG# 12:
-5

/&2 /& /&, /&-

R$*ar'i+* t%$ I'$+ti"iab#$ *!#' '$ma+'& R$*ar'i+* t%$ 7!r#' *!#' c!(+ci# R$*ar'i+* t%$ t$c%+ica# a+a#)sis !" *!#'& R$*ar'i+* t%$ G$+$ra# R(#$s "!r 0!#(m$ a+' !.$+ i+t$r$st&

-1 -2 -8 -6

/&/ /&8

R$*ar'i+* t%$ G!#' .ric$s: s$#$ct$' c(rr$+ci$s m!+t%#)& R$*ar'i+* t%$ a++(a# a0$ra*$ *!#' .ric$s

85 85

LIST OF CHARTS

SI: NO: 1&1 1&2 1& 1&, 1&1&/ 1&8 1&8&1 1&8&2 1&8& -&1 ; -&2 -& -&, -&/&1 /&2 /& ; /&, /&/&/

PARTICULARS R$*ar'i+* t%$ *!#' im.!rt i+ I+'ia R$*ar'i+* t%$ s%ar$ i+ 7!r#' .r!0$+ *!#' R$*ar'i+* t%$ .r!'(cti!+ b) c!(+tr) 7is$ R$*ar'i+* t%$ D$ma+' a+' C!+s(m.ti!+ !" *!#' R$*ar'i+* t%$ '$ma+' i+ $ac% c!(+tr) R$*ar'i+* +$7s "r!m t%$ '$mab' a+' s(..#) si'$ G!#' '$ma+'s "!r 0ari!(s (s$s : R$*ar'i+* t%$ 3$7$##$r) '$ma+' R$*ar'i+* t%$ *!#': s$as!+a#it) .ric$s a+a#)sis<164/:255/= R$*ar'i+* t%$ i+'(stria# a+' '$+ta# '$ma+' R$*ar'i+* c!rr$#ati!+ b$t7$$+ *!#' a+' !t%$r c(rr$+ci$s G!#' A+a#)sis G!#' Pric$ i+ S%!rt t$rm G!#' Pric$ i+ #!+* t$rm R$#ati!+s%i. !" I+"#ati!+ !" t%$ c!(+tri$s 7it% R$a# G!#' Pric$s R$*ar'i+* E##i!tt 7a0$s t%!r) R$*ar'i+* E##i!tt 7a0$ basics > Im.(#s$ .att$r+s R$*ar'i+* E##i!tt Basics > c!rr$cti0$ R$*ar'i+* Fib!+acci S$ri$s

PAGE NO:

6 6 11 12 1, 1/ 18 14 4 ; ,2 , ,, ,-, / /- ; // // /4

CHAPTER 1

INTRODUCTION
NEED FOR THE STUDY
7he high 8olatility in e9uity market with high:risk and the arrival of low interest rates have increased the investor presence in alternative investments such as precious metals like Gold and 0ilver. In India, gold and silver have traditionally played a multi:faceted role. Apart from Gold is being used for ornament purpose and silver is being used for industrial purpose, these metals have also served as an asset of the last resort and a hedge against inflation and currency depreciation. often been treated as an investment. Gold$0ilver supply primarily comes from mine production, official sector sales of global central banks, old gold$silver scrap and net disinvestments of invested gold$silver. 2ut of the total supply of -.;5 tons last year, 5+< was from mine production, ,6< from old gold scrap and +.< from official sector sales. "emand globally generate from fabrication '=eweler and other fabrication), bar hoarding, net producer hedging and Implied investment. Gold continues to occupy a prominent part in rural Indian economy and a significant part of the rural credit market revolves around bullion as security. India is the largest consumer of gold in the world accounting for more than ,6< of the total world demand annually. According to unofficial estimates, India has more than ++--..tonnes of hoarded gold, which translates to around >+5? billion. In spite of its predominant position, especially in the gold market where India is the largest importer, India has traditionally been a price seeker in the global bullion market. As considering the Indian growth scenario in G"3 ut most importantly, it has most

and increase importance in world economy near future, at present position India might guide the world gold economy prices.

C%art: 1&1
ullion trading in India received a ma=or fillip. %ollowing the changes in the Gold 3olicy announced by the Government of India, in +;;5 under e@port:import 3olicy +;;5:,??6. As per the policy commercial banks are authori*ed by the Aeserve ank of India

'A I) to import gold and silver for sale in domestic market without an Import license or surrendering the 0pecial Import &icense '0I&). ullion is imported into India by

banks and four designated trading agencies acting as canali*ing agents and consignees for overseas suppliers, who in turn sell to domestic wholesale traders, fabricators, etc. 7he price risk is borne either by the fabricator or the retail consumer. 7he wholesale traders, fabricators and investors do not have any effective tool to hedge their price risk in gold $ silver India being the largest consumer of gold in the world, with minimal domestic supply, the demand is met mainly from imports.

+?

Above facts certainly make the gold study, Investment in gold and good opportunity for generating revenue to the broking firm dealing in commodities trading 'like Anagram stock holding corporation) in gold and other commodities. 7his study certainly discuss the various factors effecting gold price movements in commodity e@change especially (!B vis:C:vis comparing it with international prices of gold. !ome@ gold futures witnessed reinforced upward momentum, which pushed prices to touch ,/:year highs last month. 0trong buying interest from funds coupled with a surge in investment demand has seen gold futures scaling new peaks. 7he following factors have been predominantly responsible for the surge in the yellow metal: Geopolitical tensions across the world particularly in the (iddle #ast and 1igeria, the threat of further attacks from Al Daeda in the oil rich (iddle #ast continues. 7he continued stand off between Iran and the west over 7ehranEs resumption of its nuclear program is likely to underpin price. Any rallies in crude oil futures are likely to see fresh buying interest emerge as gold is considered as hedge against inflation. Another crucial factor supportive of demand is the faster G"3 growth developing countries particularly India as compare the industriali*ed nations. #@pectations of an increase in demand for the marriage season in India could see emergence of physical buying interest. in

++

HISTORY OF GOLD
Gold has a history of more than 5??? years in India, which can be find in religious book of Findu, where it is considered as a metal of immense value. ut looking at the history of world, gold is found at the #gypt at ,??? .!, which is the first metal used by the humans value for ornament and rituals. Gold has long been considered one of the most precious metals, and its value has been used as the standard for many currencies 'known as the gold standard) in history. Gold has been used as a symbol for purity, value, royalty, and particularly roles that combine these properties. As a tangible investment gold is held as part of a portfolio by the countries as a reserves because over the long period gold has an e@tensive history of maintaining its value. It has in gained ground in relation to currencies owing to inflation. Fowever, gold does become particularly desirable in times of e@tremely weak confidence and during hyperinflation because gold maintains its value even as fiat money becomes worthless. When the value of currency depreciate. ut above all comment, it has a special role in India and in certain countries, gold Gewelry is worn for ornamental value on all social functions, festivals and celebrations. It is the popular form of investment in rural areas between the farmers after having bumper crop or after harvesting, this all factor makes India as largest consumer '+6< of world total demand in ,??6) and importer of gold due to its low production, which is negligible, and untapped gold reserves. 7his is due to lack of new technology in finding gold reserves and low interest shown by government in financing, encouraging for e@ploration programs in gold mines.

+,

HISTORY OF GOLD TRADING

Gold future trading debuted first at Winnipeg !ommodity #@change 'know is !ome@) in !anada in +;5,. 7he gold contract gain popularity among traders, led to many countries had too started gold future trading. Which include &ondon gold future, 0ydney future e@change, 0ingapore International (onetary #@change '0ime@), 7okyo !ommodity #@change '7ocom), !hicago (ercantile #@change, !hicago oard of

7rade '! 27), 0hanghai Gold #@change, "ubai Gold and !ommodity #@change are some of the world 7op recogni*ed e@change, and in India, 1ational !ommodity and "erivative #@change '1!"#B) and (ulti:!ommodity #@change '(!B), and 1ational oard of 7rade '1 27) are some Indian e@changes where Gold are traded. Fistory of gold trading in India is dates back to +;.6 with Association, which is formed by the group of (erchants. ombay ullion

CONTRACT SPECIFICATION GOLD TRADING

Gold %utures 7rading Hnit +?? troy ounces. 3rice Duotation H.0. dollars and 2pen outcry

cents per troy ounce. 7rading Fours 'All times are 1ew Iork time)

trading is conducted from 6:,? A( until +:-? 3(. #lectronic trading is conducted via the !(# Globe@J trading platform from 4:?? 3( 0undays through /:+/ 3( %ridays, #astern 7ime, with a ./:minute break each day between /:+/ 3( and 4:?? 3(. 2ff: #@change transactions can be submitted solely for clearing to the 1I(#B !lear 3ortJ clearing website as an e@change of futures for swaps '#%0) or e@change of futures for physicals '#%3) transaction until /:+/ 3(, (onday through %riday, and the

+-

day preceding a holiday. 7rading (onths 7rading is conducted for delivery during the current calendar monthK the ne@t two calendar monthsK any %ebruary, April, August, and 2ctober falling within a ,-:month periodK and any Gune and "ecember falling within a 4?:month period beginning with the current month. (inimum 3rice %luctuation >?.+? '+?L) per troy ounce '>+?.?? per contract). &ast 7rading "ay

7rading terminates at the close of business on the third to last business day of the maturing delivery month. "elivery Gold delivered against the futures contract must bear a serial number and identifying stamp of a refiner approved and listed by the #@change. "elivery must be made from a depository licensed by the #@change. !omplete delivery rules and provisions are detailed in the #@change Aulebook. "elivery 3eriod 7he first delivery day is the first business day of the delivery monthK the last delivery day is the last business day of the delivery month. #@change of %utures for 3hysicals '#%3) 7he buyer or seller may e@change a futures position for a physical position of e9ual 9uantity. #%3s may be used to either initiate or li9uidate a futures position. Grade

and Duality 0pecifications In fulfillment of each contract, the seller must deliver +?? troy ounces 'M/<) of refined gold, assaying not less than .;;/ fineness, cast either in one bar or in three one:kilogram bars, and bearing a serial number and identifying stamp of a refiner approved and listed by the #@change. A list of approved refiners and assayers is available from the #@change upon re9uest. 3osition Accountability

&evels and &imits Any one month$all months: 4,??? net futures e9uivalent, but not

+.

to e@ceed -,??? in the spot month. (argin Ae9uirements (argins are re9uired for open futures positions. 7rading 0ymbol G!.

PRODUCTION OF GOLD
7ill know the total gold is e@tracted from the mines is about >-.-; trillion dollar, which is accumulated in physical form is enough to built #iffel tower. Annual gold production worldwide is about H0 billion,/.5/ million and by far the one of the largest:trading world commodity. Worldwide, gold mines produce about -,,+5 tones in the year ,??6 from total supply of -,.;5tonnes but unable to meet identifiable demand of -/+;tonnes. Gold is mined in more than ++6 countries around the world, with the large number of development pro=ects in these countries e@pected to keep production growing well into the ne@t century. !urrently, 0outh Africa is the largest gold producing country, followed by the Hnited 0tates, Australia, !anada, Indonesia, Aussia and others, some of these countries also account for highest gold reserves from potential ,;,56-.;tonnes of world:wide reserves. %or more information refer to Appendi@ A.

+/

SHARE IN 2ORLD PRO1EN GOLD

Indonesi Australia Russia U.S.A. 10.0% 6.0% a Canada 11.2% 3.6% 3.0% China 2.0% Others 26.2% S.A.R. 38.0%

C%art: 1&2 PRODUCTION BY COUNTRY 2ISE

+4

C%art: 1& R$s$r0$ b) c!(+tr) 7is$

(ine production provides the lionNs share of gold supplied to the market each year O 5+ per cent O but recycled gold O gold scrap O accounts for one fifth, with sales of gold by central banks and similar organi*ations making up the balance of +.<. Where as is most part of this production is control companies like Anglo Gold Ashanti limited '0A), arrick gold !orporation '!anada), Gold fields, 1ewmont mining corporation

'H0A), Aino tinto, 3lacer dome, all this top / company produces around -?< of total gold production and proven gold reserves, having there e@ploration and mining facilities in different parts of world 3roduction of gold in India in negligible comparing to world gold mine production, total gold availability in India is about / tones where mines produce around ,tonnes of gold and rest is through recycled gold and scraps. 0ome of the Indian gold mines are "eccan gold mines, Futti gold mines, harat gold mines, Polar, Gadag, Wynad, goldfields and elsewhere.

DEMAND AND CONSUMPTION OF GOLD

eing a high:value commodity, gold is almost purely a financial metal. 0till, for its chemical properties, its use as an industrial metal has grown over the years. Industrial demand in ,??- was the second highest ever, topped only by pre:recession ,???, and since ,??. it is breaking all records year on year. 7he main use for gold as lu@ury '=eweler) items. %or more information refer to Appendi@ .

+5

C%art: 1&,
Gold produced from different sources and demanded for consumption in form of Geweler, Industrial applications, Government & !entral bank Investment and 3rivate investor, which has been worth H0> billion on average over the past five years in world. %or more information refer to Appendices !. 7otal of world gold produced is mostly consumed by different sectors are GewelerNs 6?<, Industrial application ++./< and rest of gold is used as investment purpose 6./<. !onsidering the situation in India, the demand for Gold consumption is far more ahead than its availability through production, scrap or recycled gold. Where gold production in India is only ,tonnes, where demand is +6.5< of world gold consumption, which make India a leading consumer of gold followed by Italy, 7urkey, H0A, !hina, Gapan. According to !ountries wise demand, the following graph shows the demand in each country. &arge part constitute by Gewelry

+6

consumption with 4,< during ,??6 by Indian consumers, who seem to spend a disproportionate percentage of their disposable income on gold and gold =ewelry.

C%art: 1&Gold fabrication for domestic and international market, also formed large part of business in India with .4; tones of gold fabricated in India in ,??6, making world largest fabricator which is 4?< more than its closet competitor Italy, 7urkey, H0A. ut this Geweler %abrication is unable to generate much revenue, as most of its consumed in India '.4; tones).

+;

NE2S FROM THE DEMAND AND SUPPLY SIDE

0trong Akshayathritiya demand. 0oftening of prices in Indian rupees '0trengthening of the rupees) !redit crunch '(ore e@pensive house loans). !onsumer belief that prices will rise in the long run. 7he increase in investment demand is likely to offset the slowdown in demand for =ewelry fabrication. A recent report by G%(0 said the investment demand for gold likely to !ontinue until ,??5 that could see global prices hitting new highs. G%( e@pects =eweler demand that represents 5,< of total gold demand to "ecline -/, tones to +.6/ tonnes in the first half of ,??6. 2n the supply side mine production is e@pected to increase /4 tones to+,-4 tones while gold scrap is e@pected to increase /, tones to ./+ 7ones. 7he increase in demand is likely to see dips being utili*ed as buying opportunities, particularly as there have been no significant fresh discoveries of gold deposits. (ost gold manufacturing of electrical components takes place in north America, western #urope and east Asia. A significant factor that could see an increase in demand from #ast Asia in increased number of companies shifting to the region due to the cost benefits on offers.

,?

 1ewer uses of gold include increased usage as an industrial metal, the Iellow metal being increasingly looked as a catalyst in fuel cells, chemical processing and controlling pollution. Another avenue that could be focused upon is in the field of 1anotechnology gold 1an rods can be used to improve &!" displays in mobile phones and laptops. Fowever gold futures continue to be vulnerable to sharp slides due to several factors. %ollowing are the prominent risks that would be faced by the market. +. 0peculative selling ,. "ollar strength -. A slide in crude oil prices

,+

C%art: 1&/
!ome@ Gold futures have continued to move higher to touch new ,/ year highs. As mentioned in our previous report supports in the >/.?:/./ region have held well and prices have rallied higher. Good support will now be seen at >/5?:/5-, these levels should continue to support any declines. A break above >4?? could yield >4+, followed by >4,+. 7he averages in the (A!" are above the *ero line in the indicator will suggest bullishnessK only a crossover below the *ero line in the indicator was suggest bearishness again. ,,

G!#' C!+s(m.ti!+ i+ I+'ia

India consumed around +6< of world Gold produced. #ven though it only contribute +.4< of Global G"3.Q7raditionally, Gold has been a good safety net for Indian households. Fowever, the sharp rise in gold imports over the last three years when the rupee has started appreciating, inflation is relatively low, banking facilities are improving And economic can confidence has picked up, is surprisingR say (arket watchers

GOLD DEMAND FOR 1ARIOUS USES:

7he ma=ority gold consumption relates to =eweler demand. Gold has some industrial uses due to its electrical conductivity, resistance to corrosion, and reflectiveness. Fowever, its higher cost limits its wider useK therefore, other metal like silver are preferred for industrial purpose.

+.Fabricati!+ D$ma+':Gewellery consistently accounts for the largest share:around 5?< of toal demand:worth around >.? billion at the average price in ,??/.

,-

C%art: 1&8&1
7here are both diffference and similarities in =ewelley purchasing habits across countries. "emand to affected bycultural and social factors,but various researches highlight the fact that feelings towards it across different markets.for instance, the purchase of gold =ewellery is associated with special occasions such as 8alentineNs "ay,Weddings, Anniversaries, and birthdays throughout the world.

"emand for gold =ewellery is seasonal 'see figure below).7he forth 9uarter is the the strongest 9uarter because of "iwali, !hrimitas,and other year:end festivals when =ewellery gifts are common. 7he long holidaysaround (ay + '&abour "ay), 1ational "ay, and !hinese 1ew Iear in !hina are occassions when gold =ewellery is purchased.

7he first 9uarter of a year is normally the second strongest 9uarter due to the !hinese 1ew Iear, the indian wedding season, and to a lesser e@tent, 8alentineNs "ay. "emand

,.

in the second and third 9uarters are usually low with the absence of ma=or gold:giving occasions. 7he start of the second 9uarter neverthless sees wedding seasons in parts of india. In (ay Akshaya 7ritiya festival occurs where gold gifts are e@changed. 7ourist demand is at its peak in 7urkey in the third 9uarter. In contrast the third 9uarter in india witnesses the 0hrad period, which is a fortnight when buying gold is not propitious for Findus.

C%art: 1&8&2

2=

I+'(stria# D$ma+': Industrial and dental uses accounted for around ++< of the

gold demand:an average of less than .?? tones annually, from ,??+ to ,??/.7he sector accounts for a slightly higher proportion of stocks since practice only part of industrial demand can be recovered as scrap.

,/

C%art: 1&8&
2ver half of the industrial and dental demand:around 5< of the total demand:is in the use of gold in electronic components due to its high thermal and electrical conductivity and its outstanding resistance to corrosion. 7he share of electronics in total gold demand has grown over the past decade but it also fluctuates according to global G"3 and the fortunes of the electronic components occur in 1orth America, #ast Asia, or Western #urope. #ast Asia is gaining in market share as companies relocate factories there to take advantage of the lower cost base.

GoldNs medical use has a long historyK its bio:compatibility, resistance to bacterial coloni*ation and corrosion, and malleability mean that it can be used inside the human body. 7oday various biomedical applications include the use of gold wires in heart transplants and gold:plated stents to support weak blood vessels. Its best:known and most widespread use, however, is in density. "ental use currently accounts for =ust

,4

under ,< of the demand share which is stable. Gapan, the Hnited 0tates, and Germany are the three leading countries manufacturing dental alloys.

Gold is also used in a number of other industrial and decorative purposes, such as gold plating and coating, and in gold thread 'such as =ari in India). 8arious techni9ues are used to use gold in decorative finishes. 2ther applications take advantages of goldNs reflectivity of heat and lasers and its optical properties. 2verall, these uses of gold account for ,:-< of the total demand.

-) G!0$r+m$+ts a+' c$+tra# ba+?s: 7he third source of gold demand is governments and central banks that buy gold to increase their official reserves. !entral banks holds ,6,,,/.. tons, the holdings of Aeserve ank of India are only a modest -;5./ tons.

.) Pri0at$ i+0$st!rs: %inally, there are private investors. "epending upon market circumstances, the investment component of demand can vary substantially from year to year. %or the consumer demand in the individual countries can be seen in the Appendices !

M!ti0$s "!r %!#'i+* *!#'

7he following are the main reasons why world now hold gold.

,5

Gold has worked down from Alexander's time...When something holds well for two thousand years, I do not believe it can be so because of pre udice or theory!. "" #ernard #aruch mistaken

Ec!+!mic s$c(rit) Gold is uni9ue asset in that it is one elseNs liability. Its status cannot therefore underdetermined by inflation in a reserve currency country. 1or is there any risk of the liability being repudiated. Gold has maintained its value in terms of real purchasing power in the long run and is thus particularly suited to for, part of central bankNs reserves. In contract, paper currencies always lose value in the long run and often in the short term as well. P%)sica# S$c(rit) !ountries have in the past imposed e@change controls or, at the worst, total asset free*es. Aeserves held in the form of foreign securities are vulnerable to such measures. Where appropriately located, gold is much less vulnerable. Aeserves are for using when you need to. 7otal and incontrovertible li9uidity is therefore essential. Gold provides this. U+$@.$ct$' +$$'s If there is one thing of which we can be certain, it is that todayNs status 9uo will not last for ever. #conomic developments both at home and in the rest of the world can upset countriesN plans, while global shocks can affect the whole international monetary system.

,6

2wning gold is thus an option against an unknown future. It provides a form of insurance against some improbable but, if it occurs, highly damaging event. 0uch events might include war, an une@pected surge in inflation, a generali*ed crisis leading to repudiation of foreign debts by ma=or sovereign borrowers, a regression to a world of currency or trading blocs or the international isolation of a country. In emergencies countries may need li9uid resources. Gold is li9uid and is universally acceptable as a means of payment. It can also serve as collateral for borrowing. C!+"i'$+c$ 7he public takes confidence from knowing that its Government holds gold : an indestructible asset and one not prone to the inflationary worries overhanging paper money. 0ome countries give e@plicit recognition to its support for the domestic currency. And rating agencies will take comfort from the presence of gold in a countryEs reserves. 7he I(%Es #@ecutive oard, representing the worldEs governments, has recognised that the %undEs own holdings of gold give a Sfundamental strengthS to its balance sheet. 7he same applies to gold held on the balance sheet of a central bank. Di0$rsi"icati!+ : In any asset portfolio, it rarely makes sense to have all your eggs in one basket. 2bviously the price of gold can fluctuate : but so too do the e@change and interest rates of currencies held in reserves. A strategy of reserve diversification will normally provide a less volatile return than one based on a single asset. Gold has good diversification properties in a currency portfolio. 7hese stem from the fact that its value is determined by supply and demand in the world gold markets,

,;

whereas currencies and government securities depend on government promises and the variations in central banksN monetary policies. 7he price of gold therefore behaves in a completely different way from the prices of currencies or the e@change rates between currencies. I+c!m$ Gold is sometimes described as a non income:earning asset. 7his is untrue. 7here is a gold lending market and gold can also be traded to generate profits. 7here may be an Sopportunity costS of holding gold but, in a world of low interest rates, this is less than is often thought. 7he other advantages of gold may well offset any such costs. St!r$ !" 0a#($ 1o one should e@pect gold to hold its real value over short time periods 'though of course it may). ut, over the course of decades and even centuries, it has been shown that gold has maintained its purchasing power in real terms. M!bi#iAi+* *!#' As the ultimate form of payment, gold has sometimes proved the only asset, when used either as cash or as collateral, acceptable to counter parties. Gold can indeed play a crucial and strategic role in central bank reserve mobili*ation in !entral banks conduct many of their gold transactions away from the public eye and it is therefore fre9uently difficult or impossible to learn the full story. Insurance 7he opportunity cost of holding gold may be viewed as comparable to an insurance premium. It is the price deliberately paid to provide protection against a highly improbable but highly damaging event. 0uch an event might be war, an une@pected surge of inflation, a generali*ed debt crisis involving the repudiation of foreign debts

-?

by ma=or sovereign borrowers, a regression to a world of currency and trading blocs, or the international isolation of a country. H!7 m(c% *!#'B 7his is a matter for countries and central banks to decide in the light of their particular circumstances. 7he international average is about +?.,< at current market prices but, in the #H it is over /?< and the H0A holds around 5/< of its reserves in gold. !ountries facing particular volatility in their economic and$or political circumstances will want to consider the level of gold in their reserves.

-+

CHAPTER 2

LITERATURE RE1IE2
F(+'am$+ta# "act!rs: (ost of the volatility in gold is affected from fundamental
factors like word currencies as "ollar, #uro, AandK !hinese yen revaluation is also a -,

considerable case, the relationship holding directly 'indirectly) with gold is discussed later in this same topic are the main factors effecting gold world wide. 3olicies by !ountries, !entral anks, and Gold production companies have effect on demand,

supply and price of gold. 0o, a trader's) generally has to take closer look at such factors. #ither to capitali*e on such opportunities or safeguard them through li9uidating or holding, hedging or "e: hedging its respective position. R$#ati!+s%i. !" G!#' 7hrough out 0tudy we have discusses the %actors affecting the price movement of Gold. We believe the main drivers of the price of gold are: investor perception of H.0. and global economic growth prospects, the strength 'or weakness) of the H.0. "ollar and different currencies, the supply of gold available for sale, and physical demand from consumers and investors. 2bviously, these factors are interrelated, making a simple analysis difficult to understand. %or different fundamental factors refer to Appendi@ ". FUNDAMENTAL FACTORS EFFECTING GOLD IN INDIA +. (ost of gold !onsumption is account from rural areas in India. Gold demand in such region depends on (onsoon, which has direct relationship with Gold demand. Good monsoon result in good harvesting means high demand for gold. ,. 0ocio:culture event like "iwali, Hgadi, "asshera and (arriage season have much needed demand for gold. -. &ack of trust in banking system for making deposit and tradition form of savings in gold in rural areas are still being followed.

--

.. Appreciation 'depreciation) in rupee or low inflation has minimal effect on gold consumption. /. (acro economic factors at large as depreciation 'appreciation) of "ollar, 3hysical demand of gold by other country's), unforeseen conditions, etc.

T$c%+ica# A+a#)sis:
It is the study of the internal stock e@change information as such. 7he word TtechnicalN implies a study of the market itself and not of those e@ternal factors which reflected in the market. 7he technician usually attempts to predict short term price movements and thus makes recommendations concerning the timing of purchases and sales of either specific stocks or groups of stocks or stocks in general. METHODOLOGY It rests upon the assumption that history lends to repeat itself in the stock e@change. If a certain pattern of activity has in the past produced certain results nine times out of ten, one can assume a strong likelihood of the same outcome. Whenever this pattern appears in the future. It should be emphasi*ed however, that a large part of the methodology of technical analysis lacks a strictly logical e@planation. %or different types of 7echnical analysis refer to Appendi@ ".

-.

CHAPTER

RESEARCH METHODOLOGY
Ob3$cti0$s !" t%$ St('):
7he main ob=ectives taken up for the study on commodity:Gold are discussed as 7o study and understand the important factors affecting gold prices movements. -/

 7o analy*e the price movement of gold. 7o suggest the reasons, the future conditions and situations 'buy, hold and sell) on gold price movements. 7he overall ob=ective of this pro=ect is to minimi*e the risk or ma@imi*e profit for the customers of %ortis !omde@ &imited, by predicting the future gold price movement. Data N$$'s: (ovement of gold prices at different !omde@ market of the world. Data S!(rc$s: 0econdary data sources were consulted for the study. %or daily closing prices of gold, data is collected from (!B website. 7he related collection of gold price movement through fundamental and technical analysis. Data A+a#)sis: %undamental and 7echnical Analysis are used for data analysis %undamental Analysis: "ollar and other currencies !rude oil With Inflation Interest Aate and "eficit 0upply and "emand %undamentals 7echnical Analysis: (oving Average !onvergence and "ivergence 0tochastic 2scillator

-4

 #lliott Wave 7heory %ibonacci 0eries Limitati!+s !" t%$ St('): 7he study is based on the parameters of following factors. 2nly a historical data have been considered. It is based on Aesearch done by authors and organi*ations like WG!, G%(0, 1ews, Articles and its affect on gold. 7echnical Analysis is done on 7wo methods by taking +, & ,4 day #@ponential (oving Averages '#(A) & 0tochastic 2scillator and price movement, uy and 0ell signal suggests on the basis of this study characteristic of this methods. 7he suggestion is based on the study of %undamental and 7echnical Analysis such as price movement, Aelationship of gold with other factors, 8olumes and 2pen Interest '2I). 7his analysis will be holding good for a limited time period that is based on present scenario and study conducted, future movement on gold price may or may not be similar. 7he predictive power of the study is limited to gold as commodity investment and cannot be generali*ed to other uses of gold.

-5

CHAPTER ,

FORTIS COMDEC LIMITED

Aeligare #nterprises &imited 'A#&) is also known to be %ortis !omde@ limited one of the leading integrated financial services groups of India. A#&Ns businesses are broadly

-6

clubbed across three key verticals, the Aetail Institutional and Wealth spectrums, catering to a diverse and wide base of clients. 7he vision is to build Aeligare as a globally trusted brand in the financial services domain and present it as the TInvestment Gateway of IndiaN. All employees of the group guided by an e@perienced and professional management team are committed to providing financial care, backed by the core values of diligence and transparency. A#& offers a multitude of investment options and a diverse bou9uet of financial services with its pan India reach in more than +//? locations across more than .4? cities and towns. A#& also currently operates from +? countries globally following its ac9uisition of &ondonNs oldest brokerage and investment firm, Fichens, Farrison and company. With a view to e@pand, diversify and introduce offerings benchmarked against global best practices, Aeligare operates its &ife Insurance business in partnership with the global ma=or: A#G21. %or its wealth management business, Aeligare has partnered with Australia based financial services ma=or:(ac9uarie. Aeligare has also partnered with 8istaar #ntertainment to launch IndiaNs first 0# I approved %ilm %und offering a uni9ue alternative asset class of investments.

1ISION AND MISSION

1isi!+: 7o build Aeligare as a globally trusted brand in the financial services domain and present it as the TInvestment Gateway of IndiaN. -;

Missi!+: 3roviding complete financial care driven by the core values of diligence and transparency. Bra+' Ess$+c$: !ore brand essence is "iligence and Aeligare is driven by ethical and dynamic processes for wealth creation.

.?

R$#i*ar$ E+t$r.ris$s Limit$'

Aeligare 0ecurities &imited #9uity roking 2nline Investment 3ortal 3ortfolio (anagement 0ervices "epository 0ervices &ending and "istribution business 3roposed !ustodial business

Aeligare !ommodities &imited !ommodity roking

Aeligare Insurance roking &imited &ife Insurance General Insurance

Aeligare !apital (arkets &imited Investment anking 3roposed Institutional roking

Aeinsurance

Aeligare Arts Initiative &imited usiness of Art Gallery launched : arts:i

Aeligare Aealty &imited In house Aeal #state (anagement !ompany

Aeligare 8enture !apital &imited 3rivate #9uity and Investment (anager

.+

Aeligare Fichens FarrisonUU !orporate roking Institutional roking "erivatives 0ales !orporate %inance Aeligare Asset (anagementU

UAeligare Asset (anagement !ompany '3) &imited is a wholly owned subsidiary of Aeligare 0ecurities &imited 'A0&), which in turn is a +??< subsidiary of Aeligare #nterprises &imited.

UUAeligare Fichens, Farrison plc. 'AFF) is a part of Aeligare #nterprises &imited 'A#&) O a leading integrated financial services group of India. Fichens, Farrison & !o. plc. 'FF), established in +6?- is &ondonNs oldest brokerage and investment firm with a global footprint. 3ost its ac9uisition through A#&Ns indirect subsidiary : Aeligare !apital (arkets International 'HP) &imited, FF has been rechristened as Aeligare Fichens Farrison plc.

O(r D!i+t 1$+t(r$s

.,

AE R$#i*ar$ Li"$ I+s(ra+c$ C!m.a+) &ife Insurance business 'A#G21 as a partner) %or more information log on to www.aegonreligare.com R$#i*ar$ MacE(ari$ 2$a#t% Ma+a*$m$+t Lt'& 3rivate Wealth business '(ac9uarie, Australian %inancial 0ervices ma=or as a partner) %or more information log on to www.religaremac9uarie.com 1ist 1istaar R$#i*ar$ :T%$ Fi#m F(+' IndiaEs first 0# I approved %ilm %und '8istaar as a partner) %or more information log on to www.vistaarreligare.com

.-

..

CHAPTER -

DATA ANALYSIS AND INTERPRETATION

C!rr$#ati!+ b$t7$$+ G!#' a+' Ot%$r c(rr$+ci$s

T%$ US '!##ar a+' t%$ *!#' .ric$: Aecall from last week that the 38# Gold Inde@ consists of the G"3:weighted gold price in thirty:si@ countries, including the Hnited 0tates. 0ince nine of the countries in the inde@ use the euro, twenty:eight currencies are represented. %or convenience, I copied last weekNs chart belowK letNs see what we can glean from it.

./

C%art: -&1
7he 38# Gold Inde@ gives us an idea of how the average gold price in the world is changing. When the gold price in any given currency deviates from the 38# Gold Inde@ it implies a change in the e@change rate of that currency with respect to the other currencies in the inde@. We can therefore see that the H0 dollar e@change rate was relatively stable from Ganuary +;;? to the middle of +;;,, when the dollar started to strengthen. We know the dollar strengthened because the gold price, in dollars, started to drop below the 38# Gold Inde@ indicating that the dollarNs purchasing power was increasing. why did the dollar strengthenV In +;;, the ut

ra*ilian real collapsed and capital in

search of safety made its way, mainly, to the Hnited 0tates. 7he real was devalued to practically nothingK it was replaced by the new real on Guly +, +;;.. As a result of the

.4

ra*ilian currency crisis the demand for H0 dollars soaked up H0 currency that would otherwise have been used for settlement of international trade. 7he dollar, therefore, increased not only against the real, but against many other currencies as well. etween +;;, and +;;. the dollar increased by about ten percent against the other currencies in the 38# Gold Inde@. 7his increase in the dollarNs e@change rate on foreign currency markets is represented in the chart above by the decline in the H0 dollar gold price relative to the 38# Gold Inde@ that started in +;;,. 7he ra*ilian real crisis was hardly behind us when, in

+;;/, the (e@ican peso dropped more than fifty percent against the dollar. 7his was the worst financial crisis in (e@ico since the (e@ican Aevolution. (ore capital flowed into the Hnited 0tates, competing for dollars on foreign e@change markets and keeping the dollar strong. etween +;;/ and +;;4 the Gapanese yen lost about twenty:five percent against the dollar. (ore demand for dollars meant that the dollar continued to strengthen on foreign currency markets, further increasing the gap between the average, worldwide gold price and the H0 dollar:gold price. Gapan set the stage for the big one, the 0outheast Asian currency crisis. etween +;;4 and +;;5, the Indonesian rupiah

dropped seventy:si@ percentK the 0outh Porean won fell fifty:si@ percent and both the (alaysian ringgit and the 3hilippine peso lost forty percent of their value against the dollar. 7his was a financial catastrophe and its effect was felt across the globe. 0ince the H0 dollar was performing well on foreign currency markets, thanks to the ra*ilian, (e@ican and Gapanese devaluations earlier in the decade, a tidal wave of capital made its way to the Hnited 0tates. 0till shaken from the events of +;;4 and

.5

+;;5, Aussia defaulted on its foreign debt in +;;6, sending the ruble down seventy percent in =ust one year. In con=unction with the 0outheast Asian crisis the mood is grim, and international capital pours into the H0 seeking refuge. 7he increase in the H0 dollar following the 0outheast Asian currency crisis crushed the H0 dollar:gold price and was large enough to be evident in the 38# Gold Inde@. 7he H0 dollar represents twenty:eight percent of the Inde@ and contributed to the Inde@N decrease of more than twenty percent during +;;4 and +;;5. As you can see though, the H0 dollar:gold price declined much more and for much longer. When the euro was launched in Ganuary +;;; it collapsed almost twenty:five percent, on average '38# #uro Inde@), and about thirty:five percent against the dollar. As if this was not enough, the Argentine peso had trouble in +;;6K in ,??? it was the 7urkish lira and in ,??, it was back to ra*il for another round. As an aside, all the currency devaluations mentioned are e@amples of how the dollarNs e@change rate affects the H0 dollar:gold price. #ven though the world is currently fascinated by the euroNs e@change rate as a leading indicator for the H0 dollar gold price we cannot ignore the impact of other currencies. !ollectively, they could be more important. 7he compounding effect of capital flight during all these currency crises can be seen in the increasing deviation between the H0 dollar gold price and the 38# Gold Inde@. 7he inde@ is currently more than si@ty percent higher than it was in +;;? while the H0 dollar:gold price has only recently recovered to its Ganuary +;;? level. 7he dollarNs strength stemmed from the weakness in other currencies. It had very little to do with AmericaNs productivity, or a Q1ew #raR. ecause most ma=or currencies in the world had already devalued against the dollar it was obvious that the dollar could

.6

not continue to increase indefinitely. A 38# "ollar Inde@, using the same G"3: weighted currency data as for the 38# Gold Inde@, shows that the H0 dollar gained ++,< from Ganuary +;;? to %ebruary ,??, 'its peak) and has since declined by fourteen percent. We have seen that the decline in the H0 dollar:gold price, and its under:performance relative to the rest of the world, is a reflection of the H0 dollarNs e@change rate. It is my belief that the H0 dollar gold price will again catch up with the 38# Gold Inde@ as a result of continued weakness in the dollar to correct AmericaNs enormous trade deficit. 7his correction of the dollar has only =ust begun and is likely to increase the H0 dollar:gold price by appro@imately thirty:five to forty percent more than the concurrent average increase in the gold price in other currencies.

.;

C%art: -&2
As the Aupee start strengthening Gold prices start strengthening. As per charts the data we analy*e from 0ept ,??6 to %eb ,??;. %rom 2ct middle onwards the rupee starts weakening and the gold is almost all flat but on 1ov middle onwards when the rupee starts strengthen up Gold is also starts rises. 7he means Gold prices are correlated to Ind vs. "ollar currency.

GOLD ANALYSIS

C%art: -&

/?

As per Gold candlestick charts are prices are in the bullish phase. If we are look in to the price trend for past couple of days 5 bullish candles out of +? candles has formed. 7his means prices are more positive and trend would be e@pected to continue.

As per the moving averages concern #(A '/) is above the #(A '4) which shows prices are positive territory. 2pen interest is negative which positive divergence for prices concern. As per (A!" histogram, the histogram is in positive *one which leads trend is intact. 2f course already the trend confirms bullish so prices would be in bullish *one for the ne@t couple of days.

GOLD PRICES IN SHORT TERM

C%art: -&,

/+

As per gold chart shown prices are in the Tbullish price channelN and prices are near to the resistance line. 3rices are touches high and open interests is negative which leads to positive divergence. 7he break above channel line resistance marked an

acceleration of the advance. 7his might consider the Gold overe@tended after this move, but the advance was powerful and the trend never turned bearish. 2nce it crosses the resistance line'As +.4??) then the immediate resistance at around As+4??? ,which is channel width. %or 0hort term +st Aesistance at ,nd Aesistance at As +.,4?? $: As +4,??? $:

GOLD PRICES IN LONG TERM

/,

C%art: -&%or the Gold, progress ultimately takes the form of five waves of a specific structure. 7hree of these waves, which are labeled +, - and /, actually effect the directional movement. 7hey are separated by two countertrend interruptions, which are labeled , and ., as shown in chart. 7he two interruptions are apparently a re9uisite for overall directional movement to occur. (otive mode is employed by both the five wave pattern on Gold chart and its same:directional components, i.e., waves +, - and /. 7heir structures are called SmotiveS because they powerfully impel the market. 7his is trend wave which is any wave that trends in the same direction as the wave of one larger degree of which it is a part.

/-

As per chart %ibonacci lines are drawn which is, the ratio of any number to the ne@t higher is appro@imately .4+6 to + and to the ne@t lower number appro@imately +.4+6 to +. 7he further along the se9uence, the closer the ratio approaches phi 'denoted f) which is an irrational number, .4+6?-..... etween alternate numbers in the se9uence, the ratio is appro@imately .-6,, whose inverse is ,.4+6. As per #lliot wave theory 3rices are in the / th wave which is motive wave. 7o find the target of /th wave we can combine #lliot wave with %ibonacci on - rd wave. 7he length of - rd wave is : As +-??? O As 64?? W As ..?? 7he -rd wave appro@imately correct at As ++-?? which is -6., < W As +5??

-t% 7a0$ 7!(#' b$ 11 55 F ,,55F1855

G Rs 18,55

S! t%$ #!+* t$rm .ric$ tar*$t is Rs 18,55&

/.

CHAPTER /

//

SUGGESTIONS AND RECOMMENDATIONS

R$c!mm$+'ati!+s: For Short Term: ', to . Weeks) We uy Gold '(c@) above +.4?? levels with stop loss of +.,?? for 7arget +4???.

uy gold above 0top loss +st resistance ,nd resistance +st 0upport ,nd0upport

As+.4?? As+.,?? As+/,?? As+4??? As+.,?? As+.???

F!r L!+* T$rm: '+ month to 4 months) uy Gold at current levels '+.+??) with s$l of +-??? for 7arget of As+5.??

uy Gold at 0top loss +st resistance ,nd Aesistance +st 0upport ,nd 0upport

As +.+?? As +-??? As +4??? As +5.?? As +-4?? As +-???

/4

1& BIBOLOGRAPHY

www.mc@india.com www.ncde@.com www.gold.org www.financiale@press.com www.google.co.in www.stockcharts.com www.netdania.com

B!!?s
(anual on 3rice:Aisk (anagement in ullion '(!B) (athematical asis of Wave theory #. White .th edition

/5

2& APPENDICES

APPENDICES : A

Tab#$: /&1

/6

APPENDICES > B I'$+ti"iab#$ *!#' '$ma+' +

Tab#$: /&2

/;

APPENDICES : C

Tab#$: /&

4?

APPENDICES : D F(+'am$+ta# "act!rs 7he following are the fundamental factors A& D!##ar a+' !t%$r c(rr$+ci$s As we have discuss, where "ollar is considered as the world local currency with nearly 6/< of world trade in > and forms 54< of world reserves, which is world most traded currency 'even 2il, gold and commodities have all been priced in H0 dollars since +;5/ when 23#! officially agreed to sell its oil e@clusively for H0 dollars. %rom +;.. until +;5+, H0 dollars were convertible into gold by central banks in order to ad=ust for any trade imbalances between countries). 0o weakness in dollar, due to economic or political factors or unforeseen conditions gives other currency strength against dollar. Where investors view gold as a Ssafe havenS from dollar weakness and that any e@pectations of a further decline in the dollar will cause gold prices to strengthen. 0o it certainly gives there is an inverse relationship e@ist, which is formidable, between gold and dollar up to certain e@tent. 7he following figure shows the relationship of dollar and #uro with gold as basis, where decline in > against and that any e@pectations of a further decline in the dollar will cause gold prices to strengthen. 0o it certainly gives there is an inverse relationship e@ist, which is formidable, between gold and dollar up to certain e@tent. 7he following figure shows the relationship of dollar and #uro with gold as basis, where decline in > against #uro give lift to Gold price.

4+

B& Cr('$ Oi# 2it% I+"#ati!+ Generally speaking, an increasing oil price results in increasing inflation, negatively impacting the global economy, particularly oil:dependent economies such as the H0, India, 7aiwan, Gapan, etc. which certainly effect the other commodities, which give rise to inflationary situation. An increases in price or supply disruptions will negatively impact the H0 economy to a greater degree with nations largely depend on H0 Imports like &atin American !ountries and south:east Asian countries with high H0 G"3 deficit could further decline the > with investor holding "ollar as reserve will start selling > which put more pressure on dollar, which already decline by --< after ,??+. #ven countries like Aussia, 8ene*uela, Arabia and some Arabian 1ations are planning to 3rice 2il in #uro, Islamic Gold and "iner with >, which could affect the countries to shift by transferring their reserves to other precious (etals, other currencies which might lead to free fall of "ollar. 7he following chart gives the clear picture of relationship of Inflation of the !ountries with Aeal Gold 3rices.

4,

Above chart clearly depict the positive relationship of Gold with other countries respective to Inflation and among correlation. 2ver the last /? years or so, gold and oil have generally moved together in terms of price, with a positive price correlation of over 6? percent with current pricing increasing of 2il at higher rate with analyst forecasting as >+?? in coming future could take Gold to his previous high during +;5?Es. C& I+t$r$st Rat$ ; D$"icit G"3 deficit of nations based on their !urrent Account balance and interest rate play a ma=or role in deciding the movement of Gold prices. A good e@ample could be recent news of hike in interest rate by %ed department in H0 for bank deposits, much better G"3 growth rate than e@pected with low deficit leading to strengthen the "ollar with gold prices declining comparing to its strengthen "ollar. D& S(..#) a+' D$ma+' F(+'am$+ta#s Gold production is relatively flat over the last several years. &imited new production coming online in the near future, it is likely that overall mine production will continue

4-

to remain relatively stagnant over the ne@t few years. G%(0 e@pects that mine supply will peak in ,??6 at levels only slightly higher than those seen in ,??5, and then decline by appro@imately -? tons per year through ,?+?, or roughly +.,< per year. While additional supply could come into the market in the form of scrap gold sales, which may be inspired by recently higher gold prices, it is doubt these sales would materially impact gold supply going forward. Aecent data suggests confirms this, suggesting that new scrap sales are not yet a ma=or contributing factor to supply growth. A wildcard in the demand$supply e9uation is the effect of central bank sales. According to G%(0, net gold sales by central banks has accounted for appro@imately +-< of the annual supply of gold over the last five years '.?? tons every year from +;;;) according to its !entral ank Gold Agreement '! GA). ut while in ,??5,

they plan revise gold selling up to /?? tones. 2ther %actors effecting gold a) Government's) policies towards gold. b) War, %amines or "rought other natural calamities which increased 'decreases) the demand and price of gold. c) #conomic or 3olitical crisis in producing countries.

d) &ockouts on ma=or gold mines producer. ut under certain situation, the relationship of fundamental factors doesnEt compile with relationship or react in situation as it should be like in where both dollar and gold price is increase, cured oil increase but gold is reacting after some days of trading, etc such situation may arise but after some time it will come to it normal scenario.

4.

IN1ENTORIES
Inventories are the fourth set of fundamentals that e@ert an important influence on gold. Gold, like silver, is uni9ue among the commodities and thatNs why it has served as a monetary asset for the government and as an investment asset to individuals. 7hat is why there is a greater tendency among different groups to hold gold when compared with other commodities like lead, *inc, timber, and copper. "eriving gold inventory levels is difficult because only a small percentage of the total inventories are registered and reported in commodity e@changes. T$c%+ica# A+a#)sis O.$+ I+t$r$st +. 7otal number of options or futures contracts that are not closed or delivered on a particular day. ,. 7he number of buy market orders before the stock market opens A common misconception is that open interest is the volume of options and futures trades. 7his is not correct, as demonstrated in the following e@ample:

Tab#$: /&,
:2n Gan + A, buys an option, which leaves an open, interest and also creates trading volume of +.

4/

:2n Gan , ! and " create trading volume of / and there are also / more options left open. :2n Gan - A, takes an offsetting position and therefore open interest is reduced by +, and trading volume is +. :2n Gan ., # simply replaces ! and therefore open interest does not change, trading volume increases by / %irst step in 2pen Interest tells us about the total number of open contracts on a security applies primarily to the futures market. It is often used to confirm trends and trend reversals for futures and options contracts. A contract has both a buyer and a seller, so the two market players combine to make one contract. 7he open:interest position that is reported each day represents the increase or decrease in the number of contracts for that day, and it is shown as a positive or negative number. An increase in open interest along with an increase in price is said to confirm an upward trend. 0imilarly, an increase in open interest along with a decrease in price confirms a downward trend. An increase or decrease in prices while open interest remains flat or declining may indicate a possible trend reversal.

1!#(m$ It is used in con=unction with open interest, volume represents the total number of shares or contracts that have changed hands in a one:day trading session in the commodities or options market. 7he greater the amount of trading during a market session, the higher the trading volume. A new student to technical analysis can easily see that the volume represents a measure of intensity or pressure behind a price trend.

44

7he greater the volume the more we can e@pect the e@isting trend to continue rather than reverse. 7echnicians believe that volume precedes price, which means that the loss of

either upside price pressure in an uptrend or downside pressure in a downtrend will show up in the volume figures before presenting itself as a reversal in trend on the bar chart. 7he rules that have been set in stone for both volume and open interest are combined because of their similarityK however, having said that, there are always e@ceptions to the rule, and we should look at them. G$+$ra# R(#$s "!r 1!#(m$ a+' O.$+ I+t$r$st lets summari*e these with an easy:to:read chart: O.$+ Pric$ Aising Aising "eclining "eclining 1!#(m$ Hp "own Hp "own I+t$r$st Hp "own Hp "own Mar?$t 0trong Weak Weak 0trong

45

Tab#$: /&0o, price action increasing in an uptrend and open interest on the rise are interpreted as new money coming into the market 'reflecting new buyers) and is considered bullish. 1ow, if the price action is rising and the open interest is on the decline, short sellers covering their positions are causing the rally. (oney is therefore leaving the marketplace and is considered bearish. If prices are in a downtrend and open interest is on the rise, chartists know that new money is coming into the market, showing aggressive new short selling. 7his scenario will prove out a continuation of a downtrend and a bearish condition. &astly, if the total open interest is falling off and prices are declining, the price decline is being caused by disgruntled long position holders being forced to li9uidate their positions. 7echnicians view this scenario as a strong position technically because the downtrend will end as all the sellers have sold their positions. 7he following chart therefore emerges: When open interest is high at a market top and the price falls off dramatically, this scenario should be considered bearish. In other terms, this means that all of the long position holders that bought near the top of the market are now in a loss position, and their panic to sell keeps the price action under pressure. 7here is no need to study a chart for this indicator since the rules are the most important area to study and remember. If you are a new technician starting to understand the basic parameters of this study, look at many different charts of Gold, silver, and other commodities so you can begin to recogni*e the patterns that develop.

46

MO1ING A1ERAGE CON1ERGENCE AND DI1ERGENCE

ullish O an increasing open interest in a rising market. earish O a declining open interest in a rising market earish O an increasing open interest in a falling market. ullish O a declining open interest in a falling market.

<MACD=:
"eveloped by Gerald Appel, (oving Average !onvergence$"ivergence '(A!") is one of the simplest and most reliable indicators available. (A!" uses moving averages, which are lagging indicators, to include some trend:following

characteristics. 7hese lagging indicators are turned into a momentum oscillator by subtracting the longer moving average from the shorter moving average. 7he resulting plot forms a line that oscillates above and below *ero, without any upper or lower

4;

limits. (A!" is a centered oscillator and the guidelines for using centered oscillators apply. 7he most popular formula for the SstandardS (A!" is the difference between a securityEs ,4:day and +,:day #@ponential (oving Averages '#(As).7his is the formula that is used in many popular technical analysis programs, including 0harp !harts, and 9uoted in most technical analysis books on the sub=ect. Appel and others have since tinkered with these original settings to come up with a (A!" that is better suited for faster or slower securities. Hsing shorter moving averages will produce a 9uicker, more responsive indicator, while using longer moving averages will produce a slower indicator, less prone to whipsaws. %or our purposes in this article, the traditional +,$,4 (A!" will be used for e@planations. &ater in the indicator series, we will address the use of different moving averages in calculating (A!". 2f the two moving averages that make up to (A!", the +,:day #(A is the faster and the ,4:day #(A is the slower. !losing prices are used to form the moving averages. Hsually, a ;:day #(A of (A!" is plotted along side to act as a trigger line. A bullish crossover occurs when (A!" moves above its ;:day #(A, and a bearish crossover occurs when (A!" moves below its ;:day #(A. St!c%astic Osci##at!r <Fast9 S#!79 a+' F(##= "eveloped by George !. &ane in the late +;/?s, the 0tochastic 2scillator is a momentum indicator that shows the location of the current close relative to the high$low range over a set number of periods. !losing levels that are consistently near

5?

the top of the range indicate accumulation 'buying pressure) and those near the bottom of the range indicate distribution 'selling pressure). E##i!tt 2a0$s T%$!r) 7he #lliott Wave 7heory is named after Aalph 1elson #lliott. Inspired by the "ow 7heory and by observations found throughout nature, #lliott concluded that the movement of the stock market could be predicted by observing and identifying a repetitive pattern of waves. In fact, #lliott believed that all of manEs activities, not =ust the stock market, were influenced by these identifiable series of waves. #lliott based part his work on the "ow 7heory, which also defines price movement in terms of waves, but #lliott discovered the fractal nature of market action. 7hus #lliott was able to analy*e markets in greater depth, identifying the specific characteristics of wave patterns and making detailed market predictions based on the patterns he had identified.

D$"i+iti!+ !" E##i!tt 2a0$s In the +;-?s, Aalph 1elson #lliott found that the markets e@hibited certain repeated patterns. Fis primary research was with stock market data for the "ow Gones Industrial Average. 7his research identified patterns or waves that recur in the markets. 8ery simply, in the direction of the trend, e@pect five waves.

5+

7here have been many theories about the origin and the meaning of the patterns that #lliott discovered, including human behavior and harmony in nature. 7hese rules, though, as applied to technical analysis of the markets 'stocks, commodities, futures, etc.), can be very useful regardless of their meaning and origin.

C%art: /&2
E##i!tt 2a0$ Basics H Im.(#s$ Patt$r+s 7he impulse pattern consists of five waves. 7he five waves can be in either direction, up or down. 0ome e@amples are shown to the right and below. 7he first wave is usually a weak rally with only a small percentage of the traders participating. 2nce Wave + 7he first wave is usually a weak rally with only a small percentage of the traders participating. 2nce Wave + is over, they sell the market on Wave ,. 7he sell:off in Wave , is very vicious. Wave , will finally end without making new lows and the market will start to turn around for another rally. 7he Wave

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- rally picks up steam and takes the top of Wave +. As soon as the Wave + high is e@ceeded, the stops are taken out. "epending on the number of stops, gaps are left open. Gaps are a good indication of a Wave - in progress. After taking the stops out, the Wave - rally has caught the attention of traders. 7he ne@t se9uences of events are as follows: 7raders who were initially long from the bottom finally have something to cheer about. 7hey might even decide to add positions. %inally, all the buying fren*y dies downK Wave- comes to a halt. 3rofit taking now begins to set in. 7raders who were long from the lows decide to take profits. 7hey have a good trade and start to protect profits. 7his causes a pullback in the prices that is called Wave .. Wave , was a vicious sell:offK Wave . is an orderly profit:taking decline. While profit:taking is in progress, the ma=ority of traders are still convinced the trend is up. 7hey were either late in getting in on this rally, or they have been on the sideline. 7hey consider this profit:taking decline an e@cellent place to buy in and get even.

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C%art: /&
2n the end of Wave ., more buying sets in and the prices start to rally again. 7he Wave / rally lacks the huge enthusiasm and strength found in the Wave rally. 7he Wave / advance is caused by a small group of traders. Although the prices make a new high above the top of Wave -, the rate of power, or strength, inside the Wave / advance is very small when compared to the Wave advance. %inally, when this lackluster buying interest dies out, the market tops out and enters a new phase.

C%art: /&,
E##i!tt 2a0$ Basics H C!rr$cti0$ Patt$r+s !orrections are very hard to master. (ost #lliott traders make money during an

5.

impulse pattern and then lose it back during the corrective phase. An impulse pattern consists of five waves. With the e@ception of the triangle, corrective patterns consist of - waves. An impulse pattern is always followed by a corrective pattern. !orrective patterns can be grouped into two different categories:

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FIBONACCI SERIES It is almost an understatement to say that &eonardo %ibonacci was the greatest mathematician of the middle Ages. 7he %ibonacci 'pronounced fib:eh:nahX:chee) se9uence of numbers was discovered 'actually rediscovered) by &eonardo %ibonacci da 3isa, a thirteenth century mathematician. We will outline the historical background of this ama*ing man and then discuss more fully the se9uence 'technically it is a se9uence and not a series) of numbers that bears his name. When #lliott wrote 1atureEs &aw, he referred specifically to the %ibonacci se9uence as the mathematical basis for the Wave 3rinciple. It is sufficient to state at this point that the stock market

5/

has a propensity to demonstrate a form that can be aligned with the form present in the %ibonacci se9uence. T%$ Fib!+acci s$E($+c$ In &ibber Abaci, a problem is posed that gives rise to the se9uence of numbers +, +, ,, -, /, 6, +-, ,+, -., //, 6;, +.., and so on to infinity, known today as the %ibonacci se9uence. T%$ G!#'$+ Rati! After the first several numbers in the se9uence, the ratio of any number to the ne@t higher is appro@imately .4+6 to + and to the ne@t lower number appro@imately +.4+6 to +. 7he further along the se9uence, the closer the ratio approaches phi 'denoted f) which is an irrational number, .4+6?-..... etween alternate numbers in the se9uence, the ratio is appro@imately .-6,, whose inverse is ,.4+6. Aefer to %igure -:, for a ratio table interlocking all %ibonacci numbers from + to +...

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C%art: /&/

Gold Price - Selected Currencies Monthly National Currency Unit per Ounce, based on London pm fix

South U$ ate Jan-07 Feb-07 Mar-07 Apr-07 May-07 Jun-07 Jul-07 US! 631.17 664.75 654.90 679.37 666.92 655.49 665.30 "uro 484.91 509.61 495.19 504.75 493.43 488.58 484.82 #en 75,828 80,309 76,970 80,594 80,560 80,401 80,809 Pound 322.25 339.61 336.36 342.85 336.20 330.01 327.10 %frican &and 4,516.94 4,782.36 4,803.86 4,862.95 4,681.88 4,691.59 4,639.37 %ustralian ollar 804.30 852.26 828.20 825.05 808.06 778.17 767.12 Canadian ollar 740.71 779.98 765.86 776.41 730.20 698.04 698.84 'ndian &upee 27,968 29,344 28,858 29,001 27,241 26,736 26,890

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Aug-07 Sep-07 Oc -07 !"#-07 $ec-07 Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oc -08 !"#-08 $ec-08

665.41 712.65 754.60 806.25 803.20 889.60 922.30 968.43 909.70 890.51 889.49 939.77 838.31 829.93 806.62 760.86 822.00

488.46 512.32 530.29 549.38 551.45 604.41 625.29 623.56 577.42 572.28 571.69 596.28 560.00 577.93 606.51 597.31 607.58

77,674 81,988 87,434 89,434 90,202 95,795 98,778 97,649 93,376 92,878 95,092 100,389 91,634 88,483 80,861 73,679 74,934

330.88 353.09 369.04 389.46 397.26 451.61 469.61 483.42 459.08 453.18 452.45 472.70 444.12 461.13 476.83 496.47 553.84

4,807.78 5,063.65 5,102.92 5,414.09 5,485.9 7 6,282.0 9 7,066.04 7,724.55 7,067.06 6,785.31 7,063.11 7,156.60 6,421.20 6,683.70 7,823.33 7,700.35 8,150.03

803.65 841.92 839.34 900.72 922.92 1,011.54 1,010.08 1,047.56 977.81 937.68 935.25 976.59 950.23264 1014.1648 1177.1619 1158.0667 1222.1468

704.23 731.26 736.17 779.25 806.84 900.09 921.71 968.88 923.25 889.22 903.85 951.93 882.92 877.91 949.00 927.71 1014.57

27,162 28,736 29,824 31,812 31,694 34,862 36,671 39,066 36,432 37,583 38,111 40,263 36,051 37,867 39,183 37,326 39,985

Tab#$: /&/ ANNUAL A1ERAGE GOLD PRICES:

Annual Average Gold 3rices H0> >,5;.+ ,??? ,??+ ,??, ,??,??. ,??/ ? >,5,.4 5 >-?;.4 4 >-4,.; + >.?;.+ 5 >..... 5 Y Y+6..?; Y+6;.-4 Y,?4.,5 Y,,,.,? Y,,-.-4 Y,...64

56

>4?-.; ,??4 ,??5 , >4;/.; Y-,5.4? Y-.5.+,

Tab#$: /&8

5;

6?