GOLD (A NEW CONTRACT PROPOSAL)

Gold is not merely a commodity, looking back at the history of gold it has its unique phase world wide, in ancient time it was used as a currency, it is one of the highly liquid asset. When it comes to portfolio managers they like to have it in there portfolio because, no specific statistical evidence to come up a relation between Gold and GDP, inflation and interest rate. It is always believe a worthy investment…
When we talk of gold traded on exchanges it is always matter of standardization of gold, in Indian context it should be 995.9fineness while outside India it is traded in 999.9 fineness of purity. Purity of gold in India is measured in the term of karat which means 24 karat of gold is purest and have 1000 fineness, i.e. it has all its particle of gold no other metal is involved there or no adulteration. But gold is very fragile metal so its use in very pure form is never easy, almost impossible. India is largest consumer of gold (800 tones annually). Maximum consumption of it is in the form of jewelries, India has already 22000 to 24000 tones of gold in the form of jewelries, but problem with jewelries is these are not in the pure form (i.e.1000 fineness). Jewelries purity generally lies from 18 karat (i.e. 750fineness ) to 24 karat(1000 fineness).
So our main motive behind the whole story to is to bring these jewelries on the exchange to trade, which will serve us two benefits ,first it will facilitate liquidity ,second it will achieve the actual motive of physical delivery in the form of jewelries.
Our whole idea begins with the standardization of these jewelries, how to standardized them? We have taken two things in consideration, first is purity of gold (jewelries) ,second is weight of gold. Now next unit of trade would be VPU (value per unit) unit. Constraints are 1- purity would not be less than 750fineness.(i.e. 18 karat), 2- weight would not be less than 7.5 gram. (This is because in India general deals happen in 10.81 gram i.e. one toula)
Now question is, what is VPU?
So VPU is equals to purity of gold multiplying with weight of gold. Suppose purity of jewelries is 750fineness and its weight is 10 gram. Than 1 VPU=750*10=7500. And its price once can be derive from the pure gold. For example price of pure gold of 1000 fineness of 10 gram is Rs 20000/ than price of 750 fineness of gold of 10 gram would be (20000/1000)*750=Rs 15000/. In the same way we can also find out the price of a pure gold of 1000 fineness but its weight is 7.5gram. Then its price would be (20000/10)*7.5=Rs15000/. Hence in both the cases the price 1 VPU is same while in one situation there was change in fineness while in other situation there was accordingly change in weight. So moral of the story is, if someone compromising in fineness of gold than he has to adjust it in weight of gold or vice-versa. Now if any body is having a gold of fineness in between 750 to 1000 of any weight minimum 7.5gram if gold is of 1000 fineness and 10 gram if gold is of 750 fineness. Accordingly we can calculate the VPU of gold.
Now we have some basic calculations of VPU……


As we know investor can have any fractional amount of gold and fineness of that amount of gold can lie anywhere in between 750 to 1000, hence to find out the number of VPUs, we simply multiply weight of gold with its respective fineness. Now our 1 VPU is equals to 7500(i.e. multiplication of 10 gm of weight with 750 fineness OR it can be multiplication of 7.5 gm of weight of gold with 1000 fineness OR may be the product of some other unit of weight with fineness).
Accordingly if we have any amount of gold, with any fineness, than we can convert it into standardized unit i.e. VPU. Now its easy to trade on exchange with this standardize unit. But some problems are still there, after calculations we have find out some VPUs in fractions? Than we can have one amendment in our contract, that if any body have fractional unit with him than he has to trade in terms of absolute nearby unit and at the time of settlement he will get premium or discount as per trading terms.
For example I have 7.45 (or 7.95) VPUs with me than I can trade with 7 (or 8) VPUs and accordingly I will get premium (or discount) of .45 VPU (or .05 VPU) unit at the time of settlement.

Now onwards our second proposal is, we need to trade with gold in dematerialized form. How that should be?
To make our reach to general people we have to constitute different exchange approved centre in different cities and towns. Than these authorized centers will provide a card with Unique Identification Number, and that record also should be maintain with exchange as well as with broker, hence just by putting that number in computer broker can know the status of investor i.e. how many VPUs he has in his account and on how many units he want to trade.
Hence simply a general person by putting his gold to nearby Exchange Authorized Centre can trade on exchange, hence this process will increase liquidity as well as a person will be able to get a right price of his gold. Later on this gold can be send to refineries, where it can be converted in to the pure gold if required.70 % of gold reserve (in the form of jewelery) lies with rural India ,hence we need to make a deep penetration to bring that gold on exchange and to being a price maker not a price seeker.
Proposed by-
Bhagwan Singh
Indian Institute of Capital Markets, Vashi, Navi Mumbai.