BULLION MARKET

CHAPTER 1: Bullion Market: INTRODUCTION

1.1Introduction to Bullion Market

A bullion market is a place where precious metals such as gold, silver, platinum and palladium
can be bought and sold. Price depends on supply and demand. These two factors drive the
underlying price which is then adjusted upwards or downwards depending on the form of the
precious metal. Modern bullion markets allow small, individual investors all the way up large
institutions to easily buy and sell precious metals.

Bullion is the most widely traded form of the precious metals. Bullion refers to precious metal
in the tradable form of bars, wafers, ingots, and coins. The minimum purity of the precious
metal in bullion is 0.995.

Bullion takes the shape of coins, bars and ingots. Prices are based primarily on the precious
metal weight and content. Bullion coins are minted by a country, and are legal tender in that
country (although unlikely to actually be used as currency). South Africa was the first country to
mint bullion coins, with the Krugerrand. Bullion coins tend to be quite rare, many with mintages
of less than 10,000. They have been minted since the late 1960s by a variety of countries,
although most have been minted since 1980. They are designed to be bought and sold based on
their metal content, not their face value.

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2
 BULLION

GOLD SILVER

GOLD REGULAR GOLD MINI SILVER REGULAR

LOT SIZE-100
LOT SIZE-1 KG LOT SIZE-30 KGS
GRAMS

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1.2 Purpose

Bullion markets exist for two types of customers. The first type of customer is the producer of
goods that require precious metals as inputs. These customers are jewelry
and electronics manufacturers as well as many other companies in industries ranging from
medicine to chemicals to glass. These companies are the main drivers of demand and the reason
precious metals have any value. These companies participate in the bullion market so they can
ensure a steady supply of precious metals to their manufacturing facilities.

The second type of customer is the speculator. These are people who buy precious metals
because they think it will provide a hedge against inflation or that the price of the precious metal
will increase because demand will exceed supply. While the first type of customer wants to take
actual delivery of the precious metal, the speculator generally does not, which is why investment
firms created precious metal derivative investments.

1.3 Physical Bullion

Physical bullion represents the oldest type of bullion market. Ever since precious metals became
valued, a market has existed for people to buy and sell physical bullion. Many individuals today
buy gold coins or bars and keep them tucked away in their homes or safe deposit boxes as a
hedge against inflation or the devaluing of our currency.

1.4 INVESTING

Bullion is the most affordable way to own precious metal. Bullion can reduce the volatility of a
portfolio while adding significant profitability. Bullion survives and actually thrives on
inflation. When economies falter and currencies become devalued, bullion tends to retain its
value. The disadvantages of bullion can include short term fluctuations and a loss of privacy
since forms are required upon sale. There is also a remote possibility for the government
confiscation of gold bullion although this happened only once before in 1933.

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1.5 Costs
Participating in bullion markets has its costs. Manufacturers enjoy economies of scale that allow
them to defray the cost of purchasing and transporting the physical bullion to their warehouse or
factory. Manufacturers are also able to pass on the cost of transportation to their customers
through the products sold.
Investors or speculators on the other hand have to contend with various buying and selling costs
depending on the type of investment they choose. If they choose to receive physical bullion into
their own possession they have the cost of transportation and security that adds a significant
premium to their price and requires a significant discount when they sell.
If an investor uses a firm that stores it for them then he will have to pay both a buying or selling
commission plus an annual storage fee that is usually a percentage of the value of the bullion
stored. The cheapest way for an individual investor to participate in the bullion market is through
exchange-traded funds.

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CHAPTER 2 : GOLD : HISTORY AND IMPORTANCE

2.1 History of gold

A child finds a shiny rock in a creek, thousands of years ago, and the human race is introduced to
gold for the first time. Gold was first discovered as shining, yellow nuggets. "Gold is where you
find it," so the saying goes, and gold was first discovered in its natural state, in streams all over
the world. No doubt it was the first metal known to early hominids.

Gold has a history of more than 7000 years in India, which can be find in religious book of
Hindu, where it is considered as a metal of immense value. But looking at the history of world,
gold is found at the Egypt at 2000B.C, 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.

Gold became a part of every human culture. Its brilliance, natural beauty, and luster, and its great
malleability and resistance to tarnish made it enjoyable to work and play with.

Because gold is dispersed widely throughout the geologic world, its discovery occurred to many
different groups in many different locales. And nearly everyone who found it was impressed
with it, and so was the developing culture in which they lived.
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Gold was the first metal widely known to our species. When thinking about the historical
progress of technology, we consider the development of iron and copper-working as the greatest
contributions to our species' economic and cultural progress - but gold came first.

Gold is the easiest of the metals to work. It occurs in a virtually pure and workable state, whereas
most other metals tend to be found in ore-bodies that pose some difficulty in smelting. Gold's
early uses were no doubt ornamental, and its brilliance and permanence (it neither corrodes nor
tarnishes) linked it to deities and royalty in early civilizations.

Gold has always been powerful stuff. The earliest history of human interaction with gold is long
lost to us, but its association with the gods, with immortality, and with wealth itself are common
to many cultures throughout the world.

Early civilizations equated gold with gods and rulers, and gold was sought in their name and
dedicated to their glorification. Humans almost intuitively place a high value on gold, equating it
with power, beauty, and the cultural elite. And since gold is widely distributed all over the globe,
we find this same thinking about gold throughout ancient and modern civilizations everywhere.
Gold, beauty, and power have always gone together. Gold in ancient times was made into shrines
and idols ("the Golden Calf"), plates, cups, vases and vessels of all kinds, and of course, jewelry
for personal adornment.

The "Gold of Troy" treasure hoard excavated in Turkey and dating to the era 2450 -2600 B.C.,
show the range of gold-work from delicate jewelry to a gold gravy boat weighing a full troy
pound. This was a time when gold was highly valued, but had not yet become money itself.
Rather, it was owned by the powerful and well-connected, or made into objects of worship, or
used to decorate sacred locations.

Gold has always had value to humans, even before it was money. This is demonstrated by the
extraordinary efforts made to obtain it. Prospecting for gold was a worldwide effort going back
thousands of years, even before the first money in the form of gold coins appeared about 700
B.C.
In the quest for gold by the Phoenicians, Egyptians, Indians, Hittites, Chinese, and others,
prisoners of war were sent to work the mines, as were slaves and criminals. And this happened
during a time when gold had no value as 'money,' but was just considered a desirable commodity
in and of itself.

The 'value' of gold was accepted all over the world. Today, as in ancient times, the intrinsic
appeal of gold itself has that universal appeal to humans. But how did gold come to be a
commodity, a measurable unit of value?
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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 extensive history of maintaining its value. It has in gained
ground in relation to currencies owing to inflation. However, gold does become particularly
desirable in times of extremely weak confidence and during hyperinflation because gold
maintains its value even as fiat money becomes worthless. When the value of currency
depreciate.
But above all comment, it has a special role in India and in certain countries, gold Jewelry 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 (18.7% of world total demand in
2004) and importer of gold due to its low production, which is negligible, and untapped gold
reserves. This is due to lack of new technology in finding gold reserves and low interest shown
by government in financing, encouraging for exploration programs in gold mines.
Till know the total gold is extracted from the mines is about $1 trillion dollar, which is
accumulated in physical form is enough to built Eiffel tower.

Annual gold production worldwide is about US$35 billion and by far the one of the largest-
trading world commodity. Worldwide, gold mines produce about 2,464 tonnes in the year 2004
from total supply of 3328 tonnes but unable to meet identifiable demand of 3497 tonnes. Gold is
mined in more than 118 countries around the world, with the large number of development
projects in these countries expected to keep production growing well into the next century.
Currently, South Africa is the largest gold producing country, followed by the United States,
Australia, Canada, Indonesia, Russia and others, some of this countries also account for highest
gold reserves from potential 50,000 tonnes of world-wide reserves.

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2.2 Uses of gold

Gold has been prized by people since the earliest times for making statues and icons and also for
jewelry to adorn their bodies. Intricately sculptured art objects and adornment jewelry have been
uncovered in the Sumerian royal Tombs in southern Iraq and the tombs of Egyptian kings.
Significant buildings and religious temples and statues have been covered with thinly beaten
sheets of gold. Due to its rarity, gold has long been considered a symbol of the wealth and power
of its possessor.

In 2001, it was estimated that 2870 tons of gold were produced worldwide. About 80 percent of
that gold production was used to make jewelry, the majority of which was sold in India, Europe
and the United States of America. Gold jewelry is universally popular, loved for its lustrous
yellow color and untarnishing character. In many Asian countries, such as India, Thailand, and
China, gold is important to religious ceremonies and social occasions, such as the Chinese New
Year and Hindu marriages in India.
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2.3 GOLD THROUGH THE AGES
The history of gold begins in remote antiquity. But without hard archaeological evidence to
pinpoint the time and place of man's first happy encounter with the yellow metal, we can only
conjecture about those persons, who at various places and at different times first came upon
native gold. Experts of fossil study have observed that bits of natural gold were found in Spanish
caves used by the Palelithic Man about 40,000 B.C. Consequently, it is not surprising that
historical sources cannot agree on the precise date that gold was first used. One states that gold's
recorded discovery occurred circa 6000 B.C. Another mentions that the pharaohs and temple
priests used the relic metal for adornment in ancient Egypt circa 3000 B.C. However, it is
curious to note that the early Egyptian's medium of exchange was not gold but barley. The first
use of gold as money in 700 B.C. is claimed by the citizens of the Kingdom of Lydia (western
Turkey). Surely, you remember the kingdom of the famous fortune seeking King Croesus - circa
550 B.C.

2.4 Major gold producing countries

 South Africa
 United States
 Australia
 China
 Canada
 Russia
 Indonesia
 Peru
 Uzbekistan
 Papua New Guinea
 Ghana
 Brazil
 Chile

The bullion reserve of a country is the indicator of the amount of wealth a country possesses.
Bullion is defined as a bulk quantity of precious metals consisting of gold, silver and others that
can be assessed by weight and cast as a lump. Bullion is valued by its purity and mass rather than
its face value which is applicable in the case of money. India Bullion Market is a recognizable
index that highlights the economic growth of the nation.
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2.5 Different Ways of Owning Gold
One of the main differences between investing in gold several hundred years ago and investing
in gold today is that there are many more options to participating in the intrinsic qualities that
gold offers. Today, investors can invest in gold by buying:

 Gold Futures

 Gold Coins

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 Gold Companies

 Gold ETFs

 Gold Mutual Funds

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 Gold Bullion

 Gold jewelry

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 CHAPTER 3 : ADVANTAGES OF INVESTING IN GOLD

3.1 DIVERSIFICATION

 In any asset portfolio, it rarely makes sense to have all your eggs in one basket.
Obviously the price of gold can fluctuate - but so too do the exchange 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. These 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 banks‟ monetary policies. The price of gold therefore behaves in a completely
different way from the prices of currencies or the exchange rates between currencies.

3.2 ECONOMIC SECURITY

 Gold is a unique asset in that it is no one else's liability. Its status cannot therefore be
undermined by inflation in a reserve currency country. Nor 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 form part of central banks' reserves. In contrast, paper
currencies always lose value in the long run and often in the short term as well.

3.3 PHYSICAL SECURITY

 Countries have in the past imposed exchange controls or, at the worst, total asset freezes.
Reserves held in the form of foreign securities are vulnerable to such measures. Where

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 appropriately located, gold is much less vulnerable. Reserves are for using when you
need to. Total and incontrovertible liquidity is therefore essential. Gold provides this.

3.4 UNEXPECTED NEEDS

 If there is one thing of which we can be certain, it is that today‟s status quo will not last
forever. Economic developments both at home and in the rest of the world can upset
countries‟ plans, while global shocks can affect the whole international monetary system.
 Owning 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. Such events might
include war, an unexpected surge in inflation, a generalised crisis leading to repudiation
of foreign debts by major sovereign borrowers, a regression to a world of currency or
trading blocs or the international isolation of a country.
 In emergencies countries may need liquid resources. Gold is liquid and is universally
acceptable as a means of payment. It can also serve as collateral for borrowing.

3.5 CONFIDENCE

 The public takes confidence from knowing that its Government holds gold - an
indestructible asset and one not prone to the inflationary worries overhanging paper
money. Some countries give explicit recognition to its support for the domestic currency.
And rating agencies will take comfort from the presence of gold in a country's reserves.
 The IMF's Executive Board, representing the world's governments, has recognized that
the Fund's own holdings of gold give a "fundamental strength" to its balance sheet. The
same applies to gold held on the balance sheet of a central bank.

3.6 INCOME

 Gold is sometimes described as a non income-earning asset. This is untrue. There is a

gold lending market and gold can also be traded to generate profits. There may be an
"opportunity cost" of holding gold but, in a world of low interest rates, this is less than is
often thought. The other advantages of gold may well offset any such costs.

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3.7 INSURANCE

 The 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. Such an event might be war, an unexpected surge
of inflation, a generalized debt crisis involving the repudiation of foreign debts by major
sovereign borrowers, a regression to a world of currency and trading blocs, or the
international isolation of a country.

Conclusion
Gold should be an important part of a diversified investment portfolio because its price increases
in response to events that cause the value of paper investments, such as stocks and bonds, to
decline. Although the price of gold can be volatile in the short term, gold has always maintained
its value over the long term. Through the years, it has served as a hedge against inflation and the
erosion of major currencies, and thus is an investment well worth considering.

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CHAPTER 4 :DISADVANTAGES OF INVESTING IN GOLD

4.1 Gold's Unique Demand/Supply Imbalance

The biggest factor influencing gold's price is the staggering amount of it held
by central banks around the world. This is a legacy from the days of the gold
standard, which existed in one form or another between 1821 and 1971. (For
more on this history, see The Gold Standard Revisited.) During this period, U.S.
and European central banks hoarded massive amounts of gold (see graph below).

According to the World Gold Council, in 2003 this stockpile consisting of 33,000
metric tons accounted for nearly 25% of all the gold ever mined. In that same
year, a total of only 3,200 metric tons of gold was supplied to the marketplace
through mining and scrap - this means the central banks' stockpile of 33,000 tons
could overwhelm the market if it were sold. In other words, there is enough gold
in the vaults of central banks to satisfy world demand for 10 years without
another ounce being mined! What other commodity has this kind of
demand/supply imbalance?

Furthermore, without a gold standard, this precious metal has limited strategic
use for these central banks. Because gold does not earn any investment interest,
some central banks - like that of Canada during 1980-2003 - have already
eliminated their gold stock. The potential for gold supply to dwarf its demand
poses a hindrance to the metal's potential return well into the future.

4.2 Taxed as a Collectible

An investment in an ETF that tracks gold prices does not consist of actual gold ownership on the
part of the shareholders. An investor cannot make a claim on any of the gold shares
and under IRS law, as of 2008, their ownership in the ETF represents an ownership in a
"collectible". Despite the fact that the fund's managers do not make investments in gold for their
numismatic value, nor do they seek out collectible coins, the shareholder's investment is treated
as a collectible. This makes long-term investing in gold ETFs (for one year or longer) subject to
a relatively large capital gains tax (maximum rate of 28%, rather than the 15% rate that is
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applicable to most other long-term capital gains, according to the GLD prospectus). In order to
avoid this tax implication, investors often exit their positions before a year, which diminishes
their ability to profit from any multiyear gains that may occur in gold

4.3 Market Risk

Exchange-traded funds that track gold are also exposed to a hosts of company risks that have
nothing to do with the actual fluctuation in gold's value. In the SPDR Gold Trust prospectus, the
trust can liquidate if there is less than $350 million dollars in the trust, if the Net Asset
Value (NAV) drops below $50 million, or by agreement of shareholders owning at least 66.6%
of all outstanding shares. These actions can be taken regardless of whether gold prices are strong
or weak.

4.4 Fees, Fees and More Fees

Finally, funds such as GLD are inherently diminishing investments. Because the gold itself
produces no income and there are still expenses that must be covered, the ETF's management is
allowed to sell gold to cover these expenses. Each sale of gold by the Trust is a taxable event to
shareholders. That means that a fund like GLD's 0.40% management fees along with
any sponsor or marketing fees must be paid by liquidating assets. This diminishes the overall
underlying assets per share, which, in turn, can leave investors with a representative share value
of less than one-tenth of an ounce of gold over time. This can lead to discrepancies in the actual
value of the underlying gold asset and the listed value of the ETF.

Given these drawbacks, many investors turn their attention to trading gold futures

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 CHAPTER 5 : GOLD FUTURES MARKET

The physical bullion markets repel private bullion investment for reasons of cost, transparency
and convenience. Because of this, and the more short term requirements of gold speculators,
there is a thriving gold futures market. Many speculators' requirements can be met by a
standardised and transferable quarterly futures contract

5.1 GOLD FUTURES TRADING ADVANTAGES

The main advantages of this method of trading are:

 For traders who don't want custody it eliminates the hassles and costs of settlement and
storage. This significantly reduces costs.
 Investors need much less money to participate.
 Traders can short sell. Provided they buy an equivalent contract back before the contract
expires they will have been able to profit from a falling price. This can only be done on
spot markets with great difficulty, because it requires the seller to borrow gold, which is
next to impossible for retail investors.
 All participants trade exactly the same notional rights - i.e. those defined on the standard
contract, so the market grows deeper and more liquid in the standard futures contract
than in spot bullion where different qualities of bullion exist each of which has different
prices.
 Greater liquidity provides a reliable real-time price, something which is absolutely not
available in the OTC bullion market.

These advantages mean turnover of gold futures contracts currently exceeds actual bullion
production by many times. It is not a figure which is easy to estimate, but COMEX turnover on
its own exceeds gold production about twenty-fold.

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5.2 GOLD FUTURES TRADING RISKS

Apart from the obvious risk of prices going the wrong way there is one key risk in futures
trading, which is the risk of default during the period from trade to future settlement date -
leaving someone entitled to a profit but unable to collect it.

This problem is mitigated by "margin". Margin is money futures investors deposit at the demand
of the clearer who seeks to prevent the risk of default from growing too big. It is calculated by
comparing the original deal to the current market value of what was traded. The process is called
marking-to-market and it results in a margin call to the person who has speculated badly, while a
margin surplus grows at the account of the successful trader. The margin is collected and
managed by a clearer on behalf of the exchange.

Margin deposited only needs to cover the likely potential loss on the trade which could occur in
the time it would take for the clearer to collect more margin. So, for example, on a $400 gold
price it might be thought that $20 was the largest likely intra-day move, and that margin could be
collected before the next trading day. So to keep off risk the clearer would require the investor to
put up margin of 20/400, i.e. about 5% of the contracted deal size.

In practice the margin calculation will vary from exchange to exchange and from clearer to
clearer. It is ultimately up to each firm to decide how it implements a margin policy and it's
always a compromise between risk and the attractiveness of the product to the client. At any rate,
the result is that speculators only have to pay a fraction of the value of the contract‟s amount - as
a variable down-payment. Provided they close their position before expiry they will never have
to put up the rest of the money.

This means that the aggressive speculator can 'gear-up' his position by trading many times more
gold than he could ever afford to pay for, and this makes futures very popular with people who
have an appetite for bigger risks.

Usually investors only have to deposit about 2% of the full value of gold they want to buy, but
their broker will retain the right to close them out without instruction if the market moves
viciously against them. Meanwhile on a daily basis investors must quickly top up margin if the
market has moved a little against them.
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5.3 VOLATILITY OF GOLD FUTURES MARKET

When a number of big open positions want to close out near to the trading deadline of a quarterly
futures contract the prices frequently can start to behave irrationally and with wild gyrations
down and up.

This is inevitable where 99 out of every 100 investors want to trade before the end of the day - to
close a position which if it is not closed will end up in them having to take delivery of metal and
pay 50 times as much as the 2% margin as they have deposited.

The volume is usually so large that the tail of the futures market wags the dog of the spot market,
where volumes are much smaller. The market becomes a high stakes game of "chicken" and it is
far from unusual to see the price maintained by a big player at a particular rate, only to swerve
violently immediately after the contract terms expire. It can make for some frightening action for
the uninitiated - and they usually lose out.

5.4 FUTURES BUILT-IN PRICE DIFFERENTIAL

It is important to understand the implicit financing cost in a futures price. A dollar denominated
gold futures contract will almost always be priced at a different level to spot gold in dollars, but
the difference does not represent either a bargain or a rip-off. It actually reflects the different
costs of borrowing dollars and gold, from the date of buying to the date of future settlement.

If gold is cheaper to borrow than dollars - which it usually is - then the spot price will be below
the future. If gold is more expensive to borrow then gold futures will be at a discount to the spot.

The relationship is a simple mathematical one which can be understood as follows: "My future
purchase of gold for dollars delays me having to pay a known quantity of dollars for a known
quantity of gold. I can therefore deposit my dollars until settlement time, but I cannot deposit the
gold - which I haven't received yet. Since dollars in the period will earn me 1%, and gold will
only earn the seller who's holding on to it for me 0.25%, I should expect to pay over the spot
price by the difference 0.75%. If I didn't pay this extra the seller would just sell his gold for

21
dollars now, and deposit the dollars himself, keeping an extra 0.75% overall." This 0.75%
"contango" in the price will reduce day by day as the futures contract approaches its expiry date.

This means that when you buy a future you are paying for the cost of financing the entire
purchase. In addition, although much less significant, because almost all brokers take the margin
you put down into their own account, you are - in effect - paying the financing cost twice on this
fraction of the contracted sum.

5.5 RISK OF SYSTEMATIC FAILURE

Not often considered is that gold is bought as the ultimate defensive investment. As a gold buyer
there should be an intention to make large profits from a global economic shock which is
disastrous to many other people. Indeed many gold investors fear financial meltdown occurring
as a result of the over-extended global credit base - a significant part of which is derivatives.

The paradox in investing in gold futures is that a future is itself a 'derivative' instrument
constructed on credit. There are many speculators involved in the commodities market and any
rapid movement in the gold price is likely to be reflecting financial carnage somewhere. Both the
clearer and the exchange could find themselves unable to collect vital margin on open positions
of all kinds of commodities, so a gold investor might make enormous paper profits which could
not be paid if busted participants defaulted in such numbers that individual clearers and even the
exchange itself were unable to make good the losses and themselves went bust.

Imagine successfully buying gold in front of a major financial crisis - and for all the right reasons
- only to fail to collect a profit because the settlement system was broke!

This sounds like panic-mongering, but it is an important commercial consideration. It is

inevitable that the commodity exchange which comes to dominate through good times and
healthy markets will be the one which offers the most competitive margin [credit] terms to
brokers. To be attractive the brokers must pass on this generosity to their customers - i.e. by
extending generous trading multiples over deposited margin. So the level of credit extended in a
futures market will tend to the maximum risk which has been safe in the recent past, and any
exchange which sets itself up more cautiously will wither and die. But in finance the recent past
is not always a good guide to the future.
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5.6 THE STOP-LOSS

Many futures broking firms offer investors a stop loss facility. It might come in a guaranteed
form or on a 'best endeavours' basis without the guarantee. The idea is to attempt to limit the
damage of a trading position which is going bad.

The theory of a stop loss seems reasonable, but the practice it can be painful. The problem is that
just as trading in this way can prevent a big loss it can also make the investor susceptible to large
numbers of smaller and unnecessary losses which are even more damaging in the long term.

On a quiet day market professionals will start to move their prices just to create a little action. It
works. The trader marks his price rapidly lower, for no good reason. If there are any stop losses
out there this forces a broker to react to the moving price by closing off his investor's position
under a stop loss agreement. In other words the trader's markdown can encourage a seller. The
opportunist trader therefore picks up stop loss stock for a cheap price and immediately marks the
price up to try and 'touch off' another stop loss on the buy side as well. If it works well he can
simulate volatility on an otherwise dull day, and panic the stop losses out of the market on both
sides, netting a tidy profit for himself.

It should be noted that the broker gets commission too, and what's more the broker benefits by
being able to control his risk better if he can shut down customers' problem positions
unilaterally. Brokers in general would prefer to stop loss than to be open on risk for a margin call
for 24 hours. Only the investor loses, and by the time he knows about his 'stopped loss' the
market - as often as not - is back to the safe middle ground and his money is gone.

The stop-loss can even more dangerous in an integrated house - where a broker can benefit
himself and his in-house dealer by providing information about levels where stop-losses could be
triggered. This is not to say anyone is doing it, but it would probably be the first time in history
that such a conflict of interest did not attract a couple of unscrupulous individuals somewhere
within the industry.

Investors can prevent being stopped out by resisting the temptation to have too big a position just
because the futures market lets them. If the investment amount is lower and plenty of surplus
margin cover is down, a stop loss is unnecessary and the broker's pressure to enter a stop loss
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order can be resisted. A conservative investment strategy with smaller positions achieves the
goal of avoiding catastrophic losses by not keeping all eggs in one basket. It also avoids being
steadily stripped by stop loss executions. On the flip side you cannot get rich quickly with a
conservative investment strategy (but then the chances of that were pretty small anyway).

5.7 THE ROLL-OVER

The structure of the futures market requires that each quarter a contract is closed and the position
re-opened again for the next future period. As a futures contract ends an investor who wants to
keep the position open must re-contract in the new period by 'rolling-over'. This 'roll-over' has a
marked psychological effect on inexperienced investors.

Having taken the relatively difficult step of investing some of their savings in gold futures they
are required to make repeated decisions to spend money, closing the old contract and re-opening
the new just to keep a long gold position open. With futures there is no „do nothing‟ option, like
there is with a bullion investment.

The harsh fact of life is that if investors are right about gold long term and wrong short term
many of them who participate via futures will be expelled at rollover date if they have lost
money in the previous quarter. Investors who fail the psychological test of roll-over will leave
their position, rather disappointed not to have made money as quickly as they had hoped, and
many will never return to benefit from the long term correctness of their view of gold.

So before deciding if futures are suitable for them investors should seriously consider whether or
not they are psychologically equipped to re-buy again and again after disappointment in the
previous quarter. Patient but convinced gold bulls who don't like losing money may be better
advised to spare themselves this psychological test and buy physical.

24
 CHAPTER 6 : GOLD EXCHANGE TRADED FUND ( ETF)

A Gold EFT is an exchange traded fund with gold being the principle and only commodity being
traded. When you "buy gold" via a GOLD ETF it is very different to the general practice to buy
and sell gold which most people are familiar with.
Exchange traded funds (ETFs)were first introduced on the Toronto, Canada, Stock Exchange
around the early '90s. They were then introduced in to the US and other markets during the 90s.

A simplified definition would be: An exchange traded fund has funds and stocks in one product
and trade is made on the particular fund. Prior to ETFs, stocks and funds, were traditionally kept
separate to reflect liquidity issues.

The purpose of an ETF is to be able to invest in the growth of an industry or even commodity
that was not easily available to the market prior to ETFs.

6.1 GOLD ETF AN EMERGING INVESTMENT OPTION

For India investment in Gold is not a new concept. Using the gold to hedge the future risk is our
centuries old practice. With the change in time the form of investment in gold has also changed,
and one of such forms is GOLD ETF. An exchange-traded fund (or ETF) is an investment fund
traded on stock exchanges, like stocks. An ETF holds assets such as stocks or bonds and trades at
approximately the same price as the net asset value of its underlying assets over the course of the
trading day. ETFs may be attractive investments because of their low costs, tax efficiency, and
stock-like features.

Investment in metals for hedging and speculation is a common practice. Among all the metals
gold is recognized as the most precious one. Due to the precious nature of gold and the
characteristic of non deterioration investors among the world have attracted towards this fantastic
form of investment. Like other commodities the price of gold is also driven by its demand and
supply. Thus investment in physical gold cannot be immune from the cost, and storing cost is
one of such costs. The storing cost associated with physical gold can be nullified by investing in
Gold ETF.

The concept of gold ETF was first proposed by Benchmark Asset Management Company Private
Limited. It is a Mumbai based mutual fund house. In May 2002 Benchmark asset management

25
company private limited filed a proposal with the SEBI, but it did not receive the approval. After
Ten months in March 2003 the gold exchange trade fund was launched on the Australian stock
exchange, under Gold Bullion securities and recognized as the pioneer gold ETF. Later, on 19
March 2007 Benchmark asset management company private limited launched Gold Bees on
National stock exchange of India. Other gold ETFs available on National stock exchange of
India are Kotak gold, Goldshare, Relgold, Quantum gold and Sbi gets.

Investment in gold ETF can be a good long term investment as it remains high against inflation.
As per the data from Association of mutual funds, the new inflow into gold in 2009-10 touched
Rs. 804 crore as against Rs. 600 crore in equities. At the time of global depression and economic
slow down, gold can be a secure investment option. Similarly the benefit of portfolio
diversification can be enhanced by keeping gold in the portfolio.

During last Two years, we witnessed that all the asset classes have to failed to perform, even in
such a situation gold performed well. Gold can be a strong hedge against dollar and inflation.
From taxation point of view gold ETF is taxed as per debt mutual fund taxation rules. Similarly
investors investing in gold ETF are not liable to pay wealth tax. Thus an investor can ensure tax
benefit by investing in gold etf.

While choosing the gold etf, the investor should consider and compare the expense ratio of all
the existing gold etfs and choose one with lower expense. Similarly the liquidity test is equally
important for this fund having good volume be selected. The average volume of different gold
etfs on 19 April 2010 is provided hereunder.

26
6.2 Returns

The 35 per cent return that gold has delivered in the last one year and 170 per cent absolute
return in the last five years is not par for the course. In the period 1970-1982, gold prices had a
compounded annual growth rate (CAGR) of around 21 per cent while inflation grew by 14.1 per
cent over the same period. But in the following 23 years, inflation grew by 7.6 per cent while
gold prices grew by 7.78 per cent.

Over the long term the realistic returns from gold would just beat inflation. Factor in entry loads
(a high 2.5 per cent for UTI-Gold) and annual fund management costs of 1 per cent or more, and
the returns are not appealing, though the costs are expected to come down in the long run.

However, in the short and medium term investment in gold can be very rewarding considering
that the prices have come off the highs quite a bit and the indicators all point to a revival in the
price rally.

27
Further, global demand for gold is 1,000 tonnes more than supply. With no new mining capacity
coming through, most of the gold is being recycled. Inflationary pressures in the world economy
are positive drivers of gold prices. The central banks of Russia, China and West Asian countries
are giving strong buying support to gold prices.

Gold prices could also go up due to demand from gold ETFs, as they did in the London Stock
Exchange in 2004. Investing in gold requires constant evaluation of international developments
especially of crude oil prices, unfavourable geopolitical developments and the strength of the US
dollar.

Gold ETFs are passively managed funds and, hence, not geared to exploit positive or negative
trends. However, the investor can vary portfolio allocation to gold ETFs to take advantage of
these trends.

28
 CHAPTER 7 : GOLD STANDARD – RISE AND FALL

7.1 The Rise of the Gold Standard

The gold standard is a monetary system in which paper money is freely convertible into a fixed
amount of gold. In other words, in such a monetary system gold backs the value of money.
Between 1696 and 1812, the development and formalization of the gold standard began as the
introduction of paper money posed some problems.
In 1797, due to too much credit being created with paper money, the Restriction Bill in England
suspended the conversion of notes into gold. Also, constant supply imbalances between the gold
and silver created tremendous stress to England's economy. A gold standard was needed to instill
the necessary controls on money.
By 1821, England became the first country to officially adopt a gold standard. The century's
dramatic increase in global trade and production brought large discoveries of gold, which helped
the gold standard remain intact well into the next century. As all trade imbalances between
nations were settled with gold, governments had strong incentive to stockpile gold for more
difficult times. Those stockpiles still exist today.

The international gold standard emerged in 1871 following the adoption of it by Germany. By
1900, the majority of the developed nations were linked to the gold standard. Ironically, the U.S.
was one of the last countries to join. (A strong silver lobby prevented gold from being the sole
monetary standard within the U.S. throughout the 19th century.)

From 1871 to 1914, the gold standard was at its pinnacle. During this period near-ideal political
conditions existed in the world. Governments worked very well together to make the system
work, but this all changed forever with the outbreak of the Great War in 1914.

7.2 The Fall of the Gold Standard

With the Great War, political alliances changed, international indebtedness increased and
government finances deteriorated. While the gold standard was not suspended, it was in limbo
during the war, demonstrating its inability to hold through both good and bad times. This created
a lack of confidence in the gold standard that only exacerbated economic difficulties. It became
increasingly apparent that the world needed something more flexible on which to base its global
economy.

At the same time, a desire to return to the idyllic years of the gold standard remained strong
among nations. As the gold supply continued to fall behind the growth of the global economy,
the British pound sterling and U.S. dollar became the global reserve currencies. Smaller
countries began holding more of these currencies instead of gold. The result was an
accentuated consolidation of gold into the hands of a few large nations.
The stock market crash of 1929 was only one of the world's post-war difficulties. The pound and
the French franc were horribly misaligned with other currencies; war debts and repatriations

29
were still stifling Germany; commodity prices were collapsing; and banks were overextended.
Many countries tried to protect their gold stock by raising interest rates to entice investors to
keep their deposits intact rather than convert them into gold. These higher interest rates only
made things worse for the global economy, and finally, in 1931, the gold standard in England
was suspended, leaving only the U.S. and France with large gold reserves.

Then in 1934, the U.S. government revalued gold from $20.67/oz to $35.00/oz, raising the
amount of paper money it took to buy one ounce, to help improve its economy. As other nations
could convert their existing gold holdings into more U.S dollars, a dramatic devaluation of
the dollar instantly took place. This higher price for gold increased the conversion of gold into
U.S. dollars effectively allowing the U.S. to corner the gold market. Gold production soared so
that by 1939 there was enough in the world to replace all global currency in circulation.

As World War II was coming to an end, the leading western powers met to put together
theBretton Woods Agreement, which would be the framework for the global currency markets
until 1971. At the end of WWII, the U.S. had 75% of the world's monetary gold, and the dollar
was the only currency still backed directly by gold.
But as the world rebuilt itself after WWII, the U.S. saw its gold reserves steadily drop as money
flowed out to help war-torn nations as well as to pay for its own high demand for imports. The
high inflationary environment of the late 1960s sucked out the last bit of air from the gold
standard.

In 1968, a gold pool (which dominated gold supply) which included the U.S and a number of
European nations stopped selling gold on the London market, allowing the market to freely
determine the price of gold. From 1968 to 1971, only central banks could trade with the U.S. at
$35/oz. Finally, in 1971, even this bit of gold convertibility died. Gold was free at last. There
was no further reason for central banks to hold it.

Summary
While gold has fascinated humankind for 5,000 years, it hasn't always been a guarantee of
wealth. A true international gold standard existed for less than 50 years (1871 to 1914) - in a

30
time of world peace and prosperity that coincided with a dramatic increase in the supply of gold.
But the gold standard was the symptom and not the cause of this peace and prosperity.

The events of the Great War changed the political, financial and social fabric of the world - the
international gold standard would be no more. While a gold standard continued in a lesser form
until 1971, the death of it had started centuries before with the introduction of paper money - a
much more flexible instrument for our complex financial world.

Note the gradual decline of the central banks' reserves since the fall of the gold standard. As this
decline continues, the price of gold also faces a continual downward stress. Sixty percent of the
current gold reserves are held by U.S., Germany, France, Switzerland and Italy. Data provided
by the World Gold Council.

31
 CHAPTER 8 : INDIAN BULLION MARKET ASSOCIATION

8.1 SIZE

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.

India‟s 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 India‟s total
merchandise exports.

8.2 ISSUES FACED BY IBMA

 Though India is the leading player in import and trade in bullion and export of

jewellery, it does not exert any significant impact in discovery of gold prices in the

32
 international market. The reason is that country‟s bullion trade is fragmented and
unorganized.

 During recent times, Bullion market has witnessed high degree of volatility in

prices, mostly due to fluctuation in international market and factors influencing
dollar valuation. This has severely affected the bullion and jewellery trade in India,
as demand for ornaments as well as bullion usually comes down if the prices are
volatile.

 Export of Indian gold bar is not allowed. This creates a disparity in Indian gold

price and international prices, if the international price goes above a certain level. It
creates a distortion in physical trade, which in turn severely affects import of gold
in India.

 Most of other commodities and merchandise are under OGL, where both import and

export of commodity is allowed without any hassle. But, in case of gold and silver,
there are a 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 benchmark price available, which is valid for the entire country.


 There is no national level trade and industry body, which can represent the bullion

trade and industry.


33
  India has huge household stock of gold and silver. In past, there have been multiple

attempts by the Government to bring out such assets into mainstream, but none of
the schemes could achieve the desired results. There is need to create a market
linkage for such household bullion stock, which can be refined / certified by
approved refineries so as to ensure purity and weight. This would induce the people
to bring out such gold into open whenever International gold prices rise beyond a
level in order to take advantage of rising prices.

8.3 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 endeavored to set- up
Indian Bullion Market Association or IBMA.

8.4 Vision Statement

To create a national level forum for India‟s bullion trade and industry and to organize Indian
bullion trade as a unified, structured, credible and transparent market discovering the
benchmark Indian spot price through the pan India electronic network created by National
Spot Exchange.

8.5 Mission
The mission is to create a business model, which serves the fundamental requirements of
Indian bullion trade and industry in a sustained manner. It proposes to achieve this mission
through a partnership approach, where the success and growth of business is to be shared
equally by and between all stakeholders. It is based on an integrated approach, where the
leading bullion dealers of the country stand together with National Spot Exchange to initiate
a golden chapter in the history of gold in India.

34
8.6 Objectives
The objectives of promoting IBMA are:
 To set up a national level trade association for representing bullion importers, dealers,
traders, jewellery merchants, ornament dealers, exporters, bullion banks, nominated
agencies, investors, consumers, refineries and all stakeholders connected directly or
indirectly with the bullion trade and industry.
 To identify the problems faced by various stakeholders connected with bullion trade
and industry and to find out likely solution to such problems for achieving overall
growth of bullion trade and industry.
 To interact with the Central Government, State Governments, RBI, nominated
agencies, banks and other regulators for submission of impartial views relating to
bullion trade and industry and to have consistent follow up regarding major policy
initiatives, budget proposals, import and export policies, announcements relating to
import duty, VAT and other issues, which may directly or indirectly impact the
bullion trade and industry.
 To set up the process for approval of local refineries and domestic brands of gold and
silver bars and to make them tradable on National Spot Exchange platform.
 To introduce a system of sale of gold coins and silver coins made by local refineries
and domestic brands so as to stimulate an investment cult among millions of investors
in gold and silver in smaller denomination and at reasonable price.
 To create linkages between domestic stock of gold and silver, recycled gold and
silver and to remove disparity between domestic prices and international prices.
 To notify the benchmark prices for Gold and Silver in terms of AM and PM fixing.
 To promote savings and investments in gold and silver and to evolve a system of
seamless trading, investment, vaulting, electronic record keeping, dematerialization
and other value added services.
 To notify a code of conduct and ethics to be followed by bullion dealers, jewelers and
traders and to develop and promote good trade practices and integrity so as to
enhance overall reputation of bullion trade.

35
8.7 BULLION IN INDIA

India is the leading consumer and importer of gold in the world. Due to this, the potential of the
India bullion market is very promising. Owing to the weak price of Dollar in the global market,
the price of bullion is soaring. The gem and jewelry industry of India is one of the fastest
growing sectors of the economy at an approximate rate of 15%. The India Bullion market is
under the strict supervision of the Government as bullion is one of the major indicators of the
wealth of the country.

There are a number of restrictions imposed on the import and export of gold as compared to any
other commodities. The bullion market of the country is very fragmented and unorganized. The
price of bullion varies very much in different parts of the country. The main reason for this is the
lack of a benchmark that is valid throughout the country.

India is the largest investor in gold jewelry as a large number of people believe that investing in
gold is beneficial. The domestic consumption of gold depends on factors like the wedding
season, festive season, the performance of the harvest and the monsoon of the country.

Country Bullion (in tons)

United States 8133.5

France 2445.1

Germany 3408.5

Italy 2451.8

Netherlands 612.5

Switzerland 1041.5

ECB 501.4

India 557.7

Russia 568.4

Japan 765.2

China 1054.0

36
 CHAPTER 9: RESEARCH METHODOLOGY AND DATA
ANALYSIS

9.1 Introduction

The project undertaken by me was “BULLION MARKET”. This project was undertaken to
study Bullion Market as well as to study the advantages and disadvantages of investment in
Gold.

This chapter includes the need & significance of study, Definitions used in study, Objective of
the Study, Research Design, Sample Studied, Tools used for the Study.

9.2 Title of the project

“BULLION MARKET”

9.3 Objective of the study

To study the awareness of the investors regarding investments in Bullion Market

9.4 Research Design

Descriptive research

37
9.5 Sample studied

Technique: random sampling

Size: 30

Nature: Investor

9.6 Limitations of the study

No study is full proof or error free. This study has also got some limitations that are given below.

 The survey was limited within the geographic limits of the city of Mumbai. Thus the
results may not be applicable to the whole country.
 Sample size was only 30.So the results may not reflect the actual situation.

9.7 Tools used to study

Questionnaire (Annexure 1.1)

9.8 Techniques of Analysis

Quantitative analysis

MAJOR FINDINGS:

Around 30 investors of different age groups were asked few questions to find out how many of
them invest in Bullion Market and the factors they consider while investing in a security. The
findings of the survey are given below:

38
1: Income Per Year:

INCOME (annual)

7%
17% 30%

Less than 2,00,00

2,00,000 to 5,00,000

5,00,000 to 8,00,000
46%
More than 8,00,000

While interview of 30 investors was taken, 14 of them had an annual income between
RS.3,00,000 to Rs.6,00,000. This was carried out to figure out the income of the investor
because as the income of an investor increases he becomes keen to invest more to get high
returns

39
 2. How much percentage of your income do you invest:

PERCENTAGE OF INCOME INVESTED

17%

33%

Less than 20%

20% to 40%

above 40%

50%

People with high income tends to invest more of their total income and people with low income
invest less. So 50% of people invest 20%-40% of their income in various securities. This
investment may be done due to various reasons such as to park their money, for capital
appreciation, to get high returns etc.

40
3. Objective of the investment done by the investor:

INVESTMENT OBJECTIVE

17%
23%

Income

Appreciation
20%
Income as well as appreciation
40%
Capital protection

The objective of the majority of the investor is to get good income as well as capital
appreciation, 12 out of 30 investors had an objective of capital appreciation as well as income
whereas hardly any of investor invests for capital protection.

41
4. Where would you like to invest your income:

WHERE WOULD YOU LIKE TO MAKE YOUR

INVESTMENT

11%
28%
11%

Bullion market

Equity

Debt

50%
Bank deposits

Majority of the investors had an objective of high returns on their investment and they preferred
investment in Equity over investment in Bullion Market. Then followed Bullion market with 8
out of 30 investors whiling to invest their income.

42
5. If you invest in Gold then in which form you would like to hold Gold in:

FORM IN WHICH INVESTOR WOULD LIKE TO HOLD

GOLD

10%
23%

30%
Gold Mutual Funds
Gold ETFs
Physical Jewellery
Gold Bullion
37%

Most of the investors having Gold as their investment alternative invested their income in
physical jewellery or Gold Exchange Traded Funds. . ETFs may be attractive investments
because of their low costs, tax efficiency, and stock-like features.

43
6. What factor according to you affects the prices of gold:

FACTORS AFFECTING PRICES OF GOLD

23%
30%

7%
Speculation
Demand and Supply
Government Policies
Inflation
40%

Most of the investors believed that prices of Gold changed due to the demand and supply of the
commodity. 9 investors out of 30 considered speculation as the reason for the rise in prices of
Gold while others believed that inflation and changes in Government policies was the reason for
it.

44
 Chapter 10: CONCLUSION:

 50% of people invest more than 20% of their income.

 The investment objective of most investors is to gain income as well as appreciation.

 Very few invest their income for the protection of their capital.

 People have started investing in Gold ETFs due to low costs, tax efficiency, and stock-
like features.

 Price of Gold mainly depend upon the demand and supply factor

 Internationally trading in Gold has given the investors very safe and very fruitfull
option. Today people who earlier feared from entering the market are investing in Gold
as it is the most safest asset and also its price is less fluctuating

 The reason may be any but today people are willing to invest in Gold rather than Stock.

45
 CHAPTER 11: BIBLIOGRAPHY

BOOKS:

 Investment management
-V.K.Bhalla

 Investment management
-Preethi Singh

 Marketing of Financial Services

-V.A.Avadhani

 Indian Financial System

-M.Y.Khan

WEBSITES:

 www.bseindia.com

 www.sebi.com

 www.nseindia.com

 www.indiabullion.com

 www.etfgold.net

46
 Chapter 12:ANNEXURE (QUESTIONNAIRE)

NAME OF THE RESPONDENT:

1. Income per year:

o Less than 3,00,000
o 3,00,000 to 6,00,000
o 6,00,000 to 10,00,000
o More than 10,00,000

2. How much percentage of your income do you invest :

o Less than 20%
o 20 to 40%
o 40 above

3. What is your investment objective:

o Income
o Appreciation
o Income as well as appreciation
o Capital protection

4. Where would you like to invest:

o Bullion market
o Equity
o Debt
o Bank Deposits

47
5. Which form would you like to hold gold in:
o Gold Mutual Funds
o Gold ETFs
o Physical Jewellery
o Gold Bullion

6. What factor according to you affects the prices of gold:

o Speculation
o Demand Supply
o Government Policies
o Inflation

48