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Brief history of Forex Markets

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									            Interdependence Study of Australian Dollar (AUD) and Gold


   1. Introduction:


1.1)   Brief history of Forex Markets:


The foreign exchange market as we know it today originated in 1973. However, money
has been around in one form or another since the time of Pharaohs. The Babylonians are
credited with the first use of paper bills and receipts, but Middle Eastern moneychangers
were the first currency traders who exchanged coins from one culture to another. During
the middle ages, the need for another form of currency besides coins emerged as the
method of choice. These paper bills represented transferable third-party payments of
funds, making foreign currency exchange trading much easier for merchants and traders
and causing these regional economies to flourish.


From the infantile stages of forex during the Middle Ages to WWI, the Forex markets
were relatively stable and without much speculative activity. After WWI, the Forex
markets became very volatile and speculative activity increased tenfold. Speculation in
the Forex market was not looked on as favorable by most institutions and the public in
general. The Great Depression and the removal of the gold standard in 1931 created a
serious lull in Forex market activity. From 1931 until 1973, the Forex market went
through a series of changes. These changes greatly affected the global economies at the
time and speculation in the Forex markets during these times was little, if any.


Initially, the value of goods was expressed in terms of other goods, i.e. an economy based
on barter between individual market participants. The obvious limitations of such a
system encouraged establishing more generally accepted means of exchange at a fairly
early stage in history, to set a common benchmark of value. In different economies,
everything from teeth to feathers to pretty stones has served this purpose, but soon



                                             1
metals, in particular gold and silver, established themselves as an accepted means of
payment as well as a reliable storage of value.


Originally, coins were simply minted from the preferred metal, but in stable political
regimes the introduction of a paper form of governmental IOUs gained acceptance during
the Middle Ages. Such IOUs, often introduced more successfully through force than
persuasion were the basis of modern currencies.


Before World War I, most central banks supported their currencies with convertibility to
gold. Although paper money could always be exchanged for gold, in reality this did not
occur often, fostering the sometimes disastrous notion that there was not necessarily a
need for full cover in the central reserves of the government.


At times, the ballooning supply of paper money without gold cover led to devastating
inflation and resulting political instability. To protect local national interests, foreign
exchange controls were increasingly introduced to prevent market forces from punishing
monetary irresponsibility.


1.2) A Transitional Era:


The Bretton Woods Accord:


The first major transformation, the Bretton Woods Accord, took place toward the end of
World War II. The United States, Great Britain and France met at the United Nations
Monetary and Financial Conference in Bretton Woods, New Hampshire to design a new
global economic order. The location was chosen because, at the time, the U.S. was the
only country unscathed by war; most of the major European countries were in shambles.


The Bretton Woods Accord was established to create a stable environment by which
global economies could restore themselves. The Bretton Woods Accord established the



                                             2
pegging of currencies and the International Monetary Fund (IMF) in hopes of stabilizing
the global economic situation.


In the latter stages of World War II, the Bretton Woods Agreement was reached on the
initiative of the USA in July 1944. The first major transformation, the Bretton Woods
Accord, took place toward the end of World War II. The United States, Great Britain and
France met at the United Nations Monetary and Financial Conference in Bretton Woods,
New Hampshire to design a new global economic order. The location was chosen
because, at the time, the U.S. was the only country unscathed by war; most of the major
European countries were in shambles.


The Bretton Woods Accord was established to create a stable environment by which
global economies could restore themselves. The Bretton Woods Accord established the
pegging of currencies and the International Monetary Fund (IMF) in hopes of stabilizing
the global economic situation.


Up until WWII, Great Britain's currency, the Great British Pound, was the major
currency by which most currencies were compared. This changed when the Nazi
campaign against Britain included a major counterfeiting effort against its currency. In
fact, WWII vaulted the U.S. dollar from a failed currency after the stock market crash of
1929 to a benchmark currency by which most other international currencies were
compared.


Now, major currencies were pegged to the U.S. dollar. These currencies were allowed to
fluctuate by one percent on either side of the set standard. When a currency's exchange
rate would approach the limit on either side of this standard, the respective central bank
would intervene to bring the exchange rate back into the accepted range. At the same
time, the US dollar was pegged to gold at a price of $35 per ounce further bringing
stability to other currencies and the world Forex situation.




                                             3
The Bretton Woods Accord lasted until 1971. Ultimately, it failed, but did accomplish
what its charter set out to do, which was to re-establish economic stability in Europe and
Japan. The Bretton Woods Conference rejected John Maynard Keynes suggestion for a
new world reserve currency in favour of a system built on the US dollar. Other
international institutions such as the IMF, the World Bank and GATT (General
Agreement on Tariffs and Trade) were created in the same period as the emerging victors
of WW2 searched for a way to avoid the destabilising monetary crises which led to the
war. The Bretton Woods agreement resulted in a system of fixed exchange rates that
partly reinstated the gold standard, fixing the US dollar at USD35/oz and fixing the other
main currencies to the dollar - and was intended to be permanent.


The Bretton Woods system came under increasing pressure as national economies moved
in different directions during the sixties. A number of realignments kept the system alive
for a long time, but eventually Bretton Woods collapsed in the early seventies following
President Nixon's suspension of the gold convertibility in August 1971. The dollar was
no longer suitable as the sole international currency at a time when it was under severe
pressure from increasing US budget and trade deficits.


The following decades have seen foreign exchange trading develop into the largest global
market by far. Restrictions on capital flows have been removed in most countries, leaving
the market forces free to adjust foreign exchange rates according to their perceived
values.


   1.3)    The Beginning of the Free-Floating System:


After the Bretton Woods Accord came the Smithsonian Agreement in December of 1971.
This agreement was similar to the Bretton Woods Accord, but allowed for a greater
fluctuation band for the currencies.


In 1972, the European community tried to move away from its dependency on the dollar.
The European Joint Float was established by West Germany, France, Italy, the

                                            4
Netherlands, Belgium and Luxemburg. The agreement was similar to the Bretton Woods
Accord, but allowed a greater range of fluctuation in the currency values.


Both agreements made mistakes similar to the Bretton Woods Accord and in 1973
collapsed. The collapse of the Smithsonian agreement and the European Joint Float in
1973 signified the official switch to the free-floating system. This occurred by default, as
there were no new agreements to take their place. Governments were now free to peg
their currencies, semi-peg or allow them to freely float. In 1978, the free-floating system
was officially mandated. In a final effort to gain independence from the dollar, Europe
created the European Monetary System in July of 1978. Like all of the previous
agreements, it failed in 1993.


The idea of fixed exchange rates has by no means died. The EEC (European Economic
Community) introduced a new system of fixed exchange rates in 1979, the European
Monetary System. This attempt to fix exchange rates met with near extinction in 1992-
93, when pent-up economic pressures forced devaluations of a number of weak European
currencies. Nevertheless, the quest for currency stability has continued in Europe with the
renewed attempt to not only fix currencies but actually replace many of them with the
Euro in 2001.


The lack of sustainability in fixed foreign exchange rates gained new relevance with the
events in South East Asia in the latter part of 1997, where currency after currency was
devalued against the US dollar, leaving other fixed exchange rates, in particular in South
America, looking very vulnerable.


But while commercial companies have had to face a much more volatile currency
environment in recent years, investors and financial institutions have found a new
playground. The size of foreign exchange markets now dwarfs any other investment
market by a large factor. It is estimated that more than USD 3,000 billion is traded every
day, far more than the world's stock and bond markets combined.



                                             5
   1.4)    The Gold Standard:


The detailed information about the Gold Standard is given as follows:
Under the gold standard, the exchange rate of two currencies was based on the intrinsic
value of gold in the unit of each currency. This also came to be known as the mint parity
theory of exchange rates.


Under the gold standard exchange rates could only fluctuate within a narrow band known
as the upper and lower gold points. A country, which had a balance of payments deficit
had to part with some of its gold and transfer it to the other country. The transfer of gold
would reduce the volume of money in the deficit country and lead to deflation while the
inflow of gold in the surplus country would have an inflationary impact on that economy.


The country which was in deficit would then be able to export more and restrict its
imports as a result of the fall in domestic prices and reduce its BOP deficits. A lowering
of the discount rates in a country with a surplus and a hike in discount rates in the deficit
country also aided in reducing the imbalance in the BOP.


The main types of gold standard were:
   1. The gold specie standard.
   2. The Gold Bullion standard.
   3. The Gold Exchange standard.


   1. The Gold Specie Standard – 1880 – 1914:


Under the gold specie standard, gold was recognized as a means of settling domestic as
well as international payments. There were no restrictions on the use of gold and it could
be melted down or be sent to a mint for conversion to coins. Import and export of gold
was freely allowed and Central Banks guaranteed the issue or purchase of gold at a fixed
price, on demand. The price of gold varied according to the supply of the metal in the
market and the value of gold coins was based on their intrinsic value.

                                             6
   2. The gold bullion standard.- 1922 - 1936:


The gold bullion standard started after the first world war, as increased expenditures to
fund the war effort exposed the weaknesses of the gold standard. It was decided at an
international conference in Brussels in 1922 to reintroduce the gold standard but in a
modified form. Under the gold bullion standard, paper money was the main form of
exchange. It could however be exchanged for gold at any time.


As it was unlikely that there would be a great demand for converting currency notes to
gold at any given time, the banks could issue currency notes in excess of the value of
gold they were holding. The gold bullion standard too could not last long as many major
currencies were highly over or under valued leading to a distortion in balance of payment
positions. In 1925, the sterling was over valued against the dollar by nearly 44% and
necessitated a devaluation. This devaluation had an impact on other currencies too and
led to an exchange rate war.


England withdrew from the gold standard in 1931, America in 1933 and Italy, France,
Belgium, Switzerland and Holland remained. It finally collapsed in 1936 with the
devaluation of the French franc and the Swiss franc.


   3. The Gold Exchange Standard - 1944- 1970:


During the Second World War, international trade suffered with runaway inflation and
devaluation of currencies. A need was felt to bring out a new monetary system that would
be stable and conducive to international trade. The process was started in 1943 by Britain
and the US and finally in July 1944 the American proposal was accepted at the Bretton
Woods conference. The new system aimed to bring about convertibility of all currencies,
eliminate exchange controls and establish an international monetary system with stable
exchange rates. The IMF was set up in 1946 under the Bretton Woods agreement and the
new exchange rate system also came to be known as the Bretton Woods system.



                                            7
Under the Bretton Woods system, member countries were required to fix parities of their
currencies to gold or the US dollar and ensure that rates did not fluctuate beyond 1% of
the level fixed. It was also agreed that no country would effect a change in the parity
without the prior approval of the IMF.




   2. The Foreign Exchange Market Today:

The foreign exchange market is unique because of:
           its trading volumes,
           the extreme liquidity of the market,
           the large number of, and variety of, traders in the market,
           its geographical dispersion,
           its long trading hours: 24 hours a day (except on weekends),
           the variety of factors that affect exchange rates.
           the low margins of profit compared with other markets of fixed income (but
           profits can be high due to very large trading volumes)




    As such, it has been referred to as the market closest to the ideal perfect competition.
    According to the BIS, average daily turnover in traditional foreign exchange markets




                                             8
     is estimated at $3.21 trillion. Daily averages in April for different years, in billions
     of US dollars, are presented on the chart below:


     This $3.21 trillion in global foreign exchange market "traditional" turnover was
     broken down as follows:
           $1,005 billion in spot transactions
           $362 billion in outright forwards
           $1,714 billion in forex swaps
           $129 billion estimated gaps in reporting.


In addition to "traditional" turnover, $2.1 trillion was traded in derivatives.


Exchange-traded forex futures contracts were introduced in 1972 at the Chicago
Mercantile Exchange and are actively traded relative to most other futures contracts.
Forex futures volume has grown rapidly in recent years, and accounts for about 7% of the
total foreign exchange market volume, according to The Wall Street Journal Europe.


Average daily global turnover in traditional foreign exchange market transactions totaled
$2.7 trillion in April 2006 according to IFSL estimates based on semi-annual London,
New York, Tokyo and Singapore Foreign Exchange Committee data. Overall turnover,
including non-traditional foreign exchange derivatives and products traded on exchanges,
averaged around $2.9 trillion a day. This was more than ten times the size of the
combined daily turnover on all the world’s equity markets.


Foreign exchange trading increased by 38% between April 2005 and April 2006 and has
more than doubled since 2001. This is largely due to the growing importance of foreign
exchange as an asset class and an increase in fund management assets, particularly of
hedge funds and pension funds. The diverse selection of execution venues such as
internet trading platforms has also made it easier for retail traders to trade in the foreign
exchange market.



                                               9
Because foreign exchange is an OTC market where brokers/dealers negotiate directly
with one another, there is no central exchange or clearing house. The biggest geographic
trading centre is the UK, primarily London, which according to IFSL estimates has
increased its share of global turnover in traditional transactions from 31.3% in April 2004
to 32.4% in April 2006.


The ten most active traders account for almost 73% of trading volume, according to The
Wall Street Journal Europe, (2/9/06 p. 20). These large international banks continually
provide the market with both bid (buy) and ask (sell) prices. The bid/ask spread is the
difference between the price at which a bank or market maker will sell ("ask", or "offer")
and the price at which a market-maker will buy ("bid") from a wholesale customer. This
spread is minimal for actively traded pairs of currencies, usually 0–3 pips. For example,
the bid/ask quote of EUR/USD might be 1.2200/1.2203 on a retail broker.


Minimum trading size for most deals is usually 100,000 units of currency, which is a
standard "lot".These spreads might not apply to retail customers at banks, which will
routinely mark up the difference to say 1.2100 / 1.2300 for transfers, or say 1.2000 /
1.2400 for banknotes or travelers' checks. Spot prices at market makers vary, but on
EUR/USD are usually no more than 3 pips wide (i.e. 0.0003). Competition is greatly
increased with larger transactions, and pip spreads shrink on the major pairs to as little as
1 to 2 pips.

The major currencies today move independently from other currencies. Although
exchange rates are affected by many factors, in the end, currency prices are a result of
supply and demand forces. The world's currency markets can be viewed as a huge
melting pot: in a large and ever-changing mix of current events, supply and demand
factors are constantly shifting, and the price of one currency in relation to another shifts
accordingly. No other market encompasses and distills as much of what is going on in the
world at any given time as foreign exchange.




                                             10
Supply and demand for any given currency, and thus its value, are not influenced by any
single element, but rather by several. These elements generally fall into three categories:
economic factors, political conditions and market psychology.




    3. Factors affecting currency trading:


1) Political Conditions:


Internal, regional, and international political conditions and events can have a profound
effect on currency markets. For instance, political upheaval and instability can have a
negative impact on a nation's economy. The rise of a political faction that is perceived to
be fiscally responsible can have the opposite effect. Also, events in one country in a
region may spur positive or negative interest in a neighboring country and, in the process,
affect its currency.


2) Market Psychology:


Market psychology and trader perceptions influence the foreign exchange market in a
variety of ways:


Flights to quality: Unsettling international events can lead to a "flight to quality," with
investors seeking a "safe haven". There will be a greater demand, thus a higher price, for
currencies perceived as stronger over their relatively weaker counterparts.


Long-term trends: Currency markets often move in visible long-term trends. Although
currencies do not have an annual growing season like physical commodities, business
cycles do make themselves felt. Cycle analysis looks at longer-term price trends that may
rise from economic or political trends.




                                            11
"Buy the rumor, sell the fact:" This market truism can apply to many currency
situations. It is the tendency for the price of a currency to reflect the impact of a particular
action before it occurs and, when the anticipated event comes to pass, react in exactly the
opposite direction. This may also be referred to as a market being "oversold" or
"overbought”. To buy the rumor or sell the fact can also be an example of the cognitive
bias known as anchoring, when investors focus too much on the relevance of outside
events to currency prices.


Economic numbers: While economic numbers can certainly reflect economic policy,
some reports and numbers take on a talisman-like effect: the number itself becomes
important to market psychology and may have an immediate impact on short-term market
moves. "What to watch" can change over time. In recent years, for example, money
supply, employment, trade balance figures and inflation numbers have all taken turns in
the spotlight.


Currencies are traded by anyone who wishes. This has caused a recent influx of
speculation by banks, hedge funds, brokerage houses and individuals. Central banks
intervene on occasion to move or attempt to move currencies to their desired levels. The
underlying factor that drives today's Forex markets, however, is supply and demand. The
free-floating system is ideal for today's Forex markets


3) Economic factors:


These include economic policy, disseminated by government agencies and central banks,
economic conditions, generally revealed through economic reports, and other economic
indicators. Economic policy comprises government fiscal policy (budget/spending
practices) and monetary policy the means by which a government's central bank
influences the supply and "cost" of money, which is reflected by the level of interest
rates.




                                              12
Economic conditions include:


Government budget deficits or surpluses: The market usually reacts negatively to
widening government budget deficits, and positively to narrowing budget deficits. The
impact is reflected in the value of a country's currency.


Balance of trade levels and trends: The trade flow between countries illustrates the
demand for goods and services, which in turn indicates demand for a country's currency
to conduct trade. Surpluses and deficits in trade of goods and services reflect the
competitiveness of a nation's economy. For example, trade deficits may have a negative
impact on a nation's currency.


Inflation levels and trends: Typically, a currency will lose value if there is a high level
of inflation in the country or if inflation levels are perceived to be rising. This is because
inflation erodes purchasing power, thus demand, for that particular currency. However, a
currency may sometimes strengthen when inflation rises because of expectations that the
central bank will raise short-term interest rates to combat rising inflation.


Economic growth and health: Reports such as gross domestic product (GDP),
employment levels, retail sales, capacity utilization and others, detail the levels of a
country's economic growth and health. Generally, the more healthy and robust a country's
economy, the better its currency will perform, and the more demand for it there will be.




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    4. Most Traded Currencies:


                                  Most traded currencies
                 Currency distribution of reported FX market turnover

                                              ISO 4217              % daily share
            Rank Currency                                Symbol
                                              code                 (April 2004)

            1       United States Dollar      USD        $         88.7%

            2       Eurozone Euro             EUR        €         37.2%

            3       Japanese Yen              JPY        ¥         20.3%

            4       British Pound Sterling GBP           £         16.9%

            5       Swiss Franc               CHF        Fr        6.1%

            6       Australian Dollar         AUD        $         5.5%

            7       Canadian Dollar           CAD        $         4.2%

            8       Swedish Krona             SEK        kr        2.3%

            9       Hong Kong Dollar          HKD        $         1.9%

            10      Norwegian Krone           NOK        kr        1.4%

            Other                                                  15.5%

            Total                                                  200%




    5. The Australian Dollar:

The Australian dollar is a commodity – based currency and is currently the sixth most
traded currency in the world currency market behind the US dollar, the euro, the yen, the
British pound and the Swiss franc.


It accounts for approximately 5% of the total volume of foreign exchange transactions
approximately 1.9 trillion dollars a day. Its popularity is due to the fact that there is little

                                              14
government intervention in the currency and a general view that Australia has a stable
economy and government.


For much of its history, the Australian dollar was pegged to the British pound however,
that changed in 1946, when it was pegged to the US dollar under the Bretton Woods
system. When this system broke down in 1971, the AUD moved from a fixed peg to a
moving peg to the US dollar. Then in September 1974, it moved to a moving peg against
a basket of currencies called the TWI (trade weighted index) because of concerns about
the fluctuations in the US dollar. This continued until December 1983, when the then
Labour government under Prime Minister Bob Hawke and Treasurer Paul Keating
“floated” the Australian dollar.


The Australian dollar, denoted by AUD or A$, is the official currency of the
Commonwealth of Australia (including the Australian Antarctic Territory, Christmas
Island, Cocos Islands, Heard Island and Mc Donald Islands as well as the independent
Pacific island states of Kiribati, Nauru and Tuvalu). The AUD is sometimes called the
"Aussie" and locally, the "Pacific Peso."


The AUD is the sixth most traded currency in the foreign exchange markets, trailing
behind the United States dollar, Japanese yen, euro, British pound sterling and Canadian
dollar. Accounting for approximately 5% of worldwide foreign exchange transactions,
the AUD is popular among currency traders because of the nation's relative lack of
government intervention in the FX market. Additionally, the economy and government
are rather stable and the AUD seems to offer diversification benefits in a portfolio
containing the major world currencies (for reasons such as greater exposure to Asian
economies and the commodities cycle, for example).


Each Australian dollar can be broken down into 100 cents. The smallest coin circulating
(as of mid-2005) is equal to five cents; one and two cent coins were discontinued in the
early 90s and withdrawn from circulation. Cash transactions are rounded up or down to
the nearest multiple of five cents.

                                            15
The Australian dollar is now governed by its economy’s terms of trade. Should
Australia’s commodity exports (minerals and farms) increase then the dollar increases.
Should mineral prices falls or when domestic spending is greater than exports, then the
dollar falls. The resulting volatility makes the Australian dollar an attractive vehicle for
currency speculators and is the reason why it is one of the most traded currencies in the
world despite the fact that Australia only comprises 2% of the global economic activity.


Over the last 23 years as a free floating currency, the Australian dollar has usually served
as a proxy for gold due to the fact that Australia is the second largest producer of gold
after South Africa. Fluctuations in the price of gold have seen corresponding rise and
falls in the Australian dollar.


As well as its relationship with gold, like the Canadian and the New Zealand dollars, the
Australian dollar is a commodity currency. According to the Australian Bureau of
Agriculture and Resources Economic, commodity sales are expected to total AUD billion
or about 55% of Australia’s exports, hence any movements in commodity prices will
affect the Australian dollar.


Expectation over the next few years is for a gradual easing of world economic growth,
which should see the price of Australian commodities average lower and result in
downward pressure on the Australian dollar especially in late 2006/2007. It should
however be noted, that there is considerable uncertainty in predicting Australian dollar
movements since it can be significantly influenced by a change in market sentiment.
Since the floating of the Australian dollar in 1983, the currency has fluctuated in an
average range of 10 cents a year.


Every year the Royal Australian Mint, based in Australia’s federal capital Canberra,
produces full sets of uncirculated coins and mint condition coins. The quality of both sets
is equal or better to any produced in the world and are always presented in extremely
attractive packaging which shows the coins to the best advantage while protecting them
from damage.

                                            16
In addition, special event coins are produced that can have denominations of one dollar,
five- dollars, ten dollars, twenty dollars, one hundred or two hundred dollars. Some are
produced in silver and others in gold. All are highly sought after and are produced in
limited numbers making them very attractive as an investment.




   6. Introduction to Commodities Market:


A commodity is something for which there is demand, but which is supplied without
qualitative differentiation across a given market. Characteristic of commodities is that
their prices are determined as a function of their market as a whole. Well-established
physical commodities have actively traded spot and derivative markets. Generally, these
are basic resources and agricultural products such as iron ore, crude oil, coal, ethanol,
sugar, soybeans, aluminium, rice, wheat, gold and silver. However, the process of
commoditization is ongoing as markets evolve.


In essence, commoditization occurs as a good or service becomes undifferentiated across
its supply base by the diffusion of the intellectual capital necessary to acquire or produce
it efficiently. As such, many products which formerly carried premium margins for
market participants have become commodities, such as generic pharmaceuticals and
silicon chips.


Linguistically, the word commodity came into use in English in the 15th century, derived
from the French word "commodité", meaning today's (2000) "convenience" in terms of
quality of services. The Latin root meaning is commoditas, referring variously to the
appropriate measure of something; a fitting state, time or condition; a good quality;
efficaciousness or propriety; and advantage, or benefit. The German equivalent is die
Ware, i.e. wares or goods offered for sale. The French equivalent is "produit de base" like
energy, goods, or industrial raw materials.



                                              17
Gold is the oldest precious metal known to man. Therefore, it is a timely subject for
several reasons. It is the opinion of the more objective market experts that the traditional
investment vehicles of stocks and bonds are in the areas of their all-time highs and may
be due for a severe correction.


To fully appreciate why 8,000 years of experience say "gold is forever", we should
review why the world reveres what England's most famous economist, John Maynard
Keynes, cynically called the "barbarous relic."


Why gold is "good as gold" is an intriguing question. However, we think that the more
pragmatic ancient Egyptians were perhaps more accurate in observing that gold's value
was a function of its pleasing physical characteristics and its scarcity.


1.   Gold is primarily a monetary asset and partly a commodity.


2.   More than two thirds of gold's total accumulated holdings account as ’value for
investment' with central bank reserves, private players and high-carat Jewellery.


3.   Less than one third of gold's total accumulated holdings is as a 'commodity' for
Jewellery in Western markets and usage in industry.


4.   The Gold market is highly liquid and gold held by central banks, other major
institutions and retail Jewellery keep coming back to the market.


5.   Due to large stocks of Gold as against its demand, it is argued that the core driver of
the real price of gold is stock equilibrium rather than flow equilibrium.


6.   Economic forces that determine the price of gold are different from, and in many
cases opposed to the forces that influence most financial assets.




                                              18
7.   South Africa is the world's largest gold producer with 394 tons in 2001, followed by
US and Australia.


8.   India is the world's largest gold consumer with an annual demand of 800 tons.




     7. World Gold Markets:


1. London as the great clearing house.

2. New York as the home of futures trading.

3. Zurich as a physical turntable.

4. Istanbul, Dubai, Singapore and Hong Kong as doorways to important consuming
regions.

5. Tokyo where TOCOM sets the mood of Japan.

6. Mumbai under India's liberalized gold regime.




     8. India in World Gold Industry:


(Rounded Figures)                    India (In Tons) World (In Tons) % Share
Total Stocks                         13000            145000            9
Central Bank holding                 400              28000             1.4
Annual Production                    2                2600              0.08
Annual Recycling                     100-300          1100-1200         13
Annual Demand                        800              3700              22
Annual Imports                       600              ---               ---
Annual Exports                       60               ---               ---




                                             19
9. Indian Gold Market:


      1. Gold is valued in India as a savings and investment vehicle and is the
         second preferred investment after bank deposits.


      2. India is the world's largest consumer of gold in jewellery as investment.


      3. In July 1997 the RBI authorized the commercial banks to import gold for
         sale or loan to jewellers and exporters. At present, 13 banks are active in
         the import of gold.


      4. This reduced the disparity between international and domestic prices of
         gold from 57 percent during 1986 to 1991 to 8.5 percent in 2001.


      5. The gold hoarding tendency is well ingrained in Indian society.


      6. Domestic consumption is dictated by monsoon, harvest and marriage
         season. Indian jewellery offtake is sensitive to price increases and even
         more so to volatility.


      7. In the cities gold is facing competition from the stock market and a wide
         range of consumer goods.


      8. Facilities for refining, assaying, making them into standard bars in India,
         as compared to the rest of the world, are insignificant, both qualitatively
         and quantitatively.




                                      20
    10. Market Moving Factors:


       Above ground supply from sales by central banks, reclaimed scrap and official
    gold loans.


       Producer / miner hedging interest.


       World macro-economic factors - US Dollar, Interest rate.


       Comparative returns on stock markets.


       Domestic demand based on monsoon and agricultural output.




    11. Frequency Dist. of Gold London Fixing Volatility from 1995 till date:


Percentage Change                   > 5%              2-5%               < 2%
Daily
Number of times                     4                 54                 2147
Percentage times                    0.2               2.4                97.4
Weekly
Number of times                     3                 62                 376
Percentage times                    0.7               14.1               85.3


Gold was in use as a form of money, in one form or another, at least from 2560 BC until
the end of the Bretton Woods system in 1971. It was used as a store of value both by
individuals and countries for much of that period. Since the end of the Bretton Woods
system, gold has largely lost its role as a form of currency. The Central banks still use
gold as an international trading and swapping currency. It is still considered by many as a
store of value and a safe haven in times of crisis. Central banks report holding large gold

                                             21
reserves, but groups such as the Gold Anti-Trust Action Committee point out that these
reports are misleading as the central banks' official balance sheets do not differentiate
between gold held in the banks' vaults and gold on loan.




   12. Gold as a financial asset:


Gold and other precious metals are assets that are both tangible and liquid (i.e. easily
traded), unlike real estate which is tangible but not liquid, or company shares and bonds
which are liquid but not tangible. Considering its high density and high value per unit
mass, storing and transporting gold is very easy.


Gold also does not corrode. Historically, it was also very easy to verify that an offered
coin had the density of gold through the use of Archimedes' principle. Today, however,
some metals are denser than gold yet cheaper. While some think gold deserves special
treatment based on its cultural value and use as money, others consider gold a
commodity, like copper or lead.


For centuries gold has been used as a store of value. Gold advocates such as Bill Bonner
argues in "Empire of Debt" that no other investment has the wealth preserving power of
gold when your frame of reference extends to thousands of years. Bonner points out that
other assets are dependent upon a certain government or political climate to retain value,
appreciate, and not be excessively taxed or nationalized. Gold is largely independent of
political climate (with the exception of laws specifically confiscating gold as happened
during the Franklin Roosevelt administration).




                                            22
12.1    Factors influencing the Gold Price:


               1. Sentiments
Today, like all investments and commodities, the price of gold is ultimately driven by
supply and demand, including hoarding and dis-hoarding. Unlike most other
commodities, the hoarding and dis-hoarding plays a much bigger role in affecting the
price, since almost all the gold ever mined still exists and is potentially able to come on to
the market at the right price. Given the huge quantity of above ground hoarded gold,
compared to the annual production, the price of gold is mainly affected by changes in
sentiment, rather than changes in annual production or gold jewelry demand. Central
banks and the International Monetary Fund play an important role in the gold price.


At the end of 2004 central banks and official organisations held 19 percent of all above
ground gold as official gold reserves. The Washington Agreement on Gold (WAG) which
dates from September 1999, limits gold sales by its members (Europe, United States,
Japan, Australia, Bank for International Settlements and the International Monetary
Fund) to less than 400 tonnes a year. European central banks, such as the Bank of
England and Swiss National Bank, have been key sellers of gold over this period. In
November 2005, Russia, Argentina and South Africa expressed interest in increasing
their gold holdings. Other than Russia, these are not viewed as significant central banks,
but any move by Japan, China or South Korea to do the same would be seen as
significant.


Currently the United States Federal Reserve has 16% of its assets in gold Federal
Reserve gold holdings, whereas China holds approximately 1% in gold.Although central
banks do not generally announce gold purchases in advance, some such as Russia have
expressed interest in growing their gold reserves again as of late 2005. In early 2006,
China, who only holds 1.3% of its reserves in gold, announced that it was looking for
ways to improve the returns on its official reserves. Many bulls took this as a thinly
veiled signal that gold would play a larger role in China's reserves, which they hope will
push up the price of gold.

                                             23
           2. Bank failures:
When dollars were fully convertible into gold, both were regarded as money. However,
most people preferred to carry around paper banknotes rather than the somewhat heavier
and less divisible gold coins. If people feared their bank would fail, a bank run might
have been the result.


           3. Inflation:
Paper currencies pose a risk of being inflated, possibly to the point of hyperinflation.
Historically, currencies have lost their value in this way over time. In times of inflation,
people seek to protect their savings by purchasing liquid, tangible assets that are valued
for some other purpose. Gold is in this respect a good candidate, since producing more is
far more difficult than issuing new fiat currency, and its value does not rely on any
particular government's health.


           4. Low or negative real interest rates:
Gold has a long history of being an inflation proof investment. During times of low or
negative real interest rates when significant inflation is present and interest rates are
relatively low investors seek the safe haven of gold to protect their capital. A prime
example of this is the period of Stagflation that occurred during the 1970s and which led
to an economic bubble forming in precious metals.


           5. War, invasion, looting, crisis:
In times of national crisis, people fear that their assets may be seized, and the currency
may become worthless. They see gold as a solid asset which will always buy food or
transportation. Thus in times of great uncertainty, particularly when war is feared, the
demand for gold rises.


           6. Production:
According to the World Gold Council, annual gold production over the last few years has
been close to 2,500 tonnes. However, the effects of official gold sales (500 tonnes), scrap



                                            24
sales (850 tonnes), and producer hedging activities take the annual gold supply to around
3,500 tonnes.


           7. Demand:
About 3,000 tonnes goes into jewelry or industrial/dental production, and around 500
tonnes goes to retail investors and exchange traded gold funds.


           8. Supply and demand:
Some investors consider that supply and demand factors are less relevant than with other
commodities since most of the gold ever mined is still above ground and available for
sale at a price. However, supply and demand do play a role. According to the World Gold
Council, gold demand rose 29% in the first half of 2005. The increase came mainly from
the launch of a gold exchange-traded fund, but also from jewelry. Gold demand was at an
all time record. Demand from the electronics industry is rising by 11% a year, jewelry by
19%, and industrial and dental by 21%.




   13. Gold's value versus money supply:




                                           25
For many years, the dollar was pegged to the gold standard. Historically increases in the
supply of paper money or fiat currency through increased money supply would cause the
demand for gold to increase. There was a time when gold was money and vice versa. If
citizens felt that there may be insufficient gold to cover the paper money in circulation,
they would queue up at the bank to change their paper currency back into gold. However,
since the gold standard was ended on August 15, 1971, governments have been free to
print as much money as they choose, without fear that their populations will come
knocking on the central bank's door demanding to change their paper money back into
gold. In January 1959 US M3 money supply was $288.8 billion, and the official gold
reserves of the United States was then 17,335.1 tonnes, or 557,336,000 ounces (there are
32,150.7 troy ounces in a tonne).


That means that in 1959, there were $518 in circulation for every ounce of gold reserves
held by the USA. Although the theoretical price should then have been $518 per ounce,
the actual price, as fixed under the gold standard was only $35 an ounce. By August
2005, the US M3 money supply had risen to $9,873.9 billion, whilst at the same time the
Official Gold Holdings of the United States had fallen to just 8,133.5 tonnes, or 261.50
million Troy Ounces. This means that today, in 2005, there are $37,831 in circulation for
every troy ounce of gold held by the United States.


However, this increase of 75 times in the ratio of central bank gold holdings to debt does
not allow for the fact that the gold standard was abandoned in 1971 and gold holdings
have been deliberately and considerably reduced. Another far less dramatic way of
looking at the same figures is this: In 1959 US government debt valued in gold was 8
billion Troy ounces, in 2005 US government debt was 20 billion ounces gold - an
increase of only 2.5 times. The above numbers show the falling influence of gold in
today's monetary system. Gold bugs believe, or hope, that one day gold's importance will
return as the printing of paper money gets out of control and before we end in a hyper-
inflationary fiat money collapse.




                                           26
The US Federal Reserve ceased publishing M3 data on 23 March 2006, with the last
published data indicating a year-on-year growth rate of 8.23%. Central banks may see
this as a reason to limit further increases in their reserves of dollars, and thus alternatives
such as gold or the euro might be considered. Jon Nadler, an analyst at Kitco Bullion
Dealers, said gold was still benefiting from August 30, 2006 release of the minutes to the
last rate-setting meeting of the US Federal Reserve. The minutes to the August 8, 2006
meeting, at which the Federal Open Market Committee kept short-term interest rates
unchanged for the first time since 2004, supported the view that US borrowing costs have
peaked.


Supply:
At the end of 2001, it was estimated that all the gold ever mined totaled 145,000 tonnes,
which would form a cube with 19.58 meter edges. Global gold mine production is
between 2,500 to 3,000 tonnes per year, which would mean that about 155,000 tonnes of
gold would have been mined as of 2006, with a total value of $3.2 trillion at June 2006
prices.


Bulls versus bears:
Many argue that gold's role in the world's monetary system has ended, and that it will
never again represent the store of value that it once was. The gold price peaked at around
$850/oz t ($27,300,000 per tonne) in 1980, and in real terms is still well below that.
However, since April 2001 the gold price has more than doubled in value against the US
dollar (as seen here), prompting speculation to circulate that this long secular bear market
(or the Great Commodities Depression) has ended and a bull market has returned.




                                              27
  14. Interdependence Study of AUD and Gold:


                                          USD/AUD    AUD/USD    GOLD
1/2/2007      January 02, Tuesday          1.25628    0.79600   639.75
1/3/2007     January 03, Wednesday         1.26358    0.79140   642.60
1/4/2007      January 04, Thursday         1.27243    0.78590   628.70
1/5/2007       January 05, Friday          1.28254    0.77970   609.50
1/8/2007      January 08, Monday           1.27992    0.78130   609.50
1/9/2007      January 09, Tuesday          1.28287    0.77950   609.60
1/10/2007    January 10, Wednesday        1.28766    0.77660    608.40
1/11/2007     January 11, Thursday        1.27828    0.78230    612.00
1/12/2007      January 12, Friday         1.27779    0.78260    619.75
1/15/2007     January 15, Monday          1.27779    0.78260    627.00
1/16/2007     January 16, Tuesday         1.27779    0.78260    627.05
1/17/2007    January 17, Wednesday        1.27146    0.78650    626.50
1/18/2007     January 18, Thursday        1.26807    0.78860    635.00
1/19/2007      January 19, Friday         1.26711    0.78920    629.00
1/22/2007     January 22, Monday          1.26695    0.78930    639.00
1/23/2007     January 23, Tuesday         1.26247    0.79210    642.50
1/24/2007    January 24, Wednesday        1.2791     0.78180    642.10
1/25/2007     January 25, Thursday        1.28634    0.77740    651.75
1/26/2007      January 26, Friday         1.29467    0.77240    645.50
1/29/2007     January 29, Monday          1.29433    0.77260    644.75
1/30/2007     January 30, Tuesday         1.29467    0.77240    645.75
1/31/2007    January 31, Wednesday        1.29199    0.77400    650.50
2/1/2007     February 01, Thursday        1.29099    0.77460    660.20
2/2/2007       February 02, Friday        1.29082    0.77470    645.70
2/5/2007      February 05, Monday         1.28717    0.77690    649.40
2/6/2007      February 06, Tuesday        1.28717    0.77690    653.25
2/7/2007    February 07, Wednesday        1.28436    0.77860    653.75
2/9/2007       February 09, Friday        1.28783    0.77650    664.50
2/12/2007     February 12, Monday         1.29433    0.77260    664.55
2/13/2007     February 13, Tuesday        1.28634    0.77740    667.80
2/14/2007   February 14, Wednesday        1.27665    0.78330    668.25
2/15/2007    February 15, Thursday        1.27437    0.78470    664.75
2/16/2007      February 16, Friday        1.27097    0.78680    665.10
2/19/2007     February 19, Monday         1.27097    0.78680    670.75
2/20/2007     February 20, Tuesday        1.27356    0.78520    663.90
2/21/2007   February 21, Wednesday        1.26598    0.78990    661.25


                                     28
2/22/2007   February 22, Thursday         1.26662   0.78950   676.60
2/23/2007     February 23, Friday         1.26263   0.79200   683.00
2/26/2007    February 26, Monday          1.26088   0.79310   685.75
2/27/2007    February 27, Tuesday         1.26056   0.79330   676.20
2/28/2007   February 28, Wednesday        1.26711   0.78920   664.20
3/1/2007      March 01, Thursday          1.27178   0.78630   670.40
3/2/2007       March 02, Friday           1.27649   0.78340   651.90
3/5/2007      March 05, Monday             1.294    0.77280   636.75
3/6/2007      March 06, Tuesday           1.29249   0.77370   643.75
3/7/2007     March 07, Wednesday          1.28783   0.77650   646.40
3/8/2007      March 08, Thursday          1.28899   0.77580   654.25
3/9/2007       March 09, Friday           1.28107   0.78060   652.25
3/12/2007     March 12, Monday            1.27567   0.78390   647.75
3/13/2007     March 13, Tuesday           1.27049   0.78710   650.80
3/14/2007    March 14, Wednesday          1.27226   0.78600   643.25
3/15/2007     March 15, Thursday          1.26839   0.78840   648.50
3/16/2007      March 16, Friday           1.25818   0.79480   653.20
3/19/2007     March 19, Monday            1.25063   0.79960   655.00
3/20/2007     March 20, Tuesday           1.2475    0.80160   659.00
3/21/2007    March 21, Wednesday          1.24766   0.80150   658.75
3/22/2007     March 22, Thursday          1.23716   0.80830   663.00
3/23/2007      March 23, Friday           1.24039   0.80620   656.25
3/26/2007     March 26, Monday            1.23503   0.80970   663.00
3/27/2007     March 27, Tuesday           1.23625   0.80890   664.00
3/28/2007    March 28, Wednesday          1.24008   0.80640   666.75
3/29/2007     March 29, Thursday          1.23793   0.80780   661.00
3/30/2007      March 30, Friday           1.23396   0.81040   661.75
4/2/2007       April 02, Monday           1.22459   0.81660   658.25
4/3/2007       April 03, Tuesday          1.22986   0.81310   664.25
4/4/2007     April 04, Wednesday          1.22249   0.81800   672.25
4/5/2007      April 05, Thursday          1.22055   0.81930   673.50
4/10/2007      April 10, Tuesday          1.21212   0.82500   677.40
4/11/2007    April 11, Wednesday          1.2108    0.82590   678.20
4/12/2007     April 12, Thursday          1.20831   0.82760   677.25
4/13/2007       April 13, Friday          1.20106   0.83260   681.75
4/16/2007      April 16, Monday           1.20091   0.83270   686.50
4/17/2007      April 17, Tuesday          1.19517   0.83670   688.00
4/18/2007    April 18, Wednesday          1.19717   0.83530   688.75
4/19/2007     April 19, Thursday          1.19676   0.83559   681.90
4/20/2007       April 20, Friday          1.19574   0.83630   691.40
4/23/2007      April 23, Monday           1.19918   0.83390   688.70

                                     29
4/24/2007    April 24, Tuesday         1.20715   0.82840   688.40
4/25/2007   April 25, Wednesday        1.20005   0.83330   684.00
4/26/2007    April 26, Thursday        1.21153   0.82540   673.00
4/27/2007     April 27, Friday         1.20322   0.83110   677.50
4/30/2007    April 30, Monday          1.20106   0.83260   677.00
5/1/2007     May 01, Tuesday           1.20671   0.82870   673.60
5/2/2007    May 02, Wednesday          1.21256   0.82470   663.50
5/3/2007     May 03, Thursday          1.21344   0.82410   674.20
5/4/2007      May 04, Friday           1.21847   0.82070   688.80
5/8/2007     May 08, Tuesday           1.20817   0.82770   684.25
5/9/2007    May 09, Wednesday           1.207    0.82850   683.00
5/10/2007    May 10, Thursday          1.20192   0.83200   673.50
5/11/2007     May 11, Friday           1.20106   0.83260   669.00
5/14/2007    May 14, Monday            1.20005   0.83330   670.20
5/15/2007    May 15, Tuesday           1.19789   0.83480   668.25
5/16/2007   May 16, Wednesday          1.21242   0.82480   667.75
5/17/2007    May 17, Thursday          1.21669   0.82190   656.75
5/18/2007     May 18, Friday           1.21212   0.82500   657.00
5/21/2007    May 21, Monday            1.21951   0.82000   658.00
5/22/2007    May 22, Tuesday           1.21758   0.82130   662.00
5/23/2007   May 23, Wednesday          1.21271   0.82460   662.05
5/24/2007    May 24, Thursday          1.21847   0.82070   659.00
5/25/2007     May 25, Friday            1.221    0.81900   655.30
5/29/2007    May 29, Tuesday           1.21921   0.82020   660.15
5/30/2007   May 30, Wednesday          1.21655   0.82200   652.65
5/31/2007    May 31, Thursday          1.2089    0.82720   659.10
6/1/2007      June 01, Friday          1.20294   0.83130   666.50
6/4/2007     June 04, Monday           1.1989    0.83410   671.10
6/5/2007     June 05, Tuesday          1.1946    0.83710   671.50
6/6/2007    June 06, Wednesday         1.18934   0.84080   669.70
6/7/2007     June 07, Thursday         1.18385   0.84470   668.75
6/8/2007      June 08, Friday          1.18666   0.84270   655.25
6/11/2007    June 11, Monday           1.1868    0.84260   650.30
6/12/2007    June 12, Tuesday          1.18497   0.84390   647.25
6/13/2007   June 13, Wednesday         1.19019   0.84020   647.65
6/14/2007    June 14, Thursday         1.19775   0.83490   653.25
6/15/2007     June 15, Friday          1.19048   0.84000   653.10
6/18/2007    June 18, Monday           1.18751   0.84210   656.00
6/19/2007    June 19, Tuesday          1.18203   0.84600   656.30
6/20/2007   June 20, Wednesday         1.18231   0.84580   657.70
6/21/2007    June 21, Thursday         1.18092   0.84680   650.50


                                  30
6/22/2007      June 22, Friday          1.17897   0.84820   652.85
6/25/2007     June 25, Monday           1.17925   0.84800   650.75
6/26/2007     June 26, Tuesday          1.18008   0.84740   647.00
6/27/2007    June 27, Wednesday         1.19403   0.83750   642.10
6/28/2007    June 28, Thursday          1.18189   0.84610   647.25
6/29/2007      June 29, Friday          1.17772   0.84910   650.50
7/2/2007      July 02, Monday           1.16333   0.85960   654.75
7/3/2007      July 03, Tuesday          1.17055   0.85430   654.25
7/4/2007     July 04, Wednesday         1.17055   0.85430   654.15
7/5/2007      July 05, Thursday         1.16809   0.85610   651.00
7/6/2007       July 06, Friday           1.167    0.85690   648.75
7/9/2007      July 09, Monday           1.16212   0.86050   661.25
7/10/2007     July 10, Tuesday          1.15982   0.86220   661.70
7/11/2007    July 11, Wednesday         1.1609    0.86140   663.00
7/12/2007     July 12, Thursday         1.15768   0.86380   667.25
7/13/2007      July 13, Friday          1.15101   0.86880   666.50
7/16/2007     July 16, Monday           1.14653   0.87220   666.00
7/17/2007     July 17, Tuesday          1.14521   0.87320   666.50
7/18/2007    July 18, Wednesday         1.13921   0.87780   666.75
7/19/2007     July 19, Thursday         1.13688   0.87960   674.50
7/20/2007      July 20, Friday          1.13688   0.87960   681.60
7/23/2007     July 23, Monday           1.13186   0.88350   682.00
7/24/2007     July 24, Tuesday          1.13109   0.88410   684.30
7/25/2007    July 25, Wednesday         1.13276   0.88280   674.75
7/26/2007     July 26, Thursday         1.13895   0.87800   670.00
7/27/2007      July 27, Friday          1.16822   0.85600   660.50
7/30/2007     July 30, Monday           1.17523   0.85090   661.50
7/31/2007     July 31, Tuesday          1.1636    0.85940   665.50
8/1/2007    August 01, Wednesday        1.17137   0.85370   665.75
8/2/2007    August 02, Thursday         1.16347   0.85950   666.25
8/3/2007      August 03, Friday         1.16645   0.85730   670.50
8/6/2007     August 06, Monday          1.16659   0.85720   671.50
8/7/2007     August 07, Tuesday         1.17055   0.85430   668.00
8/8/2007    August 08, Wednesday        1.16036   0.86180   675.50
8/9/2007    August 09, Thursday         1.17069   0.85420   662.60
8/10/2007     August 10, Friday         1.18273   0.84550   668.50
8/13/2007    August 13, Monday          1.18624   0.84300   668.75
8/14/2007    August 14, Tuesday         1.19275   0.83840   668.35
8/15/2007   August 15, Wednesday        1.21315   0.82430   667.25
8/16/2007   August 16, Thursday         1.27226   0.78600   662.25
8/17/2007     August 17, Friday         1.26791   0.78870   657.50

                                   31
8/20/2007       August 20, Monday           1.24922   0.80050   659.50
8/21/2007       August 21, Tuesday            1.25    0.80000   657.50
8/22/2007     August 22, Wednesday          1.24332   0.80430   659.50
8/23/2007      August 23, Thursday          1.22941   0.81340   660.75
8/24/2007       August 24, Friday           1.2133    0.82420   660.85
8/28/2007       August 28, Tuesday          1.21847   0.82070   666.00
8/29/2007     August 29, Wednesday           1.221    0.81900   664.25
8/30/2007      August 30, Thursday          1.22205   0.81830   666.00
8/31/2007       August 31, Friday           1.22594   0.81570   672.00
 9/3/2007     September 03, Monday          1.22594   0.81570   672.00
 9/4/2007     September 04, Tuesday         1.21286   0.82450   678.75
 9/5/2007    September 05, Wednesday        1.21286   0.82450   680.25
 9/6/2007    September 06, Thursday         1.20846   0.82750   688.15
 9/7/2007      September 07, Friday         1.2108    0.82590   701.00
9/10/2007     September 10, Monday          1.21389   0.82380   703.50
9/11/2007     September 11, Tuesday         1.20337   0.83100   704.15
9/12/2007    September 12, Wednesday        1.19033   0.84010   706.00
9/13/2007    September 13, Thursday         1.19119   0.83950   704.50
9/14/2007      September 14, Friday         1.18835   0.84150   716.35
9/17/2007     September 17, Monday          1.20077   0.83280   719.00
9/18/2007     September 18, Tuesday         1.19574   0.83630   714.75
9/19/2007    September 19, Wednesday        1.16891   0.85550   725.15
9/20/2007    September 20, Thursday         1.15727   0.86410   734.50
9/21/2007      September 21, Friday         1.15607   0.86500   737.00
9/24/2007     September 24, Monday          1.15354   0.86690   730.00
9/25/2007     September 25, Tuesday         1.15062   0.86910   728.50
9/26/2007    September 26, Wednesday        1.14299   0.87490   734.75
9/27/2007    September 27, Thursday         1.13947   0.87760   731.75
9/28/2007      September 28, Friday         1.12931   0.88550   743.00
10/1/2007      October 01, Monday           1.1197    0.89310   742.50
10/2/2007      October 02, Tuesday          1.13045   0.88460   731.00
10/3/2007     October 03, Wednesday         1.12587   0.88820   730.25
10/4/2007      October 04, Thursday         1.12575   0.88830   725.50
10/5/2007       October 05, Friday          1.11136   0.89980   737.00
10/8/2007      October 08, Monday           1.11136   0.89980   733.75
10/9/2007      October 09, Tuesday          1.11421   0.89750   736.00
10/10/2007    October 10, Wednesday         1.1121    0.89920   741.25
10/11/2007     October 11, Thursday         1.10583   0.90430   749.00
10/12/2007      October 12, Friday          1.10595   0.90420   749.50
10/15/2007     October 15, Monday           1.10963   0.90120   758.85


                                       32
10/16/2007     October 16, Tuesday         1.12867   0.88600   756.75
10/17/2007    October 17, Wednesday        1.11832   0.89420   762.50
10/18/2007    October 18, Thursday         1.11769   0.89470   764.15
10/19/2007      October 19, Friday         1.11919   0.89350   763.00
10/22/2007     October 22, Monday          1.26839   0.78840   751.25
10/23/2007     October 23, Tuesday         1.25628   0.79600   758.25
10/24/2007    October 24, Wednesday        1.26358   0.79140   757.50
10/25/2007    October 25, Thursday         1.27243   0.78590   767.50
10/26/2007      October 26, Friday         1.28254   0.77970   779.15
10/29/2007     October 29, Monday          1.27992   0.78130   788.50
10/30/2007     October 30, Tuesday         1.28287   0.77950   783.25
10/31/2007    October 31, Wednesday        1.28766   0.77660   789.50
11/1/2007    November 01, Thursday         1.27828   0.78230   790.25
11/2/2007      November 02, Friday         1.27779   0.78260   796.50
11/5/2007     November 05, Monday          1.27779   0.78260   804.75
11/6/2007     November 06, Tuesday         1.27779   0.78260   822.50
11/7/2007    November 07, Wednesday        1.27146   0.78650   834.50
11/8/2007    November 08, Thursday         1.26807   0.78860   841.10
11/9/2007      November 09, Friday         1.26711   0.78920   831.50
11/12/2007    November 12, Monday          1.26695   0.78930   803.50
11/13/2007    November 13, Tuesday         1.26247   0.79210   804.25
11/14/2007   November 14, Wednesday        1.2791    0.78180   813.50
11/15/2007   November 15, Thursday         1.28634   0.77740   794.00
11/16/2007     November 16, Friday         1.29467   0.77240   789.75
11/19/2007    November 19, Monday          1.29433   0.77260   778.85
11/20/2007    November 20, Tuesday         1.29467   0.77240   795.50
11/21/2007   November 21, Wednesday        1.29199   0.77400   798.00
11/22/2007   November 22, Thursday         1.29099   0.77460   803.25
11/23/2007     November 23, Friday         1.29082   0.77470   815.25
11/26/2007    November 26, Monday          1.28717   0.77690   830.00
11/27/2007    November 27, Tuesday         1.28717   0.77690   810.75
11/28/2007   November 28, Wednesday        1.28436   0.77860   801.75
11/29/2007   November 29, Thursday         1.28008   0.78120   794.50
11/30/2007     November 30, Friday         1.28783   0.77650   783.50
12/3/2007     December 03, Monday          1.29433   0.77260   784.25
12/4/2007     December 04, Tuesday         1.28634   0.77740   797.50
12/5/2007    December 05, Wednesday        1.27665   0.78330   793.00
12/6/2007    December 06, Thursday         1.27437   0.78470   801.50
12/7/2007      December 07, Friday         1.27097   0.78680   792.50
12/10/2007    December 10, Monday          1.27097   0.78680   809.50
12/11/2007    December 11, Tuesday         1.27356   0.78520   808.75


                                      33
 12/12/2007     December 12, Wednesday             1.26598        0.78990              814.00
 12/13/2007      December 13, Thursday             1.26662        0.78950              800.70
 12/14/2007        December 14, Friday             1.26263        0.79200              789.50
 12/17/2007       December 17, Monday              1.26088        0.79310              790.75
 12/18/2007       December 18, Tuesday             1.26056        0.79330              804.25
 12/19/2007     December 19, Wednesday             1.26711        0.78920              799.75
 12/20/2007      December 20, Thursday             1.27178        0.78630              795.25
 12/21/2007        December 21, Friday             1.27649        0.78340              810.50
 12/27/2007      December 27, Thursday             1.28899        0.77580              829.00
 12/28/2007        December 28, Friday             1.28107        0.78060              833.75




Correlation = 0.139

Covariance = 0.4276

Correlation between AUD and Gold = 0.14




   15. CONCLUSION

The three currency pairs that have the highest correlations with commodities are the
Canadian Dollar (CAD), Australian Dollar (AUD), and the New Zealand Dollar (NZD).
Highly correlated to rising and falling gold prices are the AUD/USD and NZD/USD
currency pairs, the single biggest beneficiary of rising oil prices is the USD/CAD.


When making trading decisions in the commodity pairs, it might be a good idea to take a
look at the correlated commodities because it can help to predict future up or down
movements. For example, if you think gold will keep rising, it might be a good strategy
to buy the Australian dollar since it has a positive correlation to gold.


Because Australia is the world's third largest exporter of gold, the Australian dollar has
an positive correlation with this metal. If you believe the price of gold will continue to
increase, you could favor a commodity-based economy like Australia because if gold
rises, the Australian Dollar is very likely to follow it's lead. If you think Gold will keep

                                              34
rising, it might be a good strategy to buy the Australian dollar because it's 80% positive
correlation to Gold.


Since the AUD/USD pair tends to be highly correlated to gold, it might be a good idea to
compare both AUD/USD and gold charts in order to predict future moves, if for example
gold breaks above an important resistance level and AUD/USD didn't break resistance
level yet, the AUD/USD is very likely to break above also. This illustrates how gold
tends to lead the move ahead of the Australian dollar.


It is worth mentioning that the demand and supply characteristics of gold also suggest
that gold prices will continue to rise from the current levels. The supply side has been
principally driven by the mine production and while this has been stable or falling over
the past 2 years, central bank sales and not hedging by the producers has been more key
to the overall supply condition. As a result and also due to strong positive correlation,I
see the Australian dollar strengthening from the current levels.




    Hot Commodities – Jim Rogers
    www.kitco.com
    www.x-rates.com
    www.forexdirectory.net
    www.dailyfx.net
    www.fxuniversal.com




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