How to trade gold in commodity derivatives market in India

Gold is one of the most attractive commodities amongst investors across the world. Gold is considered as a hedge against inflation and also as a safe-haven asset during economic turbulence. Whenever it comes to investing in commodities, most of the newbies as well as experienced traders prefer to invest in gold. World over, movement in gold prices takes place based on the fundamental factors such as supply demand, gross domestic product, inflation, interest rate, etc.. In India also there is a huge demand of gold.. 

Gold Futures

When the nationalized commodity exchanges, like MCX and NCDEX came into existence in 2003, initially  futures trading in Gold was allowed. Over the years, there has been  significant changes in the contract specifications. Currently,, four variants of gold futures; namely, Gold 1 Kg, Gold Mini (100 Gms), Gold Guinea (8 Gms) and Gold Petal (1 Gm) are available for trading at MCX.

Table: Contract specifications of different gold contracts

Margin in gold futures may change as per the direction and requirement of the exchange, i.e. MCX. It depends on multitude of factors like volatility, global factors, etc..

Table  2 gives a detailed understanding about margin for gold. 

Table 2: Gold margin 

• Margin percentage may vary as per the exchange requirement.

Gold Options

After taking over control of commodity market regulation from erstwhile Forward Markets Commission (FMC) on 28 September 2015, the Securities and Exchange Board of India strengthened the commodity market ecosystem by introducing series of measures by including Options on commodity futures. In a first step, the Options on commodity futures in gold was allowed by the regulator and accordingly, the first Options contract on gold futures was launched on 17th October 2017. Table 3 gives glimpse of Options contract. 

Table 3: Gold Options 

Commodity Index

Introduction of commodity-based indices was another milestone in the history of commodity derivative trading in India. A market index is an investment portfolio that reflects a portion of the financial market. Indices are best investment options for investors as these products will perform collectively of individual constituents within it. Commodity Indices solve many  of the challenges faced by commodity traders  such as; 1) delivery of the contract, as upon expiry, the commodity indices are cash settled , 2) margin payment, as to trade in a commodity index, one needs to pay a single margin only,. For e.g. to trade in gold and silver separately, , investors would require to deposit a margin of approximately Rs. 4 lakhs and Rs. 2 lakhs, respectively while the BULLDEX, which is an index of gold and silver in a proportion of 67% and 33%, respectively, require approximately Rs. 70,000 only. This amount of Rs 70,000 is lesser by Rs 3.30 lakhs compared to when separate positions are taken in one lot of Gold 1 Kg and Silver 30 Kg Futures.

Contract Specification of BULLDEX

Also Read: How to trade in commodity?

Summary

Gold is the most attractive commodity for Indians because of its traditional value for ornaments, family wealth,etc. and , as a store of value, as it provides  a hedge against inflation. In India, gold futures are available for trading in four different variants such as gold regular, gold mini, gold guinea and gold petal. In 2017, MCX launched Options trading in gold futures after gaining approval from the regulator and later the bullion index, BULLDEX was launched thereby giving wider  investment and trading options to retail participants..

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