Spot Gold rate v/s Futures Gold rate– Understanding the basics

12 Nov 2021|

2 min read |

by ICICI Securities Team

Gold is a precious metal that has found its way into Indian culture since the days of yore. The making of ornaments and also investment in gold have kept rising, regardless of its skyrocketing prices. In financial markets, gold is classified as a commodity . Like all other commodities, you can buy gold at two prices– Spot Gold and Futures Gold. It is important to know what each of these terms means to decide on how you should proceed with your investments in this yellow metal.

What is Spot Gold?

Spot Gold means a trade of gold where the transaction takes place on the spot. The payment for gold is made immediately against its instant delivery at the ongoing market price. The rate for this kind of gold trade is the Spot Gold rate or Spot Gold price.

For instance, let’s assume you want to buy 10 grams of gold from the Spot Trade market. If the ongoing market price of gold is Rs. 5,000/gm, you will have to pay Rs. 50,000 for immediate delivery of 10 grams of gold.

What is Futures Gold?

Futures Gold means trading in gold and the payment is made on a particular date in the present for delivery on a particular future date. The Futures Gold rate is typically more than the Spot Gold price, as it involves the risk of theft and inflation till the commodity is delivered to the buyer.

For instance, if you need delivery of 10 grams of gold five months from now, you can buy it now through the Futures Gold route. Let’s assume the price for Futures Gold is Rs. 5,500/gm. At this price, you have to now pay Rs. 55,000 for 10 grams of gold. Five months later, when you take the delivery of the gold, its ongoing market price could be less or more than Rs. 55,000. In case it’s more than 55,000, say Rs. 57,000, you make a profit of Rs. 2,000 from the futures trade. However, if the price is on the lower side, say Rs. 52,000, you have made a loss of Rs. 3,000.

Additional Read: Why Invest in Gold?

Understanding the pricing of Spot Gold and Futures Gold

Gold continues to be a vital component of portfolios of almost all investors due to the lucrative returns it offers. The pricing of this metal depends on various factors like demand-supply, fluctuations in currencies , global and domestic economic and political conditions, etc. The daily price of Spot Gold keeps changing as per the market scenario. Spot gold does not involve any storage risk and market price speculations owing to its immediate delivery feature. Hence, it is cheaper than the price of Futures Gold.

Differences between Spot Gold and Futures Gold

Particulars	Spot Gold	Future Gold
Pricing	Spot Gold rate is the existing market price.	Futures Gold rate is arrived at after taking into account The Spot Gold price The time after which the delivery is sought Storage risks or theft Inflation
Risk Factor	There is little or no risk involved in this trade. You are purchasing gold at face value.	This is a riskier trade proposition as there is no certainty if the price of gold at the time of delivery will be less or more than the Futures Gold price.
Delivery Status	You can take immediate delivery.	The agreed delivery date will be in the future.
Liquidity Quotient	The on-the-spot delivery associates a very high liquidity quotient with Spot Trade.	The liquidity quotient is less as your money is locked for the given period, and you will receive the delivery on a particular date in the future.
Payment Terms	The payment for the purchase is done immediately.	The payment for the purchase is done within 1-2 days of signing the Futures Gold contract.

Additional Read:Comparison between Gold ETF and Gold Futures

Conclusion

Spot Gold trade and Futures Gold trade are fundamentally different ways of investing in the yellow metal. Now that you are aware of the basics of investing in gold, you can test the waters, and then dive. The same central principles apply to other commodities as well.

Disclaimer

ICICI Securities Limited has its registered office at ICICI Venture House, Appasaheb Marathe Marg, Prabhadevi, Mumbai - 400025, India, Tel No:- 022 - 2288 2460, 022 - 2288 2470. The non-broking products / services like iLearn and Financial Learning are not exchange traded products / services and ICICI Securities Ltd. is just acting as a distributor/ referral Agent of such products / services and all disputes with respect to the distribution activity would not have access to Exchange investor redressal or Arbitration mechanism. iLearn is not an exchange traded product/service of ICICI Securities Ltd. All disputes with respect to the activity on the platform would not have access to Exchange investor redressal or Arbitration mechanism.

ICICI Securities Ltd. is a Member of National Stock Exchange of India Ltd (Member Code :07730), BSE Ltd (Member Code :103) and Member of Multi Commodity Exchange of India Ltd. (Member Code: 56250) and having SEBI registration no. INZ000183631. ICICI Securities Ltd. is a SEBI registered with SEBI as a Research Analyst vide registration no. INH000000990. Name of the Compliance officer (broking): Mr. Atul Agrawal, Contact number: 022-69997051, E-mail address: complianceofficer@icicisecurities.com Investments in securities markets are subject to market risks, read all the related documents carefully before investing. The contents herein above shall not be considered as an invitation or persuasion to trade or invest. ICICI Securities Ltd. and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon. Such representations are not indicative of future results. The securities quoted are exemplary and are not recommendatory. AMFI Regn. No.: ARN-0845. PFRDA registration numbers: POP no -05092018. ICICI Securities Ltd. acts as a Composite Corporate agent having registration number -CA0113. Mutual Fund Investments are subject to market risks, read all scheme related documents carefully. Please note, Mutual Fund, Corporate Fixed Deposits, Bonds, Alternate investment funds, Tax planning, Succession planning, NPS, IPO, Investment Advisory and Loans related services are not Exchange traded products and ICICI Securities Ltd. is acting as a distributor to solicit these products. Please note, Insurance related services are not Exchange traded products and ICICI Securities Ltd. is acting as a corporate agent to solicit these products. All disputes with respect to the distribution activity, would not have access to Exchange investor redressal forum or Arbitration mechanism. The non-broking products / services like Research, etc. are not exchange traded products / services and all disputes with respect to such activities would not have access to Exchange investor redressal or Arbitration mechanism. The contents herein above are solely for informational purpose and may not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments or any other product. Investors should consult their financial advisers whether the product is suitable for them before taking any decision. The contents herein mentioned are solely for informational and educational purpose.

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