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

Introduction:

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

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 Ltd. ( I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. - ICICI Centre, H. T. Parekh Marg, Churchgate, Mumbai - 400020, India, Tel No : 022 - 2288 2460, 022 - 2288 2470. The contents herein above shall not be considered as an invitation or persuasion to trade or invest.  I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon. 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. Investments in securities market are subject to market risks, read all the related documents carefully before investing. The contents herein mentioned are solely for informational and educational purpose.