loader2
Partner With Us NRI

Chapter 7: Bullions (Gold and Silver) – Part 1

15 Mins 01 Oct 2022 0 COMMENT

Gold is one of the most sought-after investment products and finds a special place in the global financial market. Gold was considered a medium of exchange before the introduction of currencies. You might know about various investment avenues for gold such as physical gold, gold Futures and Options, exchange traded funds (ETFs) and sovereign gold bonds. It is considered a safe asset because of its store of value. When the economic situation worsens, as we saw in 2020 when the COVID-19 pandemic struck, gold performed extremely well.

Let us understand all about the above-mentioned gold investments in derivative instruments such as index, Futures and Options.

Gold

Did you know?

COMEX, a division of CME, is the world’s largest exchange for trading gold and silver. It is also a benchmark market for MCX gold trading.

Gold is one of most important commodities traded on exchanges across the globe. Every commodity exchange would like to have gold in their product portfolio. However, only few exchanges have succeeded in launching gold as a product. On the global front, COMEX is the world’s largest exchange where precious metals such as gold and silver are available for trading.

In India, gold is available for trading on MCX, NSE and BSE. However, MCX is the market leader in gold trading. As a consumer of gold which is worn on various occasions such as marriages and festivals, you may be inclined to trade in gold. You might be under the impression that the price of gold rises during festivals and the marriage season due to increased demand for the yellow metal. However, this is not true because India is a price follower of the global benchmark. Hence, price trends in the global market, which is largely influenced by supply-demand, economic factors such as Gross Domestic Product (GDP), inflation, interest rates, industrial production, as well as geopolitical tensions, dictate the movement of the price of Indian gold.

Did you know?

India is the second largest importer of gold after China. It imports around 700-900 tonnes annually. In 2021, India imported 924.6 tonnes of gold, higher by 165% YoY because of lower international prices and reduction in gold import duty from 12.5% to 7.5%.Source: World Gold Council and Ministry of Finance, Government of India

Gold contract specifications

Indian commodity exchanges offer derivative trading in the form of Futures and Options only and no cash segment in commodities like the equity market. It is a known fact that exchange traded commodity derivatives are deliverable contracts, i.e., on expiry of the contract, open positions are settled physically with delivery between buyers and sellers through the exchange.  

You may be wondering about how to start trading in gold derivatives in India. Gold is available for trading through Futures, Options and Bullion Index.

 

MCX Bullion Futures contract specifications

 

Gold

Gold Mini

Gold Guinea

Gold Petal

Silver

Silver Mini

Silver Micro

Contract size

 1 kg

100 grams

8 grams

1 gram

30 kg

5 kg

1 kg

 Quotation base

10 grams

10 grams

8 grams

1 gram

1 kg

1 kg

1 kg

Delivery unit

1 kg

100 grams

8 grams

1 gram

30 kg

5 kg

1 kg

Delivery logic

Compulsory if the contract is open on the expiry day

Expiry date

5th day of month of expiry

5th day of month of expiry

Last day of calendar month

Last day of calendar month

5th day of month of expiry

Last day of calendar month

Last day of calendar month

Tick size

Rs. 1/10 grams

Rs. 1/10 grams

Rs. 1/8 grams

Rs. 1/1 gram

Rs. 1/kg

Rs. 1/kg

Rs. 1/kg

Initial margin*

Minimum 6% or based on SPAN, whichever is higher

Minimum 10% or based on SPAN, whichever is higher

Extreme loss margin

Minimum 1%

Minimum 1%

*Initial margin could vary as per the exchange requirement from time to time.

Did you know?

Gold 1 kg and Gold Mini are bi-monthly contracts whereas Gold Guinea and Gold Petal are monthly contracts.

Since all gold contracts are deliverable on expiry, the exchange has a mechanism to square off positions. If you do not wish to give/take delivery of the commodity, you just need to exit from your positions before commencement of the tender delivery period that starts five days prior to expiry of the contract.

Example: If expiry of Gold 1 kg and Gold Mini is on the 5th of the contract expiring month, then the tender delivery period starts from the 1st of expiring month (assuming all working days in between). For Gold Guinea and Gold Petal, if the expiry date is the 30th of an expiry month, then the tender delivery period starts from 25th of the expiring month (assuming all working days in between).

Gold Options: After taking over regulation of the commodity market from FMC, SEBI had allowed Options trading in commodity with Futures as an underlying. Accordingly, MCX launched trading on gold Options in 2017.

MCX Bullion Options contract specifications

Parameters

Description

Underlying

MCX Gold Futures (1 kg) Contract

MCX Silver Futures (30 kg) Contract

MCX Silver Mini Futures (5 kg) Contract

Expiry day

(Last trading day)

8 business days prior to expiry of underlying

8 business days prior to expiry of underlying

Underlying quotation/ Base value

Rs. / 10 grams

Rs. / Kg

Underlying price quote

Ex-Ahmedabad

Ex-Ahmedabad

Strikes

15 In the Money (ITM), 1 At the Money (ATM) and 15 Out of the Money (OTM) strike prices

25 In the Money (ITM), 1 At the Money (ATM) and 25 Out of the Money (OTM) strike prices

Strike price intervals

Rs. 100

Rs. 250

Tick size

(Minimum price movement)

Rs. 0.50

Rs. 0.50

Daily price limit

The upper & lower price band shall be determined based on a statistical method using Black & Scholes Options pricing model and relaxed considering the movement in the underlying Futures Contract

Settlement

On expiry of Options Contract, the open position shall devolve into underlying Futures position as follows:

  • Long Call position shall devolve into long position in the underlying Futures Contract
  • Long Put position shall devolve into short position in the underlying Futures Contract
  • Short Call position shall devolve into short position in the underlying Futures Contract
  • Short Put position shall devolve into long position in the underlying Futures Contract

All such devolved Futures positions shall be opened at the strike price of the exercised Options

Bullion index

As an equity market investor, you are likely to be familiar with equity indices such as Nifty, Bank Nifty, Sensex etc. Likewise, the Indian commodity market has also launched the bullion index. Commodity indices solve most of the challenges faced by commodity traders who trade in multiple commodities such as payment of single margin instead of multiple margins in different contracts, tracking of a single contract instead of multiple contracts, etc.  

Did you know?

BULLDEX is the bullion index comprising of gold and silver with weightage of 64% and 36% respectively.

To trade in Gold 1 Kg and Silver 30 kg contracts separately, investors are required to deposit a margin of approximately Rs. 4 lakh and Rs. 2 lakh respectively while the BULLDEX requires approximately Rs. 70,000. 

Contract specifications of BULLDEX

Parameters

Description

Underlying

MCX iCOMDEX Bullion

Expiry day

(Last trading day)

One business day prior to the start of rollover period in the underlying constituent/(s) index

Underlying quotation/Base value

Index points

Tick size

(Minimum price movement)

Rs. 1

Trading unit

Rs. 50 * MCX iCOMDEX Bullion index

Daily price limit

The base price limit will be 3%. Whenever the base daily price limit is breached, relaxation will be allowed up to 6% without any cooling off period in trade. In case the daily price limit of 6% is also breached, then, after a cooling off period of 15 minutes, the daily price limit will be relaxed up to 9%.

Settlement

Cash settlement

 

Summary

  • Bullion—gold and silver—is the most attractive commodity segment amongst market participants.
  • There are different ways to invest/buy gold. These are: physical gold, gold Futures, gold Options, bullion index, gold ETFs and Sovereign Gold Bonds.
  • MCX offers bullion trading—gold and silver—in the form of Futures and Options as well as index.
  • MCX offers gold Futures trading in four variants, namely Gold Regular of 1 kg; Gold Mini of 100 grams; Gold Guinea of 8 grams and Gold Petals of 1 gram Contract.
  • Gold and silver Options have their respective commodity Futures as underlying.
  • Since commodity Futures are deliverable contracts, bullion Options devolve into Futures Contracts if they are not squared before commencement of the tender delivery period.
  • BULLDEX is the bullion index comprising of gold and silver with weightage of 64% and 36% respectively.

Are you curious about what drives the prices of gold and silvers in the market? In the next chapter, we will discuss the factors that drive gold and silver prices. 

Disclaimer: ICICI Securities Ltd. (I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. - ICICI Venture House, Appasaheb Marathe Marg, Prabhadevi, Mumbai - 400 025, India, Tel No : 022 - 6807 7100. I-Sec 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. Name of the Compliance officer (broking): Mr. Anoop Goyal, Contact number: 022-40701000, 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.  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 securities quoted are exemplary and are not recommendatory. Such representations are not indicative of future results. 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.