A beginner's guide to trading in gold

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With the previous chapter, we’ve formally set foot into the commodities segment of this module. Among the various commodities that are available for trade in India, very few are as popular as gold. In this chapter, we’ll be touching upon gold trading in India and the various types of gold contracts that you can trade.  

Gold: An overview

Gold has always held a special place in the hearts of Indians. It plays a very important role in the very culture of our country, with many even considering gold to be auspicious. In addition to that, we also firmly believe in gold as a lucrative investment opportunity that can help you grow your wealth. 

With such deep affinity for this yellow metal, it shouldn’t be of any surprise to know that gold is one of the most traded and highly popular commodities in India. The commodities market in India allows you to trade in gold in both the cash segment and the derivatives segment. 

As a matter of fact, through the derivatives segment, the commodities market gives you an opportunity to make use of the price movements of gold for earning short-term profits. Just imagine, you can reap the rewards offered by gold without having to go through the hassle of purchasing and storing physical gold. How convenient.

The purchase of gold in the spot market is very similar to the purchase of direct equity. So, we’ll focus on gold trading in India in the derivatives segment instead. There’s a lot of action there, anyway.

The different types of gold contracts 

In the Indian commodities market, with respect to gold trading in India, we have not one, not two, but four different types of derivative contracts. Amazing isn’t it? Without any further ado, let’s jump right into the various gold contracts and analyse them one after the other.  

Gold 

This is the regular derivative contract of gold. The gold derivatives contract is the single most traded contract in the commodities market. Here’s a tabulated format of the gold contract specifications. 

Particulars

Contract specifications

Lot size 

1 kilogram 

Price quote

INR value per 10 grams 


(includes taxes, duties, and other levies)


(excludes GST, any other additional tax, cess, octroi, or surcharge)  

Tick size

1 rupee

Contract expiry date

5th day of the contract expiry month. 


If the 5th day of the contract expiry month falls on a holiday, the previous trading day would be the contract expiry date. 

Contract availability

6 contracts, with a validity of 2 months each. 


For instance, if you check the list of available contracts on the MCX website in the month of July 2020, you’re likely to find the following 6 contracts.


  • 05AUG2020 
  • 05OCT2020
  • 04DEC2020
  • 05FEB2021
  • 05APR2021
  • 04JUN2021

Maximum order size

10 kilograms

Delivery

Mandatory

Now that you’re familiar with the contract specifications, let’s take a look at the gold futures price as listed on the MCX (Multi Commodity Exchange).

We’re currently looking at the August 2020 gold futures contract that’s being traded on the exchange for Rs. 49,148. This price at which it is trading pertains to 10 grams of gold. Since the minimum lot size is 1 kilogram (1000 grams), the total contract value comes up to Rs. 49,14,800 (Rs. 49,148 x 100), which is a huge initial investment to make. The margin alone that you would be required to deposit for purchasing this contract would come up to Rs. 4,91,480 (assuming that the margin is 10%).

This hefty margin alone puts the contract way beyond the reach of individual traders. This is exactly why the other gold contracts namely, the gold mini, gold guinea, and gold petal exist. They have significantly lower lot sizes, thereby lowering the contract value and by extension, resulting in a lower margin requirement.        

Gold mini

Compared to the gold derivative contract, the gold mini contract comes with lower margin requirements and a more manageable lot size. Here’s a glimpse of the specifications of the gold mini contract.

Particulars

Contract specifications

Lot size 

100 grams 

Price quote

INR value per 10 grams 


(includes taxes, duties, and other levies)


(excludes GST, any other additional tax, cess, octroi, or surcharge)  

Tick size

1 rupee

Contract expiry date

5th day of the contract expiry month. 


If the 5th day of the contract expiry month falls on a holiday, the previous trading day would be the contract expiry date. 

Contract availability

3 contracts, with a validity of 1 month each. 


For instance, if you check the list of available contracts on the MCX website in the month of July 2020, you’re likely to find the following 3 contracts.


  • 05AUG2020
  • 04SEP2020 
  • 05OCT2020

Maximum order size

10 kilograms

Delivery

Mandatory

As with the previous gold contract, let’s take a look at the gold mini futures price as listed on the MCX (Multi Commodity Exchange).

Again, we’re looking at the August 2020 gold mini futures contract that’s being traded on the exchange for Rs. 49,160. This price at which it is trading pertains to 10 grams of gold. Since the minimum lot size is just 100 grams, the total contract value comes only up to Rs. 4,91,160 (Rs. 49,160 x 10), which is pretty normal. The margin that you would be required to deposit for purchasing this contract would come up to Rs. 49,148 (assuming that the margin is 10%), which is quite manageable for an average trader. But if you still find this too expensive to trade in, the gold market in India has another option for you - the gold guinea.    

Gold guinea

The gold guinea contract was introduced primarily for traders who find the margin requirements of the gold mini contract as still being too steep. According to the MCX, these are the specifications of the gold guinea contract. 

Particulars

Contract specifications

Lot size 

8 grams 

Price quote

INR value per 8 grams 


(includes taxes, duties, and other levies)


(excludes GST, any other additional tax, cess, octroi, or surcharge)  

Tick size

1 rupee

Contract expiry date

Last calendar day of the contract expiry month. 


If the last calendar day of the contract expiry month falls on a holiday, the previous trading day would be the contract expiry date. 

Contract availability

4 contracts, with a validity of 1 month each. 


For instance, if you check the list of available contracts on the MCX website in the month of July 2020, you’re likely to find the following 4 contracts.


  • 31JUL2020
  • 31AUG2020
  • 30SEP2020 
  • 30OCT2020

Maximum order size

10 kilograms

Delivery

Mandatory

Again, here’s a snapshot of the gold guinea futures price as taken from the MCX. 

Here, we’re looking at the July 2020 gold mini futures contract that’s being traded on the exchange for Rs. 39,575. This price at which it is trading pertains to 8 grams of gold. Since the minimum lot size is also 8 grams, the total contract value comes only up to Rs. 39,575, which is very low. The margin that you would be required to deposit for purchasing this contract would only come up to around Rs. 3,958 (assuming that the margin is 10%), which is very affordable. 

Gold petal

The gold petal is the smallest and the most affordable gold contract in the Indian commodities market. The specifications of the gold petal contract have been tabulated below. 

Particulars

Contract specifications

Lot size 

1 gram 

Price quote

INR value per 1 gram 


(includes taxes, duties, and other levies)


(excludes GST, any other additional tax, cess, octroi, or surcharge)  

Tick size

1 rupee

Contract expiry date

Last calendar day of the contract expiry month. 


If the last calendar day of the contract expiry month falls on a holiday, the previous trading day would be the contract expiry date. 

Contract availability

4 contracts, with a validity of 1 month each. 


For instance, if you check the list of available contracts on the MCX website in the month of July 2020, you’re likely to find the following 4 contracts.


  • 31JUL2020
  • 31AUG2020
  • 30SEP2020 
  • 30OCT2020

Maximum order size

10 kilograms

Delivery

Mandatory

And, here’s a snapshot of the gold petal futures contract from the MCX website. 

The July 2020 gold petal futures contract is priced at Rs. 4,917. This price at which it is trading the MCX pertains to just 1 gram of gold. Since the minimum lot size is also 1 gram, the total contract value comes only up to Rs. 4,917, which again is lower than all the other gold futures contracts. The margin that you would be required to deposit for purchasing this contract would only come up to around Rs. 491 (assuming that the margin is 10%), which is exceptionally low and super affordable. 

Wrapping up

Here’s a word of caution as we wrap things up. It is natural for you to get attracted to the gold guinea and gold petal contracts due to the lower margin requirements. However, always remember to check the volume, the open interest, and the number of contracts that are being traded before taking a position yourself. Sometimes, these contracts may suffer from low liquidity, which might make squaring off your positions that much harder. This is especially true with gold guinea contracts. 

A quick recap

  • Through the derivatives segment, the commodities market gives you an opportunity to make use of the price movements of gold for earning short-term profits.
  • The Indian commodities market, there are four different types of gold contracts. 
  • The gold derivatives contract is the regular derivative contract of gold. It is the single most traded contract in the commodities market. It comes with a lot size of 1 kilogram.
  • Next, we have the gold mini, which comes with lower margin requirements and a more manageable lot size of 100 grams.
  • The gold guinea contract was introduced primarily for traders who find the margin requirements of the gold mini contract as still being too steep. Here, the lot size is 8 grams.
  • The gold petal is the smallest and the most affordable gold contract in the Indian commodities market. It has a lot size of just 1 gram.
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