What is Gold Futures?

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  • 10 Oct 2023
What is Gold Futures?

Gold futures contracts allow trading standardized contracts on gold price without requiring actual physical gold. In India, gold futures are traded on Multi Commodity Exchange (MCX) and Indian Commodity Exchange (ICEX).

Gold futures have monthly expiry cycles up to 12 months. This allows taking positional trades beyond daily price movements. As the gold prices rise (go long) or fall (go short), enabling traders to profit from gold futures trading. Leverage allows trading with margin. Global cues like economic growth, interest rates, inflation, currency movements, geopolitics, and central bank policies drive gold prices. Along with exchange rates, gold prices are influenced by demand from jewelry and investments in the domestic market.

Gold futures can be used by gold jewelers, miners and bullion traders to protect themselves against risks related to commodity prices. Nowadays, without holding physical gold, gold price movements offer retail investors exposure through gold futures. Gold investment is useful for portfolio diversification. You can also do risk management through stop losses and discipline becomes more important when working with leverage.

Here is a brief overview on why gold is considered important:

  • Gold, with its inherent worth, keeps up its buying power across the board. In adverse financial conditions, real estate remains resilient and holds its value. Gold traditionally grows in value when inflation rises, shielding investors from diminishing currency.

  • Other asset classes, including stocks and bonds, tend to react differently to gold price changes. It helps diversify portfolio risk. Gold is seen as a safe haven during times of geopolitical or economic stability.

  • Gold, besides these applications, has a global demand base level for jewelry and industrial uses. With increasing difficulties in finding new gold reserves, supply is being restricted. Above-ground stocks hinder rapid supply increase capability. Central banks continue to hold gold as an important asset to support their monetary policies and exchange rate management.

  • With easy buying and selling options, large gold trading markets offer global access. With gold, cash conversion happens quickly. Physical gold ownership offers a direct asset benefit uncommon in investments. The appeal of it lies with investors against unpredictable financial assets.

  • Both individual investors and central banks view gold as an attractive strategic asset due to its intrinsic value and cultural standing.

Gold prices go up along with inflation, which drains currency value. The dual benefit of low interest rates and reduced opportunity cost makes holding non-yielding gold more appealing. Whenever the dollar changes, gold prices tend to shift. An inverse relationship can be seen between gold and dollar rates.

When geopolitical tensions heighten, market volatility spikes, or economic growth slows, investors seek refuge in gold and drive up its worth. Central banks have a toolkit of policies including monetary easing, which boosts the money supply and fuels gold demand. Also driving prices up, large central bank purchases. Gold jewelry, culturally significant in India and China, accounts for a large portion of retail gold demand each year. Their growth impacts prices. Due to different reasons mine closures and reduced gold reserves lead to increased gold prices.

Here are some of the key benefits of investing in gold futures:

  • Trade Margin: With a small margin deposit, taking a leveraged exposure to physical gold prices is possible through gold futures. Both upside profits and downside risk are magnified by this.

  • Safe investment: Gold prices go up as a hedge during inflationary times. Cash holdings are protected against inflation with futures.

  • Low Volatility: Stocks, bonds, and gold, diversification via negative correlations, is what portfolio. Decreasing portfolio volatility, gold futures addition makes for a wise investment choice.

  • Liquidity: When looking at exchanges, the transparent pricing of gold futures allows for fair price discovery compared to physical gold..

  • No Extra Charges: Those costs - insurance, transportation, storage, and others - associated with physical gold ownership are lower when trading futures.

  • Taxation: An income tax favor - profits gained on futures held beyond 36 months are taxed at lower rates compared to short-term capital gains tax.

  • Less Risk: Having defined risk means limited losses when trading.

Understanding risks like leverage, volatility, and effective trading discipline is crucial when trading in gold futures.

Here are some steps to start gold futures trading in India:

  1. Open a trading account with a broker who provides access to commodity futures markets like MCX or NCDEX.

  2. Understand the contract specifications like contract size (100 grams or 1 kg), price quotation (Rs per 10 grams), delivery units.

  3. Analyze factors affecting gold prices like global economic outlook, dollar movement, inflation, interest rates, demand/supply.

  4. Formulate trading strategy - whether to go long or short based on price outlook, maintain spread positions etc.

  5. Place margin with brokers to take leveraged positions in gold futures. Brokers will specify minimum margin requirements.

  6. Place buy/sell orders through the broker's trading platform during market hours. Monitor position constantly.

  7. Use stop losses to limit downside, book profits at target levels. Square off position before expiry or take delivery.

  8. Rollover position to next month before expiry if maintaining longer term view. Factor in rollover costs.

  9. Understand trading hours, order types, settlement process of exchange like MCX or NCDEX.

  10. Analyze trading outcomes, and refine trading strategy accordingly.

Key is starting small, managing risk prudently and developing skills with experience over time. Consistent disciplined approach essential for gold futures trading success.

Here are some of the key factors that affect gold futures prices in India:

  • Global Gold Prices: India imports over 90% of its gold requirement. So domestic gold futures track global price movements driven by international supply-demand dynamics. Events like geopolitical tensions that affect global prices also impact Indian gold futures.

  • Rupee Movement: Gold is traded in dollars globally. Rupee depreciation against the dollar increases the landed price of gold imports for Indian buyers. This results in upward pressure on domestic gold futures prices.

  • Inflation and Interest Rates: Gold is seen as a hedge against inflation. High inflation and low interest rates make gold an attractive investment bet, lifting futures prices. Tighter monetary policy depressing prices.

  • Domestic Demand: India accounts for over 25% of global gold demand. Higher demand during festivals and wedding season drives domestic prices of gold higher. Good monsoons also boost rural demand.

  • Import Duty Changes: The Indian government adjusts import duties on gold periodically based on the CAD situation. Higher import duties make gold costlier and push domestic futures prices up.

  • Exchange Traded Funds (ETFs): Gold ETFs in India allow stock-market type trading in gold. Large ETF inflows and outflows influence futures prices due to arbitrage between physical gold and ETF units.

In summary, while global cues dominate, domestic factors like inflation, monetary policy, import duties and demand from India's massive gold consumer base also significantly impact local gold futures.

Conclusion

As you know about gold futures, and the factors which affect the gold futures, you can simply evaluate different strategies to do gold futures investing. In the stock market, investing in gold can be done through various methods. Before investing in any gold based investment do your research and invest accordingly. The market is always volatile, research and invest according to your financial goals.

FAQs on Gold Futures

Gold futures are derivative contracts that allow investors to buy or sell gold at a predetermined price in the future. Gold futures are traded on exchanges like MCX and allow trading in gold without physical delivery.

Gold futures prices are largely determined by global gold prices that depend on international supply-demand. Domestic factors like rupee movement, import duties and Indian demand also impact domestic gold futures prices.

Investors can gain exposure to gold prices without holding physical gold. Gold futures can be more liquid than physical gold. It allows trading gold with leverage by paying a small margin. Futures can be used to hedge commodity price risk.

On MCX, gold futures have a trading unit of 1 kilogram. They are settled in cash on expiry and carry a maximum trading period of 12 months. MCX gold futures price quotes are in rupees per 10 grams.

Futures trading carry risks like high leverage leading to magnified losses. Prices can be volatile due to global factors. There are roll-over risks on expiry of contracts. Liquidity risk is lower but still exists in futures.

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