It’s often said that the key to building a good fortune is to buy and sit on gold as the dust on gold doesn’t change its true nature. No wonder, civilizations after civilizations have equated gold to power, beauty, and auspices. The yellow metal is treated as one of the preferred modes of investment by investors in India. The current pandemic crisis has reassured faith in gold investment.
Over the period, Gold Futures investments have gained momentum among investors.
Understanding of Gold Futures trading
Gold Futures is a trading scheme in which both investor and seller agree upon purchasing or selling gold in the future date for a price decided today – depending on the long or short position. It is considered a price hedge. In simple words, neither the buyer needs to invest the entire amount upfront, nor the seller needs to deliver any gold just yet.
To further simplify, let’s suppose Amit is planning to gift his wife a gold necklace that weighs 100 gms on their wedding anniversary which is on 12th June 2022. On 1st Jan 2022, the price of 10 gms of gold is Rs 50,000. He expects that the price of gold will rise as investors during a pandemic crisis will shift from risky assets like equities to safe investments like gold. He approaches a trusted jeweller. However, the jeweller on the contrary believes that the gold prices will fall.
Both decide to enter into a gold futures agreement that Amit will buy 100 gms of gold from the jeweller on 1st June 2022 at Rs 50,000 per 10 gms. Now there can be three scenarios:
1) Gold price increases – Amit would be able to buy gold from the jeweller at a price less than the market price.
2) Gold price remains flat – Amit would buy gold and jeweller will sell the gold at the same price agreed upon in the agreement.
3) Gold price decreases – Here Amit would be at a loss while jeweller will earn profit.
Gold Futures trading in India
Gold Futures in India can be traded through BSE, NSE, and MCX (Multi Commodity Exchange). One can invest in Gold Futures as per his or her choice of budget. For instance, one can get a gold contract for 1kg, 100 gm, 8 gm, 10 gm or 1 gm.
The gold futures contracts are purchased and sold through Demat accounts and are highly secured. Only a margin amount is required to enter the contract which is a minimum of 4% in India. The MCX futures contract commences on the 16th day of the launch month till the 5th day of the expiry month.
Furthermore, the investor must have a thorough understanding of gold’s value in the global market. It is always advisable to consult a financial expert before investing in gold futures.
Settlement of contract
The reliability of gold futures contracts is evident from the fact that they are offered by and traded on exchanges. There is the delivery of physical gold, in 24 carats purity at the contract expiry.
In India, if any income or profits earned from the trading of Futures is treated as capital gains then that is considered as short-term income or profit and is taxed as per the regular income tax slab rates.
One must be aware of both benefits and risks involved before investing in Gold Futures
1. There isn’t a need for an immediate storage facility to store the physical gold
2. Less capital is required to enter the contract as the buyer can pay a certain amount at the time of finalizing the deal and rest at the time of signing the agreement
3. Excellent liquidity on offer. Physical gold is comparatively less liquid than gold futures
1. Fluctuation in gold prices can put the investor at risk of losing money if there is a drastic fall in prices from the time of signing an agreement to the date of delivery
2. The gold futures market can be unpredictable, putting them at possible risk of crashing
Moneycontrol journalists were not involved in the creation of the article