Gold Futures

About Gold

Gold is one of the oldest precious metals known to mankind and has been used as a global currency for thousands of years . It is not only considered as an object of beauty that can be shaped into intricate designs known as gold jewellery but also as an avenue for investment. 

Gold Futures

A gold futures contract is a standardised derivatives contract between two parties to buy or sell gold at a predetermined price and quantity (lot size) on a specified date in the future. Gold futures are standardised in terms of quality and quantity to facilitate trading on exchanges. In order to trade in gold futures, both the buyer and the seller need to keep a margin. It is either cash settled or physically settled.

Internationally gold futures are traded on exchanges like the Nymex (New York Mercantile Exchange) and Tokyo Commodity Exchange.

Gold futures India

In India, gold futures are traded on MCX (Multi Commodity Exchange). The gold futures contracts available for trade are:

• Petal MCX gold futures:1 gram of gold.
• Guinea MCX gold futures: 8 grams of gold.
• Mini MCX gold futures: 100 grams of gold.
• MCX gold futures: 1 kg gold.

Gold futures can be traded from Mondays through Friday 9.00 a.m. to 11.55 p.m. Gold futures chart shows the live gold futures prices of the contracts.

Contract Launch Calendar for Gold contracts

(Reference Circular No.: MCX/TRD/079/2022 dated February 15, 2022)

Gold future contracts are available for trade on the 16th day of contract launch month. If 16th day is a holiday, then the following working day is considered as the start day. However, the last trading day is the 5th day of contract expiry month. If 5th day is a holiday then the preceding working day is considered as the last trading day.

Gold futures price

• Spot price refers to the price of gold in the cash market.
• Future price refers to the price of the gold futures contract.
• The initial margin required to take a position in gold futures is minimum 6% or based on SPAN whichever is higher.
• The extreme loss margin applicable is minimum 1%.

Gold futures settlement

• Cash Settlement

In order to opt for cash settlement, the trader has to square off his position before the 1st of the expiry month. Then the difference between the strike price and the spot price will be calculated and the profit or loss will be adjusted accordingly.

• Delivery Settlement

Gold futures are compulsorily settled on the 5th of every month. 

• Delivery Period Margin shall be higher of: 

  • a. 3% + 5 day 99% VaR of spot price volatility or 
  • b. 25%.
• Delivery pay-in will be on E + 1 working day basis (E- Expiry day) by 2.00 p.m. except Saturdays, Sundays and Trading Holidays. 
• Funds Pay-in will be on Tender/ Expiry day + 1 working day basis by 2.00 p.m. 
• Delivery Pay-out will be on Tender/ Expiry day + 1 working day basis by 4.00 p.m.
• Funds Pay-out will be on Tender/ Expiry day + 1 working day basis by 4.00 p.m

Advantages of Gold Futures 

• Liquidity

Gold futures are liquid in nature as investors can be assured of the gold’s purity as gold futures are based on 995 purity gold.

• No Storage Cost

Procuring, holding and trading gold in physical form can be a hassle due to the security concerns and time needed for assessment of the purity of the metal. However, this is eliminated when a trader invests in gold futures as these are electronic contracts, bought and sold through demat accounts which are highly secured.

• Low Capital Requirement

Gold futures are leveraged financial instruments. A trader can simply take a position by paying the margin instead of the full contract value. 

• Short Selling

Short selling refers to selling first and buying later. This means that a trader can take a short position in gold futures first and then square it off.

• Hedging

Investors tend to hedge their equity positions by investing in gold futures.

• Portfolio diversification

Gold has stood the test of time and is still being used to this day. As it has retained value over thousands of years, investors consider it a viable option for portfolio diversification.

Factors affecting the price of gold and gold futures

Gold is a globally traded commodity and thus events in any part of the world will affect gold prices in India as well. So let's understand the factors that influence the price of gold and gold futures

• Demand and Supply: China, South Africa and Australia are few of the biggest producers of gold in the world. India is one of the largest importers of gold. Indians' love affair with gold has been going on for centuries. Be it during weddings or festivals like Diwali and Akshay Tritiya. Gold has a lot of cultural relevance in India. Due to this demand but limited supply, there are fluctuations in the price of gold.

• Gold & US Dollar: Since gold is imported in India, payments are made in US dollars. A weak dollar means you can buy more gold with less dollars. So, the demand for gold automatically goes up when the dollar becomes weak. 

• Mining & Distribution Costs: Gold is mined and then exported all over the world. So the costs associated with mining, refining, transport and distribution costs also drive up the prices of gold and gold futures.