Sharekhan Blog

Gold Futures Trading in India

  • Apr 15, 2024

For traders, gold futures offer flexibility and leverage for reaping market-beating returns. This guide will simplify everything related to gold futures trading in India to help you evaluate if it suits your portfolio.

What is Gold Futures?

Gold futures contracts represent legally binding agreements that determine an obligation to buy or sell gold of pre-specified quantity and purity at a particular price on a stated future expiration date. They trade actively on exchanges and enable speculation on gold prices without dealing with physical possession.

Standard gold futures traded in India generally equal 100 grams at current market rates. But contracts are cash-settled in rupees, so no physical delivery occurs. Instead, only profits/losses from the change between the buy and expiration prices must be settled.

How to Start Gold Futures Trading

Opening a commodity trading account allows access to gold futures markets. When initiating any futures position, you must maintain margins - like collateral - of 4-10% of the contract value. Leverage allows controlling large gold positions with a relatively modest margin deposit. But remember, leverage also compounds losses if prices move unfavorably.

Initiating a long position when prices seem attractive locks in the purchase of gold at the set futures price. If spot prices exceed that rate at expiration, the buyer profits. Short positions make the opposite - contract to sell at preset rates and profit if market values fall below that point afterward. With that, the inverse causes losses.

Gold Futures vs. Gold Options

While futures lock in mandatory buy/sell price obligations, options provide the right without any mandatory futures obligations. Call options let one buy below market if prices spike, while put options allow selling above futures if prices crash. Options offer directional speculation like futures without compulsion risks. However, options do come at an upfront premium cost, unlike futures.

Factors Impacting Gold Futures Price

Here are these factors that impact gold futures price:

1. Global Economic Health

When large economies stumble, investors flee to safe-haven assets like gold. High inflation, recessions, financial crises, and volatile stock markets all boost gold demand, driving prices. Robust growth conversely diminishes gold appeal.

2. Interest Rates

Low interest rates slash bond yields and the opportunity cost of holding non-interest-bearing gold, spurring inflows. Rate hikes offer better yields elsewhere, reducing gold demand.

3. Crude Oil Prices

As critical production input, high crude oil prices increase mining costs and constrain gold supplies, supporting prices. Falling energy prices cut mining overhead expenses, boosting profitability and capacity.

4. Central Bank Policies

Ultra-dovish policies like quantitative easing and asset purchases that expand the money supply ultimately stoke inflation fears, assisting gold. Conversely, quantitative tightening and rate hikes slow money growth and deflate gold's hedge appeal.

Advantages of Gold Futures Trading 

Compared to directly purchasing physical gold or even gold ETF units, futures offer:

1. Leverage for Bigger Gains

The leverage allowed in futures means you can control much gold with a small margin deposit. This frees up capital for other investments. More importantly, leverage significantly boosts returns if your directional view on gold prices is correct.

2. Ability to Profit from Falling Prices

Another valuable perk of futures over direct gold ownership is the ability to short-sell. If your analysis suggests gold prices are headed lower, futures allow opening a short position to profit from the downtrend, unlike gold units that only make money on rising prices. The flexibility to go long and short is a powerful strategic benefit of the future.

3. Lower Acquisition, Storage and Insurance Costs

Owning physical gold entails dealer margins, making charges, assaying charges, storage locker fees, and insurance costs, in some cases, to protect the asset. Gold ETFs avoid some charges but still carry brokerage fees and management charges that accumulate over time. However, trading gold futures requires no physical buying, storing, or insuring actual gold. Margin requirements are still needed, but overall costs work out significantly lower.

4. Superior Pricing & Liquidity

Physical gold purchases and sales depend on the neighborhood jeweller's availability and pricing, which may need more transparency and efficiency in dynamic markets. Gold ETFs fare better but still face daily trading value limitations. On the other hand, gold futures markets aggregated across investors, hedgers, and speculators offer very high trading volumes and continuous price discovery for the best real-time valuation. The high liquidity also ensures ease of entry and exit.

5. Preferential Tax Treatment

Profits from delivery-based physical gold futures investing only qualify for exemption after 3 years. Short-term capital gains tax applies if held for less than 36 months. However, gains from derivative instruments like gold futures held less than 1 year attract only a 15% tax compared to slab rates on short-term physical gold gains. Quicker trades thus enjoy a preferential tax advantage in futures.

Conclusion

Gold futures present a rewarding avenue for traders to participate in gold markets while better optimising costs, leverage, liquidity, and taxes. Do comprehend risks like volatility and leverage before gold trading online. Overall, active traders with a robust understanding of macroeconomic drivers and technical perspectives can enrich their portfolios by strategically incorporating gold futures.


Team Sharekhan
by Team Sharekhan

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