Bullish on Bullion

Let's suppose you need gold for, say, a family wedding in January and are keeping your ear to the ground for the best place and rate to buy ...

Let’s suppose you need gold for, say, a family wedding in January and are keeping your ear to the ground for the best place and rate to buy gold. You plan to buy it about two weeks before the wedding, but fear the price will shoot up by then. But what if you could buy the gold you need in January at near-November prices? The thing that makes this possible is called futures trading.

Just like derivatives in the stock exchange, gold and silver can now be traded on a commodity exchange. Such trading began in early October, after a gap of 41 years. The government had banned gold futures trading in the 1960s, after the Indo-China war depleted India’s gold reserves.

	SELF CONTROL

			• Approach a broker who trades on the commodity exchange. Check with your stockbroker. • Place an order for the quantity, price and date of actual purchase. • In the NMCE, the only exchange functional at present, the minimum order size is 100 gram, equal to ‘one lot’. • You will need to pay 10 per cent of the purchase price i.e., the margin, upfront. • You also have to pay a brokerage, which is usually per lot size. Say, Rs 50 for every lot traded. • Get back to the broker on the actual date of purchase, pay off the remainder.

Futures promise: Though still in a nascent stage, gold futures, say traders, holds a lot of promise in the Indian markets. Two factors support this expectation—one, India is the largest consumer of gold in the world and two, a lot of Indians are already trading in gold futures at foreign exchanges, though illegally.

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‘‘Forty per cent of the turnover at the US Commodity Exchange comes from India,’’ informs a leading gold trader. Like any other futures trading, gold futures involves making bids for the future, based on whether you expect prices to go up or down.

Suppose today’s price is Rs 5,750 per 10 gram and a person expects the price to rise Rs 6,000 in February. He can safeguard himself from this risk by placing an order today for, say, 100 gm at Rs 5,800 per 10 grams in February. The Rs 5,800 price is set by the exchange. Since this is a trade for the future, he will pay the money only when he takes the gold home i.e. in February. There is always the risk of prices going down, in which case, the only option is to reduce the loss. This can be done by selling the order before maturity.

‘‘For specific needs like a wedding or for investment, it makes sense for you to look at gold futures. But the major players will be jewellers and bullion traders,’’ says Sanjeev Agarwal, managing director, Indian subcontinent, World Gold Council. All gold bought and sold through a commodity exchange is in bars, which adhere to certain quality standards. While traders will have to be registered with the exchange, common investors like you and me can trade through brokers.

Many stockbroking firms like Asit C Mehta Investments, Indiabulls and Sharekhan have opened separate arms to deal in commodities like gold. ‘‘Traditionally, Indians are more comfortable with gold, making it a good option for the small investor,’’ says Ajay Menon, regional head, Geojit Securities.

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Where the action is: At present there is only one exchange for trading in commodities—the Ahmedabad-based National Multi Commodity Exchange (NMCE). But before the year-end, two more will be functional in Mumbai—the Multi-Commodity Exchange (MCX) and the NSE-backed National Commodities and Derivative Exchange (NCDEX).

The Ahmedabad exchange began operations last month, but hasn’t seen much action. It’s seen trade of an average 250 lots per day (100 gram is one lot). ‘‘This is nothing considering that the physical trade of gold in India is over 32,000 lots,’’ says Kailash Gupta, managing director, NMCE. ‘‘But with more education, we expect these figures to pick up.’’ Education will bring in volumes. The more the number of players, more will be the trading and thus more liquidity. It’s clear that India has a huge market. After all, we consume 800 tonne of gold every year, of which 600 tonne is imported. Among the sellers will be banks and large trading houses. Banks already hold a major chunk of the 600 tonne of gold imported into India. ‘‘Foreign firms have also shown keen interest in participating,’’ says P. H. Ravikumar, CEO, NCDEX.

‘‘Globally, the futures market is 50 times the spot market. In India even if we assume a conservative multiplier of 10 times, it means a market size of Rs 4,00,000 crore within two to three years,’’ says Jignesh Shah, managing director, MCX. ‘‘With such levels of trading, India will rank among the premier exchanges of the world.’’