Gold is a very big part of our lives. From buying gold at birth, weddings, or even as a graduation gift, gold is truly the ‘shining metal’.
Since ages, gold has maintained its value and is the perfect way of passing wealth from one generation to another. While retail investors consider gold as a precious metal, for traders, gold as a commodity is perfect for trading.
Due to its high demand for gold among retail investors and traders, it has remained a popular asset-class for fund managers.
Today let us explore:
- Gold as a commodity investment
- History of gold
- Investing in gold as a commodity
- The Gold Contract
- The other contracts (Gold Mini, Gold Guinea, Gold Petal
- Gold Spot price
- The historical price movement of gold
Gold as a Commodity
Gold as a commodity can be profitable because:
- Unlike other commodities such as oil, rice, wheat, etc. gold cannot get used up or consumed.
- Once gold is mined, it stays in the world forever in the form of jewellery or is kept as reserves against cash, used as collateral against loans, etc.
- Gold is a scarce resource and the process of discovering and mining gold is difficult, ensuring the demand is always higher than supply.
History of Gold
Unlike any other commodity, gold has been a fascination of emperors since historical times. Empires and kingdoms were built and destroyed in an attempt to get more gold. Gold was also used as currency across the world.
Fundamentally, gold is considered to be a hedge against inflation.
[Recommended reading: History of commodity trading in India]
Investing in Gold as a Commodity
Physical Gold can be bought and stored in the form of jewellery like necklaces, earrings, bracelets, bangles, anklets, etc which involves high making charges, ranging from 15% to 20% of the total amount of gold.
When you try to sell the same jewellery to a jeweller, he will buy the gold below market rates and cut the making charges too hence, investing in physical gold is not a profitable idea.
The easiest way to gain exposure to gold as a commodity is through the stock market, via which you can invest in actual gold bullion or Sovereign Gold Bonds with highly pure gold through your Demat accounts.
You can invest in Gold through these options:
Gold exchange traded funds (EFT) are a type of mutual fund scheme that invests in gold, which is held in dematerialised form just like stocks.
The returns on gold ETFs are similar to that of physical gold. Investors get units for their holding in the gold ETF and they are listed and traded on the stock exchange.
Gold ETFs have several advantages such as liquidity, safety, tax benefits, and are cheaper than buying physical gold.
You can also invest in gold via Gold Futures which have a predetermined settlement period.
Let’s understand this with a simple example:
If you buy a gold futures contract of February expiry, you have to make sure you settle the same by February. The one advantage of buying gold in the futures market is that you have to pay only a 10% margin.
The Gold Contract
Gold is a very actively traded contract on MCX with a daily trading volume of above Rs. 4,500 Crores.
Gold comes in many variants that an investor can choose to trade-in. New investors as well as experienced commodity traders often get confused with these contracts, not knowing the difference between them.
Different types of Gold contracts –
- Gold (The Big Gold)
- Gold Mini
- Gold Guinea
- Gold Petal
All of these variants belong to the same underlying asset i.e. Gold.
Let us take a detailed view of gold so that it will be easy for you to understand the contracts.
- The above price quotation is for 10 grams of Gold and it shows the last traded price of gold futures on MCX.
- The lot size of “The Big Gold is 1KG (1,000 grams)” we can calculate the contract value – (1000* 50,130) = Rs. 5,01,30,000
- The Margin required to trade in ‘big gold’ would be roughly around 10% of the total amount.
- The contracts expire on the 5th day of every 2 months. Gold contracts are introduced every 2 months, and each contract stays in the system for a year. At any point, you will have 6 contracts to choose from. In the above example, it is 5th February, 5th April, 5th June, etc.
The Other Contracts (Gold Mini, Gold Guinea, Gold Petal)
In the ‘big gold contract,’ a heavy amount of margin is required. Hence lots of traders refrain from trading in the big gold contracts. This is the reason the exchanges have introduced contracts with much lesser margin requirement in the following variants:
- Gold Mini
- Gold Guinea
- Gold Petal
The details for the other gold contracts are as follows –
|Price Quote||Lot Size||Tick Size||P&L/tick||Expiry|
|Gold Mini||Rs. per 10 gm||100 gm||1 rupee||Rs.10||5th day|
|Gold Guinea||Rs. per 8 gm||8 gm||1 Rupee||Rs.1||Last day|
|Gold Petal||Rs. per 1 gm||1 gm||1 Rupee||Rs.1||Last day|
- Tick size is the minimum price change between the different bids and ask prices of an asset traded on an exchange platform.
- P&L/tick is the profit/loss according to each tick movement.
You can use this formula to know the P&L/tick = (Lot Size / Quotation) * Tick Size.
[Recommended reading: How the Gold Price is set?]
Gold Spot Price:
The spot price of gold represents the current rate at which gold can be purchased or sold at a specified place and time. This price defines the explicit value of gold in the market.
|The Big Gold||1 KG||Rs. 4,87,70,000|
|Gold Mini||10 gm||Rs. 48,770|
|Gold Guinea||8 gm||Rs. 39,016|
|Gold Petal||1 gm||Rs. 4,877|
*Prices of gold as of 23rd December 2020
Historical Price Movement in Gold
This chart contains the average annual price for gold from 1964 – present.
|Year||Price (24 karat per 10 grams)||Year||Price (24 karat per 10 grams)|
India is a gold loving county and has a great affinity towards the metal. It has occupied the second position when it comes to consumers globally.
Indeed gold as a commodity is a piece of precious jewellery which is also a safe and stable investment option for investors.
If you wish to invest in gold ETFs, all you need to do is open a Demat account with Samco – the best equity stock broker in India by CNBC Awaaz and get access to 3-in-1 Samco Demat + Mutual Fund investing account today and start creating wealth for your secure future!