Chapter 7: Understand Gold and Silver Bullion in Detail – Part 1

Gold is one of the most sought-after investment products and finds a special place in the global financial market. Gold was considered a medium of exchange before the introduction of currencies. You might know about various investment avenues for gold such as physical gold, gold Futures and Options, exchange traded funds (ETFs) and sovereign gold bonds. It is considered a safe asset because of its store of value. When the economic situation worsens, as we saw in 2020 when the COVID-19 pandemic struck, gold performed extremely well.

Let us understand all about the above-mentioned gold investments in derivative instruments such as index, Futures and Options.

Gold

Gold is one of most important commodities traded on exchanges across the globe. Every commodity exchange would like to have gold in their product portfolio. However, only few exchanges have succeeded in launching gold as a product. On the global front, COMEX is the world’s largest exchange where precious metals such as gold and silver are available for trading.

In India, gold is available for trading on MCX, NSE and BSE. However, MCX is the market leader in gold trading. As a consumer of gold which is worn on various occasions such as marriages and festivals, you may be inclined to trade in gold. You might be under the impression that the price of gold rises during festivals and the marriage season due to increased demand for the yellow metal. However, this is not true because India is a price follower of the global benchmark. Hence, price trends in the global market, which is largely influenced by supply-demand, economic factors such as Gross Domestic Product (GDP), inflation, interest rates, industrial production, as well as geopolitical tensions, dictate the movement of the price of Indian gold.

Gold contract specifications

Indian commodity exchanges offer derivative trading in the form of Futures and Options only and no cash segment in commodities like the equity market. It is a known fact that exchange traded commodity derivatives are deliverable contracts, i.e., on expiry of the contract, open positions are settled physically with delivery between buyers and sellers through the exchange.  

You may be wondering about how to start trading in gold derivatives in India. Gold is available for trading through Futures, Options and Bullion Index.

MCX Bullion Futures contract specifications

*Initial margin could vary as per the exchange requirement from time to time.

Since all gold contracts are deliverable on expiry, the exchange has a mechanism to square off positions. If you do not wish to give/take delivery of the commodity, you just need to exit from your positions before commencement of the tender delivery period that starts five days prior to expiry of the contract.

Example: If expiry of Gold 1 kg and Gold Mini is on the 5^th of the contract expiring month, then the tender delivery period starts from the 1^st of expiring month (assuming all working days in between). For Gold Guinea and Gold Petal, if the expiry date is the 30^th of an expiry month, then the tender delivery period starts from 25^th of the expiring month (assuming all working days in between).

Gold Options: After taking over regulation of the commodity market from FMC, SEBI had allowed Options trading in commodity with Futures as an underlying. Accordingly, MCX launched trading on gold Options in 2017.

MCX Bullion Options contract specifications

Bullion index

As an equity market investor, you are likely to be familiar with equity indices such as Nifty, Bank Nifty, Sensex etc. Likewise, the Indian commodity market has also launched the bullion index. Commodity indices solve most of the challenges faced by commodity traders who trade in multiple commodities such as payment of single margin instead of multiple margins in different contracts, tracking of a single contract instead of multiple contracts, etc.  

To trade in Gold 1 Kg and Silver 30 kg contracts separately, investors are required to deposit a margin of approximately Rs. 4 lakh and Rs. 2 lakh respectively while the BULLDEX requires approximately Rs. 70,000. 

Contract specifications of BULLDEX

Summary

• Bullion—gold and silver—is the most attractive commodity segment amongst market participants.
• There are different ways to invest/buy gold. These are: physical gold, gold Futures, gold Options, bullion index, gold ETFs and Sovereign Gold Bonds.
• MCX offers bullion trading—gold and silver—in the form of Futures and Options as well as index.
• MCX offers gold Futures trading in four variants, namely Gold Regular of 1 kg; Gold Mini of 100 grams; Gold Guinea of 8 grams and Gold Petals of 1 gram Contract.
• Gold and silver Options have their respective commodity Futures as underlying.
• Since commodity Futures are deliverable contracts, bullion Options devolve into Futures Contracts if they are not squared before commencement of the tender delivery period.
• BULLDEX is the bullion index comprising of gold and silver with weightage of 64% and 36% respectively.

Are you curious about what drives the prices of gold and silvers in the market? In the next chapter, we will discuss the factors that drive gold and silver prices.