Gold Futures: How Gold Futures Trading Works In India

India used to be known as the golden bird before the British invasion. Gold has been an important investment option in India for a long time. It is not only a financial asset but has an emotional attachment as well. 

However, over the last decade, the investment in gold has evolved beyond jewellery and coins. Today, many investors or traders are choosing gold trading, such as gold futures trading, to benefit from the gold price movement. 

A contract where the buyers and sellers agree to buy and sell the gold at a fixed price on a predetermined date is known as a gold future. The gold futures contracts are traded on the regulated exchanges like MCX (Multi-Commodity Exchange) in India. 

Instead of buying physical gold, the traders enter into contracts based on expected future prices. For traders, gold futures provide short-term gains. 

However, for investors, it can act as a hedge against inflation. 

How Gold Futures Trading Works?

Gold futures trading in India mainly happens through commodity exchanges like MCX. Here is how the process works. 

1. Opening a Commodity Trading Account - Investors need a commodity trading gold account to trade in gold futures. A commodity segment is activated with a broker. Investors also need margin money for gold trading. 
2. Understanding Gold Futures Contracts - MCX offers different types of gold contracts such as gold futures (1kg), gold mini (100grm), gold guinea(8gram) and gold petal (1 gram). Each contract has different lot sizes. 
3. Margin Requirement - Gold futures trading works on margin. Traders do need to deposit a small percentage of the contract value. 
4. Daily Mark-to-Market Settlement - Gold futures are settled daily based on market price movements. If the contract moves in investors' favour, then the profit is credited daily. However, if the market moves against you, then the losses are deducted daily. 
5. Contract Expiry  - Gold futures contracts expire monthly. Before the expiry, traders may square off their position. Some contracts may involve physical delivery, while most traders settle in cash before expiry.

Also read on How To Invest In Gold For Beginners

Factors Influencing Gold Futures Prices

Gold future prices in India are influenced by several domestic and global factors. 

1. International Gold Price

India imports most of its gold from outside. The international gold price heavily affects Indian futures prices. The global prices are influenced by US Federal Reserve policies, inflation, recession fears and central bank purchases. 

2. Inflation and Economic Uncertainty

Gold is often considered a safer asset. However, when inflation rises or the economy slows down, investors shift towards gold and the demand for gold futures increases. This was seen during the COVID-19 pandemic and the Russia-Ukraine conflict. 

3. Rupee-Dollar Exchange Rate

Gold imports are priced in US dollars. Therefore, if the Indian rupee weakens, then the gold automatically becomes more expensive in India. Gold futures price may rise even if the international price remains unstable. 

4. Interest Rates

The higher interest rates can reduce the gold demand because gold does not generate regular income like bonds and fixed deposits. Lower interest rates often support gold prices. 

5. Demand During Festivals and Weddings

The seasonal demand in India during festivals like Diwali and the wedding season can also impact the domestic gold market. India is one of the world’s largest gold-consuming countries.

Benefits And Risks Of Gold Futures

Gold futures have a lot of advantages and disadvantages that investors should know about before investing. 

Benefits of Gold Future

• Leverage - Traders can control large positions with smaller capital through margin trading. 
• Liquidity - Gold futures on MCX are highly liquid and are easy investments for buying and selling. 
• Portfolio Diversification - Gold has less portfolio risk than equities and performs differently in the market.  
• Inflation Hedge - Gold acts as a protection during the inflationary period. It delivers an annual return of 10% in INR terms according to the World Gold Council.
• No Storage Issue - The gold futures require no storage, like physical gold. No locker charges, purity concerns and making charges. 

Risk of Gold Futures

• High Volatility - Gold prices are highly volatile. It can fluctuate anytime due to global events.
• Leverage Risk - Leverage allows traders to control large positions with small capital. But even small market changes can increase losses. 
• Margin Calls - Additional funds are required for the moves against traders' positions. Failure to meet gold futures margin calls leads to automatic position closure. 
• Complexity - Gold future trading involves technical concepts like leverage, expiry dates and others. This can be difficult for a beginner to understand. 
• Short-term Nature - Gold futures have expiry dates. It is mainly suitable for short-term trading only. 

Gold Futures vs Other Gold Investments

Gold investors have multiple options today beyond jewellery and coins. 

Gold Futures vs Gold ETFs

Gold Futures vs Sovereign Gold Bonds (SGBs)

Also read on Tax on Sovereign Gold Bonds
Gold Futures vs Digital Gold

Which Option Suits Traders and Which Suits Investors?

Conclusion

Gold futures have become an important part of the Indian commodity market and the gold commodity trading ecosystem. They offer opportunities to traders to take advantage of the gold price movement without owning physical gold. It also provides hedging benefits during inflation. 

However, gold futures are not risk-free as leverage, volatility, and daily settlement make it suitable for active and informed traders rather than beginners. 

For beginners, they can opt for digital gold, which is an easier and safer option in gold trading for them. Along with gold, there are more fixed-income products like bonds that help you improve portfolio stability and reduce overall investment risk. If you are looking to diversify beyond the traditional investment platform, Grip Invest can help you explore more opportunities like these. 

FAQs On Gold Futures

Author: Grip Invest Editorial Team The Grip Invest Editorial Team is a group of Chartered Accountants, MBA (Finance) graduates, and Qualified Research Analysts dedicated to helping you invest smarter. We dive deep into India's fixed income landscape to deliver content that is accurate, up-to-date, and easy to understand. Whether you're exploring bonds, fixed deposits, or other fixed income opportunities, our guides cut through the noise and give you the clarity to make better financial decisions.

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