When in the derivatives market, one of the most popular underlying assets is gold. It is a significant asset in the world market which is by itself traded highly. The derivatives which are based on gold such as gold futures are traded independently but are dependent on the world price movements of gold.
The price of gold is dependent on many factors, and hence is difficult to predict. In India, there has been a tradition to hoard and stock gold physically than going for bank deposits. Many would even trade in gold physically. Now with the advent of gold futures, one can take advantage of the various price movements of gold without having to physically hoard gold themselves.
When it comes to gold futures, these can be highly lucrative investments but one must also be aware of the high risks involved when things go wrong. For instance, if the going price of gold is Rs. 6000 for 10 grams, if you invest 6 lakhs, you can obtain one kilogram of gold. After three months, if the price of gold becomes Rs. 6500 for ten grams, a person might decide to sell the gold and the profit made is Rs. 50,000 for one kilogram. However, for such physical transactions, there are additional costs such as cost of storage, financing, transaction commissions and taxes to be paid.
If on the other hand, you were to invest the same six lakhs in the futures market, with the same price movements, let’s see how it works out.
In the futures market, if you are going to buy gold futures, you can hold on to such contracts for a maximum of four months. For trading in gold futures, on needs to open a trading account with a brokerage house. Margin money needs to be deposited which is specified by the lot size or the minimum amount of the commodity that one has to buy on such a contract. If the minimum lot size on a gold futures is 1 kg, usually, one needs to pay around 5% margin money for such contracts and a brokerage fee of 0.1 to 0.25%. Thus, if gold is being priced at Rs. 6050 for every 10 grams, then the price comes to Rs. 32000. Hence, if you have six lakhs, you can buy around 19 lots of such gold futures contracts. Now, following a bullish view point, if at the end of three months, the spot price of gold goes up to Rs. 6500 per ten grams, then your profit is seventeen times the profit you would have made by hoarding and transacting with actual gold.
However, the risks in case of losses are also magnified and hence, the advice and guidance of market experts are necessary before investing in the highly lucrative avenue of gold futures.