gold trading Archives

Ever wondered why so many traders are drawn to gold and silver trading? Well, it’s not just about the shine! These precious metals are incredibly popular in the commodity market, thanks to their high liquidity and the big players (like jewellers and institutions) who actively trade them. In this article, we dive into everything you need to know about trading gold, silver, and bullion in the Multi Commodity Exchange of India (MCX).

How to Start Trading Gold and Silver?

One of the advantages of commodity trading is the ability to trade after regular market hours, from 5 PM to 11:30 PM in the Indian market. You can start trading through regulated brokers such as:

Zerodha
Upstox
Fyers
IIFL Securities

These established brokers provide reliable platforms for MCX trading and ensure proper regulatory compliance. When selecting contracts through your broker’s terminal, always choose MCX contracts over NSE ones due to higher liquidity in the MCX segment.

Understanding Gold Trading in MCX

Gold trading in MCX is exclusively done through derivatives contracts – either futures or options. There are four different categories of gold contracts available:

1. Gold (Main Contract): Trading unit of 1 kg
2. Gold Mini: Trading unit of 100 grams
3. Gold Guinea: Trading unit of 8 grams
4. Gold Petal: Trading unit of 1 gram

Each of these categories is tailored for different types of traders based on the trading unit, margin requirements, and liquidity. Let’s explore them in detail.

Capital Requirements for Gold Trading

Each category requires different margin amounts:

Gold (Main): Approximately ₹8 lakhs per lot
Gold Mini: Around ₹79,000 per lot
Gold Guinea: About ₹6,436 per lot
Gold Petal: Less than ₹800 per lot

While gold mini and gold futures dominate in terms of liquidity, gold guinea and gold petal contracts often experience low participation. If you’re a beginner, you could focus on gold mini contracts for better price action and stability.

Understanding Silver Trading in MCX

Similar to gold, silver trading in MCX is available through derivatives contracts with three categories:

1. Silver (Main): Trading unit of 30 kg
2. Silver Mini: Trading unit of 5 kg
3. Silver Micro: Trading unit of 1 kg

Capital Requirements for Silver Trading

The margin requirements vary significantly across categories:

Silver Main: Approximately ₹5.27 lakhs
Silver Mini: Around ₹87,000
Silver Micro: About ₹17,000

Unlike gold’s smaller contracts, Silver Micro maintains decent liquidity, making it a viable option for traders with smaller capital.

Understanding Bullion Index

The MCX Bullion Index (BULLDEX) combines gold and silver futures contracts in a ratio of 63.7% gold to 36.3% silver. While this might seem like an interesting trading instrument, it’s important to note that BULLDEX suffers from extremely low liquidity and is not recommended for active trading.

Price Impact and PnL Calculations

Understanding price impact on profit and loss (PnL) is crucial:

For Gold:

Main Contract: ₹100 PnL per ₹1 price movement
Gold Mini: ₹10 PnL per ₹1 price movement

For Silver:

Main Contract: ₹30 PnL per ₹1 price movement
Silver Mini: ₹5 PnL per ₹1 price movement
Silver Micro: ₹1 PnL per ₹1 price movement

Key Factors Affecting Gold and Silver Prices

Several factors influence precious metal prices:

1. Global Economic Conditions: Gold typically performs well during economic uncertainty as a safe-haven asset

2. Interest Rates and Inflation: Higher inflation often drives increased demand for gold

3. Currency Fluctuations: USD-INR exchange rates directly impact Indian market prices

4. Geopolitical Events: Global uncertainty tends to boost gold prices

5. Supply and Demand Dynamics: Particularly important for silver, given its industrial applications

The Gold-to-Silver Ratio Trading Strategy

The gold-to-silver ratio is a valuable tool for positional trading. When the ratio exceeds 80, it suggests gold is overvalued relative to silver, indicating potential outperformance by silver in bullish markets. Conversely, a ratio below 60 suggests silver is overvalued, pointing to potential outperformance by gold.

Important Trading Considerations

1. Contract Expiry:

Gold and Silver main contracts expire on the 5th of every alternate month
Mini and micro contracts typically expire on the last trading day of the month

2. Risk Management:

Always use proper capital allocation
Never trade with 100% of available capital
Maintain reserves for potential drawdowns

3. Technical Analysis:

Price action and technical analysis work well in precious metals
Support and resistance levels are generally well-respected
Monitor global gold and silver ETF flows for additional insights

Trading precious metals can be profitable with proper understanding and risk management. Start with more liquid contracts like Gold Mini or Silver Mini, and always stay informed about global economic conditions affecting these markets.

Watch: Gold & Silver Trading after 5 PM! | Commodity Series #3 | marketfeed

SEBI’s Proposal

India is the second-largest consumer of gold after China, with an annual demand of 800-900 tonnes. We are net importers of the commodity as our gold mining industry is very small or insignificant. Buying gold is considered to be a good omen amongst most Indians, and it does have its own set of benefits. Due to the risks associated with owning physical gold, many are now buying or investing in digital gold and gold ETFs. However, despite securing an important position in global markets, there is no concrete system in India to discover or influence the price of gold.

This is the issue that SEBI wants to address. Through a consultation paper titled “Gold Exchange in India and Draft SEBI (for Vault Managers) Regulations 2021”, the market regulator has proposed to set up a trading exchange for gold in India. Similar to the stock market, where you buy and sell shares of listed companies, a gold exchange will allow you to trade electronic receipts that will have physical gold backing them. When a large number of people buy and sell gold and negotiate on its price, it could provide a better estimate of the true value of gold at a point in time. This can be compared with prices at international gold exchanges or forums and could help us discover the true price of gold.

Retail investors, banks, foreign portfolio investors (FPIs), jewellers, and bullion dealers would be allowed to trade on the gold exchange.

How Will it Work?

When authorized institutions or people import gold into India, the deposits are stored in secure vaults. The owners of these deposits could choose to convert their physical gold into Electronic Gold Receipts (EGRs). For this, the gold has to meet certain standards, and the owner (or vault manager) has to record all relevant information regarding it. They will have to forward and save this data in a common digital interface. Thus, physical gold is converted into digital receipts and is documented on a secure network. Then, a unique code has to be assigned to EGRs so that they can be traded. This unique code is termed as International Securities Identification Number or ISIN.

In India, we have two main depositories that are responsible for maintaining information about tradable financial instruments (such as stocks and bonds). It is the National Securities Depository Ltd (NSDL) and Central Depository Services Ltd (CDSL). It is these depositories that assign a unique code to the EGRs. Finally, you will be able to trade these EGRs on the exchange. At the end of each trading day, the important stakeholders will make sure that all gold is accounted for.

According to the consultation paper, SEBI will be the sole regulator of the gold exchange. There will be three important operations performed at the exchange:

Conversion of physical gold to Electronic Gold Receipts (EGRs)

Trading of EGRs, and

Conversion of EGRs to physical gold.

What is the proposed unit of each EGR?

In the consultation paper, SEBI states that the gold exchange should have EGRs of 1 kilogram, 100 grams, and 50 grams. They might also allow EGRs of smaller denominations, including 10 grams and 5 grams, in the future.

SEBI had already formed working groups to test the transaction flow from physical gold to EGRs and vice versa. They have studied the role of different entities in the flow, such as vault managers and depositories. These groups have also suggested means of verifying the purity of gold and other safety and security measures.

Key Issues/Drawbacks

As mentioned in SEBI’s consultation paper, there are certain drawbacks with respect to this concept. Gold is a commodity and one should ideally be able to exchange the EGR for physical gold. However, this is only possible if a trader has a substantial amount of receipts (or EGRs).

Suppose you are holding 50-gram EGRs and wish to exchange them for physical gold. The vault manager (who holds and manages the physical gold) has to terminate the receipts, request the depository to cancel the entry from their database, and then send 50 grams of gold to you. This has to be done every time a person wishes to convert their EGRs to physical gold. It is a rather long and time-consuming process.

Taxation is another key issue. When EGRs are traded on an exchange, a Securities Transaction Tax (STT) will be levied. Also, GST will be applicable when EGRs are converted into physical gold. However, if the buyer and seller are from different states, the application of state GST will be very complicated. SEBI has suggested that levying Integrated GST (IGST) could resolve this issue.

You can read SEBI’s consultation paper here. Since the proposal is in the consultation phase, you can even mail them your views and ideas on the gold exchange. Let us look forward to seeing how SEBI implements its plans. We will soon be able to trade gold!