Gold Commodity trading is not that uncommon these days since Gold is one of the oldest currencies in the world and for this reason, it has become an important part of the financial world. It is placed as valuable in the psyche of the individuals and is considered an asset by almost everyone.
Gold is very useful in the commodity trading segment which is majorly used in the form of jewellery and also has other industrial applications like electronics like mobile phones, GPS systems, televisions etc. and also in industries like glass making, medical treatments and dentistry.
The biggest gold producing countries are China, Australia, Canada, Indonesia and one of the biggest consumers of gold is India, with an annual consumption of about 700 tonnes a year. Due to these factors, gold becomes an extremely important commodity in India.
Earlier, gold was traded only in the physical form, however, with the advent of technology, gold commodity trading has also been extended to gold-based exchange-traded funds (ETFs) and equity-based gold funds.
Gold Commodity Trading Basics
Gold commodity trading is one of the top commodities and has its own contract specifications, margin requirements and risks and rewards. Just like the other forms of commodity trading, gold commodity trading is majorly affected by the demand and supply of gold.
Because of the worldwide use and consumption of gold and worldwide acceptance as a financial instrument, gold prices are affected by a lot of macroeconomic and political factors.
Gold is considered a safe haven and protection against any form of economic meltdown. The gold commodity trading market is highly liquid and profitable because of its unique characteristics. A successful gold commodity trader needs to understand these unique features in order to make profitable trades in gold.
Gold commodity trading in India occurs mostly on the Multi Commodity Exchange (MCX) and in the form of different types of contracts.
Gold Commodity Trading Types
A few different types of gold contracts that differ on the basis of lot size, tick size, expiry date and profit & loss per tick are as follows:
Gold (The Big Gold):
The most commonly traded and most liquid of the gold contracts is the Big Gold. The minimum lot size for this contract is 1 kilogram and the profit & loss per tick is ₹100. Although the margin requirement is around 4%, the value in rupee is quite high and it is only suitable for big level investors and not much for the retail traders.
The expiry is on the 5th day of the contract month.
Due to the high margin requirements, the Big Gold contract is not quite suitable for retail investors. For them, Gold Mini is way more appropriate as the lot size is 100gm and the profit & loss per tick is only ₹10.
Similarly, Gold Guinea has a much smaller lot size of 8gm and the profit & loss per tick is ₹1.
The minimum lot size for Gold Petal contract is only 1 gm and the profit and loss per tick is ₹1.
Although the margin requirement is very less for the lighter contracts in gold commodity trading, at the same time the liquidity and volumes also keep on decreasing. So, it is preferable to trade in heavier gold contracts and the ones with the nearest expiry date for more liquidity.
P&L per tick
The Big Gold
₹ per 10 Gram
5th Day of Contract Month
₹ per 10 Gram
5th Day of Contract Month
₹ per 8 Gram
Last Day of Contract Month
₹ per 1 Gram
Last Day of Contract Month
For a gold commodity trader, it is critical to understand how the gold market moves, what factors affect the demand and supply and prices of gold, the crowd sentiments for gold, the ways of fundamental analysis and technical analysis and when and how much to invest.
These basics are highly necessary to understand so that the trader is able to make sound financial decisions and is able to make profits while averting losses.
Gold Commodity Trading Factors
Here are some of the basic factors that you must be considering in case you are looking to invest or trade in the Gold Commodity segment:
Factor#1: Price of gold
In order to be profitable in gold commodity trading, the first step for a trader is to understand the dynamics of gold. It is crucial to understand that gold is one commodity that is affected by many global factors like inflation and deflation, greed and fear and by the overall supply and demand.
For instance, when inflation hits the economy, the stocks start declining and at the same more investors are attracted to buying gold as a safety net. Multiple factors combine in the world markets to affect gold prices. Gold prices are also affected by the dollar prices inversely.
Factor#2: Crowd sentiments
For gold commodity trading, the traders must understand the crowd sentiments very well. There are people in the economy who buy physical gold for ownership purposes and there are many others who use gold as a hedging mechanism along with currencies and other instruments to manage their risks.
In such cases, gold funds become important as they create a basket of instruments matching the risks and rewards.
Factor#3: Technical Analysis for Gold Trading
Gold commodity trading is a lot about fundamental analysis, i.e. looking at the effect of the economy, politics, industrialisation etc. on the price of gold. At the same time, gold commodity trading also involves long-term technical analysis through charts and other techniques.
The long-term trend analysis helps the traders to identify the price levels that need to be watched.
Factor#4: Reserve Bank of India (RBI) Policies
The actions taken by RBI can directly or indirectly impact the way gold is traded in the Indian investment space. Indian government holds gold reserves and their decision (through regulatory bodies) to accumulate or sell out existing gold can certainly impact gold as a commodity.
Gold Commodity Trading: Making the choice
After considering all the above-mentioned factors, the trader has to decide whether gold commodity trading suits his requirements, objectives and goals. Once that is done, the exchange is to be decided upon and then finally the type of gold contract as discussed above.
Gold commodity trading is a rewarding and modern avenue for financial investments. It is based on similar premises as physical trading with the added benefits of modern technology and know-how. Like all the other forms of trading, it involves its own level of risks that need to be managed well with knowledge, experience and practice to ensure that the capital remains safe and there are good amounts of profits.
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