Introduction

Gold is a valued possession in India, and its allure cannot be overstated, whether you are a buyer or an investor. In our Indian households it is held in high regard for its cultural significance and high intrinsic value, making it a choice investment.

Did you know you can trade in gold without physically holding it? Yes, it is possible through gold commodity trading in the derivatives market.

Keep reading to learn what gold commodity trading means, the instruments used to trade in it, its benefits, and the steps to trade.

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Understanding Gold Commodity Trading

Trading in gold commodities doesn’t mean trading in gold directly as an investment, as you would with shares. Instead, you will be trading in its derivatives in the form of gold futures and options via exchanges. The Multi-Commodity Exchange of India Limited (MCX) is a commodity derivatives market exchange used for online commodity derivatives trading. These platforms facilitate purchasing and selling derivative contracts that derive value from their underlying asset (gold). As with any other trading instrument, you can profit from it by capitalising on shifts in gold prices.

Gold Futures and Options

The two available avenues for gold commodity trading in India are futures and options. These derivatives allow you to speculate on the change in gold prices without physically holding the gold yourself.

• Gold Futures  ​​​​​​​

The first way to engage in gold commodity trading is through gold futures. This features a standard contract to buy or sell a specific amount of gold at a predetermined price at a future date. Suppose you buy a 1kg gold futures contract worth ₹70,000 for 10 grams. If the value increases to ₹72,000, you earn a profit of ₹20,000 (₹2,000 per 10 grams you hold). However, if the price drops below ₹70,000, you will incur a loss.

• Gold Options

The second avenue is through gold options. In this, you can buy or sell gold options at a fixed strike price before or upon the expiry of a contract. Compared to the former, this is less risky and offers more flexibility.

For instance, if you purchase a gold futures contract by paying a premium of ₹500 at a strike price of ₹65,000 and the price increases to ₹66,000, you can sell it for a profit. If the price reduces, the loss is restricted to the premium paid or ₹500 in this case.

Benefits of Gold Commodity Trading

Here are some benefits of gold commodity trading in India.

• The first benefit is it offers instant portfolio diversification and helps minimise losses by hedging market risk.
• Whether it is currency volatility, inflation, or market volatility, you can hedge the risk against all this through gold commodity trading.
• It can be used as a leverage to enter big positions on relatively small margins to optimise returns.
• Given the high liquidity of the underlying asset (gold), you can easily enter and exit the market. Further, trading in this instrument offers you returns without the hassle of physically holding the gold or worrying about storage risks.

However, some common factors you must pay attention to while trading in gold commodities are:

• International demand and supply of gold influence gold prices. When demand increases, the price of this metal rises and vice versa.
• Prevailing political and economic conditions that influence inflation and interest rates.
• Changes in the policies of the Central Bank regarding the purchase and sale of gold reserves.

Steps for Gold Trading

By following the simple steps below, you can also begin gold trading.

Step 1: Create a Trading Account

The first step is to choose a commodity broker and create your trading and demat accounts with the chosen platform. Also, choose an exchange such as MCX to commence trading.

Step 2: Choose a Lot Size

Select a lot size for your gold commodity contract based on your risk tolerance and capital availability.

Step 3: Margin Deposit

A margin deposit must be made with your brokerage to begin trading.

Step 4: Monitor, Place Order, and Manage

Notice the market movements and monitor the prices before placing your order. Place an order depending on whether you want to trade in gold options or futures and your trading strategy. After this, manage your market position by considering price movements to optimise profits and minimise losses.

Conclusion

By participating in gold trading in the commodity derivatives market, you can diversify your portfolio and profitably leverage price movements. To optimise your returns and minimise losses, consider position and intraday trading along with market and news trends for gold trading. However, as with any other investment, consider your risk tolerance and investment objectives to ensure that gold commodity trading fits you.

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