Module 8 Currency & Commodity Futures

Chapter 7

Gold (Part 1)

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7.1 – Orientation

As you know, there are two commodity exchanges in India – Multi Commodity Exchange (MCX) and National Commodity and Derivative Exchange (NCDEX). MCX is particularly popular for the Metals and Energy commodities while NCDEX for all the agri commodities. However, there is a lot of activity picking up on MCX for agri commodities as well. My job over the next few chapters is to discuss these commodities which are traded on the exchanges, and get you familiar with the commodity contracts.

We will look into each and every commodity that is actively traded on the commodity exchanges. The idea is to know how the commodity contract works (contract specification), figure out which contract to trade, and identify the factor which influences the commodity. I will skip the usual background to commodities market part, the one which talks about the history, forwards markets, the farmers in US, the Chicago Mercantile Exchange etc. You will find this in almost any material on Commodity market. I would like get straight to the heart of the topic by slicing and dicing the contract specifications of commodities and other details around them.

Here is the list of commodities available on MCX to trade; of course I got this list from the MCX website –

Image 1_A list

The idea is to cover all the major commodities that one can trade. Needless to say, one has to know how ‘Derivative Futures’ function before attempting to understand Commodities. So if you are not familiar with Futures, I’d encourage you to read the module on futures trading.

Anyway, assuming you are familiar with Futures, we will now start with Gold.

M8C7-cartoon

7.2 – The Gold Contract

Gold is a very actively traded contract in MCX. It has ample liquidity, with daily trades of roughly 15,000 contracts translating to a Rupee value of over 4500 Crore. Note, these numbers belong to just one type of Gold contract, often nicknamed “Big Gold”.

Gold comes in quite a few variants that one can choose to trade in. Newbie and sometimes even the experienced commodity traders often get confused with these contracts, not knowing which one to trade and the difference between them. To begin with, let me list down all the different types of Gold contracts –

  1. Gold (The Big Gold)
  2. Gold Mini
  3. Gold Guinea
  4. Gold Petal

All these variants belong to the same underlying i.e Gold. I guess the best way to understand the difference is by understanding the contract specification of each of these variants. We will start with the big boy first, i.e ‘The Gold’.

Here is the contract specification as per MCX, let me list the important things first and then we will understand them one by one –

Particular Value
Price Quotation Rupee per 10 grams inclusive of all taxes and levies relating to import duty
Lot Size 1 kilogram
Tick Size 1 rupee
P&L per tick Rs. 100
Expiry Date 5th day of contract month
Delivery Logic Compulsory
Delivery Unit 1 kilogram

Let me discuss these details in the same sequential order, so that it becomes easy for you to understand the subsequent contracts. We’ll start with the price quotation.

The price quotation as you can see is for 10 grams of Gold. This price includes all the import duties and taxes, of course we will talk more about this at a later stage. For now, just be aware that the price on MCX is all inclusive. Have a look at the following snapshot, it shows the last traded price of Gold futures on MCX –

Image 2_Gold

As you can see, the last traded price of Gold is Rs.31,331/-. Do note, this is the quote for 10 grams of gold. Since the lot size is 1 Kg (1000 Grams), we can calculate the contract value –

(1000 * 31331) / 10

= Rs.31,33,100/-

So what is the margin required to trade this? We can check this from Zerodha’s margin calculator –

Image 3_gold margin

 

The margin amount required is Rs.1,25,868/-, which means the margin percentage is roughly –

1,25,868 / 31,33,100

= 4.017%

As you can see the margin percentage is just about 4%, which is pretty much similar to the currency contracts. However, the Rupee value of the margin is way too high and it therefore prohibits many retail traders to initiate positions in Gold. In fact, this is the reason we have contracts like Gold Mini and Gold Petal, where the Rupee value of the margins is lower. We will talk about these contracts a little later.

Now assume you buy 1 lot of Gold on MCX, this means you have to park close to 1.25 lakhs as margin and with each tick you will either make Rs.100 or lose Rs.100, and how did we arrive at that? Well, it is fairly simple –

P&L per tick = (Lot Size / Quotation) * Tick Size

Let us apply this on Gold –

= (1000 Grams / 10 Grams) * 1 Rupee

= 100 Rupees

In fact you can apply this formula to any futures and options contract to calculate the P&L per tick. Let me demonstrate this formula for the JPY INR contract. If you recollect the lot size for this contract is 100000 JPY, and the quotation was for 100 JPY, and the tick size is 0.0025, using this we can calculate the P&L per tick –

(100000/100)*0.0025

= 2.5 Rupees

Anyway, let us now focus on the expiry. If you look at the expiry of Gold it simply says 5th day of contract month. Gold contracts are introduced every 2 months and each contract stays in the system for a year, and at any point you will have 6 contracts to choose from. Considering we are in August 2016, the following table should give you an idea of how this works –

Current available contract Expires on
October 2016 5th Oct 2016
December 2016 5th Dec 2016
February 2017 5th Feb 2017
April 2017 5th April 2017
June 2017 5th Jun 2017
August 2017 5th Aug 2017

Needless to say, the most recent contract is the most liquid contract to trade; in this case it would be October 2016 contract. Now when the October 2016 contract expires on 5th Oct 2016, September 2017 contract will be introduced, and the most active contract from 5th Oct 2016 would now be the December 2016 contract.

Do recall, settlement in equities is always in cash and not physical. However, when it comes to commodities the settlement is physical and therefore ‘delivery’ is compulsorily. This means if you hold 10 lots of gold and you opt for delivery then you will get 10 kg of gold. In order to get the delivery of the commodity, one has to express his intention to do so. This has to be done any time before 4 days to expiry. So given that the expiry is on 5th, one has to express his intent to take delivery anytime on or before the 4th (1st, 2nd, 3rd, 4th).

If you are trading with Zerodha then do note, we do not allow you to get into the physical delivery of commodities. So you will be forced to close the position before 1st of the expiry month. In fact, I personally prefer to close the positions early on and not really get into the physical delivery of commodities.

For all practical purposes if you know these things about the Gold contract, you pretty much know what is really required before you trade the big Gold contract.

We will now move on to know the other variants of gold that gets traded on the exchange.

7.3 – The other contracts (Gold Mini, Gold Guinea, Gold Petal)

The big gold contract as you realize demands a heavy margin requirement in terms of Rupee value. This prevents a lot of traders from trading the big gold contract and perhaps this is the reason the exchanges introduced contracts with much lesser margin requirement.

The other gold contracts that are available to trade is –

  • Gold Mini
  • Gold Guinea
  • Gold Petal

The details for the other gold contracts are as follows –

Price Quote Lot Size Tick Size P&L/tick Expiry Delivery Logic Delivery Unit
Gold Mini Rs. per 10 gm 100 gm 1 rupee Rs.10 5th day Compulsory 100 gm
Gold Guinea Rs. per  8 gm 8 gm 1 Rupee Rs.1 Last day Compulsory 8 gm
Gold Petal Rs. per  1 gm 1 gm 1 Rupee Rs.1 Last day Compulsory 8 gm

I’m assuming the table above is a lot easier to understand now considering we have discussed these details earlier. Let’s dig straight into the margin details.

Image 4_gold margins

As you can see, Gold Mini (GoldM) contract requires a margin of Rs.15,682/-. In terms of percentage –

= Margin / Contract Value

Contract Value = (Price * Lot size)/Price Quotation

= (31365 * 100)/10

= Rs.313,650

=15682/313650

= 5%

In terms of margin percentage, this is roughly the same as big Gold. For the sake of completeness let us quickly calculate the P&L per tick for Gold Mini. We know –

P&L per tick = (Lot Size / Quotation) * Tick Size

= (100/10)*1

= Rs.10/- per tick.

Beyond the Gold Mini contract, we have Gold Guinea and Gold Petal contract. These are extremely tiny contracts which demand a very low margin, as low as Rs.1251 (Gold Guinea) and Rs.154 (Gold Petal). The lot size is small and therefore the contract value is small as well. You will find few variants like Gold Petal (Delhi), Gold Guinea (Ahmadabad) etc., I would suggest you ignore these, especially if you idea is to just trade Gold.

Here is my honest opinion – if you are trading Gold stick to either the Big Gold contract or the Gold Mini contract, simply because the liquidity is quite bad in all the other contracts. To give you a perspective on liquidity on a regular trading day (on MCX) –

  • 12 – 13K lots of big gold contracts get traded
  • 14-15K lots of Gold mini contracts get traded
  • 1-1.5K lots of Gold Guinea contracts get traded
  • 8-9K lots of Gold Petal contracts get traded

The number of lots in Gold Petal should not entice you believe that the liquidity is high, do remember Gold Petal lot size is just 8 grams, and therefore 8-9K lots translates to roughly 2-2.5 Crs.

Another important thing to note – liquidity is highest in the most nearest month contract, so always stick to these. The thumb rule here is – farther the contract expiry, lower is the liquidity.

With this, I assume you are familiar with the Gold contracts and the logistics. In the next chapter we will discuss few interesting topics such as the parity in domestic and International gold contracts, factors influencing Gold, relationship between gold, equities, and dollar etc.


Key takeaways from this chapter

  1. Gold is one of the most popular bullion contracts that gets traded on MCX.
  2. Gold contract comes in a few variants – Big Gold, Gold Mini, Gold Guinea, and Gold Petal.
  3. Big Gold is the most popular contract, but requires a margin in excess of Rs.1,25,000/-.
  4. The P&L per tick for the big Gold is Rs.100.
  5. P&L per tick can be calculated as = (Lot Size / Quotation) * Tick Size.
  6. Gold Mini is the 2nd most popular Gold contract, requires a margin of roughly 15K.
  7. Gold Petal and Guinea are other variants demanding much lower margin requirement. However the liquidity in these contracts is quite low.
  8. It is always a good idea to stick to the nearest month contract as liquidity is high in these contracts.
  9. Delivery is compulsory for all these contracts; therefore it makes sense to close these contracts at least 4 days before the expiry of the contract.

56 comments

  1. CHAITANYA KALE says:

    Market Guru,
    Gold petal lot size 8gm or 1gm ?

  2. Chhaya g says:

    Karthik Sir, when you will write strategy for crude oilm……. waiting for it

  3. Anil Choudhary says:

    How can I invest in Gold? Like If I want to invest in SBIN I simply buy 1 share of SBIN by CNC trade.
    How to buy Gold by CNC trade?

  4. uday says:

    Hi Kartik,
    Which is the most traded commodity in India ( or in Zerodha clients) gold, silver or crude oil or any other one and can you please specify the other major countries commodity market timings in IST, which are effecting Indian market

  5. thinesh says:

    I wish to trade Gold mini futures. What is the market timing in India to trade this?. example ..Stock market opens at 9.15 a.m and closes at 3.30 p.m. beyond which we cannot trade..similarly is there any timing for commodity market?

  6. Pankaj Belsare says:

    I have an account in Zerodha since last 4 years. But Commodity transactions is not active. What to do for that. Is there any separate charges for that? Can we trade commodities in kite ? Are there separate yearly charges for mainting commodity account? Please Post Crude related article at the earliest.

    • Karthik Rangappa says:

      We will post chapters on Crude soon. You need to open your commodity account to trade commodities. Suggest you contact our sales team for that. Yes, you can trade commodities via Kite.

  7. CHAITANYA kALE says:

    Lord of wisdom !
    God of intellect !!
    “ShreeGanesh” bless ‘u’..!!!

  8. Balaji says:

    Hi Karthik,great work by you and your team I have gone through all modules, excellent work!! .

  9. jai5 says:

    Hello All
    I am a beginner in commodity trading. Kindly assist me in the following
    1.Which type of analysis is suitable for the Intraday commodity trading.
    2.Which pattern i should use ?
    3.At present i am using a 5 minutes candlestick chart , Is that right to use.
    4.At present i am trading only in Metals ,kindly suggest some best analysis & patterns to study & follow.

  10. MSP says:

    Hi Karthik

    Does commodities trade on saturday and sunday as well on MCX? , if yes , what is the timing on these days for trade
    Regards,
    MSP

  11. Sumeet Das says:

    ( Now when the October 2016 contract expires on 5th Oct 2016, September 2017 contract will be introduced….). In this sentence isn’t the month should be October 2017 that is 2 months after August 2017 as mentioned on the Table ?

    And Thanks for all this. It is very helpful and informative and is explained in the most simple way possible. 🙂

  12. dk1089 says:

    Can we take short positions in gold mini and close it before 1st of expiry month, same as in nifty futures or there is difference in commodity trading n stock futures trading

  13. Sid says:

    Hi,
    Was looking at the GoldM contracts. When I look at it in the Margin Calculator in the ‘Net Qty’, I see 100 (Lot Size). But, when I try to trade it; the qty says ‘1’. Does that mean 1=100, so the tick is Rs 100? Similar is the case with SilverM.

  14. atul says:

    hi sir i dont have clarity on mcx contract expiry dates can u guide me what is best option to do commodity trading intraday or carry forward contract.when i need to exit before expiry or wait till expiry, i am also confused about physical delivery. i have read somewhere if u dont close ur contract it will goes to physical delivery what is that , what is warehouse receipt?

    presently i am trading in equity but i am intrested to trading in commodity as well as currency so i am beginner in this commodity trading and eager to learn plz guide me on above question and suggest me any book for the same

    thanks in advance

    regards
    atul

    • Karthik Rangappa says:

      Most of the thing you’ve asked is explained in the chapter itself. I’d suggest you close the position before expiry. Intraday or swing trade really depends on your risk appetite.

  15. Manish says:

    What an awesome tutorial this is !! Very nice and elaborate.. Just what we need… Thanks a lot for this…
    One more thing.. Is there some sort of chart that lists the quotation, lot size, tick size, etc for all the actively traded commodities.. Like i was looking for a table that would list all the commodities in 1 place which would be easy to refer…

    • Karthik Rangappa says:

      Thanks for the kind words, Manish.

      MCX gives out that chart, I had a copy of the same (need to dig up)…will try and put that up sometime soon.

  16. Prashant Jain says:

    I want to take delivery of gold petal in demat. How can I do so..?

    • Karthik Rangappa says:

      You cannot do this. However, you can take delivery of Goldbees, which is basically an ETF based on gold prices.

  17. Mohit Khandelwal says:

    Hello Karthik Sir

    I have read your pdfs’ and I am simply mesmerized by the way you have written down the content comparing it with routine life along with the graphs. I have opened the account in zerodha. I am pursuing MBA and very much interested in capital markets. Actually we are 3 friends and I would like to know if there is any project for us or any internship opportunity under your guidance. Hoping to learn from your experience and knowledge.

    Thank You

    • Karthik Rangappa says:

      Thanks for the kind words, Mohit. I’d suggest you reach out to our HR to know if there are any opportunities in Zerodha.

  18. abhishek kumar sah says:

    when i type gold in kite it shows gold fut contracts, how do i get the gold spot chart???

  19. abhishek kumar sah says:

    so you mean to say that GOLD M August fut contract will expire on 5th of august?

  20. Rajinder says:

    Dear sir, I am member of zerodha and at present trading on equities only.
    Sir in this chapter you have given a table for Gold Mini, Gold Guinea and Gold Petal in that in Delievery Logic you stated as Compulsory. Please clarify whether in these delievery is compulsory and it can not closed for cash.
    Is it true

  21. aravind says:

    what are the timings of commodity market?

    • 10.00 AM to 11.30 PM (up to 11:55 P.M. on account of day light savings typically between every November and March of the following year) for all Non-Agri commodities.

      10.00 AM to 9.30 PM for Internationally linked Agri commodities (Cotton, CPO & RBDPMOLEIN)

      10.00 AM to 5.00 PM for other Agri commodities.

  22. biswajit mahapatra says:

    sir, when i am writing gold on search box it shows copperm aug future. Then how i trade on gold commodity?

    • Karthik Rangappa says:

      Look for ‘Gold MCX’ on the market watch in Kite. You will find the futures contract. Good luck!

  23. Hina says:

    Sir, what is a Bullion contract?

  24. ram balak says:

    why you are not allowing delivery of gold in demat form.

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