Trading gold: MCX & NCDEX futures
On August 16, I wrote a post about a long position in gold, via the UTI Gold ETF (GOLDSHARE.NS). Since then, gold prices have risen from Rs 8650 per 10 gms to almost 9000 per 10 gms (+4%).
However, the ETF itself has risen only about half as much. Moreover, the slippage (due to poor liquidity) and commissions involved in trading the ETF would make this trade break-even, inspite of a reasonably good move in the underlying.
The other instrument to trade is the gold future: available at the Multi Commodity Exchange of India (MCX) as well as the National Commodity & Derivatives Exchange Limited (NCDEX).
The 100g NCDEX future is worth ~ Rs 90,000 per contract. A 4% margin requirement works out to an upfront investment of R 3600. The September 2007 GOLD100MUM contract went from 8805 on August 16 to 8985 yesterday (+2%); not much better than the gold ETF. The daily trading volumes and the bid-ask spread (~ 0.3% of contract value) are somewhat better for the future vs. the ETF, and brokerage is probably lower (~0.04% of contract value each way => 1% of initial margin).
Bottom-line: it’s not yet easy to make good money off sub-5% moves in gold prices, given the overhead involved.
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September 6th, 2007 at 4:06 pm
I read elsewhere on your blog that you used to trade the US markets, but that you stopped because you moved to India.
Why should that stop you ? I’m not an expert, but I thought as long as you keep your accounts open in the US (like most US returnees do), you can still trade them from India.
I ask because the US markets are much cheaper and more liquid to trade right now, especially for the kinds of strategies you mention in this post.. Just curious.
September 6th, 2007 at 4:22 pm
Snoopy,
I was on the H1B visa while in the US and now that I’m back, I am not sure what the legal & tax implications would be of my trading. The only avenue I knew of was to use IRA funds to trade options. The problem (besides playing with retirement money) is the heavy brokerage and the fact that only Vanguard & Fidelity agreed to let me (a non-resident alien) trade in the IRA accounts.
With the new regulations for foreign investment by Indian residents, I’m hoping that I will some day be able to resume trading.
September 6th, 2007 at 11:08 pm
There is another problem with going long in MCX gold futures. The Gold Mini contract is a 30 day contract and the premium between the near month and the next month contract is always hovering around a 100 Rs. So if one has to hold a long position for more than a month, on loses Rs. 100 per contract. Again, MCX has made the gold contracts “delivery mandatory” contract if the contract is not closed 4 days before settlement. (you have to square off else take delivery. if you dont want to take delivery you are fined 5% of the contract value). What this effectively does is to increase the spread between contracts starting a week before expiry.
summing up - a) you buy the near month contract, you lose 100 Rs per switch b)you buy far month contracts you loss Rs.100 per month as premium.
This makes buying MCX gold futures for more than a month’s hold highly unattractive
September 7th, 2007 at 6:59 am
Bala,
Thanks for clarifying this. It seems that the ETFs might be better for longer-term holding.
September 7th, 2007 at 9:03 am
Bala, Kaushik,
IF this is the case, the easiest way to gain from Gold raising is to buy it in physical mode (coins etc?)
that sounds like a good option isnt it ? The traditional problems of storage etc doesnt arise as we are not going to buy in tonnes anyaywa ?
September 7th, 2007 at 9:13 am
Well, the slippage in buying & selling physical gold is enormous - you would lose 5-10% of your capital each way.
I’m simply looking for the best trading instrument for gold, over a 1-2 month period - and any physical form of gold (incl. biscuits) just doesn’t work out.
September 7th, 2007 at 9:31 am
Dr Dan,
As Kaushik points out physical delivery creates bigger problems. Even buying one kilo of gold is going to create a security problem with storage and warehousing. The best way (well the least damaging way) to take delivery in gold is to buy ETFs.
In an unrelated note, buying silver in MCX is even worser than buying gold in MCX. The contracts are for 90 days and the premium for the next contract is 5% !.
September 7th, 2007 at 2:29 pm
Kaushik,
Pardon my ignorance. What exactly do you mean by “slippage” ? Is there any tax when you buy gold and sell them ?
I thought, you buy a 10g coin for price X (which is quoted on the boards in the jewellary shops)…next day if price goes to X+100, the jewellary shop will give back the price ? (atleast X+90) ??
September 7th, 2007 at 2:40 pm
Dr. Dan,
It is similar to the bid-ask spread:
If gold was trading at 9000, the jeweler will sell it to you at 9200 but buy it back at 8800. So the round-trip would cost you 4-5% without any change in the underlying.