How to Trade Gold Futures in India: Beginner's Guide

What a gold futures contract actually is

A gold futures contract is simply a standardised contract to buy or sell a specified quantity of gold at a predetermined price on a future date. On MCX you're trading a price, not the physical gold. The vast majority of people will simply close their position prior to expiry and the profit or loss is the difference between the price at which they bought and the price at which they sold.

The price that's displayed on screen is a wholesale futures price for a particular purity, on a per 10g basis. It doesn't include GST or making charges so that's why it doesn't necessarily match the price that a jeweller would quote you at the counter.

Why the price moves

The MCX gold price is the international gold price in rupees. It's the international price in dollars times the USD/INR rate, adjusted for import duty and other charges. In practice this means that even if the global price of gold remains unchanged, a weaker rupee will see the Indian price go up. A 1% fall in the rupee would see the MCX gold price go up by approximately 1%.

The contract sizes

MCX lists several versions of gold futures, which differ mainly in quantity:

Gold	1 kg	10 grams
Gold Mini	100 grams	10 grams
Gold Ten	10 grams	10 grams
Gold Guinea	8 grams	8 grams
Gold Petal	1 gram	1 gram

The minimum price movement (tick) is ₹1 in each case. The value of each tick is determined by the size of the lot. For the 1kg contract it's ₹1 per 10 grams which equates to ₹100 on the position. The 100g Mini is ₹10 per tick and the 1g Petal is ₹1 per tick.

Working out contract value

Contract value is price times the lot size, adjusted for the quote unit. Made up example: if gold is quoted at ₹1,50,000 per 10 grams then...

• one Gold Mini lot (100 grams) is worth ₹15,00,000,
• One Gold Petal lot (1 gram) is worth Rs.15,000.

A 1% move in price changes the value of the Mini position by ₹15,000. That's the amount of money on the line with that position, not the amount that was actually deposited to open it.

Margin: why you don’t pay the full value

Futures are traded on margin. Rather than having to pay the full value of the contract, the trader pays a fraction of that as a margin. The MCX and the clearing corporation set the minimum margin which is based on a volatility measure known as the SPAN margin plus an extreme loss margin. Brokers can of course ask for more than this. Additional margin can also be levied in the event of a volatile market.

Margin is normally a single digit % of contract value (although it will vary with volatility so the current figure is available on the MCX and broker websites). The same leverage that enables small deposits to control large values also means that losses can scale to the full contract value.

Step by step: how a trade happens

1. Open and activate the segment. A trading and demat account is required and the commodity segment will need to be enabled as it's separately switched on from the equity segment.
2. Add margin. Funds must be available in the account at the time.
3. Pick a contract and an expiry month. The Gold and Gold Mini contracts expire on the 5th of the expiry month (or the preceding working day if the 5th falls on a holiday). The Guinea and Petal contracts expire at the end of the month. The near month is generally the most actively traded.
4. Place the order. A buy order is a long and a sell order is a short. Market, limit and stop loss orders work in the same way as they do in equities.
5. Watch mark to market. Gains and losses are settled in the account at the end of each day, not just when the position is closed.
6. Close or roll the position. A 'close' is to place an opposite order prior to expiry. A 'roll' is to close the current month and open the next one.

Trading hours

Gold is traded on the MCX from 9:00 AM to 11:30 PM (or 11:55 PM depending on US daylight saving time). The evening session does of course overlap with the US market and that's when most of the global price action occurs.

Expiry and settlement

Contracts have fixed expiry dates and the settlement terms will vary from contract to contract (some will be physical delivery, some will be cash settled). The contract specification page on the MCX is the definitive source as the details are set by the exchange and are subject to change from time to time. If you hold a position to expiry you will be subject to delivery, which is why the majority of traders will close out prior to expiry.

Costs and tax

Costs are brokerage, exchange transaction charges, GST, stamp duty and the Commodity Transaction Tax (which is on the sell side for non-agricultural futures). The rates are by notification and can vary.

Profits and losses on commodity futures are normally treated as non-speculative business income (taxed at slab rates) and reported in ITR-3 with the loss being eligible for carry forward. The F&O taxation points are the same and a tax professional would be able to confirm how it would apply to an individual.

Main risks

• Leverage: small price changes can lead to big gains or losses in relation to the margin that you've deposited.
• Margin calls: if the losses bring the account balance down to below the required level then further funds are required or the broker can square off the position.
• **Currency and the wider global scene (**the dollar, the rupee, interest rate expectations, the geopolitical situation etc) can all cause prices to move quite rapidly, including overnight.
• Rollover and expiry: missing expiry dates can result in delivery obligations or unwanted positions.

Gold futures vs other ways of holding gold

Futures are only one route. Physical gold, gold ETFs and sovereign gold bonds all involve the ownership or holding of gold linked assets. Futures are leveraged contracts with an expiry date and work in a completely different way. They have different costs and risks and are for different purposes.

Commodity trading on Dhanush 2.0

Dhanush 2.0 enables account holders to activate the commodity segment alongside equity and derivatives on the same account. Watchlist and Price Alerts are available for monitoring levels and Portfolio Analytics for reviewing your positions. Ashika has over 30 years' experience in the securities market. The features provide information and tools and are not in any way a form of trading advice.

Key Things to Know

1. A gold futures contract is an agreement on a future price. Most traders will simply settle in rupees by closing their positions prior to expiry rather than actually taking delivery.
2. MCX offers Gold (1kg), Gold Mini (100g), Gold Ten (10g), Gold Guinea (8g) and Gold Petal (1g) all with a ₹1 tick.
3. Only margin is required to be paid up front, with profit and loss on the full contract value being settled daily.
4. Price is dictated by the global gold price and the USD/INR rate. The cost, margins and settlement rules are all set by the exchange and are subject to change.

This blog is for general information only and isn’t investment or trading advice. Futures trading involves substantial risk, and contract specifications, margins and tax rates change, so MCX notifications and a qualified professional are the right sources for current details.