Gold Commodity Trading
Since the demand for Gold is associated with the production of jewelry, Gold prices tend to increase during those periods when the demand for jewelry is the greatest the price of gold depends on a host of factors, which makes it very difficult to predict. In a fashion, gold is similar to shares. In fact, in many of the villages and small towns of India, gold is preferred over bank deposits as a savings and investment instrument.
Until a year ago, to gain from price volatility, one would have to hoard and trade in gold physically. However, with the commodity futures market operating in full swing, one has the option of not stocking gold physically to gain from its price movements. Let us see how trading in futures is far better than the option of holding gold. Firstly, there are various costs associated with the process of physically stocking gold. The costs include the cost of the gold itself, the cost of carrying, cost of physical storage, finance cost, and the most important one, the safety element.
Supposedly, the cost of gold is Rs 6000 per 10 grams, with an investment of Rs 6 lacs; one can buy 1kg of gold. Now, suppose, three months later, when the price of gold is Rs 6,500 per 10 grams, the person decides by selling the gold makes a gross profit of Rs 50,000. To arrive at the net profit, one would have to deduct; the cost of storage in a bank, the cost of financing and transaction costs, including the sales taxes. To trade in gold futures, an individual has to go to a brokerage house and open a trading account. An initial deposit of Rs 50,000 to Rs 1 lacs is paid.
One can gain from a futures market even by having a view on the price of gold. This characteristic of gain is absent in the physical market for gold. If one believes that the spot price of gold is going to fall in the near future, all one needs to do is to sell gold futures.