There is more to investing in gold than the jewellery

Would you ever say no to shop for gold jewellery? Frankly, I can’t. For some, just gazing at the exquisite pieces of ornaments is an excellent stress therapy. But what may be strenuous (especially if you are the “tending-to-economy” types about spending) is to see a few thousands or lakhs of rupees vanishing from your bank balance.

No doubt your money gets converted into another asset class — jewellery, but it is not easy to shell out those large chunks of cash for what could turn out to be a bauble.

So if your interest is to invest in gold and you are a well-informed investor who keeps tracks of gold prices, here is an option that lets you stagger the spending and yet bask in the yellow shine.

Take a plunge into the commodities market. The concept of commodities futures is not new to India as it has been around for four years.

However, it is only in two years that it has gained a lot of prominence. Particularly, more importance was given to the market after gold hit its peak price in March 2008.

India has 25 commodity exchanges, the most popular ones being the Multi Commodity Exchange (MCX) and the National Commodity and the Derivatives Exchange (NCDEX). The first step into the commodities market is to open accounts with registered commodity brokers (such as Religare Securities or Karvy Comtrade). A demat account used for equity trading cannot be used for commodity trading.

Commodities exchanges tease you with a load of choices, just like jewellery shops. Take for example products offered by the MCX, which is rated second among all the commodity exchanges in the world that trade in gold. You have three products to pick from – Gold Guinea (where the trading unit is 8 gm), Gold Mini (100 gm) and Gold HNI (1 kg). Depending on your requirements you can select the future contract that fits your bill. Well, if you’re the type who expects meenakari, filigree or kundan jewellery, then the commodities futures route may be a disappointment as deals here are only going to fetch you gold bars. So you’ll have to spend a little more money to transform your investment into stunning pieces of jewellery.

What then is the advantage of buying gold in the commodities market?

The buying process


Let’s assume one gm of gold is available for Rs 1,500 today and it is expected to move up in the coming months. Though you may not need gold now, you feel there would be a need in three to four months.

Instead of locking-in money today by making a gold purchase, you can buy a futures contract on gold from an exchange.

This gives you an opportunity to lock-in today’s gold price against its actual purchase at a later date.

When you buy 100 gm of gold from a jeweller, you need to pay up Rs 1,50,000 right away (1,500 x 100 gm).

On the other hand, when you buy one lot of November 2009 contract for Gold Mini from MCX, you are entering into a contract to buy 100 gm of gold in November at today’s price. ]

In this case, your immediate payment would be just restricted to the margin money payment of 4 per cent that you are required to make.

Your initial money outflow is contained to Rs 6,000 (4 per cent x Rs 1,50,000) and this is adequate to fetch you the three months forward contract.

If gold prices move up the way you thought it would and touches Rs 1,800 by November, you are at the gaining end. During the delivery period you need pay another 25 per cent delivery period margin and the remaining 71 per cent should be paid at expiry of the contract.

So the payment of Rs 1,50,000 is spread over three parts, and on each gm of gold that you buy though the commodities market, you make a gain of Rs 300. But if gold prices unexpectedly take a beating to touch, say, Rs 1,200, you have two options.

You can choose to continue with the contract and take delivery, in which case you will be incurring a loss of Rs 300 on each gm. Otherwise, you can roll over your contract and buy a new 100 gm contract at Rs 1,200 a gm.

For a long time, trading in commodities was perceived to be a “rich man’s domain” as the smallest contract size was 100 gm.

Most commodity exchanges are trying to break this perception by making the futures market affordable even to small-time investors. MCX’s Gold Guinea is a good example for this effort.

However, just like the equities market, you need to have a close look at the price movement and be well-informed about all types of orders (for instance, stop-loss order and limit order), to ensure that you get the best bang for buck.

Spotting the shimmer


The commodities market has recently allowed spot trading, which is identical to spot trading in equities.

NCDEX Spot and National Spot Exchange are the spot markets promoted by NCDEX and MCX, respectively. You can buy gold just the way you would buy stocks of, say, Reliance Industries or State Bank of India. However, the minimum contract size starts at 100 gm, making spot market buying no-so-affordable to all.

Spot prices of gold closely follow the international prices. Delivery is mandatory in both the futures and spot markets.

From an investment perspective, Gold ETFs (exchange traded funds) traded on stock exchanges are also an option. But they don’t offer you gold in physical form; a reason why commodities market score a little more over ETFs.