Gold is one of the most precious metals available on the earth and is known for its lustrous appearance and value-retaining capabilities. In India, Gold holds immense value for its varied uses, be it in the form of jewellery, physical Gold for investment, or religious idols, which makes it a preferred commodity amongst Indian investors. 
Gold commodity trading has been a crucial part of the Indian Economy for a long time. It was used by traders to perform transactions in order to acquire other commodities and resources. But who knew one day, Gold itself would be traded as a commodity amongst investors? In today’s investing world, all you need is a Demat and CFD account to do Gold commodity trading without ever holding Gold physically.

What Is Commodity Trading?

Before we learn about Gold commodity trading, let us understand the concept of commodity trading. In contrast to the earlier times in which commodities were traded physically, today, commodity trading takes place through digital platforms known as commodity exchanges.  These exchanges allow investors to buy and sell commodities of various types at prices that are determined by the forces of demand and supply. Simply put, the buying and selling of commodities takes place through commodity exchanges, where their physical transfer between investors does not take place.

How is Gold Traded In Commodity Markets?

“Yellow metal”, the other name for Gold, is a common investment vehicle in every household. Therefore, be it seasoned investors or new investors, Gold is always their first choice for trading. But holding Gold in its physical form and trading it through commodity exchanges are two different things. Gold trading through commodity exchanges takes place in the form of derivatives contracts such as futures and options, which means Gold commodity trading is the act of buying and selling derivatives contracts of Gold that are executed at a pre-decided future date and price. These contracts are required to be settled by both parties and at a specific date in the future, which is also known as the expiry date. The lot size for gold trades is 1000 grams per lot, which is the highest among all the other gold contracts.

Key Technicals About Gold Trading

Gold is known as the Big Gold because future contracts of Gold require a higher margin, and they have the highest lot size among all the contract types of Gold. Some key details of a Gold contract are:

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 the contract month
Delivery Logic	Compulsory
Delivery Unit	1 kilogram

What Are The Objectives Of Gold Trading?

Hedging – Hedging refers to taking positions in an instrument to offset the risk of a position taken in other financial instruments. Gold is considered a very useful commodity for hedging purposes because of its ability to hold its value during inflationary and deflationary periods.  Investors take hedging positions in Gold futures contracts to sell them at higher prices in the future so that it helps them to mitigate their risk.Speculation: Speculation refers to the activity of buying and selling financial instruments in order to earn from future price fluctuations. For example, When an investor thinks that the price of a particular security is going to rise in the future, then they will buy and hold the security to sell it for a higher price. In commodity markets, investors speculate on the prices of various commodities and invest accordingly to generate returns from future price variations. Diversification: Since Gold has the ability to hold its value in adverse market conditions, it can provide significant diversification benefits to investor’s portfolios. By investing in Gold, investors can diversify risk when other financial instruments experience negative momentum. These benefits have made Gold a safe heaven for investment.

Frequently Asked Questions

Is Investing in Gold risky?Yes, Gold investing is risky because investments in Gold are executed through futures contracts, which are highly volatile, increasing the risk significantly. 

2. In which commodity exchange are Gold contracts executed?

In India, Gold derivatives contracts are traded through the Multi Commodity Exchange of India (MCX), which started operating in 2003. It is a commodity exchange that offers the service of trading in non – agricultural commodities. 

3. What are other types of Gold contracts that are traded in the commodity market?

Including the Big Gold contract there are 3 other types of contracts that are traded on commodity markets. These Gold contracts differ according to the lot size, price quotation, and margin requirements. The other 3 Gold contracts are:

1. Gold Mini
2. Gold Guinea
3. Gold Petal

4. What is the difference between Gold commodity trading and Gold investing?

The major difference between Gold commodity trading and Gold investing is:In Gold commodity trading, traders speculate on the prices of Gold and hold positions in derivative products to gain from the price variations in the underlying prices of Gold. In Gold investing, investors tend to buy Gold through Exchange-Traded Funds (ETF) and Gold stocks. These investments are made for a long-term investment horizon to realise the benefit of the price appreciation. Apart from ETF and Gold stock, investors also buy physical Gold in the form of bars or coins. 

5. How are stock exchanges different from the Multi Commodity Exchange of India (MCX)?

The National Stock Exchange of India (NSE) and the Bombay Stock Exchange of India (BSE) are two active stock exchanges of India. These stock exchanges are different from Multi Commodity Exchange (MCX) because MCX offers the service of commodity trading, whereas the NSE and BSE offer the service of equity and derivative trading. Hence, the difference between both of these exchanges occurs because of the type of financial instrument traded on them respectively. 

6. What is the National Commodity and Derivative Exchange of India (NCDEX)?

The National Commodity and Derivative Exchange of India (NCDEX) is a commodity exchange through which investors can execute trades in agricultural commodities through derivative contracts. It is a public limited company offering a range of 23 commodities to be traded on exchange.