What to know before investing in gold futures?

Gold investment has traditionally been a simple transaction involving physical possession. But over time, market evolution has brought about newer ways to invest in gold. One medium through which it can be traded is gold futures, which combine the gold market with the tenets of futures trading.

If you are looking to invest in the gold futures, it is important to acquaint yourself with answers to some simple but important questions.

How are gold futures traded? In India, gold futures can be traded through the BSE, NSE and MCX (Multi Commodity Exchange) in a variety of order sizes, ranging from one gram to one kilo. The buyer enters into a fixed-term contract, with an agreement to buy or sell gold at a future date for a price specified in the contract. While the contract might specify a certain amount of gold, you do not need to invest the entire amount upfront. Instead, you can put up a small percentage of the total value, known as “margin”.

Like other investments, you can either gain or lose money through a gold futures contract, depending on how the price of gold moves during the contract period. Price changes (both upwards and downwards) are measured in ticks, which is the smallest price change measured by the markets. For instance, in an MCX gold future contract, the tick size is 0.10 (or Rs. 1 per 10 grams). Thus, if you have a lot size of 1 kilo (1000 gram), your profit or loss will be Rs 100 per tick movement. You can profit from the price movement of gold during the contract period or opt for the delivery of physical gold at the end of the contract period.