In India, investing in bullion of precious metals like gold and silver has always been a profitable and preferred investment option. When it comes to gold, since 2003, it has offered a remarkable 800% return when domestic prices were around Rs. 6,000 per ten-g levels. You can invest in bullion through a variety of methods, such as physical ownership, ETFs, or futures.
Let us understand what is bullion, how you can invest in it, and what role MCX plays in facilitating futures contract trading.
What is bullion market?
Bullion is a term used to define precious metals like gold and silver that are in the form of:
- Bars
- Ingots, or
- Coins
They come with a standardised weight and purity. Most often, investors use bullion to hedge against:
- Inflation
- Currency devaluation, and
- Economic instability
Bullions are traded on commodity exchanges across the world. In India, bullions are traded on the Multi Commodity Exchange (MCX). The MCX offers futures trading for precious metals like:
- Gold
- Silver
- Platinum, and
- Palladium
The trading usually happens in the form of contracts, which have varying quantities, like:
- In the case of gold, the quantity varies from 100 gs to 50 kilogs.
- In the case of silver, the quantity varies from 1 kilog to 50 kilogs.
What is the MCX Bullion Index (MCX BULLDEX)?
To facilitate easier trading of bullions, The MCX provides a platform, “The MCX Bullion Index (MCX BULLDEX)”. This index is based on gold and silver futures contracts traded on the Multi Commodity Exchange (MCX). Let us understand this better:
Composition
- The index tracks the real-time performance of futures contracts of:
- Gold (1kg) and
- Silver (30kg)
Gold holds 70.52% of the index's weight, while silver holds 29.48%.
Rebalancing
- The weights of gold and silver are adjusted every January.
- This rebalancing ensures that the index accurately reflects market conditions.
What are the different types of futures contracts for bullion trading on MCX?
Gold and silver are the most traded precious metals on the MCX. For both of them, there are four main types of futures contracts. Let’s study them:
Bullion |
Futures contract |
Quantity |
Gold |
Gold Futures |
1 kg |
|
Mini Gold Futures |
100 gs |
|
Guinea Gold Futures |
8 gs |
|
Petal Gold Futures |
1 g |
Silver |
Silver |
30 kgs |
|
Silver Mini |
5 kgs |
|
Silver Micro |
1 kg |
|
Silver 1000 |
1 kg |
How can you invest in bullion?
As a retail investor, you can invest in bullion through various methods. Let us take a look at some prominent ones:
Method I: Invest in physical bars
- You can buy physical gold or silver bars from reputable dealers.
- These bars are typically stamped with:
- Weight
- Purity
- A mint mark for authentication
In India, the bullion comes with a BIS hallmark, which certifies purity and quality.
Method II: Invest in ETFs that track the prices of bullion
- Exchange Traded Funds (ETFs) are investment funds.
- These are traded on stock exchanges and represent ownership in bullion assets such as gold or silver.
- The value of the ETF shares is directly linked to the price movements of the underlying bullion.
Let us understand better using a hypothetical example:
- You decide to invest in a gold ETF listed on the National Stock Exchange (NSE).
- Say the current market price of gold is Rs. 5,000 per g.
- You decide to invest Rs. 50,000 in the gold ETF.
- You received the following units:
- Number of units = Investment amount / Market price per g = Rs. 50,000 / Rs. 5,000 = 10 units
- Over time, the price of gold fluctuates.
- Suppose after a month, the market price of gold increases to Rs. 5,500 per g.
- This surge causes the value of your investment to increase accordingly.
Profit calculation
- Current market price per g = Rs. 5,500.
- Value of investment
- Number of units x Current market price per g
- 10 units x Rs. 5,500 = Rs. 55,000
- Profit
- Current value of investment - Initial investment
- Rs. 55,000 - Rs. 50,000 = Rs. 5,000
Method III: Gain exposure using futures contracts
- Futures contracts allow you to think on the future price movements of bullion.
- It involves agreements to:
- Buy or sell a specified amount of bullion
- At a predetermined price
- On a future date
As discussed earlier, these contracts are traded on the Multi Commodity Exchange (MCX).
Let us understand better using a hypothetical example:
The scenario
- You decide to enter into a gold futures contract to buy gold.
- The size of the contract is 1 kg.
- You agree to buy 1 kg of gold at a predetermined price of Rs. 50,000 per 10 gs (Rs. 5,000 per g).
- The expiration date of this contract is three months from now.
The initial investment
- You deposited an initial margin of, say, Rs. 10,000.
- This means you only need to invest Rs. 10,000 upfront to control 1 kg of gold.
The price movement
- Over the next three months, the price of gold on the MCX fluctuates.
- Say the price increases to Rs. 52,000 per 10 gs by the contract's expiration date.
The profit calculation
- By purchasing a gold futures contract, you have already locked in the purchase price at Rs. 50,000 per 10 gs.
- Now, you can:
- Buy gold at a lower price and
- Immediately sell it at the higher market price
Profit per 10 gs
Market price - Contract price = Rs. 52,000 - Rs. 50,000 = Rs. 2,000
Total profit
Profit per 10 gs x Quantity = Rs. 2,000 x 100 gs = Rs. 2,00,000
Conclusion
So, what is bullion? Bullion refers to bars and ingots of precious metals like gold and silver. In India, retail investors can gain exposure to bullion in various ways, such as physical ownership, investing in ETFs, or trading futures contracts on the Multi Commodity Exchange (MCX). For gold and silver, these futures contracts exist in four different types, each with different expiry dates and lot sizes.
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