Whose Gold Is It Anyway? New 10 Gram Contract Likely To Attract Equity Derivatives Traders

A new gold future contract may be the next big thing for derivatives traders who have been snubbed by regulatory curbs on equity futures and options.

Amid record-high prices, the Multicommodity Exchange of India said it would launch gold 10 gram future contracts from April 1. The minimum price movement will be of Rs 1, and the contracts will have monthly expiries.

Traders and industry experts believe this contract is likely to bring in small participants who have moved away from Nifty and Sensex's index derivatives.

Anuj Gupta, head of commodity and currency at HDFC Securities, says that many retail participants have dropped out of the index derivatives trade since lot sizes were increased last year. "The new gold contract is probably a way to attract these traders. This will also be an easier hedge for retail traders since physical gold has the same contract in the market."

Gupta was pointing to how jewellers, and most people buying and selling physical gold, do so with a base unit of 10 gm.

So, while MCX already has gold futures for the 1 gm, 8 gm, 100 gm and 1 kg categories, a 10 gm contract will make things easier for the lay trader, explained Ajay Kedia of Kedia Advisory. "If they see a quote of Rs 90,000/10 gm in the physical market, they can easily place their orders based on the same amount without having to recalculate the base value."

Both Gupta and Kedia said that margins on existing gold contracts have been on the rise as the value of the underlying asset has been on a constant upward trajectory. This has led to a stagnation in participation and volumes, which might have prompted MCX to launch a contract with a lower margin requirement.

While small retail traders might slowly pick up the 10 gm contract, immediate volumes are likely to be brought in by particular type of traders, highlighted Kunal Shah, head of commodities research at Nirmal Bang. "There is a community of traders that plays spreads on a contract-to-contract basis. They sell 1 kg futures and buy the 100 gm ones, sell 100 gm ones and buy 8 gm, sell that and buy 1 gm," he said.

So, even if the new contract might not materially change anything at once, this set of traders that brings in the volumes will surely get more active, he explained.

Meanwhile, bullion prices hit another record high as the US Federal Reserve kept interest rates unchanged and projected slower growth and higher inflation for the country. Gold prices in the US were above $3,055 an ounce, and India spot was trading at Rs 88,444 per 10 gm.

Gold prices have hit new highs over 10 times since January alone amid geopolitical and economic uncertainty. US spot prices have crossed the psychological threshold of $3,000 an ounce and India prices are close to touching the Rs 90,000-mark, making gold speculation a lucrative trade, traders said.

Gupta added that the trend of equity derivatives traders moving to commodities is not just limited to gold. "Equity derivatives traders are shifting to commodity derivatives like gold, copper, silver and crude as there are many options here," he said.