The Hindu Business Line : A golden future

Futures trading in gold has taken off very well, thanks to the initiative of the three-nation-wide multi-commodity exchanges. G. Chandrashekhar and Latha Venkatraman survey the scene.

BULLION trading in the country is in a state of metamorphosis. Introduction of futures trading in yellow metal, which is known to be exceedingly volatile, has opened up excellent opportunities for players not only to discover prices and hedge their price risk but also make speculative gains. As part of liberalisation of trade, last year the government lifted the four-decade-old ban on futures trading in gold.

The spot market needs attention in the form of further liberalisation. Early this year, the then Finance Minister announced that gold imports would be under open general licence (OGL) subject to guidelines to be issued by the Reserve Bank of India. The move was intended to liberalise the physical market and allow merchants, exporters and consumers to source gold directly from the overseas market. Currently, gold imports are restricted through designated agencies and banks. The RBI guidelines relating to OGL imports have not yet seen the light of day.

Interestingly, futures trade in gold has taken off very well, thanks to the initiative of the three-nation-wide multi-commodity exchanges: Ahmedabad-based National Multi-Commodity Exchange of India (NMCE), Mumbai-based Multi Commodity Exchange of India (MCX) and National Commodities and Derivatives Exchange (NCDEX).

These exchanges began gold futures trading six to eight months ago. Already, both MCX and NCDEX are reporting robust turnover in gold futures.

Between November 11, 2003, and August 12, 2004, MCX is reported to have clocked a total gold turnover of more than 340 tonnes valued at around Rs 20,000 crore, which accounts for 80 per cent of gold futures trading in the country.

"The importance of India as a major market for bullion in the world and the Indian market's responsiveness to world events make Indian exchanges an important platform for commercial interests as well as create an exciting opportunity for those investors who seek to profit by correctly anticipating price changes," according to the head of one of the exchanges. MCX offers two types of contract in gold: gold (1 kg) and gold mini (100 gm).

NCDEX also offers two contracts: 100 gm and one kilo while NMCE offers a contract of 100 gm.

Both MCX and NCDEX have introduced evening trading session up to 11 p.m. to allow their members to take advantage of price fluctuations on the New York Mercantile Exchange.

Gold is valued in India as a savings and investment instrument and is the second-most preferred investment after bank deposits.

India has the distinction of being the single-largest consumer of gold in the world, sharing 25 per cent of global consumption. The country imports 600-800 tonnes valued at around Rs 40,000 crore every year.

It is estimated that the Indian gold futures market has the potential to grow to 40,000 tonnes by volume and at Rs 24,00,000 crore by value.

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