Gold 2% cheaper in futures market on hopes of import duty cut

Punters increase bearish bets; those with ready bullion are selling in spot and buying futures

Gold is quoting nearly two per cent cheaper in the futures market. The MCX February gold contract was quoting Rs 510, or 1.8 per cent lower than the closing spot price of Rs 28,890 per 10 gram in Mumbai’s Zaveri Bazar on Friday. Usually, futures prices trade higher than spot as they include carry cost or cost for carrying forward positions. This time, however, the market is expecting the government to cut import duty on  gold by two per cent, which is why the metal is cheaper in both, February and April contracts. In fact April gold is cheaper than February.

An active trader in futures said that with with the decline in gold imports likely to continue this year, following the virtual collapse of the black economy, the government may attempt to bring the gold duty structure in sync with the proposed 4-6 per cent rate of GST for precious metals. The trader added that the two per cent cut in duty would also impact smuggling.

Arbitrageurs, especially those who have ready bullion, prefer to sell in the physical market now and buy futures with an intention to take delivery. Whenever futures were trading adding at a premium, they would buy in spot and sell on MCX, giving delivery.

The year 2017, like the previous year, has begun with a strong note for gold, and prices in both, the international and domestic markets have risen between 4-5 per cent. The rise in india also reflects market turning from a $2-3 discount to a marginal 1-2 premium per ounce, with rupee depreciation making gold more lucrative. However, rising prices have tempted bears to increase short positions in MCX gold futures.

Total open interest in January rose by 23 per cent to 10,213 lots and looking at the top 10 long and short positions at the MCX, short positions were more than twice the long, suggesting that market is expecting that the rise in gold prices will not sustain. Long positions of the top 10 players, according to MCX data, stood at 2,788 lots (kilos) while short positions were 5,849 lots.

Domestic demand has seen some improvement in January, resultinh in the discount seen in December turning to marginal premium.

However, in the global market gold prices have increased by $50 to trade at $1,197 per ounce so far this year. The sell-off by investors has slowed but not halted. US SPDR, the largest gold ETF saw a fall of 17 tonnes this, till yesterday.