When government is contemplating curbing import of gold by making investment in this yellow commodity less attractive, bullion punters are deploying strategies to maximize profit from trading. Traders in futures market have discounted even probable increase in import duty of gold which has been reflected in their bets on spread between two futures contract in gold.
When gold import duty goes up, gold prices in domestic market reflects that as they are calculated based on cost of imports. Since the gold import duty is expected to go up from 4 per cent at present to six per cent in the budget, prices of far month futures contract on MCX have gone up while current month contract which is expiring on 5 February is not reflecting that as budget is being presented after expiry of the near month or current contract.
This spread has importance as punters are trading in spread which is known as spread betting.
Today on MCX February gold closed at Rs.30581 while far month or April contract closed at Rs.31297 per 10 gram, which is higher by Rs.716 which used to be around Rs.350 in recent months. Far month contract in normal market is traded at a premium reflecting cost of carry but the premium this time has risen significantly in gold as seen from the spread.
“market is convinced that import duty will be raised in the budget and hence spread in two gold contracts are increasing,” said Ajay Kedia, Director, Kedia Commodities.
In past whenever import duty of gold has risen, simultaneously duty on silver has also been increased. However future prices of silver contract and its spread compared to next contract is not reflecting that as market is not convinced this time that silver duty will also be revised.
MCX has also launched a contract for trading in the spread in gold. In international market there are contracts for trading spread and popular contracts are gold and crude oil. Even spread in Brent and WTI oils are also traded. However MCX has spread contract which shows spread but it is executed in two trades in two different that is near month and far month contracts.
While gold demand in physical market has seen some improvement in recent months, several traders are also buying gold to take advantage of arbitrage between gold spot and futures prices.
“Traders are currently buying from the spot market and selling on the selling their February futures contract on Multi Commodity Exchange and giving a delivery and thus are availing of risk free return,” said Dharmesh Bhatia, vice president commodities at Kotak Commodity Services.
In physical market gold prices today closed at Rs 30415 per 10 grams which is lower by Rs 166 from near month futures on MCX today giving clear arbitrage opportunity. Which February contract is near to maturity, the difference is higher because spot market is trading at slight discount due to volatile rupee and absence of good physical demand.
