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After a long time gold in Mumbai spot market is trading above Rs.29,000 per 10 gram. The reason apart from sharp fall in rupee value against dollar in last few days, was acute shortage of physical gold. The yellow metal is trading at Rs 600 premium (per 10 gram) to landed cost.
However, there is another angle to the very high premium for spot market as short sellers in futures market are understood to have trapped in a fight with bulls. The game started a few days back when the reserve bank came out with new gold import policy. At that time some players thought that demand starved jewellers will start getting gold and price movement internationally was also biased towards fall.
However, soon after these short sellers got trapped as RBI’s gold import policy created more confusion than clarity. If that was not enough to trap gold bears, rupee nose dived in last few days from above 59 to below 61 today. This has increased cost of imports making gold costlier. This was happening at a time when there is acute shortage of gold in physical market as imports have not happened as expected. Now battle for bears against bulls turned in to battle against time as they had shorted in MCX August contact which is coming up for expiry.
Since prices started going up due to rupee fall, bulls are holding firm and not squaring off their positions. However, bears if hold on have to give delivery which is not available as RBI has created lot of confusions and imports are not happening the way it was expected to happen. As a result bears are paying higher price to exit from futures. Landed cost of gold at current prices is Rs.28, 300 per 10 gram including premium that importing banks are charging from local jewellers. However, MCX August futures is traded at Rs. 28, 800. This is reflected in October futures on MCX has turned in backwardation and trading at Rs.300 lower than august futures. Normally far month contract trades in premium as it includes cost of carry positions.
In physical market gold is trading higher than futures as it includes VAT and physical delivery premiums. It was quoted above Rs.29,000 per 10 gram in opening trades.
