Investing in gold is considered as the best way to face inflationary pressures. Retail investors can opt to buy gold in small lots, such as one lot of a gold guinea, over a period of time as a systematic way of accumulating wealth at different prices.
An investor can trade in the gold guinea by opening a Trading account and Demat account with a broker, paying the 4%-7% of the contract value as margin and taking a position at his preferred price during the Exchange’s trading hours on any trading day. The investor has to pay the full amount of the contract five days prior to its expiry and can take delivery of the gold, two days after the contract’s expiry.
An investor can opt to take delivery either through the warehouse certificate or by demat credit into his account or opt for physical coins. The advantage of the first two options is that resale in the futures market at a later stage is possible unlike the third option which does not permit later resale in the futures market. Applicable VAT billing is done through a billing agent. Details of the additional costs in delivery which are nominal can be obtained from your broker.
Gold prices fluctuate around $50 every month and the investor can take advantage of this price fluctuation to get a regular return by selling at a higher price and squaring profitably at a lower price. Even if the price rises continuously above the selling price till the expiry of the contract, the client has the option to settle his obligation by delivering the gold from his demat account rather than squaring the position at a loss. He can then take a fresh position in a new contract to continue trading.
Geojit offers an investor the option to raise funds required to take advantage of a capital market opportunity by permitting an instant loan against the gold in his demat account by pledging it or as a loan against sale. Financing of delivery is possible if the investor buys gold by paying 25% upfront, gets finance for the balance and then repays the loan in easy EMIs. Investors can also consider availing Loans against Shares, in case they need liquidity to invest in gold, as a strategy to diversify their portfolios.
Following are some of many advantages of buying gold through the futures market when compared to buying gold coins from banks:
• Gold Futures price is cheaper by around 10% compared to banks’ gold rate. (For e.g., 8 gm gold coin traded at Rs.10,300/- in MCX on 19th May’08, while being quoted at Rs.11,631/- by Kotak Mahindra Bank and HDFC Bank –Source: 21 May’08 Business Line)
• Holding gold in a demat account and then selling it in the futures market again is simple and involves no significant transaction costs.
• Gold in demat form or as warehouse receipts can be pledged for raising funds.
