Gold in the Commodity Exchange

For a month we have seen gold slide from its Peak position, however, since a couple of days we are seeing the trend reverse.

This is expected as the festival season is approaching and soon after that would be the wedding season. 

The commodity market offers very many advantages. Let’s have a look at one of the financial advantages offered by the commodity account for investing in gold.

Considering either a short or a long horizon, there are only 3 possibilities that can arise at any point

1.    Gold shall remain at current levels even in future

2.    Gold shall go northwards in future

3.    Gold shall go southwards in future

We shall always feel the probability of Gold going up with less confidence in the short term then in the long term.

In the very long term we would safely assume with more than 99% confidence that gold will be more than what it is today. Hence, let’s assume a conservative scenario whereby, we expect gold to reach 32,000 per 10 gm by the end of one year from now. Gold may see highs of above 32,000 per 10 gm and even see lows within this year. As of today Gold is hovering close to 31,000/- per 10 gm. Let's assume it to be so for the sake of simplicity of calculations.

Now, if today we purchase 100 gm of gold (physical), the investment required shall be Rs. 3,10,000/-. At the end of a year, as per our assumption, the price would have reached 32,000. Hence, we would have made Rs. 10,000/- on our investment of Rs. 3,10,000/- . Hence we would have an ROI (return on Investment) as under  

ROI  = 10,000 / 3,10,000 x 100 = 3.23%

Now, let’s compare the situation with investing in Commodity Exchange.

In the commodity exchange, you need to invest less than Rs. 20,000 (approx), sometimes as low as 15,000/- but let's be conservative and assume Rs.20,000/-, as margin money to block 100 gm of Gold. The profit / loss made on the investment are marked to market on real time basis. Hence your account is continuous credited / debited depending upon price movement.

Now to hold this investment for long we shall roll on the same on the exchange for a year. At the end of the year when the market price is 32,000, our account shall be credited with a 10,000 as profit (not accounting for small amounts removed as brokerages and/or rolling losses). Hence, in this case also the profit remains the same i.e. Rs. 10,000/-. However, this profit is now achieved on an investment of Rs. 20,000/-

This time the ROI is as under

ROI  =   10,000 / 20,000 x 100 = 50.00%

Thus ROI through investment in commodity market is over 10 times in percentage terms with that of investing in physical gold / gold ETF or for that matter any other means of investing in gold as no front offers the commodity at such less margin money.

Now imagine that the entire money to buy physical gold of 100 gm of Rs. 3,10,000/- was invested in the commodity market. We would have been able to block approx 1,500 gm of gold (1.5 kg) and when after a year the price would have reached 32,000/- / 10 gm, we would have earned a profit of 1,500 x 1,000 / 10 = Rs. 1,50,000/- (approx)

Should you be Interested in Investing in the Commodity Exchange - Click Here