Spot Gold Trading – Basics, Spot Markets, Where to Buy

7 min read • Published 13 January 2023
Written by Vaibhav Khandelwal

In the Union Budget 2021-22, Finance Minister Nirmala Sitharaman announced that SEBI would be given the responsibility to regulate the gold exchanges in India. Consequently, SEBI has approved the framework for spot trading of gold in India which will help investors to trade the gold with higher liquidity just like trading of stocks in the recognized stock exchanges of India. This article discusses the fundamentals of spot trading of gold, its prospects in India, and the spot markets where you can buy gold. To know more, keep reading.

What Is Spot Gold Trading?

Spot gold trading is similar to equity trading, in which you can buy and sell gold at live prices. Spot gold trading does not need you to hold the metal in its physical form but is instead traded in dematerialized form through exchanges. 

What Is the Spot Gold Price?

Spot gold price refers to the price at which gold is being purchased or sold at that point in time and not in the future. Since it indicates the current value or spot price, it is constantly fluctuating. Spot gold price is expressed per gram or kilo.

What Are Spot Markets?

Spot markets are places that allow the exchange of financial instruments with immediate delivery of cash, other securities, or commodities. Gold spot markets work in the same manner, offering cash exchange for an electronic form of gold. 

These are also known as cash or liquid markets, as transactions occur immediately between buyers and sellers. However, transferring funds legally may take up to T+2 days. 

In India, currently, there are no gold spot exchanges in function. However, after the regulations passed by SEBI, there are a number of existing stock exchanges planning to launch this new segment. For instance, the Bombay Stock Exchange (BSE) has introduced the electronic gold receipt (EGR) on diwali known as “Muharat trading” to  enable domestic spot gold trading for improving the transparency and efficiency of bullion pricing. 

What Are the Factors That Determine Spot Gold Price?

Similar to any other commodity, gold prices also depend on the law of supply and demand. For example, if there are more buyers, sellers tend to increase the prices resulting in a higher bid. Similarly, the bid price is lower when there are more sellers compared to buyers.

The supply and demand equation is further influenced by several factors, which account for the fluctuation of the gold spot price. Some of these factors are:

  • Demand for Gold Investment

The value of this precious metal fluctuates with investment demand. For instance, there is stronger demand for gold investments in times of economic stress.

  • Value of US Dollar and Currency Market Fluctuations

The US currency plays an important role in determining the spot gold price globally. If the dollar value is weak, there is a hike in gold price. However, the spot gold price in India will depend on the value of the Rupee. If value of the Rupee falls, it will affect the exchange rates. Thus there will be a price hike in gold.

  • Demand of Jewellery

In India, gold is not only used as an investment but also purchased in large quantities as jewellery. This trend is especially visible during the marriage season or during certain religious festivals. Therefore, the seasonal increase in gold jewellery demand results in increased gold price.

  • Inflation or Deflation

People invest more in gold during high inflation periods for security. This results in greater demand. Additionally, when the value of Indian currency falls, the conversion rate increases, affecting gold prices.

  • Geopolitical Circumstances

The spot price of gold gets significantly higher at times of geopolitical tensions or war-like situations. Moreover, monetary policy changes or interest rates may also affect the same.

  • Equity Market

If the share prices fall in the equity market, indicating a bear market, there will be an increased inclination for gold investment. Since gold investments do not offer interest on dividends as a return, the opportunity cost is more when interest rates are high. On the other hand, the demand for investment is higher during low-interest rates due to low opportunity costs.

Can You Trade Spot Gold in India?

After China, India is the second-largest buyer of this precious metal, with an annual demand of 800 to 900 tonnes. However, until now, the Indian market only had provisions for future gold trading.

Consequently, the Securities and Exchange Board of India (SEBI) sanctioned the framework for spot Gold exchanges on 28th September 2021 in India. Its objective was to remove market inefficiencies of price discovery, check the quality, and manage its delivery throughout the country. Consequently, BSE introduced the same on diwali to carry out spot gold trading in three phases:

  • Converting physical gold into EGR
  • EGR trading (spot trading)
  • Lastly, again conversion of EGR into physical gold.

How Will Gold Exchanges Function for Spot Trading in India?

As per the SEBI regulation, spot gold trading will take place through “Electronic Gold Receipts” (EGRs) as a representation of gold. These EGRs will be reported as securities under the Securities Contracts Regulation Act of 1956. Therefore, the trading will have features similar to other stock exchange trading.

Existing stock exchanges such as NSE or BSE can launch EGR trading in a distinct segment. First, the quality of the metal in the physical form is assured and deposited with the vault managers. Then the EGR is created, ready for trading. These EGRs are credited to the recipient’s Demat account and can be held according to their will, like equity trading.

An investor can withdraw the physical metal from the vaults by surrendering the EGRs. SEBI regulations also allow you to switch vault managers while converting the EGRs, cutting down on transaction costs. This not only makes the EGRs fungible but also maintains safety and transparency in the transaction. 

How Is Spot Gold Trading Different from Physical Gold Trading?

The spot price of gold is lower than its futures price. This is because it does not involve storage risk and market price prediction due to immediate delivery. This mainly distinguishes these two. 

Here are a few differences between spot gold trading different and physical gold trading:

FeaturesSpot Gold Trading Physical Gold Trading
PricingThe Spot Gold rate is the same as the current market price.The prices of physical gold is higher than the current prices as it also includes overhead charges such as wastage charge or making charge.
InvestmentSpot gold investments are done through EGR units. Therefore, they are more affordable as SEBI allows investments of 1 gm, 1gm, etc.Investments are higher since physical gold may come in the form of coins or biscuits of 10 gm. 
Demat AccountDemat account is required for spot trading similar to equity trading.There is no need for a demat account. 

Final Word

Spot gold trading is a newly launched investment option in India. It allows you to trade gold at a marketplace with immediate delivery as opposed to futures gold. In India, the demand for this metal is significantly high. Therefore, the spot exchange markets are expected to have a positive influence on the gold market by eliminating smuggling and maintaining quality and transparency in transaction processes.

Frequently Asked Questions

How can I buy spot gold in India?

In India, you can trade spot gold through spot exchanges. However, to do so, you have to deposit the physical metal with the authorised vault managers in exchange for Electronic Gold Receipts (EGRs).

Why purchasing spot gold is cheaper than futures gold?

Purchasing spot gold is cheaper than futures gold as it does not include any predicted future price or extrapolation. You can purchase spot gold at the immediate market price.

Do I need a Demat account for gold spot trading?

Yes, gold spot trading works similarly to share market trading. Gold is traded in the form of EGR instead of its physical form, which can be purchased through a Demat account.

How are EGRs taxed?

EGRs attract 20% capital gains tax if held for more than 3 years. However, you can avail the indexation benefits which will let you calculate the tax net of the prescribed rate of inflation.

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Vaibhav Khandelwal

Credit Principal
Vaibhav is Chartered Accountant by profession, having experience of 4+ years in banking & finance sector. Since past one year associated with Wint Wealth as Credit Principal. Previously worked with Northern Arc Capital for 2 years in FI-Credit Team and AU Small Finance Bank for 1 year in LAP-Credit Team.

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