Spot Gold vs Gold Futures – Understanding the basics

The price of gold is less volatile than stocks. Therefore, you do not require vast investment expertise to purchase, hold and sell this commodity. Apart from buying gold in physical form, you can also buy it either from the spot market or in the form of a futures contract. The latter option can be riskier, but you can potentially secure more profit too. 

So, before you start investing, you must clearly know the differences between spot gold and gold futures, their features, and which of these two investment approaches aligns with your risk appetite.

What Is Spot Gold?

Spot gold refers to the trading of gold in the spot market in exchange for cash. The spot market is where financial instruments, such as commodities, currencies, and securities, are traded for immediate delivery. Hence, purchasing gold in the spot market enables you to own it immediately at the current spot price. In India, the trading is generally done on a recognised exchange such as the Multi Commodity Exchange (MCX).

Let’s assume that you want to buy 10 grams of gold on the spot market, and the spot price is ₹ 5,000. You will have to pay ₹ 50,000 in cash to get the 10 grams of gold in your portfolio. 

What Is Gold Futures?

Futures Gold refers to trading in gold so that the payment is made on a particular date in the present for delivery on a particular future date. The Futures Gold rate is typically more than the Spot Gold price. The actual transaction takes place on or before the date of maturity. By entering into a futures contract, you can hedge the value of the gold against market fluctuations. 

In a gold futures contract , profit or loss is the difference between the predetermined gold price and the spot price of gold on the date of maturity.

Let’s assume, you need delivery of 10 grams of gold five months from now and the price for Futures Gold is Rs. 5000/gm. At this price, you will have to presently pay Rs. 50,000 for 10 grams of gold. Five months later, its ongoing market price could be either less or more than Rs. 50,000. In case it’s more than 50,000, say Rs. 70,000, you make a profit of Rs. 20,000. However, if the price is on the lower side, say Rs. 45,000, you have made a loss of Rs. 5,000.

Also Read: Commodity Mutual Funds – Types, Benefits and Things to Know before Investing

Differences between Spot Gold and Gold Futures

Following are some notable differences between these two kinds of investment approaches:

Why Should One Invest in Spot Gold?

Here are some major benefits you can leverage by investing in spot gold:

• Investing in spot gold allows you to diversify your investment portfolio and thereby reduce your risk.
• Liquidating physical gold can be time-consuming as you have to go to brick-and-mortar stores for this. However, liquidating spot gold on the spot market is quite simple.
• You can hedge against inflation by holding gold.

Why Should One Invest in Gold Futures?

You can get the following advantages by investing in gold futures:

• You can purchase gold futures by paying only a portion of the strike price. You get the option to pay the balance on the date of maturity of the gold futures contract.
• You can buy gold at a lower price in gold futures contracts as compared to physical gold.
• In gold futures, you also get the opportunity to exit the contract and execute the deal before the maturity date. 

Final Word

Now that you know the differences between spot gold and gold futures, you can choose the investment approach which favours your risk appetite. Spot gold can be a less riskier option because you can liquidate the gold easily at the existing market price. However, investors with a high-risk appetite prefer investing in gold futures and take all the risk it involves due to the high earnings potential it offers.

Frequently Asked Questions