Commodities trading buoyed by retail interest in gold, silver

Turnover of the two key exchanges jumps 76% in first 10 months of this year

November 6, 2011:

The action in the equity

markets may have turned tepid in recent times, but activity in commodity futures is picking up helped by rising retail interest in gold and silver. Trading in commodity ?€˜futures' contracts is nearly half that of their equity counterparts with precious metals accounting for a sizable chunk.

There is a good amount of retail participation in bullion, say brokers. This is also evident from the fact that smaller gold contracts of 8 gm and 1 gm each (Gold Guinea and Gold Petal) and silver (Mini) have been the main drivers of turnover.

Corporates are also showing a greater interest as a hedge against their exposure to price risk in such key inputs as copper, zinc, rubber, and so on.

On an overall basis, turnover in the two principal commodity markets, namely, the National Commodities and Derivatives Exchange and the Multi Commodity Exchange, saw a 76 per cent jump in the first ten months of this year compared to the same period last year.

Commodities of interest

Precious metals contributed the most to volumes in the commodity futures market and contracts of smaller size are ones to record a strong growth in last one year. While 1 kg gold contracts have seen the volumes increase by 1 per cent, gold guinea (8 gm) has registered a 102 per cent jump in volumes, indicative of retail interest.

It is also interesting to note here that gold has been overshadowed by silver futures in turnover recently. Between January and October the turnover in silver futures in the Multi Commodity Exchange (MCX) was Rs 48.6-lakh crore, higher than the Rs 31-lakh crore clocked by gold futures. Silver Mini (5 kg) contracts saw a 141 per cent increase in volumes against silver (30 kg) seeing a 69 per cent growth.

Copper saw the most action among base metals, its turnover increasing 25 per cent to Rs 11-lakh crore in the first ten months of 2011. In agri-commodities, chana, guar seed, refined soya oil and guar gum recorded the most turnover (lower however compared to gold and silver).

What drives interest?

The commodity futures market is more attractive than the equity derivatives market for those targeting short-term gains, claim market participants. There are multiple reasons for this, says Mr D. K. Aggarwal, CMD, SMC Investments.

?€œLower margin requirements (the money needed upfront), no transaction tax and increasing popularity of bullion trading are pulling more traders onto the commodity futures platform?€.

Security transaction tax is levied at 0.017 per cent on sale of a futures contract in equities while trades in commodity derivative do not attract such a levy. Initial margin requirement for commodities futures contract average 5-15 per cent while for equity derivatives (of stock futures) it starts from around 20 per cent.

The sharp rally in prices of commodities such as gold, even as equity markets remained range-bound, could also be another reason for the growing interest in commodity trading.

Gold has rallied 40 per cent over the last one year. Silver by its volatile movements too has been a trader's favourite. Agri-commodities such as chana, guar seed and guar gum too have witnessed a significant price rally.

Chana futures, for instance, have seen a 33 per cent price rise to Rs 3,393/quintal in the last one year. And, guar gum futures have doubled to Rs 14,100/quintal.