Mastering Derivatives: Gold Futures Or Gold ETF?

Gold has been in the limelight for a while now, and not without reason. The simplest way to actively trade gold is through gold ETFs. An efficient way to take exposure to gold is arguably through gold futures. This week, we discuss why gold futures is optimal for active traders.

Trading efficiency

Futures is a leveraged contract. You must pay an initial margin to initiate a position and mark to market margin to manage the position. The initial margin on gold mini futures on the MCX is approximately 10 per cent of the value of the contract. The underlying for the contract is 995 purity gold. Note that gold ETF also holds 995 purity gold. But you need 10 times as much trading capital (without including mark to market margin) to take exposure to same amount of gold through gold ETFs. That is, the initial margin requirement for futures helps you leverage your trading capital.  

Also, gold ETF is actively traded but shorting can be an issue for retail traders. So, as a trader, if you believe that gold appears weak on the price charts, you can at best take profits on your existing long positions. But gold mini futures contract offers you an efficient way to initiate short positions. The reason is you are allowed naked short positions in futures, whereas you must meet T+1 requirement in the spot market for gold ETF. That means you can close your short futures position before expiry without being obligated to deliver the underlying gold. With gold ETF, as with any stock in the spot market, you must borrow the asset, if your broker will allow you, and deliver to your counterparty. Borrowing involves high costs, which can be avoided by choosing futures. 

There is a flip side to trading gold futures. Price leverage can hurt you when prices move adversely. This is because the contract multiplier is 10. That is, for every one-gram movement in gold price, gold mini futures price will move by a multiple of 10. Also, shorting is convenient, but you must be mindful that gold prices are volatile and can move up sharply when the financial market become nervous. So, you must trade gold mini futures with tight stop-loss. Also, you must necessarily close your position well before expiry. Being a physical commodity, taking (giving) delivery of gold if your long (short) position is open at expiry can be costly.

Optional Reading

Trading in gold mini contracts is open till nearly midnight. This is because the price of gold in India is affected by trading in global commodity markets. You can manage your daily futures position based on early gold trades in the US markets. But monitoring the price movement daily till near midnight could be stressful, especially during times of high price volatility. Note that gold ETFs also react to such price volatility given the same underlying, but trading closes daily at 3.30 pm.

(The author offers training programmes for individuals to manage their personal investments)

Published on May 31, 2025