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

What do you do about Risk ...????

Definers, if I can address them that way, define risk as a condition in which there is a possibility of an adverse deviation from a desired outcome that is expected or hoped for.

Risk is present everywhere and at times. It can take many forms and can if translated in to reality can lead to devastating consequences which would never want. There is risk while leaving commuting, while investing in a business, while building a new project, even while cooking at home etc....

So, what is that we can do about Risk?

The following are the ways in which we could deal with Risk

Avoiding Risk

The best option to avoid the consequences of a risk is to avoid the risk altogether. For example, if there is a risk of injury in travelling by train, then by avoiding travelling by train would avoid the risk altogether. However, many a times avoiding risk is not practical as certain actions need to be performed in spite of risk being present.

Controlling Risk

This may prove better than the earlier method. By controlling risk, we can take steps to prevent or reduce the losses. For example, if there is a risk of fire in a shop, then the shopkeeper may install smoke detector and water sprinklers. However, controlling risk can neither undo the damage nor complete avoid the consequences.

Accepting Risk

By this we can accept or retain the loss due the risk and not take steps to either avoid or prevent it. However, such a method should and is only logical for risk whose consequences are not large. For example, we may accept the risk and not take any measures against theft of an inexpensive wristwatch.

Transferring Risk

A more financially prudent method to deal with risk is to transfer the risk. When you transfer risk to another person, you are shifting the financial responsibility for that risk to the other party. This can be achieved through insurance coverage.

Various risks can be covered by insurance which are broadly divided into property damage, liability and personal risk.

Importance of insurance arises from the fact that certain of the insurance covers have the capacity to put the insured back into the same financial status as the insured was before the happening of an unwanted event.

Read more about various kinds of Insurance Covers that exist and how you can enjoy a carefree life - Click Here

Commodity Exchange – a great place to buy Gold for Long Term

Gold has been bound between 26,000 & 27,000 on the exchange since quite some time. Now, to understand the investment in the commodity exchange and the benefit it brings, let’s assume that the gold is at 27,000 at this point in time.

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

It is all a game of probabilities since, we cannot predict future. So 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 that 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 28,000 by the end of one year from now. Gold may see highs of above 28,000 and even see lows within this year.

Now, if today we purchase 100gm of gold, the investment required shall be Rs. 2,70,000/-. When at the end of a year, as per our assumption, the price would have reached 28,000. Hence, we would have made Rs. 10,000/- on our investment of Rs. 2,70,000/- . Hence we had an ROI (return on Investment) as under

ROI = 10,000 / 2,70,000 x 100 = 3.70%

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

In the commodity exchange, you need to invest only Rs. 25,000 (approx) as margin money to block 100gm of Gold. However, 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.

However, let’s assume that we roll on the investment in 100gm of Gold in the commodity exchange for a year. At the end of the year when the market price is 28,000, our account shall be credited with a nett 10,000 as profit. 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. 25,000/-

This time the ROI is as under

ROI = 10,000 / 25,000 x 100 = 40.00%

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 manner any other means of investing in gold as no front offers the commodity at such less margin money.

Now imagine the money that can be made in absolute terms when the entire 2,70,000 can get invested in the commodity market.

Interested in Investing in the Commodity Exchange - Click Here