Gold bears trapped in futures market

Rupee fall and confusion in market due to RBI's new gold import policy have only added fuel to the fire

The gold futures market has seen a tussle among the bulls and the bears and the bears seem trapped.

A few days ago, the Reserve Bank of India (RBI) had brought out its new gold import policy. At that time, a few players thought demand-starved jewellers would start securing gold; also, global price movements were biased towards a fall. However, these short-sellers were trapped, as RBI’s policy led to more confusion than clarity.

If that wasn’t enough to trap the gold bears, the rupee dived in the last few days---from about 59/$ to about 61/$ on Wednesday, before recovering. This has increased the cost of imports, making gold costlier at a time when there is acute shortage in the physical market, as imports virtually came to halt due to confusion on the RBI policy. Now, it has turned into a battle against time, as positions were shortened in MCX August contacts, coming up for expiry.

Since prices started rising due to the rupee’s fall, bulls are holding firm, not squaring off positions. However, if bears hold on, gold for delivery wouldn't be available. As a result, bears are paying a higher price to exit futures. At current prices, the landed cost of gold is Rs 27,900/10 g, including the premium importing banks are charging from local jewellers. However, MCX August futures are traded at Rs 28,500. October futures on the MCX, however, have reversed direction and are trading at Rs 300/10g below August futures. Usually, far-month contracts trade in premium, as these include the cost of carry positions.

In the physical market, gold is trading higher than in the futures market, as it includes value-added tax and physical delivery premiums.

It was quoted at about Rs 29,000/10 g in opening trade and closed at Rs 28,585, as the rupee recovered. If RBI provided clarity on gold import norms, some premia would subside and bears would get a chance to exit.