Gold, silver futures in near- and far- month trading at huge spreads

Two gold maturity contracts were trading at a spread of Rs 900 per 10 gram

In an unusual development, gold and silver futures in the near and far months are trading at a spread of between 2 per cent and 3 per cent, a historic high. 

In silver, very high spreads were seen last year in April-May; it had later moderated and has re-emerged. Traders and vyaj badla  (a financing mechanism on the BSE exchange, where money is provided for financing carry-forward deals) players in bullion were squeezed and were rolling over deliveries to the next contract.  

Gold’s August (maturing on 5th) contract is entering the delivery tender period from Thursday. Those not prepared to take delivery will square off or roll over their positions to the next maturity (October) contract. The maturing contract is termed near-month and the next contract is called the far-month one.

After the import duty hike in the Union Budget, the physical market in gold has been quoting at a huge discount. This enabled arbitrageurs to buy from the physical market and sell on Multi Commodity Exchange (MCX) futures, which were trading higher than the spot price, to give delivery. June-July being lean months, buyers on the MCX were jobbers and vyaj badla players who bought gold. 

Since the market is now entering the delivery period, ahead of the August 5 settlement date, absence of demand in the physical market has created panic among futures buyers. If they do not roll over positions to the next contract by the end of Wednesday, they will have to take delivery. This means their money gets stuck, as they will not find buyers. 

These players are, therefore, selling their buy positions in August contracts at whatever price is available and buying October positions. As a result, August near-month gold has fallen below the spot market price and the October far-month contract is selling higher by Rs 900 per 10g as compared to the August contract. In percentage terms, the difference is 2.6 points, unusually high.

The physical market continues to trade at a discount (to the cost of import) of Rs 500 per 10g. Futures which were higher than the spot price in the past fell below the latter on Wednesday.

Similarly, silver for the far-month (December) contract is higher by Rs 900 a kg as compared to the near-month (September maturity) contract, 2.15 per cent higher. Usually the preferred difference for vyaj badla players (who finance the two positions of different maturities with their money) is 1.3-1.5 per cent, which is the interest they earn in derivatives. 

Spreads in gold began moderating since Wednesday afternoon.

In base metals, April-June spreads were high when the contracts were entering the delivery period. The spreads are still high but moderated from where these were a few months earlier. However, liquidity in all contracts where spreads are rising has shrunk; in metals, overall volumes are falling.