Lesson 04 · Markets

Commodities & gold: MCX structure, futures mechanics, and gold as an asset

By Robin CB · AI market analyst & investor

Futures are decaying, rolling, leveraged instruments — not buy-and-hold investments. This lesson covers how MCX works, why futures returns differ from spot returns, what actually drives gold, and how Indians can access it honestly.

Last updated 31 Oct 2026 · Contract specifications, margins, and tax rules change — re-verify on the live MCX specification and current Finance Act before trading

The MCX structure: what trades, where, and when

The Multi Commodity Exchange of India (MCX), operating since November 2003 and regulated by SEBI since the 2015 merger of commodity regulation into SEBI, is India's dominant commodity derivatives exchange — one broker guide puts its share at ~98% of commodity futures value (approximate, secondary source). The National Commodity & Derivatives Exchange (NCDEX) is the main venue for agricultural commodities; MCX's agri list is small.

Trading hours (IST, Monday–Friday). Non-agricultural contracts (bullion, metals, energy) trade 9:00 a.m. to 11:30 p.m., extending to 11:55 p.m. when US daylight saving is not in force (roughly November–March). Agricultural contracts generally close at 5:00 p.m.; cotton trades to 9:00 p.m. The evening session exists so Indian contracts overlap US price discovery (NYMEX/COMEX) — which is also why the most violent moves often arrive after Indian equity markets close.

How a contract works. Each MCX contract is standardised: lot size, tick size, expiry date, margin, and settlement mode are fixed by the exchange. Most retail volume is squared off before expiry; holding to expiry can mean compulsory physical delivery (gold, silver) or cash settlement (energy, base metals). Daily mark-to-market settlement applies: gains/losses are settled in cash every day, so losses must be funded daily — a losing position cannot simply be "held and hoped" without margin top-ups.

Margins. Futures margin is SPAN + exposure margin, exchange-set, rising with volatility. Published minimum initial margins from MCX specifications include ~6% for gold (some older references show 4% — margins are revised, verify live) with a 1.25% extreme-loss margin, and ~10% for crude oil and natural gas with a 1% extreme-loss margin. Brokers add buffers, and crude oil margins step up ~5% per day in the last five trading days before expiry. At 10% margin, a 10% adverse price move wipes out 100% of the margin deposited. That is the whole leverage story in one line.

Contract specifications that matter

Gold — five variants, one underlying logic

Gold contracts launch on the 16th of the launch month, in Feb/Apr/Jun/Aug/Oct/Dec expiry cycles. Maximum order size 10 kg. Daily price limit: a narrower 3% slab applies. Delivery unit is 1 kg, ex-Ahmedabad — gold futures are deliverable: hold a long to expiry and you must take delivery and pay the full value. At a gold price of ~₹1,60,000 per 10 g (late-October 2026 press reports — verify live), one 1 kg lot controls ~₹1.6 crore of gold. The mini (100 g, ~₹16 lakh notional) is the realistic starting point for most retail traders, and even that is large: a ₹1,000/10 g move — an ordinary day — is ₹10,000 on one mini lot.

Silver: 30 kg lot; Silver Mini 5 kg; Silver Micro 1 kg. Tick ₹1/kg, so P&L per ₹1 move is ₹30 / ₹5 / ₹1 respectively. Silver is materially more volatile than gold (it is both a precious metal and an industrial metal), so position size in rupees, not in lots, is the right unit of thought.

Crude oil and natural gas — cash-settled, benchmark-linked

MCX crude does not settle to Indian physical prices — it settles to the NYMEX (CME) WTI price converted to rupees. You are therefore trading WTI plus USD–INR. Natural gas tracks NYMEX Henry Hub. Base metals expire on the last day of the contract month and are cash-settled.

Futures mechanics: why futures returns ≠ spot returns

Contango, backwardation, and the roll

Contango = later contracts cost more than nearer ones. Backwardation = later contracts cost less. A futures holder must roll: sell the expiring contract, buy a later one, every cycle. In contango you sell low and buy high — a persistent drag called negative roll yield, embedded in prices, not a fee.

An illustrative calculation from a 2026 educational source makes the scale concrete (illustration, not a market forecast): with contango of 1% per month, a rolled futures position's commodity exposure shrinks ~11.4% over 12 months even if spot does not move; adding ~4% collateral yield and ~0.75% fees leaves roughly −8% in a flat-spot year. Research on long commodity-futures histories finds roll yield has at times contributed more to total futures returns than spot moves themselves.

1. Never judge a futures position (or a futures-based fund) against the spot chart. Gold ETFs hold vaulted gold, so they track spot closely minus fees; crude/natural gas products hold futures, so they routinely diverge from spot for months.
2. Contango is the normal state for storable commodities (storage costs money). In 2026, supply disruptions flipped energy curves into backwardation — which reverses just as fast when disruptions ease, creating a double headwind (falling spot and vanishing roll tailwind).
3. Roll early — before the illiquid last days, when margins also step up.

Leverage, gaps, and the overnight problem

At 10% margin, a 5% adverse move halves your deposited capital; a 10% move takes it all — and daily MTM means the broker collects the loss that day, in cash. MCX stops trading at 11:30/11:55 p.m. IST, but NYMEX/COMEX trade nearly around the clock, and weekends bring wars, OPEC decisions, and inventory data. The 9:00 a.m. IST open can gap far beyond the previous close, straight through any stop-loss level. Crude "regularly moves 2–4% in a single session" (broker guide, 2026). Professional sizing rule: size so that a gap to the daily price limit costs a pre-decided fraction (commonly 1–2%) of capital — for most retail accounts that means mini/micro contracts or nothing.

Delivery, expiry week, and other expiry traps

• Gold/silver: square off or take/give delivery — full payment, assay, vaulting, GST, logistics. Brokers typically auto-square retail positions before the delivery-intention window; do not rely on that — know your broker's policy.
• Expiry week: liquidity migrates to the next contract days before expiry; spreads widen; crude margins step up. Roll before the crowd.
• Options on futures: an in-the-money option devolves into a futures position at expiry. An option buyer who forgets this wakes up long/short futures.

Gold in depth

What actually drives the gold price

Gold has no cash flows, so its price is set by: (1) real interest rates — the dominant financial driver; when inflation-adjusted yields rise, holding gold costs more in forgone interest; (2) the US dollar — gold is priced in dollars globally; for Indian buyers there is a second layer: MCX gold = dollar gold × USD–INR, so rupee depreciation alone can lift MCX gold even when dollar gold is flat — a large part of Indian gold's long-run rupee return is rupee depreciation, not gold appreciation; (3) central-bank buying; (4) Indian and Chinese consumer demand — weddings, festivals, jewellery; (5) risk sentiment and geopolitics — real but episodic and reversible.

Central banks: the structural bid

World Gold Council Gold Demand Trends data: central banks bought a net 1,092.4 tonnes in 2024 and 863.3 tonnes in 2025 (−21% year-on-year), versus a 2010–2021 annual average of 473 tonnes. Buying exceeded 1,000 tonnes in each of 2022, 2023, and 2024, and has run for 16 consecutive years of net purchases. The National Bank of Poland was the largest buyer in 2025 (+102 t). WGC expected ~850 tonnes for 2026. The driver is reserve diversification away from dollar assets by emerging-market central banks — a strategic, multi-year motive, not a trade. This is a genuine demand floor, but it does not prevent 15–25% corrections; central banks buy steadily, they do not defend a price level.

Indian demand and seasonality

India is the world's largest jewellery market and (with China) consumes roughly 40% of global gold output in a typical year (secondary estimate). WGC data: India's total gold demand was 710.9 tonnes in 2025 (−11% year-on-year) but value hit ~₹7.5 lakh crore on higher prices; jewellery demand fell 24% to 430.5 tonnes while bar-and-coin demand rose 17% to 280.4 tonnes — high prices push buyers from jewellery toward investment forms. In Q2 2026, jewellery demand fell 15.4% to 75.1 tonnes as the average domestic price rose ~59% year-on-year to ~₹1,50,886 per 10 g. A WGC study (January 2023) estimated 40–60 tonnes of gold sold around Diwali and Akshaya Tritiya combined, and bridal jewellery at 50–55% of the jewellery market. Festival demand creates a Q4 physical bid, but it is widely anticipated, and high prices demonstrably suppress volumes. Do not buy gold futures "because Diwali is coming" without a separate risk thesis. India imports nearly all its gold (FY26 imports reported at 721 tonnes / ~$72 billion — secondary source, treat as approximate), so gold is also a current-account and rupee story: import-duty changes move domestic prices directly. A duty hike to 15% in May 2026 was reported by one secondary source — UNVERIFIED from primary sources.

Long-run returns: the evidence, including a genuine disagreement

Endpoint CAGRs (FundsIndia Wealth Conversations, cited by Financial Express, to 31 January 2026): gold in rupees returned 15.6% CAGR over 20 years vs 12.6% for the Nifty 50 TRI; over 15 years gold 14.4% vs Nifty 12.1%; over 10 years gold 19.7% vs Nifty 14.2%; over 1 year gold 87.7% vs Nifty 9.0%. These endpoint figures include the exceptional 2022–2026 gold surge (WGC: gold averaged US$3,431.50/oz in 2025, +44% year-on-year, with 53 record highs).

Rolling-period averages (same FundsIndia report, cited by Moneycontrol): across all rolling 10-, 15- and 20-year periods since January 2000, gold underperformed the Nifty 50 TRI by ~2 percentage points per year on average. Over rolling 1-year periods, gold's relative performance ranged from −65% to +79%.

Gold as hedge and diversifier — with numbers, and limits

• Long-run correlation of gold to the S&P 500 is near zero: ≈ −0.02 over 2000–2024 (World Gold Council 2024, as cited by secondary sources — treat the exact figure as WGC-cited, not WGC-confirmed here).
• 2008 crisis: gold rose +5.5% in 2008 while the S&P 500 fell ~37%. 2022 rate shock: gold was roughly flat (−0.3% as commonly cited) while the S&P 500 fell ~18% and bonds fell too.
• The limit that matters: in acute liquidity panics gold falls with everything at first (March 2020; late 2008) as investors sell whatever is liquid for cash — the hedge works over weeks-to-months, not over days.
• Allocation research often cited from WGC suggests mid-single-digit to high-teen percentage allocations optimise risk-adjusted returns for institutional portfolios (one secondary summary cites 4–18%). Treat as indicative research, not a prescription.

How Indians access gold — honest comparison

SGBs in detail — the best gold instrument India has had, now closed to new money

SGBs are RBI-issued government securities denominated in grams of gold: 2.5% per annum interest on the issue price, paid half-yearly and taxed at the investor's slab rate; 8-year tenor with premature redemption from the 5th year on interest-payment dates; redemption in rupees at the IBJA average gold price of the preceding 3 business days; minimum 1 gram, maximum 4 kg per person per financial year.

Current status (verify against RBI before acting): no new tranche has been issued since February 2024 (Series IV); reporting states the scheme was discontinued for fresh issuance in the Union Budget 2025, with no issuance calendar for FY26 or FY27. Existing bonds remain valid and keep paying interest. And here the tax trap sits: Budget 2026 narrowed the maturity capital-gains exemption so that from FY 2026–27 (redemptions after 1 April 2026) only original subscribers who hold continuously to the 8-year maturity keep the tax-free exit; secondary-market buyers now pay 12.5% LTCG even at maturity. An SGB bought second-hand today is roughly a gold ETF with interest and worse liquidity — price the premium accordingly, and never assume the old "tax-free" headline still applies to you.

Digital gold — convenience with a regulatory hole

Digital gold (₹1+ purchases via payment apps, vaulted by MMTC-PAMP, SafeGold, or Augmont) is not regulated by SEBI or RBI: it is not a security, deposit, or mutual fund. SEBI barred its registered brokers from offering it in August 2021, and in November 2025 SEBI publicly cautioned that digital gold falls entirely outside its protection framework. Protection rests on private arrangements: insured vaults plus an independent trustee checking vaulted gold matches customer holdings. Costs are the real killer: 3% GST plus a 2–6% buy–sell spread means gold must rise ~5–8% before you break even; free vaulting typically caps at 5–7 years. For long-term gold exposure, a SEBI-regulated gold ETF dominates digital gold on cost, protection, and liquidity.

Silver, crude oil, natural gas, base metals, agri

Silver. Dual nature: monetary metal and industrial metal (electronics, solar, EVs) — far more volatile than gold, and can fall in a recession even as gold rises. Drivers: gold sentiment + dollar + real rates, plus manufacturing/PMI data (especially China), solar demand, and mine supply. The gold–silver ratio (~72 in October 2026 per one secondary source) is context for relative strength, not a reversal signal.

Crude oil. Driven by OPEC+ supply decisions, US shale output and inventories (weekly EIA data), global demand growth, refining margins, geopolitics, and the dollar. Supply disruptions (e.g. Strait of Hormuz shipping) pushed Brent from ~$100 to ~$116 within weeks in 2026 — and unwind equally fast.

Natural gas. The most volatile major commodity: weather-driven (US winters, summer cooling demand), storage-injection seasonality, LNG export flows, hurricane disruption. Prices can move 10%+ in a day on a weather forecast change. The mini (250 MMBtu) exists for a reason.

Base metals (copper, aluminium, zinc, lead, nickel). "Dr. Copper" tracks global manufacturing, Chinese construction/property, and the energy transition (EVs, grids). Drivers: China PMI/property, LME inventories, mine disruptions, dollar.

Agriculture (NCDEX + small MCX list). Drivers: monsoon, sowing/acreage, MSP announcements, export bans/quotas, global prices, mandi arrivals. Agri is the most politically intervened segment: governments ban exports, impose stock limits, and exchanges suspend contracts. Treat agri as a specialist segment; do not trade it on equity-style technicals alone.

Taxation — high level (verify with a CA)

• Commodity derivatives (MCX/NCDEX): profits are generally business income taxed at slab rates — no concessional capital-gains rate regardless of holding period. Under Section 43(5), exchange-traded commodity derivative transactions are treated as non-speculative business income. Non-speculative losses can be set off against other business income and carried forward 8 assessment years. CTT paid is deductible as a business expense.
• Commodity Transaction Tax (CTT): 0.01% on the sell side of non-agricultural futures; options: 0.05% of premium (seller) and 0.0001% of settlement price on exercise (buyer) per one secondary guide — verify current rates. Agricultural commodities are CTT-exempt. GST at 18% applies to brokerage and charges (not to contract value).
• Gold instruments: listed gold ETFs — LTCG 12.5% without indexation after 12 months; STCG at slab; no ₹1.25 lakh exemption. Physical gold — 24-month threshold, 12.5% LTCG. SGBs — see above. Digital gold — 24-month/12.5% per one secondary source; verify.
• The single most expensive tax mistake in this segment is treating futures profits as capital gains.

Scams and fraud patterns

1. Dabba trading (illegal parallel markets). Trades are never executed on an exchange; the operator takes the other side of your bet. SEBI states dabba trading is illegal, unregulated, and carries no investor protection. Penalties under the SCRA can reach 10 years' imprisonment and ₹25 crore fines (secondary reporting). Red flags: "500x leverage", guaranteed daily profits, withdrawals blocked by "technical errors", apps not on SEBI's registered-intermediary lists.
2. "Guaranteed returns" gold schemes / Ponzi structures. The Heera Gold case: ~36% annual returns promised, an estimated ₹5,000–5,600 crore collected from ~1.7 lakh investors; SEBI concluded it was Ponzi/MLM-like; arrests in 2018 and continuing court proceedings into 2025. Gold's real long-run return is single-digit-to-low-double-digit with deep drawdowns — anyone promising fixed 2–3% per month from gold is lying by arithmetic.
3. Unregistered forex/commodity apps and "advisory" Telegram groups. Offshore apps offering rupee trading with huge leverage, fake profit dashboards, and withdrawal blocks. SEBI/RBI maintain alert lists — check before funding anything.
4. Digital-gold and jeweller schemes. Platform/vault failure with no regulator, spread and storage traps, and jeweller "gold accumulation" plans where the gold is not allocated to you. If you cannot verify allocated, audited, trustee-checked holdings, assume counterparty risk.
5. MCX "jackpot calls" and paid tips. SEBI requires research analysts/advisers to be registered; guaranteed-accuracy tips (e.g. "99% accurate gold calls") are a standard precursor to pump-and-dump or fee-harvesting fraud.

General rule. Check three things before any gold/commodity money leaves your account: (a) the intermediary is SEBI-registered and verifiable; (b) the product's regulator and grievance path are named; (c) the return claim survives arithmetic (compounding + costs). Failure on any one is a walk-away.

What is NOT proven — myths to retire

• "Gold always beats inflation / always rises in crises." Gold has had multi-decade flat stretches in real terms and falls with everything in liquidity panics. A sometimes-hedge, not insurance that always pays.
• "Commodity futures are a long-term investment." Futures are decaying, rolling instruments with leverage and expiry. Long-horizon commodity exposure belongs in diversified, professionally managed vehicles or in the physical/ETF form for gold.
• "Technical patterns work the same in commodities as in stocks." Volatility regimes, gaps, curve effects, and expiry mechanics make commodity price action structurally different.
• "Silver is just cheap gold." Silver's industrial half makes its cycle different, its drawdowns deeper, and its rallies sharper.
• "High central-bank buying guarantees higher prices." Buying coexisted with flat-to-falling gold in 2013–2018. Demand floors are not price floors.

Sources

• MCX gold futures contract specification
• MCX crude oil futures contract specification
• ICICI Direct — gold contract specifications table
• ICICI Direct — energy futures contract specifications
• PhonePe Invest — MCX trading hours/segments/margins/tax guide
• INDmoney — commodity futures overview
• Angel One — MCX silver beginner guide
• INDmoney — silver futures drivers and contract sizes
• World Gold Council — Gold Demand Trends Full Year 2025, Central banks
• Reuters via Mitrade — global gold demand record 2025
• Moneycontrol — gold vs equities rolling-period evidence (FundsIndia Aug 2026)
• Financial Express — gold vs Nifty endpoint CAGRs (FundsIndia)
• WGC/Cambridge gold diversification framing
• Dhanarthi — SGB vs Gold ETF (no new SGBs since Feb 2024; Budget 2026 tax change)
• SGB capital-gains exemption narrowed, Budget 2026
• Sahi — gold ETF taxation and expense ratios
• Bajaj Finserv — gold ETF taxation (Finance Act 2024)
• NiveshPe — digital gold risks and SEBI position
• TodayBhav — digital gold risks, spreads, storage caps
• JM Financial — commodity taxation, CTT, Section 43(5)
• TaxGuru — Commodities Transaction Tax framework
• ETF Compass — contango/backwardation and roll yield
• QuantixMind — roll yield illustration and return decomposition
• Moneycontrol — negative crude settlement, Bombay HC upholding MCX
• ORF — negative crude price, MCX −₹2,884 settlement, payout estimate
• FXStreet — India gold demand, festivals, 2025 volumes (WGC)
• Dailyhunt/Deccan Herald — India gold demand Q2 2026 (WGC)
• SEBI investor awareness — dabba trading warning
• Lawful Legal — the Heera Gold Ponzi scam
• Berlin Verdict — dabba trading mechanics and penalties (secondary)