Gold futures discount shows signs of narrowing as duty cut hopes rise

Mumbai-India (June 5)   Gold for August delivery traded almost flat at Rs 25,815 per 10 gm in early noon trade. Interestingly, the discount that far-month contracts have been trading at to the near month on the exchange narrowed to Rs 8 on Wednesday at the close of trade.

"This possibly indicates that markets are factoring in a duty cut during the upcoming Budget session," said DK Aggarwal, MD, SMC Comtrade. "The discount is showing signs of narrowing with a  build up of expectations."

Gold futures went into a discount after the government last August hiked the import duty to 10% and restricted imports to around half a
dozen nominated agencies, from 28 earlier, and that too only against 20% exports, also known as the 80:20 rule.

This resulted in lower supplies in the spot market, pushing up prices. On the exchange, in the near-month contract, sellers were not always able to procure the quantities bid for and began rolling  positions to far-month contracts. Thus, the number of buyers in near-month contracts exceeded the sellers (who rolled over their positions) and thus the market went into a discount from a premium, which is normally the case.

Now, as expectations of a duty cut build up, concomitant hopes are rising that supplies will improve and thus the discount is showing signs of narrowing.

However, analysts added it might be too early to interpret data from the futures market. The discount widened to Rs 28 during thin noon trading on Thursday.