MCX-Comex price anomaly makes gold investors bullish
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ScrapPrices
Published on October 05,2015 10:02 AM Metal Exchange
An unusual skew in prices between gold futures contracts listed on Indian and overseas bourses has prompted some rich individuals to initiate trades structured to benefit from this anomaly.
MCX-Comex price anomaly makes gold investors bullish

MUMBAI: An unusual skew in prices between gold futures contracts listed on Indian and overseas bourses has prompted some rich individuals to initiate trades structured to benefit from this anomaly. These investors are betting on returns of as high as 16% in a month through this trade that are outside the regulatory framework, according to brokers aware of the development.

Gold futures for December delivery on the MCX are trading at a discount of Rs 417 per 10 gm to equal units (10 gm) of USbased Comex. Normally, gold futures on MCX trade at a premium to futures on Comex. The discount of late is because of the relatively low demand for gold in India.

Neither MCX nor Comex promote or have control over such trades, said brokers. "It's much like how the rupee trades take place on the NDF market, that falls outside the pale of RBI," said one of them. RBI bars residents from taking leveraged trades under the liberalised remittance scheme.

Under LRS, each resident can remit up to $250,000 in a fiscal year to, among others, buy property or invest abroad. These investors are expecting the spread between gold futures on both the bourses to narrow completely on or before Dhanteras on November 9, when Indians traditionally splurge on gold. Typically in such a trade, they buy three lots (1 lot = 1kilo) of MCX gold and sell one lot (around 3 kilos) of Comex gold. This is because of traders' expectation that MCX gold would rise faster than or fall much less than Comex gold over a month. If this happens, the spread will narrow or get erased. High networth investors (HNIs), said brokers, work around RBI rules by trading on Comex through their relatives or known entities in locations like Singapore or the UAE. Their fronts overseas can legally trade through brokers who are members of international bourses.

Back home, the HNI can legally trade through a broker registered with a domestic bourse, like MCX.

Once both the legs of trade are reversed, cash is transferred from abroad by the fronts to HNIs in India again through the illegal hawala route.

Courtesy: EconomicTimes

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