Delivery in Commodity Markets

#1
Hi,

I am totally new to commodity trading and have a question on physical settlement vs cash settlement. I have some experience in share trading and was wondering if it's possible to completely do away with the hassles of physical delivery that comes with commodity trading. I use an online trading platform.

- If someone has failed to close his long position in a futures contract on the expiry of the contract, does he compulsorily have to accept physical delivery or is a cash settlement possible?

- In spot trading where delivery is compulsory after one day, can the commodity be bought in demat form as opposed to physical form? In particular, does the answer depend on the type of the underlying commodity (non-perishable like gold vs perishable like soyabean)?

What I would ideally like to do is to trade commodities the same way as I trade shares, i.e. sell it off when the price reaches a particular threshold, which might be 1 month, 3 months or maybe a year down the line. The physical delivery clause makes this kind of difficult to do.

Thanks.
 

ashu1234

Well-Known Member
#2
Hi,

I am totally new to commodity trading and have a question on physical settlement vs cash settlement. I have some experience in share trading and was wondering if it's possible to completely do away with the hassles of physical delivery that comes with commodity trading. I use an online trading platform.

- If someone has failed to close his long position in a futures contract on the expiry of the contract, does he compulsorily have to accept physical delivery or is a cash settlement possible?

- In spot trading where delivery is compulsory after one day, can the commodity be bought in demat form as opposed to physical form? In particular, does the answer depend on the type of the underlying commodity (non-perishable like gold vs perishable like soyabean)?

What I would ideally like to do is to trade commodities the same way as I trade shares, i.e. sell it off when the price reaches a particular threshold, which might be 1 month, 3 months or maybe a year down the line. The physical delivery clause makes this kind of difficult to do.

Thanks.
Hi,
First be clear on which exchange you'll like to trade. There are three exchanges available to trade commodities. MCX, NCDEX and NSEL(which is providing dmat spot delivery possible for its e-series products, mostly metals).

Commodities can be broadly classified as Agri-commodities and Non-Agri commodities. Non-agri commodities are mostly settled in cash (except gold, silver). And agri. commodities are mostly setteled by delivery on expiry date.

So decide on which exchange you want to trade. If you are interested in holding commodities in dmat form or taking delivery let me know, our product manager will detail you how to do it as explaining here everything is not possible.
 
#3
Thanks. The online brokerage firm I trade with allows me to trade on MCX, so that's where I intend to do my trading.

What I understand from your reply below is that if I exclusively trade in non-agri commodities, I should not have to worry about physical delivery.

Again, I am speaking here based on my share trading background, so please bear with me since my understanding of the working of the commodity market is minimal. :(

Let's assume I only trade in non-agri products on MCX.

- On expiry of a long futures contract, I would normally be required to settle in cash. Is there a way I can keep holding the underlying commodity in demat form instead of cash settlement (and maybe sell it off later at spot price)?

- If instead I buy at spot price instead of entering into a futures contract, is a cash settlement again compulsory at the end of the trading session or can I keep holding the underlying commodity in demat form?

Having the commodity in demat form with my online brokerage is what I would like to do, since it gives me the flexibility of selling it off at spot price at any date without having to worry about the contract expiry. I understand that holding the commodity in demat form is probably not allowed for agri-products because they are perishable. But for agri-products, this should be possible, right?

As always, any response would be extremely appreciated. :)

Thanks
 

ashu1234

Well-Known Member
#4
Thanks. The online brokerage firm I trade with allows me to trade on MCX, so that's where I intend to do my trading.

What I understand from your reply below is that if I exclusively trade in non-agri commodities, I should not have to worry about physical delivery.

Again, I am speaking here based on my share trading background, so please bear with me since my understanding of the working of the commodity market is minimal. :(

Let's assume I only trade in non-agri products on MCX.

- On expiry of a long futures contract, I would normally be required to settle in cash. Is there a way I can keep holding the underlying commodity in demat form instead of cash settlement (and maybe sell it off later at spot price)?

- If instead I buy at spot price instead of entering into a futures contract, is a cash settlement again compulsory at the end of the trading session or can I keep holding the underlying commodity in demat form?

Having the commodity in demat form with my online brokerage is what I would like to do, since it gives me the flexibility of selling it off at spot price at any date without having to worry about the contract expiry. I understand that holding the commodity in demat form is probably not allowed for agri-products because they are perishable. But for non :D agri-products, this should be possible, right?

As always, any response would be extremely appreciated. :)

Thanks
Hi,
To keep long positions open in futures market you need to roll over the same, i.e sell the expiring contract and take position in new series. By doing this you'll keep your long position open but you need to bear brokerage and transactions cost to do that. One more way to do the same thing is to take position in 3-6 far month contract.

Taking delivery is possible on NSEL which is spot exchange, there you can have deliveries just like shares in your demat account. You can visit their site, it is convenient for long term investments in commodities.

Apart from that everything is same like m2m, so don't worry about trading sessions, its same like nse futures are traded. In spot again same thing you can hold whatever quantity you want, you'll be paying full price on your quantity and sell it on a later date.
 
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#5
This is very helpful information!

Let me outline what I've understood from your posts. Please feel free to correct me wherever you feel necessary.

A) For MCX futures it might be a better idea to close out my positions before expiry even if I am making small losses, since rolling over would incur brokerage/transaction costs which might be even more than my current losses

B) For MCX spot (non-agri), I can buy, say, 2 lots of copper, hold it in demat form, and then sell it off after N months if the spot prices go up. I cannot do the same for something like soyabean (agri-product), which is likely to perish by that time.

C) Point B holds true both for non-agri and agri, even if I am trading on NSEL spot instead of MCX spot.

On a different note, if I am looking for long term investment in commodities, would NSEL be a better option than MCX?

Thanks
 

ashu1234

Well-Known Member
#6
Yes, you got everything right :).
Now coming to the practical part on how to invest systematically, either on MCX or on NSEL.

Investment is a successful mix of putting money in a planned manner into right commodities and with proper mix of leveraging and hedging, investment objective of the returns can be tweaked.

So investment through Dmat on NSEL, say in gold, will give you absolute return of the underlying, so go for E-series on NSEL to invest in metals which are best for long term investors.

But commodities are cyclical in nature, so here most commodities peak its cycle at least once or twice in a year, so you can't compare 4-5 year of investment of equities with commodities. Rationally your time frame shrinks here, so it makes sense for going through mcx futures route, trade 3 month ahead futures and roll it over max 2-3 times, it will surely cover all your costs if invested on proper level of their respective cycles and yield you more than absolute returns of the underlying.
 
#7
Makes sense.:thumb:

I currently hold a few units of e-gold/silver/platinum in my NSEL demat account. Some months back I had bought and sold off a few units of e-Copper/Nickel within a span of one week. My broker advised me to look at MCX for such short-term trading and not NSEL because
(i) They were offering lower brokerage on MCX trading as compared to NSEL trading
(ii) E-series is usually for long-term investment

I do realize it's not fair to compare e-gold with say, a cardamom futures contract. So, to keep things simple let's consider e-gold on NSEL vs gold as a commodity on the MCX spot market.
- E-gold can be bought/sold in demat form exactly as one would buy/sell shares. There is a difference in LTCG, but we can ignore that for the time being
- When I buy gold on MCX spot, the physical asset would be kept in some warehouse/vault and the units would be credited to my demat account. I can choose to sell off those units on the spot market at a later date. In essence, this is exactly the same way as one would trade e-gold, i.e. not having to worry about handling or storage of the physical asset himself.

Here's my confusion.:confused:
If the mode of handling of both e-gold and MCX spot gold is exactly the same, why do we consider the former as a long term investment and the latter as short-term? In both cases the absolute returns are on the underlying asset.

Is there something special about e-gold that makes it a fundamentally different type of investment as compared to spot gold? I can think of pricing transparency and warehouse cost as two factors that might theoretically drive the differences between these two, but I'm not sure if these can be powerful enough factors.

I'm quite sure that I will go for MCX futures. I just wanted to convince myself why MCX spot is not the ideal investment route for a short-term horizon.

Thanks.
 

ashu1234

Well-Known Member
#8
As far as I know, spot gold at MCX and e-gold both are same. Never came across this classification "short-term investment" for MCX spot gold - so could you elaborate the source of this classification. E-gold and MCX spot gold both entitle buyers to take delivery if they wish, product objective is the same, so I can't see any differentiating factor as far as both the product are concerned.

You are right, spot investing is not a good option to invest considering the shorter term horizon, go for MCX futures.:thumb:
 
#9
It was actually a wrong assumption on my part to consider spot gold as short term. I knew that e-gold was long-term and MCX futures was short-term. The confusion was where spot gold can be classified between these two, short-term or long-term.

I believe I am more clear now having read your posts. For long term, both e-gold and spot gold are equivalent options, though I might have to look at brokerage and warehouse costs to decide if one is definitely better than the other. For short term the unanimous choice is gold futures, or for that matter even agri-product futures as long as one makes sure to close his/her positions before the contract expiry.

Thank you so much for your replies and for your patience. Really appreciate it. :clap:
 

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