A Study on Impact of Forward Trading On the Spot Market Prices with Special Reference to Gold

Sanikeneni Sravanthi

Abstract


Trade in gold was as normal as any other commodity until the speculators have made a foray into the bullion market and started hoarding a sheer quantum of gold either to resell at higher price or to reap arbitrage advantage. This phenomenon is emerged as a new Alchemy which has started forging gold from the stage of mere commodity to that of a sterling investment avenue and led to the dawn of investment mechanics like forward trading in the segment of Yellow Metals either. Forward trading in gold has crossed its basic frontiers of hedging with the active participation of speculators and arbitragers hovering between spot and forward markets inflating the prices of underlying commodity. Such price inflation would not have come to the fore if it is confined to the Bullion markets alone. But, the cascading impact of proliferated prices in gold on other economic variants like import bills of the country, exchange rates and collateral problems in financial system had become a major concern why researchers and policy makers have been attempting to find the causes and effects of gold price volatility. Thus it is strongly felt necessary to analyze how far forward trading affects the price of gold. It is with this intention a paper titled “Impact of Forward Trading on the Spot Market Prices” is proposed with the twin objectives of studying the trends of spot and forward market prices of gold in India and quantifying the impact of forward rates on spot rates in long run.

 


Keywords


Forward rates, Spot rate, Bullion Market.

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