Attractive India, US gold spreads spur arbitrage
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Attractive India, US gold spreads spur arbitrage

Several Indian commodity dealers are getting sleepless nights over an alluring new investment opportunity - gold arbitrage.

india Updated: Feb 14, 2006 15:40 IST

Several Indian commodity dealers are getting sleepless nights over an alluring new investment opportunity - gold arbitrage.

Commodity brokerages said attractive price spreads ranging between RS 30 and 60 or even more per 10 grams of gold between exchanges in the United States and India are prompting them to trade their evenings away for gobs of golden gains.

Given the metal's bullish yet zigzagging moves, the spreads have been both negative and positive between Comex and Indian exchanges - Multi Commodity Exchange of India Ltd. (MCX) and National Commodity and Derivatives Exchange Ltd.

But dealers said myriad difficulties such as indirect access to Comex and currency fluctuations aren't deterring new investors from plunging into the gold mine.

"Cross-border arbitrage is perhaps at its peak as Indian futures markets are still nascent and are thus providing price anomalies," said Kishore Narne, assistant vice president of commodities at Anand Rathi Commodities.

"If you do one single transaction each day, at the end of the year, returns could be up three to four times."

Another brokerage, Kotak Commodity Services Ltd, also indulges in arbitrage and several others, including Sharekhan Commodities Pvt Ltd and Geojit Financial Services Ltd, said they were looking to tie up with foreign brokerages who would execute their orders on Comex as it uses open outcry in its morning session.

"We have been getting frequent enquiries for arbitrage from our clients," said Si Kannan, a commodities analyst at Sharekhan Commodities. "Many of these people are jewellers."

On Tuesday, at 0911 GMT, an arbitrager would have gained around Rs 41 per 10 grams of gold by buying the April contract at Comex for $541.6 and selling the same month contract on the MCX at Rs 7,836 per 10 grams.

Comex gold, when converted into rupees and topped with levies, worked out to Rs 7,794.68 per 10 grams.

Indian dealers get hooked to their terminals at 1950 local time when Comex opens at 0820 hours in New York. They try to catch the rapidly changing spreads with a finger on the MCX trading terminal while keeping an eye on Comex prices.

Trading is preferred in the evenings as dealers want to react to gold sentiment in its active trading hours in its biggest market - United States.

Making an imperfect arbitrage happen

Dealers said that as opposed to a simultaneous buy and sell that forms a perfect arbitrage, they have to factor in dropping international calls, currency risks and high foreign trading costs to make the cross-border trade happen.

"Sometimes, there's a communication gap with US," said a dealer. "The next morning we learn that the call we wanted was never executed."

Another dealer said networking with their foreign partners helps offset the couple of minutes' advantage local dealers have when MCX moves with a lag to ape its foreign counterpart.

"No matter how alert he is, the Indian dealer can't react as fast as his US counterpart who is in the feel of things," said Alex Mathews, research analyst at Geojit Financial.

A remittance cap of $25,000 a year and chances of a change in the value of the dollar at the time of repatriation, are other headaches, Mathews added.

Analysts said arbitragers would make money as long as the sun shines.

Maturing futures markets and more liberalisation would eventually vapourise the spreads as India's futures exchanges get even more closely aligned with the overseas markets.

"When the volumes at the Indian exchanges rise, the spread will narrow," said V. Sivaramakrishnan, executive director at KomBench DMCC, a Dubai-based commodities brokerage.

As well, the expected introduction of options trading and the possible entry of banks and financial institutions in the futures markets could make the Indian markets perfectly mirror the foreign exchanges, he added.

Till then, the night traders will continue to lose sleep.

"I get back home past midnight, but I'm up early the next day as there is so much news to catch up on," said Raghavan Sundararajan, a researcher at Kotak Commodity Services who starts his day just when most office workers go home. "I catch up on my sleep over the weekends."

First Published: Feb 14, 2006 15:40 IST