Gold futures market welcomed as instrument for hedging

According to research by the Thammasat Business School, commissioned by the Thai Futures Exchange, hedging with gold futures would help financial institutions in their risk management.

Asset-management companies are unanimously in favour of a gold futures market, Kulpatra Sirodom, a Thammasat University lecturer and a director of TFEX, said yesterday.

But that would mean more qualified fund managers would be needed to handle derivative products.

In the past four years the use of gold as a financial instrument has been increasing, she said, citing statistics in demand trends from the World Gold Council.

Demand, particularly for industrial use, has quickly outstripped supply, pushing the price of gold even higher - briefly surpassing US$1,000 (then Bt31,500) per troy ounce in March.

TFEX has recently approved the trading procedures and specifications for gold futures contracts. It is now looking for market-makers and accepting applications for derivatives traders. Nine applicants are being considered. Their systems for trading, clearing and settlement are being tested with Thai Clearing House and will be completed by mid-August, TFEX managing director Kesara Manchusree said.

Previously, gold merchants would have to carry out their hedging transactions as far away as Australia, which was costly.

Those in the physical gold trade would directly benefit from gold futures, which allow greater flexibility and more convenience in protecting their bottom lines in an increasingly volatile market.

However, Kritcharat Hirunyasiri, managing director of Mae Thongsuk Goldsmith, would like to see more international standardisation.

The deputy secretary-general of the Gold Traders Association wants the gold price to be quoted in dollars per troy ounce. This would allow traders to link their prices real time with the New York Mercantile Exchange or other major gold exchanges in Hong Kong and London, moving towards paper-based trading.

Kritcharat said physical settlement should be clear - how investors could translate their paper values into gold bullion. But with more than 6,000 gold stores, Kritcharat sees no problem in integrating the bricks-and-mortar trading with real-time futures trading.

Thailand has traditionally been one of the top gold consumers in the world. So unlike SET50 Index futures and options, gold futures would be much more culturally relevant, immediate and understandable.

But for retail investors, knowledge of economic factors would be vital, too. Foreign exchange, interest rates, inflation and politics can all shape the gold price.

Pakawat Kovitvathanaphong, chairman of Trinity Wattana, wants to see more incentives for securities houses in the initial phase of gold futures trading.