Gold futures trading could be another option

Two weeks ago, local goldbar prices fell to as low as Bt12,850 per baht weight (15.1 grams) amid falling global gold prices. This prompted a huge number of investors rush to gold shops to buy cheap gold. At least 80 per cent of their buying over the past few weeks was gold bars for investment, while only 20 per cent was gold ornaments.

Gold futures trading could be their alternative, although experts advise investors to study the nature of futures trading prudently before entering the market.

Gold futures trading is a new product on the Thailand Futures Exchange (TFEX), debuting on September 22. It is a futures contract in which the buyer and the seller agree to buy or sell gold at that time, and they are obliged to settle for the purchase in the future. Once the contract is due, they must settle in cash, not physical gold.

The TFEX's contract specification for gold futures trading stipulates one gold futures contract is based on 10 baht of 96.5percent pure gold. The trading will be done in Thai currency with a tick size, or incremental price movement, of Bt10. Investors must deposit collateral for trading at 10 per cent for one contract.

For example, say you want to buy one gold futures contract. If the gold price today is Bt13,000 per baht weight, you invest in Bt130,000 worth of gold futures. Before trading, you must deposit collateral by putting up cash of Bt13,000 per contract.

With the tick size at Bt10, investors can calculate their loss or gain from the goldprice movement by multiplying by 100 per contract. For example, if the gold price moves up Bt10, investors who "long", or buy, the gold futures contract gain Bt1,000 per contract, but those who "short", or sell, the gold futures contract lose Bt1,000.

On the other side, when gold prices fall, investors who "short", or sell, the gold futures contract gain Bt1,000, while those who "long", or buy, the gold futures contract lose Bt1,000.

There are three tranches of gold futures contracts, for two, four and six months. For example, in September there will be gold futures contracts that expire this November and next January and March.

Suvarn Valaisathien, bestselling author of several investment guides and a former deputy commerce minister, recently said that over the past four years, world gold prices had risen significantly, from US$400 (Bt13,650) per ounce to $700 in 2006, and would rise further depending on oil prices.

He warned that gold prices abroad had been very volatile, due partly to speculation.

He suggested investors allocate only 1015 per cent of their investment portfolio in gold trading, because gold futures trading involved high risk. However, futures trading is a good riskmanagement tool, although mostly hedge funds and investors who love risky speculation are the ones involved in it. Thus, conservative savers should avoid futures trading, Suvarn warned.

In addition, he warned that the possible movement of gold prices was unlimited. For example, on August 12 gold prices dropped as much as $60 an ounce in one day and $30 an ounce over the next three days.

Thus, investors should not hold futures trading contracts for too long. For example, if you have "longed" the gold futures contracts and see a trend of falling gold prices, you should cut your loss by selling the contracts. Otherwise, you will be forced to sell the contracts, which will later cause too many contracts in the market.