Chinese cherish gold as a symbol of fortune, a sign of
prosperity and a hedge against inflation.
Now there are even more reasons for the Chinese to love the
precious metal which made a strong debut in China's futures
market.
While investors can't wait to make big bucks out of the newly
launched gold futures, the futures exchange and analysts are
discouraging retail investors from dashing blindly into the
market.
Trading cap
The gold futures made a strong debut on the Shanghai Futures
Exchange on Wednesday, with opening prices hitting the daily
trading cap. It then corrected in line with declining global
prices.
The most actively traded contract, gold for June delivery,
opened at 230.95 yuan (US$31.77) a gram, almost hitting the
10-percent daily trading cap, from a benchmark price of 209.99 yuan
a gram on Wednesday. It then tumbled to end at 218.10 yuan on
Friday.
"Gold futures is the only futures product in China that also has
a financial status (others are all commodities), that's why it
attracted heavy buying interest from investors," said Jing
Zhuocheng, a Shanghai CIFCO Futures Co analyst. "The huge rise in
gold prices in New York the night before (Tuesday) also helped to
boost the new product to open at the daily trading cap on
Wednesday" before succumbing to the influence of global prices.
Retail investors had swarmed futures brokerages to open accounts
before the launch of gold futures trading.
"Lots of newcomers opened accounts before the introduction of
gold futures, indicating the strong interest in the product," said
Lin Hui, a Dongzheng Futures Co analyst.
Small capital
Futures contracts are generally considered one of the most
speculative instruments in the investment market, with investors
leveraging against the fluctuations in price.
Chinese investors, familiar with massive profits from the
domestic stock market, dream of making it rich while betting small
capital on the futures market where money can be made whether
prices drop or rise.
However, industry experts said unprepared retail investors may
find their dreams busted.
To cut risks, the exchange has also raised the minimum margin
requirement to nine percent in the early stages of trading. The
figure will drop to seven percent after some time, the country's
biggest commodity bourse by value said, without giving a time
frame.
The bourse has also increased the margin requirement, which will
top a maximum 40 percent, when the date of delivery gets
closer.
Besides the current nine-percent transaction margin requirement,
futures brokerages also require another two to three percentage
points of margin to ensure that clients have ample capital to
protect against risks.
"The total 12 (9+3) percent margin doesn't mean that investors
can trade futures equal to 12 percent of the contract value," said
Lin. "It's risky for clients to bear such a concept."
In futures trading, the profits and losses are settled on each
trading day. If an investor loses money on the account, and the
capital goes below the margin requirement, he has to add funds or
the bourse will force him to close his position, which may lead to
a huge loss.
For instance, an investor bets on buying a lot at 230 yuan with
the minimum margin. He pays 27,600 yuan (230*1000*12%=27,600). If
the price drops to 220 yuan, he needs to pay 26,400 yuan
(220*1000*12%=26,400) on the account. But the price drop from 230
yuan a gram to 220 yuan means he will face a loss of 10,000 yuan
(10*1000=10,000). If the investor has put only 30,000 yuan in the
account, he now has 20,000 yuan left, already below the 26,400 yuan
minimum margin requirement. The investor has to add capital to the
account, or be forced by the bourse to close his position and face
a loss of 10,000 yuan.
Shanghai CIFCO's Jing advised investors to better put only 30
percent of the capital on the position to cut risk.
This means investors should have at least three times the
capital of the minimum margin requirement.
False concept
Getting enough capital is not enough.
Some retail investors have the false concept that if they can't
make profits in the futures market, they won't lose at all or at
least they can take the bullions home.
The futures bourse has also taken other measures to discourage
naive retail investors. It bases each contract, or a lot, on one
kilogram of gold, more than triple the previously planned 300 grams
per lot. This means a higher capital requirement than planned.
The bourse also prohibited retail investors from taking delivery
of gold futures. Retail investors are also banned from holding
positions into the delivery month.
"Futures are for hedging and pricing. Physical delivery of the
product is not the main purpose," said Cao Yue, a senior official
with the products innovation division of the exchange. "Chinese
retail investors are familiar with the traditional gold bullion
investment, but the futures market may be a novelty for them. The
rule is to ensure they are reminded of risks and hope they are
fully prepared for risks."
The bourse will force retail investors who hold the contracts
into the month of delivery to close positions. Investors will then
have to bear the loss due to mandatory position closure.
The gold industry has cheered the futures as a hedge to protect
against price fluctuation while speculators see a new vehicle to
make big bucks as the stock and property markets start to
correct.
The stock market's benchmark Shanghai Composite Index has
undergone a correction after touching an all-time high in mid
October on concerns of over valuation. The excess liquidity is
pushing investors to seek more investment channels, and the launch
of the gold futures amid three-decade high gold prices has placed
the debut of gold futures trading under limelight.
Gold prices soared on concerns of inflation, higher oil prices
and a weak US dollar. Gold topped US$880 an ounce last week - a
28-year high. Some analysts even expect the metal to crack US$1,000
an ounce this year.
"Gold's movement is against that of the greenback and can be a
hedge against a weak US dollar," said David Leung, chief investment
officer of wealth management of consumer banking of Standard
Chartered Bank (China) Ltd.
"The US dollar has the chance to make a short-term recovery in
the first half but may tumble in the second half," giving a golden
opportunity for the metal's price to soar, according to Leung.
(Shanghai Daily January 14, 2008)
