HKEX is third time lucky in launching gold futures but trading is starting to slip

Average daily turnover of the yuan and US dollar gold futures have declined by 50 per cent and 30 per cent respectively in August, compared with July

PUBLISHED : Monday, 21 August, 2017, 5:31pm
UPDATED : Monday, 21 August, 2017, 5:30pm

Finally – the Hong Kong Exchanges and Clearing is third time lucky in launching gold trading.

The two contracts have a reported a combined 27,122 contracts, or 904 per day, in the first 30 days of trading between their launch on July 10 and last Friday.

The levels have not been excessively high but they showed a decent beginning when compared with six other London Metal Exchange metal futures contracts traded in Hong Kong, which on average only has one or two contract traded.

They were also a far cry from two pervious launches of gold futures. The two products, one traded in US dollars and the other in yuan, marked the third attempt by the local stock exchange to jump into gold trading.

The last time HKEX launched a gold product was during the financial crisis in October 2008. The contract was scrapped in March 2015 owing to poor turnover, where there were almost zero trading throughout the short-lived period.

The Futures Exchange, now a unit of HKEX, first traded gold futures in the 1980s. But that was scrapped in the mid-1990s due to a lack of interest.

A combination of reasons has helped HKEX’s latest attempt.

Timing can’t be more critical: the two contracts were launched when international tensions were dangerously high, including potential military provocations by Pyongyang after North Korea threatened to fire missiles towards the Pacific island of Guam, a US territory.

China is also facing a border conflict with India.

Amid these, gold became a safe haven for investors, pushing its price to rise 3.5 per cent in the past one month to US$1,285 on Monday, the highest level in two months.

In addition, the yuan’s rising trend in recent weeks against a weaker US dollar and improved Chinese economy, has raised the attractiveness of the yuan-denominated gold contracts, as investors can gain from both the rising value of gold and the currency.

Between the two gold futures, the yuan-denominated product has a bigger trading volume of 20,521 contracts in the 30 trading days, which is almost triple of US dollar gold at 6,871.

Unlike the previous two times when the gold contracts could only be settled in cash, the exchange has now allowed for physical delivery which has also attracted some end users to trade.

One month on, one can safely say that the HKEX’s early success in gold underlines a positive step to expand its commodities trading products.

The next question is how long its luck will last.

In August until last Friday, the average daily turnover of the yuan gold futures stood at 411 contracts traded per day, down more than 50 per cent from the 923 contracts in July.

The US dollar gold futures also decreased to 186 contracts per day in August, down from 267 contracts in July.

The HKEX will need to do more than count on its luck to stem the decline.