The launch in Dubai of the first yuan-denominated gold futures product outside China is expected to draw more investors from the Asian country to the emirate.
Dubai Gold & Commodities Exchange (DGCX) foresees higher participation from Chinese investors following the March listing of the Shanghai gold futures, the first yuan-denominated gold futures product available outside China.
The Shanghai Gold Exchange, the world’s biggest physical gold exchange, launched last year a yuan-denominated gold benchmark, which is being used by DGCX.
It signed a deal with DGCX to use its benchmark last year as the world’s top gold consumer seeks to stamp its mark on the bullion market, which is mostly denominated in dollars.
DGCX, the derivatives bourse majority-owned by the free zone Dubai Multi Commodities Centre (DMCC), has three Chinese members, including GlorySky Group, and expects at least six or seven more to join by year-end, according to Gaurang Desai, its chief executive.
“With the emergence of China and the Chinese economy, the balance of power is titling,” said Mr Desai. “China is one of the largest bullion markets around the world but it doesn’t allow any foreign participation. There is a lot of demand and a lot of interest from global participants to access that market but, so far, it was not available to them.”
DGCX, which lists 47 contracts from copper to Indian rupees, already has a yuan currency futures contract as part of its strategy of courting Chinese investors and strengthening ties with Dubai’s biggest trade partner. The exchange expects the Shanghai gold contract to boost trading in the yuan currency futures as well.
“Our strategy is to create a market structure that marries East and West,” said Mr Desai. “We want Chinese customers to come down to the region.”
The Shanghai contract, the exchange’s fourth gold futures contract, has traded more than 3.5 tonnes since its launch on March 10. The contract size is 1 kilogram, with the price quoted in Chinese yuan per gram.
The Agricultural Bank of China, which has a branch in the Dubai International Financial Centre, has been appointed as the market maker. A market maker is a broker and dealer that balances supply and demand for an asset by matching buyers to sellers, a process that helps create liquidity.
“Having a large Chinese bank like the Agricultural Bank of China as an appointed market maker gives us the assurance that liquidity is guaranteed at all times,” Alfred Yeung, the chairman of GlorySky Group, said last month. “I’m confident that this unique gold product would greatly appeal to our clients who’d like to trade and take positions to hedge against fluctuations in gold prices.”
Bringing more Chinese members to the exchange is important if the contract is to include physical delivery of gold. For example, DGCX’s spot gold contract is deliverable.
“Shanghai Gold is currently fully cash-settled but as we develop this product and we develop the partnership with the Shanghai exchange going further, then we look at other mechanisms,” said Mr Desai.
“It will depend on liquidity and participants coming from China and various other factors. That’s why it is important to get participants from China involved in the project and get them active.”
Besides the Shanghai gold contract, the exchange is working with DMCC and RAKBank to launch in the third or fourth quarter a product targeted at retail investors in the UAE and later the wider Arabian Gulf region.
“DGCX, RAKBank and DMCC have interest in developing a gold product for retail participants to facilitate small-scale savings and provide them with a secure and safe platform, with less cost and less hassle and more transparency,” said Mr Desai.
The exchange’s spot gold contract currently requires the physical delivery of 1kg gold bars but the new product will have smaller quantities that will be listed by the exchange.
Trading volumes on DGCX rose by 36 per cent year-on-year to US$440 billion last year, representing 19.7 million contracts during the year. The exchange traded an average 76,835 volumes a day, the highest average level in its 11-year history.
Gold has bounced back somewhat this year: “Gold prices have staged a meaningful recovery during the first three-months of 2017 and the bullish sentiment surrounding the precious metal may gather pace over the coming months as Federal Reserve officials anchor interest-rate expectations,” the Nasdaq said. At 5pm NY time on Friday, spot gold was up 2.57 per cent at $1,255.27 per ounce at the close. It is up by 3.5 per cent over the past six months.
dalsaadi@thenational.ae
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