Hedging tools that can help gold traders to manage price risk in the precious metal and boost profitability
Effective hedging tools will be critical for gold traders to maintain business profitability in the current economic climate, according to a senior official of the Dubai Gold and Commodities Exchange (DGCX).
Samir Shah, Chief Business Officer of DGCX said: “Gold prices have had a phenomenal run over the last two years, but the distinguishing feature of the gold market in this period has been the extreme price volatility of the precious metal, which has consistently threatened profit generation.
Shah believes that hedging against price risk is particularly vital in the current environment where many potential developments could significantly increase price volatility, including the Eurozone crisis, the slowing down of emerging markets like China, elections and political risk, the possibility of the third phase of Quantitative Easing (QE3) and the US fiscal situation.
DGCX recently hosted a Gold Hedging Workshop for gold merchants, in association with the Dubai Gold and Jewellery Group (DGJG), aimed at explaining the vital need for hedging in today’s volatile economic environment and the tools the Exchange offers to help them protect their profits. “The DGCX Gold Futures contract provides an exceptional tool for hedging price risk exposure in today’s market, allowing participants to profit when the market moves in either direction,” said Shah.
Biju Joy, General Manager of the Dubai Gold and Jewellery Group (DGJG) said: “The workshop was an excellent opportunity for Dubai’s gold merchants to understand the various strategies they can adopt to manage gold price risk using the DGCX’s platform. The Dubai Gold and Jewellery Group is committed to work with institutions like DGCX to support the development of the gold market in Dubai.”
Using DGCX Gold Futures, gold merchants can hedge against gold price volatility by locking in a future selling price for gold, thus making sure they can offset potential losses from any significant change in prices.
“DGCX has designed its Gold futures contract with the needs of the UAE’s gold merchant community in mind. We also regularly consult with the Dubai Gold Advisory Group, an informal industry body composed of gold market players that we created to understand changing market needs. Based on feedback from the Group, we have initiated key contract changes to further improve liquidity in the product. Irrespective of their size, DGCX provides every gold merchant equitable pricing with narrow bid-ask spreads to support them in managing their risk at a low transaction cost,” Shah added.
He further said: “Since the Exchange is regulated by the Securities and Commodities Authority (SCA) and provides a government-owned central clearing system, gold merchants can trade with the confidence that that their trades will be settled. Hedging gold using DGCX Gold Futures, as opposed to products of other international exchanges, also allows Gold merchants to ensure that their capital does not leave the UAE and that they incur very low transferring costs.”
DGCX expects increased interest in Gold Futures trading on its platform and the Exchange is well positioned to meet this increased demand. In June, DGCX Gold Futures volume increased 111% compared to the same month last year on the back of heightened trading spurred by increased price volatility. The volume rise is also a result of significant steps taken to enhance the DGCX Gold Futures contract.
Since its establishment, DGCX has played a vital role in strengthening the UAE’s financial system by providing hedging tools and mechanisms that allow market players to transfer and manage risk within a well-regulated environment. DGCX Gold futures, one of the Exchange’s flagship contracts, when launched in 2005, introduced a new pricing benchmark for gold in the UAE, the One kilo bar gold futures contract (0.995 fineness).