Unprecedented stimulus measures and low interest rates last year have benefited gold as investors chased the yellow metal as a safe-haven and a hedge against inflation. In 2020, the gloomy global economic outlook and the weak USD helped gold seal its role as a store of value. Bullion prices denominated in USD rose 35% last year, breaking through historical highs of US$1,900 before giving up some of its hefty gains. Bullion set a new record price of US$2,070 ($2,780) in 2020.
In fact, the last decade has been the best for gold, as central banks globally embraced looser monetary policy to boost growth. Brexit, political and social unrest in regions from Chile to Hong Kong, and buying sprees from key central banks and investment funds have also helped to support prices.
Phillip Futures offers over-the-counter (OTC) and exchange-traded gold. Traders from various trading hubs access both electronic and voice broking facilities due to market leading prices and tight spreads. Gold contracts are offered in a variety of currency denominations other than the USD, for example, the TFEX gold futures priced in baht and BMD gold futures in ringgit, so savvy traders benefit from currency fluctuations and contract value anomalies.
CEO of Phillip Futures Teyu Che Chern says that while the global futures exchanges play a key role in the ecosystem, the OTC market is growing significantly over the last 10 years, and is gaining popularity among the retail investors.
“Offering gold as a spot OTC product is offering the customer another option, as the OTC market is open for trading 24 hours a day. Both spot gold and gold futures markets have their own following and it is dependent on the way the investor likes to trade. Some customers find trading gold futures more transparent as they can see the volume in the futures markets and they feel more comfortable with the centralization of an exchange as counterparty,” he says.
“As a broker, we are offering customers with the choices of products, and we believe that it will contribute to the growth of the entire product eco system. As an extension to the product value chain, we also started exploring physical gold and other non-leverage gold products over the last few years. There is optimism on the growth potential of this product in line with the rise of bullion prices and we believe in having something suitable for clients with different risk appetite,” he adds.
Challenges
Volatility, especially at market peaks and bottoms and geopolitical news can lead to wild swings in gold prices, to the extent of over 4% rise or fall.
This is why Teyu emphasises the importance of having a sound risk management system when offering gold and silver trading. In fact, he believes that one of the key challenges for brokers like Phillip Futures is to manage volatility and liquidity risk.
“Gold as a safe haven product, is often impacted by sudden geopolitical news. Over the last 10 years, there were also numerous black swan events that cause sudden short term volatility in the gold prices,” he observes.
It can be difficult to gauge the size, scale and liquidity of the gold market, as there is a large amount of gold available in the vaults of central banks and in the hands of investors. Unlike exchanges’ volume, OTC transactions are not known to the public. The World Gold Council’s conclusion is that the depth and breadth of the gold market is greater than all but the two largest debt markets in the world. Furthermore, the liquidity characteristics, including daily trading volumes and average bid-ask spreads, show that gold is as liquid as most sovereign debt bonds.
Higher liquidity is desirable as it narrows spreads and cost of trading, but severe liquidity crunches happen in a crisis if brokers rely on principals or minor liquidity providers to provide tight bid-ask spreads.
Teyu says Phillip Futures is able to navigate this challenge. “Gold has a highly liquid market and we want to take advantage of narrow bidask spread, so when we develop bullion products, we deepen our liquidity and ensure we have sufficient providers pricing bullion prices constantly. It is not uncommon to experience gaps in bullion prices, especially on early Monday mornings and after major geopolitical incidents. We understand the importance of allowing our clients to trade as seamlessly as possible, so we increase the number of liquidity providers,” he says.
Cryptocurrencies
While gold is considered a trusted part of an average investor’s portfolio as any other asset class, cryptocurrency trading has mainly gained attention because of their spectacular rallies and the novel blockchain technology on which their transactions are based.
Will cryptocurrency replace gold as an asset class? While the former lacks the commodity trait that gold enjoys, it has the currency aspect of gold. In fact, digital currency offers an alternative store of value via electronic means which could be more convenient than storing physical bars. In this sense, digital currencies can fulfil gold’s role as a safe-haven asset.
Another similarity between cryptocurrency and gold is that neither earns any yield or interest, and their prices are largely determined by investor demand and financial speculation. Some cryptocurrencies such as Bitcoin are also limited in supply like gold.
As differences between the two, cryptocurrency prices are highly volatile, as seen in Bitcoin’s rally over the past year. Bitcoin’s onemonth volatility is over 90 vols, compared to 6 vols for Euro and 16 vols for gold. In a financial crisis, cryptocurrencies are more likely to be dumped by investors while gold remains popular as a store of value and a hedge against inflation.
The fact that cryptocurrencies can only be stored in digital wallets also makes it susceptible to hacking and increases its risk as a tool for crime.
Having said so, Phillip Futures offers both gold and cryptocurrency for trading. Cryptocurrency in the form of exchange-traded futures has been offered since 2019, and cryptocurrency CFD has been available since 2020. There are currently two exchanges offering crypto futures, at contracts of different sizes suitable for investors with different appetites.
“We have offered spot gold and gold futures for many years now,” says Teyu. “I think clients are aware of this offering and we have garnered significant volume over the years. Gold is also more familiar among retail investors as well as corporates, for the purpose of speculation or hedging. On the Phillip MT5, among CFDs on Bitcoin, Etherum, Ripple and Litecoin, Bitcoin is still the most popular crypto.”
The increasing popularity of digital currencies has led central banks and financial institutions to publish papers so that regulators and lawmakers can be more accommodative and knowledgeable about cryptocurrencies.
In turn, this would allow more participation from retail and institutional investors, because, as Teyu sums up: “The current bullish growth of cryptocurrencies is not something we can ignore. As a broker, our role is to offer what our customers want to trade and at the same time strengthen our knowledge and depth in the product to continuously deliver good service and diverse product offerings.” E
