Regulating gold trading important to ensure fairness to all stakeholders
SPOT GOLD TRADING, which has seen explosive growth in both volume and values in recently years, has attracted the interest of the authorities, who suspect major gold traders have unfairly taken advantage of retail investors. And now some investors have co
The issue was raised by the governor of the Bank of Thailand, Prasarn Trairatvorakul, after the central bank found some questionable activities in the sector. He said he believed that some gold importers were speculating on the exchange rate. Moreover, the interests of investors might be compromised.
But how would gold traders speculate on the baht’s exchange rate with the US dollar?
If they predict that the baht will weaken or that the dollar will rise in the future, gold importers bring in large amounts of dollars but import small amounts of gold, so keeping some extra dollars in their pockets. When the baht weakens, they exchange those extra dollars for baht, making a profit from exchange-rate volatility.
Finance Minister Kittiratt Na-Ranong is less concerned than the BOT governor about exchange-rate speculation. He does not agree with Prasarn on the need to regulate gold imports.
Gold imports increased by 36.4 per cent year on year in the first eight months to US$11.56 billion, or about Bt360 billion. Thailand’s gold demand ranks third in Asia, following only China and India.
The gold spot market is huge, but nobody knows how big it is as consumers change their behaviour. Previously they bought physical gold only for the purposes of savings or jewellery, but now many of them buy physical and paper-linked gold as investments. This pattern of behavioural change has contributed to a sharp increase in gold trading outside the Thailand Futures Exchange and oversight by the Securities and Exchanges Commission. TFEX trading was valued at about Bt800 billion in the first seven months and may reach Bt1 trillion by the end of the year.
Kritcharat Hirunyasiri, president and chief executive of MTS Gold, one of the top five gold traders, estimated that spot gold trading was worth about 10 times the gold futures trade. If he is right, the market value could be as large as Bt10 trillion, close to Stock Exchange of Thailand’s market cap of Bt12 trillion.
While the market is expanding but remains unregulated, the interests of retail investors are on the line. At the very least, gold traders can take advantage of investors by manipulating information or not fully informing clients about potential losses. This is in contrast to trading in stocks or gold futures, where brokerage firms have to uphold a code of conduct and are regulated by the SEC.
Some investors complained last week to Krungthep Turakij TV that they had suffered massive losses from online gold trading. Two of them said 23 investors had suffered combined losses of about Bt300 million to Bt400 million, and they accused gold traders of manipulating online transactions, resulting in losses.
Usually each investor makes a cash deposit of Bt100,000 to set up an account with a gold trader and then can trade up to 1 kilogram of physical gold, the value depending on the world gold price at the time of the trade.
The BOT, the SEC and the Finance Ministry recently formed a working group to look at the issue.
Somchai Sujjapongse, director-general of the Fiscal Policy Office, who chairs the committee, said efforts would be made to protect the interests of retail investors.
However, the authorities’ response to this issue may be too late, as the damage has already been done. Several lawsuits between one gold trader and investors are pending in the court.
Some traders have proposed that authorities set up a gold exchange to regulate spot trading and make Thailand the hub of gold trading in Southeast Asia. Some of them claim that Singapore authorities have invited them to set up trading offices in the city-state.
Indeed, Prasarn’s concern about the interests of retail investors is a very good point for us to ponder. Should some unanticipated events take place, such as an economic crisis, retail investors holding paper-linked gold may not be able to change it into physical gold if large numbers of them rush to gold traders at the same time. The whole system could collapse in the same way as a run on a bank, when large numbers of depositors withdraw their funds at the same time. Then many people will get hurt.
As the gold market develops rapidly, it is time to regulate trading to make sure that all parties participate in a fair game and prevent potential calamity.
