Bursa Malaysia Derivatives (“BMD”) launched the BMD Gold Futures contract (“FGLD”) on 7th October 2013. FGLD offers an exciting opportunity for traders and investors in Malaysia to trade gold futures in the local exchange.
BMD’s Gold Futures Contract is based on LOCO London Gold prices, one of the benchmarks for global gold prices. It will be denominated in Ringgit Malaysia with every contract based on 100g of gold.
Its relatively small contract size of 100g makes it much more accessible to retail investors as compared to the 100 troy oz (3.1 kg) COMEX gold traded in the Chicago Mercantile Exchange. With an initial margin of RM 1,000 to trade one contract of FGLD, this is cheaper compared to the initial margin of COMEX gold which is USD 8,800 (as of 30th August 2013).
Most gold investments make a profit only on rising gold prices. However in the Futures market, an investor is able to profit from falling prices as well. You can short-sell FGLD in anticipation of a price drop and buy it back later at a lower price. This characteristic distinguishes itself from the myriad of investment vehicles in that it enables investors to take advantage of both market trends, even in times when gold is on a bearish trend.
Another distinctive feature of BMD Gold Futures is the ability to used leverage. When utilised appropriately leverage is a powerful tool which allows investors to control an asset of greater value compared to their initial investment and this can greatly amplify the return on investment.
For example, a cash trader who wishes to invest in gold could buy 100g of physical gold at RM130 per gram and would have to pay RM 13,000 for the purchase. If the gold price were to increase by 10%, he will then have a realised profit of RM1300 (10%) minus the cost of transactions. This is an example of cash purchase without leverage.
On the other hand, another savvy trader could buy one FGLD contract which is equivalent to 100 gram per contract by putting up a margin of RM 1,000. However, the same 10% increment in gold price would mean a RM1300 profit, a 130% return for his capital, effectively giving him 13X leverage on his investment compared to buying physical gold.
Thus, with leverage, investors are able to use their capital more efficiently and garner a greater return from their investments.
To get started in trading FGLD, an investor will need to open an account with a Malaysian broker who is a Trading Participant of BMD. RHB Investment Bank is one of the premier futures broker offering all futures products traded on BMD. After opening an account, the investor will need to fund the account to start trading.
For example, an investor has a cash balance of RM 5,000 in the account and made a trade on 11th October 2013, buying 1 contract of December 2013 FGLD at RM 130.00 per gm. Subsequently, if the market moves in the investor’s favor on 18th October 2013, and the investor sells 1 contract of December 2013 FGLD at RM 132.00, this trade will make a profit of RM 200 as below:
(132.00-130.00) = RM 2.00 per gram profit
Since each FGLD Contract size is 100g,
RM2.00 X 100 g = Total profit RM 200.00
Add the profit onto the cash balance and the investor would now have RM 5,200.00.
An investor starts off with the same cash balance of RM 5,000 on 11th October 2013 and makes a trade on 11th October 2013, buying 1 contract of December 2013 FGLD at RM 130.00. Subsequently, on 18th September 2013, prices fall and the investor sells the 1 contract of December 2013 FGLD at RM 128.00.
By making these two trades, the investor would have made a loss of RM 200:
(128.00 -130.00)= RM 2.00 per gram loss.
And since 1 FGLD Contract size is 100g,
-2.00 X 100 = Total loss RM 200.00
The investor will now have a cash balance of RM 4,800.00 remaining in the account.
It is vital that the broker understands the investor’s trading needs as well as the requirements to support the investor’s trading activities. The broker will be able to advise on the trading strategies that are available when trading FGLD.
RHB Investment Bank offers our clients personalised advice coupled with convenient trading access to BMD FGLD and other products globally. We understand your needs and strive to provide continuous 24-hour support and service for you. We have a large talent pool of experienced futures professionals who are only a phone call away.