Financial Times: Gold Futures, Effective Instruments for Corporate Risk Management

Updated on: August 3, 2017

Reported by: Gao Guohua, Journalist from Financial Times

Stable development of the gold futures market has optimized the formation mechanism of gold price, promote standardized development of the gold industry and facilitated its restruction. SHFE will continue its efforts in reform, innovation, opening and self-disciplinary supervision, to attract relevant enterprises and various institutional investors to participate in the risk management of the futures market, constantly improve serviceability for the gold futures market, facilitate the gold industry to seize opportunity and realize transformation and upgrading .
“To further accelerate product innovation, SHFE will intensify studies of precious metal derivatives like gold options on futures, complete product line and constantly expand market risk mitigation instruments”, says Teng Jiawei, Vice General Manager of SHFE on how gold derivatives can better serve the real economy in the Forum for Gold Derivatives Market Development hosted by SHFE .
SHFE President Song Anping says on the same occasion that China’s gold industry is in the key period of transformation and upgrading during which SHFE will continue its efforts in reform, innovation, opening and self-disciplinary supervision, trying to attract relevant enterprises and various institutional investors to participate in the risk management of the futures market and constantly improve serviceability for the gold futures market. 

Constantly improved serviceability for real economy
Since SHFE officially launched its gold futures in 2008, it has seen, as an important part of China’s gold market, obvious achievements in performing market function and serving industrial entities.
Firstly, stable market expansion. In 2015, annual total trading volume and amount topped 50,634,400 round lots and RMB 11.98 trillion, respectively 6.5 times and 8 times of those in the year of launch. The first half of this year has seen a trading volume of 42,251,200 round lots, indicating a YoY growth of 89.5% and a trading amount of RMB 10.6 trillion, a YoY growth of 100.6%. As of the first half, a total of 17 registered brands can be used for physical delivery of gold futures. Output of registered brand enterprises takes up 50% of the national total, indicating further enhanced market influence.
Secondly, continuous optimization of investor structure. Participation of corporate clients to the gold futures market sees growth year by year, whose indicators including position, transaction, hedging and physical delivery have remained at a relatively high level. In 2015, gold futures position ratio of corporate clients was 62.68%. Compared to other varieties, corporate clients show a stronger interest in position. Domestic gold production, sales enterprises and commercial banks have already became important market participants. Along with the market expansion are applications of several fund companies for development of ETF or LOF products of precious metal futures.  .
Thirdly, effective role of hedging. Data shows that hedging efficiency of gold futures has been stabilizing at 95% in recent years, which respectively topped 97.6% and 98.8% in the first and second halves of 2015, topping the listings of SHFE. Daily transactions of gold futures hedging in the first half of this year reached 3,865, showing a 36.3% YoY growth and daily average positions amounted to 57,000 round lots. More and more enterprise in the chain of gold production, fabrication and circulation have met their expectations for production stabilization, risk exposure control and profitability on the futures market.  

Fourthly, enhanced correlations between futures price and relevant markets. In 2015, the domestic correlation coefficient between gold spots and futures prices was 0.9947 and that with overseas gold futures price 0.954, indicating that gold futures price of SHFE may sufficiently reflect trends of domestic and international demand-supply relations and has become an important pricing basis for domestic forward quotation. 

Study gold options on futures   Promote an orderly opening-up.
In recent years, China’s gold market system sees continuous improvement in product variety, trading mechanism, infrastructure, market function and investor, which plays different roles and satisfies diversified needs, and ascends itself to one of the world most important gold markets with ever growing international influence. .
China Gold Yearbook, published by China Gold Association, shows that China’s gold output in 2015 topped 450.05 tons, taking up 14.02% of the global total and ranking the first place for 9 consecutive years. Its gold consumption reached 985.90 tons, leading the world for 3 years in a row. Physical gold transactions at Shanghai Gold Exchange reached 34,100 tons, being the world number one for 9 consecutive years.  .
However, geopolitics and changes in international situation have resulted in wild fluctuation of gold price in recent years and ever growing demands for lean management of the gold industry. “Stable development of the gold futures market has optimized the formation mechanism of gold price, promoted standardized development of the gold industry and facilitated its restruction”, said Song, “SHFE will continue its efforts in reform, innovation, opening and self-disciplinary supervision, trying to attract relevant enterprises and various institutional investors to participate in the risk management of the futures market, and constantly improve serviceability for the gold futures market, facilitate the gold industry to seize the market opportunity and realize transformation and upgrading”. .
It’s learned that gold futures market of SHFE has been in a stable and orderly progress at the concerns and under the supports of all market stakeholders. In terms of institutional innovation, SHFE will continue to optimize the trading mechanism, constantly improve market operation efficiency and service level and actively study pathway and scheme for internationalization of gold futures to expedite the internationalization process. In terms of providing legal rights protection for investors, SHFE will closely follow the requirements for regulatory transformation, maintain a “fair and open” market and crack down various violations to constantly improve its regulatory effectiveness. In terms of legal construction, SHFE will actively work with MOF in the study and revision of the hedging financial system and to advance the cancellation of relevant policies. In terms of technological innovation, SHFE will comprehensively implement the ISO 9001 and ISO 2000 technical management system to complete the construction of a newer generation exchange (NEG 2.0). .
Teng Jiawei says that SHFE will continue to serve the real economy, steadily develop futures market, actively facilitate supply-side reform and provide a safe and effective risk management platform for the gold industry chain businesses. According to him, SHFE shall first improve the service level for industries, conduct diversified hedging publicity and training based on the characteristics of gold production, consumption and trading enterprises, strengthen site service and business guidance and further improve capacity and level of real enterprises in utilization of futures instruments. SHFE shall also expand varieties to meet the needs for development of market and customers, optimize contracts, improve rules, improve operating efficiency and to enalbe the market to work. SHFE shall further accelerate product innovation, intensify study of precious metal derivatives like gold options on futures, complete product line and constantly expand market risk mitigation instruments. Lastly, SHFE shall explore opening to the outside world, full leverage the “Belt & Road” Initiative, accelerate the globalization process of SHFE, push forward market opening-up, study the feasibility of foreign investors’ access to the domestic futures market and expand the international influence of its pricing.