Sunday, October 5, 2008

Thailand's Gold rush brings calls for prudence

Retail investors need to know risks

PHUSADEE ARUNMAS AND CHAROEN KITTIKANYA

Given the wild swings of gold prices in local and global markets, trading experts warn investors, especially small-scale players, to use gold as just one of many diversification vehicles rather than for speculation.

"Speculation poses potentially high risks for small investors, as gold price swings have been fast and frenetic recently," said Jitti Tangsithpakdi, the president of the Gold Traders Association. "We recommend they set aside just 20% of their investments in gold."

All eyes on the window these days

Kritcharat Hirunyasiri, the association's deputy secretary-general, said gold prices were expected to remain volatile over the next few months as they are influenced by US dollar volatility and oil prices. He expects an upward trend for two or three months, probably moving near US$950 per ounce and pushing local prices to 14,600 baht per one-baht weight (15.16 grammes).

Mr Kritcharat also says it would be safer for people to invest from their own savings, as gold prices are still quite volatile and pressured by the US economic slowdown.

"Gold's appeal is expected to persist, as people realise gold is another lucrative investment alternative to savings, with better returns than a bank," he said.

According to Mr Kritcharat, returns on gold last year were as high as 20% in baht terms, compared with 2-3% from fixed bank accounts, 4-6% from funds and -10% from investments in stocks.

"Those who want to invest in gold need to thoroughly study it, as unlike the past, current gold prices are very fast-moving and volatile," he warned. "Gold investment requires lots of money, so do not invest in haste."

In any case, Mr Kritcharat recommends a long-term approach.

Somphob Manarungsan, a Chulalongkorn University economist, said gold was still subject to uncertainties and its price relatively high despite perceptions that it is a safe-haven asset.

"Gold selling by fund managers who have heavily invested in gold certificates is anticipated if the world economy goes from bad to worse," he said.

Gold has been valued for centuries as an investment but began to recede as financial markets developed rapidly during the 1980s and 1990s. In recent years, though, there has been a striking revival in interest by investors.

Over the last five years, Thailand's gold trading structure has shifted markedly to gold bars from gold ornaments. Gold bars currently make up 80-90% of daily gold trading at outlets.

The gold rush has gripped Yaowarat, the centre of local trading. In mid-August, long queues formed as investors waited to buy after the price fell to an eight-month low of 12,850 baht.

However, only a few people could get gold on the spot, as shops ran out of stocks of bars, prompting several to issue purchase tickets.

The ticket solution alarmed the Internal Trade Department, which threatened to place gold on its price-control unless legal questions about tickets and their validity could be resolved.

The department has since backtracked from its proposal, as traders pledged to work out measures to regulate trading.

To accommodate growing demand by large investors, the Thailand Futures Exchange is preparing to offer gold futures trading but not until next year. The TFEX had hoped to start trading on Sept 22 but now says more time is needed to educate investors.

Gold futures contracts are settled in cash, not physical gold.

The Gold Traders Association has proposed that the TFEX double the size of its standard contract to 100 baht-weight (1.5 kg) to guard against retail investors gambling on prices.

However, SET president Patareeya Benjapolchai insisted contract sizes would not change as retail investors deserved a chance to participate.

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