Trading Gold Futures On The Tfex

[gregb]

So, it finally happened. Somehow my wife got a hold of some marketing material from Ausiris on gold futures. She is intent on trying her hand at this. I wouldn't mind putting up a small amount of money both in the interest of maintaining marital bliss and to get an education on how the other half lives. I like holding the nice shiny metal in my hand, but I can understand the lure of higher returns through the magic of paper.

If we do this, it looks like the current performance bond is 67,000 baht for a 50 baht gold contract. So I'm thinking maybe put 150k at risk for 2 contracts, likely December delivery. This is completely a learning experience though. I have no experience doing this, and my wife has less. I'll leave it as an exercise for the reader to figure out how you can have less than none.

My big fear is of course a 2008 style event, which I have to admit to having some trepidation about at the moment. Things are feeling eerily similar, only worse. When researching how to protect myself against a devastating collapse in the price, everyone seems to recommend options. Unfortunately, I haven't been able to find options mentioned anywhere on the TFEX.

Does the TFEX currently do options contracts? If not, is there another trading strategy that an inexperienced investor can use on the TFEX? I don't mind getting a margin call, but I don't want to suddenly find my account balance negative after a $100 single day collapse in the gold price.

Any other advice? There is no way I want to let my wife go in and apply for this with all the negotiations done in Thai and my understanding of what is happening limited at best. Is there anything that I should be aware of before doing this? Can someone give me an example of how the whole thing works and the charges to watch out for?

Historically, how close do the contracts on the TFEX track the price of gold? Do they actually match up on the delivery date? Is there anywhere I can get this data? Is there any practical difference between 10 x 10 baht contracts and 2 x 50 baht contracts, other than the fee charged per contract?

Thanks for any assistance. In case anyone is curious, my bet is $2300/oz. for December. If that turns out to be in the ballpark, it would be around 600k return on a 150k investment. If this turns into 2008 though, I just want to make sure I'm not completely wiped out.

[cloudhopper]

Choke dee gregb I will be interested to see how this strategy works out but attempting to predict non linear behavior just seems like gambling to me...

[gregb]

Choke dee gregb I will be interested to see how this strategy works out but attempting to predict non linear behavior just seems like gambling to me...

Of course it's gambling, which is why I've never done it before, and why I'm asking for help from those who are alot smarter than me. But my wife wants to take a risk, I'm curious myself, and it's money I can afford to lose if that is what fate has in store. The economy is terribly unstable right now, but it's still probably better odds than you'd get at the casino in Poipet.

Anyone have suggestions on how I can protect myself on the TFEX in the event gold does a swan dive off a cliff?

[12DrinkMore]

Just buy her six Bahts of the shiny stuff.

Even if the price drops to 5,000 Baht/Baht you still have something to hold. But most likely you'll have a modest profit.

What is your maximum loss on the two contracts? Is it just the premium or are you leveraged for more if the gold price does not reach the target? Never forget that on the other side of the contract is a counter party also looking to make money on this deal.

You have admitted inexperience. Therefore you are betting at a table with experienced professionals and the odds against you.

I would never, ever, make an uninformed speculative bet, I will never be fantastically rich, but I'm not going to be heading to the temple for a handout either.

But some people need the "excitement" and stress, and presumably also the hangover of the loss as well. Apropos make sure that your wife has an equivalent amount of "skin in the game" if you do take the bet. You might find her enthusiasm falls off if she stands to lose personally.......

Up to you, as they say

But I would do a lot of homework first.

[rakman]

If you've never done it, buy some real gold.

You can get trashed in a hurry.

Learn about the process, maybe try a cheaper metal first.

But, when the common man jumps in, its time to jump out.

I'm wondering when the gold bubble bursts..

[fletchsmile]

I'd suggest you do some homework on the internet on learning how "futures" and "options" work. Pass the info to the missus. If she can't understand it stay away.

Then for someone who is a novice buying options is the safest place to start(either "put" if you think price will fall or "call" if you think price will rise). Here the risk is limited to the option premium you pay. You can lose that and nothing more. This would at least get her interested and familiar with the market.

If you sell (also referred to as "write") naked options, or if you buy futures or sell futures, in each of these 3 cases you can lose much more than your initial stake.

[gregb]

I'd suggest you do some homework on the internet on learning how "futures" and "options" work. Pass the info to the missus. If she can't understand it stay away.

Then for someone who is a novice buying options is the safest place to start(either "put" if you think price will fall or "call" if you think price will rise). Here the risk is limited to the option premium you pay. You can lose that and nothing more. This would at least get her interested and familiar with the market.

If you sell (also referred to as "write") naked options, or if you buy futures or sell futures, in each of these 3 cases you can lose much more than your initial stake.

Do you know if options are traded on the TFEX?

Unfortunately, while there is no prohibition against Thais opening overseas brokerage accounts, it is impossible to fund them. So if she is going to play at all, she is stuck with whatever is available locally.

[fletchsmile]

Do you know if options are traded on the TFEX?

Unfortunately, while there is no prohibition against Thais opening overseas brokerage accounts, it is impossible to fund them. So if she is going to play at all, she is stuck with whatever is available locally.

I don't think TFEX does options on gold contracts. It does do gold futures, and it does do equity and index options.

The links below may be useful, as would generally browsing this website:

http://www.tfex.co.th/en/investor_corner/knowledge_OIC.html

http://marketdata.set.or.th/tfx/marketOverview.do?locale=en_US

My wife is also Thai, and our kids have dual nationality. To gain gold exposure for them I use mutual funds:

MFC International Gold Fund

TMB Gold Fund

They are both obviously doing well this year up around 28-29% each. They are somewhat safer the futures, as the funds are not leveraged. They are also reasonably convenient. Some people moan about charges. I think the initial is around 1%, which if you are expecting large shifts in prices pales in comparison to this and the convenience. TMB fund is unhedged against currencies and even gives a passbook. MFC can hedge currencies.

Key really is building up knowledge. This should be to markets, investments, economics, etc. With a good understanding of these and others she can then specialise.

[Brewster]

gregb - as an index futures trader I can shed a bit of light on the mechanics at least. If u are trading commodoties however u need to understand the supply and demand dynamics as well but thats another story...

So yes the 50 baht contract with an initial position of 1 contract will cost you 62,700 baht.

On top of whatever the broker charges (u have to use one here i see - no electronic trading access) there is an exchange and clearing fee of 50bht per contract - per side ie 100 baht for a round trip.

While the postion is open you are required to maintain a maintenance margin of 43,890 baht. If u are long and the price of gold falls - and the value of the contract falls to below 43,900 you will get that margin call. You usually get a notification sometime before that happens telling you that u r within 5 or 10% of a margin violation. In the US this is all computerised but not sure here - probaby just a phone call from the broker maybe.

The method of calculating the settlement price is a bit convoluted coz of cross rates etc but there is an 18K baht difference between the intial and maintenance margin so that is your buffer. A $100 fall in the gold price is only about 5.5 % ofthe contract value so (without doing a calculation) Im not sure that would trigger a margin call - 10% probably would though - the Daily price Limit is 10%.

I would give some serious consideration to trading the 10 baht contract. U can scale in and out - which gives u much more flexibility.

There is no practical difference between 10 x 10 small vs 2 x 5 bigs. The margin requirements will effectively be the same - the daily price fluctuations will be the same - only diff wlll be exchange costs and brokerage fees.

I would add this though...

U really need to have at least 2 or 3 times the capital minimum you are talking about. Gold could easily drop $100 > $200 from where it is now and then may well go to $2300 as u predict. Money Management is a key facet of trading. YOu will end up being right but u may well wash out before that if u get a margin call and get scared and bail as would probaby happen in that case. The idea is to have sufficient capital to negate those kind of emotive situations. Of course if u just want to have a punt and dont care if u lose or win then doesnt matter but that doesnt sound ike you?

And dont start thinking about how much money u will be making before u start. If as u say u have calculated a 450K return on a 150K investment if it goes to $2300- then that is 300% . You cannot expect that on the upside without the same being true on the downside so be prepared for it. Another reason for going with the mini contract at half the size. How will you feel if the price goes to 2150 and you are up 200% and then drops to where it is now or below? What will u do then? With more mini contracts to play with you can bracket your 5 sells around the 2200-2300 target. and scale out.

Historically, how close do the contracts on the TFEX track the price of gold?

The TFEX contract is based on the London Gold Fixing Price so it will track the London Price very closely. It is however valued in Thai baht so exchange rates will affect it.

Hope this helps.

[Brewster]

Or theres always this option ...

http://www.smh.com.au/executive-style/snack-bars-to-gold-bars-vending-machines-dispense-bullion-20110822-1j5w2.html

[gregb]

gregb - as an index futures trader I can shed a bit of light on the mechanics at least. If u are trading commodoties however u need to understand the supply and demand dynamics as well but thats another story...

So yes the 50 baht contract with an initial position of 1 contract will cost you 62,700 baht.

On top of whatever the broker charges (u have to use one here i see - no electronic trading access) there is an exchange and clearing fee of 50bht per contract - per side ie 100 baht for a round trip.

While the postion is open you are required to maintain a maintenance margin of 43,890 baht. If u are long and the price of gold falls - and the value of the contract falls to below 43,900 you will get that margin call. You usually get a notification sometime before that happens telling you that u r within 5 or 10% of a margin violation. In the US this is all computerised but not sure here - probaby just a phone call from the broker maybe.

The method of calculating the settlement price is a bit convoluted coz of cross rates etc but there is an 18K baht difference between the intial and maintenance margin so that is your buffer. A $100 fall in the gold price is only about 5.5 % ofthe contract value so (without doing a calculation) Im not sure that would trigger a margin call - 10% probably would though - the Daily price Limit is 10%.

I would give some serious consideration to trading the 10 baht contract. U can scale in and out - which gives u much more flexibility.

There is no practical difference between 10 x 10 small vs 2 x 5 bigs. The margin requirements will effectively be the same - the daily price fluctuations will be the same - only diff wlll be exchange costs and brokerage fees.

I would add this though...

U really need to have at least 2 or 3 times the capital minimum you are talking about. Gold could easily drop $100 > $200 from where it is now and then may well go to $2300 as u predict. Money Management is a key facet of trading. YOu will end up being right but u may well wash out before that if u get a margin call and get scared and bail as would probaby happen in that case. The idea is to have sufficient capital to negate those kind of emotive situations. Of course if u just want to have a punt and dont care if u lose or win then doesnt matter but that doesnt sound ike you?

And dont start thinking about how much money u will be making before u start. If as u say u have calculated a 450K return on a 150K investment if it goes to $2300- then that is 300% . You cannot expect that on the upside without the same being true on the downside so be prepared for it. Another reason for going with the mini contract at half the size. How will you feel if the price goes to 2150 and you are up 200% and then drops to where it is now or below? What will u do then? With more mini contracts to play with you can bracket your 5 sells around the 2200-2300 target. and scale out.

Historically, how close do the contracts on the TFEX track the price of gold?

The TFEX contract is based on the London Gold Fixing Price so it will track the London Price very closely. It is however valued in Thai baht so exchange rates will affect it.

Hope this helps.

Thank you very much Brewster for this detailed explanation.

As I'm sure anyone who was watching noticed, December futures got hammered today. Down 1420, almost 5%. I am still willing to bet that they will go up substantially by December based on historical performance during this period, but that kind of a hit really does make you stop and think. There is no guarantee this year is going to look like it did in previous years, and the possibility of a repeat of 2008 still has me a bit squeamish.

My wife still wants to try it though. She looks at the beating today as a good opportunity to buy. I still need to do a little more research myself before I am comfortable with this. I don't mind if I make an informed guess and lose everything, but I would hate to lose it simply because I didn't understand what I was doing.

[Brewster]

Yes that was a pretty big drop - plus another 600 after hours I see. Possibly signals a short term top has been put in. Not surprising considering the run its had - the stock market is also tryng 2 find a bottom right now and they are inversely correlated.

These huge 3 - 5% plus swings mean the volatility is at a very high level - comparable to the 2008 credit meltdown. The same swings are driving the stock and bond markets. Volatility is high because fear levels are high and while that is the case ANY negative or positive news will have an amplified effect on the markets. .

The markets have recently been pricing in a whole bunch of negative possibilities - the European sovereign debt crisis and possible default by various euro nations, a prolonged recession, the US debt ceiing debacle etc, thus the flight to gold.

IF / when these concerns are allayed - markets will consolidate and go up and gold will seem less attractive - they are inversely correlated as was seen yesterday. Must admit - these are huge global issues though and can't be solved quickly.

But the markets are down a lot - a real lot - 10-15% in a short time so its on the cards they will try and rebound at some point which means that gold could well go down more b4 it goes back up. Your (wives) strategy could well work out but u have to be aware of the macro factors as well. If the markets consolidate here and and general economic sentiment improves then golds current run might stall and go sideways for a while.

But I would think that in the current climate any historical trend will be far outweighed by the sheer fear (and greed) driving things right now.

Trading is hard enough when markets are calm let alone when they are like this.

Good luck - it will be a wild ride!!