Ending decades of regulations limiting gold trade in Thailand to the baht, the US dollar will now be allowed as well. 2 weeks ago, in a bid to slow the rapidly rising baht and avoid landing on the US list of “currency manipulators”, the Bank of Thailand announced a policy to allow trading gold products in US dollars. Market players say the central bank will consider dollar-denominated trade for foreign-related capital market products in the near future. A source familiar with capital markets said:
“The investment world has changed. Domestic investment alone is not suitable and diversifying overseas is better. Thais should be gradually educated about foreign exchange risk. Relaxing rules and letting people open foreign currency deposit accounts freely is one measure to help people understand risk related to foreign asset investment.
The Thailand Futures Exchange and the Stock Exchange of Thailand have long requested permission from the Bank of Thailand to trade foreign-related products like gold online futures, oil futures and foreign equity products in US dollars, but it was denied because the Currency Act of 1958 mandates that trading goods and services in Thailand must be conducted in baht.
A former regulator at the central bank, speaking on condition of anonymity, said gold trading is speculative and does not create economic value, but with the right implementation, trading gold or assets in foreign currency terms could be a good risk management tool.
“I understand the central bank’s purpose in allowing trade of gold in dollars because gold imports and exports could disrupt the trade balance and the exchange rate. It would be better if the impact of exchange rates is separated from gold import/exports.”
He says currencies and interest rates are quite complicated and traded among big players, thus trading gold in dollars will be more advantageous for those with high net worth.
Trading gold in dollars may take a few years of adjustment, he added.
MTS Gold Futures’s CEO says it could take a few tries until the market adjusts as the structure of the gold business in Thailand has many moving parts: customers, gold retailers, gold exporter/importers, and commercial banks, which offer currency exchange and FCD.
“The current infrastructure is not ready yet. How can people trade gold in dollars if they lack a dollar currency account?”
Few Thais own FCD accounts and if they are not exporter/importers and want to have US dollars, they have to go to bank branches to exchange baht for dollars and bring ID cards or documents related to travelling overseas.
Domestic gold buyers are divided into 2 types: collectors who are willing to buy gold and hold it (like retail investors buying corporate bonds for interest return to hold to maturity), and gold speculators who trade in the short term for profit.
“Most speculators deal in daily domestic bullion trade, where someone trades gold in the global marketplace in dollar terms. Those unfamiliar with exchange rate risk trade derivatives of gold online futures on TFEX.”
Collectors prefer to buy physical gold to collect as individual reserves for a long time (sometimes decades or even generations). When the economy tanks or the price hits a high point, they sell their reserves. Then businesses export excess gold, bringing money into the country.
“Thais accumulate gold in individual reserves for many decades. This is a unique mechanical difference from the other countries. Most Thais love to accumulate physical gold in their personal reserve.”
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