RBI rule pushes up gold hedging on commexes

For instance,one of the smelters hedges its total bullion output on the bourse.

Mumbai: The RBI circular of March 12, 2018, which removed gold from the list of eligible commodities whose price risk could be hedged overseas has begun yielding fruit. The total gold futures contracts’ open interest, or outstanding buy-sell positions, on MCXNSE 0.86 % hit a five-and-a-half year high of 24.97 tonnes intraday on Tuesday. The previous high of around 25 tonnes was on July 29,2013.

The circular, which took effect on April 1, 2018, meant that big,listed gold jewellers and refiners and copper smelters, who derive gold as a by-product of copper concentrate refining, would perforce have to hedge gold price risk on domestic commodity bourses against doing so on the Comex,one of the four exchanges that make up the CME group. Market participants said the idea behind excluding gold from the eligible list was to reduce forex outflow. The plus for MCX is that copper refiners have begun to hedge their bullion output on its platform.For instance,one of the smelters hedges its total bullion output on the bourse. Also, with the introduction of GST on July 1, 2017, small jewellers have begun to hedge their raw material price risk on MCX, brokers said. “The RBI circular has meant that smelters, listed jewellers and big gold refiners now have to hedge their bullion exposure on domestic exchanges, which, in turn, deepens the market,” said Kishore Narne, associate director at Motilal Oswal Financial Services. “Earlier, these constituents hedged their exposure on CME group.”

Gold futures contracts accounted for around 13 per cent of the Rs 25,395 crore average daily turnover of MCX in the fiscal year through February 2018.

Gnanasekar Thiagarajan, director, Commtrendz, said domestic hedging activity on gold had picked up post RBI’s circular. He said in a volatile gold price environment, hedging was imperative. Hedging is a practice of a genuine commodity user taking exposure to a futures or forward contract to offset its price risk.

Courtesy- ET