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29 March 2024

Investors turn to currency, gold

Published
By Vicky Kapur

Even as trading volumes on local stock exchanges hit new lows this summer, investors are focusing their liquidity on foreign exchange and bullion trading as key currencies continue to fluctuate widely and precious metals make new lifetime highs in the wake of Euro Zone debt crisis and global growth concerns.

“Institutional, corporate, professional and retail investors in the region are increasing their exposure to foreign exchange and commodities both for hedging and speculation,” Philippe Ghanem, Managing Director of ADS Securities, an Abu Dhabi-based brokerage and trade services provider, told Emirates 24|7.

The Dubai Gold and Commodities Exchange (DGCX), for instance, today announced that by the end of last week, year-to-date volumes reached more than 2m contracts, valued at $98.7 billion, a 76 per cent increase from last year. The DGCX also announced that its average daily volumes YTD have gone up by 67 per cent to touch 12,963 contracts this year.

“In forex and bullion, we have seen an increase in trading year-on-year because both the asset classes provide the level of liquidity and growth that investors are looking for. In these product groups, volatility has had a limited impact on the investor’s confidence and decisions,” said Ghanem.

On the other hand, daily average turnover on the Dubai Financial Market (DFM) has gone down to $43.48m this year so far, down from $87.49m during the same period last year. The decline on Abu Dhabi Exchange (ADX) has been more muted this year, from $35.66m last year (until August 15) to $31m this year YTD.

However, the decline looks much worse when looked at in perspective – compared with 2009 and 2008, when the average daily turnover on the DFM stood at $190.24m and $336.65m, respectively, the turnover this year is down 77 and 87 per cent, respectively. On the ADX, the average daily turnover in 2009 was $76m, and in 2008 it was $255m.

“The UAE markets have reacted in similar ways to other global markets. Investors have become more risk-averse, and more analytical in their approach. They are looking for investments and investment opportunities which will not just provide them with the returns they want, but also offer the desired level of flexibility and liquidity,” said Ghanem, whose company recently signed an agreement with global banking leaders Goldman Sachs and BNP Paribas to provide FX prime brokerage solutions on its trading platform.

“Trading FX and commodities gives access to liquidity and offers investors an alternative to a traditional equities based portfolio. Recent market volatility and fluctuating global economics have resulted in an increased trading in these areas,” added Ghanem.

According to the DGCX, its currency contracts, in particular the Indian Rupee/Dollar contracts, are the key drivers of the exchange’s volumes, with Indian Rupee year-to-date volume reaching 1,356,993 contracts – a 1331 per cent increase from last year. Precious metals also witnessed increased interest and participation, with YTD volume touching 328,856, up by 1 per cent.

The trend is global. “Gold has dominated markets’ attention in the past few weeks, as is clearly evident from large inflows. From 15 July to 15 August, gold ETF inflows totalled $4.95bn (4.5 per cent of total assets under management),” said Standard Chartered Bank's Koun-Ken Lee in a research note issued today.

“One of the clear trends that we have been witnessing now is the increase in the prices of gold and silver, with investors looking for tangible commodities to diversify their portfolios,” Ghanem said. “The development of commodity trading has been well documented and has been mirrored by the yearly increase in the levels of forex trading,” he said.

“Both provide liquidity and diversification for regional and international investors. We are also seeing that clients are now looking for more from their brokers. They want a very professional approach with excellent customer service, so that they feel that they are in a position to maximise their returns,” he added, explaining the changing client expectations in the new normal.

“Since 2007, we have seen an increased level of interest and trading in FX and commodity asset classes. Unlike the traditional stocks, these asset classes did not experience a dip in trading, which is why there is so much interest in diversifying portfolios through trading in Forex and commodities. The risk appetite of traders has changed. Traders are now more cautious in their approach and are looking for a high quality trading platform with excellent levels of service.”