By Kazim Alam, The Express Tribune
KARACHI: Anyone who has ever bought gold from the Saraf bazaar – the traditional gold market – knows how helplessly uncertain they feel in most cases about its quality and whether it is going to fetch an equivalent amount of money should the need arise to sell the gold.
Moreover, while small investors are increasingly reluctant to keep gold in their possession due to security concerns, institutional investors in Pakistan have practically been barred from investing in bullion due to lack of standardisation in traditional gold trading.
“The investment horizon was limited to stocks and real estate in Pakistan until the establishment of the Pakistan Mercantile Exchange (PMEX). For institutional investors, the option of investing in gold never existed because they could not simply buy it from spot markets on a cash basis,” said Amjad Khan, acting managing director of PMEX, while speaking to The Express Tribune.
Established in 2007 as a demutualised exchange, PMEX has 325 members and 77 active brokers. Up to 45% of the total traded value of Rs1.16 trillion on the country’s only electronic commodities exchange in 2012 was in gold alone, according to PMEX Head of Marketing and Business Development Raeda Latif.
Besides gold, PMEX currently lists silver, crude oil, palm oil, rice, wheat, sugar and Karachi interbank offer rates (Kibor) futures contracts.
Khan says he expects further growth in traded value in 2013, as institutional investors will participate more actively through asset management companies, which have recently been allowed by the Securities and Exchange Commission of Pakistan to launch commodity-specific mutual funds.
Other than mutual funds, Khan says the upcoming listings of currency and Shariah-compliant contracts are also going to boost traded value in the current year.
“Besides targeting corporate clients, we strongly encourage retail investors to invest in gold through the exchange,” Khan notes. It involves little handling of cash while gold stays 100% insured in the secured vaults of PMEX.
According to PMEX Chief Business Officer Sahibzada Mansoor Ali, the banking sector is closely involved in bullion trading in many countries of the world – such as India, China, Iran and Turkey – by acting as the primary liquidity provider. “Unfortunately, banks were never involved in bullion trading in Pakistan, which has resulted in underdeveloped infrastructure as far as safe custody, vaults and purity testing systems for gold are concerned,” he observes.
PMEX gold bars are imported from selected refineries, which produce bullion that is up to Dubai’s gold standard. “We do not accept gold that people keep in their homes because we do not maintain independent testing facilities,” he says.
Citing recent incidents of burglaries in Karachi’s Saraf market, Ali says the exchange becomes the legal counterparty to every trade that is done through the PMEX. “The exchange is buyer to the seller, and seller to the buyer, in every trade,” he says.
Moreover, traditional trading involving forward delivery is invariably bilateral in nature where both parties are exposed to risk. “In such cases, one party almost always ends up losing money because of price movements, which gives it an incentive to default. On the contrary, the exchange guarantees the settlement of every trade regardless of any party’s default,” he says.
He adds small investors should use the exchange as a platform to buy gold for hedging against inflation along with wealth and savings protection. “They can purchase gold when they have liquidity, keep it safe in PMEX’s custody, and withdraw their gold bars whenever they want,” he says.
In case of a withdrawal request, PMEX provides the broker concerned with gold bars, who delivers it to the retail investor.
“Physical gold exists in equal measure (of traded value) in our vaults. We deliver it in your account the day your trade is settled,” he says. “When you need cash, you can sell your gold using your computer terminal and receive cash in your account with little risk of theft or cheating.”
Published in The Express Tribune, February 10, 2013.