Arthur Buchner: Head of Derivatives, BoE Securities

MONEYWEB, BY BRUCE WHITFIELD, 19 JULY 2002

BROADCAST TRANSCRIPT: Arthur Buchner, head of derivatives at BoE Securities, joins us now. Arthur, the JSE has just re-introduced gold futures. What is a gold future?

ARTHUR BUCHNER: They were in existence up until about four years ago but, with the consolidation in the gold industry where we had 15 gold stocks, the actual index dropped to such an extent that, whenever you used to trade in it, you used to cross quite a big percentage spread. With the bull run in gold markets itself, the index has now moved to around 3000 and so the JSE have re-introduced it because people are looking at other ways to gear themselves in gold. We have warrants, which guys gear themselves in, but warrants have the problem of volatility, and volatility is exceptionally high at the moment. So to buy it, if volatility comes down, you are going to lose on the gold coming back and on the volatility. Whereas on the future you basically are buying something worth, let’s say, R300,000 and you are putting down a deposit of R30,000 to get that access.

MONEYWEB: And do you take a bet on which way the gold price has to go?

ARTHUR BUCHNER: Correct. The one thing to remember with futures is that for every loser, there’s a winner. And for every winner, there’s a loser. It’s not like in the case of a share, where you buy and it goes up, and you sell and for the next person it goes up some more, and he makes money and you lose. If you sell a gold future and the market moves up, you lose money. If you sell a gold future and the market moves down, you make money, but someone else is on the other side. For every buyer, there is a seller.

MONEYWEB: But we’ve seen the gold index go from something like 700 or 800 two years ago to it’s current level above 3000. It seems as if this re-introducing gold futures has come a little bit too late?

ARTHUR BUCHNER: I used to be a very bad gold bull, and I used to always say gold didn’t have any fundamental value, essentially. And if I look at the fundamentals now, they have changed certainly. People will come out, your pessimists, and say that we always bring out a product as soon as it’s at the top of the market. The newspapers, if they say to you, start buying gold, it’s at the top of the market, well, you can also short a future, you don’t have to buy.

MONEYWEB: But is that what you think most investors would be doing now, is actually shorting gold? Where is it headed?

ARTHUR BUCHNER: Yes, I think if you look at the break of the dollar, the key break of that one to parity to the euro, that has brought in a lot of gold bulls. People are pulling money out of US equities, they’ve got to put it somewhere. The mutual funds have to put it somewhere. There’s not that much that you can put into government bonds and if you are earning 1% in the US, is it worth it? So let’s go for gold, let’s go for resources, that’s why they are doing it. If it’s the top of the market, well, that’s for everyone else to find out later, and we will all be crying in our milk if it is.

MONEYWEB: But you could use spreads, for example, to take a position on the dollar gold price? Why would you use futures, instead of something like spreads, for example?

ARTHUR BUCHNER: On the spread market, the doubles are quite wide. As a percentage, you are looking at something like 2% to get in and out, whereas on the gold futures, you are looking at something around .7% to 1%. So if you had to go and, let’s say, trade in the market and buy Gold Fields, you would pay your brokerage, which would amount to about 1.5% in and out. On a future, you only are looking at about .7% in and out.

MONEYWEB: A lot of people, I am told, are getting a bit bored with the warrants market. The costs are quite high and it’s not somewhere they would like to be ? do you see private clients moving into the futures side rather?

ARTHUR BUCHNER: Definitely. On the singles stock futures, there has been exponential growth over the last two to three months, and I think the gold just adds another dimension. And people are always looking for something new to put their money into. As I said to you, with warrants, the volatility is very high. If gold has to now start to fall off, or volatility has to start to die down, you are going to lose on the volatility and you are going to lose on the directional play. Whereas in futures, you’ve got one play direction.

MONEYWEB: Arthur Buchner is the head of derivatives at BoE Securities.

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