Volume figures from the Pakistan Mercantile Exchange show how trading activity is distributed among its contracts. The Pakistan Mercantile Exchange operates under the supervision of the Securities and Exchange Commission of Pakistan. It offers contracts for different commodities and other approved products, although trading activity may be higher in certain contracts. Gold and crude oil are among the commodities that attract traders, partly because their prices are affected by inflation, exchange rates, and developments in international markets.
Gold carries an obvious cultural weight. Many households in Pakistan have measured savings in tolas for generations, buying jewelry for weddings and sometimes treating bullion as protection against inflation and currency weakness. PMEX offers contracts linked to international gold prices in several lot sizes, including smaller contracts that may be accessible to eligible retail traders. For traders familiar with physical gold, moving from physical gold to exchange contracts may seem familiar, since the underlying asset is already familiar and its price is followed closely in local news. For these traders, futures trading provides another way to follow gold prices without purchasing physical bullion.
Crude oil appeals for different reasons. OPEC’s decisions on crude oil production can sometimes be followed by price changes, as can the release of oil inventory data by the United States. Political issues in oil-producing countries can also impact prices. Some traders keep an eye on these developments, since they are interested in short-term price changes. In cash-settled crude oil futures, traders are not required to take or deliver crude oil, but rather are paid or delivered the “cash” amount, which represents the difference in price of the futures contract and the current spot price. PMEX also conducts evening trading sessions which coincide with the US market hours, allowing daytime workers to trade.
PMEX has a few of its contracts open for trading out of the day. This allows the traders from Pakistan to keep a watch on the price changes in the international markets, especially when trading is happening in London and New York. All traders need to be aware of the developments in other countries as well since the events outside Pakistan have an impact on gold and oil prices. All deposits into trading accounts, margin payments and settlements are still made in local arrangements. Some traders may prefer using PMEX because it operates under Pakistani regulations and works with local banks. Agricultural and local contracts may attract less activity than internationally traded commodities. Products tied to commodities such as cotton or wheat would seem relevant in an economy so dependent on farming, but liquidity in some of these instruments may be limited. There are still some farmers and mills who enter agreements directly with buyers or through middle men in selling their products. They might not want to purchase exchange contracts since they have already had experience with such arrangements. With less volume of regular trading, there may not be enough volume to draw in other traders. This is because it makes it more difficult for agricultural contracts to create an active market where farmers, businesses and financial traders can participate.
Leverage can be a surprise for novice participants. Margin requirements enable traders to buy a much bigger position with a relatively small amount of money, meaning that a large decline in crude or a sharp surge in gold’s price during a geopolitical crisis can result in significant losses within mere hours. For new clients, overnight risk may be underestimated, especially if the big announcements are made outside of the local daytime. Traders can learn the concept of futures settlement, size of positions and margin calls to control the risk of futures trading.
Gold and crude oil may continue to attract interest, since gold and oil sit so close to Pakistan’s everyday concerns about prices and the currency. Broader participation across other products would require patient work on liquidity and education, and until that arrives, international commodity contracts may continue to attract greater futures trading activity than some domestic agricultural products.
