Trading and Investing in Gold Picks Up in the Japanese Market

The Japanese market has seen an increase in gold trading and investment, establishing itself as a major player in the world gold market. The market has grown as a result of a variety of investment opportunities, including holding actual gold and gold-related financial instruments like futures and exchange-traded funds (ETFs). In the past, physical gold has mostly been exchanged on negotiated spot markets in London, New York, and Switzerland amongst market participants, including central banks. However, gold is actively traded as a financial instrument on a global scale through the use of ETFs, mutual funds, futures, and contracts for difference (CFDs), which promotes commodity trading and cross-market arbitrage. As of 2023, the Japanese market ranks sixth globally in terms of trading volume on the Osaka Exchange (OSE), where gold futures trading was first introduced in 1982. After illustrious exchanges like the NYMEX and the Shanghai Futures Exchange (SHFE), Japan now ranks among the largest global open futures markets.

The Supply and Demand of Gold

Up until China surpassed South Africa as the world’s leading producer of gold in 2007, South Africa retained the top spot in terms of supply. On the demand side, over 75% of the world’s demand for gold comes from jewelry and investments, with the remaining 10% coming from industry. Notably, almost 50% of the world’s gold demand is accounted for by China and India combined due to their high passion for jewelry.

Source: Metals Focus, Refinitiv GFMS, ICE Benchmark Administration, World Gold Council
The 1990s saw a high in gold demand on the Japanese market from retail and individual investors. According to the World Gold Council (WGC), the year 1986 saw the largest demand, topping 500 tons, in part because of the unique demand effect brought on by commemorative coins marking the 60th anniversary of Emperor Hirohito’s rule. However, real gold has continued to be a popular investment choice for jewelry and coins among retail investors since that time, just as investing through ETFs has done in recent years.

Gold Prices

Supply and demand dynamics, world events that cause safe-haven buying (commonly referred to as “gold for contingency”), monetary policy trends like interest rate hikes, and central banks’ holdings as part of their foreign exchange reserves are some of the factors that affect the price of gold.

Central Bank Gold Reserves

The predicted 35,700 metric tonnes or 20% of the total world gold reserves held by central banks as of March 2023 will have a substantial impact on the gold market. In reaction to the current geopolitical and economic threats, central banks in emerging economies, particularly those of the BRIC countries, have been boosting their gold purchases.

Japanese Markets for Gold Investments

Retail investors in Japan have been the primary driver behind active trade in physical gold since the deregulation of gold exports in April 1978. The retail and institutional markets saw a considerable increase in investors after the launch of gold futures in 1982 and the appearance of new investment choices including ETFs in the 2000s. The parent business of the OSE, the Japan Exchange Group (JPX), provides a variety of such gold-related investment products, such as gold futures contracts and exchange-traded funds (ETFs) with gold as the main underlying asset.

ETFs With the debut of the first gold-based ETF on the Tokyo Stock Exchange (TSE) in 2007, ETFs became a well-liked investment choice. There are four gold-related ETFs available as of July 2023. Pension funds, individual investors, and other groups who have in the past been reluctant to invest in real gold due to storage difficulties can all find a solution in these ETFs. The rising popularity of alternative investments has significantly increased the net asset value (Asset Under Management) of gold-related ETFs, especially in the 2020s.

Futures on gold

Since its debut in 1982, gold futures trading has also been a significant component of the Japanese market. Japanese gold futures were initially priced at JPY 2,641 per gram, and on June 19, 2023, the price of the Gold Standard Futures temporarily hit a record high of JPY 8,915 per gram. This astounding accomplishment can be partly ascribed to the weakening of the yen versus the US dollar and the persistently high price of gold on the world market. This pattern is anticipated to continue, helping the OSE’s growth as demand for gold as a safe-haven asset rises. As of June 2023, the market had indeed experienced a resurgence that had attracted the interest of both domestic and foreign investors, as the open interest (OI) balance had gone back to the 50,000 contracts level and the average daily volume (ADV) had remained constant at the 30,000 contracts level.

With nearly 70% of the market share held by foreign investors, the Japanese gold futures market stands out for this factor. Foreign investors are highly engaged in market-to-market arbitrage trades. Notably, retail investors account for more than 20% of the market, demonstrating the size and historical importance of the domestic retail investor base.

Japanese gold futures are priced in yen and have seen increases in both the price of gold globally as well as the value of the yen relative to the US dollar.ъ

Specs for Gold Futures

Because they differ from those traded on COMEX and other exchanges, the specifications of OSE gold futures are noteworthy. The OSE uses kilograms as the trading unit rather than troy ounces, and its gold futures contracts, including the Gold Standard Futures, are one-third the size of COMEX Gold Futures contracts. This distinction highlights how retail investors have traditionally dominated the Japanese market. The most liquid futures contract on the OSE, the Gold Standard Futures, can be settled through the physical delivery of gold bullions that are at least 99.99% pure. The entire annual delivery volume under the contract is 2,423 kg. On the Japanese market, there are more gold futures contracts outside the Gold Standard Futures. These include Gold Rolling-Spot Future contracts (also known as a gold contract day) with no settlement deadline and Gold Futures Mini contracts (with a trade size of 1/10th and cash settlement). These numerous gold futures products have found favor with retail investors, which has resulted in a steady rise in trading volumes.

The concentration of activity in the forward contract month is another characteristic shared by these Japanese commodities futures markets. The furthest contract month sees about 90% of trade and 60% of open interest (OI) in Gold Standard Futures. This concentration reflects the market’s historical sway over domestic individual investors. Interestingly, the most liquid contract month for OSE platinum futures is the sixth one; this is a trend seen across all commodity futures traded in Japan.

Due to rising geopolitical tensions, changing interest rate trends, and the active participation of domestic and foreign investors in the Japanese gold ETF and derivatives markets, trading volumes in gold investments are increasing globally. The OSE is still committed to growing the market and providing ample market liquidity to support a variety of transactions.

Get back to Seikum News 🤓

Latest Posts

September 25, 2023

What should investors do if the market is sending them conflicting signals?

What should investors do if the market is sending them conflicting signals? During the morning hours of yesterday, before the flurry of market activity began, I penned an article highlighting the underlying weakness in the weekly unemployment claims number. It was apparent that the market’s initial positive reaction to this seemingly favorable figure was short-lived, […]

September 11, 2023

Daily Markets: August CPI tomorrow, Apple today

Market Recap Today Equity markets across the Asia-Pacific region concluded the day with a mix of outcomes. China’s Shanghai Composite recorded a slight 0.18% decline, while Hong Kong’s Hang Seng slipped 0.39%, and South Korea’s KOSPI closed 0.79% lower, primarily driven by declines in Commercial and Industrial Services sectors. On the positive side, India’s SENSEX […]

September 11, 2023

Two Stocks to Buy Now and Hold for Five or More Years

Adopting a strategy of purchasing and holding stocks for an extended period, ideally five years or more, proves to be a highly effective approach for accumulating wealth, as stocks have consistently demonstrated their status as one of the highest-yielding asset classes over the long haul. However, for investors committed to the long-term perspective, the key […]

September 8, 2023

Worldwide crude oil Inventory declines could pave the way for more volatile and expensive goods

Crude oil futures surged on Tuesday, reaching their highest point in eight months, buoyed by an overall positive sentiment in the markets. Simultaneously, Saudi Arabia and Russia announced their commitment to extending voluntary cuts in oil production through the year’s end. Intermonth spreads saw an increase compared to the previous week, with the JPX Dubai […]