Singapore Seeks Gold-Hub Role With Shanghai as Demand Shifts

Jun 25, 2014 8:23 am ET

(Updates prices in fifth paragraph.)

June 25 (Bloomberg) -- Singapore will introduce a physical gold contract this year, while Shanghai starts international bullion trading, highlighting a push in the biggest consuming region to establish new price benchmarks as demand shifts east.

Singapore’s kilobar contract for 25 kilograms of 99.99 percent purity may begin as soon as September, according to a statement from Singapore Exchange Ltd., the World Gold Council, the government’s trade-promotion body and the Singapore Bullion Market Association at an industry conference. The Shanghai Gold Exchange plans to start its contract priced and settled in yuan in the third quarter, Chairman Xu Luode told the same gathering.

Asian exchanges are developing bullion products as more of the world’s gold is processed and consumed in the region and the industry discusses changes to the century-old fixing benchmark in London. Asia accounted for 63 percent of total consumption of gold jewelry, bars and coins last year, up from 57 percent in 2010, according to the council, which plans to hold a meeting next month on changes to the fixing. China became the world’s largest user last year, boosting consumption as prices fell.

“The center of the world for gold consumption is Asia, so it makes sense that the center of price discovery for the physical market moves that way,” said Victor Thianpiriya, an analyst at Australia & New Zealand Banking Group Ltd. “It’s only going to be positive for Asian gold demand.”

Gold for immediate delivery sank 28 percent last year, spurring demand across the region, as prospects for global growth and higher U.S. interest rates reduced the appeal of the metal as a store of value. The spot price was at $1,315.98 an ounce at 8:21 p.m. in Singapore, up 9.5 percent this year.

Metals Center

The Singapore government is promoting the city-state as a center for precious metals after removing the 7 percent goods and services tax on investment-grade gold, silver and platinum in October 2012. After the change, the trade in gold in Singapore rose 94 percent to S$35 billion ($28 billion) in 2013 from a year earlier, the groups, including IE Singapore, the trade-promotion agency, said in today’s statement.

Shanghai is aiming to become a regional bullion-trading hub, luring foreigners with services such as 1,500 metric ton storage vaults and access into the world’s largest physical-gold market, Xu said at the conference. The exchange has all the systems ready to start the platform in the city’s free-trade zone, including clearing and settlement, said Xu.

“We want Shanghai to be an offshore gold-trading hub after consulting with foreign banks,” said Xu. “Bullion flowing into those 1,500-ton vaults can be either imported into China, or en route to be transported to other markets around this region.”

Testing Ground

China started the zone in Shanghai this year as a testing ground for liberalizing interest rates and currency usage. Foreigners’ access to China’s gold market will expand the range of investment options for yuan deposits around the world, which reached at least 1.5 trillion yuan ($241 billion) in March, according to Standard Chartered Plc estimates as of last month.

About 30 percent to 40 percent of new bullion demand comes from the so-called kilobar market, Ng Cheng Thye, chairman of the Singapore Bullion Market Association, told the conference in Singapore. The kilobar market is currently priced off the London fixing, which is under scrutiny, said Ng.

The Singapore contract, which will have no price limits, will trade from 8:30 a.m. to 11:25 a.m. local time, with additional 5-minute, pre-opening and pre-closing sessions, according to the statement. The Singapore Exchange will act as the central clearing house, Trade Minister Lim said.

Reference Prices

“This is a timely development given the increased requirements for reference prices to be transparent,” Lim told the conference, which was organized by the London Bullion Market Association. “What the bullion industry needs most is a vibrant and robust marketplace within the heart of Asia. With our close proximity to both demand and supply in Asia, I believe that Singapore is well-placed to support the bullion industry.”

Metalor Technologies SA is in the final stage of getting good-delivery certification from the London Bullion Market Association for its new gold refinery in Singapore, Chairman Scott Morrison said at the conference. The city-state was chosen as the site for the plant, which will also produce silver, because of its location between China and India, he said. The countries are the world’s largest consumers.

The flow of bullion from west to east may last for 20 years, said Zhang Bingnan, vice chairman and general-secretary of the China Gold Association. There are not as many investment vehicles in the east compared with the west, so as incomes rise bullion demand will continue, Zhang said at the conference.

Regulatory Scrutiny

Precious metals are getting more attention from regulators after price rigging in everything from interbank lending rates to currencies led to fines and overhauled financial benchmarks. The U.K.’s Financial Conduct Authority in May fined Barclays Plc after a trader sought to influence the gold fix in 2012.

A new gold mechanism or changes to the current procedure should be based on executed trades rather than submitted quotes, be tradeable and not just a reference price, while data should be transparent, published and subject to audit, the producer- funded World Gold Council said last week. It will hold a meeting on July 7 in London for the industry to discuss changes.