Shanghai, Singapore, HK bid to break London grip on gold trading

ASIANS buy most of the world’s gold, but nearly all of it trades in London. Now, with Western investors souring on the metal, the region is making a bid for some of the action.

Three big financial hubs in Asia are separately launching trading in a gold contract, each backed with physical gold.

If they draw enough investors, the contracts could influence the price of gold, which is set by a daily fix in London.

“You now have a market that’s driven by Asia,” says Catherine Raw, who manages BlackRock’s $US7 billion global mining fund.

The Shanghai Gold Exchange was launched in September inside the city’s free-trade zone, offering yuan-denominated contracts backed by gold held in Shanghai.

This week, Singapore will offer its own contract, and later this year, CME Group, which operates exchanges in Chicago and New York, plans to start a US dollar-denominated contract in Hong Kong.

In the US and Europe, gold is often bought as a hedge against higher consumer prices. But with few signs of inflation, the price of gold has fallen 10 per cent since March and is down by a third since the end of 2012.

Holdings by gold-backed exchange-traded funds fell to 53.5 million ounces in October, the lowest level in five years, according to US-based ETF Securities.

In Asia, where the metal remains popular as a store of wealth, demand for gold jewellery, bars and coins is robust. The World Gold Council, an industry body, says demand in China rose to almost 1300 tonnes in 2013, up 160 per cent from five years ago, although it expects demand to be flat this year. In India, buying was 50 per cent higher over the same period at 975 tonnes.

Two-thirds of global gold purchases come from Asia, the World Gold Council says. Still, many observers say Asia is likely to find it a hard task to unseat London as the world’s centre for gold trading. A major reason: China bans the export of gold bullion, arguing its huge domestic production is needed to meet local demand.

That means gold can flow into China when prices there are above those set in London, but cannot move the other way. Beijing’s strict controls also limit movement of capital.

“Any desire by China to establish a price benchmark which is not London-based is impaired by these restrictions,” said Ryan Case, Brisbane-based head of institutional sales for bullion­capital.com, a gold exchange.

London has dominated the trade in physical bullion for more than 300 years. Vaults in the city, including one under the Bank of England, house 7500 tonnes of gold, according to the London Bullion Market Association. Since 1919, prices have been set in the city by a twice-daily conference call among four banks: Barclays, HSBC, Bank of Nova Scotia and Societe Generale.

Trade in gold futures — agreements to buy or sell the metal at a specified price on a predetermined date — is dominated by the Comex division of the New York Mercantile Exchange. The contracts in Shanghai and Singapore are backed by physical trade in gold, while Hong Kong’s plans are for a futures contract.

Efforts in the past by Asia to set local gold prices haven’t been successful. In 2010, the Singapore Exchange offered a gold contract but later withdrew it amid poor investor appetite.

“The greater prominence of prices out of Asia can only enhance the mix, but I doubt within the next couple of years that it will fundamentally change the way spot prices are derived,” said Ross Norman, chief executive of Sharps Pixley, a London-based bullion broker.