Hong Kong begins trial operation of new gold clearing system

Hong Kong has launched the trial operation of a new gold clearing system, backed by several major banks, in a key step toward its ambition to become a significant bullion-trading hub with price-setting power.

The mechanism, which introduces a new gold price benchmark called HAU that is now live on Bloomberg, will help lay the groundwork for the city to contribute a global reference rate for the gold-trading market, Hong Kong chief executive John Lee said on Tuesday at the Hong Kong FIC & Bond Connect Summit.

“The goal, of course, is to build a highly sophisticated, institutional gold-trading market in Hong Kong,” he said. “That includes significantly strengthening our gold storage and refining facilities in the coming years.”

By launching this month – a timeline first reported by Bloomberg News in May – Hong Kong has secured first-mover advantage in a push to become Asia’s preeminent hub for gold trading. Last month, Singapore unveiled a similar initiative to build a clearing system by the end of the year.

Both cities aim to capitalize on robust demand for gold in Asia, where many investors remain bullish about the long-term prospects for the precious metal as an alternative store of wealth. The government-owned Hong Kong Precious Metals Central Clearing Ltd. “will offer a comprehensive suite of services, ranging from gold deposits and withdrawals to transaction settlements for the over-the-counter market,” Lee said.

“The initial gold deposits and the first transaction settlements have been completed,” he added. “They involve multiple banks, as well as their clients, including mining companies, refiners, jewelers and other investors.”

Eleven financial institutions are represented on the clearing company’s board, including JPMorgan Chase & Co, HSBC Holdings Plc and UBS Group AG, as well as five Chinese banks. Speaking at the same event, HSBC chief executive officer Georges Elhedery said the bank would ramp up its gold storage capability in Hong Kong to 200 tons “fairly quickly.”

Standard Chartered Plc announced in a release that it had completed transactions with companies including Chow Sang Sang, Haitong International Securities, JD Technology and Shanghai Pudong Development Bank, while HSBC said it had conducted trades for a number of clients looking to broaden their access.

Gold’s multi-year bull run ground to a halt earlier this year as the war in the Middle East triggered a surge in energy prices and stoked inflation fears, raising the likelihood that central banks will raise borrowing costs – a headwind for non-yielding bullion. A stronger dollar has also made gold that’s priced in the US currency more expensive for many buyers.

But while a handful of major banks have lowered price forecasts in recent weeks, their year-end estimates remain above the current spot price and are bullish in the long term on prospects for reserve diversification. Spot gold was trading near $4,130 an ounce at 4:45 pm Hong Kong time on Tuesday.

Ahead of the trial launch, at least four of the banks participating in Hong Kong’s clearing system were importing large bullion bars to build up inventories that will allow for physical delivery. The shipments of 400-ounce bars, typically used in London but less common in Asia, have driven Hong Kong’s import volumes above the two-year average, defying the usual seasonal lull.

Hong Kong will also partner with Shanghai Gold Exchange to create a “streamlined mechanism” that will allow participants to use gold holdings to settle transactions, Lee said, adding that three banks were already taking part in an initiative that “will effectively bridge the physical liquidity pools of both markets.”

Lee added that Hong Kong Exchanges and Clearing Ltd. has revitalized its US dollar gold futures contract and is considering the development of a new yuan-denominated futures contract, with delivery support from the Shanghai gold bourse. The Hong Kong exchange has made several attempts to introduce gold futures contracts in the past, without lasting success.

Earlier, Hong Kong invited some central banks to participate in the clearing system, targeting countries already engaged in Beijing’s Belt and Road initiative to supply institutional clout that would enhance the city’s credentials as a bullion hub. China’s central bank will keep increasing the allocation of national foreign reserves to Hong Kong, Pan Gongsheng, governor of the People’s Bank of China, said at the same event Tuesday.

(By Iris Ouyang)