China, Singapore vie for Asia gold pricing alternative to London

SINGAPORE Wed Jun 25, 2014 4:32pm IST

A sales assistant arranges gold necklaces at a store in Lianyungang, Jiangsu province, January 23, 2014. REUTERS/China Daily/Files

A sales assistant arranges gold necklaces at a store in Lianyungang, Jiangsu province, January 23, 2014.

Credit: Reuters/China Daily/Files

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SINGAPORE (Reuters) - China and Singapore are vying to provide feasible gold price benchmarks in Asia, as calls grow in the top consuming region for more localized pricing of the precious metal at a time when the global benchmark is under regulatory scrutiny.

Singapore said at an industry conference on Wednesday it would launch a physical gold contract on an exchange to create a transparent form of pricing.

China, at the same conference, said it wanted to have a bigger influence on the global gold market and would like to have its own price 'fix'.

The moves underscore rising pressure from Asia, home to the top two gold consumers – China and India - to have pricing references that better reflect the region's market dynamics, and the growing disenchantment with prices set in the West.

The London fix, the global benchmark for spot gold prices that is determined by a group of four banks over a teleconference, is being investigated by regulators in Europe and the United States under suspicion it may have been manipulated.

"Why should a country that is importing gold use a benchmark in London or the United States? Why can’t they have their own benchmark?" Jeremy East, global head of metals trading at Standard Chartered, said at the conference.

China and India account for more than half of global gold consumption but Asia still largely relies on the London fix for reference. The fix is set twice daily, at 1030 and 1500 London time - both much after Asian markets close.

The strength of Asian demand and a push by countries such as China and Singapore to be trading hubs have led them to explore providing benchmarks.

China, the world's biggest producer and consumer of gold, is set to launch three physical gold contracts in an international exchange in Shanghai's pilot free trade zone. It is also looking to launch gold derivatives later.

"We should have gold fixing, pricing done in China itself," Xu Luode, chairman of the state-backed Shanghai Gold Exchange (SGE), told the industry conference on Wednesday.

Singapore's gold contract, expected to be launched in September, will be the first wholesale 25 kilobar contract to be offered globally and comprises a series of six daily contracts, the Singapore Exchange said in a statement.

The city-state wants to become a hub for precious metals trading. In 2012, it scrapped sales tax for investment-grade gold, and has since seen many banks open up gold vaults. Swiss refiner Metalor will officially launch Singapore's first precious metals refinery later this week.

"Having a local price for local markets ensures that markets are more efficient and that the price accurately reflects where the metal is locally trading," said Ruth Crowell, chief executive of industry group London Bullion Market Association.

"As more markets develop, local prices for precious metals will become more tailored."

CME Group Inc, the world's No.1 futures exchange, plans to launch a physically deliverable gold futures contract in Asia, most likely in Hong Kong, sources familiar with the matter told Reuters in April.

LIQUIDITY CHALLENGE

The Asian contracts, however, face the significant challenge of drumming up liquidity, if past experience is any guide.

CME's COMEX gold contract is the most-traded bullion futures contract, with 2013 volumes nearly four times higher than the second-biggest gold contract, on the Shanghai Futures Exchange, according to Thomson Reuters GFMS.

The Hong Kong Mercantile Exchange - which used to trade gold and silver futures - shut down last year, partly because of low volumes. Regulators later found suspected irregularities in the firm's operations.

And in 2010, the Singapore Exchange launched a gold contract but later pulled it on weak investor appetite.

"If you need a price discovery function, then COMEX serves us pretty well," said Yuichi Ikemizu, branch manager for Standard Bank in Tokyo. "The fact is the liquidity is there and not in the local exchanges."

But the regulatory scrutiny and accusations of manipulation of the London fix is providing an added impetus to the development of local prices in Asia, some traders said.

"It's the new age for pricing because with the London fix under trouble, there is going to be more and more local importance," said a trader with a major bullion bank.

(Editing by Muralikumar Anantharaman)

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