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SGX gold contract: S'pore adds another brick to hub ambition

[SINGAPORE] The Singapore government yesterday moved closer to realising the Republic's ambitions of becoming a gold trading hub by confirming plans for a gold futures contract, which could start trading on the Singapore Exchange (SGX) as early as September.

The announcement came just as China also signalled its goal of asserting greater influence over the gold market.

At the London Bullion Market Association (LBMA) forum held here, Minister for Trade & Industry Lim Hng Kiang said the development was timely, given increased requirements for reference prices to be transparent.

In his address to a 350-strong crowd, he said: "With SGX as the independent matching and clearing entity, this physically-settled contract will create a more transparent and efficient marketplace for kilo-bar trades."

The exchange will also be a centralised clearing house to reduce settlement risk among multiple counter-parties, he said.

The contract for 25 kilograms of 99.99 per cent-purity kilobar will be settled daily for physical delivery, using only newly-refined gold bars from approved refineries. The vaults in the Singapore Freeport will be the delivery point and US secured-logistics firm Brink's, the vault operator.

The contract will be the first wholesale kilobar contract offered globally. Trading for a series of six daily contracts will take place in the morning, in sync with trading hours in key gold Asian markets such as Japan and India.

JP Morgan, Standard Chartered Bank, Standard Merchant Bank (Asia) Limited and The Bank of Nova Scotia will be the initial market makers; it is hoped that second-tier banks, private banks and jewellery-makers will eventually also use the contract.

At the same event, the Shanghai Gold Exchange also outlined its plans to launch three physical gold contracts in the Shanghai Free Trade Zone to reach out to global investors.

Exchange chairman Xu Luode said: "Before, China's gold market was in a loop of its own. But now, we feel China's gold market can open itself up to the rest of the world . . . Shanghai should have a place in influencing the gold market . . . It's our goal."

The growing golden ambitions of Singapore and China come at a time of structural changes in the global gold market: the global price benchmark, the London gold fix, has come under heavy regulatory scrutiny since the scandal over the setting of the London Interbank Offered Rate (Libor) and a probe into possible abuse of the foreign-exchange market. And gold trade flows have tilted heavily to the east since China started snapping up large amounts of the yellow metal last year.

The Financial Conduct Authority in the UK had last month fined Barclays £26 million (S$55.1 million) for lax controls, after it surfaced that one of its traders had influenced the gold fix to save the bank money on a derivatives contract.

The World Gold Council, the marketing body for the gold industry, has called for a meeting in London on July 7 to explore a reform of the gold benchmark.

Meanwhile, China has become the largest gold consumer; demand there shot up after a 28 per cent fall in the gold price last year.

Standard Chartered Bank's global head of metals trading Jeremy East said yesterday in a keynote speech: "We're seeing gold flows bypassing the London market, with producers going straight to China. In fact, gold is being drawn out of the London market, and there is tightness in liquidity from time to time."

But Singapore and China do not appear to be moving into direct competition with each other as yet. Singapore's aim as a gold trading hub is, first, to serve South-east Asia's needs, said IE Singapore trade services and policy group director Gina Lim, who added that it was well and good if Singapore grows to serve Asia's needs later as well.

World Gold Council managing director of the far east Albert Cheng told The Business Times that Singapore and China could complement each other - given that Singapore is focused on the wholesale market and, China, on retail participation in the physical market.

Since the October 2012 removal of the 7 per cent goods and services tax on precious metals, critical pieces for building a gold hub have fallen into place here: bullion banks have set up gold-trading desks; four banks have launched vaults here; Swiss refiner Metalor officially opens its greenfield refinery today.

Mr Cheng added: "This is really an exciting time for Singapore."