Asia joins race for gold price benchmark leadership

|By TAP Staff| Asia is giving expression to its growing disenchantment with the prevailing West-centred gold pricing mechanism by setting in place its own benchmarks that reflect the region’s market dynamics.

China and Singapore are preparing to launch physical bullion contracts with an eye on gaining pricing power of the metal at a time when the global benchmark is under scrutiny. CME Group, the world’s leading derivatives marketplace, announced it is launching a physically deliverable gold futures contract in Hong Kong later this year, joining the race to provide a viable price benchmark in the biggest gold-consuming region.

The Dubai Gold and Commodities Exchange is set to launch a spot contract this year, while Thailand is also considering setting up a spot gold exchange.

But the immediate focus will be on the launch of the Shanghai Gold Exchange’s international bourse later this month, closely tracked by global investors as gold is one of the first commodities that China is opening up to foreign participants.

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 century-old London fix, the global benchmark for spot gold that is determined by a group of four banks over a teleconference, is being investigated by European and U.S. regulators under suspicion that it may have been manipulated.

“Asia needs more tools to manage price risks and it needs more pricing power,” CME’s managing director of metals products, Harriet Hunnable, said at an industry conference in Beijing on Thursday.

Asia accounted for 63 percent of total consumption of gold jewellery, bars and coins in 2013, according to the World Gold Council.

CME said its new contract will help bring price transparency to Asia as well as meet growing demand to manage risks and create trading opportunities for investors looking to arbitrage between different contracts.

The international push by CME could boost flagging revenues at the precious metals business of the world’s No.1 futures exchange, a Reuters report had said in April, when it reported on CME’s plans for the Asian gold contract.

CME, along with Thomson Reuters, the parent of Reuters news, won the battle in July to administer the silver price benchmark, and was also the first to confirm its interest in bidding to operate the gold process too.

CME’s announcement comes just a few months after Singapore said it will launch a 25 kg contract on the Singapore Exchange to create a transparent form of pricing.

The new bourse will launch on Sept. 29 on the back of strong interest from foreign players keen to participate in the world’s biggest bullion market, exchange officials said.

“Our gold market is still very young. We are the biggest market in the world but our influence in the international market is still very small,” Xu Luode, chairman of the exchange, said at Thursday’s conference.

“But by setting up the international board, we can show that our country is open.”

The bourse will launch a total of 11 yuan-denominated physical gold contracts, with three new varieties of 100 grams, 1 kg and the bigger London gold delivery bar weighing 12.5 kg, a senior source involved in the launch told Reuters.

The other eight will be similar to what is already being traded on SGE’s main board.

The international exchange will launch silver and platinum contracts next year, the source said.

All fifteen gold importing banks in China, including three foreign banks HSBC, Australia and New Zealand Banking Group and Standard Chartered, will be part of the initial set of trading members, according to the source.

Goldman Sachs, and refiners Metalor and Heraeus have also signed up, officials of the exchange and the refiners said.

(With Reuters)