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It has been a golden summer for HKEX, because just days after launching the Bond Connect, they’ve turned their attention to one of the world’s most precious metals: gold.
Today HKEX has launched a dual-currency gold futures contract in Hong Kong that is physically-settled, and a gold contract as part of LMEprecious on the LME. They mark a number of firsts: the first time HKEX launched a contract in two currencies, the first time they’ve offered physical delivery in Hong Kong, and LME Gold is the first and only on-exchange, spot to five-year loco London contract in the world.
HKEX Chief Executive Charles Li speaks all about it in the latest Charles Li Direct:
It’s no secret that gold is popular in Asia, and particularly in China, which is the largest consumer of gold in the world. The vast majority of the gold Mainland China imports comes through Hong Kong.
Gold is different from other commodities, because while it’s used to make things like watches and bracelets, it’s also widely recognised as a form of currency. The price of gold is heavily influenced by macro-economic trends, in addition to things like supply and demand.
Currently the price of gold is set through the OTC market in London and futures trading in New York, both of which are many time zones away from the largest consumer of gold in the world: China. Asia is severely under-represented when it comes to influencing gold pricing.
Why two cities?
China is already the world’s largest consumer of gold, and consumption could grow exponentially in the future as the economy continues to expand. This creates new demand for gold trading in an Asian time zone, a need for physical settlement, and demand for hedging and risk management tools.
Hong Kong already has many important ingredients to become a gold trading hub: investors have traded gold here for more than 100 years and we have an active physical gold trading market that is one of the major bullion markets in the world. We are perfectly positioned to be a robust trading hub in the Asian time zone for both Mainland and international gold traders, leveraging the city’s existing gold trading market and the massive demand from China to develop new gold benchmarks and provide more hedging opportunities, which will further develop the existing physical gold market in Hong Kong. It also brings other benefits, such as attracting investors who want to add gold to their portfolio and providing more investment options for offshore RMB deposits.
Our long-term plan is to build Hong Kong into a commodities, currencies and risk management centre, and gold ticks all three of those boxes.
London is also the perfect place to introduce on-exchange gold futures trading. We are leveraging the LME’s long history and expertise in non-ferrous metals trading to move into precious metals with LMEprecious, which is a team effort involving the World Gold Council as well as Goldman Sachs, ICBC Standard Bank, Morgan Stanley, Natixis, OSTC and Societe Generale.
LMEprecious will bring greater transparency to precious metals trading by bringing more transactions onto the exchange-traded market, support and aid ongoing regulatory change, provide additional robustness to the market, broaden market access, make trading more capital efficient and trade lifecycle management easier. It will accommodate the interests of the full range of market stakeholders and reinforce the strengths of the London market.
While the contracts are not fungible, we are launching in Hong Kong and London at the same time to promote synergy and create on-exchange liquidity to complement the OTC markets and provide further risk management and arbitrage opportunities across different time zones.
What makes these products unique?
The Hong Kong gold contract is unique because HKEX is the first exchange to simultaneously offer dual-currency gold derivatives contracts in both US dollars and offshore RMB (CNH). It’s significant because investors can now arbitrage between CNH futures, and the synthetic currency prices derived from dual currency gold contracts.
Physical settlement is important, too. If these contracts were purely cash-settled, there could be a price discrepancy between the US dollar and CNH tranches. But with physical settlement, smart investors will be able to arbitrage the price differences in the two liquidity pools, which will then lead to price convergence. This physical delivery option keeps the implied exchange rate between the two liquidity pools honest.
This is unique, and gives professional investors the option to use the new dual-currency gold futures as well as CNH options to create a powerful derivatives strategy.
In London, which is already a global gold centre, LMEprecious will meet the needs of investors who want access to exchange-traded, transparent and centrally-cleared precious metals. The contracts will include spot, daily, monthly and quarterly futures out to five years for both gold and silver.
With these two products launching today, investors will be able to trade gold products on HKEX’s platforms 24 hours a day.
This is also another key step in our goal to build out a multi-asset class exchange with a focus on China. Gold is an important contract that diversifies our portfolio of CNH-denominated products, moves Hong Kong forward as an RMB pricing centre, and gives investors even more options in the Hong Kong and London markets.