The Hong Kong Mercantile Exchange (HKMEx) started trading its first gold futures contract yesterday, responding to a surge in demand for the precious metal among regional investors during the past few years.
The 32 troy ounces futures contract is denominated in US dollars, with physical delivery in Hong Kong for the first time. The initial trade was transacted by Industrial and Commercial Bank of China (ICBC), one of 18 exchange members, when the market opened at 8am (HKT). By 5.30pm, a total of 3,415 contracts had been traded with a value of $163.33 million, and dealing continued until 11pm when the market closed.
“We’re very pleased with our trading volumes so far. It clearly shows that there is indeed demand for a gold futures contract providing physical delivery, and designed with Asian needs in mind,” said HKMEx chairman Barry Cheung in a written statement.
The cash gold price hit a record $1,577.57 an ounce on May 2 and is up 5.2% this year after a 30% rise in 2010 and a decade-long rally. In addition to its prestige quality and its perceived status as a store of “real” value, the metal is used as an inflation and currency hedge, particularly against a weak dollar, as well as for portfolio diversification.
The gold price has been weaker since early May, however. Yesterday’s move above $1,490 came after a 5% decline earlier in the week, in response to a fall in the US dollar and a recovery in oil prices. As of 5.30pm in Hong Kong, HKMEx gold for August delivery traded at $1,492.7.
On Monday, US SEC filings revealed that financier George Soros had sold nearly all his $800 million bullion holding in the first quarter of this year. Other leading commodities hedge funds had also significantly reduced their gold exposure, although John Paulson retained his $4.4 billion stake in SPDR Gold Trust, the world’s biggest gold-backed exchange-traded fund.
Albert Helmig, president of HKMEx, is taking a long-term strategic view that demand for gold and commodities in general will continue to shift towards Asia. He expects that his exchange will become “the world’s gateway for commodities trading with China”, pointing to Hong Kong’s strategic location.
Hong Kong has a gold vault buried under the international airport on Lantau Island, and is a major channel for gold flow into China. However, Chinese investors are not allowed to trade futures offshore, while other regional investors can transact their business in the Comex gold futures market in New York almost round-the-clock or trade a US dollar-denominated gold contract on Hong Kong’s stock exchange. So HKMEx faces stiff competition.
To meet those challenges, HKMEx plans to introduce other commodity-based US dollar contracts, including silver futures next month and then later agriculture and energy contracts and commodity indices. Most notably, it intends to offer renminbi-denominated gold futures by the end of the year, according to Helmig.
HKMEx is backed by global and regional shareholders, including China’s ICBC and Cosco Group, as well as Russia’s En+ Group, and on April 27 was authorised by Hong Kong’s Securities and Futures Commission to act as an automated trading services provider. Its trades are cleared and settled through LCH.Clearnet in London, and its three clearing members are Interactive Brokers, MF Global and Morgan Stanley.