J.P. Morgan will open a precious metals vault in Singapore in the third quarter of this year, according to a release issued by the US bank earlier this week. The timing could hardly be better.
Gold prices have surged as investors seek a safe haven from financial markets reeling from the European debt crisis. Gold for June delivery, the most active contract, reached $1,239.60 an ounce in intraday trading on Globex yesterday after closing at a record high on Tuesday. The price denominated in euros has risen more than 25% this year, also breaking record ground. And inflows into gold exchange traded funds (ETFs) have soared.
At its precious metals headquarters in London, J.P. Morgan already runs one of the biggest commercial vaults outside the official banking sector, providing warehousing services for a wide range of clients, including governments, central banks, sovereign wealth funds, asset managers and hedge funds.
But, Asian clients are keen to diversify the locations of their gold, platinum and palladium holdings.
"During the last couple of years, we have identified a growing desire by our Asian clients to diversify geographically their holdings of gold. In particular, they want those holdings to be physically closer to their businesses and operations," said Peter Smith, J.P. Morgan's head of precious metals vaulting services in London.
Singapore is strategically located as a commodities hub and is well positioned geographically, with proximity to the region's physical distributors, refineries, institutional investors and financial institutions.
"In addition, substantial amounts of precious metals are mined in Australasia, so a vault in a regional hub such as Singapore will reduce shipping costs and enhance trade. Singapore has special advantages in terms of tax efficiency, security and infrastructure. In some ways, it is the Switzerland of Asia", added Smith.
Few international banks have a regional vault facility. However, HSBC and other Asian banks provide vaulting services in Singapore and Hong Kong, as do specialist storage businesses such as Brinks and Brambles.
J.P. Morgan claims that its new underground vault in Singapore will have state-of-the-art security and guaranteed confidentiality. It will also accommodate trading of physically settled futures contracts on regional exchanges, regional ETF allocations, and physically settled financing transactions in which J.P. Morgan is involved.
Coincidently, on March 30, trading of a gold deferred settlement contract began on the Singapore Commodity Exchange, which is a unit of the Singapore Exchange. A spot contract priced in US dollars per troy ounce, it is made up of 10 troy ounces of gold with a minimum purchase requirement of 300 lots. However, investors don't have to handle physical delivery or pay the full notional contract value.
"Although the introduction of a gold futures contract by the Singapore Exchange at the end of March was not a determining factor for creating a vaulting facility, we intend to be a major participant in the market," said Smith.
As mentioned, the key reason for setting up a vault in the region is to offer an alternative site to London, New York and Zurich. Blythe Masters, J.P. Morgan's head of global commodities, said in a statement that the bank has seen strong appetite from both private and institutional investors to diversify the location of their increasing gold holdings.
"Our decision to launch this vaulting capability in Singapore was supported by the benefits it can provide to our trading counterparties with a facility of this nature," he added.
J.P. Morgan also recently announced plans to buy selected RBS Sempra Commodities businesses, including Henry Bath base metals warehousing, global oil, and European power and gas assets. The transaction is expected to close later this year, subject to regulatory approvals.