Derivatives may sharpen Hong Kong edge in gold trade

A plan to increase its vault capacity means it can offer cheaper storage rates than London.

Hong Kong should strengthen yuan-denominated gold contracts in its derivative market and set up an Asia-focused gold benchmark as part of its push to become an international gold trading market that is dominated by Shanghai, New York, and London, analysts said.

The city should leverage its ties with China to raise the profile of these contracts and compete with their more widely traded US dollar-denominated counterparts, Ross Maxwell, global strategy and operations lead at multi-asset broker VT Markets, told Hong Kong Business.

The contract could attract more regional investors particularly from Mainland China "as it would internationalise the yuan and reduce currency risk exposure" for Asian, especially Chinese, investors, he added.

Meanwhile, the benchmark would complement the pricing systems in London and New York and reduce dependency on US dollar pricing, attracting more participants, Maxwell said. It is also the next best step since Hong Kong already has a strong gold infrastructure, he pointed out.

He said the city should emulate the US’ strong derivative market to gain an edge over Shanghai, Asia’s biggest gold market though it has a much less established futures and options market.

He added that if Hong Kong could boost its derivative market, match London’s physical liquidity and trust and Shanghai’s strength in physical gold trading, it would be well-positioned to become a major gold trading hub.

Maxwell said Hong Kong should capitalise on its flexible regulatory regime and preserve its tax-neutral stance to attract foreign investors. Shanghai’s strict rules remain a major hurdle to its ambition to become a global trading centre.

He said Hong Kong’s established gold storage facility, the Hong Kong International Airport Precious Metals Depository, gives it an edge. Airport Authority Hong Kong has announced plans to increase the depository’s capacity to 200 from 150 tonnes, with room for at least 1,000 tonnes.

With higher capacity, the city could offer much cheaper storage costs than London, Maxwell said.

“Hong Kong's geographical location gives it a clear advantage over London and the US when looking to attract Asian investors, especially with the high costs for storing gold in London, and the potential to align its trading hours with Asian markets,” he added.

It should also take advantage of its close ties with China, which consumed 741.732 metric tonnes of gold in the first three quarters of 2024, based on data from the council.

“Hong Kong’s deep economic ties to Mainland China make it a natural conduit for gold to access the Chinese market, which is the largest consumer market for gold in the world,” said Shaokai Fan, global head of central banks at the World Gold Council.

Whilst it is important for Hong Kong to work with Shanghai, it must also keep its market accessible to the world, Maxwell said.

Finding a niche

He noted that the threat of geopolitical tensions and another round of trade wars under US President-elect Donald Trump, as well as perceptions of reduced Hong Kong autonomy could affect investor confidence.

“Striking a balance between leveraging its ties with China whilst also maintaining an attractive regulatory environment for foreign investors will be key,” he added.

Still, the biggest hurdle for Hong Kong’s ambition to become a major gold trading hub is intense competition from the Big Three players.” Singapore is also a potential competitor as it can offer a tax-friendly alternative,” Maxwell said.

Fan said Hong Kong should find a niche in a competitive gold market. “Hong Kong should find a specific market to serve, or offer innovative solutions that will enhance its role in the global gold market.”

“To differentiate itself, Hong Kong should seek ways to improve gold trading practices, bring in new technologies, or innovate gold-based product offerings," he added.

Hong Kong should likewise leverage technology such as blockchain and the cloud to improve security in trade integration and ownership records, giving clients transparent access to their holdings, Maxwell said.