Hong Kong Gold futures contract reports physical delivery record as the city's role as a Gold hub grows

Mike Maharrey Money Metals Exchange

On Wednesday, Hong Kong Exchanges and Clearing (HKEX) reported record physical gold deliveries linked to its dollar-denominated gold futures contract. This underscores Hong Kong’s push to challenge Western dominance of the gold market.

The exchange physically delivered 145kg (319.67 pounds) of gold on Aug. 19. It was the highest single-day delivery since the futures contract was launched in 2018.

The previous delivery record was 63kg in December 2018.

HKEX also reported a surge of interest in its dollar-denominated gold contract.

This comes after HKEX revitalized the contract last month.

On July 6, the company implemented several policy changes to increase liquidity:

HKEX waived its normal $1-per-contract-per-side trading fee through June 30, 2027
It established incentive programs for designated liquidity providers
It established incentives for active traders

According to HKEX, “As the USD Gold Futures Contract has been inactive for a period of time, the introduction of the incentive programs is intended to support initial liquidity and revitalize the contract.”

The move had an almost immediate impact. On the day the new policies went into effect, the August contract traded 4,286 contracts. Volume the day before was zero. In the following week, HKEX reported record volume and open interest during the revitalization.

According to the South China Morning Post, average daily trading volume reached 9,974 contracts between July 6 and August 19. Total trading value hit $1.35 billion.

The HKEX intentionally implemented rules for its dollar-denominated futures contract to encourage physical delivery of metal.

Ramifications of the surge in physical Gold delivery

The revitalization of the dollar-denominated futures contract corresponds with a broader push to challenge Western control of the global gold market.

London, New York, and Switzerland have served as the center of the gold trade for nearly two centuries. However, with gold progressively flowing from West to East, China and other Asian hubs are developing the infrastructure to challenge Western dominance.

A day after the revitalized futures contract launched, Hong Kong began trial operations of its gold clearing and settlement system. The government-owned clearing system will reportedly “mirror” the financial infrastructure used by the LBMA in London.

According to Hong Kong Precious Metals Central Clearing Company CEO John Lee Ka-chiu, the company will offer “a comprehensive suite of services ranging from gold deposits and withdrawals to transaction settlements in the over-the-counter market in Hong Kong,” adding that a new gold price ticker – HAU – would be introduced to “ensure that Hong Kong gold prices are fully accessible to global market participants.”

The new gold clearing system also features a partnership with the Shanghai Gold Exchange. Lee said that “Delivery Connect” will “bridge the fiscal liquidity pools of both markets.”

Cooperation between the Hong Kong clearing company and the Shanghai Gold Exchange will reportedly include facilitation of physical gold delivery, warehousing, and further enhancing financial connectivity between the two markets. Through this partnership, gold stored in approved Hong Kong vaults can be transferred into the SGE system and vice versa. Once the metal is inside either system, it becomes eligible for settlement without having to be re-assayed or shipped through an entirely separate process.

Meanwhile, the clearing company introduced a new gold price ticker – HAU –to “ensure that Hong Kong gold prices are fully accessible to global market participants.”

In another move to elevate its status as a gold hub, Hong Kong officials plan to expand the region’s gold storage capacity from 200 to more than 2,000 tonnes over the next three years.

Looking at the bigger picture, it reveals a slow but steady migration of the gold trade from the West to the East.

In this context, it appears the revitalized futures contract is intended to connect gold futures trading to Hong Kong’s expanding physical gold market infrastructure.

According to HKEX, this connection will attract additional gold storage and delivery activity into Hong Kong, further establishing the Chinese special administrative region as an international bullion-trading center.

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Author

Mike Maharrey

Money Metals Exchange

Mike Maharrey is a journalist and market analyst for MoneyMetals.com with over a decade of experience in precious metals. He holds a BS in accounting from the University of Kentucky and a BA in journalism from the University of South Florida.

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