Hong Kong Begins Trial Operation of New Gold Clearing System

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(Bloomberg) — Hong Kong has launched a trial operation of a new gold clearing system, backed by several major banks, in a key step toward its ambition to become a major bullion-trading hub with price-setting power.

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The mechanism will help lay the ground for the city to contribute a global reference rate for gold trading, Hong Kong Chief Executive John Lee said at the Hong Kong FIC & Bond Connect Summit on Tuesday.

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By launching this month – a timeline first reported by Bloomberg News in May – Hong Kong has secured first-mover advantage in a push to become Asia’s preeminent hub for gold trading. Last month, Singapore unveiled a similar initiative to build a clearing system by the end of the year.

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Both cities are aiming to capitalize on robust demand for gold in Asia, where many investors remain bullish about the long-term prospects for the precious metal as an alternative store of wealth.

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A multi-year bull run ground to a halt earlier this year as the war in the Middle East triggered a surge in energy prices and stoked inflation fears, raising the likelihood that central banks will raise borrowing costs – a headwind for non-yielding bullion. A stronger dollar has also made gold that’s priced in the US currency more expensive for many buyers.

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But while a handful of major banks have lowered price forecasts in recent weeks, their year-end estimates remain above the current spot price and are bullish in the longer term on prospects for reserve diversification. Spot gold was trading near $4,140 an ounce at 9:30 a.m. Hong Kong time on Tuesday.

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Ahead of the trial launch, at least four of the 11 banks participating in Hong Kong’s clearing system have imported large bullion bars to build up inventories that will allow for physical delivery. The shipments of 400-ounce bars, typically used in London but less common in Asia, have driven Hong Kong’s import volumes above the two-year average, defying the usual seasonal lull.

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Hong Kong has also invited some central banks to participate in the clearing system, targeting countries already engaged in Beijing’s Belt and Road initiative to supply institutional clout that would enhance the city’s credentials as a bullion hub. Singapore, meanwhile, plans to introduce a central bank custodian service by October.

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—With assistance from Jessica Zhou.

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