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In what seems to be another interesting development in the gold market, the Hong Kong Futures Exchange will implement two new gold futures contracts. These two contracts do something that is completely foreign to the COMEX: settle in physical gold (1-kilo bars). Settlement is now available in USD and CNH (offshore renminbi). The CNY is mostly used inside China, and the CNH is used outside. One major stipulation of the COMEX contract is that it does not require physical settlement and the short side of the trade is forced to settle in USD or GLD shares, even if the long side demands physical.

     The new Hong Kong Exchange requires that a long or short contract must unwind the position the day before the last trading day if they do not have physical settlement capability. Additionally, there are position limits that include: an entity can only hold 10,000 contracts in the spot month, and in future months, an entity can hold 20,000 contracts. Limiting contract positions like this on the COMEX would make it more difficult to manipulate the price, as the open interest would converge with the amount that COMEX reports as being deliverable. Hong Kong position limits would make it difficult to run up the naked short selling and control the price. Additionally, something that some may have overlooked are the trading hours of the exchange. Trading hours will run from 8:30 AM to 4:30 PM, and after-hours trading will run from 5:15 to 1 AM. The extended trading hours will overlap the trading hours in New York. This is not by accident, as New York sets the gold fix and the Chinese want to be operating when this takes place.

By developing these contracts, the Chinese are essentially opening up two markets to facilitate the gold flow into China. The Hong Kong Exchange facilitates the global gold trade through the CNH, and then the gold makes its way to the Shanghai Gold Exchange via RMB/CNY. This is a major development, especially since the largest energy exporter to China is Russia. China pays Russia with RMB/CNY and the Russians convert the RMB/CNY to gold in Shanghai. Opening the markets to dual currencies allows an arbitrage opportunity to bleed the London and NY markets. Gold will continue to flow to China, and with two markets operating in physical settlement, the price should move much higher. In 2012, the London Metals Exchange was sold to the Hong Kong Metals Exchange. As China and the Asian countries continue to make strategic moves to cap the Western bullion banks’ ability to manipulate the price, some spectacular moves should be coming due to the dollar’s dwindling presence as the world reserve currency leads investors to gold.

 

Cheers,

 

Colin Bennett

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