Beginning October 1st 2012, Singapore will exempt investment-grade gold, silver and platinum from a 7% goods and services tax (GST). This is massively good news not only for the local citizens but, perhaps more importantly, for global precious metals investors.
Taxing a particular type of money discourages its use. Lifting that tax opens the door for citizens and businesses alike to save in, trade and utilize an alternative, a huge boon for demand.
According to finance minister Tharman Shanmugaratnam, the intent is to develop a refining and trading industry within the nation. The removal of the GST on precious metals will allow Singapore to better compete with Hong Kong and other bullion trading centers in the region, said Nick Trevethan, a senior commodity strategist at ANZ in Singapore, adding that “it seems a little unfair to put a sales tax on what is essentially money.”
Singapore already tripled gold imports year over year, ending December. Now that this announcement hit the presses in 2012, traders, bullion banks, warehousing and vaulting infrastructure will follow, further developing the epicenter of finance in the east.
As MF Global has taught us, client accounts are not sacred, and even if they were, paper gold is just a claim on the real thing, while physical metal has no counterparty risk. Re-hypothecation means someone else says they are the true owner of what you believed was yours, because the entity in control of the asset sold it to you, then sold it again to another buyer, and again. In the gold market this is the rule, not the exception. The world may not understand this fully, as Chinese precious metals exchanges have seen substantial increases in derivative volume, alongside U.S.-based derivatives such as GLD, which serve to sequester demand for the real thing. For now.
As the bullion exchanges in the west typically attempt to settle contracts in cash, they further distance themselves from the actual physical market and the actual price. Traders will avoid waffling paper exchanges in favor of an exchange fully backed with metal and no hyper re-hypothecation. Price discovery will be accurate where physical settlement is known to be consistently available. An exchange such as this, with allocated metal, and online visual verification of the fact, is now a possibility, thanks to the foresight of leaders in the East. When those in paper alternatives see a more sound option, they will sell, and buy in the real market. Demand such as this will outstrip supply many fold, thrusting prices far higher than anyone can predict.
Derivatives are contracts or securities that derive their value from other assets. In other words, derivatives don’t have value in and of themselves; they get their value from something else—an index, a commodity, or anything else of value. This gives derivatives an interesting characteristic: an infinite number of them can be created.