The Chinese Gold & Silver Exchange Society (CGSE) recently announced its intention to initiate another deliverable physical silver contract, with trades denominated in the Hong Kong dollar.
GSGE is the authorized spot market in Hong Kong for physical gold and silver, and delivery will have a 956 oz. (30kg) minimum compared to the 5000oz. minimum at the COMEX in New York.
CGSE is further expanding electronic silver trading to boost the city’s position as a precious metals trading hub and because it sees a strong capacity for silver price hikes in the near future. In addition to fully outfitting their silver-trading hub, CGSE has petitioned the Chinese government for permission to establish a precious metals vault at the Hong Kong International Airport. The exchange also has plans in the works to develop a physical silver and gold depository on mainland China, previously banned because CGSE has been considered by China’s government to be a foreign entity. In 2011, some 25% of CGSE’s trade came from mainland China, a figure expected to increase to as much as 30% for 2012, according to a recent Reuters report.
CGSE already supports contracts denominated in multiple currencies:
- US dollar London “loco” silver (500 & 5000oz.)
- US dollar London “loco” gold (10 & 100oz.)
- Yuan kilo bar gold
- HK dollar kilo bar gold
- HK dollar tael (1.22oz.) gold
- HK dollar silver
Expanded trade in physical metals among Asia’s vast and newly affluent population of potential investors may have unintended consequences: By making physical delivery more convenient and attractive for buyers, the reality of tight supplies and delivery delays will only inflame demand and may hasten investor awareness that more metal is pledged on paper than exists in the world’s depositories.
CGSE is making this move with the expectation that trading in silver is poised to increase and will most likely out-perform gold in terms of volume. CGSE’s yuan gold kilo bar contract has failed to meet CGSE expectations, with daily transaction volume of 2-3 billion yuan instead of the expected of 5-6 billion yuan. Cheung believes the low performance on the yuan gold contract is due to the fact the Chinese national currency is still pegged to the dollar:
Despite the lower than expected results on CGSE’s yuan gold contract, expectations for the new Loco Hong Kong silver contract is high. A yuan-denominated silver contract is still under consideration for now. In addition CGSE believes that with the price of gold hovering around $1,725 per ounce, access to an additional precious metal with a lower entry point will help drive the growth of silver trading, which will consequently move the price of silver upward. Again, according to Cheung:
If trading volume rises, it is logical to expect that demand for delivery of physical silver will also increase. This of course raises the question of whether or not there is enough actual silver in the vaults around the world to service this demand. As we chronicled in a WealthCycles article earlier this year, there is ample evidence to suggest Silver Supply Inadequate To Meet Growing Demand. We wrote further about the impacts of mainland China launching deliverable silver contracts on the Shanghai Futures Exchange earlier in the year after they asked for public comment a month prior.
Were large numbers of Asian investors to experience delivery delays, the effect would no doubt fuel a sense of urgency and accelerate demand. As Wealth Cycles readers know, demand for physical metals is only expected to grow, as investors face the reality that unless they hold their property in-hand, when the chips are called in they may end up holding nothing more substantial than paper.