Hong Kong Gold Futures Set Physical Delivery Record as Gold Hub Grows

Mike Maharrey

On Wednesday, Hong Kong Exchanges and Clearing (HKEX) reported record physical gold deliveries tied to its dollar-denominated gold futures contract, highlighting Hong Kong’s effort to challenge Western dominance in the gold market.

HKEX said it physically delivered 145 kg, or 319.67 pounds, of gold on Aug. 19. That marked the largest single-day delivery since the futures contract launched in 2018.

The previous delivery record was 63 kg in December 2018.

HKEX also reported a sharp rise in interest in its dollar-denominated gold contract.

The surge followed HKEX’s decision last month to revitalize the contract. On July 6, the company introduced several policy changes aimed at increasing 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 changes had an almost immediate effect. On the day the new policies took effect, the August contract traded 4,286 contracts. Volume the previous day 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 Aug. 19. Total trading value reached $1.35 billion.

HKEX deliberately structured its dollar-denominated futures contract to encourage physical delivery of metal, so the increase in activity is notable not just for trading volume but for the metal actually changing hands.

Ramifications of the Surge in Physical Gold Delivery

The revitalization of the dollar-denominated futures contract fits into a broader effort 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. But as gold has increasingly moved from West to East, China and other Asian hubs have been building the infrastructure to challenge that 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 includes 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 physical gold delivery, warehousing, and further 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 needing to be re-assayed or shipped through an entirely separate process.

Meanwhile, the clearing company introduced the 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 tonnes to more than 2,000 tonnes over the next three years.

Taken together, these developments point to a gradual shift in the gold trade from the West to the East, with Hong Kong building the market plumbing needed to support both trading and delivery.

In that context, the revitalized futures contract appears intended to link gold futures trading with Hong Kong’s expanding physical gold market infrastructure.

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

About the author

Mike Maharrey