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Singapore carves out position as Asia gold hub

Singapore, an Asian hub for banking and finance, is ramping up its bid to become a center for gold trading that may one day rival London.

This week the Southeast Asian city-state unveiled plans to launch a physically deliverable gold contract in September to meet strong demand from Asia – home to the world's biggest gold consumers.

"I think this is the next step for Singapore, which has made a number of moves to turn itself into a gold hub," said Victor Thianpiriya, a commodities analyst at Australian bank ANZ.

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"Singapore is already a hub for financial services and wealth, so it makes sense that it wants to make itself a benchmark for gold trading in Asia."

The Singapore Exchange said on Wednesday that the contract will be the world's first wholesale 25 kilobar gold contract and will be made up of a series of six daily contracts.

Trends

In 2010, Singapore set up a high-security storage facility called the Singapore Freeport that subleases storage space to management companies.

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Two years ago, the government scrapped a sales tax for investment-grade gold and in the past year banks such as Deutsche Bank have set up gold vaults on the tiny island.

"This [gold contract] is a plan two years in the making. The reason is that we have seen a trend of gold moving from West to East and there is actually no market place for market players to buy gold at a wholesale level," Albert Cheng, managing director, Far East at the World Gold Council, told CNBC.

Maciej Frolow | Photographer's Choice RF| Getty Images

The launch of the gold contract on the Singapore Exchange is supported by the World Gold Council, Singapore Bullion Market Association and four banks that include JP Morgan and Asia-focused bank Standard Chartered.

The other trend Singapore is trying to take advantage of is growing wealth in the region, analysts say. Research firm Wealth Insight expects the country to overtake Switzerland as the world's biggest hub of offshore wealth by 2020.

China and India, two of the region's heavyweight economies, meanwhile account for more than half of global gold consumption.

"I think with this gold-contract move, Singapore is targeting high-end investors," said Ng Kok Fai, the head of currency and precious metal advisory at Credit Agricole private bank. "The bar in this contract is double the size of a typical gold bar around 12 kilobars."

Taking on London

The launch of a gold contract in Singapore will bring centralized trading and clearing of physically cleared gold and could provide a price benchmark for gold trading in Asia.

At the moment the benchmark price for gold, known as the London "fix," is set daily in the British capital at times that both fall after the close of Asian markets. Asia still mostly relies on this fixing for trading.

"This contract is meant for the Asian market," said the World Gold Council's Cheng, explaining why the contract will only be open for trade for three hours each day.

"There is a robust London market, and that comes in later in the day. But in Asian hours – there is no morning market for wholesale trade. Having a structure means the wholesaler can contribute to the market, which then becomes more transparent," he said.

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And given growing demand for gold comes from within Asia it makes sense to have benchmark pricing within the region, analysts said.

"Asia is the largest consumer and producer of gold, so price discovery here should make more sense," said Thianpiriya at ANZ. "But it will take time before Singapore can compete with London. The problem with a new contract is getting people to trade it."

Spot gold was trading at about $1,316 an ounce late Thursday and is up almost 10 percent so far this year.

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