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Singapore's Ascent As A Gold Hub; Asia Demand Strong - WGC

Stephen Little

6 September 2013

Over the past 40 years, Singapore has managed to transform itself into one of the world's leading financial centres, and with demand for gold across Asia surging, it is now seeking to establish itself as the regional hub for the yellow metal.

According to trade agency International Enterprise Singapore, Singapore has about 2 per cent of the global gold market and is looking to become an Asia-Pacific industry hub for gold by targeting growth between 10 to 15 per cent over the next five to 10 years. (To view another article on Singapore in this publication about a visit to the FreePort, click here.)

Despite competition from other Asian cities such as Shanghai and Hong Kong, the World Gold Council believes that the city-state is well-positioned in the region to become a bullion centre, told this publication in a recent interview.

"Singapore's advantage over China is that it is an open market with no exchange control and gold is freely traded there, whereas China still has a number of hurdles to overcome," said Cheng.

Whilst world hubs for gold have traditionally been in Zurich, London and New York, stores for the metal are increasingly being built in Asia as countries such as Singapore take steps to attract gold and precious metal trades to the region.

Last October, the Singapore government exempted investment grade gold and other precious metals from a 7 per cent goods and services tax in order to increase the development of gold trading by bringing it in line with other major markets.

Singapore's bid to become a regional hub for gold comes amid falling prices of the precious metal and falling demand in the US and Europe. Despite this, trading has been brisk in Asia, especially in China and India, where demand is still strong.

According to the World Gold Council, overall global gold demand fell by 12 per cent to 856.3 tonnes in the second quarter of 2013 and prices fell by around a fifth this year to a near three-year low in June of $1,180.50 an ounce.

Meanwhile, demand for gold in China hit a record 706.36 tonnes for the first half of 2013, up 54 per cent on the same period last year, despite a bearish market globally, according to data from the China Gold Association.

New facilities

As Singapore looks to establish itself as Asia's answer to Fort Knox, a raft of banks have opened up facilities in the city-state to store bullion, reflecting its growing importance as a financial centre.

In 2010, JP Morgan opened a vault in FreePort, a high-security facility for storing precious metals and other collectibles of the wealthy adjacent to the airport.

Since then, Deutsche Bank, UBS and Australia and New Zealand National Bank have all joined JP Morgan by also opening vaults at the FreePort facility to tap the increased demand for bullion storage.

Much of the rising demand for gold storage facilities in Asia has been driven by the growth in the number of wealthy individuals in the region who are looking to store their gold close to home, rather than abroad, according to Cheng.

"In the past ten years there has been an increase in the middle class in Asia, which has created a new group of high net worth customers who want to invest in gold and store it closer to home, rather than in Europe," said Cheng.

"Demand is also being driven by the migration of wealth from the West to the East and the growth of wealth in Asia, particularly in India and China. As a result of changes to banking secrecy laws in Switzerland, people are looking for alternatives and want to move their gold to a place which respects customers’ privacy," added Cheng.

Following the decision of the Singapore government to exempt investment bullion from the goods and services tax, Swiss-based precious metal refiner Metalor decided to build a gold refinery and bullion product manufacturing plant in Singapore, which is expected to be completed by the end of the year.

As a result of the new refinery, gold scrap that would have once been shipped from South East Asia to other countries with refining capabilities will now go to Singapore.

"Singapore is gradually building up its own ecosystem for the gold market, seen in the increasing number of banks that are opening storage facilities there and the new Metalor refinery. The Singapore government has planned well with its initiatives and managed to stay ahead of the curve. Further development of the gold value chain will only help to enhance the possibility of the island becoming a gold trading hub," said Cheng.

Slump in price

Following 12 years of gains, gold prices recently tumbled and the gold market now looks to be heading for its worst year in decades.

According to the World Gold Council, gold demand plunged 23 per cent in value between April and June 2013 to $39 billion, the biggest quarterly loss since modern trading began in the mid-1970s. Despite this fall, demand has remained strong in Asia.

This slump occurred amid speculation that the US Federal Reserve would taper, or cut, its quantitative easing programme in response to an improving US economy. As gold benefited from fears that QE would undermine fiat currencies such as the dollar, so the prospect of QE ending has removed some of gold’s safe-haven attraction.

Cheng also attributed the rapid decline in the price of gold to outflows from gold-backed ETFs as a number of hedge funds and speculative investors exited their positions in response to a US recovery.

"The US economy started to pick up at the beginning of the year and it seems people were more willing to take a risk on the stock market than in previous years. Since April, we have seen an exodus of hedge funds and speculative institution investors leaving the ETF market, resulting in the price of gold falling," said Cheng.

"The prospect of the US government tapering quantitative easing by the end of 2013 had a disproportionate downward impact on the price of gold as some investors in ETFs saw their key rationale for seeking a safe haven in gold fade," Cheng said. 

The rise of Asia

Asia's influence in the gold market has been rising in recent years, with China and India now accounting for the lion's share of global gold demand.

China and India, where gold is an essential part of weddings and gift giving, now account for over half the global demand for gold, according to the World Gold Council.

Cheng argues that the increased demand for jewellery in China and India has been driven by the fall in global gold prices, which have made it more attractive for Asian investors.

"Because of the decline in the price of gold we have seen a huge increase in jewellery demand, which has helped to stabilise the market," said Cheng.

Last month, the WGC said that China's gold demand could hit a record 1,000 tonnes this year and that the country is set to overtake India as the world's top gold consumer.

"I definitely believe gold demand in China will overtake India at some point, although only by a small margin. It does not really matter though, as these two countries are the twin engines of the gold market and account for the majority of global gold consumption. If China and India continue to buy gold, I think the market will remain positive," added Cheng.