The movement of gold trading to Hong Kong

 

There is a movement for the center of gold trading to be Hong Kong and not London. China has taken five clear steps to become a center for gold trading.

1. Launching the Shanghai Gold Exchange International Board (SGEI)

• Creating a Bridge for Foreign Capital: In 2014, the People's Bank of China (PBoC) established the SGE International Board within Shanghai's Free Trade Zone. 

• Yuan-Denominated Gold: By offering contracts denominated in Offshore Yuan (CNH) rather than US Dollars, China allowed international investors to trade gold directly using offshore yuan, chipping away at the dollar's monopoly in precious metal settlement.

2. Developing Cross-Border Infrastructure ("Shanghai–Hong Kong Gold Connect")

Because Mainland China enforces strict capital controls, international investors historically favored London’s free capital market. To circumvent this, China leveraged Hong Kong’s open capital borders:

• The Gold Connect Mechanism: Launched through collaboration between the Shanghai Gold Exchange (SGE) and Hong Kong’s Chinese Gold and Silver Exchange Society (CGSE), "Gold Connect" links trading liquidity between the two cities.

• "Delivery Connect" Infrastructure: Beijing and Hong Kong established direct cross-border physical delivery systems, enabling institutional traders in Hong Kong to seamlessly settle and store physical bullion vaulted across Mainland China and Hong Kong.

3. Modernizing Hong Kong’s Clearing, Storage, and Benchmarking

• Establishing Central Clearing (HKPMCC): Hong Kong launched the Hong Kong Precious Metals Central Clearing Limited (HKPMCC)—a centralized gold clearing and settlement system that mirrors institutional clearinghouses in London—backed by major international banks.

• Regional Vault Expansion: China and Hong Kong have aggressively expanded local vault capacity, scaling toward thousands of tonnes of high-security physical storage to ensure local delivery of physical metal without relying on London-based vaults.

• Asian Benchmark Pricing (HAU): To end reliance on the twice-daily "London Fix" (LBMA price discovery), Asian institutions introduced regional price benchmarks (such as the Shanghai Gold Benchmark and HAU indices) tailored to Asian trading hours.

4. Repositioning Central Bank Physical Gold Holdings

• Physical Reserve Relocation: Through the PBoC, China has systematically accumulated physical gold reserves and gradually moved portions of its bullion from Western repositories (like the Bank of England in London) to vaults in Hong Kong and Shanghai.

• De-Risking Foreign Reserve Assets: After Western sanctions froze foreign dollar assets in geopolitical disputes, China has treated physical gold stored in Hong Kong as a neutral, sanction-resistant asset outside the Western banking network.

5. Transitioning from "Paper" Speculation to Physical Delivery

• Divergence from London’s Unallocated System: London’s market relies heavily on "unallocated" paper gold—pooled claims where investors do not hold dedicated bars.

• Physical Focus: China tightened domestic retail paper-gold trading regulations and incentivized institutional contracts backed strictly by allocated, T+1 physically deliverable bullion. This attracts central banks and sovereign wealth funds seeking hard assets over paper promises.

Bond history in context

 

A recurring theme in our fixed-income view is that the current rise in yields is a return to normalcy. The excess was the low yields after the GFC. It was a form of financial repression used to boost economic growth, but it was also used as a tool to extend government programs through cheap borrowing. This was first and foremost a Fed monetary policy choice, with the fiscal side taking advantage of “free money with rates near the zero bound. 

The current rates reflect macro fundamentals. The issue will be whether the market may overshoot with higher inflation expectations and strong risk premia. 

We have not seen the impact of this higher cost of capital across all markets. Clearly, the housing market is at a standstill, but business financing will not see higher yields until debt has to be rolled over. 

The concentration problem in equities

 The book Exponential Wealth: Centuries of Stock and Bond Returns provides context on concentration in US stocks. The adjusted HHI index places us at historic levels. The smaller-cap market is being squeezed. Is this good for investors? One could argue that any index has less diversification, and that market power will be more concentrated in these larger firms. Is more vigorous antitrust action needed? The government has not used this tool, yet it may help restore balance in the markets.

The periods of pain in equities

 This chart from Exponential Wealth: Centuries of Stock and Bond Returns shows significant, long periods of pain for US stocks. There has been a long drought since our last pain period. Should you be worried about this? We may not be at an inflection point, but history suggests the current path won't last forever.