Metals Report Gold trading in the Far East

For most of us, gold trading is a mysterious business at best.

From the five bankers who set the bullion price in London twice each day to gold smugglers in Bangkok, most North Americans know very little of how trading in the great international currency actually works.

The New York, London and Zurich markets are secretive enough. When it comes to markets elsewhere in the world, events are virtually unknown.

Victor Lam, managing director of Shearson Lehman Brothers Bullion in Asia, is familiar with some of the more exotic markets for gold. Speaking at a Financial Times conference earlier this year, he reviewed some of those less known markets.

Japan, Hong Kong and Australia are in his bailiwick, but his responsibilities also include China, the Philippines, Papua New Guinea, Thailand, Singapore, Indonesia and Taiwan.

Those names are less well known in the world of gold, and volumes traded don’t compare with the larger centres. But the precious metal takes on a significance much closer to everyday life in the Far East than it does in Western Europe and North America where gold holdings are likely to be in the form of certificates or options rather than the physical commodity.

Over-all, Mr Lam’s outlook is bullish largely because of the domination of the Japanese market, whetted by the new Emperor gold coin.

“We still can expect this Japanese physical market to continue to thrive for the next two or three years, based on the underlying saving power and purchasing power of the broad base of the investing public,” says Mr Lam.

Elsewhere in the region, however, the future is not as bright although some local situations give rise to expectations of a more active market, he says.

In China, the government is trying to hold back foreign spending and, in attempts to build up foreign reserves, has stepped up gold mining and exports.

Although there is no official data available, Mr Lam says the increased offshore sales are very evident in Hong Kong. He expects 1986 output and exports will be much larger than expected with early figures showing Hong Kong imports of physical gold at 1.8 million tons compared to very “minute tonnages” in earlier years.

“Incidentally, the private enterprise mines now account for about half of the country’s gold production,” in China, says Mr Lam. “The government has raised the internal price several times as an incentive.”

Internally, Chinese buying in 1985 was up about 300% over 1984 figures, a reflection of the more affluent times.

The Philippines is a special case, says Mr Lam. It has been a consistent seller of gold in order to gain cash to service its large debt. But, he says, there are many problems of credit and of actual ownership of assets which interfere with smooth trading.

“I think we can expect some improvement in the market in the the Philippines, given the effectiveness of the new government.”

Papua New Guinea is a rising exporter of gold with the new Ok Tedi mine in production. Output jumped to 32 tons in 1985 compared with 17 tons in 1982 and, with Placer Pacific’s Porgera deposit getting closer to production, the future looks bright. “Some of the production is now being sent to Japan, further strengthening Japan’s importance as a refining centre.”

In Thailand, says Mr Lam, there is a curious angle in the gold trade. Some of the gold is moving out of Bangkok into India.

“I cannot find a reason for this development,” he says, calling it the mystery of the gold year.

Despite all its problems, the Thai economy is remarkably strong, he says, and the gold market is relatively dull.

Singapore is a depressed market with some bullion houses closing down or pulling out.

One promising sign, however, is that changes are being made in the use of the government’s giant Central Provident Fund to which all workers must contribute.

From May 1 this year contributors have been given more liberal use of withdrawals and 20% of the allowable fund can be deposited through four designated banks for investment. A quarter of this can be invested in physical gold.

“There may be an impact in the longer term from this” resulting in greater gold purchased in that city state.

Also since May Taiwan has deleted gold and silver from foreign exchange regulations. That will allow for more importation of gold, but exports are still not allowed.

The Far East may not be the largest of markets for gold, but it is broadly based and diverse. Regardless of its share of world bullion trading, it will be an important venue.