History of the Hong Kong Gold Market

The Chinese Gold & Silver Exchange Society (hereinafter referred to as the Exchange) was established in 1910, originally known as the "Gold and Silver Trade Association." It was officially renamed the "Chinese Gold & Silver Exchange Society" and registered after the First World War in 1918. The organization has continuously grown and expanded, and after 2024, it was renamed the Hong Kong Gold Exchange, establishing a lasting foundation that endures to this day.

The founding pioneers of the Exchange were all owners or managers of money exchange shops and silver houses that operated remittance businesses across various ports. After the war, leaders of the Exchange such as Mr. Ho Sin Hang, Mr. Ho Tim, Mr. Wu Chit Yee, Mr. Leung Kai Yat, Mr. Tung Chung Wai, and Mr. Ma Kam Chan were all founders of major Chinese-funded banks in Hong Kong. Ninety-four years ago, around the time of the First World War, the trading of scrap gold and silver was popular in Hong Kong, which later developed into money exchange platforms, then evolved into silver houses, and eventually into modern banks. The Exchange was established purely to accommodate the development of the money and silver industry. Consequently, although the Exchange's main business was gold and silver trading, before the war it also traded "八九" large gold, silver dollars, and after the war, it traded US dollars, Japanese yen, Saigon notes, Philippine pesos, and Mexican gold coins, alongside gold bar trading on the Exchange's bilateral market. By 1960, due to difficulties in US dollar spot delivery causing intermittent suspensions, trading eventually ceased in 1962 due to inactivity, leaving only gold and silver trading continuing to this day.

For ninety-two years, relying on strict and effective rules and regulations as well as the integrity of its practitioners, the Chinese Gold & Silver Exchange Society has stood firm in the Hong Kong gold market despite various challenges, playing a significant role. It has provided local and international investors and gold traders with a gold market characterized by Continuity, Liquidity, and Depth, allowing everyone to fully utilize gold as an object for investment, speculation, hedging, and arbitrage.

Since its establishment, except for the period from 1941 to 1945 when it closed due to the outbreak of the Pacific War and the fall of Hong Kong, the Exchange has operated in accordance with its articles at all other times, serving investors. What the Exchange is most proud of is that in January 1980, when the Soviet Union invaded Afghanistan, gold prices hit a historic high on January 18, reaching HK$4,855.00 per day, only to plummet sharply on the 23rd of the same month to a low of HK$3,590.00, a difference of HK$1,200.00 within just a few days. At that time, all major gold markets worldwide suspended trading, but the Exchange, with its sound system and effective contingency measures, was the only gold market in the world that remained open for trading as usual.

In early February 1983, due to factors such as falling oil prices, the US Federal Reserve's tightening of monetary policy, and high interest rates, gold prices experienced significant fluctuations. Gold markets in the US and Singapore successively suspended trading, yet the Exchange continued to operate as usual. Based on these two instances, investors can have absolute confidence in the continuity of the Exchange.

In terms of liquidity, investors who wished to exchange their gold bars for cash or close out their investment positions have been able to do so smoothly for decades without complaints. A notable example is when the Exchange changed the standard from 945K gold to 99 gold on January 15, 1970, to meet the needs of the jewelry industry. At that time, Hong Kong citizens held over 100,000 taels of 945K gold. Exchange members fully redeemed all of it according to the purity ratio of 945 to 99, without any disputes. This demonstrates the credibility of the Exchange's gold group members and the high liquidity of the Exchange's gold bars.

In terms of depth, although the Exchange has experienced periods of both active and quiet trading due to gold price fluctuations, during the boom of the early 1980s, daily turnover exceeded 2 million taels. History has proven that Exchange members possess strong financial strength, handling large volumes of trading without any issues during prosperous times. Looking from another perspective, considering international factors: from the founding of Hong Kong until 1939, gold import, export, and trading were unrestricted. In 1939, when Hong Kong joined the sterling area, foreign exchange controls were implemented, and gold import and export came under regulation. Therefore, after the war, foreign gold entered Hong Kong through a unique channel: foreign gold was shipped to Hong Kong and then re-exported by a consortium of foreign trading companies to Wang An Hong in Macau, from where it was brought back to Hong Kong through various private means. This situation persisted until January 1, 1974, when the Hong Kong government removed all restrictions on gold import and export.

The resumption of direct gold importation by merchants greatly benefited Hong Kong's status as an international financial center. In fact, after 1974, London and Swiss gold dealers successively established offices in Hong Kong to expand their businesses. The import, export, and re-export of gold, as well as the Exchange's business, achieved rapid development in the following years, reaching a peak in early 1980.

The Hong Kong market can play an important role in the international gold market for multiple reasons: political stability, free trade, respect for private property rights, a strong legal foundation, convenient transportation, advanced communication facilities, a sound financial system, and rigorous regulatory oversight. Another important factor is that Hong Kong is located in the Asia-Pacific region, and due to time zone differences, it fills the time gap between the close of the New York market and the opening of the London market, allowing international investors to continue trading in Hong Kong or engage in hedging and arbitrage activities. International gold trading continues around the clock, 24 hours a day, across Europe, America, and Asia.

Over the years, the Exchange has maintained a relationship of mutual respect and cooperation with the Hong Kong government. The Hong Kong government pursues a policy of positive non-intervention in commercial development, while the Exchange practices self-regulation, strictly governing its members. For decades, disputes between the Exchange and its members, among members, or between members and investors have been rare. When disputes unfortunately arose, they were resolved through consultation. Over the years, government officials and community figures have praised the Exchange's successful self-regulation. The Exchange remains humble and continuously strives for improvement, maintaining close contact with the Financial Secretary and the Financial Services Bureau. For any major reforms, the Exchange first seeks the government's views before implementation.

The Exchange is a market that combines spot and futures trading. While it is based on spot transactions with same-day settlement as the principle, it has a system of storage fees that allows spot delivery to be deferred to the next day or even indefinitely until the position is closed, thereby functioning like a futures market. This unique trading system and operational mechanism are the crystallized wisdom of our predecessors, created with meticulous care decades ago. Having weathered decades of market turbulence, it has proven to operate effectively, possessing enduring value like gold itself.

The Exchange trades gold in two purities: 99% purity gold bars weighing 5 taels (called 99 Gold) and 999.9% purity gold ingots weighing 1 kilogram (called Kilogram Bars). The trading unit for 99 Gold is 100 taels (1 tael equals 37.429 grams or 1.2033 troy ounces), with a minimum price fluctuation of HK$0.50. The trading unit for Kilogram Bars is 5 kilograms, with a minimum price fluctuation of HK$0.01. All gold trading is quoted and settled in Hong Kong dollars. For the convenience of domestic investors, Kilogram Bars also provide RMB quotes based on the morning and afternoon fixing prices.

The following is a brief introduction to the trading system. Members or their floor representatives engage in open outcry trading in Cantonese in the trading hall, supplemented by hand signals. This trading method, known internationally as Open Outcry, is still used by some major futures markets today. The Exchange operates six days a week. From Monday to Friday, there are morning and afternoon sessions: the morning session runs from 9:00 AM to 12:30 PM, and the afternoon session runs from 2:30 PM to 5:00 PM. On Saturdays, there is only a morning session from 9:30 AM to 12:00 PM. After a transaction is completed, the seller must fill out the trading slip within 15 minutes and submit it to the buyer for confirmation. It is then submitted to the Exchange's settlement department to register the transaction and update each member's long and short positions to control risk. After each session, the Exchange performs intermediary settlement for all transactions and submits the results to the designated settlement bank. The fixing price (for settlement purposes) is determined twice daily, in the morning and afternoon, based on the market price at the time of fixing. The fixing price for 99 Gold is rounded to the nearest HK$5, while for Kilogram Bars it is rounded to the nearest HK$0.05. All members' transaction contract prices are compared with the fixing price to calculate settlement differences, with profits and losses settled through the Exchange. All active members must open accounts with the same designated bank to facilitate settlement. Morning session settlements are completed in the afternoon, while afternoon session settlements are completed in the evening.

As we mentioned above, the Exchange is a market that integrates spot and futures trading. The principle is this: although the Exchange's trading is based on spot transactions with same-day position closing and delivery as the principle, there is a system of delivery storage fees that allows spot delivery to be deferred to the next day or even indefinitely until the position is closed, thus functioning like a futures market. The storage fee is determined openly in the market at 11:00 AM (for 99 Gold) and 11:15 AM (for Kilogram Bars) daily. At that time, members wishing to deliver or receive spot gold bars register on the board, and the spot supply and demand determine the day's storage fee.

The determination of the storage fee is primarily influenced by two factors: (1) the supply and demand of gold, and (2) the level of Hong Kong dollar interest rates. If the demand for spot gold (receipt) exceeds the supply (delivery), the buyer receiving the gold can charge a storage fee from the seller requesting延期 delivery of gold as compensation. In industry terminology, this is called "high interest" or "storage fee added," where long position holders receive the storage fee and short position holders pay it. Conversely, when short position holders receive the storage fee and long position holders pay it, this is called "low interest" or "storage fee reduced." If the amounts of gold for delivery and receipt are equal and both parties have no objection, the storage fee is considered settled. If neither party needs to pay interest, it is called "flat interest" in industry terminology.

Regarding risk management, two main measures are employed. The first is the margin system. Each member currently has a credit limit of 1,000 taels or 75 kilograms. Within this limit, no margin is required. Otherwise, a margin of HK$20,000 per 100 taels and HK$28,000 per 5 kilograms must be paid to the Exchange. The credit limit amounts and margin amounts are adjusted by the Board of Directors and Supervisors at any time according to gold price fluctuations to mitigate risk. During the peak market in early 1980, the margin per 100 taels reached as high as HK$160,000. Because of this mechanism, the Exchange has been able to navigate through various gold risk crises smoothly and safely.

Another important measure is the discount limit. According to the Exchange's articles, when the gold price movement compared with the previous session's fixing price reaches a difference of HK$400 per 100 taels (for Kilogram Bars: HK$10 per gram), a discount must be implemented. For example, based on the current margin standard, if the previous session's fixing price was HK$3,500 and the current market has risen to HK$3,900 or fallen to HK$3,100 before the fixing price is determined, either situation requires the implementation of a discount. The discount is similar to price limits in general markets. The Exchange must announce its implementation through a resolution by the Board of Directors and Supervisors, declaring the suspension of public warehouse trading. The discount price becomes the fixing price, and delivery registration and storage fee negotiation proceed immediately. All public warehouse transactions are settled at the discounted fixing price. After the discount, trading resumes after a two-session interval, and trading must begin anew.