Asia’s Role in the Gold Market

By Albert Cheng, CEO, SBMA

Published on January 9, 2018

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While gold is extremely widespread in life and culture in Asia, its gold bullion market is relatively new compared to its counterparts globally. In this article, SBMA CEO Albert Cheng looks at how the gold bullion market has evolved in Asia in recent decades, and what else needs to be done for Asia to become a more significant player in the global gold market.

Despite the centrality of gold in the life and culture of Asia, and its function as a medium of exchange in the region for hundreds of years, the role the Asian gold market has played globally has been less significant than its peers. Only in the past two decades has Asia actively engaged with the rest of the world, but there is still much to be done for the region to become a vibrant gold market that plays a more significant role in the future multi-polar gold market. In particular, the developing economies of Southeast Asia have rich and diverse precious metals markets that are underdeveloped.

Table 1: Significant events in the history of the gold industry worldwide

Growth of the gold market globally

The modern gold market has only 46 years of history, beginning in 1971 when US President Nixon ended the international convertibility of gold to the US dollar. London was an exception, as it was the ultimate market, even when gold trading was an exclusive activity limited to governments, imperial families, dignitaries and the ultra-rich. The rest of the world has since slowly opened to gold trading (Table 1), but Asia, and Southeast Asia in particular, has to play catch up, which brings many opportunities.

Asia, and Southeast Asia in particular, has to play catch up, which brings many opportunities.

The opening of the gold market in Asia has been a slow and steady process. Bullion investment in Asia grew in popularity with the introduction of bullion investment coins such as the South African Krugerrand, Royal Canadian Mint’s Gold Maple Leaf, Australian Nuggets and many others more than 30 years ago. But one of the breakthroughs since then has been the development of China’s gold market and the Shanghai Gold Exchange.

The introduction of the best-selling retail product, ICBC’s Gold Accumulation Plan (GAP) in China, following the success story of GAP in Japan more than a decade earlier, which eventually spread to all major bullion banks helped the investment sector, while two major breakthroughs in the jewellery sector have been the introduction of Italian inspired K-gold (18 karat gold) jewellery to China, which opened a new category of jewellery and led to the creation of the gold value chain, and the shift from weight-based sales to piece-based sales in the retail of pure gold jewellery.

This has allowed larger profit margins that have raised the quality of designs, marketing and merchandising. With these changes, gold began to trade more widely in China in various forms and products. In ASEAN, significant progress was made in the opening and development of the gold markets of Thailand, Malaysia and Vietnam.

Asia has since become the driver of the rising demand for gold, with East Asia and the Indian subcontinent accounting for more than 70% of global physical bar investment. In addition, about 50% of the world’s scrap gold comes from Asia, according to Thomson Reuters.

Changing minds

Engaging with regulators in each country was necessary to open up markets, but ongoing dialogue is still needed to convince them to remove the remaining barriers to gold investment and the movement of jewellery products, which would benefit industry stakeholders and ultimately, investors and jewellery lovers, especially in Southeast Asia, where tax laws and other regulations related to the precious metals trade vary widely among jurisdictions.

Purposeful discussions with the right audience can yield results, such as the removal or lowering of import duty or tax, more transparent custom clearing procedures, and documentation. The removal of GST for investment-grade metals in Singapore from Oct 1, 2012, to kick off the proposition of building Singapore as a precious metals hub, under the guidance of IE Singapore, was a demonstration of successful engagement with government regulators, and there has been mutually beneficial outcomes for all parties.

A more open gold market would create more jobs, contribute to GDP, and add vibrancy to the financial sector. Most importantly, it would help quench the thirst of consumers longing for physical gold, especially in Asia’s nascent economies, where a burgeoning middle class is driving the demand for gold products.

A more open gold market would create more jobs, contribute to GDP and add vibrancy to the financial sector.

Connecting ASEAN to a multi-polar gold market

The Singapore Bullion Market Association (SBMA), previously an informal industry association that only met occasionally for business networking, began developing its competencies to become the central body for the bullion industry. It hopes to create a more harmonised tax regime (Table 2), regulatory infrastructure and industry standards among ASEAN jurisdictions, including legal documents, testing, assaying, and operating procedures. The association also wants to look beyond the immediate horizon to further develop the Singapore and ASEAN gold markets through advocacy and research activities.

There are many reasons to be excited at the prospects for gold markets in ASEAN countries, with region’s increasing wealth and disposable income, the fact that gold is rooted in life and culture of people, the introduction of Shari’ah Standard on Gold, a new generation of gold investors, and the establishment of the ASEAN Economic Community (AEC), which provides SBMA the opportunity to create a seamless regional market and production base.

In general, gold market globalisation is well advanced in terms of trade links, though there are still important exceptions, such as the near-prohibition of gold exports from China. In terms of domestic gold trading, this has become liberalised in most countries, but currency and capital controls still hinder cross-border activity in several cases. Singapore is at the heart of global trade flows, with world-class infrastructure for precious metals storage and trading, which puts the country in a good position to play a pivotal role in the development of the precious metals markets in ASEAN, and further afield in Asia, so the region can play a larger role in the future multi-polar global gold trading system.

Asia’s gold markets must continue moving towards a free market model, where physical gold can move freely in terms of trade, settlement and clearing, storage, manufacture and retail. Investors and gold jewellery lovers will be availed with investment and jewellery products they want without being disadvantaged by taxes, duties, or government decrees. This is a viable proposition in today’s interconnected world and the breakthroughs the internet and blockchain technology are bringing to this industry.

As such, continued cooperation and partnership agreements, like the memoranda of understanding (MOUs) SBMA signed with Myanmar Gold Development Public Co. Ltd and The Chinese Gold & Silver Exchange Society at the Asia Pacific Precious Metals Conference (APPMC) 2017 held in Singapore, will only help to promote interconnectivity in the global gold market and connect the region’s precious metals community to global bullion players.

Table 2: Duties and taxes for gold products in ASEAN countries

Corporatising succession planning is very important for preserving family wealth and transferring it to the next generation, Ms Ow said, advising investors to look into the effective use of family offices, which are entities that can provide services to manage large private fortunes. She said important considerations when setting up a single family office are the appropriate structure of the family office, and the best location to implement such a structure.

Deloitte Private director of Family Enterprise Consulting Catherine Chow said that in this regard, Singapore is ideal because of its pro-business environment and competitive tax regime. She advised investors to look into establishing a trust to structure private wealth and explained the benefits of using trusts for distributing money in a tax-efficient way. A trust provides flexibility with both income and capital distributions, and there is a host of tax incentives available, Ms Chow said.