Hong Kong Mercantile Exchange Defaults On Gold And Silver Paper Contracts
By Patrick A. Heller
Commentary on Precious Metals Prepared for CoinWeek.com …..
Here’s another story that the US mainstream media seems to have missed.
The Hong Kong Mercantile Exchange was established in May 2011 as an electronic trading platform for gold futures. Two months later it added a platform for trading silver futures. Exchange officials announced plans to eventually launch trading in base metal contracts, but had not yet done so.
Over this past weekend, the Exchange posted a notice on its website reading, “With immediate effect no new orders may be placed and all open positions will be financially settled at the settlement price determined by the Hong Kong Mercantile Exchange and its designated clearing house.”
The English translation of this announcement is that those who thought they owned a gold or silver position at the HKME did not. Instead, at best, they owned a paper contract whose value will be paid in cash at a price that may or may not have anything to do with the value of the contracts’ supposed assets.
On Tuesday, May 21, the Hong Kong securities regulator, the Securities and Futures Commission (SFC), announced that it had discovered possible financial irregularities at the Exchange and turned the matter over to the police to investigate.
The same day, the head of the Hong Kong government reported that Barry Cheung, the chairman and controlling shareholder of the Exchange, had taken a leave of absence from all of his public service reports. The SFC statement said that all open trading positions on the Exchange had been wound down, but that there were serious suspected irregularities.
At creation, the intention for the Exchange was to tap into China’s rising demand for commodities. The list of minority owners of the Exchange included a company owned by Russian billionaire Oleg Deripaska and a subsidiary of the Industrial and Commercial Bank of China, the world’s largest bank by market value.
However, the financial problems of the Exchange were attributed to a failure to establish trading volumes along the scale of existing competitors such as the Chicago Mercantile Exchange (which owns the New York COMEX) and the London Metal Exchange.
A failure to deliver the metal that was supposedly backing these open contracts constitutes a default. However, since a cash settlement is theoretically promised to contract holders, there is likely to be a major effort to re-characterize this failure as anything but a default.
With the default in the past two months by the huge Dutch bank ABN Amro to return the precious metals it was storing for customers and the recent difficulties that customers of several Swiss banks have had in trying to withdraw their stored gold, we could be on the brink of a worldwide collapse of gold and silver commodity exchanges. At the minimum, I urge people to contact the institutions holding any precious metals on their behalf. Even if there does not appear to be any problems, it still might make sense to pull out some or all of your holdings to then hold them in your custody or to store them at a facility that is not tied financially to any bank or government.
Patrick A. Heller was honored with the American Numismatic Association 2012 Harry J. Forman Numismatic Dealer of the Year Award. He owns Liberty Coin Service in Lansing, Michigan and writes Liberty’s Outlook, a monthly newsletter on rare coins and precious metals subjects. Past newsletter issues can be viewed at http://www.libertycoinservice.com. Other commentaries are available at Numismaster (under “News & Articles) . His award-winning radio show “Things You ‘Know’ That Just Aren’t So, And Important News You Need To Know” can be heard at 8:45 AM Wednesday and Friday mornings on 1320-AM WILS in Lansing (which streams live and becomes part of the audio and text archives posted at http://www.1320wils.com