What would an exchange need to offer to challenge COMEX?

When we were in the midst of our research into gold price discovery it was clear that the majority of large gold exchanges we studied were inaccessible and unappealing to investors looking to own physical gold bullion.

COMEX is arguably one of the most inaccessible markets for the retail investors. Those looking to own physical gold are not likely to use COMEX, whilst its 100 ounce gold futures contract dominates activity in the gold futures market, accounting for 85% of gold futures trading, the contract size and nature of delivery on COMEX remains unappealing to the retail investor.

So we began asking ourselves if there could ever be a viable alternative to COMEX, one which could challenge its dominance. We decided to ask our readers what an exchange would need to offer in order to do this.

In our poll we asked:

What would an exchange need to offer to challenge COMEX?

We offered the following options:

Vaults and easy delivery in Hong Kong

Vaults and easy delivery in Singapore

Vaults and easy delivery in Zurich

Smaller contract size (1kg not 100oz)

Nothing, it’s impossible

Other

Is it impossible?

First, the good news: only 6.5% of investors thought it was impossible to set up an exchange that would challenge COMEX.

We see this as a positive outcome, the fact that so few respondents believe it is impossible to challenge COMEX proves that there is demand for a futures exchange which is better suited to the retail investors requirements.

The remaining results clearly show what is required of the COMEX Challenger.

It’s all about contract size and delivery

Unsurprisingly the size of the contract is the most important factor when it comes to challenging COMEX. As we explained in previous research the Shanghai Gold Exchange offers 1kg and 3kg contracts.  Both have high delivery ratios.

Whilst not a futures exchange, the data from the SGE demonstrates (and interest surrounding it) shows those looking to own gold prefer to buy smaller contract sizes. Unlike COMEX, the SGE is used by those looking to own gold, rather than those looking to make gains on its price.

A futures exchange which offers a smaller contract size will clearly be more appealing to those looking to own and hold gold but look for the efficiency of a futures market.

Singapore wins again

Nearly a year ago we ran a poll asking our clients where they would prefer to store their gold. Given their historical place in the gold world and discrete banking we had expected Switzerland to be the country of choice, however we were wrong. Singapore took the majority of the vote. As a result of this previous poll we opened a vault in new hub of the gold market and it remains our most popular vault location.

Given this experience of Singapore’s popularity it wasn’t surprising to us when ‘vaults and easy delivery in Singapore’ won the majority of the votes compared to both Hong Kong and Zurich. In the last year big names have also opened gold-storage facilities in the country’s Freeport facility. This is no doubt due to the City State becoming the heart of the gold market, it is working hard to promote itself as a gold-trading hub, it no longer charges a tax on holding and importing gold and it has an extensive Freeport gold storage facility.

It is clear that activity in physical gold has shifted to Asia where exchange customers want 1kg bars rather than the bigger contracts offered elsewhere.

The size of contracts and popularity of taking delivery on exchanges such as the Shanghai Gold Exchange shows Asia is attractive to a more retail participating market.

Singapore’s opportunity?

We are witnessing phenomenal physical demand from both Western investors and those in Asia. All looking to own physical gold and store outside of the West.

Given this and the increasing levels of interest surrounding the physical delivery numbers on the Shanghai Gold Exchange, compared to those on COMEX, it is evident that smaller contract sizes and physical delivery out of the exchange’s custody (as opposed to warehouse receipts) are attractive to many retail investors.

As we said earlier, retail investors are locked out of COMEX but are looking for the efficiency offered by a futures market. Our data shows that there is a requirement for an affordable, easily deliverable contract which is also accessible to Western investors.

Currently there two futures exchanges in Singapore, but neither have a liquid futures contract in gold. Our data shows there is an opportunity for the future hub of the gold market to provide the first futures exchange that offers a fully deliverable, accessible gold contract.

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