Filed 27 December 2011, 15:20 IST. Every price, volume and forecast below is reproduced as published on that date and is not a current quotation. For how the benchmarks themselves are set, see how gold is priced.
The Pan Asian Gold Exchange, established in Kunming to give Chinese retail savers direct access to spot gold, ran into difficulty. The venue had been announced with substantial ambition: retail accounts, physical settlement, and distribution through a major bank's branch network. The problems that emerged concerned the mechanics underneath that proposition rather than demand for it.
The central question was clearing. A spot venue selling metal to retail buyers has to hold or source the metal, settle the trades, and stand between the two sides of each transaction. Building a distribution channel is comparatively easy; building the clearing and vaulting arrangements behind it is not, and it is where this venture struggled.
What was being attempted
China's household savings were very large, domestic investment options were limited, and appetite for gold was strong. A venue that let a saver buy metal directly, in small quantities, through a bank account was therefore commercially obvious. What made it difficult was that it required functions normally split between an exchange, a clearing house, a vault operator and a bullion bank, assembled at once and at retail scale.
The Shanghai Gold Exchange already occupied the institutional end of that market with a member structure and established clearing. A new venue entering at the retail end had to build the same infrastructure without the same participants, in an environment where the regulatory perimeter for retail commodity trading was itself unsettled.
Why it is worth restoring
Because the failure is more instructive than a success would have been. It shows precisely which part of a gold market is hard to build: not the demand, not the technology, not the distribution, but the clearing and settlement layer that guarantees the other side of every trade. Every subsequent Chinese retail gold product had to solve that problem, and most did it by routing through an existing exchange rather than by creating a new one.
The dispatch also sits in a cluster with the Shanghai margin increases of the same period, and with the Tokyo exchange's search for order flow. Three venues, three different structural problems, all inside eighteen months; see the gold section and contract specifications.
The clearing question is the one that decides whether a venue survives. An exchange can arrange listing, membership and a matching engine and still have no answer to who stands behind a trade if a counterparty fails. Kunming had built the visible half of an exchange and left the half that carries the risk unresolved, which is why the trouble arrived as a regulatory problem rather than as a commercial one.
Questions about this dispatch
What was the Pan Asian Gold Exchange?
A venue established in Kunming intended to give Chinese retail savers direct access to spot gold in small quantities, distributed through a bank's branch network with physical settlement. It ran into difficulty over the clearing and settlement arrangements required to stand behind retail trades at scale.
Why is clearing the hard part of building a gold exchange?
Because someone has to guarantee the other side of every trade, hold or source the metal, and settle obligations if a participant fails. Those functions are normally divided between an exchange, a clearing house, a vault operator and a bullion bank. Assembling all of them at once, at retail scale, is a far larger undertaking than building the trading interface.
Did Chinese retail gold demand go away?
No. It grew substantially over the following years. What changed was the route: subsequent retail products were generally built on top of the existing Shanghai exchange's clearing rather than through new venues. The demand was never the constraint.
This page restores an item first published on 27 December 2011, 15:20 IST at the address below. Cite the publication date rather than the date you read it: the material is a 2011 to 2016 document, and the date is what makes it meaningful.
https://www.bullionstreet.com/news/chinas-pan-asian-gold-exchange-in-trouble/683