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Established in 1910, the Hong Kong Chinese Gold and Silver Exchange Society specialized in the buying and selling of gold bullions. However, gold and silver coins and paper currencies of the United States, Japan, Indo-China, the Philippines and Mexico were also traded in the pre-war days and during the early post-war years. Gold traded in the society is of 99 percent fineness, weighed in taels and quoted in Hong Kong dollars, whereas gold traded in the European and American markets is of 99.5% fineness, weighed in troy ounces and quoted in US dollars. Tael, also known as “liang” (两), is a Chinese weight measuring unit. One tael is equivalent to 38.5 grams and 1 troy ounce is equivalent to 31.1 grams; therefore 1 tael is equivalent to 1.24 troy ounces. The minimum unit of transaction in the society is 100 taels. Members of the society are allowed to hold an open position of up to 3,000 taels in the buying and selling of gold. If this limit is exceeded a margin deposit of HK$75,000 per 100 taels will have to be paid. This limit and the amount of margin deposit are subject to change, depending on the fluctuation of gold prices. The amount of margin deposit paid by clients to members varies with the amount of margin required from members by the society. In certain cases, however, clients are allowed smaller margin deposits. In principle, settlement of all transactions in the trading hall has to be effected within one business day. However, settlement can be rolled over until the next business day or indefinitely subject to the constraints of the “carried over charges system” whereby interest is to be paid either by the seller or the buyer, depending on which party defers either delivery or taking delivery. There is also a “daily storage fee” of HK$6 per 100 taels outstanding at the close of business. The so-called “carried over charges system” works as follows. On each business day, at 11.00 a.m. (10.30 a.m. on Saturday) the society takes stock of the amount of physical gold for spot delivery. If there is an excess demand Appendix I The Chinese Gold and Silver Exchange Society 190 The Dragon and the Crown for spot delivery, sellers deferring delivery of the gold will be charged interest in favor of the buyers. Interest so paid is known as “positive interest”. In a situation of excess supply, buyers deferring taking delivery will be charged interest in favor of the sellers. Interest so paid is known as “negative interest”. No interest will be paid either by the seller or the buyer if the demand for and supply of physical gold delivery is in equilibrium. If this is the case a situation of “even interest” arises. This “carried over charges system” stipulates that payment of interest is divided into five classes. If a disequilibrium situation in demand and supply persists, interest will be adjusted upward — one class for every three consecutive days (from first class to second class and so on until the fifth highest class). If the disequilibrium subsides interest will be back to an “even interest” level after which it will scale up again should either a “negative interest” or “positive interest” situation develop. The amount of interest is expressed as $x per 10 taels and is calculated on the previous day’s afternoon price fixing. In order to avoid complications, in the gold trading contracts the term “interest” is referred to as the “handling charge”. The existence of such a system enables the society, which is basically a physical spot market, to evolve into something akin to an undated future market. (Market participants have the option of deferring delivery with no fixed date of delivery). To facilitate the settlement of members’ accounts the society fixes prices twice daily (i.e. the morning fixing and the afternoon fixing.) These fixings are clearance prices for members to compare the contract prices of various deals with the fixed prices and transfer the proceeds of net profit or loss to the society. In this way the society assumes the duty of a clearing house. Source: Excerpts from the article “Hong Kong — An International Gold Trading Centre” published in Hang Seng Economic Quarterly, January 1983. ...

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