Shiny outlook: A proposed central gold exchange could prove a milestone

Often described as wedged between India and China to illustrate its growth potential, Myanmar’s proximity to the two resource-hungry giants has not always been a blessing. For a long time, the state has fostered the interests of smugglers of various resources, creating a black market that grew to some $100bn between 1960 and 2013, according to the US-based research and advocacy group Global Financial Integrity.

However, this is gradually changing. As the country pursues adoption of more modernised trade techniques across a variety of industries, illegal trade is being indirectly obstructed. One example of this is the proposed development of the Yangon Gold Exchange, which will formalise the trade of gold. This, in turn, will restrict the smuggling of precious metals, as investors will have the option to purchase gold certificates, eliminating the need to hold the actual commodity.

Price

Under current market conditions, the price of gold is determined by two factors: the international price of gold, and the strength of the US dollar against the Myanmar kyat. The volatility of the latter, which fell by more than 30% on the official market in 2015, has complicated the calculation of gold prices for dealers. This is due to the presence of unofficial market rates which differ from those released by the Central Bank of Myanmar. The creation of the central exchange would remove this uncertainty to some degree.

Process

The gold exchanges of Shanghai and Hong Kong are being used as a template for the development of a central trading market, Myanmar’s first major gold exchange. The initiative is being undertaken by the Myanmar Gold and Jewellery Entrepreneurs Association, which has formed a public company in a bid to boost local interest in the mineral.

The establishment of the exchange gained momentum in early 2015, when executives from Myanmar Gold Development Public Company visited Shanghai and Hong Kong to better understand how those markets were formed and currently function. Shortly after the visit, the company drafted a report which will form the framework of the exchange.

Benefits

According to the Myanmar Gold Entrepreneurs Association (MGEA), a central exchange would bring quality and pricing in line with international standards. While the MGEA is aiming to restrict trade to local investors initially, it has publicly announced an interest in bringing in foreign investors at a later stage. The purchase of gold from dealers in Mandalay and Yangon is not tightly regulated at present, with no strict standard on locally produced gold.

Advancements are set to be made in various areas to raise the level of trade. Official trademarks will be placed on gold bars, and the MGEA is pressing the government to regulate taxes on the precious metal, all of which will aid the development of the exchange.

If the Shanghai exchange is anything to go by, it will take a few years for a central exchange in Myanmar to gain traction. However, there is significant potential to generate local demand. Created under state supervision in 1997, trade activity stayed at low levels for the first few years on the Shanghai market. Yet by 2012, it accounted for 95% of all gold trade in China, and by 2014 the country surpassed India to become the world’s leading gold consumer.

Product

A central exchange, which was still awaiting government approval as of late 2015, may take time to become a reality in Myanmar. The numerous hurdles to this mostly mirror those faced by the Yangon Stock Exchange, such as upgrading accounting standards and recruiting experienced technical staff and local traders. At a time when commodity prices are depressed, however, the creation of an exchange presents an opportunity for locals to capitalise on the undervalued segment. As 2015 drew to a close, market experts were predicting that the price of gold would rise, given ongoing instability in the Middle East.