Scam alert raised as gold nears US$1,000

PUBLISHED : Monday, 10 March, 2008, 12:00am
UPDATED : Monday, 10 March, 2008, 12:00am

Legislator and industry call for tighter rules

The government is under pressure to tighten gold trading rules as record-high prices for bullion raise fears that eager investors will be ripped off by unregulated traders.

Legislator Chim Pui-chung and the brokerage industry want stricter controls on the hundreds of gold trading shops in the city to protect investor interests as the precious metal heads towards US$1,000 an ounce.

Gold was last traded in New York at US$972.60 to US$973.40 an ounce, after rising as high as US$988 in morning trade on Friday.

'We have heard about scams in local gold trading and there is no regulation in this area,' Mr Chim said. 'The government should plug this regulatory loophole. It was not a problem before, when few people were trading gold, but with the price hitting record highs everyday, investors are trading again.'

He said he would submit a proposal to Secretary for Financial Services and the Treasury Chan Ka-keung for a law that would stipulate only members of the official gold exchange can offer products to retail investors.

The Chinese Gold and Silver Exchanges Society plans to launch an electronic trading platform in the second quarter. The 98-year-old exchange has 171 members, jewellers or investment firms trading local gold in tael and in Hong Kong dollars.

'The gold exchange has a good reputation and if the government requires gold trading shops to be members, it will enhance investor protection,' Mr Chim said.

Under present laws, anyone who pays HK$2,600 for a business licence can open a local London gold trading shop, so named because it allows investors to bet on gold prices based on the settlement price fixed in London. The Securities and Futures Commission does not regulate these shops.

The shops allow small retail investors to use a minimum deposit to trade. Industry insiders said some shops allow people to put as little as HK$80,000 on a 100 ounce London gold contract. Based on the current price of just under US$1,000, the contract is worth almost HK$780,000.

Retail traders could easily lose their entire deposits. In some cases, shops are alleged to have cheated customers by charging huge commissions for unnecessary trades.

A source said the government in the early 1990s had considered regulating the shops by requiring them to secure licences from the SFC. 'But when we were preparing the law, the market turned and there was a lack of interest in gold,' the source said.

Professor Chan, through his spokesman, said Hong Kong had always let London gold shopowners regulate themselves and they would only need a licence from the SFC if they offered gold coins or gold fund products. He said other markets such as London and New York did not regulate London gold trading.

'The complaints against London gold trading are mainly related to some scams. If the public suspect they are victims of such scams, they should report to the police. If investors think gold shop traders are acting in a manner that is unfair to them, they should report to the Consumer Council,' he said.

Chow Yat-ping, a retiree who invests in gold, wants to see more protection for gold trading.

'I trade in a shop which offers both securities and gold trading. I do not understand why securities trading is regulated by the SFC while gold trading is not. They are both investment products,' he said. 'It is the government's responsibility to increase protection for investors.'

Anderson Cheung, deputy managing director of Mitsui Bussan Precious Metals (HK), said it would be better for the SFC to regulate these shops. 'The Chinese Gold and Silver Exchange Society is not being regulated by the SFC, it would be hard to convince the government to let the exchange regulate these shops. I think the best solution is to let the SFC give licences and regulate these firms,' Mr Cheung said.

Lee Sik-ming, a committee member of the Chinese Gold & Silver Exchange Society and a bullion trader for 40 years, supported Mr Chim's proposal. 'If gold trading shops all had to be members of the gold exchange, we could better regulate their behaviour and ban any malpractices,' he said.

Hong Kong Stockbrokers Association chairman Kenny Lee said all gold traders should be licensed by SFC.