Gold in Hong Kong: ridiculously cheap spreads

October 28, 2012,
Hong Kong

After spending a fantastic weekend in Myanmar, I headed to Hong Kong late Sunday to partake in one of my favorite activities: buying gold on the cheap.

As we’ve discussed before, Hong Kong consistently ranks as one of the cheapest places in the world to buy gold. In the past I’ve bought one ounce gold coins for as low as 0.1% over spot in Hong Kong… practically a rounding error. I suspect in the future it may be outmatched by Singapore. But not yet.

To be fair, premiums in Hong Kong do fluctuate wildly based on supply and demand. Just before Chinese New Year, for example, gold demand soars. It’s a common gift for the holiday.

Right now is a time of high demand; much of this is driven by mainland Chinese coming across the border to buy gold and stash it in Hong Kong.

But while gold premiums do vary in Hong Kong with supply and demand, there’s another metric that’s equally important to pay attention to: the spread. And spreads in Hong Kong are among the lowest I’ve seen anywhere in the world.

As you probably know, the spread is the difference between a dealer’s buy and sell prices. For example, if a dealer sells gold coins for $1,775/ounce and buys them back at $1,725/ounce, his spread is $50. The lower the spread, the better for us.

This morning, the spot price of gold quoted in Hong Bank dollars was HKD $13,285.05. Remember that’s Hong Kong dollars– about $1,714.20 in US dollars.

Bank of China was selling one ounce Panda coins for HKD $13,854, about 4.1% over spot. But they were BUYING them at HKD $13,814, about 4% OVER spot. Both their sell price AND their buy price were above spot.

In this case, Bank of China’s spread was a mere HKD $40, or just about five bucks in US dollars. This is insanely low– the gold price can move more than $5 within minutes!

For Maple Leaf coins, Bank of China’s premium over spot was slightly higher– HKD $13,889, or roughly 4.5%. But the spread was similar at HKD $50 (USD $6.45). That will hardly buy you a Big Mac anymore.

Hang Seng Bank had nothing but a few Australian Kangaroo coins in stock (remember– high demand and tight supply) selling at 4.4% over spot. But the spreads were just as tight– HKD $50, or $6.45 USD.

Spreads this thin are a great opportunity for gold buyers. And adventurous North American investors may even consider taking an arbitrage trip to Hong Kong.

For example, one could buy Maple Leaf coins at a low premium over spot in North America, fly to Hong Kong, and take advantage of the low spreads by selling the coins there. You may even be able to buy Pandas in Hong Kong (which are cheaper in Asia) and then sell them for a much higher premium when you fly home.

This is one way of heavily subsidizing a cheap trip to Hong Kong. And if nothing else, it’s worth flying here to open a bank account. After all, Hong Kong is one of the best places in the world to bank. More on that later this week.

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