China Gold Fix to create greater price transparency

Beijing (Apr 13)  China is set to extend its influence in the gold market with the launch of a highly anticipated yuan-denominated gold fix on April 19.

“As the largest producer and consumer of gold, it is only logical that they develop the infrastructure to trade, price and provide liquidity for gold in their own currency,” said John Butler, vice president and head of wealth services at GoldMoney.

Seamus Donoghue, chief executive officer of Singapore-based Allocated Bullion Solutions said the gold fix also provides the People’s Bank of China with the capability to control and stabilise the gold price.

Like the London Gold Fix, the Shanghai Gold Exchange’s (SGE) benchmark price will be set twice per business day and both local and foreign banks will be allowed to trade the contract. It is understood that clients of foreign banks will be allowed to trade anonymously whereas those of domestic banks will not enjoy the same privilege. In China, the initial price for the first auction will be determined by a ‘trimmed arithmetic average of price-setting members’ inputs’ whereas the London auctions kick off using a price selected by an independent chairperson, Donoghue said.

The state-run SGE deals solely in physical gold whereas ‘paper gold’ contracts are factored into the London Gold Fix, administered by the London Bullion Market Association (LBMA). “It’s increasingly unclear that the paper gold market and physical market are as linked as they should be. Someday, there’s going be a delivery issue. A mismatch between paper and physical plays would redirect the market more toward the physical and would facilitate rising positions in Chinese contracts,” Butler said by telephone.

“Should the Chinese gold fix deviate from the London fix price, concerns around the pricing and settlement of ‘paper gold’ in London could arise and destabilise the functioning of the market – although we believe it will take some time before the Chinese benchmark has such a significant impact,” said Donoghue.

Butler expects the Chinese fix to create greater price transparency and make opportunities for arbitrage more apparent. Although, this should be short-lived and infrequent. “In theory, that’s a good thing as arbitrage opportunities in an efficient market should be rare and temporary rather than often and frequent,” he said.

He also cautioned against theories that the move is an attempt to displace western market dominance. “It’s a leap to assume that they’re trying to squeeze the dollar out as the dominant currency when it comes to precious metals. They’re potentially building the infrastructure to do so, but I’m not sure it is the immediate goal. At this stage it’s more a matter of convenience and it’s symbolic. They taking action to confirm what we already know, that they’re the biggest gold player,” said Butler.

Noting that the Hong Kong Exchanges and Clearing (HKEX) is also considering offering both yuan and dollar-based quotes on gold futures for physical delivery as well as the rising popularity for physical delivery, Donoghue said other exchange markets would come under pressure to provide similar offerings.

Butler said Chinese contracts are also likely to gain market share if low COMEX inventories persist and if the LBMA fails to find a solution for the way in which the gold price is fixed in London. Although the London Gold Fix, in operation since 1919, has recently undergone changes mainly to boost transparency, some still consider it archaic.

Source: Mineweb