One major consequence of China's emergence as a powerful player in the global economy has been the fact that it is progressively supplanting the traditional world financial centers as the real home of price discovery for precious metals.
In reality, due to the heavily industrial basis of the Chinese economy, the People's Republic is the leader in determining prices for virtually all of the metals. This includes copper, aluminum, and other industrial metals. Nevertheless, China's influence over the gold price and silver price is one of the undeniable trends of today's global markets.
Making the Rules of the Game
For over a century, London has been the epicenter of the bullion market. "The City" is not only the heart of the world financial system; it is also home to the most gold vaults in the world. It only makes sense that the London Bullion Market Association (LBMA) would be entrusted with overseeing the largest portion of the world's gold and silver trade.
However, as more and more of the precious metals held by countries in the Western Hemisphere have been sold and sent to the other side of the world—especially to China—this has naturally given the East more control over "price discovery," the process whereby fair market prices for a given commodity are determined. Since Economics 101 tells us that supply and demand are the factors that govern this process of price discovery, it only follows logically that China would assume a larger and larger role as it controls so much of the world's demand and supply of gold.
While nobody will deny that London and New York are highly influential centers for setting precious metals prices, places like Shanghai and Hong Kong are quickly rivaling them in influence.
This is where the Shanghai Gold Exchange (SGE) comes into play. As a tool for price discovery (alternately called price-fixing, or benchmark-setting), the Shanghai Gold Exchange will have its own slightly different rules for how this is done when compared to its London counterpart.
The time limits, bidding process, and the way the final price is set by participants will vary slightly from how things are done in London, since the Shanghai Gold Exchange sets its own rules for going about the fix. Moreover, the SGE will obviously be yuan-denominated, perhaps challenging the long-held practice of pricing gold in terms of U.S. dollars.
China Joins the Silver Fix
In addition to the SGE's impact on how gold is traded, China also recently secured an important place in the global silver market. The Chinese Construction Bank, among the largest banks in the world based on assets, has joined the London silver fix. The CCB replaced outgoing member Deutsche Bank amid recurring suspicions of price manipulation and general impropriety from the German megabank. This marks the first time that China will have a greater say in the benchmark price for silver, as well.
These developments only make sense because the Chinese government has become so entrenched in the various aspects of the precious metals markets. Plus, the Chinese people consume an incredible amount of gold and silver bullion each year. It will be intriguing to see how these changes play out in the coming months.
The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.