This past week, the new Shanghai Gold Fix was introduced to the world. Will this price-setting mechanism now give China dominance over the global gold market?
In a word, no.
Asia Gold Price Discovery
The Shanghai gold fix made its debut on Tuesday. Perhaps coincidentally, gold prices made a leap higher of more than $20 per ounce.
The new gold fix conducted in Asia will set fair market prices twice a day, just like its London counterpart. There are, however, a few key differences that stand out.
The price-setting benchmark will naturally be denominated in Chinese yuan (also known as renminbi) rather than U.S. dollars or pounds sterling. The standard weight of the gold being priced will also depart from the long-held standard of troy ounces, using a per-gram basis instead. Further, rather than using the existing list of Market Makers according to the London Bullion Market Association (LBMA), the Shanghai Gold Fix will rely upon its own pool of 18 Market Makers, including big financial institutions such as the Bank of China and the Chinese Construction Bank.
There were other steps taken prior to the SGE's price-fixing platform that give the Asian markets a greater sway in gold price discovery, as well. In addition to acquiring a slew of overseas gold mines, China also got its foot in the door with the traditional London gold fix, as well. The Bank of China filled the seat vacated by Deutsche Bank in what has been rebranded as the "LBMA Gold Price." (Deutsche Bank admitted to engaging in price manipulation as a member of the London fix.)
Limits of the Shanghai Gold Fix
However you slice it, the debt of the Shanghai Gold Fix is a major development. It only stands to reason that China should play a considerable role in setting global prices. In addition to consistently ranking as the world's top gold producer (thanks to its foreign acquisitions), China is also one of the top two consumers of the yellow metal, as well. It even supplants India as the top importer of gold some years.
There are several reasons to be skeptical of the new Chinese gold price benchmark's ability to reshape global markets. Even though China plays a strong role in both gold demand and supply, BullionVault's head of research Adrian Ash believes the Shanghai gold fix "will remain just another measure of localized demand and supply, rather than a tool for global traders."
Moreover, China has a problem penetrating global gold markets because it is illegal to export the metal from the country. This lends credence to Ash's point that the SGE fix will only represent regional price discovery. Nonetheless, the new mechanism helps the Asian gold market function more efficiently (instead of relying on a simple premium over the London spot price) and certainly gives China more control over the world's gold market to some greater degree.
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.