Shanghai International Gold Exchange Gets the Green Light; China's Huge Physical Demand Will Set the Global Price

With London 'fix' under fire, China seeks bigger sway in gold trade
The Shanghai Gold Exchange (SGE) got the go ahead from the central bank last week to launch a global trading platform in the city's pilot free trade zone, a move that could challenge the dominance of New York and London in gold trade and pricing.

Beijing's plans to open up gold trading comes at a time when the benchmark price-setting process for precious metals is under scrutiny. Barclays Plc became the first bank to be fined over attempted manipulation of the 95-year-old benchmark London gold market daily "fix" last week.

State-backed SGE has asked bullion banks such as HSBC , Australia and New Zealand Banking Group , Standard Bank , Standard Chartered and Bank of Nova Scotia to take part in the global trading platform, two people approached by the exchange said.

SGE, the world's biggest physical gold exchange, where domestic banks, miners and retailers buy and sell gold, could also open up the international platform to foreign brokerages and gold producers, they said.

......Even if China lures foreign players, the exchange would still need to see full convertibility of the yuan and enough liquidity on the exchange before it can be considered to operate on a par with other hubs.

This plan will make China one of the three largest gold markets, after London and New York. Due to Chinese demand, and the price manipulation scandals and evidence that COMEX is the center for price suppression, once this exchange is up and running it may quickly become number 1.

Two important points from China:
Industrial Bank (Industrial Bank) analyst Jiang Shu said: "China needs to have more say in the gold price and the international exchange is the first step in obtaining that right.

......Physical demand has been unable to play a larger role in the gold price trend, but with the launch of the international exchange, China's huge physical demand will begin to have a greater impact.

The market will open this year: 上海自贸区官员:黄金国际板将在年内推出

Xu Luode, party secretary and Chairman of the Shanghai Gold Exchange, had these comments on gold:

Gold is special and super-sovereign asset....China's gold consumption is the highest in the world, but it cannot decide the price, the current price is still the "shadow price"......


  1. What do you think of Rickard's proposal that the West is suppressing the price in order for China to catch up its reserves as a percentage of GDP? To me that seems like a reasonable explanation and more likely than other "conspiracy" theories like JPM banging the market in order to cover previous shorts.

    Although if it isn't the central banks selling their reserves to China, then who is? Who besides miners actually sells?

    The price has been trading in a pretty tight band of 1290-1300 for the past few weeks, a bit out of the ordinary.

    - Luke

  2. It is a plausible explanation, maybe the most plausible. FOFOA and others have discussed similar arrangements with regards to Saudi Arabia, while explaining why the flow of physical is what is important. It's the Flow, Stupid. Secret deals between governments wouldn't be new or surprising.

    The answer, whatever it is, will be much simpler when revealed. Asset prices can trend away from their fundamental valuation for a long time before reversing, as long as people who believe the trend is correct keep betting on it.

    There's also been no instability in the core economies to send gold higher the past couple of years. The price went way too high in 2011 and for the wrong reason: if the U.S. refused to raise the debt limit, it would have touched off major deflation and the U.S. dollar would have gone much higher. Gold should have been dropping in 2011 for fear the U.S. Congress would actually end deficit spending. Or put another way, the supposed price suppression completely failed from 2009 to 2011, but it suddenly started working in 2013? I can believe that since China wants to buy a lot, and the Western central banks are on record not wanting the price to rise a lot, that they are working behind the scenes, maybe not even with direct gold sales, but simply working to move gold without hitting the market and causing a price dislocation. I suspect the reason for the price being where it is now is because that's where the market values it, the market including all individuals and central banks.