Shanghai Gold Exchange International Board
China is slowly moving to dominate the global gold market and it is important
to join the dots regarding a few key recent developments in China relating to
gold.
When the International Board of the Shanghai Gold
Exchange (SGE) was launched last Thursday September 18 during an evening
trading session, it was notable that the first transactions were put through
by a diverse group comprising HSBC, MKS (Switzerland), and the Chinese banks,
ICBC, Bank of China and Bank of Communications.
MKS is the Geneva headquartered precious metals trading
group that also owns the large PAMP refinery company in Switzerland.
There are reportedly 40 international participants signed
up to trade on the SGE International Board (SGEI), but the SGE hasn't
specifically confirmed the identities of all participants.
Like the domestic SGE which counts precious metals refineries
as members, the SGEI will have a diverse group of trading participants
including a number of international refineries as well as bullion banks and
trading houses.
Precious metals refineries Metalor Technologies and
Heraeus have confirmed that they will be participants and along with MKS,
this represents three of the largest gold refineries in the world.
International bullion banks who have already announced
their participation include ANZ, Standard Chartered and HSBC, and its also
known that Standard Bank, JP Morgan and the Bank of Nova Scotia were said to
be interested. The Perth Mint was also said to be interested.
The presence of international refineries and possibly
international mints as possible direct participants within SGEI trading
should improve liquidity and price discovery on the new international
exchange and help it become a serious competitor to the existing duopoly of
gold price discovery carried on in the London OTC market and the New York
gold futures market.
One encouraging factor about the SGE and the SGE
international platform is that there is a lot of physical gold flowing
through the Exchange. Therefore, price discovery is not just based on an
inverted pyramid of mostly unallocated gold as in London or mostly
cash-traded futures paper gold as in New York.
Like everything in China, the SGE thinks big and it
currently employs a network of 58 certified vaults, 55 of which are for
storing gold and 3 of which store silver. These 58 vaults are located in 36
Chinese cities that are considered important for gold refining and gold
consumption and physical delivery can actually occur between the
vaults.
With the launch of the SGEI, the International Board has
its own new vault in which international participants can load gold in and
out of. The is vault is being managed by Bank of Communications and is
strategically located in the Zhabei district, not too far from the Shanghai
International Airport. Brinks in Shanghai will be the official transporters
of gold for the SGEI.
Shanghai and Hong Kong Gold Markets To Connect
When the Hong Kong based Chinese Gold and Silver Society (CGSE) announced
last week that they plan to build a massive new precious metals vault in
Qianhai in Shenzhen, the significance of this announcement was not really
appreciated, as of yet.
The vault is not a stand alone project and its real
purpose is to support a CGSE gold trading platform in Shenzhen and allow this
new Shenzhen gold exchange to link up with the Shanghai Gold Exchange.
Shenzhen is less than one hour away from Hong Kong by rail or road.
The CGSE has 171 members and between 50 and 60 of these
will be registered to operate on the new Shenzhen gold exchange by as early
as next month.
At the CGSE announcement ceremony last week, Dr. Haywood
Cheung the president of the CGSE confirmed that he has begun negotiations
with the Shanghai Gold Exchange with the intention of forming a strategic
alliance between the new CGSE exchange in Shenzhen and the Shanghai Gold
Exchange.
The main objective said Cheung "was to enable a
mutual access between CGSE and the Shanghai Gold Exchange for market
participants in the form of a "Shanghai Hong Kong Precious Metals
Connect", which could help the local gold & silver industry to gain
access to the mainland market through the Qianhai project."
The Chinese and Hong Kong Governments and financial
authorities are going to model this 'Precious Metals Connect' on the soon to
be launched "Shanghai - Hong Kong Stock Connect", which is an
initiative between the Shanghai and Hong Kong stock markets to boost liquidity
and access between the two stock markets and access between Chinese A
and H shares.
Chinese A shares are shares of mainland Chinese companies
traded in yuan/renminbi. H shares are the Hong Kong listing of the
dual-listed mainland stocks training on HK dollars. In the 'Stock Connect'
there will be northbound and southbound daily flows of liquidity within
certain limits between the Hong Kong and Shanghai stock markets. The Shanghai
- Hong Kong Stock Connect initiative starts next month on October 13.
The CGSE therefore is planning that their Shenzhen
gold platform will become China's second gold exchange and offer Hong Kong
and the international market another route of access to the mainland Chinese
gold market.
This is important news and a very significant development
and is worth watching over the coming months.
PBOC and Gold - China Using Gold To Position Yuan
As Reserve Currency
Recent comments by David Marsh, the co-founder of the influential advisory
and research group, the Official Monetary and Financial Institutions Forum
(OMFIF), illustrate that a paradigm shifts is also occurring within the
official Chinese sector as regards gold and the renminbi currency.
Interviewed at this month's Chinese gold conference in Beijing, Marsh said that
“I don’t know if China has been boosting their official gold reserves,” but
he added that “over the past six or seven years the Chinese authorities
probably have been adding to their holdings in different ways.”
Marsh’s most recent comments resonate with similar
comments he made in January 2013 when he said that “it is likely that the
Chinese authorities will carry on purchasing gold in modest amounts and they
will do it in a way calculated not to disturb the market.”
Commenting on reserve diversification at the time, Marsh
said that “there’s no reason why the Chinese central bank should hold a
disproportionate amount of other countries’ reserve currencies such as
the dollar.”
Just over a week ago, the UK Treasury announced the
issuance of its first ever renminbi sovereign bond, in a move that is
seen as a continued boost to the internationalisation of the Chinese
currency. The proceeds of HM Treasury’s issue will become part of the UK’s
foreign reserves in the Exchange Equalisation Account (EEA).
Until now the EEA has only held gold, euros, dollars, yen
and Canadian dollars. Some other central banks such as the Australian Reserve
Bank already hold renminbi as part of their reserves, and others such as the
Swiss National Bank are considering adding renminbi as one of their reserve
assets.
Last week, to coincide with the British government’s
renminbi announcement, David Marsh penned a commentary for the OMFIF on
reserve diversification and the Chinese currency titled “A Big Chinese step
for Britain: UK moves to forefront of Renminbi internationalisation”.
Marsh highlights that in 2015, the IMF will review the
composition of their Special Drawing Right (SDR) monetary unit, and an
important milestone for the Chinese currency will be “the possible inclusion
of the renminbi” in the SDR. According to Marsh. “there is a growing belief
that the Chinese currency now conforms to a sufficient number of standards
for convertibility that it will be become one of the constituent parts along
with the dollar, the euro, yen and sterling.”
In all aspects of the Chinese gold market, be it the commercial sector or the
official sector, the importance of gold as an investment and as a backing to
a future currency is being explicitly signalled by the Chinese authorities.
The rest of the world should take note that when the
Chinese decide on a plan, they almost invariably see it through. For gold,
the Chinese are still planning big and the next phase of this plan is worth
watching.
These important developments in the Chinese gold market
are bullish for gold in the long term and should reassure jittery investors
after recent price falls.
MARKET UPDATE
Today’s AM fix was USD 1,214.00, EUR 944.75 and GBP 743.51 per ounce.
Friday’s AM fix was USD 1,222.50, EUR 949.22 and GBP 745.38
per ounce.
Gold fell $7.30 or 0.6% to $1,217.60 per ounce and silver
slid $0.61 or 3.3% to $17.90 per ounce Friday. Gold and silver both declined
for the week at 1.06% and 4.02% respectively.
Silver in USD - 5 Years (Thomson Reuters)
Spot gold in Singapore was trading at
$1,217.60 an ounce. Gold spiraled to its weakest level since January
and silver hit a 4 year low today, as investors speculate that the Fed will
begin tightening interest rates sooner than expected.
Spot gold fell 0.1% at $1,214.84 an ounce at 0916 GMT, while earlier it saw a
low of $1,208.36. U.S. gold futures for December delivery were down $1.20 an
ounce at $1,215.40.
Silver touched its lowest since June 2010 at $17.30 an
ounce, and was later down 0.6% at $17.71 an ounce.
The gold/silver ratio, jumped to its highest since mid
2010 on Monday at 68.7. Silver is weaker despite robust physical demand
globally.
China's silver imports were up 5.6% in the first eight
months of the year, official customs figures showed today. Palladium imports
were up 30.9% and platinum imports were down 18.9% at 49.049 tonnes.
Support for silver is now at $15, the 5 year low from
February 2010 (see chart).
by Ronan Manly , Edited by Mark O’Byrne
