An update on the China gold market by Michael J. Kosares.
. . . . . .
In the World Gold Council’s Gold
Investor magazine, Jiao Jinpu, Chairman of the
Shanghai Gold Exchange reports that “In its first month, the Shanghai Gold
Benchmark Price’s trading volume was 105.91 metric tons of gold kilo bars,
corresponding to a turnover of [renminbi] 27.94 billion and an average daily
trading volume of 4.81 metric tons. 102.10 metric tons of gold were
physically settled, addressing the market’s need for physical gold.”
In The Cina
Syndrome article series, I emphasize the
physical nature of settlements on the Shanghai Gold Exchange as a matter of
exchange policy, and a requirement that will have significant impact on the
gold market in the years to come. This quote from Jiao Jinpu verifies
the application of that policy. Speculation on the price, which drives
activity New York’s COMEX, is discouraged by the delivery requirements on the
SGE. Over 96% of the volume on the SGE is settled in physical metal.
Jiao goes on to discuss how the Shanghai benchmark
influences derivative contracts within China. Gold contracts –
including leases, derivative contracts of various kinds, and commercial banks
savings and accumulation plans – are based on the benchmark price which in
turn is based on physical settlement. The physical price arrived at on the
SGE transfers directly to derivative contracts. In China, in
other words, the dog (physical gold) wags the tail (derivative gold).
On several occasions since the SGE benchmark started,
Chinese investors and traders drove the price to higher levels that carried
over to London and New York as the day progressed. (I should note that
Chinese traders can also drive the price lower.) As the first major
market to open in any given 24-hour period, China is positioned strategically
in the daily cross-global flow of gold trading. Trends there, as a result,
can have a strong influence on trading the rest of the day and in the London
and New York markets.
Since all settlements are in physical metal, demand in
China is for the real thing. Sellers will need to have a line on real
metal in order to settle their side of the contract, not a paper promise.
Already we have had reports of London bullion traders having to buy
metal in Switzerland – the reverse of the prior relationship when London was
the major seller to Swiss refiners. That might very well be the extended
influence of the new Shanghai benchmark.
