Wall Street Journal/Ese Dheriene and
Biman Mukherji/8-25-2015
“In recent years, China has come to shape the very way in
which commodities are bought and sold, traditionally the preserve of
financial centers such as London and New York. Late last month, the
price of gold fell sharply, to a five-year low, within minutes of Asian
markets opening. That came after almost five metric tons of gold—close to
$200 million of the metal—was sold on the Shanghai Gold Exchange, according
to ANZ Bank. The trade was seen by market participants as a key moment
reflecting how China had moved Asian commodity markets away from just
following the overnight pattern of U.S. and European trading.”
MK note: The premise of this article is that China
will continue to play a key role in shaping commodities’ markets in the years
to come, despite the current slowdown, based on its sheer scale. If
you follow this blog, you already know of the infrastructure China is putting
in place to influence the gold trade and insert itself as a third gold
trading center along with London and New York. We should note that the
five tonne trade cited above came after the price had dropped. Keep in
mind that Shanghai is physical market exchange. In other words, someone in
China took advantage of the price drop to force the market into a delivery of
five metric tonnes of the metal. You might recall too that there have
been reports in the background of Goldman
Sachs and HSBC looking to purchase significant amounts of physical metal for
delivery around the time of the five tonne trade. Are the two events
related? They very well might be. And this might the very first
signs of China flexing its muscle in the gold market in the way we outlined
in this News & Views Special Report titled, The Shanghai stock crash and China gold demand.
Quoting that Special Report:
In addition, an institution wishing to bet against
gold would be forced to do so by delivering the physical metal itself in kilo
bar form (the standard trading unit) upon settlement – an expensive and
cumbersome process likely to further discourage excessive speculation or
attempts at price manipulation. Gold Forecaster’s Julian Phillips, who has
analyzed activity in the gold market for a number of years, points out that
the seminal changes taking place in the gold market centering around Shanghai
“will allow Chinese banks to participate in the gold market on a global
basis.” It will be a market, he says, “that is not distorted by the banks,
their proprietary trading, or control of the gold distribution system
globally. China will hold these reins.”
Gold as a wealth building asset – East and West
In short, the physical flow of metal – its purchase
and sale in real terms – will govern pricing in Shanghai, not leveraged paper
trades, as is the case in the West. This emphasis on physical pricing in
Shanghai, particularly when the new Shanghai Fix comes into play later this
year, could signal the birth of a whole new gold market unlike anything we
have experienced since the United States detached the dollar from gold in
1971.
At the moment, there is a strong, steady flow of gold
through the London-Zurich-Hong Kong-Shanghai pipeline. Should the supply
slow, prices in yuan terms could receive a strong jolt. Don’t forget too that
the newly structured London fix now includes one Chinese bank with perhaps
two others soon to be accepted as members, the situation Julian Phillips
touches upon above. These banks will be on the constant lookout for arbitrage
opportunities that could be purchased and shipped to their home country.
Competition, as they say, is good for the soul, and in this case, it could be
curative.
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