Will China set Gold prices?

Thu, 2 Jul Pre-Open

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Chinese economy has been in the news because of the bad developments lately for reasons such as margin trading, stock market bubble, and shadow economy etc. In an attempt to regain its influence over the global economy, China is planning to introduce Yuan gold fix via Shanghai Gold exchange.

Before we go further, let us explain what gold fix means. It is an act of setting gold prices. The same is used to set price of global gold products and derivatives. As of now, prices are set twice a day by five members of the London Gold Market Fixing Ltd. While this should ideally be done on the basis of supply and demand principles, London fix is already under scrutiny for an alleged price manipulation.

China is one of the world’s leading producers and consumer of gold. However, it hardly has enjoyed any pricing power on the bullion. The same is mainly dominated by London and New York. One must note that London fix is set twice a day, but at times when Asian markets remain closed. With this background, London fix can hardly be called transparent.

Yuan gold fix, apart from increasing China’s global influence, is likely to give Asia region more power and transparency with regards to the gold trade. It is also fair that the region which is the highest producer and consumer of gold should be the one setting the benchmark. However, there is more to this development than what meets the eye.

As an article in Seeking Alpha suggests, by hoarding gold and introducing Yuan gold fix, China is perhaps aiming for a control over the global currency markets. The Yuan based gold price will be set at SGE (Shanghai Gold exchange) which is sponsored by Chinese banks with direct Government support. This is different from London banking structure which is mainly private. What this means is that under the Yuan gold fix, China could increase or decrease the amount of yuan used to buy gold. This will mean that either US will need to adjust dollar price accordingly, or value of yuan versus gold will adjust accordingly. This would lead to China having an influence over value of US dollar in global markets. And that could cause a significant shift as far as financial strength of the US Government is concerned.

However, unless Yuan is made fully convertible, London fix is unlikely to become entirely irrelevant. Whatever happens we believe this move is likely to boost China’s role and position in the global gold market.