With the gold price behaving contrary to expectations these last 18 months and the sudden drops in prices in April and June of this year, China’s effect on the gold investment market has once more come under the spotlight.
How does this emerged, giant economy and its people affect trends in the price of gold?
Quite a lot it turns out.
Rethinking how gold prices are set
Investors have thought for years that the main centres for gold price discovery were in London and New York, citing the opaque London Gold Market and the COMEX futures contracts.
However, it seems the growing size of the Shanghai Gold Exchange is bringing competition to this market. This much more physical of gold markets, where 240 tonnes of gold bullion was delivered in April compared to 3 tonnes at COMEX, is quite different to its dynamics than London and COMEX.
London and COMEX markets have been famous for their fractional nature, which could mean that investors lose confidence in these locations if they think they cannot be guaranteed delivery of their gold bars.
This issue has been written about by hedge fund manager Ned Naylor Leyland for some time. Other recent reports have also shown the superior physical nature of the Shanghai Gold Exchange, where far higher delivery ratios exist compared to COMEX.
It’s all different in Shanghai
In contrast the transparent nature of the Shanghai exchange, with its ability to deliver huge tonnage of the yellow metal, might become an increasingly attractive destination for investors to bring their bids and offers.
For now the Western market probably do maintain dominance in the setting of gold prices, but China’s ravenous appetite for hedges against the dollar based financial system is leading to new and improved gold markets inside China itself.
Already Western institutions have forged relationships into Chinese exchanges allowing traders to access these markets.
Only time will tell how quickly China might also usurp the West in this key area of gold trading.
If at this time ‘Mrs Wong’, as Max Keiser refers to the 300 million Chinese housewives buying gold, is the main constituent part of retail demand at the Shanghai exchange, she might be joined by Mrs Watanabe, Mrs Smith and Mrs Benz if Western and Japanese retail investors seek better markets for their trading and investment needs.
How does this fit into the currency wars?
The Chinese are well aware of their position in the global currency wars. It’s why they’re so warm in their attitudes towards precious metals and Bitcoin. They are looking to escape the downsides they experience within the dollar based financial system.
It is in China’s interests to get as big a slice of the gold game as she possibly can. This might involve a bullion backed yuan, the largest and most robust trading markets and exchanges and perhaps also the most efficient, transparent and reliable retail investment services and products.