China Launches Yuan Gold Fix

China Shakes Up Gold World with Remnimbi Denominated Gold Fix.

Shanghai Now Shares Power Over Gold Price With London and New York.

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Earlier this week, China launched the Shanghai Gold Benchmark (SGB) that provides a gold price fix denominated in Chinese Remnimbi or Yuan. The new SGB provides an alternative or competition to the New York and London Price gold pricing mechanisms.

China is the largest consumer, importer and producer of gold. China also is home to the Shanghai Gold Exchange, a robust and growing physical gold market. It’s only natural that China should have a role in determining the price of gold.

Chinese Gold Production

chinese gold mining production 2000-2015

Chinese gold mining production is the largest in the world.

Chinese Gold Exchange

Shanghai gold exchange final 2105 vs other years

The Shanghai Godl Exchange had record withdrawals in 2015.

The Participants in the Shanghai Gold Benchmark

In China Flexes Its Gold Muscle, we reported that Chinese officials were looking to include a number of western banks in the Shanghai Gold Benchmark. On launch date, 18 entities participated in fixing the price of gold in Remnimbi. These included the largest four largest Chinese state owned Banks, Industrial and Commercial Bank of China, Agricultural Bank of China, Bank of China and China Construction Bank, Chinese entities, The Bank of Communications, Shanghai Pudong Development Bank, China Minsheng Banking, Industrial Bank, Ping An Bank, Shanghai Bank, Bank of China (Hong Kong), retailers Chow Tai Fook and Lao Feng Xiang, , Chinese miners China National Gold Group and Shandong Gold Group. The group also includes two foreign banks, Standard Chartered and ANZ and Swiss trading house MKS.

How it Works

The Shanghai Gold Benchmark works in a similar fashion to the London pricing mechanism. The SGB sets the price of gold twice a day based on a few minutes of trading. Bullion Vault has provided a fine summary of the details on the mechanics of the SGB in “All You Need to Know About China’s New Shanghai Gold Fix”.

Gold Price Manipulation

Manipulation charges have been leveled for years against the London gold pricing mechanism and the price discovery on the New York Comex gold futures exchange. Allegations include suspected manipulation for nefarious reasons including price supression and self dealing for profits. Click here for a summary of suspected gold manipulation theories.

Indeed, last year a Barclays trader was found to have manipulated the price of gold and last week Deutsche Bank settled charges that it had manipulated the gold market. There have been many examples of actual gold manupulation taking place over the past century. Click here to review actual examples of proven and admitted gold manipulation.

What Changes?

The Reaction

From the South China Morning Post:

“The gold fix is also the latest sign that Beijing will continue to expand the role of its currency to match the country’s increasing economic might.”

Shanghai’s third set of eyes on the price of gold may act to keep the other two in London and New York honest. Or it may, as in any oligopolistic structure, solidfy the price signals sent by each of the participants to each other.

A common theory is that western governments have a vested interest in supressing the price of gold as it is viewed as competition to their debt based fiat currencies. As such, the theory goes, the London and New York markets have been used to supress the price of gold. China, also has an interest in lower gold prices as it plays catch up to the west in accumulating gold. Lower gold prices have therefore been in the interest of the west and China. Should that change and it become in the interest of China to have higher gold prices to make the value of their accumulated gold holdings more valuable, China will have a greater say in how the price of gold is fixed.

gold reserves by country april 20 2016 top ten

According to the World Gold Council, China holds the fifth most gold of any nation.

Many believe that China has more gold than the officially stated amount in the People’s Bank of China’s (PBOC) reserves. “China” indeed probably has more gold than the 1797 tons reported by the PBOC. Gold is most likely held in other state-owned Chinese entities. For a list of potential places where Chinese gold might be, see The Case of China’s Missing Gold

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