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China Looking To Dominate Gold Market With International Shanghai Gold Exchange

By Kitco News
Tuesday May 27, 2014 11:12 AM

(Kitco News) - Not only is China the world’s top gold-producing and consumer nation but according to media reports, the country now has plans to become a major player in market pricing.

According to reports, the People’s Bank of China has given the Shanghai Gold Exchange permission to build an international gold-trading platform in Shanghai. The exchange has already contacted foreign banks including HSBC, ANZ, Standard Bank, Standard Chartered Bank and the Bank of Nova Scotia and invited them participate in a new international board.

China’s announcement to create an international price platform comes during a time of intense scrutiny of gold benchmarks. On Friday, the British regulator, the Financial Conduct Authority, fined Barclays Bank Plc GBP26 million for failing to adequately manage conflicts of interest between itself and customers, as well as “systems and controls failings,” connected to the London gold fixing.

Jessica Fung, commodity analyst from BMO Capital Markets, said that this move by the Chinese central bank appears to be extremely opportunistic.

“It is quite clear that the East is trying to dominate the market,” she said.

Ole Hansen, head of commodity strategy at Saxo Bank, agreed China is trying to capitalize on the turmoil in the London gold cash market as a result of the problems with the London gold fix.

Although the timing is opportunistic, Fung added that this is part of the Chinese government’s commitment to open up their markets. She pointed out that the Hong Kong exchange’s purchase of the London Metals Exchange last year is another example of how the country is slowly embracing international markets.

In August 2013, China surprised markets by giving approval to Australian bank ANZ and HSBC to trade gold futures on the Shanghai Futures Exchange.

Fung recently visited China and said the perception of domestic traders is changing and they are getting more comfortable and confident about the idea of trading in international markets.

She added that the country has major credit risk problems that they have to deal with and the only way to resolve them is by looking outside their borders.

“One of the reasons for the property bubble in China is because nobody knows where to put their money,” she said. “The government has to allow investors to move aboard and spread the risk.”

However, the question on a lot of analysts’ minds is whether an international Shanghai exchange will be able to dominate the market?

The Shanghai Gold Exchange is the largest gold exchange in the world; however, it currently provides a platform for domestic financial institutions, mining companies and retailers.

Hansen said because of the problems in the cash market, the SGE could dominate London; however, it would take a significant change in the market for China to dominate the futures market in North America.

“The investment flows are still bigger than the physical demand,” he said. “The liquidity is still on North America.”

Fung agreed that as long as there are still controls on Chinese markets and the yuan remains tightly regulated, an international Shanghai won’t be the global standard.

“The Shanghai exchange is just going to be a piece of the puzzle. Will it drive contracts? I doubt it,” she said.

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By Neils Christensen of Kitco News; nchristensen@kitco.com



Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.
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