China Launches Yuan Gold Fix

Yesterday, China launched a yuan-denominated gold price fix. What does it imply for the gold market?

The new benchmark for the price of gold, called the Shanghai Gold Benchmark Price, is listed on the Shanghai Gold Exchange and is set twice a day (with the AM session beginning at 10:15am and the PM session at 2:15pm) by eighteen institutions, including top Chinese banks, jewelry retailers, and gold miners. The benchmark is derived from a 1 kg-contract – yesterday it was set at 256.92 yuan ($39.70) per gram. The price was equivalent to $1,234.49 per ounce – interestingly, it was slightly higher than the $1,234.30 per ounce set in the afternoon in London.

There are twelve fixing members (including two foreign banks): the Industrial and Commercial Bank of China, Agricultural Bank of China, Bank of China, China Construction Bank, Bank of Communications, Shanghai Pudong Development Bank, China Minsheng Bank, Industrial Bank, Ping An Bank, Bank of Shanghai, Standard Charted Bank (China) and the Australia and New Zealand Bank (China). Another six companies take part in the benchmark as reference price members: China National Gold Group Corp, Shangdong Gold Group, Shanghai Lao Feng Xiang, Chow Tai Fook, Bank of China (Hong Kong) Ltd and MKS (Switzerland) SA.

How will the yuan-denominated gold price fix affect the gold market? The introduction of a new benchmark for the price of gold is a step by China to exert more control over the pricing of the yellow metal and to increase the country’s influence in the global bullion market dominated by London and New York. However, China is not an open economy, therefore, the impact of its gold fix will be limited, at least at the beginning, as the yuan is not fully convertible, while investors have been accepting the London fix for decades (China has yet to show that the fix setting is transparent and rational). The fix will promote the internationalization of the Chinese gold market and the yuan’s role as a global currency.

The take-home message is that China launched the yuan-denominated gold price fix. The new benchmark will not be an immediate threat to London gold fix, but this may change with time and the full convertibility of the yuan. The Shanghai Gold Benchmark Price will be complementary to the prices in London and New York (since it will be Asian-oriented and yuan-denominated), which will help both consumers and producers in this part of the world (e.g., having a yuan-denominated gold fix excludes foreign exchange risk) and will increase the liquidity and efficiency of the global gold price discovery process.

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Disclaimer: Please note that the aim of the above analysis is to discuss the likely long-term impact of the featured phenomenon on the price of gold and this analysis does not indicate (nor does it aim to do so) whether gold is likely to move higher or lower in the short- or medium-term. In order to determine the latter, many additional factors need to be considered (i.e. sentiment, chart patterns, cycles, indicators, ratios, self-similar patterns and more) and we are taking them into account (and discussing the short- and medium-term outlook) in our trading alerts.

Arkadiusz Sieron

Sunshine Profits‘ Gold News Monitor and Market Overview Editor