There appeared to be a changing tide of acceptance rather than concern over the past fortnight, that Shanghai is becoming a bigger, and more influential, cog in the global gold machine.
One senior bullion banker said that fear is no longer the rationale, as has been the case for many, regarding China becoming the dominant force in the global gold marketplace.
A gold dealer was of the same inclination.
He said that “someone” needs to step in and help rejuvenate London’s importance as a global gold hub, be it the London Metal Exchange of Shanghai Gold Exchange; or both.
“I think it should be the best [London as a global hub for gold trade] and still could be, but time is running out fast,” he said.
The SGE recently launched its yuan-denominated gold benchmark pricing mechanism, the “Shanghai Gold Benchmark Price”. It is traded basis physical gold ingots with minimum fineness of 999.9 and a standard weight of 1 kg.
The SGE performs centralized clearing, settlement and delivery for all executed orders, according to the exchange’s website.
London has been one of the world’s major gold trading hubs for hundreds of years, home to the global benchmark now known as the London Bullion Market Association Gold Price.
The system was previously known as the “fix” and was settled over the telephone by participating banks.
The new LBMA Gold Price is operated and administrated by IntercontinentalExchange, with the LBMA owning the intellectual property.
China, China, China
China is the world’s number one physical consumer of gold, and for now producer, as such a local pricing system has been on the cards for some time.
The LME is owned by parent-company, the HKEx, who recently signed an MoU with the SGE.
Still, senior London players seemed unfazed by the new system SGE system: “It might be used by the local market, but until China opens up its currency markets, it will have no impact on the international market, nor London,” said one broker.
Ross Norman, CEO of gold brokerage Sharps Pixley noted, “this is of course very much early days and it will almost certainly evolve to give transparency…and with transparency you get authentication and confidence that the benchmark is a valid number.”
London calling, for change
London is currently undergoing a period of reformation, steered by industry body the LBMA, with talk of a possible move to an exchange system from the current over-the-counter model, although the move would follow a number of smaller steps, including trade reported data.
Regarding the SGE price: “It’s another small step. On its own it is difficult to see why London should be afraid while the currency [yuan] is still not convertible,” Seamus Donoghue, CEO of tech firm Allocated Bullion Solutions, said via email.
A gold fund manager said: “London should not be afraid of a Chinese benchmark whilst capital controls remain in place in China.”
Still, there’s no denying that China is on the verge of change, and that could have a knock on effect to the London market as a global hub.
However, many defended the City’s position, noting that it will always remain an important part of the world’s bullion business.
Physical at a standstill
Looking at the immediate, physical hubs including the world’s two largest players China and India, remained at a standstill May 3 as the dollar spot price traded around $1,300/oz.
One senior bullion banker said of physical conditions, “[these are] very tough markets. [There’s] more physical selling than buying.”
This was backed up by senior logistics sources, who said that the market was becoming crowded and business tougher and tougher.
“We need things to pick-up, and sooner rather than later,” said one. A second said that, “it’s quiet. Everywhere.”
A senior trader agreed, “[the continued slow down] in the physical business is going to be difficult going forward.”
Looking at various physical premiums/discounts, they largely pointed towards a physical market on its knees.
India was heard in a deep a discount as $13/oz [for 995. fine material] in Mumbai, with a range of $5-$13/oz reported country-wide.
China was said to be in a modest premium of $1/oz [for 999. material], with Dubai in a discount of $3/oz and the rest of the world — Turkey, Singapore, Japan, Hong Kong etc. — all heard flat [against dollar spot], to a modest discount.
“It’s very quiet, there’s really no activity at all,” said one banker in Mumbai.
This was echoed across India; from brokers, jewelers, dealers to refiners.
It begged the question of many, how important are the physical markets — and real fundamentals — to the gold price?
The PGPI 995 was assessed at minus $5/oz May 3, from minus $3/oz May 2.