China Challenges Gold Price-Setting Regime; Confirms Launch Of Yuan-Denominated Fix

“They want to be on the top table in all areas of international trade and this is no different,” Sharps Pixley CEO told Bloomberg earlier this month, tying China’s move to participate in the twice-daily auction that determines London gold prices to Beijing’s efforts to embed the yuan more deeply in international investment and trade. 

As a reminder, the auction has its roots in efforts to deter manipulation. Here’s what we said last month: 

A long time ago, in a financial galaxy far, far away, a “fringe” blog raised the topic of gold market manipulation during the London AM fix. Several years later (which, incidentally, is about average in terms of the lag time between when something is actually going on and when the mainstream financial media finally figures it out and reports on it), it was revealed that in fact, shenanigans were likely afoot and indeed, regulators are still trying to sort out what happened. The ‘fix’ for the ‘fixed’ gold fix (only in the world of corrupt high finance is such a hilariously absurd passage possible) is supposedly a new system whereby the fixings are derived electronically. 

On June 16, the LBMA announced that Bank of China would become the first Chinese bank to participate. Earlier this week, ICBC said it may also join the electronic auction process. From the press release introducing Bank of China's participation:

"We are proud to become the first Chinese and Asian bank to participate in the gold auction.” said Yu SUN, General Manager, Bank of China London Branch & CEO, Bank of China (UK) Limited. “Bank of China joined LBMA as an initial member in 1987, and has been actively participating in the gold trading business in London for over forty years. Although being the world’s largest gold producer and consumer, China has never played a major role in the global gold fixing. Bank of China’s direct participation in the IBA gold auction will reinforce the connection between the Chinese domestic market and overseas markets, make the international gold price better reflect the supply and demand in China, and help to promote the internationalization of the Chinese gold market.”

 

“We are delighted to welcome Bank of China to the gold auction,” said Finbarr Hutcheson, President, ICE Benchmark Administration. “The growth in daily volumes coupled with the increase in participation from around the globe, demonstrates strong market support for the independent governance and oversight we have implemented to bring transparency and trust to the gold auction.”

“Participation in the gold auction will increase the link between China and international markets, and make the gold price better reflect the nation’s supply and demand,” Bank of China said, while on Thursday, ICBC’s general manager of precious metals Zhou Ming told an audience in Shanghai that “Chinese banks want to expand [their] reputation and brand influence in the Western market.”

Indeed, China isn’t stopping with the LBMA when it comes to increasing its influence on gold pricing. As tipped here last month, the country is set to launch a yuan-denominated gold fix later this year. Now, we have the first public confirmation from the Shanghai Gold Exchange that the fix will be introduced by the end of 2015. Reuters has the story:

"We will be introducing a renminbi-denominated fix at the right moment, we are hoping to introduce by the end of the year," Shen Gang, SGE's vice president, said at the LBMA Bullion Market Forum in Shanghai on Thursday.

 

"We have policy support for development (of the gold market)," she added.

 

While Shen did not give more details, sources familiar with the matter have said that China is expected to receive central bank approval for the fix soon.

 

Pan Gongsheng, a deputy governor of the People's Bank of China (PBOC), said the central bank would continue to support "speedy and healthy growth of the China gold market" and its internationalization.

 

Given its leading role in gold, China feels it is entitled to be a price-setter for bullion and is asserting itself at a time when the global benchmark, the century-old London fix, is under scrutiny for alleged price-manipulation.

 

If the yuan fix takes off, China could compel local buyers and foreign suppliers to pay the domestic yuan price, making the dollar-denominated London fix less relevant in the world's biggest bullion market.

 

While details of the fix are yet to be revealed, sources say it would be derived from a contract traded on the bourse for a few minutes, with the SGE acting as the central counterparty. That could make the process transparent - addressing one of the big concerns about the London fix.

 

The yuan fix is the most recent effort by SGE to boost China's position in the global gold market. The exchange opened an international bourse in September 2014, allowing foreigners to trade yuan-denominated contracts for the first time.

Between Chinese banks' participation in the London auction and the advent of the yuan fix, China is now in a position not only to exert its influence on the dollar-denominated benchmark, but to establish its own price setting mechanism that may well serve to challenge and ultimately supplant the Western fix which the market will likely always view as subject to manipulation.

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