All You Need to Know About China's New Shanghai Gold Fix
Thursday, 4/21/2016 17:03
New SHAU auction modelled on London benchmark, will "complement" or "challenge"...
CHINA's Shanghai Gold Exchange this week launched a new benchmark price for gold bullion.
Aimed at finding the market-wide price in the world's No.1 gold mining and importing nation, it will either complement, challenge or supersede the world's long-established daily benchmark set in London, according to officials, traders and analysts commenting on the launch.
The new Shanghai Gold Benchmark auction "concentrates" supply and demand twice every working day, aiming to find the one single price at each event that matches the most business from buyers and sellers.
This method –
known as tâtonnement (literal meaning "fumbling") or a
Walrasian auction – is modeled on the same price discovery process as the century-old London gold and silver benchmarks. Formerly known as the "fixings", they seek to find a market-wide price by taking a "fix" on the metal's position as a ship takes its bearings at sea.
Transacted under the code SHAU, Shanghai's new "base price will fully reflect supply and demand," says the SGE in a 30-page white paper, "representing the whole Chinese gold market."
"'Shanghai Gold' and 'London gold' complement each other," says state newspaper the
People's Daily in a report headlined "China increases its weight in the global pricing of gold."
China "is a market of 1.2 billion people and simply cannot be neglected," said Marwan Shakarchi, chairman of Swiss-based refining group MKS – a member of the new Shanghai process – in news-wire Thomson Reuters' professional Gold Forum chatroom on Tuesday.
"I am convinced that in the future we won't say China is at a premium or discount to London,
but vice versa."
International prices typically show a discount for gold delivered in London – heart of the world's wholesale bullion trade, owing to its long history of stable property rights, central timezone, specialist vault facilities and free trading laws – against other locations, most notably China and India.
That gap invites dealers to buy in London, and sell in Mumbai or Shanghai, creating a flow of imports to those key consumer markets.
But Beijing, like Delhi,
bans the export of gold bullion. So dealers cannot exploit and erase any "
London gold premium" when the key Asian markets have too much supply over demand, not without trying to get around the ban by shipping out crude semi-manufactured products.
For as long as that ban remains in place (due to Communist China's politburo deeming gold to be a "strategic" metal), global banks may view Shanghai's new Fix as an opportunity only to sell or build local stockpiles, rather than to source metal for other markets or to balance trading positions elsewhere in the world.
"Following the 2014 launch of the international board the Shanghai Gold Exchange," reported China's state news agency Xinhua on Wednesday, "China's new gold fix is another landmark event in the development of internationalization.
Trading on the SGEI, which enables foreign and domestic dealers to buy and sell contracts for gold held in Shanghai's free-trade zone using Yuan held in offshore accounts, surged after its September 2014 launch, briefly overtaking volumes in the Exchange's main Au(T+D) contract for onshore metal in March 2015.
But the International bourse's volumes then collapsed, falling to zero on at least 4 occasions between July and September, and recovering to just 5% of last spring's peak so far in 2016.
Trading volumes in the domestic Au(T+D), in contrast, have set a series of new record highs.
Average daily volumes at the new Gold Price auction run on behalf of members of trade body the London Bullion Market Association have meantime doubled the last 5 months of the previous London Gold Fixings, with the number of direct participants gathering buy and sell orders from their clients rising to 13 from the previous five, and now including both Bank of China and ICBC, the Chinese giant now larger than any other bank worldwide by assets.
"We view this as a stepping stone to a multi-access trading market that will consist of London, New York and Shanghai," says Greg Collett, director of investment products for mining-backed market-development organization the World Gold Council.
"This will help investors get a better sense of what the price difference is between China and these other markets."
Like the London Fix – first in use by 1907 and relaunched in March 2015 as
the LBMA Gold Price, with independent administrators the ICE exchange providing an electronic platform to replace the informal discussion between member banks under the old system – the new Shanghai Benchmark starts with a suggested price, broadly reflecting where live trading prices stand.
In London, this opening price is suggested by a human chairperson. The SHAU auction instead takes the average price suggested in a preceding 5-minute window.
Each market-making member then gathers together buy and sell orders at that price from its clients, and reports its overall balance, either wanting or offering metal in total. The SGE aggregates all of the members' positions, and – until buying and selling come into balance – suggests a new price, higher or lower as needed to deter or encourage each side.
Auction rounds last 30 seconds both in London and now in Shanghai. To save time trying to find an exact match, a small imbalance is permitted (10,000 ounces or 311 kilograms in London, and 400kg in Shanghai). As in London, any extra selling or buying then needed is split equally between the market-making members, currently numbering 12 in Shanghai and also including Bank of China and ICBC.
Both London and Shanghai also require physical delivery within 2 days of the auction. But while the LBMA Gold Price settles for large 400-ounce bars meeting the Association's Good Delivery specifications – and with a minimum fineness of 99.5% pure gold – the SGE's new price settles for 1-kilo gold bars meeting its own standard, set in consultation with the LBMA last July, requiring a fineness of not less than 99.99%.
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