Asia’s Role in Gold Market is Growing
Over the past several months there have been new initiatives coming out of Asia that will positively impact the Gold market in the coming months and years. The BRICS Development Bank, the Asian Infrastructure and Investment Bank, the new Silk Road Project are all examples of Asia’s growing influence.
Now China looks to exert more pricing control over the global Gold market. However, for decades the price setting mechanism for the Gold market has been dominated by London and New York. The vast majority of of the paper Gold contracts that trade on the COMEX do not settle in Physical Gold. This creates a supply and demand disconnect in the market.
Shanghai Gold Exchange
Asia’s influence on Gold is the next step. An article in MarketWatch speculates that the Chinese government wants its physical Shanghai Gold Market to supplant the COMEX as the primary mechanism to set Gold prices. (Source: MarketWatch 2015 July 9th)
The article reports that last month, the Bank of China, became the first Chinese Bank to join the group of lenders that set the London Bullion Market Association’s gold price benchmark. Two more Chinese Banks are also looking to become members.
If the Shanghai Gold market took the lead as the primary global Gold market that would mean that Gold contracts would be settled in the physical metal. This would allow the true supply and demand fundamentals of Gold to be reflected in the price.
The Chinese Yuan
What is so interesting about this story is that it is related to the Chinese Currency. It is expected that sometime in October or November of this year, the IMF will consider inviting the Chinese Yuan into IMF currency basket called Special Drawing Rights (SDR).
At present the value of the SDR is a basket of US Dollars 41.9%, Euros 37.4% Pound Sterling 11.3% and Japanese Yen 9.4% (Source Business Insider 2015 July 10th) Including the Yuan in the currency basket allows China to have a globally recognized currency.
With China set to become the worlds largest economy, western influence in many aspects of the financial system will have to be at minimum shared. But in the case of the Gold market, Asia will likely play the lead role, mostly because that is where all the Gold is.
This will all take time but it looks as though the first steps are already being taken. The first big effect on Gold prices could be coming later this year.
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