China Initiates Gold And Silver Futures Trading

May. 7.12 | About: SPDR Gold (GLD)

In one of my previous articles about gold (NYSEARCA:GLD) and silver (NYSEARCA:SLV), I told an anecdote about how it was impossible to buy silver in China and Hong Kong. There was little to no incentive from the Asian public to even look at silver. Little by little, a trend change is emerging. China approved silver trading on the Shanghai Futures Exchange on 26th April 2012. This will increase the liquidity in the silver market in China and is a first step into combating the manipulation of silver. The trading of silver futures will start on 10 May 2012.

Previously, investors could trade silver via the Shanghai Gold Exchange Silver Forward (T+D) contracts. Silver's 500 ounce mini contracts and gold's 10 ounce mini contracts are named AG T+D and AU T+D respectively. Trading of gold and silver at the Shanghai Gold Exchange takes place in prescribed quantities with a certain purity.

The silver futures market in China is currently trading at approximately $US 20 billion in size per month. This market is very small compared to the current U.S. market , but is likely to expand as China grows. To compare the size of the silver futures market in China to the COMEX silver futures market, let's take a look at the high days of silver trading in May of last year 2011. In that month, the COMEX traded 14.4 billion ounces of silver or a trading volume of $US 600 billion. So the Chinese silver futures trading has still a long way to go to compete with the COMEX.

On another note, the opening of the Pan Asian Gold Exchange (PAGE) is only one month away and is anticipated to start trading in June 2012. The Chinese will be able to trade gold futures contracts online. This market-- as opposed to the silver market-- is much larger and has greater significance due to gold being money.

The significance of PAGE lies in the fact that these futures contracts are traded in RMB. This gives the yuan a more prominent status in the world and is a big step on the road to become the reserve currency of the world. Secondly, the COMEX will have a new competitor, which is far more superior. PAGE will be 100% backed by gold, while COMEX is leveraged 30 to 1. Additionally, the COMEX doesn't have the real physical gold and silver as I already discussed about in this article. As a matter of fact, I believe we already see a gold/silver run from the COMEX in anticipation of PAGE. This is visible in the low amounts of registered silver (25%) and gold (22%) inventory at the COMEX.

As an investor it's easy to play this start in futures trading in China-- just stack up on gold and silver. As more demand comes into the precious metals market, prices will go up as well. At this stage, all technicals and fundamentals are pointing to higher precious metals prices as I discussed in this analysis. Mike Shedlock and Mike Maloney recently added to their silver positions.

Disclosure: I am long PSLV, AGQ, PHYS.