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How Is Chinese Gold Investment Affecting The Gold Price?

Jul. 22, 2013 6:44 AM ET
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Incredible import, demand and consumption figures for gold have thrust China's effect on the gold investment market into the spotlight once more.

How does this huge Tiger economy effect trends in the price of gold?

This recent report uncovers the heart of activity at the Shanghai Gold Exchange, showing the growing effect on global gold price discovery.

Rethinking gold price discovery

Investors have thought for years that the main centres for gold price discovery were in London and New York, with focus falling on the opaque London Gold Market and the increasingly question COMEX exchange in the Big Apple.

The growing size of the Shanghai Gold Exchange is bringing competition to this market and disrupting the status quo. This much more physical of gold markets, where 240 tonnes of gold bullion bars were taken delivery of in April compared to a paltry 3 tonnes in New York, is quite different to its dynamics than established and more traditional gold buying markets.

London and COMEX markets are famous, or infamous, for their fractional nature. Essentially investors could lose confidence in these locations if they think they cannot be guaranteed delivery of their gold bar holdings. Paper gold might not be able to be converted into physical gold bullion.

Gold fund manager Ned Naylor Leyland has been writing about this structural issue in the gold market for sometime.

Shanghai lights and gold trading

In contrast the transparent nature of the Shanghai exchange, with its ability to deliver huge tonnage of the yellow metal, might become an increasingly attractive destination for investors to bring their bids and offers.

For now the Western market probably do maintain dominance in the setting of gold prices, but China's ravenous appetite for hedges against the dollar based financial system is leading to new and improved gold markets inside China itself.

Already Western institutions have forged relationships into Chinese exchanges allowing traders to access these markets.

Only time will tell how quickly China might also usurp the West in this key area of gold trading.

If at this time 'Mrs Wong', as Max Keiser refers to the 300 million Chinese housewives buying gold, is the main constituent part of retail demand at the Shanghai exchange, she might be joined by Mrs Watanabe, Mrs Smith and Mrs Benz if Western and Japanese retail investors seek better markets for their trading and investment needs.

How does this fit into the currency wars?

The Chinese are well aware of their position in the global currency wars. They are being forced to face the downsides they experience within the dollar based financial system and make huge, long-term plans to mititgate them.

You cannot blame China, no doubt we'd do similar in her position.

China knows full well she needs to gain a dominant part of the global gold investment and trading market. She has a range of options available to her, including:

  • A gold backed yuan
  • Growing the best wholesale trading markets and exchanges
  • Establishing a wide and robust range of retail investment solutions

Naturally the Shanghai Gold Exchange features prominently in China's long time plans for gold, currency and financial security.

We look forward to seeing the SGE bring more and more welcome competition in the market and for gold price discovery.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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