Australian gold producers, traders and the domestic economy could be among the big winners if China moves ahead and opens up the world’s biggest gold exchange.
The Shanghai Gold Exchange (SGE) is understood to have received approval last week from the Chinese central bank to launch a global trading platform in the city’s pilot free trade zone, a move that could challenge the dominance of New York and London in gold trade and pricing.
According to reports by Reuters, the exchange has asked bullion banks such as Australia and New Zealand Banking Group, HSBC, Standard Bank, Standard Chartered and Bank of Nova Scotia to take part in the global trading platform.
ANZ and HSBC declined to comment when approached by The Australian Financial Review.
The development comes as Australian fund managers express concern about attempts to fix gold prices with Barclays fined £26 million ($47 million) after one of its London-based gold traders successfully drove down the price to benefit the investment bank.
Speaking on news that China may establish an alternative gold exchange, Sydney-based gold expert David Baker, managing director at Baker Steel Capital Managers, said “anything that takes gold control out of the bullion banks can’t be a bad thing”.
“Anything that cleans up issues relating to price fixing, the better,” said Mr Baker.
He added that the £26 million fine given to Barclays was too low. “It should be multiples of this,” he said, given that the bank had also been fined a record £290 million for trying to rig the London Interbank Offered Rate.
Currently, the London gold “fix” is the benchmark for spot prices, while New York’s COMEX contract sets the futures’ benchmark. SGE prices are tracked to gauge Chinese demand as reflected in premiums or discounts to spot rates, according to Reuters.
Australia is currently the second largest exporter of gold and China is the world’s biggest buyer of the precious metal which at 3pm AEDT on Tuesday was trading at $US1292.40 an ounce.
The World Gold Council estimates that total private-sector demand from China will grow by an estimated 20 per cent by 2017, to 1350 tonnes, as the country’s middle class population grows to 630 million people.
Globally, just 2500 tonnes of gold gets produced every year and most of it makes its way into China and India.
Australian Bullion Company (NSW) chief economist Jordan Eliseo said “a third gold exchange would only enhance liquidity but I don’t see it being a driver of prices in the short term.
“What it should do is help to add even more liquidity to the market. And with question marks over the London fix, it is a good thing if a more transparent form of pricing develops,” said Mr Eliseo.
Chinese demand is being driven by the fact that people see it as an alternative form of savings as well as investment with many seeing it as an ostentatious display of wealth.
China’s central bank is also looking to increase its store of gold. It only holds roughly 2 per cent of the nation’s $4 trillion of foreign exchange reserves in gold, whereas countries such as the US and Germany hold closer to 70 per cent.
Some experts believe the growth in Chinese demand for goal will not only put upward pressure on gold prices in the next couple of years but will keep the Chinese interested in Australian commodities just as appetite for steel making iron ore wanes.
“The export of Australian commodities to China was the major reason Australia avoided a recession over the last five years, but as iron ore demand and prices wane, increased gold exports, and rising prices would be a good thing for the economy,” said Mr Eliseo.
The global platform will first host spot physical contracts for gold and other precious metals, before aiming to launch derivatives down the line, reported Reuters, quoting a third source who is directly involved in the launch of the international exchange.
Australian Financial Review