China Gets Its Own Gold Benchmark in the Country

China has launched a yuan-denominated gold contract which will act as the benchmark price for gold in the country. It was only in November that the renminbi was included in the IMF’s SDR basket and it received the reserve currency status (to take effect in October 2016). The new gold contract, launched last week, is expected to help in better price discovery in gold as it will be based on the domestic market demand and supply.

Also, as the contract will be under the supervision of the Shanghai Gold Exchange (SGE), there will be more transparency and lower counterparty risk for the country’s gold producers and traders in bullion. The 12 members who will do the fixing and the six members who will provide the reference price include the country’s top banks as well as two gold miners and the jewellery retailer Chow Tai Fook. The benchmark price for a 1 kg contract was set at 256.92 yuan/gram on Tuesday at the launch of the benchmark contract. End week, on Friday, the PM session price was 260.41 yuan/gram, up 1.4 per cent since Tuesday (spot gold price in COMEX was down 1 per cent). The Shanghai gold benchmark price will be based on the buy/sell quotes given in the auction conducted on the SGE platform.

Chinese banks may soon launch more derivative products based on gold, say analysts, as there is a spot market for gold in the country now.

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Why now?

It was in September 2014 that China launched its own gold exchange, the SGE, and now it is the yuan-denominated gold benchmark which will become the reference price for gold in the country. The London gold fix was replaced by the new benchmark, the ICE Benchmark Administration’s LBMA gold price, last year. The LBMA gold price is the global benchmark price for gold now and all miners, traders, and central banks across the world use it. In India and China, the two large markets that consume most of the gold mined across the world, a physical gold exchange and a benchmark gold price in domestic currency is essential for effective price discovery.

Demand to grow

With a local benchmark price in gold now, China’s banks may launch more derivate contracts in gold, say analysts. Gold prices have a floor at $1,000/ounce, which is the cost of producing an ounce of the metal now…”

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A recent report from the World Gold Council (WGC) holds that, currently, about 30 per cent of high quality sovereign debt (more than $8 trillion) is trading with a negative yield, and an additional 40 per cent with yields below 1 per cent. With no physical market for the metal in the country despite about 70-80 tonnes of scrap gold being traded in the market every year, there is no rule-book on how gold price is fixed. Talking to large bullion dealers, we found that some use the MCX gold futures near month contract’s price while some take the internationally quoted price of gold and add the import duty to it to arrive at a ballpark price.

Cues for this week

As was indicated in these columns on March 28, gold price is witnessing a consolidation.