Can the Shanghai gold price ever become a regional/global benchmark?

Opinion pieces are the views of the author: they do not represent the views of Metal Bulletin.

Singapore 19/10/2016 – The path to viability for the Shanghai Gold Benchmark at a regional level – let alone an international level – is a long one. That was the view expressed by attendees at the LBMA conference here over October 17-18.

The LMBA took the opportunity to announce at the conference that it was looking into a pre-AM gold auction to set a third price at 14:00 Singapore time to cater to the Asian trading community – a move largely welcomed by participants polled by Metal Bulletin at the conference, with most commenting that such a price was much needed in Asia.

But no one viewed the potential new Asia benchmark as serious competition to the Shanghai Gold Benchmark for now because they see the latter as a Chinese price mainly serving the domestic market.

A live poll at the LBMA conference yielded a similar result. In response to the question of how many years before global market participants widely use the yuan-denominated Shanghai Gold Benchmark, 32% voted for ten years, followed by 27% for five years. The remainder believe it will take three years or less.

Market participants still prefer a US dollar-denominated gold price. They continue to see China’s currency and capital controls as obstructions to using a yuan-based price.

But does this mean that the Shanghai Gold Benchmark is doomed to become nothing more than a domestic benchmark with little regional or global influence? SGE chairman Jiao Jinpu does not think so.

China will accelerate the loosening of its capital controls, he had said at an industry conference in September in Singapore, citing the SGE’s international board – Shanghai International Gold Exchange (SGEI) – as an example where investors are not restricted on capital flows and/or currency exchange.

“The shift of [price discovery] from the west to the east is a market choice and is inevitable,” he said.

Since its inception in September 2014, the SGEI has gained 67 international members as at the end of September, he said at LBMA conference this week.

And since Jiao’s appointment as SGE chairman a year ago, he has held talks with foreign exchanges on how to use the Shanghai benchmark – the Dubai Gold and Commodities Exchange is now expected to be the first foreign exchange to do so.

Roland Wang, the World Gold Council’s managing director for China, also appears confident that the SGE will garner more international interest.

The SGE is actively working on getting more foreign banks involved in setting its benchmark and attracting more international participants to trade on the SGEI, he told Metal Bulletin on the sidelines of the LBMA conference. Currency constraints are a major hurdle for now but the yuan will become more internationalised, he said.

China has indeed made in-roads here in recent years; chief among these is transitioning the yuan from a highly managed foreign-exchange regime to a more floating system.

Earlier in October, the yuan’s internationalisation reached a crucial milestone when it was added to the International Monetary Fund’s Special Drawing Rights basket, boosting market confidence in the currency’s accessibility.

There are many more examples of China’s efforts to open up its economy but the point is China is working, albeit gradually, on ridding itself of what market participants see as impediments to using a China-oriented benchmark.

While the LBMA pre-AM benchmark might not be a viable competitor to the Shanghai Gold Benchmark for now, it might provide further impetus for China to speed up the opening up of its economy.

China, after all, is the world’s largest consumer of gold, accounting for 23% of total demand in 2015 at 985 tonnes – and has always maintained that it wants a larger say in commodities markets and to be a price-setter rather than a price-taker.

How long it will take for these impediments to disappear is unclear – it may not happen in the next few years but I’d like to think it’s likely within our lifetime.

(Editing by Mark Shaw)

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