China's Yuan Gold Fix: What Investors Need to Know

China launched its yuan-denominated gold price fix this Tuesday as part of a bid to build up its influence in the global bullion market. 
Benchmark prices will be set twice daily, similar to how the London Gold Fix was previously administered, and will be derived from prices for a one kilogram-contract traded by 18 participants on the Shanghai Gold Exchange, as per Reuters. The first price was set at 256.92 yuan per gram, or $1,234.49 per ounce.
“The Shanghai gold benchmark will provide a fair and tradable yuan-denominated gold fix price … will help improve yuan pricing mechanism and promote internationalisation of the Chinese gold market,” Pan Gongsheng, deputy governor of the People’s Bank of China, was quoted as saying at the launch in Shanghai.

China is currently the world’s top producer and consumer of gold, so it certainly makes sense that the country would want to increase its influence on pricing.
Here’s what gold investors need to know about the China gold fix:

• London: the established market leader; For over a century, gold pricing has been dominated by the London Bullion Market Association (LBMA) gold fix. That might make it seem difficult for China to break into the market.

• Gold price manipulation worries; On the other hand, there have been plenty of concerns over the years about a lack of transparency for the fix and the potential for gold price manipulation. Indeed, Deutsche Bank (NYSE:DB) recently admitted to manipulating gold and silver prices. Gold prices on the LBMA gold fix were set twice daily by market participants via teleconference in the past. But in early 2015, it was announced that the fix would transition to an electronic mechanism.

• Varied members; Participants in the fix include Chinese banks, miners, jewelers and local units of Standard Chartered Plc (LSE:STAN) and Australia & New Zealand Banking Group (ASX:ANZ), according to Bloomberg.

• ‘Limited global repercussions’; While the fix is certainly big news, Robin Bhar of Societe Generale told Bloomberg that it would have a limited effect globally. “This is a very important development and will obviously be very closely watched,” the analyst told the news agency. “But as long as it exists inside a closed monetary system it will have limited global repercussions. For a truly efficient benchmark, the market has to be as unimpeded and unfettered as possible.”

Time will tell how much of an influence China’s new gold fix will truly have on the gold market, and investors will no doubt be watching closely.
Certainly, China will have to work to overcome existing stigma related to gold price fixing and price manipulation in order to be successful. As a source familiar with the Shanghai Gold Exchange (SGE) told Reuters, “China has to show to the world over a consistent period of time that the price is open, rational, reasonable and that there is no manipulation.”
However, some market watchers are already predicting that China’s gold fix will carry weight. Zero Hedge quoted World Gold Council CEO Aram Shishmanian as stating, “It is a stepping stone to a new multi-axis trading market consisting of London, New York and Shanghai and signals the continuing shift in demand from West to East … As the market expands to reflect the growing interest in gold by Chinese consumers, so too will China’s influence increase on the global gold market.”
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Securities Disclosure: I, Teresa Matich, hold no direct investment interest in any company mentioned in this article.