China is moving in on the gold market. Last week, a Chinese bank was finally added to the LBMA gold price last week, and this week China revealed that it’s looking at launching a yuan-denominated gold fix by the end of the year.
Since the LBMA gold price replaced the London gold fix back in March, China has been a point of contention.
Initially investors were curious about whether a Chinese bank would be included in the LBMA gold price on the day of its launch. Writing at the time, Mineweb’s Lawrence Williams said that some market watchers believed that if that happened, the door would be open for “China’s powerful state-owned banking monopoly to … control the gold bullion market.”
Ultimately, a Chinese bank was not included in the LBMA gold price when it launched — the six participants were Barclays (LSE:BARC), HSBC (LSE:HSBA), the Bank of Nova Scotia (TSX:BNS), Societe Generale (EPA:GLE), UBS Group (NYSE:UBS) and Goldman Sachs Group (NYSE:GS). The first four firms were members of the London gold fix.
However, the roster of LBMA gold price participants didn’t stay at six for long. JPMorgan Chase (NYSE:JPM) was added in March to skepticism from those who’d hoped the new benchmarking process would be more transparent than its predecessor. Williams quipped upon the announcement, “[i]f any bank selection could be guaranteed to inflame those within the gold bull community who preach gold price manipulation, it would be the addition of JP Morgan, following that of Goldman Sachs and UBS, over the original four members of the old London Gold Fixing panel.”
He also drew attention to the fact that the LBMA gold price still included no Chinese banks. “Until the benchmarking process participants are widened to include entities from outside the Western banking elite, the process will remain suspect in the eyes of those who feel that there are no level playing fields in the global financial markets – if indeed there ever were!” he said.
Luckily for Williams and others hoping to see China represented in the LBMA gold price, last week the Bank of China was added to the benchmarking process.
Immediate reactions to the bank’s addition ranged from positive to unsurprised. Speaking to Bloomberg, Afshin Nabavi, head of trading and physical sales at Switzerland’s MKS, fell into the former camp, noting, “[t]o have China participate in the fix is a positive development both for the process and for China. It shows they are opening up to the world.”
Meanwhile, Ross Norman, CEO of Sharps Pixley, expressed a little less excitement, stating, “[China wants] to be on the top table in all areas of international trade and this is no different. They want to be represented in locations where benchmark prices are derived, and they have demonstrated that by signing up for the fix.”
Williams also seems skeptical about whether the Bank of China’s addition to the LBMA gold price is really all that positive. In an article published this week he discusses the addition, noting that a second Chinese bank may also soon be added to the LBMA gold price, but comments, “[w]hether this on its own will do anything to allay the suspicions of the gold bulls remains to be seen, or whether it will make any difference to the pricing mechanism itself.”
That question is especially potent given that since the Bank of China’s addition, two more western firms have been added to the LBMA gold price: Morgan Stanley (NYSE:MS) and Standard Chartered (LSE:STAN).
It’s also an interesting question given Thursday’s news that China is looking to launch a yuan-denominated gold fix by the end of the year. According to Reuters, the Asian nation will do so via the Shanghai Gold Exchange, and expects to receive central bank approval in the near future.
Speaking at the LBMA Bullion Market Forum in Shanghai, Shen Gang, vice president of the exchange, confirmed, “[w]e will be introducing a renminbi-denominated fix at the right moment, we are hoping to introduce by the end of the year.We have policy support for development (of the gold market).”
The news outlet points out what’s likely on all investors’ minds: a successful yuan-backed gold fix could “compel local buyers and foreign suppliers to pay the domestic yuan price, making the dollar-denominated London fix less relevant in the world’s biggest bullion market.” That said, it also notes that as the yuan isn’t fully controvertible “the two fixes could exist side by side globally.”
Whether or not China’s planned gold fix rises to dominate the market remains to be seen. However, one thing certainly seems clear from the events of the past week or so: China is interested in taking a more prominent place in the gold space and intends to do so from both the western and eastern ends of the market.
Securities Disclosure: I, Charlotte McLeod, hold no direct investment interest in any company mentioned in this article.