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Chinese investors will soon have direct domestic access to silver futures. Could this development be a game changer?
By Michelle Smith — Exclusive to Silver Investing News
As of May 10, there will be more diversity in silver futures. On that day, the Shanghai Futures Exchange (SFE) will begin trading silver contracts, providing Chinese investors with direct access to the market. Regulators hope that this new trading option will provide China with a pricing mechanism, a tool to control price volatility, and that it will be beneficial to silver-related enterprises. Market watchers suggest that SFE contracts could prove bullish for silver prices and that they could make market manipulation more difficult.
Although it is a leading producer of silver and one of the top consumers of the metal, China has been largely sitting on the sidelines, taking cues from London and the US when it comes to silver prices. However, the Chinese now want more influence in the pricing of silver and want a tool to tame the volatility. Regulators seem to believe that silver futures are key to accomplishing these goals.
“Since there is no authoritative price signals in China to guide production and operation and head off price fluctuation risks, China’s silver production, consumption and trading enterprises are exposed to substantial market risks making it urgent to launch silver futures trading for the purpose of price discovery and hedging,” said the China Securities Regulatory Commission (CSRC).
Referring to CME Group‘s futures contracts, Peter Krauth, Global Resources Specialist at Money Morning said that for years there has only been one game in town.
“Outside of the US, it [the COMEX] is seen as a monopoly because you have to trade in dollars and you have to abide by their rules.”
Furthermore, there is a sizable camp that believes that COMEX silver futures are a rigged game. Last year’s drastic margin hikes and the sharp price declines that followed only aggravated these suspicions and have left an especially sour taste in the mouths of many.
Shanghai silver futures contracts
SFE silver contracts appear to be a response to the recognized need for different rules set in a different arena.
The SFE contracts have a 15 kg lot size. Instead of being denominated in dollars, they will be traded in yuan. There is a seven percent minimum margin requirement. Initial prices for the silver contracts are estimated to range from RMB 6,400 to 6,600 (approximately $1,014 to $1,046), and price fluctuation is set to be limited to five percent per day.
Given the domestic setting and the reduced size and cost of the silver contracts, it is hoped that Chinese investors will perceive the market as being more accessible than in the past. Some believe that this will prove bullish for silver on a global scale by providing a new route for money to flow into the market.
The Shanghai Metals Market (SMM) said that in the short term, Shanghai silver futures prices are expected to move in line with London spot prices, but domestic spot trading may cause certain differences.
According to Five Star Equities, another benefit of having silver futures trading on the SFE, is that it will “make it more difficult for American speculators to manipulate the markets in their favor.”
The SMM also said silver prices generated in London and the US have resulted in a distorted reflection of the silver supply and demand scenario in China.
The CSRC has said silver futures trading in the nation will help “promote the rational allocation of silver resources and balanced silver supply and demand in the market.”
Regulators, however, are hoping to see more than just investors benefit from this new trading vehicle.
With SFE silver contracts, silver miners and industrial users of the metal will have the ability to hedge at home. The CSRC hopes that silver futures will provide low-cost and effective risk control that will allow such enterprises to improve management, competitiveness, and promote steady development of related industries.
Securities Disclosure: I, Michelle Smith, do not hold equity interests in any companies mentioned in this article.