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LAWRIE WILLIAMS: SGE gold fixes toeing the line

Today's SGE gold benchmarks converted to US dollars:  AM: $1,253.  PM: $1,248.

Despite the big fluctuations in the gold price in the west yesterday, the new Shanghai Gold Exchange (SGE) benchmark gold price in Chinese Yuan seems to be pretty well toeing the line as it becomes established.  Today’s Chinese am and pm fixes in yuan were CNY261.32 and CNY260.41 – equivalent in US Dollars at the current CNY:USD parity at the time of writing of 6.4879 to around $1,253 and $1,248.  This certainly doesn’t differ from the spot price at those times by any significant extent, so those who were hoping perhaps that the SGE’s ‘fixings’ might create big ‘arbitrageable’ differences between West and East or in any way suggest a big disparity between Chinese and New York/London prices, have so far been disappointed.  These markets are very much global and are proving to be so.

At the moment, the Chinese have nothing to gain by distorting the precious metals markets, but longer term this situation could change.  There are various theories about the true size of Chinese gold reserves and what the nation may be hiding in various unreported accounts, but the general consensus from listening to presentations from Chinese officials and academics, which are presumably sanctioned by higher authorities, is that China is planning to build its gold reserves until they are larger than those of the USA’s 8,133.5 tonnes. At a figure reported to the IMF of only around 1,800 tonnes (including the latest announced purchases) there would still seem to be an awful long way to go to achieve this.  At the current announced rate of between around 10 and 15 tonnes a month it would take 35 years to achieve this – even at the higher monthly rate, so logic suggests that if the Chinese are realistically aiming to exceed U.S. gold reserves, they are almost certain to be starting from a much higher level than currently reported.

But regardless of this, if China is buying gold on the open market, as well as perhaps accumulating its own domestic production of around 460 tonnes a year according to the latest analysis from Metals Focus, it will have no real interest in pushing prices higher.  Whether this will continue once they have achieved, or neared, their objective, which we suspect is hugely closer than 35 years, is anybody’s guess – and maybe when the yuan is safely included in the IMF’s Special Drawing Rights bundle in the fall we could see some new moves on the Chinese markets.  That the Chinese government or central bank cannot influence the SGE gold fix should it wish to is not supported by logic.  The SGE is itself a subsidiary of the People’s Bank of China, while nearly all the participants in the benchmarking process are in effect ultimately owned by the Chinese government.

22 Apr 2016 | Categories: Gold

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