LAWRIE WILLIAMS: Will the SGE gold benchmark fix the fix
Will the new Chinese gold price benchmarking system, reported to be going live April 19th after some delays, fix the gold fix – or just be another fix in the worst sense of the word? It has the potential to do either or both and, we suspect, in its earlier stages at least, attempt to do the former.
Reports out of Beijing, Shanghai, Hong Kong and Singapore suggest there will be 18 banks. gold traders and gold miners involved in setting the new twice-daily gold price benchmark in yuan per gram – which will have analysts reaching for their calculators. But no doubt some enterprising website will run the calculations to convert the prices set into U.S. dollars per troy ounce on an effectively instantaneous basis for us given that it involves not only the gram to ounce conversion, but also the yuan to dollar one, the latter being potentially variable throughout the day. One suspects that, at least initially, the calculations will show the yuan benchmark prices to be close to those set by the LBMA in London to present a degree of conformity. But if, and when, the new benchmark gains good traction – and despite what GFMS may say, China remains by far the largest accumulator of physical gold putting India into the shade - so could the figures from London and Shanghai start to diverge, creating some interesting arbitrage opportunities, and putting additional pressure on the former.
The yuan benchmark is to be run by the Shanghai Gold Exchange (SGE), which in turn is a subsidiary of China’s central bank – the Peoples Bank of China (PBoC). This will in itself raise concerns for the possibility of benchmark manipulation to suit China’s own purposes, which is probably why it will remain honest – and as transparent as these things can be – early on. Otherwise it will have no credibility on global markets, although will still have on China which absorbs at least half the world’s annual production of new mined gold – probably more.
As to how the benchmark price setting will operate is still a little hazy. According to the reports the SGE benchmark initial auction price will start as an arithmetic average of pricing inputs from the price setting members. This differs from the LBMA gold price where the auction begins from a price set by the independent chairman. Presumably, from there on the final price setting procedures will be somewhat similar.
Reports say that the SGE benchmark setting process will have 18 participating members – mostly Chinese banks (believed to be 10), plus gold trading, consuming and gold mining concerns, together with two foreign banks - named by reuters as ANZ and Standard Bank, presumably to give the process a little more international credibility, much as the LBMA has brought Chinese banks into its process. However it should also be noted that Standard Bank is nowadays a part of ICBC Standard Bank, which muddies the waters given that it is an internationl bank, headqurtered in London, but effectively controlled by China's largest bank ICBC. Apparently it is the foreign bank participation which has been the most difficult for the SGE to organise because of bank reluctance to be brought into a system which may not be as transparent as bank regulators would like it to be.
According to a Reuters report, the Chinese partcipants include: Industrial and Commercial Bank of China (ICBC), Agricultural Bank of China, Bank of China and China Construction Bank. Other regional banks to be involved are stated as Bank of Communications, Shanghai Pudong Development Bank, China Minsheng Banking Corp, Industrial Bank Co, Ping An Bank and Shanghai Bank. Additionall the participants are reported by Reuters to also include Bank of China (based in Hong Kong) retailers Chow Tai Fook and Lao Feng Xiang, Swiss trading house MKS and Chinese gold miners China National Gold Group and Shandong Gold Group.
Will this change the gold market – probably not in any significant way initially, but it may well lead to a system which gradually drags price initiation away from the COMEX paper gold market, which can only be positive for the gold sector. However, as we have noted before, the vast majority of the SGE benchmarking members are Chinese, and thus effectively state-controlled, which could make market manipulation to an agenda which suits the Chinese government, whatever that may be, a distinct worry as far as the international financial community is concerned. For example, with China currently seen to be building its gold reserves it may suit the Chinese to hold prices back while it is so doing, but once it has achieved its reserve objective it might then suit it to see prices rise – perhaps sharply. To those who believe the LBMA gold price is something of a fix already then this could be out of the frying pan into the fire. But then governments are always totally honest with their announcements and data aren’t they?! So no worries there then!