Commodities | Dec 06 2012
By Greg Peel
It is clearly Beijing's intention for China to become the world's major trading hub, specifically through Shanghai, challenging the incumbent global trading centres of London and New York. As is the case with all Beijing policy, progress is achieved on a softly-softly basis in incremental steps. There is a lot to be said for autocratic government, ten-year regimes and five-year plans. Things get done, and done in a sensible time frame. If only that government were transparently benevolent. But then show me a democratic government today that is benevolent rather than self-serving.
China is the world's largest producer of gold and second largest consumer. Beijing increasingly views gold as the currency substitute in which to maintain sovereign wealth rather than debased fiat currencies backed by immeasurable debt. The government is encouraging its population to buy gold and is constantly topping up its own reserves from its own production, as well as a limited level of imports. Earlier this year physical gold trading commenced on the Shanghai Gold Exchange. From this week Beijing will allow “over the counter” gold transactions.
Despite these steps towards what one might call a “Western” open financial market, progress is very incremental. Beijing is determined to test the water and iron out any issues rather than rush headlong into that of which it has little previous experience, risking “loss of face” globally. Hence to date, gold imports are only permitted for a handful of designated banks. Membership to the Shanghai Gold Exchange is also limited, as will be licences to trade over the counter. The addition of OTC trading enhances exchange trading as it allows member banks to make their own markets in gold.
Beijing intends to open up the gold market to more and more banks, which includes foreign banks, gradually. The government is also assessing approval for the Shanghai Exchange to list gold exchange-traded funds for investors next year. While global currency debasement has underpinned the gold price rally post-GFC one must not ignore the fact the gold price bottomed out and began rushing northward well before 2008. The greatest catalyst for this rally was the introduction of gold ETFs in the US, making gold as an investment that much more accessible for the average investor and fund manager alike.
The fact that OTC gold transactions will begin this week in China will not in itself move the gold price. As the greatest producer and second largest consumer (consumption implies jewellery buying, which is not strictly “consumption”, at which the Indians excel) China balances itself out to a great extent in the global gold demand-supply stakes. However, as noted, greater access to gold investment provides a natural supporting mechanism for the gold price, particularly at a time when fiat currency is under attack from widespread central bank money printing.
Of course it's not all a way way street to the upside, and we've seen that large pools of smaller investors can trigger seemingly illogical sell-offs in gold which can snowball into hundreds of dollars per ounce. There is a yang for every yin. However those looking to include gold within a balanced portfolio as a safety store of wealth may rest easier over the longer term knowing that a new pool of investors numbering in excess of a billion may be thinking the same thing.
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