Commodities | Sep 17 2014
By Greg Peel
It must have been a bit of a mad scramble, trying to line up the required government officials to be present at the ribbon cutting, although given the opportunity no doubt a little pressure may have been applied. Beijing had been set to launch trading on the long awaited Shanghai Gold Exchange at the end of this month, but now it will open tomorrow.
The Singapore Exchange was due to launch a 25kg gold contract this month but due to technical gremlins, the exchange has been forced to delay the launch until October. Never let a chance go by, said Beijing.
The SGE is set to launch no less than eleven separate gold contracts, including physical contracts ranging from 100 grams to one kilogram. To put that into familiar terms, from 3 troy ounces to 32 troy ounces. With gold presently trading at US$1235 per troy ounce, that’s US$3,705 to US$39,520.
Singapore’s 25kg contract would represent US$991,705. Thanks, I’ll take a dozen.
Clearly it is Asia’s intention to “metricise” gold trading as part of its push to lure participants away from the ancient and dusty vaults of London physical trading and the global benchmark pricing of the Comex futures exchange in New York. And it is of little surprise that all the Chinese contracts will be denominated in renminbi, not in that other thing once known as the global reserve currency.
It’s no leap of logic. China is both the world’s biggest producer and biggest consumer of gold – “consumption” in this case meaning gold fashioned into jewellery and trinkets, small bars and coins, rather than held as certificates against some central bank vault stash. Throw in India and that’s at least three quarters of global gold trade right there. Beyond that, gold exchanges are used as means of forward selling and hedging by global gold producers and other things we won’t go into, such as central bank currency control.
To the latter point, Goldman Sachs and UBS are among the initial tranche of forty members of the SGE (who would have thought?) along with the likes of Standard Chartered and HSBC.
At risk of losing market share, the CME Group, owner of Comex, plans to launch a physically deliverable futures contract in Hong Kong later this year. Dubai is also preparing to launch a contract to tap into substantial Middle Eastern demand for gold while even Thailand is considering setting up a spot gold exchange.
One might look at this development in two ways. Either the opening of gold exchanges in the heartland of gold consumption will signal a new era for gold accessibility and thus demand, just as the launch of exchange traded funds in the US revolutionised gold trading and fuelled the great gold rally of last decade, or just as ETFs have seen somewhat of a bubble and bust of activity, the rush to open several exchanges might signal the death of gold as a popular financial asset.
One is reminded of the ill-fated launch of a spot uranium contract at what proved to be the peak of the uranium market. And one might also note these launches seemed perfectly timed to occur just before the Federal Reserve starts raising interest rates for the first time since the GFC. There are many who assume that when that finally happens, it’s all over for gold.
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