How China Plans to Dominate Pricing in the Gold Market

The rise of China, the world's most populous nation, is moving influence and assets from West to East.

And this is having a dramatic effect on the gold market.

China's efforts over the last two decades to modernize and urbanize its economy have created a burgeoning middle and upper class with growing disposable income and net worth.

China has a long-time affinity toward gold. For the past several years, it's consistently been one of the top two gold consumers worldwide. (India holds the title of No. 1 gold consumer - for now.)

China is also the world's largest gold producer. So it stands to reason that China would want to exert more influence over the gold market - and gold prices.

Here's how the Asian nation aims to do just that...

China's Per Capita Gold Consumption Shows Room for Growth

Despite being one of the two largest gold-consuming nations, China still ranks relatively low on a consumption per-capita basis, thanks to its massive population.


China's gold imports have remained strong, with 2014 being the second-best year for Chinese bullion demand. Imports in 2015 have surpassed five-year averages.

Neighboring countries love gold, too. Indonesia, Malaysia, Vietnam, and other emerging markets don't have the benefit of developed financial services. People there look for ways to shelter their savings from inflation.

According to HSBC analysts, many of these buyers turn to gold because they see it as an "efficient and reliable store of value."

Low per-capita consumption of gold in China is regarded as positive. As HSBC sees it, there remains "significant room for growth."

And that bolsters the case for China's desire, and future ability, to dominate the gold market.

According to Anthem Blanchard, CEO of online gold retailer Anthem Vault, "Given that China is the epicenter of the physical gold market, it does make sense that the Chinese government would want its physical Shanghai gold market to supplant the Comex derivative market (and others) as the primary global price-setting mechanism."

And now is China's chance to take over...

China Leveraging Its Role in Global Gold Trade

After a manipulation scandal plagued the nearly 100-year-old London Gold Fix, industry participants decided it was time to "open up" the gold-pricing process to transparency and modernization.

On March 20, the historical London Gold Fix was replaced by the LBMA Gold Price. Now the gold price is set through an electronic auction process.

In June, the Bank of China became the first Chinese bank allowed to join the exclusive group of banks that determine the daily gold price through the LBMA. It was followed by Industrial & Commercial Bank of China. And more Chinese banks are working toward joining the small but powerful group that sets the daily LBMA gold price.

Of course, China would love to have even more say regarding the gold price.

Julian Phillips of believes that with New York and London as the prime locations currently setting gold prices, they have been held below what supply and demand would normally dictate.

China sees the United States and UK as relatively small players, considering their total annual demand. China is not sitting idly by - it is taking several steps to gain greater control...

China's Strategy to Influence Gold Market Pricing

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A separate yuan-denominated gold fix is in the cards for later this year.

The Shanghai Gold Exchange has applied to the People's Bank of China to gain approval for its own gold fix pricing system by the end of 2015, SGE Vice President Shen Gang told Bloomberg Business.

Bolstering its odds of success, China is also working hard to expand worldwide use of the yuan.

By establishing currency trading hubs in major financial centers around the world, businesses dealing with China are increasingly able to sidestep the U.S. dollar entirely for their transactions. And that's saving them a lot of money in the process.

China has been lobbying the International Monetary Fund for years to have its yuan included in the lending institution's currency reserve basket called Special Drawing Rights (SDR). By all accounts, this year's review could well lead to news of its inclusion as early as this fall.

It's only a matter of time before a barometer as significant as the gold price also moves from West to East.

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