Gold Market Commentary – Thu 29 Dec, 2016
Will the SGE become the world’s dominate gold exchange?
This debate has been on gold bugs minds for as long as the SGE has been around. Below is a post from Lawie Williams’ site posted by Julian Phillips outlining why he thinks the SGE will become the “global gold hub”. While this may happen I think it is still a long way off.
Please feel free to weigh in with what you think.
SGE controls speculation – In a distinct departure from the western style of markets, where institutional or wealthy individuals can drive prices up or down at will, the Chinese authorities are taking steps to curb rampant speculation from happening. In a gold world where COMEX, with its low physical volumes [compared to demand and supply volumes globally] but huge non-physical [sometimes by High Frequency Traders] trading levels [London and New York account for over 90% of ‘gold’ transactions] dominate gold prices. Shanghai has lowered the dealing size permissible on many commodities including gold. The exchange said in a statement it will halve its limit on transactions to 500 kg on some spot gold contracts starting Jan. 1.
The move does not affect the amount traders can sell or buy in any one day, but it would likely force traders to carry out big transactions in multiple moves and prevent big investors from carrying out rapid-fire buying or selling to influence prices. It will certainly drive up the transactions costs on such speculative transactions.
We would expect this would increase the stability of the Shanghai gold market and considerably reduce volatility. In turn, we see gold producers and users preferring to base gold contract prices on Shanghai Fixes not London due to less volatility of gold prices.
While this will not reduce speculation in London and New York we see it as reducing the influence of London and New York on global gold prices, eventually.
For example, look back at 2013 when in April of that year the gold price dropped back over four hundred dollars in a few days due to a ‘raid’ by Goldman Sachs and clients. Such operations will prove far more expensive and likely be met with censure by the SGE itself. Bear in mind there are 10,000+ institutions operating on the SGE right now. It is the leading gold exchange in the world in terms of physical volumes.
We foresee it becoming the global gold hub. The Shanghai Gold Exchange is taking direct steps to enable gold investors to trade on the SGE in the same way as they do in London and New York, so promoting easy arbitrage operations, via the Yuan.