One China bank joins London fix, another slated in coming weeks

China Update

Under the new London gold fix regime, there are now eleven participants.

“Volumes have also increased significantly, with average daily volumes for the morning and afternoon gold auctions more than doubling, compared with the five months prior to IBA’s administration.”

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MK note:  As I have noted in the past, including China in the fix, brings a new element to the table in that China is out front about its market position as a major buyer of the physical metal.  In March’s NEWS & VIEWS, I cover  how China’s participation in the global gold pricing system is likely to impact the market in the months and years to  come.  Bank of China is already a participant and China Construction Bank is slated to join soon.

From the March newsletter:

“I expect this synergy to carry over when later this year China inaugurates its own version of a gold fix in Shanghai and three Chinese state banks join the London Bullion Market Association’s new London fix later this month. I am not among the group that foresees a hot gold war between the Shanghai and London fixes, between China and the West. More I believe we will see a balancing of interests – a cold war of sorts between the physical metal-based Shanghai business and the paper-based London business. China would not be seeking admission to the international gold club in London if it did not intend to adhere to some common ground rules – if in fact a quid pro quo of some sort had not been agreed.

That is not to say though that the new gold market mechanisms will fall short of being transformative. To the contrary, I would counsel to expect major changes in 2015. At the top of the list I would put the likelihood of Shanghai forcing London to honor its pricing by delivering real metal into the China market. The three state banks China has stationed in the new London eleven-member fix regime will act as a conduit for those deliveries – a mission for the time being likely to keep the flow through the London-Zurich-Hong Kong-Shanghai pipeline moving at a steady pace. In the process, China might force a level of honest settlement too often avoided in the previous gold fix regime. More on that further on . . .”

[Note: The original announcements listed three China banks as participants, not two.]

The doubling of volumes is a surprising development and it has come quickly under the new regime.  It is difficult to know at this juncture how much of that volume is going to China in the form of physical metal, but those numbers will likely come out over time.  At some point, the pressure from China is likely to accrue as a positive in the pricing mechanism, as the sellers realize over time that real, not paper, metal is China’s final objective.  We will be watching these developments with a great deal of interest as we move out of the usual summer doldrums in the gold market and into the Fall rush season.

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