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Thursday, May 14, 2015

China's new gold fix to rival the establishment of the West

For years, the gold fixed has been based in London. But with increasing concerns of manipulation, China is seizing an opportunity to take over the reigns.

With the recent introduction of the London gold fix, there has been some speculation in the markets that China would also participate in the new system to price they yellow metal. However, recent indications are that the country is in fact now looking to have a pricing system of its own. Reuters reports that China is already working on a yuan-denominated gold fix, which is expected to go live later this year.

The yuan gold fix would launch on the international platform of the Shanghai Gold Exchange (SGE), with the SGE acting as the medium for the trading. This is somewhat in contrast to the existing London gold fix, whose trades are done between banks without a governing body. That said, the SGE did work with major Chinese banks (and even some foreign ones) when creating the benchmark.

Despite the process already being significantly underway, a participant directly involved in the testing told Reuters: "No final proposal on the fix has been given yet. This was like beta testing and there is still some room for discussion."

This step is seen as yet another move meant to establish China as a global financial force. With the country being among the top in the world both in terms of gold production and consumption, it's not too surprising that they are using the yellow metal to establish their currency by imposing their own benchmark on any Chinese gold trades. Indeed, considering its share of the global gold market, much of this decision stems from China feeling entitled to its own fix.

While the creation of an additional fix itself isn't a direct move against the existing gold pricing system, it's possible that the Chinese gold fix might end up pressuring and competing against the one currently based in London.

It's probably no coincidence that China is pushing for its own gold fix at a time when the established pricing system in London has found itself under heavy criticism due to lack of transparency. To counter such claims against its own system, and reduce concerns about potential manipulation, the SGE will look to trade a 1 kilogram contract a few minutes every day.

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