Coinciding with moves to open access to the Mainland equity market, China has started to allow foreign investors direct access to its gold market for the first time.

Coinciding with moves to open access to the Mainland equity market – as discussed in these pages here earlier this week – China has started to allow foreign investors direct access to its gold market for the first time.

The Shanghai Gold Exchange has started trading contracts in the Chinese city’s free trade zone, or FTZ; these contracts are available international banking firms, including UBS, HSBC and Standard Chartered. On its website, the exchange said it has decided to “establish the International Board Certified Vault to provide services for physical delivery at the SGE and physical warehousing of its International Members and international customers”.

The background for this latest development is a move by China’s government to widen international use of the renminbi as a global reserve currency; at present, gold is typically measured in US dollars. China, a major consumer of the yellow metal, is seen as hoping to challenge that dollar dominance.

The move also demonstrates how, despite pullbacks in the gold price from its September 2011 high of over $1.900 per ounce, there remains considerable interest in the precious metal, both as a traditionally safe store of value as well as its jewellery and fashion qualities. Over the long-term (if not always in the short run), gold, its advocates argue, is a good portfolio diversifier and is lowly, or even negatively, correlated with mainstream assets such as equities.  

At present, there is a premium to be paid for holding China-traded gold. Bloomberg said its data shoed that gold in China this year cost as much as $31 an ounce more and $42 less than the London spot price. At the time of writing, spot gold was around $1,22 per ounce (source: BullionVault).

The exchange has set out categories, charge standards and payment methods for the gold varieties to be traded. For example, in a transaction vault, there is a load inventory of 0.18 yuan/kilogramme per day, with traded inventory of 0.6 yuan/kg per day. On the day of physical bullion’s load-out, the charge is 1.8 yuan/kg.

World Gold Council

Chinese gold gold demand is likely to grow by 20 per cent in the next three years, according to the World Gold Council, the industry and research group.

"The Chinese gold market has grown exponentially in the last 10 years and China is now the largest market for both gold supply and demand. China's rapid economic growth combined with the acceleration of China's financial reforms provide a solid foundation for the internationalisation of the gold market and the country’s deep rooted pro-gold culture will continue to accelerate gold demand," it said in a statement coinciding with the start of trading on the Shanghai exchange.

The Shanghai Gold Exchange and the World Gold Council said they will be "actively cooperating
to develop the SFTZ as an international hub for gold and to work together to develop the gold market in the region".

Aram Shishmanian, CEO of the World Gold Council, said: “The growth of the Shanghai Gold Exchange to become the world’s largest physical gold exchange provides compelling evidence that the future for gold is physical. As the market shifts from west to east, the expansion of strong gold trading hubs in Asia will improve price discovery, liquidity, transparency and efficiency; all of which will transform the landscape of the global gold market."