Shanghai Gold Exchange Opens

- October 23, 2014 -

The highly anticipated opening of the Shanghai Gold Exchange International Board (SGX) took place last month on September 18th. The yuan-denominated board, which was launched in Shanghai’s new free-trade zone, is aimed at encouraging foreign participation in China’s tightly controlled gold market. China is the world’s largest producer and consumer of gold, but sees itself as lacking sufficient clout in global pricing platforms.

Sources note that the Chinese gold market has grown exponentially in the last 10 years. China’s rapid economic growth, combined with the acceleration of China’s financial reforms, provides a foundation for the internationalization of the gold market. China’s deep rooted pro-gold culture should continue to increase gold demand. The country’s economic growth, growing middle class and rapid urbanization are key factors fueling gold demand in China.

So why do the Chinese buy gold? There is a fundamental view in China that gold is ultimately money. Therefore, gold is always worth accumulating by selling potentially worthless foreign currency (i.e. US Treasuries). Also, gold is generally accepted as a superior form of money in Asia, which is China’s long term regional interest. Finally, by encouraging her citizens to buy gold, China achieves two objectives: if the Chinese citizenry has real wealth, it makes them potentially less rebellious in difficult times; and secondly, private ownership of gold reduces the trade surplus, which in turn reduces the accumulation of potentially worthless foreign currency reserves (i.e. US Treasuries).

The emergence of the Shanghai Gold Exchange as the world’s largest physical gold exchange strongly suggests the future for gold is physical. As the market shifts from west to east, the creation of strong trading hubs in Asia will improve price transparency, efficiency and liquidity, all of which should hopefully transform the landscape of the global gold market.