China gold benchmark unlikely to impact gold ETPs

Apr 21st, 2016 | By | Category: Commodities

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China has launched a new gold benchmark on the Shanghai Gold Exchange (SGE) this week in a move that will create a more reliable and tradable Yuan-denominated gold benchmark price. The move comes amid flows into gold exchange-traded products reaching near record highs as investors looked for a safe haven against volatile markets at the beginning of the year.

Deputy Governor of the People’s Bank of China, Pan Gongsheng

Pan Gongsheng, Dep Governor of the People’s Bank of China, stated that the Shanghai Gold Benchmark Price is a key initiative of innovation and opening-up of China’s financial market

The move could also boost China’s power in the global gold market. China is currently the largest producer and consumer of gold in the world and the SGE has been ranked as the world’s largest physical gold exchange for the last nine consecutive years.

Pan Gongsheng, deputy Governor of the People’s Bank of China,  said on Tuesday that the launch of the benchmark was a key initiative of innovation and opening-up of China’s financial market leaning in the global economic integration. “It will also provide market participants with a new product and a well-designed tool of risk management, which will improve the price discovery mechanism, and further accelerate the internationalization of China’s gold market.”

Historically, the gold price is set in London in dollars per ounce, meaning that China, like other markets, can often trade at a premium or discount to the gold price as a result of timezones, exchange rates and London being one of the major holders of physical gold (meaning stock is often in good supply). While the launch of the benchmark has seen some market watchers comment that it could compete with the near century old benchmark, the SGE points out that the relationship between the two timezones will be non-competitive due to the differences between quotation units, underlying assets, delivery points and time zones.

The move is more likely to adequately reflect the gold supply and demand in China and represent the price trend of China’s gold market. “It will provide a tradable and reliable RMB-denominated gold price for the gold market,” according to a note from SGE.

The gold price has risen 18.7% from the start of the year to $1,259.22 an ounce at closing yesterday [20th April], shy of its highest point this year of $1,272 an ounce on 10th March. Investors have flocked to the yellow metal this year on the back of the uncertain economic climate and volatile equities.

A note from BlackRock’s March landscape report, found that the first quarter of the year saw flows into gold ETPs reach their highest level since the first quarter in 2009.

Townsend Lancing, Head of Short & Leveraged & FX Platforms at ETF Securities, told ETF Strategy: “ETPs will follow the impact on the London – if there is one. The Yuan is not yet fully convertible to the open market, so it is difficult for this to be a fully international benchmark. I would think this is more of a political move for China to be more active in the gold market and it makes sense in a long term strategy.”

“Investors are comfortable trading in USD, which is how the majority of gold assets are traded in. It is possible that more flows from domestic Chinese investors will go into this benchmark, but there are too many unanswered structural questions for USD investors to move away from the current set up. The London market is a very liquid market,” said Lancing.

There are several ways investors can get exposure to gold. In Europe the ETFS Physical Gold ETP (PHAU) is offered by ETF Securities and has over $4.8bn in assets. It is physically backed by gold held in a vault in London and has fees of 0.39%.  In the US the SPDR Gold Shares ETF (GLD)tracks the spot price of gold and costs 0.40%. It is physically backed and has asset of $32bn.

The new RMB-denominated benchmark price will follow a tendering volume based on price. All orders will be executed on the SGE price trading platform during the auction period of Shanghai Gold trading, which is done through SGE price trading system, when the price and volume reach the balance, the final benchmark price is determined.

On Tuesday 19th April the 12 Fixing Members and 6 Reference Price Members were announced, along with 18 international consultants. The first Shanghai Gold Benchmark Price was set on Tuesday morning at 256.92 RMB/g. The prices will be set twice daily, which is also the case in London.

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