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Shanghai Could Become Gold Capital

Written By Brian Hicks

Posted December 17, 2012

In the Asia-Pacific region, Hong Kong has for some time been the clear leader in gold trading. Now, Shanghai is gearing up to oust the reigning champion—and it is making a good bit of progress toward that end.

Early this December, the Shanghai Gold Exchange began operating an inter-bank market on a trial basis to try and stimulate a steady liquidity flow into the Chinese gold market. Both AUX.CNY (gold percentage no less than 99.95) and AUY.CNY (gold no less than 99.99) will be listed on the exchange, China Daily reports.

Nearly 20 banks are expected to pile in on this trial run, and the names include major players like ICBC, Bank of China (HKG: 3988), HSBC (China) (HKG: 0005), Standard Chartered (China) (HKG: 2888), and others. Each transaction will carry a mutual commission charge of 0.04 percent.

To ease matters and give gold investors flexibility, SGE-approved institutions will be able to use a bilateral, OTC system, with all clearing going through the SGE.

Back in November, SGE had announced its intention to begin OTC trading, along with gold ETFs, Friday night trading, and upgrades to the leasing market. Moreover, the Chinese domestic market for precious metals is expected to open up to the global market.

China Daily cites Wang Zhe, head of the SGE, who said an inter-bank market beginning with spot contracts will be created, opening up later to include forward contracts.

Figures from the World Gold Council indicate that Chinese demand for gold dropped to 176.8 tons in Q3 2012, a fair decrease from Q3 2011’s 191.2 tons. Jewelry fell by 6 percent, and investment by 12 percent—largely in response to perceived slowdowns in the Chinese economy.

But domestic shifts away from quick profits—as investors realize the benefit of relying on gold as a safe haven or long-term bet—means there is a fundamental change occurring in the way the Chinese gold market operates.

From China Daily:

“Gold is beginning to re-establish itself as part of the fabric of the financial system. In the medium term, the quantitative easing initiatives in the West and the continuing growth in the East, particularly in India and China, coupled with the seasonally strong quarter coming up in Asia, are excellent indicators for further growth in the gold market,” said Marcus Grubb, managing director of investment at the World Gold Council.