Latest Move by China Could Further Establish Beijing as a Global Power Player
The rumors are true. With all the talk surrounding whether or not China would introduce a yuan-backed gold fix, they have now been confirmed.
This week, Your News to Know covers recent news and rumors involving the gold market and the global economy. Stories include: Chinese gold fix has been confirmed, Greeks turn to the U.K.’s Royal Mint in search of safe asset storage, and all signs are pointing to higher gold prices.
Yuan gold fix confirmed, China introducing a counterweight in gold trade
For some months now, there have been rumors that China will look to introduce a yuan-backed gold fix. This was seen by many as a power play meant to further establish the yuan in the global market. Now, the rumors have been confirmed, with Reuters reporting that China plans to launch the gold fix by the end of 2015, via SGE.
This could be the biggest – and boldest – step China has taken towards gold market reforms in the last decade, as the Asian Dragon aims to make full use of its status as a top gold producer and consumer. “Across the commodity markets as a whole, we’re seeing some very significant initiatives by the Chinese authorities,” noted Nic Brown, head of commodities research at Natixis.
Having their own gold price benchmark doesn’t mean the Chinese are no longer interested in the customary, the London Gold Fix – China’s central bank recently joined the gold price auction in London, with the state-owned ICBC (Industrial and Commercial Bank of China) also showing a desire to participate. Among other things, China might utilize a transparent fixing process by trading a SGE-mediated contract on the stock echange. Transparency has long been a concern with the London fix, culminating in the recent introduction of a new fixing process.
While there aren’t many details available at present time, one Chinese bank official suggested that the yuan gold fix will move from the local market to a global one as China introduces more currency reforms. Jeremy Horn, Standard Chartered’s global head of metals trading, also said that the launch “will be a fundamental building block for the Chinese market.”
Greeks’ massive bank withdrawals are being spent on gold bullion
As the debt crisis in Greece escalates, Greeks seem to have found a safe haven for their assets – the U.K.’s Royal Mint, the world’s largest bullion exporter. Wall Street Journal’s MoneyBeat reports that Greek bank withdrawals grew so numerous over the course of just a few months that the government had no choice but to disallow them until further notice.
Consequently, the Royal Mint has reported a significant increase in gold demand during the same period, contributing to the metal’s reputation as a safe-haven asset in times of turmoil. “In June, we experienced twice the expected demand for Sovereign bullion coins from our customers based in Greece,“ the institution said in an official statement.
The Royal Mint specializes in selling Sovereign coins made from 22 carat gold, which go from $311 a piece onwards.
The financial markets also reflected rising concerns about the situation in Greece, with the price of gold on the London spot market rising almost 1 percent to $1,188 an ounce before settling at $1,172. Analysts say that any worsening of the crisis in Greece will likely push the price of gold further up.
All signs are pointing to higher gold prices ahead
A recent article from StreetAuthority examined the factors that could contribute to a surge in gold prices, and why it could happen sooner rather than later. From fundamentals to mine supply, the metal’s future seems bright.
As global growth continues to rise, the price of gold will have no choice but to follow, especially considering the inflationary nature of said growth. According to IMF estimates, “nearly every developed economy is on the verge of accelerating inflation.“ With numbers such as the $80 trillion yen that Japan adds to its financial system every year, or the estimated $1 trillion that the ECB will print by September 2016, inflationary expectations are certainly reasonable.
Diminished mining supply over the next few years is expected to be another factor pushing gold’s price up. The world’s biggest gold miners are investing less and less into their operations each year: the average capital investment by these companies in 2014 was less than half of what it was in 2012, already causing global gold supply to drop 4 percent in Q1 2015.
The author also notes that the current situation in Greece might be a win-win situation for investors. The greater the possibility of a Grexit, the more appeal gold will have as a safe-haven asset. On the other hand, if a Greek exit from the eurozone is avoided, the dollar will probably fall – in turn, causing gold prices to soar, since the metal is priced in the greenback. As StreetAuthority’s John Kosar puts it: “Smart money is making an aggressive bet that gold is undervalued at near $1,200 per ounce.“
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