Shanghai gold deals get a boost as WGC sets bullion free trade zone

Shanghai gold trade gets a boost as WGC sets bullion free trade zone

The World Gold Council (WGC) and the Shanghai Gold Exchange (SGE) signed Thursday a memorandum of understanding to develop a Shanghai free trade zone for bullion and so encourage foreign participation in China's tightly controlled gold market.

The parties say they will support the development of both domestic and international gold trading in the Asian nation by “leveraging the opportunity provided by the internationalization of the Chinese gold market, through the Shanghai Free Trade Zone, to support market expansion”, the WGC said.

Chinese demand for gold has recovered a few weeks ahead of Lunar New Year celebration, but the peak season pickup remains far below previous years’ levels, which made it the world’s biggest consumer of the precious metal in 2013.

The price of gold in the Beijing, which slipped to an uncharacteristic discount to international rates in November, has strengthened back into positive territory over the last couple of months. China’s premium has doubled to $4 per troy ounce from December.

In September last year, China’s largest physical bullion bourse introduced its international board, aimed at encouraging foreign participation in China's tightly controlled gold market.

The future of gold is physical

“The growth of the Shanghai Gold Exchange into the world’s largest physical gold exchange provides compelling evidence that the future of gold is physical,” WGC CEO Aram Shishmanian said.

“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” he added. “As a major market, accounting for 30% of global capacity, this will enable China to take its rightful place in the world gold market.”

China is the world's second largest producer and consumer of the precious metal, but sees itself as lacking sufficient clout in global pricing platforms. Its gold reserves are officially put at 1,054 tonnes — a number officials haven't updated since 2009.

The country has been striving to extend its influence over the bullion market with new contracts aimed at luring international investors, but trading volumes are still a fraction of those in London, where benchmark prices are determined.