The Chinese government acknowledged gold as a strategic asset in 2000, when it included the establishment of an open gold market in its five year economic plan.
Since then China has come to play a significant role in the international gold market as it strives to develop and advance all aspects of the industry and gold’s role in the domestic market.
Why it has decided to focus on building and developing the gold industry from both a supply and demand perspective is a question that requires further investigation.
In the coming weeks Koos Jansen and myself will reveal the cogs of China’s gold market as we work to reach a conclusion as to why gold is such a high priority for China’s economic development.
This week we provide an overview of the major elements of the marketplace in an attempt to unveil the strategy of the State Council.
What is the China Gold Market?
There are three main areas of focus for the State Council when it comes to the precious metal market. These are not exclusive areas and are, in many ways, interconnected. The point being however that the government has identified where and who is best to develop its gold strategy.
We look at them briefly below.
Shanghai Gold Exchange
The SGE is the poster child for the 2013 gold market. It is managed and supplied by the PBOC. Many expect it to represent the tipping point in a dichotomous two part gold market (paper vs physical) due to the vast number of physical deliveries made in the last year. At times delivery numbers have touched global mine supply figures and when they haven’t they remain stunningly high.
Numbers from the SGE this year suggested that there was a change in the manner in which the Chinese made investment decisions. Having previously bought when prices were climbing and during festival seasons, they took delivery of record amounts of gold in both April and July following significant drops in the price of gold.
Launched in 2002, it took just ten years for the SGE to become the biggest physical gold exchange in the world signalling the rise of China as a gold market leader. A quick glance at previous data released by the SGE shows that the three largest gold contracts traded on the exchange are as follows: Au 99.95 (3kg contract), Au 99.99 (1 kg) and Au (T+D) (also 1kg of 99.95). The former two launching just two years ago.
Members of the SGE, of which there are over 160, are heavily represented by commercial banks (domestic and Chinese branches of foreign banks) and firms involved in gold production and investment.