In part three of their collaboration focussing on the Chinese Gold market, Jan Skoyles and Koos Jansen delve into the key elements of the gold contract on the Shanghai Futures Exchange and present what they believe is a growing cog in the international gold market. For more great analysis of China’s gold news don’t miss Koos’ blog.
This year volumes and deliveries on the Shanghai Gold Exchange have begun to appear with some regularity in gold market updates, alongside COMEX gold futures volumes and London prices.
But the Shanghai Futures Exchange is where we believe the Chinese authorities wish to use their influence on the international gold price.
Background to the Shanghai Futures Exchange
As we have highlighted in an earlier infographic, China’s gold market has undergone radical changes in the last two decades. From preventing gold ownership to publically encouraging it, the State Council is ensuring that China’s gold market is the one to watch as the nature of the global economy changes.
There are only two State Council approved gold trading exchanges in China; the Shanghai Gold Exchange and the Shanghai Futures Exchange.
On January 9 2008 the SHFE launched a 1kg gold futures contracts in response to both domestic and hedging demand. Originally there was a debate over who would have the gold futures contract, the SHFE or the SGE. In 2006, when the issue was discussed the SHFE traded 58% of China’s futures volume and its copper and aluminium trading volume was second to the LME. It seemed a clear choice who would introduce China’s first gold futures contract.
Shortly after launch the gold futures contract quickly gained a dominant share of China’s gold product market and was seen as ‘a major force in its own right’ within the gold futures market. Despite trading only being available to domestic customers, the SHFE’s gold contract became the fourth most traded futures contract in the world within two years of launch (in terms of size).
Reportedly the size of the contract was originally contested, and a 300 gram contract was originally considered. However the 1000g contract enabled the SHFE to present a gold contract which is line with others on the international market, namely TOCOM, India and Dubai futures markets.
It seems to us that there are two main aims of the State Council when it comes to offering access to gold markets. The first is to facilitate gold ownership, the second is to play a significant role in price discovery.
We believe the SGE is to facilitate gold ownership whilst the SHFE is a vehicle for China to influence the international gold price.
Despite its relative infancy to the market, it is the second largest gold futures exchange in the world.