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China Moves To Dominate
Gold Market With Physical Exchange

China is slowly moving to dominate the global gold market and it is important to join the dots regarding a few key recent developments in China relating to gold.

When the International Board of the Shanghai Gold Exchange (SGE) was launched September 18 during an evening trading session, it was notable that the first transactions were put through by a diverse group comprising HSBC, MKS (Switzerland), and the Chinese banks, ICBC, Bank of China and Bank of Communications.

MKS is the Geneva headquartered precious metals trading group that also owns the large PAMP refinery company in Switzerland. 

There are reportedly 40 international participants signed up to trade on the SGE International Board (SGEI), but the SGE hasn’t specifically confirmed the identities of all participants. 

Like the domestic SGE which counts precious metals refineries as members, the SGEI will have a diverse group of trading participants including a number of international refineries as well as bullion banks and trading houses. 

Precious metals refineries Metalor Technologies and Heraeus have confirmed that they will be participants and along with MKS, this represents three of the largest gold refineries in the world. 

International bullion banks who have already announced their participation include ANZ, Standard Chartered and HSBC, and its also known that Standard Bank, JP Morgan and the Bank of Nova Scotia were said to be interested. The Perth Mint was also said to be interested. 

The presence of international refineries and possibly international mints as possible direct participants within SGEI trading should improve liquidity and price discovery on the new international exchange and help it become a serious competitor to the existing duopoly of gold price discovery carried on in the London OTC market and the New York gold futures market. 

One encouraging factor about the SGE and the SGE international platform is that there is a lot of physical gold flowing through the Exchange. Therefore, price discovery is not just based on an inverted pyramid of mostly unallocated gold as in London or mostly cash-traded futures paper gold as in New York. 

Like everything in China, the SGE thinks big and it currently employs a network of 58 certified vaults, 55 of which are for storing gold and 3 of which store silver. These 58 vaults are located in 36 Chinese cities that are considered important for gold refining and gold consumption and physical delivery can actually occur between the vaults. 

With the launch of the SGEI, the International Board has its own new vault in which international participants can load gold in and out of. The is vault is being managed by Bank of Communications and is strategically located in the Zhabei district, not too far from the Shanghai International Airport. Brinks in Shanghai will be the official transporters of gold for the SGEI.

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