China Looks To Dominate Gold Prices

Wednesday, April 20, 2016

If you've been watching gold over the past couple of days, you know that big news is coming out of China. The country is looking to be the world's leader when it comes to fixing the gold price by launching the Shanghai Gold Fix. Today, we'll talk about what the Shanghai Gold Fix is, why some believe that it will change the gold industry as we know it, and why I don't believe it's going to have such a huge effect on the market.

What Is The Shanghai Gold Fix

China is currently the world's largest producer of gold. So, it makes sense that the country wants to be in control of the global price of the precious metal. As a result, the country has launched what is now being called the Shanghai Gold Fix. The Shanghai Gold Fix is quite a bit like the London Gold Fix. Essentially, there are 18 institutions that are members on the fix. Two of the institutions include the Bank of China and the China Construction Bank. Essentially, the 18 members of the Shanghai Gold Fix will meet twice daily in an attempt to make the market.

During the meetings, the 18 institutions will negotiate the price of gold. Once the negotiations reach a price at which all of the institutions can agree upon, that will be announced as the price of gold in China for the time being. So essentially, 18 institutions within China will dictate the price of gold for chines business, consumers, and investors.

Why Some Believe This Will Change The Gold Market As We Know It

The gold market is a very interesting one at the moment. Essentially, the entire gold market is dictated by the London Gold Fix, which as of late has come under scrutiny for it's lack of transparency. Some investors believe that the Shanghai Gold Fix will slowly take the power away from the London Gold Fix, making China the market maker in the gold market. Because China is currently the world's largest producer of the precious metal, those that believe that China will soon control the gold market also believe that the value of the precious metal is going to climb as a result.

Why I Don't Think This Is Going To Make Much Of A Change

While the idea of a Shanghai Gold Fix makes for a great story to write about, in the long run, I'm not expecting for the SGF to make any big changes globally. In China, things are likely to change in a big way, but globally, there's a bit of a hurdle to get over. You see, when it comes to China, it is completely legal to bring gold into the country. However, taking gold out of the country, even selling Chinese gold to nations outside of China is 100% illegal. The reality is that without Chinese gold in the open market, the Shanghai Gold Fix isn't going to make much of a difference globally. Now, don't get me wrong... once things are set up, it is definitely possible, and maybe even probable that China will change their laws with regard to exporting gold. However, until this happens, the SGF isn't likely to make the tidal waves in the market that some analysts are expecting to see.

What We Can Expect To See Moving Forward

Considering that the SGF isn't likely to make any big changes, I'm maintaining my bullish opinion on gold. The reality is that there are tons of factors that are likely to push the precious metal upward. With geopolitical, economic, and market concerns in our midst, it only makes sense that the safe haven investment will grow in value. 

Joshua Rodriguez

Joshua Rodriguez is an avid financial professional. He is the owner and founder of CNA Finance, a partner at Modest Money, and a writer for US News & World Report, Investing.com, and more! Joshua takes a strong fundamental approach to market analysis and enjoys offering his take on what we can expect moving forward. You can reach Joshua at cnafinancehelp@gmail.com.