What Does China's Control Over Global Silver Prices Really Mean?

Friday, March 11, 2016

Recently, the story broke that China was going to start helping to dictate global silver prices. However, few people really know what this means from a logistics level, and perhaps more importantly, what it means for the price of the precious metal. Today we'll talk about what China helping to control the price of silver means from the logistics side of the equation, what it means for the price of silver, and whether or not China makes silver a better investment than it already is.

The Logistics Of China's Control Over Silver's Price

For several years, China has helped to set the price of silver in an unofficial sense. However, that has changed in a big way throughout this week. In fact, the country has become an official participant with regard to setting prices for the commodity. The silver price that China will help to dictate is known as the London Bullion Market silver price. CME Group is in charge of setting silver prices in London, and on Sunday, it was announced that one of China's largest banks, China Construction Bank will officially be joining CME Group as a member of the silver price process. This adds to a number of large banks around the world that participate including HSBC, The Bank of Nova Scotia, UBS, Toronto Dominion Bank, JPMOrgan Chase, and others.

One Of The Biggest Things This Means For Silver

For some time now, silver has not been able to be purchased using China's home currency. However, the move will likely change that. Soon, China's own currency will be able to be used in the purchase of silver. That doesn't sound like much of a big deal, but it is for two very important reasons...

  • USD And Silver – China is the world's second largest economy and first largest consumer of silver. As such if Chinese consumers, businesses, and governmental bodies are able to purchase silver using China's own currency, it will greatly shape the relationship between silver and currency, most importantly, the relationship between silver and the United States Dollar. This could mean big changes in demand around the world as well as global price fluctuations in silver.

  • Demand – If Chinese consumers, businesses and governmental bodies are able to purchase silver using the Chinese currency, the cost of silver to these consumers will be much lower. After all, at the moment, these consumers must go through an exchange of currency that costs money in order to get the currency they need to purchase silver in the first place. If that step can be skipped, more money can be used to purchase the precious metal itself. As such, we would likely see an incredible spike in demand for silver out of China.

What This Means For The Price Of Silver

In my opinion, the fact that China will be helping to set the price of silver is actually a good thing. Ultimately, this will increase the demand for the precious metal, which in turn will lead to increased prices. So, while some look at this as a loss of control for other nations and a bad thing for the silver market as a whole, I'm on the bullish side of the equation that believes that overall, this is a great move that will likely benefit precious metals investors around the world. All in all, I believe that China is making silver a better investment.  

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.