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Shanghai starts night trading for gold and silver futures July 5

Section: Daily Dispatches

Goodbye to the old East-West arbitrage?

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Gold Standard? China Doesn't Set It

By Yue Li
The Wall Street Journal
Sunday, June 30, 3013

As global gold prices on Friday recorded their worst quarter since the start of modern gold trading in 1974, industry experts in Shanghai were talking about China's efforts to have a say in global gold prices -- and whether the efforts are having an impact.

China is the world's largest gold producer and the second-largest consumer after India, but industry executives and professionals have been complaining that gold prices in China are just shadows of global prices and don't have any impact on other markets.

"The U.S. and Europe still have the pricing power, although prices are usually being affected by a number of factors, such as liquidity and overall economic conditions," said Yang Maijun, chairman of the Board at the Shanghai Futures Exchange, which is going to start night trading hours for its gold and silver contracts on July 5.

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"The purpose of night trading is to help prices [on the Shanghai exchange] better connect with global prices, and to help achieve our goal of internationalizing our contracts," Mr. Yang told the audience at the Lujiazui Forum, an annual gathering of financial policy makers and executives in Shanghai.

Beijing also introduced interbank gold trading in May last year, an over-the-counter market the authorities hope that commercial banks can play a bigger role in pricing and trading, in an effort to try to influence global prices. Trading have so far been tepid compared with high volumes on the Shanghai Gold Exchange, according to traders participating in the interbank trading.

However, the absence of a comprehensive financial system, such as a freely traded currency and an opening up of the capital account, keeps China from gaining a stronger foothold in global markets, Sun Zhaoxue, president of China National Gold Group Corp., the country's largest gold producer by output.

Meanwhile, the average Chinese person "only holds 4.5 gram of gold," Mr. Sun said. "That is far below an average of 24 grams per person globally. So unless Chinese people have more gold in their hands, I don't see it happening any time soon."

China has futures contracts of gold and silver on the Shanghai Futures Exchange and spot contracts of the two metals on the Shanghai Gold Exchange. All the contracts are denominated in yuan. Global trading in spot and futures contracts are denominated in the U.S. dollar.

Gold for July delivery, the front-month contract, rose 1% to $1,223.80 a troy ounce on the Comex division of the New York Mercantile Exchange on Friday. Gold prices fell 23% in the second quarter, its biggest quarterly decline since 1974.

China has strict restrictions on capital moving in and out of the country, and the yuan isn't a truly global currency despite several currency swap deals with countries like Australia and the UK.

"Without all the restrictions lifted, such as in trade, tax, foreign exchange, and currency, China isn't going to have any pricing power. However, you should know all these are under our own control -- that is to say, we choose not to have any impact on global prices," said Andrew Wang, general manager of precious metal department at Standard Bank, one of South Africa's largest lenders by assets. China's ICBC has a 20% stake in the Johannesburg-based bank and has partnerships with Standard Bank's China unit in gold and silver trade.

China allows only nine commercial banks to import and export gold and silver, and has quotas for trade of the two metals. The National Bureau of Statistics never releases official data for gold imports and exports, citing national secrets.

Chen Zhiwu, a finance professor at the Yale School of Management, shrugged off the idea of China pursuing pricing power in gold.

"I don't think it is all that important. China doesn't have the pricing power -- so what?" Mr. Chen said. "No one's going to die if we don't have it."

To be sure, gold has long been considered not just a store of value or a hedge against inflation but also an asset class investors can choose when they consider diversifying their portfolios.

In Asia in particular, gold is also something that's worthwhile to own and to pass onto generation after generation. Central banks have been net buyers of gold over the years and are one of the main factors behind gold's 12-year bull run that ended in April, where prices suffered their biggest daily slump since the 1980s.

"There are plenty of other ways to hedge and to make money, such as bond and stocks. ... Gold can't generate returns, so why do we so care about gold pricing power?" Mr. Chen said.

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