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China Proposes New Gold Standard in Yuan

According to the COT report on Friday, last week hedge funds continued to build up long positions on gold. Speculative positions on the precious metal rose to 213,807 contracts. Similar interest from speculators was seen in the height of the gold rally of 2010 and 2011. Now there is active opening of long positions on the precious metals at the same level.

Due to rising interest from hedge funds for gold futures, the Shanghai Gold Exchange – one of the world’s largest precious metal markets –launched its own gold benchmark on Tuesday. The standard is that of bars hallmark 999.99 weighing a kilogram and valued in yuan. Trading was kicked off by Chinese banks, national representatives of jewelry and gold mining industries, UK transnational corporation Standard Chartered PLC and the largest Australian bank ANZ, with the price in the morning at 256.92 yuan per gram of gold ($1,233.85 per ounce). Auctions are taking place twice per day at 10:15 and 14:15, local time.

China is the world’s largest producer and consumer of gold. According to data from the China Gold Association (CGA), demand and manufacturing in China is at 985.9 and 450.05 a ton correspondingly. The launch of the benchmark aims to reflect demand and supply as needed on the internal gold market, thereby easing reckoning between producers and consumers in China. However, it is already clear that this step could have more of an effect on the world gold market and that of currencies as a whole.

Trading of gold in yuan could help the Chinese currency strengthen as a world reserve currency and stray away from dollar dependency. However, to become a new world standard, China needs to oust out its competitor London and show that the price formulation mechanism is transparent and not under manipulation from the interests of trade participants or the state. This is something that will take not a day, nor a week and not even a year.

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