China’s displeasure over the dollar’s supremacy in global financial markets is no secret. The Chinese feel the yuan should rightfully be the preferred reserve currency of all nations. In yet another move to dethrone the dollar, China has now decided to get its own gold benchmark that will be denominated in yuan. While the Shanghai Gold Fix may not immediately have an impact on international gold prices, it does help diminish the need for the dollar.

What is it?

Gold prices will now be fixed twice every day in China, based on the contracts traded on the Shanghai Gold Exchange. Shanghai gold fix will compete with the popular benchmark, the London Fix, which is set by the London Bullion Market Association.

While the London Fix is conducted in dollar, pound and euro, the Shanghai Fix will be conducted only in yuan. So investors will have to reckon with the Shanghai Fix too while fixing their domestic benchmark price. The number of participating banks and other stakeholders is higher in the Shanghai Fix at 18, against 12 in the London Fix. Four state-owned banks including the Industrial and Commercial Bank of China and Bank of China will be involved in this process.

The Shanghai Fix is quoted in yuan per gram, not in troy ounces that is widely used currently. The auction will be based on the trading of 1 kg gold contract traded by the 18 members on the Shanghai Gold Exchange.

Why is it important?

As the largest consumer of gold, China felt that it ought to have a bigger influence on gold prices. The new benchmark will now be able to reflect the local demand in China. Interestingly, the Bank of China is also present in the panel of members that determines the London Fix. This move is likely to help China’s efforts to internationalise its currency.

This effort received an impetus through the IMF’s inclusion of yuan in the SDR basket last year. By making gold benchmarked against the yuan, China is now ensuring that about 30 per cent of the gold trade takes place in yuan and not in dollars. China is also trying to increase the use of yuan in settling international trades. The yuan has already displaced the dollar as the most used currency in China’s trades with its partners in the Asia-Pacific region.

Why should I care?

While the Shanghai gold fix might not be adopted immediately by other international markets, many arbitrageurs might trade the price difference in gold between the London, New York and Shanghai markets, increasing trading volumes in China and also increasing the usage of yuan. These arbitrage trades will ensure some alignment between the prices traded in Shanghai and other international markets.

Gold prices in India are linked closely to international prices. As dollar was the predominant currency used in fixing gold prices, the movement in dollar had a significant impact on the gold prices so far. If the popularity of Shanghai fix increases over the coming years, you might have to start looking at the yuan movement to gauge the movement in gold.

Yuan is a lot less volatile than dollar; gold prices could also fluctuate a lot less if benchmarked to the Chinese currency. While that seems quite far-fetched now, the determination of gold prices may be set to change significantly in the coming years. This affects your investments in gold ETFs or bars and coins.

The bottomline

Watch out dollar, the dragon is hot on your heels

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