China Joins the New London Gold Fix

It’s official: China now plays a small role in directly setting the price of gold in Western markets. For the first time ever, a Chinese bank has joined the twice-daily gold price fixing process run by the London Bullion Market Association (LBMA).

As we reported back in February, this news was anticipated. The LBMA has replaced the old London Gold Fix with a new, electronic mechanism in an effort to increase transparency in the gold markets. Part of this restructuring of the price fix includes opening the doors to more banks. The Bank of China is a state-owned institution, and joins the ranks of Barclays, Goldman Sachs, HSBC Bank, JPMorgan Chase London, Bank of Nova Scotia, Societe Generale and UBS.

While this development is unlikely to have a dramatic effect on the price of gold in and of itself, it is a harbinger of the times to come. Eastern markets will inevitably play an increasingly important role in global finance. The Asian Infrastructure Investment Bank is one of the latest examples of this new paradigm.

As China takes a more central position in the global economy, precious metals could also return as a significant form of money. The Bank of China has joined the LBMA, and China is simultaneously laying the groundwork for a gold market that could directly compete with the Western-controlled systems. It wants the Chinese yuan to become essential to the international gold trade. To that end, China recently announced its largest gold-investment fund ever: the “Silk Road Gold Fund”. MarketWatch reports:

In addition to buying stakes in gold-mining projects and companies in the New Silk Road area using ‘private-equity and venture-capital methods,’ the new fund would also be used to invest in gold-miner stocks and to set up gold exchange-traded funds, the state-run Shanghai Securities Journal quoted an unnamed insider as saying on Monday. The fund may also boost China’s power over the world gold market and could increase the use of the yuan in pricing gold…”

In the midst of all this progress, the world is now well aware that China has been stockpiling physical gold as a way to stabilize its foreign exchange holdings. The exact amount of those reserves remain unknown.

Some researchers believe China may now unofficially hold the second largest gold reserves in the world, with as much as 2,510 tons of the metal. Other analysts think China may have even larger unofficial gold holdings, but due to a lack of transparency, the exact numbers are impossible to calculate. Near the beginning of this year, evidence emerged that China was on track to consuming more gold than the world is currently producing.

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