Mechanics of the Shanghai fix
After long contemplation of the viability of yuan-priced gold, China launched the new gold fix on Tuesday, April 19, 2016. The Shanghai Gold Exchange listed the benchmark (or the “fix”). It set the price for 99.99% gold at 256.92 yuan, which is $39.71 per gram. This was marginally higher than the international price at the time. The auction is based on the trading of one-kilogram gold contracts.
The details of the Shanghai fix are comparable to those of the London Bullion Market Association (or LBMA), where the benchmark price is set twice a day. The new yuan fix is in direct competition with the London fix. While the London fix is conducted in the dollar, pound, and euro, the Shanghai fix is carried out only in yuan. 18 banks and other stakeholders participate in the Shanghai fix including China’s big four state-owned banks, foreign banks like Standard Chartered and ANZ, the world’s top jewelry retailer Chow Tai Fook, and two of China’s top gold miners.
Investors are likely looking forward to multi-axis trading for gold in London, New York, and Shanghai. The Chinese fix may pose tough competition to the other markets. With such huge demand from China, 30% of the gold market may soon be converted to the yuan, giving the yuan comparative strength among other currencies.
The funds that might be significantly impacted by the changes in gold demand patterns include the SPDR Gold Shares (GLD), the Advisor Shares Gartman Gold (GYEN), and the iShares Gold Trust (IAU). These three funds have increased 16.2%, 9.6%, and 16.4%, respectively, on a year-to-date basis.
The exchange is also likely looking into creating yuan-based benchmarks for other precious metals including silver, platinum, and palladium.