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A Message from the East... A Warning to the West
April 27, 2020 - (Gold Market Wire) - Stuffed into the middle of a long exhausting report by the World Silver Institute – you know, the kind that tells you all about jewelry, fabrication and recycling not to mention riveting subjects like long-term industrial demand and all sorts of (not very) market compelling facts, an interesting bit of data caught our eye.
Under the heading of Annual Turnover on Major Commodity Exchanges we found the following table:
Significant contractions on the London Metals Exchange, flat growth on the CME and massive growth in China. Nearly non-exist just two decades ago, the Shanghai Futures Exchange (SHFE) and the Shanghai Gold Exchange(SGE) are now roughly one-third of the dollar traded amount of the mighty COMEX – and they are closing the gap fast. And while London's Spot market is still the center of the world Gold trade, even the World Gold Council has been moved to opine that London “has been losing (its) relative share of global trading volumes.” It also noted that with banks no longer submitting GOFO rates to establish the forward curve of the market, such changes could be seen as “one of several symptoms of a market that has become increasingly fragmented.”
That fragmentation is a result of China's rising role in the market. If current trends persist for just a few more years, they will become, perhaps, the dominant futures centre for the Gold trade in the world. No wonder COMEX/CME started a bi-lateral product licensing of the Shanghai futures contract in Q4 2019. Although it is a financially settled contract, while Shanghai is a physical trading center, every step taken seems to be edging towards the Shanghai Gold market becoming an international benchmark for the Gold trade, above and beyond a mere “Asian hub.” The World Gold Council notably states that the Shanghai Gold Exchange is now “the largest purely physical spot exchange in the world.”
So, when the Gold crowd wonders about COMEX paper contracts, and their inability to perform delivery functions, they might begin to ruminate about alternatives to the East. If the Anglo-American Gold trade wants to keep its pre-eminent position, it may have to begin to contemplate what the Chinese might be doing right, in terms of market access and contract spec. Perhaps London might want to examine why it took 20 years for its new forward venture, “LME Precious” to get off the ground, when other ventures like ICE, COMEX and Shanghai were cementing their stake.
Too little, too late? Let's hope not.