In Wake of Gold Benchmark Investigations, China Attempts to Squeeze Into Gold Exchange Marketplace

May 28th, 2014

Over the past month, gold trading in New York and London has come under heavy fire as dozens of lawsuits pile up in Manhattan’s Federal District Court and regulators on both sides of the pond, including the United States (US) Commodity Futures Trading Commission (CFTC) and United Kingdom (UK) Financial Conduct Authority (FCA), open investigations into gold price fixing.  Financial institutions including Deutsche Bank, HSBC and Societe Generale have been implicated in lawsuits related to the London gold fix and Barclays has already been fined $43 million by the FCA.

 

It appears that China is trying to capitalize on the temporary vulnerability in the gold markets.  Coverage has been sparse; however, Reuters broke news earlier this week that China’s central bank approved a new global trading platform for the Shanghai Gold Exchange (SGE). China has since approached HSBC, Standard Bank, Standard Chartered and Bank of Nova Scotia about participating in the exchange, in what seems to be attempts to increase the country’s footprint in pricing in the precious metals market, especially considering that China is the world’s largest importer and producer of gold.

 

With regulatory oversight and enforcement heating up in the largest hubs of the global financial system, specifically in the US and UK, it is possible that aspiring participants, such as China, may seize the opportunity to capture market share in other new areas in addition to the commodities markets.  Whether or not these secondary markets will be successful remains to be seen. The effectiveness of these market-grabbing attempts depends on the willingness of the largest financial institutions to engage new players on new platforms as well as the internal factors specific to any given country. For example, in the case of the Chinese financial system, financial institutions must overcome concerns with the stability of the Yuan, transparency and liquidity.

 

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