China is the world’s biggest gold producer by far and only recently lost its top spot as the world’s biggest buyer of gold. These two factors alone could be sufficient to provide the impetus for the Chinese push to control the gold market.
Traditionally, the large gold producers were either British colonies or former British colonies which resulted in London becoming the center of the Gold market. The gold price is fixed twice daily in USD, GBP and the euro. The price is fixed by the London Bullion Market Association and by the COMEX in New York. During June of 2015, the Bank of China became the first Chinese bank to join the group of banks that comprise the Association that sets the precious metal's benchmark price.
Julian Phillips, founder of and contributor to GoldForecaster.com says this will allow Chinese banks to participate in gold markets on a global basis in the future.
Phillips also pointed out that while London and New York through COMEX are the hubs for setting the gold price, very little physical gold goes through the COMEX. The prices thus reflect the trading picture of New York speculators rather than that of the actual physical gold buyers.
This has led to a situation where China, as the biggest producer and more often than not the biggest buyer of gold, is left with little or no control over the gold price, a situation they are seeking to correct.
Commenting on this situation Julian Phillips said that having New York and London as the price setting locations “has kept gold prices well below the level that demand and supply should reflect.” China does not want an uncontrolled gold price but it also “does not want the U.S/U.K. to have control over this market if they are minor players”.
The Chinese approach to the gold market is part of a larger plan to install the Yuan as an alternative international currency to the US dollar on the basis of a multi-currency system which would see the gold price quoted in yuan in addition to the USD, GBP and the Euro.
China has amassed a gold stockpile second only to that of the U.S. as one of the legs of its multi-pronged attempt to join the U.S. in its dominant position in the global economy.
Julian Phillips also said China could encourage gold trading in yuan by allowing Chinese banks to take up gold stock and then on sell it in yuan. He also expects China to announce a Shanghai gold fix before the end of this year which he says will provide a market “that is not distorted by the banks, their proprietary trading, or the gold distribution system globally.”
The establishment of the BRICS national grouping which consists of Brazil, Russia, China, India and South Africa could also be significant in the Chinese strategy. While India is not a gold producer, it shares the status of the world's largest buyer with China with the other four BRICS members are responsible for one third of the world gold production.
These measures by the Chinese could have the effect of diluting the influence the dollar has in global trade. The last word from Philips, “This is not just about gold for China, it is a new monetary system independent of the U.S. and the dollar.
MT4 Chart: Gold