Shanghai Gold Exchange, Comex and the LBMA

Photo by gags9999 / CC BY 2.0

There has been much talk about the Shanghai Gold Exchange (SGE) which is seen as a direct challenge to the Comex and the London Bullion Market Association  (LBMA). So what is the primary difference between these exchanges?

We are all aware of the paper market manipulation in the West which seeks to control the spot price of Gold and Silver. Crucially the Shanghai exchange deals solely with the physical flow of metal between buyers and sellers. So the price in Shanghai will be governed in this manner and not by leveraged paper trades as in the West.

If an institution chose to bet against the Gold in a short position it would be required to deliver the physical metal upon settlement of the trade which would clearly deter such speculation on the grounds of logistics and cost.

The SGE will be a market not distorted by institutions and their trading platforms which have controlled global gold markets. This change to a physical pricing mechanism for Gold accelerated when Shanghai introduced it’s own gold price fix in April 2016 which will also be different in how it operates.

Furthermore it should be noted that a Chinese Bank joined the London Price Fix in March 2016 with others rumoured to be joining soon. One can come to our own conclusions as to why that would be the case but it suggest they may wish to change these traditional centres for gold price fixing to mirror what Shanghai intends doing in the future.

We have witnessed trades in 2016 whereby the paper price drops and enormous physical trades are being undertaken in China of the order of several tons as witnessed by the very large recent outflow of the metal from Shanghai this year.

Chinese investors will continue to take advantage of the paper price manipulation but at some point the availability of Gold via London which takes delivery, then ships to Switzerland for recasting into 1 kilo bars before shipment to Hong Kong and China will dry up virtually in totality.

Perhaps the Shanghai gold price fix will ultimately lead to the much vaunted reset and the subsequent implosion of the gold centres in London and New York and become the catalyst for the new financial paradigm based upon gold trade settlement and gold and silver backed currencies. We shall see but there are several indicators already suggesting that this could be a possibility.

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