OREANDA-NEWS. London, the traditional home/hub of the world’s gold trade, could be slowly losing its grip on power as more and more of the world’s physical gold moves from London’s vaults to Asia, chiefly China.

This part of the story isn’t really anything new. Since 2013 when Western investors started to liquidate Exchange Traded Fund holdings of gold, and the dollar price in turn started its descent from historic highs, China has been stocking up gold.

Now, exact data of gold imports is sketchy at best, as the mainland doesn’t officially report figures, so analysts use fancy calculations from Hong Kong and Switzerland to get to a rough number.

ANZ, for instance,  said recently that as much as 75% of the world’s gold reserves have now been shipped from London vaults to the Middle East and China.

The benchmark price of dollar gold is set in London twice daily via an auction process that is administrated by ICE Benchmark Administration, under the name the London Bullion Market Association Gold Price.

The LBMA is the trade body of the gold industry, acting as a quasi-regulator of quality control of gold bars and refiners of gold.

Gold discovery

Big news recently was that the Bank of China joined the process, adding to the “internationalization” of gold price discovery.

In June at the LBMA gold forum in Shanghai, the Industrial and Commercial Bank of China, or ICBC, said it is “very keen” to become an accredited participant in the LBMA Gold Price auction process.

Also at the forum, the LBMA and the Shanghai Gold Exchange announced that they have collaborated to launch a 9999 gold kilobar contract standard in China.

Ruth Crowell, LBMA chief executive, said of the move: “Following a series of in-depth discussions, the LBMA and SGE mutually recognize new specifications for 1 kg 9999 gold bars. These specifications have been created to facilitate smooth trading of kilobars between Shanghai and other 9999 gold kilobar markets.”

The move is seen as many as the London market readying itself for a seismic change in the dynamics of the gold market.

Bigger news still was official word from the SGE, the world’s largest physical gold exchange, that a Chinese currency based gold benchmark reference price could be launched by the end of 2015.

Shen Gang, vice president of SGE, said the internationalization of China’s gold market was key.

China is the world’s largest consumer and producer of the precious metal, and SGE the world’s largest physical gold exchange. Gang said the SGE’s plan was to become an international exchange, adding gold’s financial function in China’s economy had yet to be “unleashed” and had “limitless” possibilities.

The SGE currently has 52 international members, she said.

China’s needs

Speaking to Platts on the sidelines of the forum, SGE Market Executive Director LiLa Lu said any yuan benchmark gold price would be designed to meet market needs in China.

The global gold market was moving away from a dollar-only price structure and a yuan benchmark would add “color” to the industry, she said. Going forward, it could also make sense for the world’s second largest gold consumer, India, to have a contract priced in rupees, she added.

She stressed that the market had the wrong idea about China’s objectives in the gold market and that the SGE was simply reacting to demand. Lu said that SGE’s key focus was to make China’s gold industry “fair, clean and regulated.”

The need for internationalization of China’s gold market was echoed at the forum by representatives from the People’s Bank of China and Standard Chartered.

Underlining the importance of China, Harriet Hunnable, global head of precious metals at CME Group, told Platts that the Chinese yuan price of gold is becoming increasingly important as a trend indicator for the global gold market and will continue to build influence in the coming years.

“The market is evolving. Is China important? Absolutely,” she said, adding that the yuan price of gold “sends signals” to the global gold marketplace.

Hunnable noted that the fact the LBMA is hosting more and more meetings in China is a clear sign of its importance. “More people need to understand how the Shanghai price works,” she added.

Hunnable believes that it is possible that sooner rather than later the global market could be paying a premium to the China gold price.

“The London market is coming to China,” she said in the interview.

This underlined a continuing theme. China and India account for around 54% of physical gold flows; the current market structure sees both countries pay either a premium or discount to the international dollar price.

As a sign of the importance of the China gold market, earlier in 2015 CME launched a physically delivered kilogram gold contract. It is similar in structure to CME’s benchmark US 100-oz contract and settled in Hong Kong at CME-approved locations.

So, what can we take from all of this? China is king. But only because the market dictates it. London is waking up to change, and that change is already in action. Now it’s a case of evolution.

The big change will arrive when the Yuan benchmark arrives. It will, perhaps, do the market more good to accept it, rather than fear its coming.