China may ultimately set gold’s global benchmark price

China is taking a dominant position in the physical trading of gold and may ultimately decide the global gold price, said David Harquail, chairman of the World Gold Council, in an interview with the China Fortune Media on July 25.

The Shanghai Gold Exchange, as a venue for physical trading in gold, has evolved into one of the most respectable gold markets in the world within a short period of time. It marks a sharp contrast with the markets for gold derivatives and paper gold which are susceptible to manipulations and short-term volatilities, he pointed out.

David Harquail, chairman of the World Gold Council, speaks at the China Gold Congress on July 25. (Photo by Li Lin/China Fortune Media)

"It is the physical market which Shanghai Gold Exchange represents that determines the price in the long term. China is becoming dominant in what is the more important market in the long term," he told China Fortune Media.

In terms of gold production and consumption, China has been the global leader for many years, as shown by data in the China Gold Yearbook 2018, unveiled on July 24 by the China Gold Association.

For 11 straight years to 2017, China's gold production remained the highest in the world. Its consumption has also been the largest globally for the past five years. In 2017, trade volume of gold in China, via the Shanghai Gold Exchange, the Shanghai Futures Exchange and the commercial banks, amounted to 55,000 tons, or a global share of 10.85 percent.

The above yearbook revealed that China's own gold production was not enough to meet its robust demand at home. In 2017, this country produced 426.14 tons of gold, down by 6.03 percent year-on-year, but consumed 1,089.07 tons, up by 9.41 percent year-on-year.

China' gold imports, which have been on a steady rise, is a reflection of its sustained economic growth, Mr. Harquail believed, adding that as long as the wealth of China keeps expanding, gold will get a share in it.

He said China now has a true gold market economy based on the state-of-the-art infrastructure. It has also developed good policies thanks to advice from the World Gold Council.

Regarding further improvements China could make, he believed that as the ultimate step, the RMB should become the free trading currency globally to attract traders across the world to China's Shanghai Gold Exchange.

With the liberalization of the RMB, this exchange's gold price will become the international benchmark. Otherwise, it will only serve as a reference despite the importnt role of the Shanghai Gold Exchange, he believed, advising some patience for such a step.

"It is inevitable that China will be determining the gold price in the world, but it will just be a matter of time," he said.

Drawing the picture of the gold industry in China and the West, Mr. Harquail said Chinese and Western companies run into the same situation --- it's difficult to find and permit new gold deposits, and the new mines are of lower grade and involve higher productions costs. Because of these limitations, these gold enterprises share the same model of development --- mergers and acquisitions.