When the Shanghai Gold Exchange (SGE) raised margin requirement a second time in August for gold forward contracts on August 23, followed by the CME raising margins by 27%, gold futures sold off by $134 in 2 days. Chinese investors and consumers saw this as a good buying opportunity as they believe gold is a store of value, especially in the midst of sovereign debt crises in the developed world and inflationary problems in China.
Given this Chinese structural demand and macro backdrop, SGE which opened in October 30, 2002 saw its trading volume in gold, silver and platinum (spots and forwards) rising at 40% per annum since 2004, and its transaction value since its inception reaching over RMB 6 trillion to July this year, according to SGE data.
Key features of the development of SGE include its leading trading position in the domestic gold spot market and its crucial role in transforming gold market from a commodity to a financial derivatives market, minimizing the international and domestic gold price difference, and spearheading more and more individuals (who represent about 19% in gold trading) to invest in physical precious metals. SGE, being the only exchange with foreign membership, now has 7 foreign financial institutions as members including the latest entrant, Barclays.
Looking forward, SGE hopes to step up its momentum by co-operating with international markets to improve its interbank price quoting system, expand the gold lending market, establish a gold lending rate in China, build up its ETF products and allow the foreign members a larger role in the Exchange. SGE is also working with LBMA on certification requirement so that Chinese gold can be traded in the international market. “We are in a special historical time full of opportunities,” said SGE Chairman Wang Zhe. We cannot agree more.
Ross Norman is the owner and chief executive officer of the London-based gold broker Sharps Pixley Ltd.