Chinas New Silk Road and Its Implications for Gold

April 20 2015

China will be the global powerhouse of the 21st century. This was reconfirmed while I visited an international precious metals conference in Dubai this week. Among the speakers was the Vice President of the Shanghai Gold Exchange. China is gradually opening its financial markets and gold is one of the cornerstones of this development.

Chinas New Silk Road and Its Implications for Gold

China will be the global powerhouse of the 21st century. This was reconfirmed while I visited an international precious metals conference in Dubai this week. Among the speakers was the Vice President of the Shanghai Gold Exchange. China is gradually opening its financial markets and gold is one of the cornerstones of this development. He indicated that the Chinese government wants to enlarge the gold holdings of its citizens to Western standards. Furthermore, he suggested that local commercial banks are encouraged to start selling gold to the masses. This would be equivalent to the Dutch central bank (DNB) stimulating Dutch commercial banks like ABN AMRO, SNS and Rabobank to start selling physical gold bars at their office. This would be revolutionary, but what are the consequences?

The ‘New Silk Road’

The Silk Road was a network of trade routes across Central Asia which operated for many centuries. Goods like; silk, satin, diamonds, pearl, chinaware, horses and rhubarb were transported and traded along this route. The network came into existence when China and the Middle East steadily became on friendly terms with each other and trade relations flourished.

Now, China once again wants to strengthen its international relations. The initiative to create a new Silk Road called ‘One belt, one road’ aims to improve economic relations. The economic integration is very promising: vast markets will become interconnected and free trade shall prevail.

Countries such as India, Mongolia, Russia, Iran, Indonesia, Kazakhstan, Egypt, Greece, the United Arab Emirates, and Kenya have already joined the New Silk Road. In total, the Chinese government has entered into allegiances with 60 countries.

As the most western located port of the New Silk Road, the Netherlands also plays an important role.

The Role of the Gold Market in the New Silk Road

The Shanghai Gold Exchange (SGE) wants to acquire a major position in the international gold market. It wants to become a commercial center, and — if we read between the lines — their ambition is to replace London as the center of gold trading.

The SGE wants to realize this ambition through ‘One belt, one route.’

The ‘One belt, one route’ initiative will turn Shanghai into a center for gold trading, providing better access to and less frictions for buyers, trades, and foreign producers. The first move is to internationalize the Shanghai Gold Exchange.

The trade volume at the Shanghai Gold Exchange is already booming. Last year, the quantity traded increased by 59% to 18,500 tons. The SGE expects this growth—and especially the trading volumes of derivatives (of vital importance for a gold exchange)—to continue, making China’s role in the gold market ever more significant.

The Gold Price in 2015

Every single gold expert was present the Middle East. The various outlooks were interesting: at what price will gold close this year?

The market estimates between $1251 and $1350/oz, which corresponds reasonably well with my personal expectation that the gold price will be under pressure during the first half of this year. However, I expect a turning point when the economic recovery in the U.S. turns out to have stagnated and the Fed decides to postpone raising interest rates.

 

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