London gold fix gets a Chinese touch

Customers waiting for banking transactions at a Bank of China Ltd branch in Guangzhou, Guangdong province. The lender has become the first Asian bank to join the auction process that sets gold prices in the London market. [Photo/China Daily]

The presence of a Chinese bank in the global gold pricing system will strengthen the nation's ties with the global bullion market and increase transparency, experts said on Wednesday.

Earlier on Tuesday, Bank of China Ltd became the first Asian lender to be a part of the auction process that sets gold prices on the London market, according to the London Bullion Market Association.

The bank, along with seven other lenders, will start participating in the twice-daily electronic auction, it said.

The move was not surprising, considering that there were reports earlier in the year that Chinese banks would be a part of the gold auction process.

At that time, Ruth Crowell, chief executive of the London Bullion Market Association, said that a new fix will help create a more diverse pool of participants, which includes Chinese banks.

While China is the world's largest bullion buyer, it has never played a direct role in determining London gold prices till now. Gold prices in China are normally fixed through trading on the Shanghai Gold Exchange.

The London gold market is considered as the global gold pricing center. Its gold prices are widely used in settlements between producers, consumers and financial institutions and is an important pricing benchmark for gold derivatives contracts.

A new electronic auction went live in March as a more transparent alternative to the century-old London Gold Fix. Under the old system, which was introduced in 1919, banks simply called each other on the telephone to set the price on a daily basis.

Barclays Plc, HSBC Holdings Plc, Bank of Nova Scotia and Societe Generale SA were the initial members of the London Gold Fix. In March, the pool was expanded to include Goldman Sachs Group Inc, UBS AG and JP Morgan Chase & Co, but contrary to expectations, no Chinese lender was included.

With the entry of the Chinese lender, the auction process is expected to better reflect the gold supply and demand trends from the Chinese market.

China and India are the largest consumers of gold globally. The two countries account for more than 50 percent of the global demand. China is also the world's biggest importer of the yellow metal and consumes more than three times the amount of gold it produces.

With its new role in the gold pricing system, the Chinese bullion market is set to take on a more international hue.

The Bank of China's decision to join the gold pricing process has been widely welcomed by bullion market participants, who expect it to boost trading volumes.

What is more, a larger and more diverse pool of participants in the pricing system will help maintain transparency of the system.

In the absence of transparency, gold prices can be rigged to benefit banks at the expense of producers, traders, investors, jewelry producers and other market participants. It is expected that more firms may join the auction process soon.

Crowell is expected to attend next week's LBMA Bullion Market Forum in Shanghai and use the occasion to encourage more cooperation between China and the world gold market.