This year, at the end of June, a new gold exchange opened in Kunming City, Yunman Province China. The Pan Asian Gold Exchange (PAGE) is part of China’s12th five year plan that was released in March 2011. In communist China, they have a series of five year economic plans dating back to 1953 that are carefully planned and methodically executed. PAGE is part of a long-term strategy to resurrect Kunming City’s role as a trade interface with India and Southeast Asia. Yunman Province has trading history of about 2400 years and PAGE is part of an initiative to attract investors and restore Kunming as a gateway to Southeast Asia.
There has been a remarkable lack of mainstream media coverage on PAGE. It's been suggested that it is because it is a Chinese initiative as opposed to an American or European effort, as well, there’s not a lot of information available about it on the internet. Even PAGE's official website is quite cryptic. Furthermore, other Asian exchanges have opened in the past with no dramatic effect on the market. E.G. Hong Kong and Beijing, CN This could be why media outlets perceive it as a non-event. As well, mainstream media does not possess the mindset or responsible journalism to find out how PAGE will be unlike any other gold exchange to-date.
Currently, PAGE is running a 10 ounce mini physical gold contract for the domestic retail market. This contract allows the average retail investor to buy physical gold or set up an account with a brokerage firm and trade futures. This enables all of the customers of the Agricultural Bank of China who are approx 320 million retail customers and 2.7 million corporate customers, to buy and sell these contracts straight from their bank account in Renminbi (RMB is the Chinese currency of mainland China). This could impose a big draw down on the physical market. In fact, Andrew Maguire said “To give a further idea of scale, if just 1% of their customers bought a single 10 ounce contract, that would equate to 1,000 tons of physical gold being drawn down....”
Another important point to make is that International investors will now have access to the Renminbi through these gold contracts.
The most severe impact will be with the international facing spot contract. The spot market is where the real weight of money is in the gold market, and this October, people will be able to buy into a 90 day rolling spot gold contract in Renminbi. Each contract will be backed 1:1 with allocated gold. The investor will have the choice to either take delivery of their gold or be paid in Chinese Renminbi.
Six major Chinese banks will fix the gold price every morning at 8am their time.
Until now, the mechanism has been that the futures market in London drives the spot price of gold. The LBMA and COMEX are supposed to have 90% unallocated versus 10% allocated contracts, so for every 100 OZ's of paper gold, there is only 10% allocated backing them. Some gold and silver market experts like Adrian Douglas of GATA suggest there’s even less than that.
James Turk of GoldMoney recently put up a video featuring Ned Naylor-Leyland of Cheviot Management where they discuss the paper market and how it currently drives the physical market but in actuality, it should be the other way around. It is the physical market that the paper market should price itself off of. Even though the physical market is much larger, and it is more logical that the price discovery would be based on physical, the public has become quite complacent in accepting that the futures market controls the spot price. This is now all going to change with inception of PAGE, and per CFTC hearing whistle blower and bullion trader, Andrew Maguire, “we now have an additional factor to be vended into the supply demand equation. This factor will ultimately destroy the remaining short positions in both gold and silver.”
From an investor stand-point, the advantages PAGE provides are invaluable because it offers a fully backed 1:1 allocated gold contract, and gives people looking to diversify their fiat currencies access to RMB. What international investor would want to continue to invest in 10% backed paper contracts vs. the 100% physically backed spot contract PAGE is launching? This aspect of the new exchange is of tremendous significance in the international gold market and could put an end to paper gold as well as change the price discovery mechanism for gold. It will be interesting to watch what happens in October when the 90 day spot contracts are available and then measure what impact it has by the end of the year on the markets.
Addendum: I have been updated by one of the people closely involved with PAGE that the exchange may take a couple of months more to be fully operational than expected.
By Kirsty Hogg
http://www.fundsingold.com/
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