Move London, Shanghai is here. Seeing the pace at which China’s gold trade is growing, chances of Shanghai taking over London Bullion Market Association in fixing spot gold prices cannot be dismissed. In such a situation Indian bullion market will be seen turning eastwards to determine price movements and Indian physical and investment demand too will be playing a role in determining prices.

China, the largest producer and consumer of gold, is determined to make Shanghai a “leading physical trading centre in a new integrated multi-polar world” and “decrease the impact of the US dollar and US economy on gold”. In an email response to Financial Chronicle, Albert Cheng, managing director, far east, World Gold Council, said that future will see gold being denominated in Yuan.

It was in 2002 that China opened Shanghai Gold Exchange and allowed its citizens to hold gold. Since then China started devouring the metal apart from producing it. Within the past 12 years, China surpassed Italy in consumption, ranking the third in the world. In 2007 China overtook Turkey to become the second largest gold consumer next to India and in 2013 it overtook India as well to become the largest consumer of gold. Gold demand in China is likely to further grow by 20 per cent within the next three years.

China also has been keen on augmenting its production. In 2007, China became the largest producer with an output of 270.5 tonnes and in the past ten years production has doubled from 217 tonnes to 437 tonnes. With such a dominant position in the physical gold market, why should the super power aspirant not want to have a better say in the fixing of global gold prices by replacing London Bullion Market Association (LBMA) and COMEX in the US, which currently determine the international gold prices, have the backing of only 10 per cent of the physical gold.

In these 12 years, China has not just strengthened its domestic market, it has also started internationalisation of its gold trade. China came up with Renminbi-denominated gold products for overseas market, set up Pan Asia Gold Exchange (PAGE), which facilitates gold trade in its local currency abroad. More recently, it opened an international board for Shanghai Gold Exchange and moved it into a free-trade zone so as to make it an international hub for gold trade.

“The launch of International Board of Shanghai Gold Exchange marks a transformation – a transformation not merely to become a part of the global gold trading market, but to create a new world model whereby Shanghai Gold Exchange becomes a leading physical trading centre in a new integrated multi-polar world,” said Albert Cheng.

“It took China only twelve years to develop from scratch and the International Board marks China’s first step towards creating a new world model in the future. Whether Shanghai Gold will become a benchmark for world gold prices depends on its future influence – number of participants and their levels and sophistication, volume of gold traded via the platform etc. There are many tasks to accomplish on the path to internationalisation, such as technological cooperation with international institutions, exchanges, banks, etc,” he said.

“The International Board is a milestone showcasing its capability of internationalising the gold price rather than representing the Chinese market alone,” he added.

Zhou Xiaochuan, governor of China’s central bank, had recently said that the International Gold Board in the Shanghai Free Trade Zone will also become a standard in this multi-polar world. With the continuous development of the Chinese economy, it is expected to play an increasingly important role in the global gold fix.

Analysts hold different views on chances of Shanghai replacing London in gold fixing. “Dubai has been an international hub for gold for a long time. But, it could never benchmark prices and it was always done by the western world,” said Naveen Mathur, associate director of commodities and currencies at Angel Broking. However, in case of China, it will not just be an international trade hub, but largest supplier and consumer too.

“As part of the ‘West to East’ shift happening in the global gold market, we could see that more and more gold in trading will be denominated in currencies other than the US dollar, such as RMB (renminbi). This will decrease the impact of the US dollar and US economy on gold,’ said Cheng.

So what does it mean for India and India’s large bullion market? India has been the largest consumer of gold for the past several decades till last year. It has over 18,000 tonnes of over-the-ground stocks of gold lying in its households and with religious trusts and other institutions. Yet the demand in India and its ups and downs have been hardly impacting the movement in the international gold price. Even the gold rates in the country are benchmarked against the London fix. For the past several years gold prices have not been following the fundamental demand-supply equation. The macro-economic developments, geo-political tensions and more importantly the US dollar and the US economy have been influencing the prices.

Pitching against the dollar as a safe haven asset, gold prices have been dancing to the tunes of the greenback and the US economy. Even the gold ETFs, which account for a miniscule of the total gold consumption, have a better say in fixing the rates than the physical buying in India or China.

In the second quarter of 2013, the gold consumption in India went up 71 per cent and China 87 per cent as the prices fell in April. However, the increased physical demand never saw a subsequent rebound in gold prices.

“If China takes over the mantle of gold market, the fundamentals of the commodity will be revived. By virtue of being the largest producer and consumer of gold China may want to control the market. One cannot dismiss possibility of Shanghai fixing global gold prices five to 10 years down the line,” said Harish Galipelli, head of commodities and currencies at Inditrade Derivatives and Commodities Price discovery will be more realistic if the fundamental demand-supply equation starts determining the price movement in gold. Prices will be determined by the demand and supply situation in China, the demand in India, which is the second largest consumer of the commodity

The total gold import bill of India too will remain relatively steady as the prices will move up and down with the demand. “If Shanghai is able to benchmark gold prices, India will stand to benefit in terms of price discovery with regard to closer time zones between the two countries,” said Gallipelli.

However, Naveen Mathur is doubtful about the Yuan being able to replace the dollar in gold fixing. “The yuan is a stable currency but the economy being largely closed, chances of the currency replacing the dollar in the trade is doubtful,” he said.

However, China has already started internationalisation of its currency and it hopes that gold trade will also help this internationalisation.

“The newly launched International Board of Shanghai Gold Exchange offers global investors all RMB-denominated products, which will no doubt advance China’s drive to internationalise the RMB. In return, the RMB-denominated gold products will benefit the local market in discovering the gold price and increase the efficiency of the market.

While RMB is playing a more essential role as an international currency, the diversification of currency will in turn benefit the gold market,” said Cheng.

According to Aram Shishmanian, CEO of the World Gold Council growth of Chinese market will also transform the global gold market.

“The growth of the Shanghai Gold Exchange to become the world’s largest physical gold exchange provides compelling evidence that the future for gold is physical. As the market shifts from west to east, the expansion of strong gold trading hubs in Asia will improve price discovery, liquidity, transparency and efficiency; all of which will transform the landscape of the global gold market. As a major global market, this will enable China to take its rightful place in the world gold market”, he said.