The gold market is about to be shaken up. According to Reuters the bank with the world’s largest market value is seeking entrance to COMEX and other major futures exchanges and wants to join “the 11 market makers of the London Bullion Market Association (LBMA).” That bank is the Industrial and Commercial Bank of China, Ltd (ICBC).
China has long been moving to gold in its quest to dominate global economics, but until now its trading activity outside its borders has been strictly over-the-counter. The entrance of a $90 billion a year player in futures market is certain to bring about extraordinary changes.
ICBC vice-general manager of financial markets Shen Shisheng let the cat out of the bag. “We hope to … become a major market maker, like Barclays,” Shen commented to one of the magazine’s reporters.
Last year the ICBC became the first Chinese bank to join the LBMA as an ordinary member and it now operates in 34 countries. “We need to expand our gold services and products to other major markets,” Shen said.
It’s what is behind China’s enormous clout that promises to rattle the walls of the futures gold market – a strong belief in gold as the ultimate safe haven coupled with very robust and consistent trade. China’s domestic futures trade last year rose 113% to over 722 million lots while turnover rose to $402 billion, an increase of 180%.
The moderating impact of such trade on COMEX could be staggering. With a major buyer always at the ready, triggered sales would no longer necessarily cause prices to plummet. Dampened volatility would in turn make the gold market less foreboding to household investors and China’s safe-have mindset is bound to spill over.
The futures market will not be instantly transformed into a Utopian dream, of course. China plays to win and the first prize is domination of the global economy. We have seen China’s tricks many times in the past as they have learned to bend the rules to suit their needs. There is nothing new in that, they have just gotten better at the game than those who invented it.
The threat of market manipulation will multiply several-fold, and constant vigilance will be in order. None-the-less, the game will change. Gigantic funds and central banks will find it a lot harder to make the gold market march to their own drummers. In the end, the entrance of major new competition into any market will always work in favor of free trade.
The futures gold market is no different and I suspect that household gold investment will soon be getting very interesting – and even more profitable.