Gold and Silver Jump as SGE Yuan Benchmark Begins

This morning’s two gold and silver USD spot price plots below look remarkably similar. Following the SGE’s historic inaugural yuan denominated benchmark auction, wholesale gold reached a 4 session high exceeding $1255/oz. Impressively, silver hit a high not seen since May of last year after jumping around 5% to exceed $17/oz.

We’ve been covering the build-up to this event recently and now we can report that Tuesday’s yuan fix was made at CNY257.29/gram in Shanghai at 2.15pm which equated to a small premium to international dollar spot prices at the time.

Deputy Governor at the PBOC Pan Gongsheng was quoted as saying "the Shanghai gold benchmark will provide a fair and tradable yuan-denominated gold fix price and will help improve yuan pricing mechanisms and promote internationalisation of the Chinese gold market."

Marwan Shakarchi, chairman of Swiss trading house MKS and one of the SGE benchmark’s reference members said on CNBC that the new fix is supported by growing consumption of gold in China and that local pricing will support producers and consumers in that region. Mr Shakarchi describes a reference member as being one that participates in pricing but must pass through fixing members in order to buy or sell. Fixing members on the other hand are permitted to import gold into China and are required to be local. The purpose of members such as MKS is partly to attract more foreign interest and money.

Interestingly, Mr Shakarchi suggests that there is potential for opportunities in the future when the currency becomes fully convertible despite admitting that the short-term impact of the new gold fix will likely be limited. Mr Shakarchi said that he can ultimately “see them uniting the CNH (offshore yuan) and CNY (onshore yuan). The yuan will be fully convertible and it will be easier to import gold into China".

Moving over to silver and Reuters is largely attributing yesterday’s price spike with the opening of the SGE benchmark. Ronald Leung, Chief Dealer at Lee Cheong Gold Dealers in Hong Kong attributes the silver spike to "heavy buying of silver in Shanghai, and that has triggered buying in gold as well". The result sees silver entering a bull market; up 22% so far this year and now surpassing gold as the best investment of 2016 as the one year plot below shows. The move in silver has reduce the gold/silver ratio to levels not seen since last November and notably below the recent highs around 80 which we have reported as being stretched.