AN ANALYSIS OF THE GOLD PRICE GAP

Since its official operation on October 30, 2002, the Shanghai Gold Exchange has witnessed satisfactory performance. As the gold market grows, shortcomings have emerged due to an imperfect market mechanism. The domestic gold price often displays an abnormal trend, deviating from the international price.

There are two major causes attributed to this phenomenon.

One cause is the unreasonable structure of domestic gold market members. By the end of January 2003, enterprises using or producing gold accounted for 88 per cent of the total members, while financial members, with a turnover of 15,703 kilograms of gold, accounted for only 20.9 per cent of the accumulated turnover of the market. Commercial banks have not played their role as a reservoir or a stabilizer in the market. Therefore, when the international gold price was soaring and the domestic market was at a consumption peak, the latter lacked pressure from profit-taking either for speculation or investment. Under such circumstances, China saw a seller market dominated by gold producing enterprises, whose reluctance to sell led to a rising domestic gold price. The domestic increase was even higher than that in the international market.

Another cause lies in the separation of the domestic gold market from the international market. Currently, almost all the gold traded on the Shanghai Gold Exchange comes from domestic gold producing enterprises, and no member of the Exchange is authorized to import and export gold. Therefore, the surplus or shortage of gold in the domestic market cannot be adjusted through the international market. Therefore the domestic market is virtually separated from the international market.

Putting an end to this phenomenon requires the restructuring of the domestic gold market and an improved market mechanism.In this regard, it is suggested that:

An exchange channel between the domestic and international markets should be explored in the manner of "bringing in and going out". "Bringing in" means referring to the QFII (Qualified Foreign Institutional Investor) system in the stock market. If QFIIs are introduced into the domestic gold market, the exchange between gold markets home and abroad will be realized through the QFIIs' investments in the domestic and international markets, which are made in accordance with the rules and regulations of the authorities. "Going out" means that the authorities should authorize the competent members, such as some commercial banks, to import and export gold, with which the surplus or shortage of gold could be adjusted through imports and exports within their authorized scope.

Secondly, the domestic gold market should strengthen its investment function and enhance its capability for self-adjustment. New varieties should be introduced and trading patterns be innovated to attract more investors; meanwhile the scope of market participants should be expanded to improve the structure of market members.

(by Zhang Wei)