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China’s Yunnan Province,
the southernmost tip of China, is often referred to as the “gateway to
Southeast Asia,” sharing borders with Vietnam, Laos, Burma, and Tibet.
After virtually two millennia as a commercial and agricultural hub, this
strategically-located province and its new development have been receiving
little attention in the mainstream Western financial world that is currently
focused on their own fiscal calamities.
Picture the 240 million retail
banking customers of the massive Agricultural Bank of China having the
ability to buy physical gold from the comfort of their own home online, on a
dime. One can imagine what impact that would have on the price of gold,
especially considering the cultural acceptance of gold in China, a country
which also happens to be the world’s largest producer and consumer of
gold. The World Gold Council estimates that the
total amount of gold ever mined on planet Earth to the end of 2009 was
approximately 165,000 tonnes. If every ABC customer
bought just an ounce of gold, that would equal 7,500 tonnes,
or five per cent of the world’s above ground gold supply.
This is not hyperbole, as the new
Pan Asia Gold Exchange (PAGE) aims to do just that, and it is part of
China’s twelfth five-year economic plan for achieving global,
diplomatic, and financial superpower status.
Kunming City, located in the
heart of Yunnan and boasting a history of over 2,400 years of trade, will be
the home of the exchange, which aims to be fully-functional at the end of
2011, or as late as June 2012 by Forbes’s estimates. Ironically, after China’s
failed communist experiments turned the city into a land of exiles where to
which political prisoners were deported, economic freedom sparked its
eventual economic about face, and in May 1995, the State Council of the
People’s Republic of China approved Kunming as an Open City.
Staying consistent with their
mission of “open, fair, and just transactions,” the exchange promises rigid
leverage requirements, fair trade in gold mining, and to increase monetary flexibility. The
first order of business: the clients of Agricultural Bank of China are
allowed to purchase ten-ounce mini physical gold contracts or trade futures.
PAGE will allow the average investor to buy and sell these contracts in RMB,
the currency of mainland China. Second, non-Chinese investors will be able to
buy into 90-day rolling spot contracts, also in RMB. The investor will then
have the option of taking delivery or being paid in RMB.
Both options will surely impose
significant pressure on the physical market, but what makes PAGE unique is
that the gold buyer will also have the actual title to the gold he or she
purchases, so the gold can be delivered to the buyer with relative ease. This
also means that contracts are fully backed at one to one, paper to physical,
a game changer that has interesting implications for established gold trading
venues such as the London bullion market and the Comex
futures exchange in New York.
Crucially, in unprecedented
fashion, PAGE will be the first exchange in which the Renminbi,
not dollars, will be used as the dominant currency in buying and selling gold
contracts. So, if international investors purchase gold contracts that are denominated
in RMB, they are effectively diversifying out of dollars and owning RMB.
Therefore, this exchange is a very important development in exposing
investors to RMB and consequently increasing its value. The potential effects
cannot be underscored enough — PAGE is clearly preparing the world for
a Chinese world reserve currency, and is doing this by bringing gold, and by
extension silver, back into the Chinese economy.
China has experienced
double-digit growth for most of the last 30 years, and has built up huge
foreign exchange reserves. Some international estimates predict that it will
become the world’s largest economy in five years, making this entrance
a logical step for China as the world’s financial power continues
shifting east.
The Western world may not be the
most enthusiastic about this step forward for the RMB, but one thing
believers in free markets could all agree on is that the debut of the Pan
Asia Gold Exchange is consistent with the ideas of capitalism. Competition is
healthy, and alternatives among exchange models bring more liquidity, better
price discovery, and better demand and supply dynamics to the market. We
should all welcome the arrival of PAGE.
Readers may also be interested in what Richard Poulden
– Director of Power Capital Financial Trading – had to say about
PAGE in an interview with James Turk recorded in August of this year:
Author:
Vincent Le
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