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Insight Conversation: Young-Jin Chang, CME Group

China has dominated the physical global gold markets for the last few years, as not only the world’s number one producer but also the top consumer.

Physical flows have swapped direction – no longer East to West, but West to East. The traditional hubs of New York, London and Switzerland remain powerhouses – but China tops the charts.

China produced 401.12 mt (14.15 million oz) of gold in 2018, down 5.9% from 426.14 mt the previous year. Despite the decrease, China has now held the global record for gold production for 12 consecutive years, China Gold Association said.

China also remained the world’s largest gold consuming country for the sixth consecutive year with 1,151.43 mt (40.62 million oz) in 2018, a 5.7% rise from 1,089.07 mt the previous year, CGA added.

CME Group recently partnered with the Shanghai Gold Exchange to offer the Shanghai Gold Futures contract, giving investors access to China’s booming bullion business.

CME’s Global Head of Metals, Young-Jin Chang, talked to Ben Kilbey about the rationale behind the partnership, and gave insight to what the future holds for the exchange. CME already operates the world’s most liquid gold contract on COMEX.

How is the new Shanghai Gold contract doing?

We are only in week three [as of 07/11/2019], but the market is showing interest in the new Shanghai Gold Futures contracts with more than 23,000 contracts traded since launch and daily volumes around 1,350 contracts. We are starting to get interest from the paper markets, banks and other clients. Although it is very early days, we are happy with the way things are going.

What is the main reasoning for launching the product?

Over the past 20-years there has been a massive switch in gold flows, with physical metal flowing West to East. China in particular has seen the main flow, and is now the world’s largest consumer, producer and net importer. This has created a new spot market, and a unique opportunity that only happens very rarely. We saw a natural opportunity to bridge the local physical price to a futures contract. Not only that, but it is an opportunity to bridge the global gold industry to China and facilitate trade and liquidity.

The Shanghai Gold Benchmark Price is widely regarded as the Renminbi-denominated gold benchmark, and CME Group’s two new gold futures contracts will provide global market participants access to the Chinese gold markets.

What are the benefits of the contract for participants?

China is the largest gold producer and consumer in the world, whose market dynamics can differ from the international benchmark. These products will offer our clients the opportunity to trade the onshore market on a familiar global venue. International clients can access the Chinese market, allowing them to trade the arbitrage between the COMEX price and the China price.

On a like-for-like basis, the Chinese contract trades at a premium to COMEX. This can increase around times of heightened demand, such as Chinese New Year. The contract also gives refiners and other physical players a new hedging tool.

LBMA vs SHANGHAI GOLD EXCHANGE GOLD PRICES

What’s the most important thing to CME’s business?

Our focus is on providing our customers with the deepest, most liquid and most efficient metals markets of any exchange so they can effectively manage their price risk here at CME Group.

What’s next for CME?

In terms of the metals business, we will continue to grow our global footprint and we’re very excited about this. It’s important to note that the growth we’ve seen across all our metals products is part of a broader, multi-year growth story, led primarily by our global benchmark COMEX gold and copper contracts.