What is the Pan Asia Gold Exchange?

2011-NOV-25

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: