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Gold market pricing faces China-led upheaval, warns boutique star

Gold market pricing faces China-led upheaval, warns boutique star

China’s efforts to internationalise the renminbi and achieve world reserve currency status will have major knock-on effects for the global gold market, Citywire + rated Florian Siegfried has said.

Siegfried made the comments in the July update for the Precious Capital Global Mining & Metals fund, which he runs on mandate.

These comments came before the price for gold fell to its lowest level for five years following heavy selling in the Asian market on 20 July.

The Zurich-based investor, who was named as one of the top 10 equity investors of the year so far in recent , said measures coming into effect in Shanghai later in 2015 will have huge ramifications for gold.

Most notably, Siegfried said, with COMEX, the Commodity Exchange, ceding ground when it comes to price-setting.

‘The gold price remains determined by the COMEX paper futures market but with the introduction of the new physically-backed Renminbi gold futures contract at the Shanghai Gold Exchange (SGE) this October the current price mechanism is likely to be challenged,’ he said.

‘Once China has accumulated enough gold in order to institute the Renminbi as the world's new reserve currency, why would the biggest producer and consumer of gold let a few Western banks to settle the gold price while at the same time the London and COMEX vaults are virtually empty?’

Going for gold

Siegfried said this shift would come at a time when investors are seeking to move into gold markets to avoid the problems posed by rates rises in the US treasury market.

‘As the Federal Reserve continues to export QE to infinity, liquidity in the US-Treasury bond market is down by roughly 50%.

‘As there are fewer and fewer legitimate buyers of treasury securities, this causes money to leave the government bond markets and we expect that gold, which is still the most liquid asset class, will be the beneficiary of this development in the long term.’

Looking at the global market, Siegfried said gold prices, which have fallen nearly 12% in the year to 15 July, were nearing their bottom.

‘In USD-terms gold remains in a late stage of bottoming formation while in most other currencies the bull market of the yellow metal has resumed. Gold currently trades at AUD 1,560, CAD 1,470 or NZD 1,750 per ounce, which are all multi-year highs.’

Gold makes up 86% of Siegfried’s Swiss-domiciled fund at present, while intermediate produces account for 71% of total exposure at a sector level.

The Precious Capital Global Mining & Metals Fund lost 52.4% in US dollar terms over the three years to the end of June 2015. This compares with a drop of 54.3% by its Citywire-assigned benchmark, the LCI FTSE Gold Mines/HSBC Global Mining (70:30), over the same period.

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