Monday, June 9, 2008

Shanghai Stock Exchange initiates future trading of gold-- In a country where many treat the stock market like a casino is this good or bad?

Response by Bennett A. Reiss from
http://www.resourceinvestor.com/pebble.asp?relid=43400 - written by China Interfax


The Shanghai Stock exchange may still lag behind the major exchanges of Asia; Tokyo, Hong Kong, Singapore, etc-- is quickly growing no less. Despite growing market capitalization and incredible overall market performance, up until this year, the exchange still trades many equities which lack transparency in their business operations, are inter-twined with the Chinese government or provincial governments trying to raise money, and has millions of active participants who truely lack the understanding of financial systems and markets to be investing in what are in reality speculative equities.

Gold--a precious metal which is very prone to speculations, known as a means for countries and individuals to hedge against inflationary pressures which are hurting people all over the world is now going to be traded in a futures market in Shanghai.

Not much has truly been clarified on the regulations which will be in place, but, futures markets... especially in commodities have become quite volatile and to introduce such a feature to the Shanghai exchange right now might help better indicate Chinese demand for gold, but with gold trading everywhere in the world from the London Metals Exchange to free market in Saudi Arabia, this could potentially lead to future volatility.

Don't get me wrong... Shanghai needs a futures exchange, of China in general should create one which could allow it to compete with other exchanges in the world, many of which have futures markets or are connected to another exchange which controls the futures markets. I ask one question. Does the average investor watching his stocks move up and down in China even know what buying a futures contract means???

Chinese I meet here in the United States who have MBA's from US schools know and understand modern financial markets as well as anyone, however many have not lived in China for 2-4 years now (because of their studies in the US), they know about futures but sadly the average investor walking the streets of Shanghai I don't feel does. China needs more time for their greater population to at least become slightly more educated in modern financial institutions before it ventures too far into futures markets. It could be very dangerous if millions of people poor money into gold futures and distort the true price of the commodity.

Time will simply tell... and whether China can wade the woes of post-Olympic syndrome, re-cover from economic problems due to freezing temperatures and snow storms earlier in the year to the recent earth quake in Sichuan Province, and lastly repair their international image--slightly tarnished from the Pro-Tibet protests will all be key factors as well.

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