May 29, 2012
by mktgeistmike
The Shanghai Futures Exchange’s silver futures contracts, the first of their type to be offered in China, give Chinese investors a new way to bet on the precious metal.
MUMBAI (MINEWEB) -
In a move that will make the silver market more liquid, the Shanghai Futures (SHFE) has begun trading in silver contracts. The contracts are expected to be bullish for silver prices, with traders stating that it could make market manipulation more difficult.
Although the country is a main producer and consumer of silver, it has remained on the sidelines in silver trading. By initiating silver futures, traders say China clearly wants more control over the precious metal’s pricing policy.
Chinese investors have been showing an increasing interest in the white metal amidst surging inflation and the sluggish performance of the stock and property markets. In March, about 134 billion yuan ($21 billion) in silver contracts were traded, more than 15 times the amount traded two years ago. More than gold, many retail investors prefer silver because the minimum requirement for investing in it is much lower in China.
The white metal is imbedded in the Chinese psyche. For long, it has been the basis of China’s currency. In 1935, the Shanghai-based biweekly Finance and Commerce reported personal hoards of the precious metal at 1.27 billion ounces.
With the Shanghai Futures Exchange gaining approval to begin trading silver futures, traders insist a significant shift appears to be in the making.
Wang Ruilei, an official with precious metals trader CGS Company told newswire agencies that the market would be bigger and more liquid with the advent of the futures contracts. Traders added the futures exchange would provide direct access to silver for Chinese investors.
It would also be beneficial to silver enterprises and industries as the metal would now be available for trading, hedging and buying at their local exchange and in the local currency.
Huo Ruirong, vice manager of the Exchange was quoted by newswires as saying that the new trading option would provide China with a pricing mechanism on silver and help readjust the silver industry structure.
This is at a time when China is believed to have exceeded Peru and Mexico to become the world’s leading producer of silver. The country is also the second-largest consumer of the precious metal after the United States. It is also, of course, now the world’s leading producer of gold too.
Regulators in China are hoping to see more than just investors benefit from this new trading vehicle. At the inauguration ceremony, Liu Xinhua, Vice Chairman of the China Securities Regulatory Commission, pointed out that this year, they were keen to implement the spirit of Premier Wen Jiabao’s 2012 missive to “secure introduction of …commodity futures and financial derivatives, in order to enhance our overall competitiveness and meet the real economy needs to provide more tools and instruments”.
He said the silver futures market would be conducive to optimising the silver price formation mechanism and provide low-cost, efficient means of risk management.
Liu Xinhua stressed that the silver futures play, from the listing to mature and play features, would require a gradually cultivated stance, and was no overnight decision. He added the move would help the Shanghai Futures Exchange strengthen market surveillance and effectively guard against market manipulation and other illegal activities.
INVESTMENT INTEREST
Investment in silver has been booming in China. An early indication was the trading volume of silver forwards on the Shanghai Gold Exchange, China’s only exchange for the precious metal, which surged 751% in 2010 as compared to a year earlier. Also, the volume in September last was more than six times that of the same period in 2010.
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