Bank of China Joins Auction Setting Gold Prices in London

Bank of China Ltd. will become the first Chinese bank to join the auction process that sets gold prices in the London market.

The bank, along with seven other lenders, will start participating in the twice-daily electronic auction, according to a statement from the London Bullion Market Association on Tuesday. While China is the world’s largest bullion buyer, it has never directly played a role in determining London gold prices.

China is increasing its influence in gold and currency markets worldwide as the country seeks to make the yuan a viable competitor to the dollar. The country saw a surge in commodities-derivative trading last year and policy makers are making a case to add the yuan to the International Monetary Fund’s basket of reserve currencies.

“They want to be on the top table in all areas of international trade and this is no different,” Ross Norman, chief executive officer of dealer Sharps Pixley Ltd., said by phone from London. “They want to be represented in locations where benchmark prices are derived, and they have demonstrated that by signing up for the fix.”

Gold Auction

The gold auction started earlier this year as a more transparent alternative to a previous process in which banks talked by phone. London is the world’s largest market for over-the-counter gold trading with an average of $20.2 billion in the metal changing hands each day in April, clearing data from the LBMA show.

Participation in the gold auction will increase the link between China and international markets, and make the gold price better reflect the nation’s supply and demand, Yu Sun, general manager of the Bank of China’s London branch, wrote in a press release.

Efforts to make the yuan an international currency have fueled speculation the government is stockpiling gold as part of a plan to diversify $3.7 trillion in foreign-exchange reserves.

China Stockpile

The People’s Bank of China may have tripled holdings of bullion since it last updated them in April 2009, to 3,510 metric tons, according to data from Bloomberg Intelligence in April that used trade statistics, domestic output and China Gold Association figures. A stockpile that big would be second only to the 8,133.5 tons in the U.S.

Bank of China will be added to the price-setting auction for gold on June 22, Intercontinental Exchange Inc. said in an e-mail. The group already includes Goldman Sachs Group Inc., Societe Generale SA, Bank of Nova Scotia, HSBC Holdings Plc and Barclays Plc.

ICE Benchmark Administration, which runs the process, expects more firms to join soon, according to President Finbarr Hutcheson. It occurs at 10:30 a.m. and 3 p.m. London time, with buy and sell orders submitted electronically in rounds until a price is found.

“To have China participate in the fix is a positive development both for the process and for China,” Afshin Nabavi, the head of trading and physical sales at MKS (Switzerland) SA, said by phone from Geneva. “It shows they are opening up to the world.”