Wednesday, April 25, 2012

China Adds Silver to the Shanghai Futures Exchange.

Although the global economic recovery is slow, the overall operation is smooth. Driven by emerging countries, major indicators of the United States also started to improve. European debt is also moving in a positive direction. It can be said that the global real economy has stepped out of the haze of financial crisis and systemic risk is quite unlikely to be renewed. Therefore, commodity prices, especially prices of silver closely related to the industrial sector would find strong support from the real economy to run smoothly. However, there are also uncertainties, including high unemployment rate in the United States, sovereign debt crisis in Europe, emerging markets inflation risks and China’s currency policy shift to slow economic growth. 

As part of China’s overall program to merge into global markets, the China Securities Regulatory Commission announced today the addition of silver futures contracts on the Shanghai Futures Exchange. Specific launch time will be decided based on the market situation and the progress made in the preparatory work.


The joining of silver futures into existing copper, aluminum, lead, zinc, gold and steel futures in China is a key step for Chinese businesses to gain a stronger say over commodities prices. Though China is the world’s largest silver producer and consumer, silver has been priced based on London and US silver prices in both domestic and overseas trade, causing distorted reflection of the silver supply and demand scenario in China.
 
The silver futures contracts to be added in Shanghai is not a complete abandonment of global silver pricing, though, but will be priced in consideration of both overseas and Shanghai silver prices, to more accurately present the Chinese silver market and offer Chinese businesses stronger say over silver prices.
Similar to base metals prices, silver prices also have a very high degree of internationalization, London spot prices are the world’s silver pricing Centre. It is not difficult to find from historical data that correlation between domestic and London silver spot prices is very high. In addition to international prices, domestic prices are another benchmark in setting domestic futures prices, which include mainly Shanghai Gold and silver prices. In the short term, Shanghai silver futures prices are expected to move in line with London silver spot, but domestic spot trading may cause certain difference.
High level of market awareness for silver means the silver futures will have more financial relevance, in addition to its industrial relevance. The global economic recovery and investment opportunities will likely push silver futures prices higher in the future. Investors should also bear in mind that opportunities always come with risks, especially in the financial derivatives sector.

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