Price Discovery in Gold Markets: China and the US

Abstract

China has become the world’s biggest consumer of gold in recent years. After only several years of operation, the Chinese gold futures market is now one of the largest globally. This paper studies the price discovery process for the Chinese gold markets. Since the financial crisis in 2007, gold has become one of the best-performing assets. This paper adopts the classic Information Share (IS) and Component Share (CS) metrics to measure information leadership. Recent studies show that IS and CS fail to assign information dominance among different markets if they have different noise levels caused by market microstructure differences. As suggested by Yan and Zivot (2010) and Putniņs (2013), the IS and CS metrics can be combined to overcome this problem. The results suggest that the Chinese gold futures market functions well by facilitating price discovery for the Chinese spot market. However, unlike many previous works showing that the US market leads other countries (Fung et al. 2003, Ghosh et al. 1999), our findings suggest that the Chinese gold futures market leads US gold futures. The Chinese gold futures market contributes more to the price discovery process than the US market. Our results uncover an interesting pattern in that the Chinese and US gold futures markets take turns in leading the Chinese gold spot market during the day and night trading sessions.