Exploring The Function Of Gold ETF Price Discovery And Its Enlightenment To China

Now China has become the biggest gold producer and consumer in the whole world. We must improve the influence on world gold market, otherwise our enormous gold treasure will suffer losses because of the frequent fluctuations of gold price. For this purpose, China lunched gold future in Shanghai Future Exchange in2008. But through research, we find that Shanghai gold future market hasn’t become an efficient market after5years development. We believe that the following factors are the reasons that restrain the price discovery ability of future market:first, high transaction costs because of the high security deposit; second, the design of the future contract has some intrinsic defects and the price of the contract is very high; third, the structure of the transaction parties is not rational and the market lacks of market makers. Now that the gold future market was not efficient in the past5years, is there any other solution to develop our gold market? My paper pays attention to a new product-Gold ETF. Since launched to the market in2003, Gold ETF has a great development because of its special transaction model and mechanism. Now there aren’t Gold ETF products in our gold market, but SFC has issued some relevant policies in order to launch our awn Gold ETF products. Through this paper, we want to do some empirical research in order to find out whether the Gold ETF has price discovery ability. We use the classic time-series models, such as Granger Causality Test, Error Correction Model, Impulse Response Function, to find out the relations between gold spot price, future price and Gold ETF price. At last, the empirical results reveal that comparing to future and spot, Gold ETF has a better price-discovery ability. Besides, price of future and spot reflects strongly due to a shock from the Gold ETF Market. We believe that the following factors are the reasons that get the Gold ETF product better price-discovery ability:first, Gold ETF faces less transaction restrains; second, transaction costs are very low in Gold ETF market. Through our research, we believe that in order to develop our gold market, we should optimize the investor structure of the future market and launch some mini future contracts in order to attract small investors, and we also should increase the intensity of innovation to launch the relevant derivative products to build a comprehensive gold market.