China’s Gold Intent – ICBC Bank Reclassified as an LBMA Market Maker

ICBC Standard Bank, China and the world's largest bank, has been reclassified as a spot Market Making Member of the London Bullion Market Association (LBMA) with effect from today according to a note posted on the LBMA website last night at 2100 GMT.

According to the post:

“In order to qualify as a LBMA Market Maker, a company must offer two-way quotations in both gold and silver to the other Market Makers throughout the London business day. Reclassification is the responsibility of the LBMA Management Committee. In deciding on the issue of reclassification, the Committee takes account of the views of the other Market Makers on the performance of the candidate company during an approximately three month probationary period.

Total LBMA membership stands at 146, consisting of 13 Market Making Members, 67 Ordinary Members and 66 Associates Members. The membership list can be found on the LBMA’s website.”

ICBC becoming a new LBMA market maker in the gold market, while expected, is an important development and again shows China’s intent with regard to becoming a key player in the global gold market. we are surprised by the lack of coverage of this important event but this could be due to the fact that the note was published at 9pm London time.

Gold Prices (LBMA)5 April: USD 1,231.50, EUR 1,083.59 and GBP 866.32 per ounce
4 April: USD 1,215.00, EUR 1,068.80 and GBP 854.58 per ounce
1 April: USD 1,232.10, EUR 1,080.69 and GBP 860.20 per ounce
31 Mar: USD 1,233.60, EUR 1,085.50 and GBP 857.62 per ounce
30 Mar: USD 1,238.20, EUR 1,094.12 and GBP 860.23 per ounce

Silver Prices (LBMA)5 April: USD 15.19, EUR 13.37 and GBP 10.69 per ounce
4 April: USD 14.96, EUR 13.17 and GBP 10.52 per ounce
1 April: USD 15.58, EUR 13.92 and GBP 10.99 per ounce
31 Mar: USD 15.38, EUR 13.52 and GBP 10.68 per ounce
30 Mar: USD 15.38, EUR 13.58 and GBP 10.68 per ounce

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China To Buy $344 Billion Worth of Gold?

As economic conditions in the U.S. and the global economy deteriorate, and as central banks around the world print more money in their misguided attempts to spur growth, more and more analysts are saying that gold bullion’s best days are behind it.

Their reasoning: the economy is improving, the Fed will cut back on its monetary stimulus, the worst is behind us, and there’s no more crisis, so there’s no more reason for gold to rise—this is the exact opposite of what I’m saying!

The gold bears fail to realize there are fundamental forces at play behind the gold bullion bull market.
Central banks around the world are looking at gold bullion as an alternative to the currencies they hold in their reserves. It is well documented in these pages how major central banks like the ones from Russia and Turkey continue to buy gold bullion.

Then there is the central bank of China. Its official reserve reached a value of $3.44 trillion in the first quarter of 2013—similar to the size of Germany’s economy. China increased its reserve by $128 billion in the first quarter, making it the biggest increase in reserve since the second quarter of 2011. (Source:Financial Times, April 11, 2013.) My bet is that most of that reserve is in U.S. dollars, which China would desperately like to get rid of.

With that said, China doesn’t have as much gold bullion to back its reserves as countries like the U.S., Germany, and France have. As a matter of fact, the Chinese central bank only holds 1.6% of its reserves in gold bullion, compared to 75.6% for the U.S. and 72.0% for Germany. (Source: World Gold Council, May 2013.)

To bring its total gold bullion holdings to 10% of its reserves, the central bank of China would need to allocate about $344 billion of its reserves to buy gold bullion.

Add strong demand from countries like India to the fact that China needs to increase its gold reserves, and the fundamental demand behind gold bullion is clear. According to the World Gold Council’s estimates, demand for gold bullion in India is expected to jump 150% by the end of June as compared to last year. (Source: Wall Street Journal, June 3, 2013.)

The amount of gold bullion and silver imported in India reached $7.5 billion in April—more than double the amount from a year earlier. The Indian government has increased its import tax from two percent to six percent in a matter of just 1.5 years to curb demand. (Source: Wall Street Journal, May 20, 2013.)

The demand for gold bullion is as strong as ever.

What He Said:

“Home-building in the U.S. will enter a quasi depression state in 2008 and the construction industry will make 2008 a record year for pink slips. I predict a major homebuilder will go bankrupt in 2008.” Michael Lombardi in Profit Confidential, January 10, 2008. WCI Communities, the largest U.S. luxury home builder, filed for Chapter 11 protection on August 4, 2008.

Where to Next for China's Gold Market?

The annual conference of the London Bullion Market Association - the "premier professional forum for the world's bullion market" as Haywood Cheung of the 100-year old Chinese Gold & Silver Exchange put it this morning - is taking place right now in Hong Kong.

The timing could hardly seem more urgent. Hong Kong has always had great importance to the global precious metals market - particularly since the 1970s, as several speakers noted on Monday, day one of the LBMA's two-day 2012 conference. But while Hong Kong's dominance as Asia's bullion hub may yet be challenged (it beat off "stiff competition" to be this year's Asian LBMA venue, Cheung writes in the South China Morning Post; Singapore removed general sales tax from gold last month, and now its gleaming new freeport vaults are already booked out, with a second facility being discussed), it's Hong Kong which remains "the gateway to China".

And China remains the big prize for the record 700+ delegates from 279 different miners, refiners, banks, dealers and secure logistics providers gathered here from 39 countries.



"China's appetite for gold has increased rapidly," explained Albert Cheng, managing director for the Far East at market-development organization the World Gold Council after lunch today, "with gold demand growing by an average 24% per annum since 2007.

"China's share of global gold demand doubled from 10% in 2007 to 21% in 2011." And as Cheng's chart shows above, China in fact overtook world #1 consumer India in the first half of 2012.

None of this happened by accident. Not according to keynote speaker Xie Duo - general director of the People's Bank of China. Listing China's #1 position in both gold mining production and now consumer demand, "Gold plays a very important role in the formation of the financial market system," he explained - repeating what PBoC governor  Zhou Xiaochuan told the LBMA's 2004 conference in Shanghai, and then reminding the grand ballroom of the plan which Zhou then set out:

#1. Transform gold from a commodity to a financial investment market: The Shanghai Gold Exchange now boasts 33 financial members, and 3 million individual clients. Meantime, more than 30 commercial banks are active end-to-end in gold, offering both physical and paper gold, and acting as "an important channel for Chinese citizens to be involved."

#2. Transform it from an immediate-delivery to derivative market
Deferred settlement was launched on the Shanghai Gold Exchange in 2004, in a bid to allow greater trading volumes without being hit by shortages. From 2008 to 2010, it accounted for over 60% of the SGE's volume, rising to 73% in 2011. Compared to other "spot" contracts worldwide, said Xie, it's now the most heavily traded, with turnover of 6,000 tonnes last year.

#3. Transform China's trading from a domestic to an international market
Twenty-four hour trading is crucial today, the PBoC general director said. So in 2005 the SGE launched its night-time session, to overlap with the afternoon in London's physical market and morning trade in New York's Comex gold futures. Now that period - from 21:00 to 02:30 - accounts for a third of total SGE volume. It's particularly welcome for those foreign banks which have become members of the exchange, starting with HSBC in 2008.

All this adds up to "big progress in the Chinese gold market," Xie said. "But there is still a long way to go." And which way is that? Remember, we are in China.

"Frankly speaking, this success is the result of free choice by the market and the support of policy," Xie went on. "The government took effective measures to guarantee smooth development."

In particular, late last year it banned the "illegal" gold market, closing down all trading centers outside the officially recognized and managed Shanghai Gold Exchange and the Shanghai Futures Exchange (SHFE). The concern was that "the gold price rise had led to a surge in domestic demand, and that led to margin-trading businesses using overseas derivatives contracts as the underlying asset. That was very risky because of the leverage. So the government is fighting the underground market."
Laying out his own "proposal" for how China's gold market should develop from here, Xie made this concern - the level of risk worn by China's citizen traders - the basis for 3 steps in his 5-step plan. In fact, together with the parallel aim of "guid[ing] investors to trade on the legitimate platforms", keeping a tight rein on free-market provision of gold products pretty much sums it up:

#1. Ensure development of mature market
#2. Perfect the laws, rules and relative policies
#3. Perfect the mechanism of risk aversion and investor protection
#4. Strengthen the market system & accelerate innovation
#5. Promote further opening to the outside world

That last point is for "later on", Xie added, with China's gold market only "fully opened" to foreign players once the other planks are assured. No, this doesn't yet cut both ways; the giant ICBC bank gained approval to buy a major investment bank's operations in Argentina. Yes, the Communist Party may have long considered it "glorious to get rich", but its brand of capitalism remains very alien to the developed West's idea of financial fun.

Seeing the trouble that has caused, however, you might forgive China's leaders for wanting to marry strict regulation with a boom in financial services. Gold investors everywhere might want to thank the bureaucrats' strong hand, too.

"Is China's gold investment demand sustainable?" asked Albert Cheng of the China/Asia panel this afternoon. Yes, replied Zheng Zhiguang, general manager of precious metals at ICBC. Because over the next 10 years, there will be "very stable, progressive economic development. So household incomes will continue to grow. It's in the government's plan."

Put another way, and again looking at the question of a "hard landing" for Chinese consumers and therefore their double-digit gold demand growth rate, "Beijing has tremendous means to achieve its growth targets," said Professor Yu Yongding, a former PBOC member and now at the Institute of World Economics and Politics, just before the conference's morning break.

Western gold owners should hope he's right.

China's Gold Investment Demand to Grow More Than 10% - ICBC

Gold-investment demand in China may gain more than 10 percent this year as buyers seek a haven from Europe's debt crisis and the prospect of weakening currencies, according to the country's largest bullion bank.

"Investors here want to hold part of their assets in gold to hedge for the risks, especially now that the financial crisis has evolved into a sovereign crisis," Zheng Zhiguang, general manager of the precious-metals department at Industrial and Commercial Bank of China Ltd., said in an interview in Shanghai.

China will topple India this year as the largest bullion market as rising incomes bolster demand, the World Gold Council forecasts. Gold may gain for a 12th year in 2012 as European policy makers strive to avoid a breakup of the euro zone and the U.S. Federal Reserve weighs more stimulus to aid the recovery. Investors in China, facing lackluster equity markets and property curbs, are looking more to the metal, Zheng said June 6.

"It's necessary for individual, institutional or even government investors to hold gold when the value of money is decreasing at a time of possible quantitative easing or excessive money-printing practices," said Zheng.

Investment demand in China was a record 98.6 metric tons in the first quarter, 13 percent higher the same period in 2011, according to figures from the producer-funded council. Last year, it climbed 38 percent to 258.9 tons compared with 2010, as overall demand gained 20 percent to 769.8 tons. China's total gold demand may reach 1,000 tons this year, the WGC has said.

Debt Crisis
Gold for immediate delivery traded at $1,599.02 an ounce at 12:41 p.m. in Shanghai, 2.3 percent higher this year. The price touched $1,526.97 on May 16, the lowest level since December, as Europe's debt crisis weakened the euro and investors favored increased dollar holdings.
While a stronger dollar may pressure bullion, "I'm optimistic on the gold prices in the long term because of the China demand," said Zheng. "There are too many uncertainties now in the global economy, politics and the financial sector."

ICBC represents more than 20 percent of the turnover on the Shanghai Gold Exchange, China's largest spot market for precious metals, and more than 30 percent of the gold-leasing business in China, according to Zheng. The lender accounted for about 16 percent of nationwide bullion sales last year.

Gold imports by mainland China from Hong Kong climbed 65 percent to a record 103.6 tons in April, according to data from the Census and Statistics Department of the Hong Kong government released on June 5. The increase came even as Lao Feng Xiang Co. (900905), the mainland's biggest gold-jewelry maker, said in May that gold-demand growth in China may stagnate this year as falling prices put off investors and an economic slowdown crimps sales.

Hurt Exports
The second-largest economy expanded 8.1 percent in the first quarter, the slowest pace in almost three years as Europe's crisis hurt exports. Should Greece exit the euro, the expansion may slow to 6.4 percent in 2012 without stimulus, China International Capital Corp. said on May 23.

China, which on June 7 announced the first cut in borrowing costs since 2008, has curbed property investments to avoid a bubble. The Shanghai Composite Index (SHCOMP) declined 15 percent in the past year, while spot bullion gained 5.5 percent.

On a three-month basis, gold demand in China eclipsed India's over the past two quarters, according to the World Gold Council. The increased wealth of China's middle class is helping to drive consumption, Albert Cheng, the council's Far East managing director, said in an interview in May.

Last Resort
Greek voters are set to go the polls for the second time in two months on June 17 in a vote that may determine whether the country stays in the 17-nation euro. Goldman Sachs Group Inc. (GS) said gold remains the so-called currency of last resort, forecasting a rally by year-end, according to a May 9 report.

Spanish Economy Minister Luis de Guindos said on June 9 that he would request as much as 100 billion euros ($126 billion) in emergency loans from the euro area to shore up the country's banking system. That, coupled with weekend trade data from China, helped to boost stocks and commodities today.

As China allowed investors to buy and hold gold only in recent years, "there's explosive, pent-up demand because the Chinese have an attachment to gold," said Zheng, predicting that growth in investment demand will beat the expansion in jewelry sales. "There's great potential for expanding China's physical-gold investment market."