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I've just attended the LBMA Forum in Singapore. Among the speakers were Xu Luode, Chairman of the Shanghai Gold Exchange, and Zhou Ming, General Manager of the precious metals department for ICBC.
Mr. Xu started his speech by referring to the official figure of demand for the Chinese gold market 1189 tons, as published by WGC, but mentioned twice that the figure for consumption is likely higher. Later in the speech Mr. Xu mentioned and I quote the official translation in the headphones “..as the Chinese consumption demand of gold hit 2000 tons in 2013”. There you have it. The chairman himself said it out straight. The Chinese gold demand is even higher than the official figures from the WGC.
Other key takeaways from the Chairman’s speech:
- The government and the government agencies are strongly supporting the gold market development in China generally and the Shanghai free trade zone specifically.
- There’s a London fix for gold, there should also be a fix in China.
- The free trade zone will open up the Chinese gold market internationally. Settlement will be in RMB but with the possibility to freely exchange to other currencies.
The chairman focused especially on the strategic opening up of the Chinese market internationally and China influencing the international gold market.
Mr. Zhou’s speech was equally interesting.
According to Mr. Zhou, the commercial bank retail volume including sale and repurchasing in China was 500 tons in 2013, up 165 % compared to 2012. Of this ICBC stands for 200 tons. The four largest banks have 80% of the market.
Mr. Zhou also mentioned that the transaction increase for paper gold was up 27 % in 2013 i.e. much less than the physical demand. The volume of the OTC gold derivates market in China in 2013 was 550 tons according to Mr. Zhou and the market for interbank borrowing and leasing was 1300 tons in 2013 up 160 % compared to 2012.
ICBC has over the last years restructured their precious metals department with a speciality branch in Shanghai. ICBC has more than 300 dedicated warehouses for gold in 36 provinces and more than 20 million gold clients!
The customers buy for "personal use". It’s rare that anyone sells back.
Mr Zhou also interestingly mentioned that ICBC “can not meet the demand of the market” and that we will see “the price of derivatives delinking from the (physical) spot price”. He said that fluctuations will affect the pricing system in gold but that the market will retreat to the fundamental analysis of gold supply and demand to rebuild the current market structure (my comment: obviously hinting that the physical Chinese market will take over the current derivative markets flawed price setting mechanism). He was talking about the shift of trading distribution and price transmission mechanism in the light of this.
This summary has also been published on the excellent blog In Gold we Trust by precious metals blogger Koos Jansen covering the Asian precious metals market.