Category Archives: Translations

Song Xin: Increase Gold Reserves And Join SDR.

The Chairman of the China Gold Association and General Manager and Party Committee Secretary of China National Gold Group Corporation, the latter being China’s largest gold mining enterprise, is Song Xin and happens to be one of my favorite commentators in China. This gentleman made waves in July 2014 when he candidly wrote on Sina Finance that the People’ Bank Of China (PBOC) should slowly raise its official gold reserves to 8,500 tonnes, more than what the US Treasury claims to hold. The article was published in Chinese but translated by BullionStar to share the views by Song Xin with the English speaking world:

For China, gold’s strategic mission lies in the support of renminbi internationalization, and so let China become a world economic power and make sure that the China Dream is realized. … gold forms the very material basis for modern fiat currencies. 

Gold is the world’s only monetary asset that has no counter party risk…

That is why, in order for gold to fulfill its destined mission, we must raise our gold holdings a great deal, and do so with a solid plan. Step one should take us to the 4,000 tonnes mark, more than Germany and become number two in the world, next, we should increase step by step towards 8,500 tonnes, more than the US.

In the next translation further below you will read more on how Song Xin views gold’s role in China’s financial strategy. The bullet points from the article:

  • China continuously accumulates gold reserves to support and accelerate renminbi internationalization.
  • Renminbi confidence and gold are closely related. Gold reserves are the cornerstone for renminbi internationalization.
  • In modern times gold plays an important role in managing economic risk and maintaining China’s financial safety.
  • China is continuously increasing its official gold reserves in conjunction to joining the SDR.
  • The ratio of China’s official gold reserves to its GDP should be more in line with the US and other developed countries. At this moment China’s official gold reserves are still relatively low.
  • The Silk Road economic project, also called “One Belt and One Road” (OBOR), has huge development opportunities for the Chinese gold industry. Song Xin mentions that the in ground gold reserves of countries along OBOR reach 21,000 tonnes. In 2015, witnessed by Chairman Xi Jinping and President Putin, China National Gold Group Corporation and Russia’s largest gold mine Polyus have signed a strategic cooperative agreement and they are promoting detailed relevant cooperative issues at present.

What he didn’t mention is that China is striving to boost gold trade along OBOR to be settled in renminbi through the Shanghai International Gold Exchange.

Is The SDR A Means Or And End For China? 

In the mainstream media we often read China wants the SDR to replace the US dollar as the world reserve currency, based on statements from PBOC Governor Zhou Xiaochuan – among others:

Special consideration should be given to giving the SDR a greater role. The SDR has the features and potential to act as a super-sovereign reserve currency.

Since 2009 China has vigorously pressured the IMF for renminbi inclusion into the SDR. Finally, in 2015 the IMF decided the renminbi would be added to its currency basket in October 2016.

Zhou and other prominent economists at the PBOC are clearly pushing the SDR, but what’s China’s exact strategy?

In advance of the official inclusion of the renminbi into the SDR, which will take place on October 1, 2016, developments regarding the International Monetary Fund’s synthetic reserve currency are unfolding rapidly.

Author of the Big Reset, Willem Middelkoop, reported this August a “Substitution Fund” is being discussed in the higher echelons of the monetary elites, to facilitate dollar exchange for SDRs outside the market, and thus creating an escape from dollar reserves without putting downward pressure on the dollar.

Also in August, The PBOC allowed a division of the World Bank (the IBRD) to issue bonds denominated in SDRs in the Chinese market. The bonds worth $2.79 billion dollars can be created “soon” – presumably within a month. In addition, the Chinese government-linked China Development Bank will issue SDR notes worth somewhere in between $300 million to $800 million dollars. Both issues are “SDR-denominated financial market instruments” called M-SDRs by the IMF. Though experts think the M-SDRs will encounter many practical challenges when implemented and demand will be tepid, nevertheless the intention by the PBOC to launch these instruments is clear.

On the surface we can observe China has a vast interest in the SDR, but is the SDR a means or an end for China? What if China is simply using the SDR as a vehicle to achieve other objectives? For example:

  1. Dethroning the dollar. The SDR can be an excellent tool to unwind the dollar hegemony. In addition the Substitution Fund could help an orderly exit from China’s lob-sided dollar reserves.
  2. Internationalize the renminbi. Inclusion of the renminbi into the SDR boosts global renminbi acceptance as a reserve currency.
  3. Reduce capital outflows from China. With respect to M-SDRs, David Marsh of financial think tank the Official Monetary and Financial Institutions Forum (OMFIF) wrote:

Beijing’s SDR capital market initiative will allow domestic Chinese investors to subscribe to domestic bond issues with a significant foreign currency component, which will help dampen capital outflows… 

I think for China the SDR is just a means to an end. The end being to internationalize the renminbi, which of course is connected to the dollars retreat. And as Song Xin clearly states, “gold forms the very material basis for modern fiat currencies” and, “gold reserves should become the cornerstone … for renminbi internationalization”.

In my humble opinion the financial crisis has shown (once again) the inherent flaws of all fiat currencies. A bundle of some of these currencies will not solve the problems ahead of us; at best provide tools or a next level printing press. I still prefer gold as a store of value.

I find it interesting that Song Xin mentions the importance of the ratio between China’s official gold reserves and GDP. This concept was also brought forward by Jim Rickards. If the PBOC would have 5,000 tonnes of official gold reserves their “gold to GDP ratio” would be roughly on par with to the US, Europe and Russia.  One of the theories about our current international monetary system – that was detached from gold in 1971 – is that it can shift to a new gold anchored system when the power blocks have equalized the chips (Jim Rickards). In other words, if the US, Europe, Russia and China all have a roughly equal ratio of official gold reserves to their GDP, the international monetary system could make a transition towards gold.

Global gold vs GDP

According to my estimates the PBOC has roughly 4,000 tonnes in official gold reserves, in contrast to what is publicly disclosed at 1,800 tonnes. Perhaps the PBOC is “nearly there”.

Song Xin who was also a speaker at the “Renminbi Internationalization and China’s Gold Strategy Seminar” in Beijing on 18 September 2015.

Original source of the article below is the China Gold Association website. [Brackets added by Koos Jansen]

Song Xin, Chairman of the China Gold Association, General Manager and Party Committee Secretary of the China National Gold Group Corporation: Stick to the gold mission and boost innovative development

March 14, 2016

As the sole central enterprise in the gold industry, China National Gold Group Corporation is a firm defender of renminbi internationalization, pioneering demonstrator of the country’s “One Belt and One Road”, and faithful guardian of a happy life for people. It’s the direction that we should strive for.

On March 10 during the two assemblies, Song Xin, Chairman of the China Gold Association, General Manager and Party Committee Secretary of the China National Gold Group Corporation, was the guest in Xinhuanet’s 2016 two assemblies special Interview. In the program Dialogue with New State-owned Enterprises and Cheer up in the “13th Five-Year Plan”, he proposed the conclusions above. Besides, in the in-depth dialogue, Song Xin systematically illustrated topics including the functions of renminbi internationalization, effectively enhancing gold supply, realizing improved quality and efficiency of enterprises, practicing the central party’s “Five Development Theories”, and fulfilling the responsibilities of central enterprises.

About Gold’s Functions: Increase Gold Reserves And Accelerate Renminbi Internationalization. A Close Relationship between Increasing Gold Reserves And Joining The SDR

When the credit lines of paper currency declines and there are enough gold reserves, people can be less worried about the existing credit system and enhance their confidence in the currency.

Last year, China joined the IMF (International Monetary Fund) Special Drawing Rights (SDR), signifying the renminbi’s march towards internationalization.

Song Xin pointed out that the renminbi is closely related to gold. Gold is priced in US dollars throughout the world and in renminbi in China. There is a special relation between the renminbi and gold. We have continuously increased gold reserves since China strove to join the SDR basket of currencies. By the end of February this year, our gold reserves have increased to 1788.45 tonnes. In other words, China has continuously increased its official gold reserves and publicized the amount to the world, keeping a close relation with renminbi internationalization and joining the SDR.

Song Xin 2016:07:26

Further increase gold reserves to adapt to economic strength

China’s existing gold reserves are only about 1/5 of America’s. With the acceleration of renminbi internationalization, the renminbi should further increase its gold reserves in order to reach a level matching the national economic aggregate [GDP], especially if the renminbi wants to become a global currency.

Song Xin mentioned that China’s gold reserves once maintained around 1,054 tons. In the second half of last year, it started to increase these reserves substantially. Now, it has been increased by 70%. The increase range is big, but small compared to that of developed countries. At present, our economic aggregate [GDP] reaches second place in the world, but our gold reserves only reach the sixth place in the world. If the IMF’s reserves are excluded, China’s reserves rank in fifth place according to national rankings.

Possessing sufficient gold can strengthen confidence in a currency

Song Xin said, “There is a remarkable distance between China’s gold reserves and America’s gold reserves. America’s gold reserves are 8,133 tons and it even reached over 20,000 tons before. In those days, America controlled most of the gold in the world, which laid an important foundation for the US dollars to become a global currency.”

Before the Bretton Woods system was disintegrated in the 1970s, gold was directly connected with the US dollar. After the Bretton Woods system was corrupted, gold was disconnected from the US dollar, but America still kept sufficient gold reserves.

Song Xin believes that it has a relation with the global governing system. When the global economic aggregate was not so big, the gold standard had a certain advantage. With the expansion of the economic aggregate, the Bretton Woods system was disintegrated, and gold was disconnected from the US dollar. America announced that gold was unimportant then under this circumstance. However, in fact, when a financial crisis happens in America, its gold reserves don’t reduce at all. Americans firmed up people’s confidence in the US dollar by sufficient gold reserves.

Talk about supply reform: increase the effective supply of gold to boost quality and efficiency of enterprises rather than excess capacity, the gold industry needs to increase supply

In 2015, our domestic gold mine output reached about 450 tons, ranking the top in the world for nine consecutive years. Meanwhile, gold [retail] consumption reached almost 986 tons, surpassing India for three consecutive years and becoming the largest gold consumption country in the world.

Song Xin mentioned that our gold production can’t satisfy consumption demand and it doesn’t include the central bank’s reserves. Therefore, for the gold industry, increasing gold production and rapidly supplementing the gap above are the important missions for the gold industry.

Regarding how to increase the effective supply of gold, Song Xin believes that enterprises in the gold industry should offer more suitable marketing paths, especially customers’ favorite gold jewelries and gold investments with cultural connotation and innovation.

Maintain national financial safety and fulfill political responsibility 

“The political responsibility of the China National Gold Group Corporation is to make enterprises strong, excellent and big. Besides that, it is also to allow staff to enjoy the achievement of enterprise development. More importantly, it is to increase the effective supply of gold, to satisfy the demands of people and country for gold products, and to maintain the healthy and harmonious development of the industry”, said Song Xin.

Song Xin introduced that gold played a very important role in different historical periods. In the revolutionary war period, the underground party delivered abundant gold to Yan’an from the Jiaodong base area in order to get medicine and materials, playing a positive role for the Communist Party to gain victory. In the beginning of reform and opening up, the country’s foreign exchange was in a shortage and our country vigorously increased gold productivity, once amounting to 70% of the whole country’s foreign exchange reserve which is mainly for gold swap transactions and purchasing devices, etc. and guaranteeing foreign exchange demand of economic development. In the new era, gold has played an important role in resisting economic risk, maintaining the country’s financial safety and assisting with renminbi internationalization.

Song Xin thinks that the China National Gold Group Corporation shoulders the important mission of increasing gold reserves and production and adding trust for renminbi internationalization for the country. He said, “Gold reserves should become the cornerstone or ballasting stone for renminbi internationalization, which can improve the gold content of renminbi. In these aspects, the China National Gold Group Corporation is obligated to fulfill its own political duty.”

Chinese historic gold mining 1949 - 2015

Talk about “Five Major Development Concepts”: Explore Profound Meaning Based on Practical Conditions for Enterprise.

Make achievement in the “One Belt and One Road”

With the implementation of “One Belt and One Road”, the China National Gold Group Corporation can accomplish a lot in “going out” and “going out” is an important constituent of our reform and opening up in the new era. “One Belt and One Road” has brought huge development opportunity for Chinese gold industry and enterprises. Song Xin mentioned that the gold [in ground] resources of countries along the “One Belt and One Road” reached 21,000 tons, taking up 41.5% in the world. The gold production of countries along the line reached 1,116 tons, occupying 1/3 in the world. In addition, 6 gold mines are located here among top 20 gold mines in the world.

“The consumption amount of gold jewelry in the area accounts for 82.4% of the global consumption amount. Physical gold item demand including gold bars takes up 77% of the global demand. Gold resource development potential and gold market consumption potential in the area are quite huge, bringing important strategic opportunities for Chinese gold enterprises”, he said.

Song Xin introduced that the China National Gold Group Corporation is constructing mines in Kyrgyzstan and Congo. Last year, witnessed by Chairman Xi Jinping and President Putin, China National Gold Group Corporation and the largest Russian gold enterprise have signed a strategic cooperative agreement and they are promoting detailed relevant cooperative issues at present. Meanwhile, they are preparing to export devices to countries along the “One Belt and One Road” including Russia and Kazakhstan. In the practice of open concept, China National Gold Group Corporation is comprehensive and systematical.

Kazakhstan & China Join Forces In Gold Market

Silk Road Gold Trading Kicks Off

The other day I bumped into a small but potentially important news item on the website of the Shanghai Gold Exchange. The article was published in Mandarin, of course, as the Chinese (authorities) hardly ever publish valuable information in English – most articles published in English have been intentionally written to communicate what the State Council wants the West to hear. In the article it’s described a financial delegation from Kazakhstan visited the Shanghai Gold Exchange (SGE) to discuss cooperation in gold trading along One Belt One Road (OBOR), also referred to as the new Silk Road, that reaches over the whole Eurasian continent. From the SGE (exclusively translated by BullionStar):

A group led by Kairat Kelimbetov, the Chairman of the Board of Directors of the Kazakhstan International Financial Center, visited the Exchange

At noon on 26 February 2016 a group led by Kairat Kelimbetov, President of the Astana International Financial Center and former President of the National Bank of Kazakhstan, visited the Shanghai Gold Exchange and held talks with President Jiao Jinpu. Both parties reached consensus on strengthening cooperation and seeking development in the gold market under the “One Belt One Road” project. Zuo Qihan, Kazakhstan consulate general in Shanghai, Shen Gang, Vice General Manager of the Exchange and Zhuang Xiao, CTO, attended the meeting.

Although the article lacks any detail, we can discover its potential impact if we study the financial and political backdrop.

Kelimbetov has an impressive track record. Previously he served as the Minister of the National Economy, Deputy Prime Minister and Governor of the National Bank of Kazakhstan. Currently, he’s the head of the brand new Astana International Financial Center (AIFC) that was officially launched in January 2016, aimed to become one of the top 10 financial centers in Asia and one of the top 30 financial centers in the world by 2020. The government of Kazakhstan contributes full support to the AIFC .

Kairat Kelimbetov and Jiao Jinpu at the SGE
26 February 2016, on the left SGE President Jiao Jinpu, in the middle AIFC President Kairat Kelimbetov. Courtesy SGE.

The main language spoken at the AIFC is English and the center includes an independent court for financial and investment disputes using English law. Kenneth Rogoff, Professor at Harvard University and former chief economist at the IMF, has said with English law at the basis the AIFC will be a game changer.

The AIFC decree signed in May 2015 at the Astana Economic Forum (AEF) by the President of Kazakhstan, Nursultan Nazarbayev, commands the National Bank of Kazakhstan and the Kazakhstan Stock Exchange to relocate from the city of Almaty to Astana. The AIFC will be installed on the premises of the EXPO 2017 starting from 1 January 2018.

At the AEF Nazarbayev stated the financial crisis that broke out in 2008 is systemic and will only end when the key cause is eliminated: the profound accumulated imbalances in the currency markets. He added that these hidden, latent roots of the crisis have spawned currency wars and economic wars in the form of sanctions hurting many countries. Nazarbayev said, “This is what generates an increase in confrontation between East and West, the U.S. and NATO against Russia and China, … deep reforms are needed for sustained economic growth.”

Nazarbayev may 2015 AEF
Nazarbayev speaking at the AEF 22 May 2015.

Nazarbayev has always been a vocal critic of US supremacy and an advocate of gold. Under his guidance, in 2011 the National Bank of Kazakhstan has taken the pre-emptive right to buy all domestic gold mine output to strengthen its international reserves and develop the local gold industry. In 2012 a (third) large gold refinery, Tau-Ken Altyn, was erected as one of the key projects of the Astana Industrial Park, to ensure all domestic mine output can be refined in Kazakhstan.

President Nazarbayev paid a visit to the Tau-Ken Altyn refinery in December 2013, as can be seen in the video below starting at 1:13. Tau-Ken Altyn can produce 12.5 Kg investment bars for the central bank, as well as 100 gram and 1 Kg bars for personal investment.

Although official documentation is lacking, from the news item at the SGE website I assume the AIFC has included the Shanghai International Gold Exchange (SGEI) for servicing gold trading in renminbi – supporting the internationalization of the renminbi.

It’s unclear if the AIFC has exclusively attracted the SGEI platform for gold trading. On 11 March 2016 Kelimbetov visited London where he held a meeting with the heads of UK government institutions, large investment banks (Goldman Sachs, Morgan Stanley, UBS) and international financial organizations to discuss the AIFC’s progress. Though, Kazakhstan is likely to prefer cooperating with its Chinese partner in gold business, as both nations share a common interests of making a fist against US dollar domination.

The central banks of Kazakhstan and China are among the most aggressive gold buyers in the world. Since 2010 the official gold reserves of Kazakhstan have grown from 67 metric to 222 tonnes. In turn, over the same time horizon China has increased its official gold reserves from 1,054 tonnes to 1,762 tonnes, according to official statistics – it’s thought China’s central bank has significantly more gold than it publicly discloses.

Kazakhstan & China Gold Reserves 2011 2015

The central banks of numerous other countries in (central) Asia are buying gold as well, in example Russia, Belarus, Tajikistan, and Kyrgyzstan, sharing an objective to diversify foreign exchange reserves and unwind the US dollar hegemony.

But increasing their official gold reserves is not all these countries do, it’s part of something bigger. In recent years a vast movement of economic collaborations between countries in Eurasia has unfolded. One of these collaborations is the Silk Road economic project (/OBOR) that was launched in 2013. Partially funded by China’s foreign exchange reserves the project focuses on connectivity and cooperation among countries in Asia, Europe and Africa. Aside from its independent activities OBOR also provides the structure to connect other collaborations, of which the most relevant ones are:

  • The Shanghai Corporation Organization (SCO). The SCO is a political, economic and military alliance, comprising the member states Russia, China, Kazakhstan, Tajikistan, Uzbekistan and Kyrgyzstan, that was launched in 1996.
  • The Eurasian Economic Union (EEU). Launched in 2014 the EEU members Russia, Belarus, Kazakhstan, Armenia and Kyrgyzstan now form a space that is modeled on the European Economic Community.
  • The Asian Infrastructure Investment Bank (AIIB). The AIIB is an international financial institution, erected to support the building of infrastructure in the Asia-Pacific region, launched in 2015 counting 57 prospective founding members. Most Asian (except Japan) and European countries participate in the AIIB.

If we look closely we can observe that China is slowly pushing for more integration of the clubs mentioned above with OBOR. For example, in May 2015 Xi Jinping and Vladimir Putin signed a decree on cooperation in tying the development of the EEU with OBOR and in December 2015 the first discussions were held to integrate the SCO with OBOR. (Chinese state press agency Xinhua has a dedicated Silk Road web page that covers developments regarding OBOR and the SCO, EEU and AIIB.)

Kazakhstan recently opened a logistics terminal in Lianyungang, China, and completed the construction of its Zhezkazgan-Beineu railway to create a better connection for China through Kazakhstan to the Caspian seaports. “All these projects are aimed at increasing the transit potential of both our country and the whole of the Eurasian Economic Union,” said Nazarbayev at the AEF on 22 May 2015. “This is the new Silk Road. Forty countries have showed an interest in free trade with the Eurasian Economic Union. But we must not stop there. I propose to create a new … Eurasian transcontinental corridor.”

Screen Shot 2016-03-15 at 11.23.11 pm
Kazakhstan has a strategic position in Eurasia.

Coincidentally, also on 22 May 2015 the Silk Road Gold Fund was launched at a conference in Xi’an, China, with the subject of “Serve the New Strategy of the Silk Road, Lead the New Development of Gold”. From iFeng we can read (exclusively translated by BullionStar):

Representatives from gold and financial institutions talked freely about bringing gold’s superiority into full play, seizing the historic and strategic opportunity of One Belt One Road [OBOR], strengthening bank-enterprise cooperation and financial-industrial combination, and leading the transformation and upgrading of the gold industry under the economic background of the new normal.

Time will tell to what extent the cooperation between the SGEI and the AIFC will execute what this quote describes. Namely, increasing gold business in the economies along the Silk Road.

A few days later in May 2015 China unveiled the Silk Road Gold Fund to the English-speaking world. From Xinhua:

The fund, led by Shanghai Gold Exchange, is expected to raise an estimated 100 billion yuan in three phases.

…Among the 65 countries along the routes of the Silk Road economic belt … there are numerous Asian countries identified as important reserve bases and consumers of gold.

…About 60 countries have invested in the fund, which will in turn facilitate gold purchase for the central banks of member states to increase their holdings of the precious metal, …

I’m not sure if the National Bank of Kazakhstan will buy its gold through the SGEI anytime soon, more likely some of Kazakhstan’s gold production will be sold through the Chinese exchange.

From all information presented above the intensions of China and numerous Asian countries with respect to gold and the Silk Road are clear. Through OBOR China will not only use its foreign exchange reserves for infrastructure in Eurasia to boost growth and strengthen economic ties and in the region, additionally, gold business is developed and gold is promoted as a key reserve currency.

In China Everyone Can Buy Gold At The SGE

The Shanghai Gold Exchange launched a smartphone app for customers to trade gold.

It’s advised to have read The Chinese Gold Market Essentials Guide before you continue.

The main reason there is such a large discrepancy between Chinese gold demand as disclosed by the World Gold Council (WGC) and the amount of gold withdrawn from the vaults of the Shanghai Gold Exchange (SGE), the latter being a measure for Chinese wholesale gold demand, is because of direct purchases by individual and institutional clients at the SGE. Whilst the WGC, and many other consultancy firms, measure Chinese gold demand strictly by how much gold is sold through retail channels, the reality is that in China every citizen can open an SGE account and buy gold directly in the wholesale market (the SGE). Such direct purchases at the SGE are not captured in retail demand.

As we all know many wealthy Chinese invest in gold. In the knowledge these people all have direct access to the wholesale market, we can ask ourselves, why would any of them buy gold at retail level? Naturally, Chinese women prefer to buy gold in the form of jewelry because that’s an investment they can flaunt with. But if gold is not bought to flaunt with rational investors would always prefer to pay the lowest price for the gold content. That is, at the SGE.

A Chinese investor that wants to invest, for example, 100,000 RMB in gold will likely open an SGE account through which he can exchange his fiat money for physical metal. At the SGE the investor is granted to pay the lowest price. His purchase at the SGE , however, would then not be counted in retail demand.

My estimate is that half of the gold withdrawn from the vaults of the SGE is bought by wholesale customers that process the metal into gold products, like jewelry, that are eventually sold to the private sector. The other half of the gold withdrawn from the vaults is purchased directly by the private sector (individual and institutional clients). Have a look at the next chart:

SGE distribution

Currently the SGE has almost 10,000 institutional and over 8.3 million individual clients. If those 8.3 million clients all buy 100 grams of gold a year that would be 830 tonnes of gold. Of course we don’t know how much all the individual and institutional clients buy every year, though, the total number of institutional and individual clients can easily explain the huge volumes of gold withdrawn from the vaults on a yearly basis. In 2015 no less than 2,596 tonnes of gold were withdrawn from the SGE vaults – in comparison 2,860 tonnes were globally mined.

Shanghai Gold Exchange SGE withdrawals yearly 2007 2015

Previously I’ve written how easy it is for Chinese citizens to open an SGE account and start trading. As of December last year people with an SGE account can also trade gold on their smartphone (Android or iOS) through the Yijintong app that provides access to the SGE trading system. Within a couple of weeks from now “SGE Gold Accounts” can also be opened through this application. Below I’ve displayed a couple of screenshots from Yijintong:

The announcement by the SGE regarding the launch of the new mobile trading software was published on 10 December 2015. BullionStar decided to translate the article as it once again exposes what the Chinese gold market is all about. For an orderly, healthy and strong development of the Chinese gold market all enterprises and citizens have direct access to the central SGE trading system overseen by the PBOC. Accordingly, everyone in China can buy gold directly at the SGE and thus Chinese gold demand measured at retail level is anything but complete.

Next is the translation of the article, at the end you can find the QR code for downloading the software yourself.

State-level Gold Market Transaction Terminal “Yijintong” Was Formally Released

December 10, 2015

With the increasing growth of residents’ wealth in recent years, gold and silver investment has become a trend. However, numerous precious metals transaction platforms and software of varying quality have brought many risks to vast investors on the way to wealth. In order to guarantee investors’ legal rights and guide the healthy development of gold market, “Yijintong”, an authoritative and professional transaction terminal integrating market, transaction and online account opening has emerged.

“Yijintong” breaks a cocoon after painstaking efforts for half a year

In December 2015, the Shanghai Gold Exchange “Yijintong” app was formally released and has entered into the trial operation stage. It is the first professional mobile terminal of state-level gold market jointly researched and developed by the Gold Exchange and all its members after half a year. The first batch of online members include China Bank, Industrial Bank, Shanghai Pudong Development Bank, China Everbright Bank, Ping An Bank, Postal Savings Bank, Ningbo Bank and Haitong Securities. Members who agent personal business in exchanges such as the Agricultural Bank of China, China Securities, China Construction Bank, Bank of Communications, China Minsheng Banking Corp will join the system in succession.

“Yijintong” has comprehensive functions and advanced systems, which are compatible with various Android and iOS operating systems. Right now, it possesses market, transaction, search and information functions, so investors can conduct transactions via mobile phones after opening an account online. In early 2016, Yijintong will also be supporting mobile phone online account opening function. After that, new users will be able to establish Shanghai Gold Exchange’s “Gold Account” business on their mobile phones directly, and avoid the step of visiting stores. It has brought convenience for personal investors to participate in gold and silver transactions.

Authoritative, convenient and comprehensive “Gold Splendor”

Shanghai Gold Exchange has always been dedicated to the healthy and orderly development of the Chinese gold market under the guidance of the Central Bank [the PBOC] leaders for years. It strives to serve entity industry and members in order to offer an open, fair and transparent transaction platform for investors. Now, it has gradually formed to an abundant market system of domestic and overseas markets integrating bidding (spot and derivatives), asking, leasing and financing. Up until November 2015 the Gold Exchange counted 246 members globally, 183 domestic members and 63 international members, next  to almost 10,000 institutional and over 8.3 million individual clients.

As the first domestic professional mobile terminal released by the state-level gold market, “Yijintong” has attracted the market attention after it was released owing to its identity of “being jointly released by the Shanghai Gold Exchange and members”. The gold market and investors have welcomed its authoritative information and fair and transparent transaction functions.

While taking functional practicability and user experience into consideration, Yijintong has taken the lead in realizing rapid declaration via mobile phones, real-time account search and internal reference of professional investment, helped investors sell or buy gold, open or close transactions, as well as utilized professional data and information to better grasp the investment opportunities on the precious gold market. One thing to point out is that the Gold Exchange and members jointly released the system. Investors can access to transactions through “Yijintong” without changing the existing business structure, agency relations and risk responsibility system of the Gold Exchange, members and investors.

Investors can log into Yijintong through mobile phones to conduct daily and nightly market transactions and search, utilizing all-day mobile phone services for gold and silver transactions, allowing Yijintong to become a mobile phone gold and silver investment edge tool that integrates functions and practicability, which also helps investors to do well in both work and financial management.

Download methods: iOS and Android mobile phone users can scan the QR code and open it in the browser to download and install directly.

SGE app qr code

 

The PBOC Was Buying Gold in London In The Nineties

I couldn’t resist translating this must read from 1993 in Dutch newspaper NRC Handelsblad (h/t @frankknopers) about the gold sales by the Dutch central Bank (DNB). Presumably, “a part” of the 400 tonnes sold at the time through the Bank For International Settlements went to the Chinese central bank. Although we don’t know for sure what the Chinese central bank did with the gold – at the time the People’s Bank Of China was the primary dealer in the Chinese domestic gold market and in theory could have sold the gold to Chinese jewelry fabricators – we may assume it was kept for its official reserves.

The other week I published an article about the Chinese Gold Army that was established in 1979 to develop domestic gold mining and exploration. This signifies the People’s Bank Of China (PBOC) was laying the foundation for the Chinese gold market in the seventies. Later on, in 2002 the PBOC started to liberalize the gold market by launching the Shanghai Gold Exchange that took over gold allocation and the pricing mechanism from the central bank. Many of us thought that the PBOC only became active in the international OTC gold market to diversify its lopsided US dollar reserves after, say, 2009. But we were wrong, the PBOC was buying gold in London as early as 1992. No, we don’t know exactly how much or what they did with the gold, though for sure the PBOC has been designing its gold strategy decades ago along side its opening up policy.  

Remarkably, the article from NRC noted that the Dutch central bank sold gold “to equalize its holdings relative to other important gold holding nations” and “it’s known China is working to increase its gold reserves to bring it more in line relative to its GDP”. One of the theories about our current international monetary system – that was detached from gold in 1971 – is that it can only shift to a new gold anchored system when the power blocks have equalized the chips (Jim Rickards). In other words, if the US, Europe, Russia and China all have an equal ratio of official gold reserves to their GDP, the international monetary system could make a transition towards gold.

Global gold vs GDP

Within the aforementioned theory China should have about 6,000 tonnes to come to the gold/GDP ratio the EU and Russia have (the US has a little less gold proportionally). Although it’s impossible to know how much the PBOC really holds, it’s certainly more than what they disclose at the moment, which is 1,743 tonnes. In a forthcoming post we will discuss the most recent ins and outs regarding PBOC official gold reserves. For now, enjoy the full article.

Note, at the time the article was published DNB held 1,090 tonnes of gold.

DNB gold

Operation Gold

(NRC Handelsblad, 27 March 1993).

Last summer the President of the Dutch Central Bank, W. Duisenberg, persuaded the Minister Of Finance, W. Kok, of the need to sell a quarter of the Dutch gold reserves: “The time is right”. Part of the Dutch gold was probably sold at the end of last year to the People’s Republic Of China. The multi billion operation that has taking place in utmost secret is producing the state an annual 400 million guilders in extra benefits since 1994. “Part of the sale was handled outside the market.”

van Ewijk and L.J.R. Scholten: The profitability of De Nederlandsche Bank, in: ESB 1-7-1992. In ESB 19-8-1992 there was a sequel and in ESB 20-1-1993 both authors went on about the gold sales.

March 27, 1993

No. The gold of De Nederlandsche Bank [DNB] was not secretly loaded into a Chinese cargo plane at Schiphol and flown to Beijing. The gold of the Dutch Central Bank remained where it was, in the vaults of the Bank of England where it has been for years. Only the signs with the name of the owner of the gold bars were changed. A new name: for traders in the international gold market there is no doubt that the People’s Bank Of China (PBOC) has bought a part of the 400 tonnes of gold, a quarter of the Dutch gold reserves, which DNB has sold late last year in utmost secrecy.

“With 99 percent certainty we know that the People’s Bank of China has been one of the buyers of the Dutch gold”, said Philip Klapwijk from Goldfields Mining Services, an institute in London affiliated with the South African gold mines that specializes in research into the gold market. Also other London bullion dealers have a strong suspicion that China was involved in the gold sales of DNB. “We have noted that the Chinese central bank has bought gold in recent months”, said John Coley of the London bullion dealer Sharp Pixley and spokesman of the London Bullion Market Association.

At the Ministry of Finance in The Hague and at DNB in Amsterdam they know the story of the Chinese connection, but they remain tight lipped. “Everything is sold locally in London”, said the spokesman of DNB, JH du Marchie Sarvaas. The central bank is silent on the question of who was engaged in the sale and who the buyers were. “It is not in our interest to make announcements about it”, he said. Servaas will only tell us that the transactions have been set up in different ways and that DNB has not entered the market directly itself.

The spokesman of the Ministry of Finance, Dr. RP Florisson, stated not to know where the gold that was sold has gone. Some things, he added, you would rather not know. Members Of The House have neither any idea in what way the gold was sold. With the letter from 12 January by Kok that notified the Members Of the House about the gold sale came an attachment, though in it the ‘technical details’ from the original correspondence between Duisenberg and Kok were omitted. This was a crucial passage, which disclosed the name of the mediator in the gold sales, the Bank for International Settlements, the central bank of central banks.

BIS
Courtesy BIS.

The Seller

Perhaps the phrase “silence is golden” finds its origin in the world of central banks. Like is the case in Operation Gold. In April 1992 DNB developed the intention to sell part of its gold stock and add the proceeds to its foreign exchange reserves. The Board Of Governors of the central bank, consisting of President Dr. WF Duisenberg and three other Directors, approved the plan. Only a few other employees were notified. In June Duisenberg shared his plan with Kok during one of their weekly lunch meetings. Kok hesitated at first because he feared he would be remembered as The Seller of the national gold.

Duisenberg explained that it was the sound fiscal policies from Kok and the strong position of the guilder that made the gold sales possible. Kok was persuaded. At the Ministry Of Finance the Deputy Comptroller General and the Director were informed. On 29 September Duisenberg sent a letter to Kok in which he explained that the sale was intended ”to equalize our gold holdings relative to other important gold holding nations”. The sale should not lead to loss of confidence in the guilder, not serve to fill the state coffers and not lead to disruption of the gold market. “Therefore, a high degree of secrecy is warranted”, Duisenberg wrote. If unexpected complications would arise DNB would waive the operation.

Wim Kok China Construction Bank
Courtesy CCB. Coincidentally, the Minister Of Finance of the Netherlands, Wim Kok, in 1993 that approved the gold sale that ended up in China is now employed by China Construction Bank Corporation – the second largest bank in China after ICBC.

Kok agreed on 2 October and in the fall several sales transaction followed in the London forwards market. In addition, the Bank has for International Settlements (BIS) was involved as an intermediary. The BIS, which is based in Basel and was established in 1930 to administer the German reparations, is as closed as the Swiss banking secrecy. Who calls the BIS can enjoy the long version of Eine kleine Nachtmusik as on-hold music, to finally be told the BIS never releases any information.

Duisenberg expanded on the gold sales at a meeting of the BIS on 12 January 1993. The sale had already taken place, only the gold had yet to be delivered. Not all members of the BIS welcomed the Dutch move, nor were they consulted for its decision. That same day DNB published the news. A team from a TV news network was – under the pledge of secrecy –flown to Basel for an interview with Duisenberg. “The time is right” for the sale of part of the Dutch gold reserves, the President said.

The news dropped like a bomb. Rumors were circulating in the gold market late last year about possible Dutch gold sales, based on these rumors a reporter from news agency Reuters asked DNB for a response in November. It replied no announcements were ever made on market transactions. Gold traders were particularly surprised by the volume of sales: “It was very well done. I never knew that the market could absorb such an amount in such a short time without drastic price distortions”, said one gold dealer.

It was a huge deal. Four hundred tonnes is nearly a quarter of the total annual gold mine production. It is the equivalent to 32,000 gold bars of 12.5 Kg [400-ounce] and 26 centimeters in length, which placed end to end form of line of 8.32 kilometers. That is almost as long as the symbol of our national pride, the Oosterscheldedam.

With the sale DNB earned 7.5 billion guilders in US dollars, D-marks and Japanese yen that have been added to the foreign exchange reserves of the central bank. As these foreign exchange earn interest – unlike gold – the profit starting from 1994 is an annual 400 million guilders which will flow to the state coffers. Recent pleas from Members Of The House to invest this money in infrastructure have been rejected by Kok, who agreed with DNB that this amount, like other profits of the central bank, flow to the Treasury.

Economics Journal

Seldom a critical note is written about the policy of DNB. Coincidentally, last year, while Duisenberg was preparing the gold sales in secret, a remarkable article in the journal for economists, ESB, was published. Casper van Ewijk and Bert Scholten, both working at the economics department of the University of Amsterdam, questioned the profitability of DNB. They concluded that the central bank, with its relatively large reserves of gold and foreign exchange, yields an extremely poor result on its investments. With that, the annual profit payment to the Treasury is a lot lower than possible.

In a second article – after the gold sale – the two economists claimed that DNB had sold too little gold and had waited too long with the sale. Now the gold was sold for an average of 18,800 guilders per kilo, while ten years before it could have been twice that amount. In those ten years, the gold yielded not one cent and its value only declined. The addition of the gold to the foreign exchange reserves was in their opinion, “unnecessary and therefore undesirable”, as the Netherlands has more than enough foreign exchange reserves. And the revenue of the sale, according to Van Ewijk and Scholten, could be better used to reduce the national debt. That gives the government more financial benefit than an annual interest income.

The defense of DNB – as expressed in replies from the Minister Of Finance to questions by the parliament – is that a central bank is not a hedge fund. The gold and foreign exchange reserves are not intended to maximize returns but to conduct a proper exchange rate policy and to ensure confidence in the guilder. As a result, it is also necessary to hold currency that offers a low rate of return. The gold is not held for speculation, but is a cornerstone of the monetary policy of the Netherlands as a major gold holding nation. When deciding on the time at which it sold some of the gold, the gold price did not play any role whatsoever.

The suggestion to use the principal proceeds to flow to the treasury could no find grace: the change in the composition of reserves (gold was converted into US dollars, D-marks and yen) is not a reason to pour assets of the central bank into the hole of the national deficit. If DNB would give in to this temptation that would be a monetary sin: financing the government deficit by the central bank. That happens in South America, or in Italy, but not in countries that appreciate a hard currency.

Parity

Gold plays a vital role in finance since trade emerged. Late last century all European countries and the United States went on the classical gold standard. The direct link between the amount of money in circulation to gold reserves at central banks broke the economies of the industrialized countries in the economic depression of the thirties. The Netherlands held on to gold until 1936 as one of the last countries together with Switzerland and France.

After the Second World War the US dollar ruled. Under the Bretton Woods system, which was set up in 1944 under US-British leadership, all currencies were pegged to the US dollar. This provided stability and dynamics because the Americans constantly pumped new dollars into the world economy. The Bretton Woods system created unprecedented economic growth for a quarter of a century. The gold did not disappear completely. To increase the credibility of the system, the United States declared their readiness to ensure the conversion of dollars into gold at a fixed price of 35 dollars per troy ounce (31.1 grams). The Americans could easily make that offer, because in 1944 they were in possession of three quarters of all the gold reserves in the world.

The Dutch government in exile had largely spent its gold reserves during the war. During the reconstruction foreign exchange reserves piled up in the fifties and sixties and DNB happily took advantage of the opportunity to convert dollars that were earned through exports, for gold in the US. Together with France The Netherlands was in those years the largest gold accumulator. French President General Charles de Gaulle said, in a famous news conference on 4 February 1965, about the US dollar hegemony and gold, “Ah! Gold its nature never changes, not in any form, bars or coins. It has no nationality, it is held eternal and universal as the unchangeable and trustworthy value par excellence”. Also in The Netherlands gold was held as an article of faith.

During the sixties the US gold reserves in Fort Knox severely declined. Eventually, President Nixon decided in 1971 to temporarily suspend the convertibility of dollars into gold. The ‘gold window’ was closed; the world had spent well over twenty five years to tap into the US gold reserves.

Since 1971 the gold reserves of DNB hardly changed. The spectacular rise in gold price to $850 dollars per troy ounce in early 1980 led to a great gain in the books but that was all. However, politicians in the seventies had their greedy eyes on the gold stocks to use these for employment projects and other fun things for the people to finance. President of DNB at the time, Dr. Jelle Zijlstra, abhorred such ideas. Not a single gram of gold was sold from the vaults of DNB.

Zijlstra and his successor Duisenberg feared gold sales would affect the position of the guilder. Moreover, the government deficit was so huge in the eighties that sales would be interpreted by financial markets as weakness. Gold supported confidence in the guilder and provided an aura of invulnerability.

Drawbacks

During 1991 the gold inventories were casually mentioned in a conversation between senior officials of the Ministry Of Finance and DNB during the preparations for the Economic and Monetary Union (EMU) – the plan for a European central bank and a common currency, which was clinched in the Maastricht Treaty. It was clear that the size of the Dutch gold stock was well above average in the EC. This would be disadvantageous if in a few years DNB must transfer part of its reserves to the European Central Bank (ECB).

As a rich gold country the Netherlands is at a disadvantage, because it participates for a relatively small amount in the ECB. The Netherlands threatens to get stuck in the monetary union with a huge amount of gold – that doesn’t yield – because according to ECB rules participating central banks may only purchase or sell gold and foreign exchange reserves with approval by the ECB. After ratification of the Maastricht Treaty, the freedom of DNB would be very limited. “The Netherlands has no interest in a large amount of gold”, said a source familiar with the matter.

The Netherlands receives a 4.7 percent share in the ECB based on the size of the Dutch population and the national economy. That’s less than the Dutch share of 7.3 percent in total international reserves (gold and foreign exchange) of all central banks in the EC and much less than the share of 11.7 percent in gold reserves. Even after the sale of 400 tonnes the Netherlands retains a stake in the EC gold reserves of 9.4 percent. DNB is expected to sell another 685 tonnes of gold to bring their gold share in line with that of the ECB. To reassure the gold market DNB states it will not sell any more gold, though financial experts expect that the gold reserves by EC central banks, including DNB, will be further adapted within the framework of the monetary union. “Last year the Belgian and Dutch central banks sold gold. That made gold sales by central banks respectable. Additional sales threaten the market”, said a London bullion dealer.

In the beginning of 1992, still in the fuddle of Maastricht and nine years after the traumatic devaluation of the guilder in 1983, the position of the guilder was very strong and the Dutch budget deficit was considerably reduced. In The Hague no one advocated to do any more fun things with the Dutch gold stocks. The time was right to proceed to sale.

Small World

It was not possible that DNB would enter the gold market itself, because that would be known immediately in the closed world of gold trading. The few remaining Dutch players in the gold market are tiny. In London, there are four major gold traders, Sharps Pixley, Samuel Montague, Mase Westpac and Rothschild. According to John Coley, spokesman of the London Bullion Market Association, it was obvious that DNB would use the BIS as an intermediary. Duisenberg is very well known in Basel because he was President Of The Board of the BIS from 1988 to 1990.

duisenberg
W Duisenberg

The advantage of the BIS is, as “central bank of central banks”, that it guarantees anonymity and direct access to the central banks of the member countries in Eastern and Western Europe as well as Australia, Canada, Japan and South Africa. A London trader suggested that DNB used the central bank of another member state of the BIS to bring the gold to the market. That could have been the central bank of South Africa, whose gold offers would not surprise any traders. South Africa is always very active in the London bullion market. The BIS could have acted as an intermediary between DNB and the South African central bank.

“Part of the sale was handled outside the market”, says Philip Klapwijk of Goldfield Mining Services. He says he came to this conclusion because the price of gold last year, although down slightly, it should have shown much greater fluctuations if 400 tonnes would have been sold – even if the supply would be split into small tranches.

The BIS probably made contact with the People’s Bank of China as the buyer. Why precisely the People’s Republic of China? Chinese love gold, says an expert, and he refers to the huge Taiwanese gold purchases in 1987. Second, China has large dollar surpluses as a result of the spectacular economic growth. And third, China announced that it is working to build up its reserves in order to bring it more in line with the size of the Chinese GDP.

The weekly table of DNB, which is published every Wednesday in the newspaper, we can see since February a decline in Dutch gold reserves. Presumably, the increase in the gold reserves of China will never be visible. The statistics produced by the International Monetary Fund for China record the same amount of gold for a decade, coincidentally about 400 tonnes. China experts, however, know that the People’s Bank has second secret gold reserves, which are held outside the statistics in “non-monetary gold”. If part of the gold reserves of DNB have been added to these, as many suspect, no one will ever officially know.

Renminbi Internationalization And China’s Gold Strategy

Here we go!

A seminar about gold supporting the internationalization of the renminbi and China’s financial strength was held in Beijing on 18 September 2015. One of the keynote speakers was Song Xin, President of the China Gold Association (CGA), Chairman of the Board of China International Resources Corporation, President of China National Gold Group Corporation and Party Secretary, who believes China’s economic power must be serviced by appropriate gold reserves to support the renminbi. An article written by Song published on Sina Finance in 2014 stated (translation by BullionStar):

For China the strategic mission of gold lies in the support of renminbi internationalization. Gold … forms the base for a currency moving up in the international arena.

If the renminbi wants to achieve international status, it must have popular acceptance and a stable value. To this end… it is very important to have enough gold as the foundation and raising the ‘gold content’ of the renminbi. Therefore, to China, the meaning and mission of gold is to support the renminbi to become an internationally accepted currency and make China an economic powerhouse.

That’s why, in order for gold to fulfill its destined mission, we must raise our gold holdings a great deal, and do so with a solid plan. Step one should take us to the 4,000 tonnes mark, more than Germany and become number two in the world, next, we should increase step by step towards 8,500 tonnes, more than the US.

President of the CGA before Song was Sun Zhaoxue, who shared many of the viewpoints of his successor. In 2012 a famous article from Sun was published in Qiushi magazine, the main academic journal of the Chinese Communist Party’s Central Committee, wherein he plead for stimulating the Chinese citizenry to buy gold next to increasing China’s official gold reserves (translation by BullionStar):

Currently, there are more and more people recognizing that the ‘gold is useless’ story contains too many lies. Gold now suffers from a ‘smokescreen’ designed by the US, which stores 74% of global official gold reserves, to put down other currencies and maintain the US Dollar hegemony. Effectively, the rise of the US dollar … and later the euro currency, from a single country currency to a global or regional currency was supported by their huge gold reserves.  

Individual investment demand is an important component of China’s gold reserve system, we should encourage individual investment demand for gold. Practice shows that gold possession by citizens is an effective supplement to national reserves and is very important to national financial security.

Regular readers of this blog will know what Sun wrote in 2012 regarding ‘individual gold investment’ is exactly what has unfolded; through the Shanghai Gold Exchange (SGE) we could see thousands of tonnes of gold moving into the mainland in recent years. According to my estimates Chinese privates gold holdings have reached 12,000 tonnes – next to the People’s Bank Of China’s (PBOC) gold buying program.

Since my last extensive blog post (20 May 2015) on PBOC gold purchases I’ve been able to collect more clues related to the amount of gold China’s central bank has harvested in exchange for its lopsided US dollar holdings. Last week I spoke to an insider with connections at Western bullion banks. This gentleman confirmed proxies of the PBOC purchase gold directly in the London OTC gold market that is shipped to Beijing. Implying much of the 1,750 tonnes that have mysteriously vanished from the London Bullion Market (left London without being disclosed in UK customs statistics) in between 2011 and early 2015 went to China. This supports the analysis the PBOC is buying at a pace of 500 tonnes a year in the international OTC market (not through the SGE) and owns approximately 4,000 tonnes by now.

Furthermore, it seems the writings from Song and Sun correspond with China’s real undertakings in the gold market, which influences our valuation of their words. There are no transcripts from the seminar in September, but I found an article (in Chinese) that summarizes what Song and others have said. Please read the gripping translation below.

CGA

Note, Song is the President of China National Gold Group Corporation, which started an alliance with Russian gold miner Polyus Gold to deepen ties in gold exploration. China and Russia aim to trade (newly mined) gold over the Shanghai International Gold Exchange in renminbi for international institutions and central banks as part of the Silk Road Gold Fund to attract the center of the international gold market towards the East.

Renminbi Internationalization and China’s Gold Strategy Seminar

Date: September 22, 2015. Source 

On 18 September 2015 the “Renminbi Internationalization and China’s Gold Strategy Seminar” was smoothly held in Beijing. The seminar was guided by the China Gold Association and jointly held by the Chinese Gold Research Center of Capital University of Economics and Business and Beijing Gold Economic Development Research Center. It was supported by Zhao Jin Futures, Shandong Zhaojin Investment Co., Ltd., Shenzhen Jinmingzhu Jewelry Co., Ltd. and Chifeng Jilong Mining Industry Co., Ltd.

Over 130 representatives from the governments, banks, gold mining industry, gold investment organizations, jewelry companies and educational institutions attended the seminar. Wang Wenju, Vice President of Capital University of Economics and Business announced to rename the Chinese Gold Market Research Center of Capital University of Economics and Business on the seminar site.

Wang Jiaqiong, President of Capital University of Economics and Business, Song Xin, President of Chinese Gold Association & General Manager and Secretary of the Party Committee of China National Gold Group Corporation, Wang Xiaomei, Deputy Party Secretary of China National Gold Group Corporation, Wei Benhua, Former Director of the State Administration of Foreign Exchange and Former General Representative of Chinese International Monetary Fund, and other leaders and representatives attended the seminar. 13 experts from China Gold Association, Shanghai Gold Exchange, Renmin University of China, Chinese Social Science, Capital University of Economics and Business, China Center for International Economic Exchanges, China Forex Investment Research Institute, Gold Economic Research Center, ICBC, China Construction Bank, Shandong Gold Group and Shandong Zhao Jin Group delivered splendid speeches.

Wang Jia Qiong
Wang Jiaqiong

President Wang Jiaqiong delivered a speech. In his speech, Wang Jiaqiong pointed out, RMB internationalization is a struggling process in need of strategic research. In the seminar, many experts, scholars and entrepreneurs were discussing renminbi internationalization and Chinese gold strategies. They would propose wise ideas and good policy suggestions after brainstorming, playing as a think tank in the development of China. The research team led by Professor Zhu Heliang from our university spent years studying Chinese gold strategy problems and some research results obtained the central affirmation and recognition. All of your arrival can better support our in-depth research on relevant topics and construction of related disciplines.

In the opening ceremony, Wang Wenju announced the renaming of the Chinese Gold Market Research Center of Capital University of Economics and Business, which focuses on the current gold market, to Chinese Gold Research Center of Capital University of Economics and Business with the purposes of better studying gold problems comprehensively, displaying the function of gold in national economy and society, boosting renminbi internationalization and keeping pace with the times. The school would offer vigorous support and hope that the new research center can strengthen team building and display think tank functions.

Song Xin rmb au
Song Xin

In his speech, Song Xin mentioned that the Chinese gold industry has achieved a great-leap-forward development since the new century. In 2014, Chinese gold yield had turned China into the biggest gold producing country in the world for eight consecutive years and the biggest gold consumption country again. Whether in the past, present or future, gold plays a crucial role in the development of human society. Renminbi internationalization has boosted China’s march towards an economic power from an economic giant. The new age has endowed gold with more important missions. Gold has shouldered a heavy responsibility of “increasing credit” for renminbi internationalization and increased the “gold content” for renminbi internationalization. 

Recently, the Central Bank announced to increase gold reserves to the public many times in succession. In fact, it’s the strategic layout and major move for laying the renminbi’s international credit foundation. We always suggest formulating and boosting national gold strategies in pace with national financial strategies positively, further improving the quantity and proportion of gold in national foreign exchange reserves, developing occupancy volume of gold production and increased gold resources. We further suggest perfecting the gold market, promoting foreign currency in individuals, boosting Chinese and western wealth flowing, improving our control power of global gold wealth flowing, accelerating renminbi internationalization, helping the renminbi enter special drawing rights currency basket, rebuilding international currency system, balancing American hegemony process, and positively displaying the due function of gold and the gold industry. Leaders from Capital University of Economics and Business have supported the research on gold problems for a long time. The team led by Professor Zhu Heliang has persistently pursued basic research on gold with outstanding viewpoints. They have obtained relevant departments’ high attention for long. I hope that Capital University of Economics and Business can further display its gathering advantages of majors and talents, and strengthen the cooperation with Chinese Gold Research Center, China National Gold Group Corporation and its subordinate companies.

In the seminar, experts thoroughly analyzed the essence and inherent laws of renminbi internationalization, new positioning and functions of gold in the non-gold standard currency system. They discussed the strategic significance of gold in renminbi internationalization from historical and actual perspectives and Chinese gold strategies in the new age. Experts unanimously regarded gold as playing an irreplaceable role in currency internationalization progress. The important element of gold shouldn’t be ignored during renminbi internationalization. The country should attach great importance to the development of the gold industry and market and increase gold reserve from a strategic height.

The seminar is the “prelude” of the first renminbi internationalization and Chinese Gold Strategy Research Project jointly carried out by Chinese Gold Research Center of Capital University of Economics and Business and Beijing Gold Economic Development Research Center. After the seminar, key viewpoints were to be collected and submitted to related departments. Chinese Gold News will set up a special column and publish solicited articles about “renminbi Internationalization and Chinese Gold Strategies”. Meanwhile, two organizations will organize special research teams, focus on the topic research of “renminbi internationalization and Chinese Gold Strategies”, and open the research results for publication. With national major strategy research as their own duty, the two organizations have formed a strategic alliance in terms of promoting renminbi internationalization and adjusted research directions of Chinese gold strategies in order to make effort and contribution to the prosperous cause of China.

The Official Chinese Gold Trade Rules By The PBOC

Because inaccurate information regarding the Chinese gold market keeps circulating in the international gold community BullionStar has decided to translate the Measures for the Import and Export of Gold and Gold Products drafted in March 2015 by the People’s Bank Of China (PBOC). The translation, which can be read below, will serve as a foundation to further expand on CCFDs and investigate the discrepancy between SGE withdrawals and Chinese consumer gold demand. In a forthcoming post I will expand in detail on the Measures for the Import and Export of Gold and Gold Products combined with additional Chinese trade laws, to elucidate how these rules relate to the physical gold flows involved in round tripping. A second succeeding post will be dedicated to the physical gold flows inside the Chinese domestic gold market – through the SGE – and how these relate to gold leasing.

You can download the original Chinese Measures for the Import and Export of Gold and Gold Products from the PBOC here. Be advised the Measures for the Import and Export of Gold and Gold Products can be confusing if not connected to Chinese trade rules in general.

In the translation below reference is being made to:

  1. Annex 1, Import and Export License of the People’s Bank of China for Gold and Gold Products, of which is a translation can be viewed here.
  2. Annex 2, Application Form for Import and Export of Gold and Gold Product, of which a translation can be viewed here.
  3. Catalogue for the Regulation of the Import and Export of Gold and Gold Products, of which a translation can be viewed here.
PBOC gold 3
Courtesy PBOC

Measures for the Import and Export of Gold and Gold Products

Order of General Administration of Customs and People’s Bank of China

Order No. 12015

Measures for the Import and Export of Gold and Gold Products is prepared by People’s Bank of China and General Administration of Customs based on Law of the People’s Republic of China on the People’s Bank of China, Customs Law of the People’s Republic of China and Decision of the State Council on Establishing Administrative License for the Administrative Examination and Approval Items Really Necessary to be Retained.

The Measured is issued hereby and shall take effect since April 1, 2015.

Measures for the Import and Export of Gold and Gold Products

Article 1 The Measure is prepared to regulate the imports and exports of gold and gold product and to enhance the import and export management of gold and gold product based on laws like Law of the People’s Republic of China on the People’s Bank of China, Customs Law of the People’s Republic of China and Decision of the State Council on Establishing Administrative License for the Administrative Examination and Approval Items Really Necessary to be Retained etc.

Article 2 For the purpose of these Measures, gold means gold unwrought and gold products mean semi-finished gold and finished products of gold.

Article 3 The People’s Bank of China, as the authority in charge of the import and export of gold and gold products, implements a permit system for the import and export of gold and gold products.

The People’s Bank of China, based on the needs of national macroeconomic regulation and control, may conduct restrictive approval for the import and export volume of gold and gold products.

For the import and export customs clearance of gold and gold products as included in the Catalogue for the Regulation of the Import and Export of Gold and Gold Products, the Import and Export License of the People’s Bank of China for Gold and Gold Products (Annex 1) issued by the People’s Bank of China or a People’s Bank of China branch shall be submitted to the Customs.

The People’s Bank of China shall, in conjunction with the General Administration of Customs, formulate, adjust, and issue the Catalogue for the Regulation of the Import and Export of Gold and Gold Products.

Article 4 A legal person or another organization importing and exporting gold and gold products by the following trade modes shall obtain an Import and Export License of the People’s Bank of China for Gold and Gold Products in accordance with these Measures:

(I) General trade;

(II) Processing trade for the domestic market and gold products exported under processing trade with gold raw materials purchased within the territory of China; and

(III) Import and export between areas under special customs supervision or supervised bonded places and overseas areas.

An individual, a legal person or any other organization donating imported gold and gold products for public interest undertakings shall obtain an Import and Export License of the People’s Bank of China for Gold and Gold Products in accordance with these Measures.

The provisions on the administration of individuals entering and leaving China with gold and gold products shall be formulated by the People’s Bank of China in conjunction with the General Administration of Customs.

Article 5 The import and export of the state gold reserves shall be handled by the People’s Bank of China.

The import and export of gold coins (including gold precious metal commemorative coins) shall be handled by institutions designated by the People’s Bank of China.

Article 6 The main market players with the qualifications for the import and export of gold shall assume the liability of balancing the supply and demand of material objects on the domestic gold market. Gold to be imported and exported shall be registered at a spot gold exchange approved by the State Council where the first trade shall be completed.

Article 7 Applications for the import and export of gold and the import of gold products donated for public interest undertakings shall be accepted and approved by the People’s Bank of China.

Applications for the import and export of gold products shall be accepted by the branches of the People’s Bank of China at or above the prefecture level and approved by the Shanghai Head Office of the People’s Bank of China, the branches and business management departments of the People’s Bank of China, or the central sub-branches of the People’s Bank of China in the capital cities of the provinces (autonomous regions), and the central sub-branch of the People’s Bank of China in Shenzhen.

Article 8 An applicant for the import and export of gold (except the import of gold for donation to public interest undertakings) shall have corporate status, have no record of violating laws and regulations within the recent two years, and satisfy one of the following conditions:

(I) It is a financial institution member or a market maker on a gold exchange approved by the State Council, with professionals of the gold business, a perfect gold business risk control system, and stable gold import and export channels, whose business carried out on the gold market complies with relevant policies or regulatory provisions, and whose spot trading of gold is active and the volume of transactions for its own account is among the highest in the two years before the application is filed;

(II) It is a comprehensive member of a gold exchange approved by the State Council, and a mining enterprise with annual gold production of 10 tons or more, pollutant emissions during the production process satisfying the environmental protection standards of the state, overseas gold mineral products investment scale exceeding USD 50 million, which has obtained mining rights of overseas gold mines or paragenetic and associated gold mines, which has formed mineral gold production capacity, whose business carried out complies with relevant policies or administration provisions, and whose spot trading of gold is active and volume of transactions for its own account is among the highest in the two years before the application is filed;

(III) It is a mining enterprise, with three consecutive years of domestic taxation records no less than RMB 200 million yuan and investment in overseas nonferrous metals exceeding USD 100 million, which has obtained mining rights of an overseas gold mine or paragenetic and associated gold mine and is ready to produce gold, and whose business carried out complies with the relevant policies or regulatory provisions;

(IV) It is a manufacturing enterprise that assumes the task of producing precious metal commemorative coins for the state;

(V) It is a gold importing and exporting refining enterprise which has become a certified brand on the international gold market.

Article 9 An applicant for the import and export of gold products (except the import of gold products for donation for public interest undertakings) shall have corporate status or the status of other organization, have no violation of laws and regulations within the recent two years, and satisfy one of the following conditions:

(I) For enterprise which produces, processes or uses relevant gold products, it shall possesses necessary production sites, equipment and facilities, discharge pollutant made in the production process based on national environment protection standards and keep a tax payment record that no less than RMB 1 million yuan has been paid each year for a successive 3 years;

(II) For foreign trade operation enterprise which applies to customs certification on enterprise management, it shall keep a tax payment record that no less than RMB 3 million yuan has been paid each year for a successive 3 years;

(III) Educational organizations, science study organizations and so on which need to use gold product for national research project and key subjects.

Article 10 Those which apply for import and export of gold shall submit the following materials to People’s Bank of China:

(I) Descriptions on business conditions including name, address (office place), enterprise profile, using of the imported and exported gold and planned amount etc. shall be noted on the written application;

(II) Application Form for Import and Export of Gold and Gold Product (Annex 2);

(III) Copies of officially sealed business certification of the enterprise legal person;

(IV) Gold import and export contracts and their copies;

(V) Officially sealed copies of Organization Code Certificate of the People’s Republic of China;

(VI) Explanatory materials on whether the applicant has illegal conducts in the past 2 years;

(VII) Financial organization of banking industry shall also offer relevant materials on internal gold business control system; those which apply for gold export shall submit real gold inventory amount certification of gold and commodities exchange approved by State Council;

(VIII) Gold mining enterprises shall also submit pollutant discharge permit certification and copies of annual qualification inspection report issued by provincial environment protection department, copies of relevant foreign investment approval document by the business department, copies of bank out-remittance certification, relevant certifications on exploiting gold in foreign countries or regions and tax payment record of the enterprise in the past 3 years; those which apply for exporting gold shall submit gold production capacity issued by the industry command department or self-discipline organization and registration certification of gold and commodities exchange approved by State Council.

Those which apply for gold import and export again and of which no materials of the aforesaid terms are changed shall only need to submit materials in Item II and Item IV; or shall apply and handle as the first application in case the other materials in the aforesaid terms are changed.

Article 11 Those which apply for import and export of gold product shall submit the following materials to the branch of People’s Bank of China above municipal level where the applicant lives:

(I) Descriptions on business conditions including name, address (office place), enterprise profile, using of the imported and exported gold and planned amount etc. of the applicant shall be noted on the written application;

(II) Application Form for Import and Export of Gold and Gold Product;

(III) Copies of officially sealed legal registration certificate including business certification of the enterprise legal person and legal certificate of public institutions;

(IV) Gold import and export contracts and their copies;

(V) Registration Form for the Archival Filing and Registration of Foreign Trade Operator or Certificate of Approval for Establishment of Enterprises with Foreign Investment in PRC which is sealed with archive filing seal.

(VI) Description materials on whether the applicant has illegal conducts in the past 2 years;

(VII) Enterprises which produce, process or use gold product shall also submit the enterprise tax payment record of the past 3 years, pollutant discharge permit certificate issued by municipal environment protection department and annual qualification inspection report as well as their copies;

(VIII) Enterprise of foreign trade operation shall also submit relevant enterprise management proving materials apply to customs certification and enterprise tax payment record of the past 3 years;

(IX) Education organizations and science research institutes shall also submit proving materials on conducting national research projects or key subjects;

(X) Enterprises which export gold products shall also submit proving materials including added-value tax invoice of gold raw materials obtained within China.

Those which apply for gold import and export again and of which no materials of the aforesaid terms are changed shall only need to submit materials in Item II and Item IV; besides, education organizations and science research institutes shall also submit materials in Item IX and enterprise which export gold products shall also submit relevant materials specified in Item X; or shall apply and handle as the first application in case the other materials in the aforesaid terms are changed.

Article 12 The application conditions specified in Item I, Article 9 of the Measure applies to gold product from processing trade for the domestic market, imported materials of products for domestic market within products listed in Catalogue for the Regulation of the Import and Export of Gold and Gold Products and gold products exported under processing trade with gold raw materials purchased within the territory of China.

For processing trade for the domestic market, the application materials shall be submitted and delivered in accordance with provisions in Article XI of the Measure; besides, materials explaining fair reasons for turning to domestic market, copies of processing trade business approval certificate and processing trade contracts and their copies etc.

For gold products exported under processing trade with gold raw materials purchased within the territory of China, the enterprise shall report the conditions of gold purchase within the territory of China when the processing trade manual is established (changed) and submit Import and Export License of the People’s Bank of China for Gold and Gold Products.

Article 13 As for imported gold and gold product donation made by individual, legal person or other organization for public welfare establishments, the following materials shall be submitted by the Donee to People’s Bank of China:

(I) Donation agreement that conforms to provision of Law of the People’s Republic of China on Donations for Public Welfare;

(II) Legal registration certificate and their copies including public institute legal person certificate or social group legal person registration certificate;

(III) Application Form for Import and Export of Gold and Gold Product

Article 14 People’s Bank of China shall make the administration permit decision within 20 work days since accepting the application for import and export of gold and gold products.

Article 15 Municipal branches of People’s Bank of China shall directly report the primary review opinions and all the application materials to the upper organization within 20 work days since accepting the application for import and export of gold and gold products. And the upper organization shall make the administration permit decision within 20 work days since receiving the primary review opinions and all the application materials.

Shanghai head office, all branches, business management department, central branches of provincial capitals (metropolis) and Shenzhen central branch of People’s Bank of China which directly handle application for import and export of gold products shall make the administration permit decision within 20 work days since acceptance.

Article 16 People’s Bank of China or its branches may review the applicant in case it is necessary to verify the real content of the application materials; the review shall be conducted by more than 2 working staff.

Article 17 The approved applicant shall handle relevant procedures at the customs by Import and Export License of the People’s Bank of China for Gold and Gold Products when handling cargo import and export of gold and gold products.

There shall be one Import and Export License of the People’s Bank of China for Gold and Gold Products for each batch of product and the License shall be used within 40 work days since the issuing date. The licensed party which need a postpone for reasonable reasons may apply for handling a delay procedure to the issuing organization with the original license 5 work days after the expiring of the license.

Article 18 People’s Bank of China and its branches are entitled to supervise and inspect the activities of administration permit items conducted by the Licensee shall be cooperative.

Article 19 The Licensee shall promptly report the implementation conditions of import and export of gold and gold products and provide relevant materials based on the provision of People’s Bank of China and its branches.

Article 20 Despite of the provisions in Article 4 of the Measure, gold and gold products imported and exported by the following means shall exempted from handling Import and Export License of the People’s Bank of China for Gold and Gold Products and shall be supervised by the customs instead:

(I) Imported or exported by processing trade;

(II) Imported or exported between customs special supervision region, tax-free supervision area and foreign territories;

(III) Imported or exported between customs special supervision region and tax-free supervision area;

(IV) Imported or exported by maintenance, shipment return and temporary in-and-out methods.

Article 21 Except for provisions in Article 4, 5 and 20 of the Measure, any individual, legal person or other organization shall not import and export gold and gold products by any other means. Except otherwise specified by the state.

Article 22 Individual, legal person or other organization shall abide by relevant national regulations on anti-money laundering and anti-terrorist financing when importing and exporting gold and gold products.

Article 23 Foreign exchange receipts and payments incurred when importing and exporting gold and gold products shall be handled in accordance to foreign exchange management rules.

Article 24 The Licensee shall not make the following conducts:

(I) Transfer or lend the import and export license for gold and gold products;

(II) Use fake or intentionally made import and export license for gold and gold products;

(III) Acquire the import and export license for gold and gold products by lying or other dishonest conducts;

(IV) Exceed the class, specification and amount scale permitted by the import and export administration;

(V) Make fake donations on imported and exported gold and gold products;

(VI) Fail to register and exchange the imported and exported gold at the gold and commodities exchange based on the provisions;

(VII) Maliciously manipulate gold exchange price by means like hoarding and profiteering, or other conducts which violate the rights and interests of the other investors like cheating;

(VIII) Violate relevant policies or management provision on gold market and gold derivatives exchange;

(IX) Refuse the supervision and inspection by People’s Bank of China and its branches or hide relevant conditions and provide fake materials during the supervision and inspection process.

In case the Licensee makes any of the conducts listed in former terms, People’s Bank of China and its branches is entitled to suspend the handling of its import and export application; those with vital situations shall be punished in accordance to Article 46 of Law of the People’s Republic of China on the People’s Bank of China.

Article 25 People’s Bank of China and its branches is entitled to withdraw the import and export license for gold and gold products of the Licensee by law.

Article 26 Illegal conducts including smuggling or violating customs supervision provisions resulting from importing and exporting gold and gold products by violating the Measure shall be disposed in accordance to laws and regulations including Customs Law of the People’s Republic of China and Regulation of the People’s Republic of China on the Implementation of Customs Administrative Punishment by the customs; or shall be investigated for its criminal liabilities by being transferred by the justice organization in case of crime.

Article 27 People’s Bank of China and General Administration of Customs are responsible for explaining the Measure.

Article 28 The Measure shall be implemented since April 1, 2015.

Annexes:

1. Import and Export License of the People’s Bank of China for Gold and Gold Products

2. Application Form for Import and Export of Gold and Gold Products

China Aims For Official Gold Reserves At 8500t


2383
China should accumulate 8,500 tonnes in official gold reserves, more than the US, according to Song Xin, President of the China Gold Association, General Manager of the China National Gold Group Corporation and Party Secretary. He wrote this in an opinion editorial published on Sina Finance July 30, 2014. Gold is money par excellence in all circumstances and will help support the renminbi to become an international currency as “gold forms the very material basis for modern fiat currencies”, Song notes. In the short term the Chinese will not back the renminbi with gold (establish a fixed renminbi price for gold), but support it with gold so it has sufficient credibility for the world to accept it as a trade and reserve currency.

The previous President of the China Gold Association (CGA), Sun Zhaoxue, was also the General Manager of the China National Gold Group Corporation, these jobs are apparently connected. Song took over from Sun as CGA President and Manager of China National Gold in February 2014. Remarkably, when Sun was in office he wrote equally candid articles (in Chinese) about the importance of gold for China’s economy. Sun’s most renowned article is titled “Building A Strong Economic And Financial Security Barrier For China”, published on August 1, 2012, in Qiushi magazine, the main academic journal of the Chinese Communist Party’s Central Committee (click here for a translated version). From Sun:

The state will need to elevate gold to an equal strategic resource as oil.

Currently, there are more and more people recognizing that the ‘gold is useless’ story contains too many lies. Gold now suffers from a ‘smokescreen’ designed by the US, which stores 74% of global official gold reserves, to put down other currencies and maintain the US Dollar hegemony. Going to the source, the rise of the US dollar and British pound, and later the euro currency, from a single country currency to a global or regional currency was supported by their huge gold reserves. 

Individual investment demand is an important component of China’s gold reserve system, we should encourage individual investment demand for gold. Practice shows that gold possession by citizens is an effective supplement to national reserves and is very important to national financial security.

2386Song’s vision is in line with these statements which confirms the strategy of the Communist Party of China to aggressively accumulate official gold reserves and to stimulate individual gold investment in order to strengthen the Chinese economy and protect it from internal and external shocks.

Note, Song is the President of the CGA that for political reasons largely understates Chinese gold demand figures in order to conceal China’s true hunger. Though clearly expressing his point of view in the next article, he could not disclose deviant data regarding CGA demand numbers. Actual Chinese wholesale gold demand in 2013 was 2197 tonnes, as is confirmed numerous times.

Translated by LK, gold investor from Hong Kong.

Gold Will Support Renminbi As It Moves To Join World

By Song Xin, General Manager of the China National Gold Group Corporation, Party Secretary and President of the China Gold Association.

2014 edition 6

For China, the strategic mission of gold lies in the support of RMB internationalization, and so let China become a world economic power and make sure that the “China Dream” is realized. 

Gold is the only thing carrying the dual mantels of a commodity as well as a monetary substance. It’s both a very ‘honest’ asset and forms the very material basis for modern fiat currencies. Historically, gold has played an irreplaceable role in responses to financial crises and wars as it comes to protecting a country’s economic security. Because of this, gold carries with it an honored and divine-given strategic mission in the ascend of the Chinese people and the pursuit of the “China Dream”.

The Important Function Of Gold

Gold is the world’s only monetary asset that has no counter party risk, and is the only cross-nation, cross-language, cross-ethnicity, cross-religion and cross-culture globally recognized monetary asset. Gold is the last protection for a country’s economic security; it safeguards a nations sovereignty in times of crises. A textbook example happened in 1997 during the Asian financial crisis. To work through Korea’s severe debt problem, the IMF’s condition for a rescue package was to sell large enterprises. In the end, the Korean government had no choice but to call on its people to donate gold to settle the foreign debt, and it was only through this act that the chaebols at the center of the country’s economy and independence survived.

From our country’s point of view, gold has played an irreplaceable role in the development of our economic society. In the wars during the Revolution [1921-1937] gold provided strong support in the economic development of the liberated zones and achievements in reforms; in the three years of natural disasters, the nation used gold reserves to obtain information on living and production conditions and took actions to alleviate hardship. At the start of the great Reforms (1980’s), gold boosted our foreign reserve levels and helped the promising private sector and it advanced society. After 1989, we suffered economic sanctions from Western countries for a while and the PBOC used our gold reserves to enter into swap agreements to obtain needed foreign currencies. Right now, gold is still serving its functions to protect against economic risks; contributing in ever more important ways to our financial security. For the moment, although in general the international scene is peaceful, conflicts can develop in certain regions. If there should be a blockade or regional war, there could be only one method of payment left: gold.

The strategic Mission Of Gold

Since the 18th People Congress, general secretary Xi Jinping brought up the goal to revive our nation, to realize the “Chinese dream “. One important part of this dream is to have a strong economy. Though China is already the world’s second largest economy, there is still a long way to go to become an economic powerhouse. The most critical part to this is that we don’t have enough say in matters such as international finance and matters regarding the monetary system, the most obvious of which is the fact that the RMB hasn’t fully internationalized.

Gold is a monetary asset that transcends national sovereignty, is very powerful to settle obligations when everything else fails, hence it’s exactly the basis of a currency moving up in the international arena. When the British Pound and the USD became international currencies, their gold reserve as a share of total world gold reserves was 50% and 60% respectively; when the Euro was introduced, the combined gold reserves of the member countries was more than 10,000 tonnes, more than the US had. If the RMB wants to achieve international status, it must have popular acceptance and a stable value. To this end, other than having assurance from the issuing nation, it is very important to have enough gold as the foundation, raising the ‘gold content’ of the RMB. Therefore, to China, the meaning and mission of gold is to support the RMB to become an internationally accepted currency and make China an economic powerhouse.

In this view, our gold reserves are very low, both in terms of a nominal level as well as a percentage of official reserves. From the nominal level, the total official reserves of gold in the world stands at 30,000 tonnes, of which the USA has been occupying the first place at 8133.5 tonnes – 26 % of the world total. Germany has 3387.1 tonnes and Italy and France both hold more than 2,400 tonnes. Ours is 1054 tonnes at the sixths place – only 3.4% of the world total. As a percentage of a country’s total reserves, US gold reserves amount to 71.7 % and European nations have kept their levels between 40% to 70%. The average of the world is about 10%, but for us it’s only 1%.

That is why, in order for gold to fulfill its destined mission, we must raise our gold holdings a great deal, and do so with a solid plan. Step one should take us to the 4,000 tonnes mark, more than Germany and become number two in the world, next, we should increase step by step towards 8,500 tonnes, more than the US.

All-round, Multi-channel Increases In Gold Levels. Fulfill Our Part In Enabling Gold To Accomplish Its Strategic Mission.

How to achieve growth in our gold reserve? Apart from the PBOC directly buying in the open market, we should use also use the following strategies:

1. Relax gold import controls, grant large scale gold enterprises permits to import gold. In 2013, our gold consumption reached 1176.4 tonnes. Compared to the 426 tonnes of local production, there is a shortage of 750 tonnes. To meet this gap, we presently let the 12 commercial banks with gold-trading rights import standard gold ingots. But these banks lack the ability to refine and assay gold, they can only import standardized gold, missing the large amount of non-standardized gold and wasting the international resources that we could reach. By relaxing import controls, the large-scale gold companies can then obtain this gold and use their own technology to refine it into standard quality gold. This can help meet demand in the market, or turn gold into official reserves as required.

2. Establish a gold reserve building fund. This can be seeded using capital from the State Treasury, and open it for participation by private-sector capital in the public. It should be controlled by the State and used to target diverse off-shore gold resources, acquire mines and raw gold and in so doing, extend our reach beyond our borders and add a layer of opaque reserves to otherwise standard reserve numbers.

3. Establish a Gold bank. We need to establish our gold bank as soon as possible, and enable it to break the barrier between the commodity and monetary world. It can further help us acquire reserves and give us more say and control in the gold market. It may be guided under the PBOC and led by the China Gold Association, involving leading gold industry companies and commercial banks, and it’s business would include: gold pricing (fix), gold financing and leasing, gold-guaranteed payments, gold saving accounts, gold lending, gold production chain financing and issuance and trading of paper gold and other gold investments. This gold bank can then naturally use market-oriented methods to change commodity gold into monetary gold reserves, thus help us increase our strategic gold reserves.

ABN AMRO: Gold’s Safe Haven Status Should be Revised

I think most of you remember the Dutch bank ABN AMRO. Last month they came out with an analysis titled: It’s Not All Gold That Glitters.

I present the translation, from which you can read ABN AMRO is trying to change thousands of years of history by saying gold’s safe haven status should be revised, all because the price of gold did not behave as they expected in recent years. An interesting read from a paralel universe.

It’s Not All Gold That Glitters

03-05-2014

In uncertain times investors seek safety in gold, but gold isn’t the safe haven it used to be, according to experts.

The volatility in the price of gold is getting a lot of attention from investors world wide, more than ever. Janet Yellen, chairman of the Federal Reserve, said last year to have no insight in the fluctuations. According to Yellen there is no economic model that explains why the price of gold goes up or down. The precious metal appeals to the imagination for decades. It’s scarce, immortal and is een globally as valuable. A safe haven for people that fear currencies and stocks will drop in value or political and economic problems. Different from other commodities the supply of gold is less important for its price. The majority of all the gold ever mined is still in circulation. For example in the form of coins and jewelry. Owners can bring gold relatively easy back in circulation. The price of gold is mainly determined by demand.

By rising demand in times of uncertainty the price of gold will rise. The price goes down if trust in financial markets increases and investors sell gold. This was how it worked before the financial crisis. At this moment the direction of the gold price is extremely unpredictable.

Georgette Boele, precious metals specialist at ABN AMRO, closely follows this market. On behalf of the bank she presents her analysis: “At the hight of the crisis – in 2008 – the gold price tumbled, although sentiment in financial markets was very negative.” The same happened last year. The price of gold fell the most since the 80’s on disappointing economic figures from inter alia emerging markets. “De link between stock market volatility and the price of gold is no longer self-evident”, Boele explains. The status of gold as the ultimate safe haven should be revised, according to specialists.

Were Is The Price Of Gold Headed

An important task of Georgette Boele, precious metals specialist at ABN AMRO, is to map all factors that can influence the price of gold. For investors who like to use gold as potential safe haven, as for investors who prefer to speculate on short term price movements. It’s all about estimating the effects of economical and political developments on the price of gold.

Boele: “ABN AMRO expects the price of gold to drop in 2014 and 2015. A consequence of positive sentiment in the US stock market and the expectation the interest rate in the US will rise as well as the value of the US dollar. In 2016 the balance between supply and demand will change in favor of gold and the price will then recover.”

Speculation

Boele sees multiple reasons which can explain why the price of gold is moving differently than in the past. “A major factor is the increased accessibility in the gold market for investors.” Until 2004 the price was mainly set by physical gold trade by investors and the gold price in the professional market. “The introduction of ETF’s (exchange traded funds or indextrackers) changed the influence on the price of gold significantly. ETF’s can be traded on a daily basis”, according to Boele. “The liquidity increased and investing in gold became more easy, also for speculators”. The speculators have a different incentive than gold buyers that aim to possess gold as a safe haven in uncertain times. “This became clear at the hight of the credit crisis in 2007 and 2008. The speculators had a shortage in liquidity and were forced to sell ETF’s and other gold financial products. As a consequence the price of gold dropped in times of economic uncertainty.”

Jewelry   

Also developments in emerging markets were important. Gold plays an important role as a commodity for jewelries and a safe haven. Boele: “People in emerging markets are more likely to buy gold to protect themselves against currency devaluation. These people have experienced hyperinflation not so long ago.” We can also see gold investment rising if other markets are under pressure. Recent research pointed out that when Chinese real estate goes down, gold demand goes up.” Demand for gold in emerging markets is also influenced by the jewelry market. The size of this market puts an important floor under the price of gold. Gold is a common gift at marriages in India and at new year celebration in China. According to a recent study from HSBC, India, China, Indonesia, Vietnam, Hong Kong and Taiwan make up 60 % of global demand for physical gold. Although the amount of total imported gold is decreasing. Boele: “The cause is the import duty on gold in India, traditionally the largest gold importer. The government implemented this measure to decrease India’s trade deficit. Because of the import duty India has imported significantly less than in previous years. The import duty will not be revised as India needs to control their trade deficit.” Chinese demand for gold wil not have an impact on the price, Boele expects. In the past years Chinese demand was strong, especially in 2013, however, slowing growth will most likely cause Chinese demand to drop.

Various Investment Possibilities In Gold    

There different instruments to invest in gold. For example futures, mining stocks and funds that invest in a basket of commodities. “The choice determines the riks and yield of the investment”, says Martijn Storsbergen, investments director ABN AMRO MeesPierson. He advices his customers to match their investments to their risk profile. “Choose a fund that invests in multiple commodities.”

ABN AMRO

SGE Chairman: China Should Become First Class International Gold Market

Below is the full translation of a Chinese article I’ve used in a previous post on the Shanghai Gold Exchange international board. The article is about a speech from SGE chairman Xu Luodo at the Fourth Commercial Bank Gold Investment Forum where he spoke about the SGE international board.

It’s a must read because Xu clearly states he is developing the SGE from a domestic to an international gold exchange for China to have a stronger voice in gold pricing – and stimulate the internationalization of the renminbi. Xu Luode has long been engaged in the practice of financial reform and development, he has a wealth of experience and deep theoretical knowledge. A short biography:

1983, Xu Luode graduated in economics at the Hunan University (the oldest institution in Chinese history, founded in 976 AD).

1983 to 1996, Xu worked at the China Banknote Printing and Minting Corporation, that carries out the minting of all renminbi coins and printing of renminbi banknotes for the People’s Republic of China.

1996 to 2003, Xu served as general director at the People’s Bank of China (PBOC).

2003 to 2007, Xu served at the People’s Bank of China Payment and Settlement Division.

2007 to 2013, Xu was president of China UnionPay, a bankcard association established under the approval of the State Council and the People’s Bank of China, where he gained experience to internationalize a Chinese financial institution. China UnionPay is one of the world leaders in payment services, reaching 3.5 billion people in over 30 countries.

October 2013, Xu was appointed as the chairman of the SGE and vice president of the China Gold Association. In December 2013 he announced the SGE international board.

According to this article Xu also currently holds a position at the China Society For Finance And Banking, China Numismatic Society and the Payment And Clearing Association of China.

Very important about this translation is the part where Xu points out that in 2013 Chinese mines produced 428 tonnes of gold and China net imported 1540 tonnes, adding up to nearly 2000 tonnes. This is exactly in line with the amount of total supply (/demand) at the SGE that year: 2197 tonnes. The 229 tonnes gap has been filled by scrap supply. With this statement Xu confirms that SGE withdrawals equal wholesale demand. (read this for a full analysis of the Chinese gold market)

Dai op SGE
December 2013. Left: Dai Xianglong, PBOC governor from 1995 until 2002, the man who initiated the reform of the Chinese gold market during the tenth five year plan. Right: Xu Luode, SGE chairman.

Translated by Soh Tiong Hum:

Xu Luode: China Should Become First Class International Gold Market

2014/5/16

Author: Lilin Xu | Source: China Gold Network

May 15 , Speaking at the “Fourth Commercial Bank Gold Investment Forum” in Hangzhou, Xu Luode, Chairman of the Shanghai Gold Exchange said the Chinese gold market is an important force, a positive energy in the international gold market but its influence does not correspond to its mass and scale. Therefore to accelerate the development of China’s gold market, he proposed building China’s “Shanghai Gold”.

Commenting on China’s voice in the international gold market, Xu Luode said that the right to price gold now lies in the West, namely New York and London. New York prices gold through bidding whereas gold price is fixed by five banks in London. However the London gold fixing price is now being questioned since these five banks are price-fixers while at the same time they are also the market’s most important participants.

Xu pointed out that the current gold market, especially the physical gold market is actually in the East, mainly in China. Last year China’s own gold-enterprises produced 428 tons; at the same time China imported 1,540 tons of gold, adding up to nearly 2,000 tons. China’s import volume is significant but China’s influence in the gold price is very small. Although influence was visible last year, real influence still lies in the West. Data such as Non-farm payroll, even a speech could impact the gold market in a big way. In this sense, the mass and scale of China’s gold market and its voice and influence in the international gold market do not match, so it should speed up the development of China’s gold market.

Xu pointed out that the development of China’s gold market should not be limited to an increase in scale, it also needs market development, product improvement, system development and risk prevention. Marketing, pricing mechanisms and international standards are all very important building blocks so every aspect of China’s gold market should join forces to speed up development.

Touching on the Shanghai Gold Exchange, Xu said the exchange has nearly 8,000 institutional investors and nearly 5 million individual investors.

As for Shanghai Gold Exchange’s future direction and potential, Xu said that there should be more and more investors to participate in the Shanghai Gold Exchange platform. Along with China’s economic development and growing personal wealth, the rising middle class wants to invest in capital markets, make financial investments, attend to wealth planning and also want to invest in the gold market. This is a judgment based on the general trend. Therefore the Shanghai Gold Exchange must grow to accommodate more domestic investors participating in the gold market, for example growing from the current 5 million investors to 6 million, 7 million, 8 million or even more. Key issues are marketing, sales, sufficient investor education and plentiful products.

Xu suggested that a platform such as the Shanghai Gold Exchange should be internationalized. Compared to international exchanges, the number of domestic exchanges is relatively few so the emergence of the Shanghai Gold Exchange was well received from all quarters; approved by the regulatory body, supported by the industry and acknowledged by society.

Xu said the Shanghai Gold Exchange is actively preparing for internationalization this year. Of course, the specific meaning of internationalization is to allow overseas investors to invest through the Shanghai Gold Exchange platform and to trade gold quoted in RMB.

Xu said that other currencies can be used as margin for transactions. Shanghai Gold Exchange will become an international platform with global investors. This will raise the standard of product assortment, ability to prevent risk, information technology and support market promotion and regulation.

Xu believes that China’s gold market should be the first class in the international gold market. China is fully qualified and may become the world gold market’s most important player.

When talking about the Shanghai Gold Exchange international board, Xu said that early interaction is very good with very good momentum. Many commercial banks, industrial enterprises and investment institutions all expressed interest in the international board.

Gold Price Manipulation Goes Mainstream On German TV

Public TV channel 3sat, which is a cooperation between Germany, Austria and Switzerland, broadcasted a short documentary on gold price manipulation on May 9, 2014. More and more mainstream news outlets are covering the allegedly gold price manipulation, after evidence is pilling up and many other market manipulations, like LIBOR, are coming out. From the Financial Times February 23, 2014:

Global gold prices may have been manipulated on 50 per cent of occasions between January 2010 and December 2013, according to analysis by Fideres, a consultancy.

The findings come amid a probe by German and UK regulators into alleged manipulation of the gold price, which is set twice a day by Deutsche Bank, HSBC, Barclays, Bank of Nova Scotia and Société Générale in a process known as the “London gold fixing”.

Fideres’ research found the gold price frequently climbs (or falls) once a twice-daily conference call between the five banks begins, peaks (or troughs) almost exactly as the call ends and then experiences a sharp reversal, a pattern it alleged may be evidence of “collusive behaviour”.

“The behaviour of the gold price is very suspicious in 50 per cent of the cases. This is not something you would expect to see if you take into account normal market factors,“ said Alberto Thomas, a partner at Fideres.

Oddly enough this article from the Financial Times was removed from their website two days after publication.

One of the most extensive researches that has been done on gold price manipulation is by Dimitri Speck in his book “The Gold Cartel”. On his website there is a chart that illustrates what Fideres’ found about the London gold fix. Dimitri Speck was, amongst others, interviewed by 3sat for the documentary.

London Gold Price Fix Manipulation Chart, By Dimitri Speck

I do not agree with everything that’s being said in the video, for example they state Chinese gold demand was 1066 tonnes in 2013, which is based upon numbers from the World Gold Council I happen to disagree with, or that it’s not necessary to invest in physical gold stored outside the banking system, though I thought it was worth sharing this clip with subtitles for the English speaking world. Germany is one of the few Western countries where there is a broad consensus about the importance of gold and sound money.

Press the captions button and choose English. Translated by Behfar Bastani.

Transcript:

Presenter: Good evening and welcome to the business magazine Makro. For many people, the purchase of gold represents a safe reserve for bad times. No wonder that, at the height of the financial crisis savers were queuing up at gold dealers. Throughout history, gold has served as a promise of reliability and stability. But today there are considerable doubts as to whether that promise remains valid, because an examination of gold prices reveals machinations fit for a financial thriller.

Narrator: London, the most important gold market in the world. Whether the price of gold rises or falls is determined here. Twice a day, a handful of bankers confer on the phone to fix the daily price of the precious metal. Thus arises the most important reference value for physical gold, used by businesses ranging from jewellers to gold mines. There is no public oversight for the “Fixing”. Apparently, this lack of restraint has led to serious manipulations of the gold price, as pointed out by a current investigation which has detected strange price movements spanning a number of years.

Rosa Abrantes-Metz: The setting of the gold fixing is, in my view, problematic. It opens the door for abuse and manipulation. There is absolutely no transparency in the arrangements made during the private phone conversations of this small group of participants as they decide what the price of gold should be.

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Narrator: Experts have long complained that this system is particularly susceptible to manipulation. Only five banks participate in the London gold fix, thus far including the Deutsche Bank. In the more extreme futures markets, where bets are made on gold price developments in future months, the quantities that exchange hands are of quite different magnitudes.

Folker Hellmeyer: We have a situation where this market is dominated by three essential players, three banks, in the USA. These banks have a market share on the order of 80 percent. In other words, we are talking about an almost monopolistic structure which of course also provides the power to manipulate the market.

Narrator: And which power is apparently being abundantly used. The futures market, intended to provide predictability and stability for future prices, is controlled by the following three banks: HSBC, Citibank, and JP Morgan. Their tool: paper gold securities.

Thorsten Schulte: It is possible to simply sell scraps of paper, thereby creating fear, especially fear among those who possess gold in its physical form, and who may then arrange to sell their metal, eventually resulting in such a a wave of fear …

Narrator: The gold price has been attacked in this fashion time and again, often with massive price declines within a matter of a few minutes. Yet, there is quite a bit more to the story.

Dimitri Speck: Gold is the opponent of debt based moneys, i.e. currencies, and in particular the US Dollar. Therefore, the US Federal Reserve has an interest in a weak gold price, and the US government protects the manipulation of the gold price by the private banks.

Narrator: For years, the US Federal Reserve has served as the lender of last resort. Gold must be weak if a loss of confidence in the US Dollar is to be averted. It has been difficult to prove that this is a rigged game with a stacked deck, but if the gold market manipulations are indeed encouraged in addition to being condoned, that would explain why oversight bodies have thus far turned a blind eye to it, despite years of massive conspicuous activities in the futures markets, as with the gold fixing in London.

Presenter: Incidentally, the Deutsche Bank intends to withdraw from the gold fix. As of now, no other bank has expressed an interest
in filling that spot. Too many banks are scared to damage their good reputation in London. Gold is a speculation commodity with a high symbolic power. Its price is therefore strongly influenced by many fears and hopes. Here are a few facts about that from our Makroskop.

Narrator: 31.1 grams, the weight of one ounce of refined gold. The precious metal is regarded foremost as protection in times of crisis. Gold climbed rapidly during the financial and economic crisis. Currently gold trades for about USD $1300 per ounce. Yet the more hopes grow for an end to the international economic slowdown, the more the price of gold declines. The US government continues to hold the largest governmental gold reserves at 261.6 million ounces, over 8100 metric tonnes. The US is followed by Germany, Italy, France, and China. But the largest demand comes from the Middle Kingdom. From gold coins to gold bars, the Chinese are accumulating large quantities. In 2013 the Chinese acquired 1065.8 tonnes, moving for the first time ahead of the Indians who purchased 974.8 tonnes in 2013. Jewellery accounts for the highest portion of the demand. In China, jewellery sales have tripled since 2004. They represent about 30 percent of worldwide demand. About 400 tonnes was purchased by businesses. In particular, China’s electronic manufacturers need industrial gold for production. Meanwhile, in the mining sector, China has risen from being a small player to become the number one gold producing country. In the past tens years, Chinese gold production has more than doubled from 217 to 437 tonnes.

Presenter: Today, the course of the gold market is being set by China. What are the worldwide consequences of this? Let’s talk about that with the chief editor of the Frankfurter Börsenbrief.

Presenter: A very good evening to you, Mr. Bernhard Klinzing. These days the flow of gold seems to be from the west to the east, as we have just seen. There are considerably more buyers in Asia than in the developed western countries. What do you attribute this to?

Klinzing: The reason is that India and China, which together make up half the gold market, do not have state provided elder care, which is valued differently there. Inflation fears are another factor. “The Chinese are the Germans of Asia”, it is said, and so they sit on gold.

Presenter: We have seen that the price of gold is heavily manipulated. There are manipulators that are apparently backed
from the highest places. Do you believe that, or do you regard it as a conspiracy theory?

Klinzing: I don’t believe that based on the Deutsche Bank and the London fix, but based on what we just saw from the Americans I absolutely do see that danger, because there is a quasi “Edward Snowden”. His name is Paul Roberts and he worked at the US treasury department and he has confirmed that the Fed, together with a number of banks, are preventing gold from rising above $1400 per ounce by continually providing gold bids which put downward pressure on the price.

Presenter: Given the unsound loans that came to light in the Libor scandal or the forex markets, do you believe that this is only the tip of the iceberg in the gold trade?

Klinzing: I would say that we are only seeing a snow ball from the iceberg while a lot more is hidden at the bottom. The banks earn a hefty sum whenever they fix the gold price by as little as 1/10th of a US Dollar upwards or downwards. You can see that with Goldman Sachs who published studies predicting gold’s decline to $950 per ounce while at the same time increasing their own gold positions by 20%. That does not match up. Presenter: What are some consequences for other market participants? You stated that the banks are lining their pockets, but what are some of the consequences?

Klinzing: Yes, there is a hedge fund manager by the name of William Kaye who has said that the German gold is no longer stored in the vaults of the Fed in New York, but has already found its way to China because the Fed needed the gold in order to carry out its market manipulations. This is as yet only a suspicion, and it may even be a conspiracy theory, but the Germans were denied an opportunity to touch or take samples of their own gold in New York.

Presenter: One could hardly think up a better plot for an economic thriller. I would like to talk about investors again. Is gold a good investment for the, let’s say, small investor?

Klinzing: One should not construct a portfolio with only gold, that much should be clear. But of course gold is a very attractive portfolio addition, whereby investors can insure the value of their portfolio against currency risks. Because if the Euro rises, the value of gold falls, so you can participate only less than possible, therefore invest always in a currency protected fashion.

Presenter: How can I do that as an investor?

Klinzing: There are certificates for doing this, there is no need for an investor to store gold in their own vault or under their pillow. For that there are very good solutions on the financial markets.

Presenter: Before we wrap up, what are your thoughts on how the gold price develops further from here?

Klinzing: We can see that in China the standard of living is rising, the middle class will grow from 300 million people to 500 million by 2020, and urbanization is accelerating. This means that there will be much more demand for gold from China, as well as from India. I don’t believe that gold will break $1400 per ounce this year, but we will see a new gold rally in the next few years.

Presenter: An overview of the gold price from Bernhard Klinzing of the Frankfurter Börsenbrief. Thank you for being on the show with us tonight. Dear viewers, if you have any questions for our studio guest, please visit the Makro blog where Mr. Klinzing will be available for a little while longer after the show. On our homepage you will also find additional background material on the topic of gold.

In Gold We Trust

Internationalization Renminbi Requires Increase In Gold Reserves

I present another intriguing translation, this time from an article by Tan Weihuan “China Gold News” Chief Researcher on the internationalization of the renminbi. What I find interesting is that according to the author China or any other of the BRICS countries in the short term are not interested in a gold backed currency (I share his opinion). There is a difference between backing and supporting a currency with gold. Backing means a fixed price, for example one gram of gold is one yuan. For China a gold backed renminbi is completely unrealistic at this point because the renminbi is still in it’s infancy – capital controls need to be lifted, full convertibility needs to implemented, etc. Next to the fact that the Chinese would have too little influence over the exchange rate of a gold backed renminbi should it be in full effect any time soon, which is nor desirable.

However, China has a great interest to support the renminbi with gold, having an x amount of tonnes at the PBOC, to give their currency trust and credibility. This is needed for the renminbi to be accepted worldwide. The euro and the dollar wouldn’t be reserve currencies if they weren’t supported by thousands of tonnes of gold. It’s very clear the Chinese recognize the monetary value of gold and the purpose it serves in financial markets, but they take it one step at a time. For the years to come the schedule of the PBOC is to accumulate gold mainly for the internationalization of the renminbi (compete the US dollar) and to diversify and hedge their exorbitant US dollar reserves. At the same time the Chinese government is stimulating its people to hoard gold for wealth preservation.

Though I’m convinced gold will officially return into the global monetary system within five to ten years, as all fiat roads are a dead end, in what way remains to be seen. There are many types of gold standards and it also depends if the transition will be led top-down or bottom-up.

Translated by Soh Tiong Hum.

Internationalization Renminbi Requires Increase In Gold Reserves

Author: Tan Weihuan “China Gold News” Chief Researcher | Source: China Gold Network 2014/3/21.

To internationalize the renminbi increasing gold reserves is a very important condition because it can increase the world’s confidence in the RMB and expand its circulation.

When central bank governor Zhou Xiaochuan talked about the internationalization of the renminbi (RMB) recently, he pointed out: “Pace and timing of RMB internationalization will not be pre-arranged…making the internationalization of the RMB happen is a long process.” This reflects the country has considered the complexity and difficulty of internationalizing the RMB.

As we know, the US takes the initiative in global financial markets by imposing the US dollar on the whole world, and greatly benefits from this position. When the financial crisis came, the US escaped by printing money massively yet did not suffer inflation because the Dollar is the main reserve and trade currency in the world.

Although China holds nearly $4 trillion in foreign exchange reserves and more than a trillion dollars in US Treasury bonds at the moment, the RMB’s influence in the world is very small, not matching China’s position as the world’s second largest economy. RMB internationalization is a long process so we need to look at it historically. The RMB was not a hard currency in the past, wishing that it can quickly become an important currency to compete with the Dollar and the Euro is not practical. The euro was transformed from currencies such as the Deutsche Mark and French Franc so it already occupied a large market share. The RMB was developed from scratch so naturally needs sufficient time to build trust and a base for use. At the beginning of last century it took the US a long time to overtake the currency hegemony from Britain. At this moment the strength of China and that of United States is still far apart.To internationalize the RMB, increasing gold reserves is a very important condition because it can increase the world’s confidence in the RMB and expand its circulation.

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I do not think it is desirable as some people said, to establish a BRICs bank on a gold standard. That is because implementing a gold standard implies that our country has to combat the volatility of the international gold market; the RMB would fluctuate along with the price of gold. Historically, only the post-WWII US was able to peg its currency to gold because the US held 70 percent of the world’s central bank gold reserves, over 20,000 tons of gold and economic strength in pole position. But as other countries developed their economic strength after the war, the gold standard became a burden for the US. When gold price was high, other countries sent their gold to the US to exchange to dollars; when the gold price was low, they bought gold from the US. After a lot of money printing, the US lost its gold and eventually had to remove the gold-peg.

The essence of RMB internationalization is exporting the Yuan, that is to exchange paper currency for goods. Other countries wanting to hold the Renminbi must offer goods to exchange, whereas China is just paying money – which is like writing a promissory note. China aims to win market share predominantly from the US dollar, slowly but surely. Too quickly and the US will resist strongly; it needs to be done slowly and steadily like a boiling frog. Therefore Zhou Xiaochuan said this will be a long process.

Since China is going to benefit, we should also let other countries benefit (a win-win situation), unlike the US which is passing the buck; buying foreign assets when the dollar is strong and then buying back dollars when it is weak, thereby passing financial and economic crises to other countries.

In Gold We Trust

Golden Ruble Symbol Appears In Front Of Russian Bank

Silverdoctors published an article on April 9, 2014 titled: PUTIN SENDS THE WEST A GOLDEN MESSAGE: CENTRAL BANK OF RUSSIA CHANGES LOGO TO GOLDEN RUBLE. The article presents a “Google Translate” from the Russian website 1prime.ru and states the Russian central bank has changed it’s logo into a Golden Ruble. From Silverdoctors:

According to reports from Russian media, Putin appears to have sent the west a golden message in the aftermath of JPMorgan unilaterally deciding to block an official Russian wire transfer, as the Central Bank of Russia has introduced a new logo, which just happens to be a gold ruble.

Officials stated on the new logo: Golden Badge of the Russian national currency, officially adopted by the Central Bank of Russia, will symbolize a sign of stability and security of the ruble gold reserves of the country.

The article suggests this to be the new logo:

Russia gold bar

The first thing I noticed was that in the original Russian article I couldn’t find the new golden Ruble logo displayed by Silverdoctors. In order to get closer to the bottom of this I decided to ask a Russian friend of mine, who has no expertise in politics or economics, to translate the original Russian article:

Golden Ruble symbol appears in front of the central bank of Russia

Moscow, march 30- RIA News. A symbol of the Russian ruble appears on sunday in front of the office of a Russian joint-stock bank, organizers said.

The action took place at 15.00 in front of the bank Perevedenovskom lain in the center of Moscow (near metro “Baumanskaya”).

A golden badge of the Russian national currency officially adopted by the CBR will symbolize a sign of stability and security of the ruble gold reserves of the country – said the organizers.

Thus participants installation intends to express support to the Russian bank, who decided to work exclusively for the domestic market and only with one currency, the national currency of the Russian Federation, the Russian ruble.

US authorities in response to accession of the Crimea to the Russian Federation imposed sanctions on 20 Russians and Russian banks, including the thirty largest in the country. Consequence of the sanctions was the refusal of the international payment system Visa and Master Card to conduct non-cash transactions through Russian cards, worsening outlook on the banks and suspension of rating actions. On friday, the Bank announced that it will only work in Russia, and only with rubles.

The symbol of the Russian ruble, the letter R with a horizontal line, was approved by the Central Bank sovdirom in december 2013.

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Im fully aware that “my” translation is far from perfect, though we must conclude the message the original article contains is different from that of Silverdoctors. What actually happened was that activists supporting their banks in the fight against US sanctions, build a golden colored Ruble symbol out of wood and revealed it in front of a commercial bank, as we can see in the picture below. And no, I don’t think Putin funded this action. Here is more information.

Golden Russian Ruble

In Gold We Trust

Deposit Insurance System Will Increase Physical Gold Demand China

Within 2014 the State Council aims to implement a new deposit insurance system for its banks. While one might think this is meant to lower systemic risk, it’s actually meant as a step to shift risk from te government to its citizens. Handing the people the opportunity to be more responsible for their own financial health, introducing more laissez-faire. I present a translation from a Chinese commentator on this matter, published on March 21, 2014.

Notes from the translator, LK:

The fact the Chinese government is pushing to introduce a nation wide deposit insurance system in 2014 tells a lot; according to the author, we are in an environment of heightened financial uncertainty and default risks. As the West moves for bail-in legislations, the Chinese are heading in the opposite direction.

As Western economies become more and more policy and stimulus driven, socialist China is becoming more market driven, preparing to withdraw official support and let defaults occur to clean up malinvestments and unviable businesses. The first corporate bond default in history happened past February (2014).

Efforts to carefully move towards market driven mechanisms are introduced to the people as government guarantees will slowly be withdrawn, depositors are stimulated to investigate and seek ways to protect themselves.

The defensive nature of gold in the face of defaults is highlighted. This article concerns depositors, but we should be on the watch for signs that banks themselves are encouraged to hold gold as hedge against financial risks: for this hedge to be effective, the value of gold must rise by a large magnitude to make up for any such systemic losses – if official bailouts are to be avoided. This would mean that a large rise in the price of gold is implied in the policy!

gold.org.cn

Deposit Insurance System Will Increase The Demand For Physical Gold In China

2014 March 21

Author: Liu YuXiang, Research Director, Shandong Zhaojin investment company ltd.

March 5, Premier Li Keqiang in his government work report suggested that one of the main tasks this year is to deepen financial reform, including “the establishment of a deposit insurance system and improve the mechanisms of risk management for financial institutions.” On March 10, central bank governor Zhou Xiaochuan also said the deposit insurance system will be launched within 2014.

“Compulsory insurance”, “bounded compensation” and “different rates for different risks” are important aspects in the design of the deposit insurance system. Bounded compensation meaning that a policy holder will receive compensation in full if the amount is within the stipulated limit. With the introduction of the deposit insurance system, depositors, for the first time, will face the reality that bank deposits may not in fact all be safe and secure.

The limited compensation feature in the deposit insurance system is expected to have bullish effects on the price of gold. In the minds of the Chinese people gold is a hard currency, the asset of minimal risk. For a long time, under the planned economic system, China’s banks were not only riskless but also payed interest, hence the preferred investment channel for many. Under the socialist market economy bankruptcy has become accepted by the public not only in theory but also in practice. Subsequently this particular commodity currency, gold, operating for the potential risks of commercial banks has also been accessible to the public. The deposit insurance system will hike the risk awareness to the general public, with the market speaking out the fact that banks may indeed collapse as the official safety guarantee is withdrawn. People will also start to recognize the message that there are other ways and places, apart from banks, in which they should consider putting their money.

Gold is the most well known strategy against risk and is well recognized by ordinary Chinese people. The insurance safety guarantee may be set at RMB 500,000 which covers more than 99 % of the accounts. The deposits greater than this amount may go seek a type of capital guarantee investment. Although the gold price is now near a two year low, compared to other investment asset classes such as stocks and bonds, gold still has a considerable advantage; in times of heightened financial risk gold should perform better than other asset classes.

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Gold is an effective hedge against counter-party risks in deposit losses. After the launch of the deposit insurance policies, those not covered by the insurance guarantee will naturally be more aware of risks and will likely shift some assets into physical gold so as to guard against deposit defaults. Moreover, gold’s high value, stable physical properties and easy storage should make gold a first choice for wealth preservation purposes. Hence, the policy of the new deposit insurance system should raise China’s demand for physical gold, and is bullish for the gold price.

Gold’s safe haven attributes has received fresh attention recently as capital markets have become jittery again: The “11 ChaoRi” default is the first interest bearing corporate bond default in history, and it’s likely to be a first, not a last. More cases of default will definitely have an impact on global capital markets. After “11 ChaoRi”, copper and iron ore prices plunged more than 9 percent, global mining stocks took a dive, followed by market indices. The RMB has also lost value.

Let’s review the history of the United States deposit insurance system. In the 1930s the United States passed the Glass-Steagall Act in order to save the banking system, in 1933 the government established the FDIC bank deposit insurance agency. The deposit insurance system came into operation in 1934 to ensure stability, it was the the world’s first system of this type.

The Chinese economy is facing a lot of problems and we must establish a sound financial and social safety net as soon as possible, preferably before any banking problems surface because prevention is the best crisis management policy. We can see from the tumbling prices of various industrial raw materials and the loss of value of the RMB that China’s economic situation isn’t doing well. In all this, however, gold has stayed firm for the last 3 months. In this environment, the introduction of the deposit insurance system should be expected to push up the safe haven demand for gold.

In Gold We Trust

China’s Road To Secret Gold Accumulation

In august 2013 I published a translation from an article written by a Chinese gold commentator called Zhang Jie. In the article Zhang described how not only the US but also other western countries have been involved in manipulating the price of gold to control the international monetary system for decades. I suggest to read the full article – here are a few snippets:

…Gold leasing is an important innovation in the gold settlement system. Through continuous gold leasing the gold in the market can be circulated and produce derivatives, creating more and more paper gold. This is very significant for the United States. Gold leasing is a major tool for the Federal Reserve and other central banks in the West to secretly control and regulate the gold market, creating gold credit derivatives and global credit conflict.

…The purpose of gold leasing is not just to receive a rent, but it also provides the ability to short-sell gold, which allows central banks to interfere in the currency market.

…If the Fed’s large gold reserves are used in gold leasing, there will be a serious problem. Germany therefore will threaten the Fed’s dominant position by demanding their gold back; the Fed subsequently needs to withdraw the leased gold and thus could destabilize the market. This is a new credit game of international capital.

…The Fed probably has agendas aimed at preventing Germany to inspect its gold or to ship it back to Germany.

I recently came across another article by Zhang that I also found worth sharing. First you can read the article, then I will provide some comment. This article is dated 16-04-2013, but it must be a repost as the data in the text shows it had to be written Jan/Feb 2013. Everything in between [brackets] is written by Koos Jansen.

Translated By Soh Tiong Hum!

Zhang Jie: China’s Road To Secret Accumulation

2013-04-16  Author: Zhang Jie

Zhang Jie


Core hint: China may gradually acquire gold on the international gold market through non-central bank financial entities, the newly acquired gold shipped back to China to be converted into central bank gold reserves. Credit in various forms including gold reserves will support China’s Renminbi and its internationalization.

Unless military confrontation or economic sanctions take place between China and US, there should be little question about the safety of China’s gold reserves stored at the US Federal Reserve. The question of China’s gold is not its safety but rather to possess the ability to use it for market intervention, and to boost creditworthiness of the Renminbi.

 

Difficult To Bring Back Gold

Risk of losing China’s gold stored at the US Federal Reserve can be temporarily set aside because in comparison to China’s foreign exchange reserves, the risk to China’s foreign exchange reserves is larger than the risk of gold deposited at the Federal Reserve! Regardless of buying sovereign debt or depositing in the US financial system, there is risk of a mass default. A mass failure to fulfill obligation by Western countries should no longer be called a default but a crisis. Cash deposited inside the financial system has even more danger. Western banks can go bankrupt, even large corporations like Lehman. Therefore risk has to be looked at in relative terms, not just absolute ones. The gold question should be looked at from the angle of the global currency system. Whether gold should be stored in China has to be considered for the level of creditworthiness.

The PBOC operates on a ‘pool’ concept, which also needs gold. Considering the global credit game, it is highly necessary for China to develop her own gold reserves and must do so with a better strategy than Germany.

The US has already demonized China’s rise so if China were to ask to bring back her gold, it would surely lead to a tremendous confrontation. When China first shipped her gold to the US, it was meant for reform, opening up and removing US economic sanctions. To ask for the gold back now would be a political signal. China can wait to look at Germany’s outcome before considering to repatriate it’s own gold from the Federal Reserve. China does not yet have to pull her chestnuts out of the fire. If China were to make a fuzz about their gold, Western countries will point their fingers at China, but not to Germany because of their close relation.

pboc

Accumulating Gold To Convert FX Reserves

China can use its increasing foreign exchange reserves to buy gold continuously. When the US and European central banks are continuously leasing and short selling gold, China can buy this gold and take possession, adding them to domestic reserves.

It’s best to let domestic financial entities acquire gold rather than the PBOC, to create multiple positions in the domestic gold futures market, to create the impression of forced buying by private hands so as to shut off international opinion. 
Purchased gold is withdrawn from the futures market, stored with reserves held in core financial entities then moved to the PBOC for domestic safekeeping. Just like Western central banks use gold leasing and short sell gold, China also needs to employ deception to secretly accumulate gold in a timely manner.

It is a good time for China to use surplus foreign exchange reserves to purchase gold when central banks around the world are secretly leasing gold and short selling gold to prop up currency printing. During the 10 years after gold leasing was born [early eighties] the world sold gold short, while during the gold bull market short sellers in the gold leasing business covered their shorts. International gold price fluctuations after 2008 was when gold short selling commenced again, especially at the time when gold fell from USD 1900 and US and Western countries were running endless quantitative easing. With the gold price is running contrary to quantitative easing, it is highly probable that Western central banks or major institutions were short selling gold. With China acquiring gold till a currency crisis erupts and short sellers need to cover their position, international gold price will certainly rally, possibly resembling eighties like fluctuations. It is therefore a tremendous opportunity for China to buy gold now to hedge against risk from a global currency crisis.

China in possession of large amounts of gold, China has secretly accumulated more gold, is a way to fight developed countries that are depreciating their currencies with quantitative easing; China’s gold accumulation gives them caution about short selling gold and currency printing. This is the most effective means to protect China’s foreign exchange reserve wealth from the threat of the Western financial hegemony.

Great Wall of China

China’s GDP and foreign exchange reserves already exceed Germany’s. Therefore China must possess effective control over gold volume not less than Germany’s gold reserves. At the current price of USD 1700 per ounce, one ton of gold is worth USD 50 million. When gold rises to USD 2500 per ounce, one ton of gold is worth USD 75 million. If China brings in 10,000 tons, foreign reserve spending is merely USD 800 billion but this volume is roughly 30% of gold in global circulation [he means global official reserves!] and is going to be pole position in global markets. Spending such a small expense to swallow such a massive gold position is only possible when the world is short selling. Otherwise price will go sky-high when you buy 10,000 tons! Buying US government debt with China’s current foreign exchange reserves at USD 3.3 trillion yields less than the 0.25% Fed Funds Rate. With this very low yield, buying gold is a good deal.

More than 80% of the PBOC’s currency in circulation is foreign exchange. Depreciation by foreign currencies such as US Dollar forces Renminbi to lose its purchasing power and increases turbulence. This was the reason why China imported inflation years ago. If China buys gold in large amount now, she can choose to support the value of Renminbi with gold in future. Purchased gold will support Renminbi creditworthiness. At the moment, Renminbi’s creditworthiness is supported by the central bank’s foreign exchange reserves but the creditworthiness of foreign exchange in its possession is a function of the issuing country, not China. Supporting China’s creditworthiness is not just about buying gold but also buying China’s sovereign debt, government debt, core industry debt, Chinese real estate, Chinese rare earth, tungsten, antimony and so on. However, besides foreign exchange gold and precious metals are the most appropriate for use overseas to support Renminbi’s export and international policy.

The foreign exchange standard has more problems than a gold standard. The Renminbi wants to be internationalized and China wants to be wealthy and strong. If the Renminbi issuance remains linked to the US Dollar, then the Renminbi will just resemble many so-called international currencies, becoming merely a proxy of the US Dollar, unable to match the creditworthiness of the US Dollar. Internationalization of a pegged-Renminbi is a make-believe internationalization, just like the Hong Kong Dollar, freely changeable but confined to linked rates.

______________________________________________________________________________________________________

Though he’s not a politician Zhang provides us with interesting insights about China’s monetary policy.

My thoughts:

Zhang writes; “there should be little question about the safety of China’s gold reserves stored at the US Federal Reserve” (I asked my interpreter if this is really what he wrote, he really did..), while he clearly states these reserves held by the Fed are leased out and are thus NOT save. A few sentences later he writes; “Risk of losing China’s gold stored at the US Federal Reserve…”. In fact the rest of the article is about the importance of the PBOC holding official gold reserves in the mainland to strengthen the Renminbi. I don’t understand why he wrote the gold is safe in the US in the beginning.

“When China first shipped her gold to the US, it was meant for reform, opening up and removing US economic sanctions.” This underlines the dirty game the US is playing. It demands countries to store a part of their official gold reserves at the New York Federal Reserve so ultimately only the US controls the global currency market. According to this article, written in January 2013 by Liu Zhongbo from Agricultural Bank of China, at least 600 tons of Chinese official reserves are stored at the Fed.

“It’s best to let domestic financial entities acquire gold rather than the PBOC, to create multiple positions in the domestic gold futures market, to create the impression of forced buying by private hands so as to shut off international opinion. Purchased gold is withdrawn from the futures market, stored with reserves held in core financial entities then moved to the PBOC for domestic safekeeping.” I fully understand the PBOC is buying gold through proxies, however all my sources in the mainland ensure me the PBOC would never (indirectly) buy at the Shanghai Gold Exchange, which is the only domestic futures/deferred market where significant amounts of gold are being withdrawn from the vaults. On the Shanghai Futures Exchange withdrawals are neglectable. Maybe Zhang’s approach is wrong here.

The PBOC wants to diversify it’s FX reserves (USD) in gold, all gold on the SGE is quoted in RMB. It would make more sense for the PBOC to buy gold abroad in exchange for dollars, this would also circumvent SGE premiums. On the Chinese Foreign Exchange Reserves of the People’s Republic of China wikipedia page (not on the English page) it states:

中国大陆外汇储备作为国家资产,由中国国家外汇管理局及中国人民银行管理,实际业务操作由中国银行进行。

The FX reserves of the Chinese mainland are State-owned assets and managed by SAFE and the PBOC. The real operations are done by the Bank of China.

The Bank Of China is a commercial state-owned bank and LBMA member, just like ICBC. It’s more likely the PBOC would make purchases through these channels.

Precious Metals Aspirations Of The Biggest Bank In The World: ICBC

Notes from LK: Below you can read an interview with the head of the precious metals department of ICBC (Industrial & Commercial Bank of China), the world’s largest bank by assets and market cap. In a way it’s like the other side of the memo from the Chinese Government on gold policy we published earlier. On one hand, you see the policy directives in the memo carried out in practice. On the other, you can detect that this is just what the policy makers want to hear,  how it’s the bank’s proud mission to bring the country into a stronger position in the international capital arena. Note the way they see that international capital markets and the players are intricately related to gold. Whichever way, they aspire to be a global player with their own full set of world-class systems and infrastructure. Being the world’s largest bank, what can stop them?

Translated by LK in Hong Kong (originally posted on www.gold.org.cn):

The “Chinese dream” of ICBC’s Precious Metals Department  – an interview with Zhou Ming

January 7, 2014
ICBC logo “In case of changes in the market environment, we must prepare to meet the different needs of innovative products and services.” Zhou Ming, head of the precious metals department for ICBC, summarizes.

International gold prices fell sharp on uncertainty of Fed monetary policy changes. Most participants in the gold market in 2013 have gone frightened. In charge of a leading precious metals business unit for the country, Zhou Ming has never allowed his team to be lost in confusion. Two years ago ICBC foresaw the possibility of large scale volatility in the gold market and started developing products, services and marketing to prepare for this. ICBC launched gold accumulation schemes, swaps, forward hedging, leasing/financing, collateralized loans and other financial services ahead of time. Developing to ongoing investment and consumption needs of the market, which produced good business results. For retail and institutional investors his department also launched products that adapt to the market. In 2013, ICBC physical gold sales increased by more than 80% YoY, the growth rate of the entire line of business also grew more than 30% over the previous year.

The bank’s precious metals department has many natural advantages. With more than 300 million customers and a more than 17,000 points sales network, the rapid rise of it’s business isn’t surprisingly. More importantly, large banks have many operational advantages. Corporations have experience in trading in the spot market, while banks can participate in the international market through five lines of businesses available to them: physical dealing, trading, financing, leasing and wealth management. Additionally, international commodities business requires cross-border, cross-product, cross-market, on-shore/off-shore, exchange/OTC spot and futures trading capabilities. Compared to other institutions, banks have more all-round global network transaction capabilities. This is also why the precious metals departments are growing so fast in Chinese banks.

Zhou Ming’s confidence is not limited to this. For him, the growth of the precious metals business is not accidental. Aside from ICBC’s management forward-thinking and advantages from being a bank, it’s also because in China’s internationalization process banking institutions are required to play this role.

When the precious metals department was established, ICBC chairman Jiang Jianqing said: “We have the ambition that ICBC becomes a world-class commercial bank in precious metals investment management.”

When serving as a general manager of Shanghai Industrial Investment (Holdings) Finance in Hong Kong, Zhou Ming experienced the Asian financial crisis, seeing the Hang Seng Index and the company’s shares tumble but couldn’t do anything about it. “A business manager under a planned economic system has no idea about financial crises in free economies”, he recalled, still feeling the fear. “It was frustrating and painful, when each blow came, no matter how you try yourself to face it, it ends up in defeat. it’s humiliating.” That taught him how slow and passive Asian capital markets are in the wider international landscape, and let him witness for the first time how miserable it is to be weak in the merciless international capital markets.

“Too few people take part in the actual Wall Street transactions. Too few understand the operations in this international game. Too few participate in the global flow of capital transactions. We didn’t know what was happening until after the facts. We were besieged and were only part of the losers.” Zhou Ming sighed. “I thought, one day China enters the international stage, we will need more people to participate in understanding the characteristics of capital flows, so we don’t have to be so passive.”

Now Zhou says, “I drive our traders to work on scale and quantitative problems of our platform for the possibility of taking part in international transactions.” In addition , ICBC has been introduced to Wall Street private equity and global financial transaction specialists, research models, product planning, and ways to analyse counter-party moves. Over the past year, our precious metals department has greatly benefitted and has become a radar through which to monitor markets.

Today, the establishment of the Shanghai Free Trade Zone has provided an additional stimulant for our department. “The State is building an open market right at our door step, which lets us test the water and practice before swimming. We will use this to learn some skills.” he said.

According to Zhou, ICBC’s precious metals department is working with HSBC, JP Morgan Chase, Brink, Metalor and other professional logistics providers, manufacturers and warehouse operators to communicate and learn about storage, transport, monitoring etc. If successful the ICBC precious metals department will have a a repository that is up to international standards for any insurance purposes in the FTZ in 2014.

This aside, Zhou Ming is also constantly working to expand his territories in the international area. In the first half of 2014, his department will have a trading exchange center in Hong Kong, to help settle with demands from Southeast Asia. “Because the USD can be used for settlement in Hong Kong, it is more direct and entirely on an international standard. This helps integrate the global trading capability of Hong Kong to supply a better internationalized product for South East Asia including China.”

For the future, Zhou Ming’s goals are clear and simple: to continue to build the precious metals “battleship”, heading towards international markets. “In 2013 China became the world ‘s largest gold producer and consumer, there is no reason for it not to have any voice in international price fluctuations.” Zhou Ming said, “This must be the aim of ICBC, to service the market and our customers competitively.”