Tag Archives: Shanghai

Shanghai Gold Benchmark Price – New Kid on the Block

Exactly 19 months to the day after the International Board of the Shanghai Gold Exchange (SGE) held its first full trading session on 19 September 2014, the Shanghai Gold Exchange launched the Shanghai Gold Benchmark Price auction on 19 April 2016. In China, the number 19 is very auspicious since it consists of lucky number 1, which means origin or beginning, and lucky number 9 meaning everlasting, eternity, or longevity.

In another example of calculated Chinese planning, the SGE first announced plans to launch its own gold fixing auction on 11 March 2015. This was the week immediately prior to the launch of the LBMA Gold Price auction on 20 March 2015, an event which occurred without any Chinese banks being present in the initial participant list. This lack of Chinese banks as initial participants in the LBMA Gold Price auctions was despite the Chinese banks having made it clear in October 2014 that they wanted to be present in the London auction on launch day:

“It’s been very welcome to see that quite a few banks in China are very interested in taking part. They said they definitely wanted to be there on day one for gold” [Ruth Crowell, LBMA CEO, October 2014 interview with MetalBulletin quoted here]

Two Chinese banks eventually joined the LBMA Gold Price auction, Bank of China on 22 June 2015, and China Construction Bank on 30 October 2015, with Industrial and Commercial Bank of China(ICBC) tee’d up to join the LBMA Gold Price auction next month on 16 May 2016. However, sources in the gold market have indicated that the Chinese banks, and others, had difficulty establishing the necessary credit lines with the incumbent bullion banks that are a LBMA perquisite for being a direct participant in the LBMA auction. This need for bilateral credit lines between auction participants is not something that the Shanghai Gold Benchmark Price suffers from, since it is using a central clearing model, something that the LBMA have paid lip-service to but that has never materialised (nor will it if the LBMA has its way).

SGE bar

The Shanghai Gold Benchmark Price – Details

The Shanghai Gold Benchmark Price, which I’ll abbreviate to SGE Gold Fix, is a twice daily auction held on SGE business days at 10:15 am and 2:15 pm (Beijing Time). All time zones in China are officially the same time zone (and run on Beijing Time), with Shanghai Time equivalent to Beijing Time.

The SGE Gold Fix auctions use the exchange code SHAU, and run on the electronic SGE trading platform using a ‘centralised pricing trading’ auction model. The auction is for physically-delivered 1 kg lots of 99.99% purity gold or higher, quoted in RMB per gram, with a tick size of RMB 0.01. Delivery is in the form of 1kg standard gold ingots of fineness 999.9 or higher at SGE certified vaults. For the SGE Gold Fix, standard gold is either gold from an SGE approved refinery, or gold from a LBMA approved refinery. Settlement / Delivery is two days after trade date i.e. T + 2.

At this juncture it is important to emphasise that the Shanghai Gold Benchmark Price is a centrally cleared auction on the largest physical gold exchange in the world, that delivers real physical gold bars at any of the SGE’s 55 certified vaults. Shanghai Gold Exchange uses 55 certified vaults across 36 Chinese cities for gold storage. Unlike the LBMA Gold Price auction which just settles and clears its trades as unallocated gold that merely exists as a book-keeping entry in the database tables of the LPMCL’s AURUM system.

The objective of the SGE Gold Fix auction is to arrive at a ‘Benchmark Price’, which is a price at which supply and demand reach a balance, while allowing a certain imbalance (less than 400 kgs) to remain. The overall auction concept is therefore similar to the LBMA Gold Price auctions in London. However, there are many features unique to the Shanghai auction. The SGE Gold Fix involves a ‘Reference Price’ which is used as the auction’s initial opening price. This reference price is derived from prices entered into the trading system by two specific groups of auction members during a 5 minute pre-auction window period called the ‘Reference Price Submission Window’ which runs from 10:09 am – 10:14 am for the morning auction and from 2:09 pm – 2:14 pm for the afternoon auction.

These two sets of members are ‘Fixing Members’ and ‘Reference Price Members’. All of the Fixing members are financial institutions. The Reference Price members include gold mining companies and gold jewellery companies. The logic of obtaining opening reference prices from both fixing members and reference price members is that the SGE feels it will minimise price manipulation and price collusion since the reference prices submitted include a broader set of entities (i.e. include non-financial entities). This is a clever ‘checks and balances’ approach that is lacking in the LBMA Gold Price auction.

The Members

At launch, there are 12 Fixing Members and 6 Reference Price Members. The 12 Fixing Members are all banks, 10 of which are pure Chinese banks. These 10 Chinese banks are the Big 4 state-controlled banks in the Chinese Gold Market, namely Bank of China, China Construction Bank, Industrial and Commercial Bank of China (ICBC) and Agricultural Bank of China, followed by Bank of Communications, and also Industrial Bank, Ping An Bank, Bank of Shanghai, Shanghai Pudong Development Bank, and China Minsheng Bank.

The final Fixing members are local entities of 2 foreign banks, namely Standard Chartered Bank (China) and Australia and New Zealand Bank (China) (ANZ). Both Standard Chartered and ANZ hold gold import licenses into China, as does HSBC, however, there is no indication as of yet of HSBC becoming a Fixing Member. This is despite a report in January that China would penalise in some way a foreign bank with a gold import license if it did not join the SGE Gold Fix. Two of the 12 domestic bank holding gold import licenses, Everbright and China Merchants Bank, are also absent from the SGE Gold Fix member list. Perhaps in time, they, along with HSBC will sign up.

The 6 Reference Price members are Chow Tai Fook, one of Hong Kong’s largest jewellery companies and which also has a huge Chinese retail presence, China National Gold Group Corporation (China Gold), the largest of the Chinese gold mining companies, Shangdong Gold Group, another large Chinese gold miner, Shanghai Lao Feng Xiang, a large and well-known Chinese jewellery company, Bank of China (Hong Kong) Ltd, the RMB clearing bank in Hong Kong, and the SGE’s appointed settlement bank for the CGSE-SGE Gold Connect betwen the SGE and CGSE in the Hong Kong Gold Market, and MKS (Switzerland), the Swiss gold trading group that owns the PAMP gold refinery and also owns New York based MTB.

The above is just an initial list of participants that have joined so far. The SGE maintains that any qualified entity can join up in either the Fixing of Reference Price member categories. SGE stipulates that Fixing Member applicants are required to be financially-viable financial institutions that are either active on the SGE or active in the global gold market, while Reference Price applicants can meet one of a number of criteria such as “be a leading producer or consumer in the gold industry” or “be involved in the production, processing, trading, or investment of physical gold“.

SGE Benchmark

The Auction Mechanism

The Fixing members and Reference Price members submit initial reference prices. As to whether all members must submit a reference price is a moot point. Article 12.2 and 12.3 of the Rules for the Shanghai Gold Benchmark Price Trading state that the Fixing and Reference Price members “must provide market reference price at the designated time before the start of centralized pricing-trading“, however, the Shanghai Gold Benchmark Price White Paper (April 2016) describes a hierarchy of contingencies in deriving the reference price, two of which cover situations where less than 50% of members make a reference price submission.

The White Paper calculation methodology (algorithm) is as follows:

If > 50% of members submit a reference price, SGE calculates an arithmetic mean after disregarding the highest and lowest submitted price.

If < 50% of members submit a reference price, the SGE calculates an average (arithmetic mean) of all trades in the Au9999 spot gold contract that have been executed on the SGE during the timeframe for submitting reference prices.

If no trades were executed in the AU9999 during that time, the SGE takes the Shanghai Gold Reference Price from the previous trading session as the initial price. [this would be the previous afternoon benchmark price if applied to the morning pre-auction etc]

The Au9999 is the SGE busiest spot gold contractBased on this three-pronged approach, it would seem that the members are not all obliged to submit a reference price, otherwise the 50% threshold would never arise unless due to communication outages or similar. The only logical interpretation of the two documents is that if a member turns up to the auction (or logs in to the trading platform), then they are obliged to submit a reference price. If they don’t turn up, then there is no obligation. Notwithstanding this grey area, after the reference price is calculated the SGE then publishes the opening price.

Some readers will recall that ICE Benchmark Administration (IBA) uses a ‘human’ chairperson to come up with the opening price in the LBMA Gold Price auction using a number of price sources that ICE Benchmark Administration will not divulge. Nor will ICE Benchmark Administration divulge the identities of the panel of chairpersons that it employs to chair the daily LBMA Gold Price auctions. Frankly, this is a disgrace and a scandal, and shows that the Chinese auction methodology is far more transparent that its London counterpart. My hunch is that there are names involved as chairpersons in the current LBMA Gold Price auction that were also involved in the former London Gold Market Fixing Limited company which operated the London Gold Fixing auctions. Otherwise, why keep the identities a secret. No mainstream financial journalists in London will touch this particular story, although they are all aware of it. See BullionStar blog “Six months on ICE – The LBMA Gold Price” for further details about the lack of transparency in the administration of the LBMA Gold Price auction.

Once the opening price of the Shanghai Gold Benchmark Price is established using the calculated reference price, the auction begins, and participants and their clients submit their buy or sell orders and transaction volumes etc. The auction consists of a first round and possible subsequent rounds if supply and demand don’t reach a balance. There are two distinct time periods in each round, a ‘market tendering‘ session and a ‘supplementary tendering‘ session. The market tendering part is just the normal part of the round where all participants and their clients submit orders. The supplementary tendering session in each round only applies to the Fixing members, and allows them to submit supplementary orders against the remaining imbalanced quantity so as to try to reduce the imbalance to less than 400 kgs and so speed up the auction, because if the imbalance is shrunk to under 400 kgs, there is no need for an additional round(s).

The first round  consists of  a 1 minute market tendering session + a supplementary tendering session of 10 seconds. If the price is not balanced after the first round, the SGE trading system will adjust the price upwards or downwards depending on buy and sell orders, and then a new round begins. Any and all subsequent rounds consist of 30 seconds duration of a market tendering session + 10 seconds of a supplementary tendering session.

Once the imbalance is less than 400 kgs, it is shared out among the Fixing members. The price is then said to be balanced and the SGE then publishes the benchmark price. The ‘Shanghai Gold Benchmark Price’ now has its own web page on the SGE website here, with daily price lookup, daily, monthly and annual charting (which will make sense when the auction has been running for a while), and Trading Rules, Contract Spec and Q & A (to be uploaded, but some of which are already detailed in the Rules and White Paper linked above).

SGE Surveillance Committee

The SGE has also created an Oversight Committee to monitor and oversee the auction’s functioning. This Committee currently comprises 11 representatives from 9 organisations. Although the names of the representatives have not yet been published, the names of their organisations have. The SGE will have 3 representatives, and the 8 other entities will each have 1 representative. The list is as follows

  1. SGE  3
  2. ICBC  1
  3. Bank of China  1
  4. Standard Chartered Bank (China)  1
  5. ANZ Bank (China)  1
  6. China Gold Coin Corporation  1
  7. Baird Mint  1
  8. China Gold Association  1
  9. World Gold Council  1

Of the list of 11, seven reps come from pure Chinese entities, with the remaining four from two foreign banks, the World Gold Council and ‘Baird Mint’. All represented entities have connections with the SGE except it seems Baird.

The Oversight Committee’s remit is to monitor trading, clearing, delivery, in terms with SGE rules, analyse trading behaviour, examine conflicts of interest etc.

Central Clearing

The SGE uses central clearing of the trades executed in the SGE Gold Fix auctions and so there is no credit risk between participants. Under central clearing, the exchange becomes the counterparty to all buyers and sellers. This also avoids the need for participants to maintain bilateral credit arrangements with each other, and so easily allows the number of auction participants to grow, even exponentially. The lack of central clearing in the LBMA Gold Price auction is a huge barrier to entry for non-bullion bank participants and has been kept as such by the LBMA, even though ICE offers central clearing and has been well able to implement a centrally cleared model from Day 1 in March 2015. See ICE Executive Summary which summarises the winning ICE bid for the LBMA Gold Price wherein ICE discusses “moving to a centrally cleared model“.

The Purpose of the Shanghai Gold Benchmark Price

The Shanghai Gold Benchmark Price is but one more step in the growth and deregulation of the Chinese gold industry, and the internationalisation and extended use of the RMB. Much of this scene was set back in 2000 at the China Gold Economic Forum. It’s also a natural step for a country that is the largest gold producer, gold consumer and gold importer on earth. The SGE Gold Fix also provides China with a real role in global gold price discovery and creates the first proper transparent RMB denominated gold price benchmark, calculated within a centralised trading auction setting on an exchange.

An RMB gold price benchmark aids risk management and hedging in the domestic gold sector, and can also now be used within Chinese gold-backed derivative products, a function which the SGE has explicitly mentioned. So expect financial products to appear that use the Shanghai Gold Benchmark Price as a reference or valuation price. In China, where gold is correctly recognised as the ultimate money, there is also the prestige of having an internationally known global gold price benchmark, that will, in SGE’s words “enhance China’s voice in the global gold pricing market”.

In its White Paper, the SGE states that “the relationship between Shanghai Gold and Loco London Gold is non-competitive”, and it lists a number of reasons why this, on paper, is so, such as the London auction is for the OTC trading of 400 oz bars of 99.5 purity quoted in USD, while the Shanghai auction is Exchange-based trading for 1 kg bars of 99.99 purity quoted in RMB. While this is true, these are only ‘contract spec’ differences, and having a PBoC controlled gold benchmark that is not in London and not under the control of LPMCL clearing banks and the Bank of England is a much bigger change than purely differing contract specs.

The Chinese play a long patient game and more often than not just go ahead and do things / make things instead of just talking about doing things. The SGE and the PBoC have now set up another part of the infrastructure that can in time play a critical role in the global gold market as the Renminbi begins to internationalise. Whenever the Chinese Government and PBoC move to allow gold to be officially exported, this will really boost the new kid on the block benchmark.

I would not think that the Chinese will want to make waves with this Shanghai benchmark in the near future that would explicitly jeopardise their relationships with the London Gold Market. The fact that the luminaries of the global gold world were at the SGE Gold Fix launch ceremony and the China Gold Market Summit Forum on 19 April, much like they were at the launch of the SGE International Board in September 2014, attests to the fact that large players such as the World Gold Council, LBMA, MKS, ANZ and Standard Chartered are very much in a cooperative relationship with the SGE, the China Gold Association and the large Chinese banks. As the Chinese Gold Market continues to evolve, my view is that the Shanghai Gold Price Benchmark will naturally move into the ascendancy, and that its physical gold price discovery influence will subtly begin to show up the London Gold Market’s trading weaknesses (i.e. small % of physical traded), or alternatively, the Chinese will at some stage call time-out when ready, and allow the Shanghai Gold Price Benchmark to really shift up a gear to generate physical gold prices that will disconnect from the COMEX and LBMA pass the parcel shenanigans.

The IMF’s Gold Depositories – Part 2, Nagpur and Shanghai, the Indian and Chinese connections

Part 1 of the IMF’s Gold Depositories series explained the legal background as to why the IMF originally made the decision to hold gold at the Federal Reserve Bank of New York, the Bank of England, the Banque de France and the Reserve Bank of India.

See Part 1 for details, but as a quick recap, although the current IMF Rule F-1 on the location of its gold depositories states that “Gold depositories of the Fund shall be established in the United States, the United Kingdom, France, and India”, the original 1946 version of the rule, then called Rule E-1, said that “Gold depositories of the Fund shall be established in New York, London, Shanghai, Paris, and Bombay.

It is generally known that the central banks in some of these cities are indeed locations are IMF gold depositories, and the IMF will actually, on occasion, bring itself to confirm these facts.

What is less well understood however are the references to the cities in two of the word’s great gold markets, specifically, the reference to the Reserve Bank’s Bombay office, the transfer of IMF gold to another Indian city, Nagpur, and the fact that Shanghai was only removed “temporarily” and could, in theory, be reinstated as an IMF gold depository.

The Road to Nagpur

The original version of Rule E-1 was adopted on 25th September 1946, and then amended in 1956. This amendment in 1956 was triggered by the Reserve Bank of India (RBI), but it created some far-reaching implications for where the IMF’s gold can be stored.

The trigger for the amendment of Rule E-1 in 1956 was an initiative by the RBI to move their own gold from their Bombay office to a new office in Nagpur which they had just opened. Nagpur is a city in the very heart of India in the state of Maharashtra.

Nagpur in India
Nagpur, at the heart of India

In moving their own gold, the RBI asked the IMF if it objected to the re-location of the IMF gold at the same time. There was actually not much IMF gold held in Bombay, the only gold held there being India’s initial gold subscription to the IMF that had been transferred at the Fund’s inception, worth $27.5 million at $35 an ounce, or just over 24 tonnes. No other founding nation of the IMF had supplied gold to Bombay at that time.

In a 1956 staff document to the IMF Executive Directors, “Gold Depositories of the Fund”, the IMF staff explained the RBI’s move and recommended that the wording of Rule E-1 should be made more flexible so as to take account of future situations where other gold depositories of the Fund might want, or need, to hold gold at alternative locations in their respective countries, other than those locations already specified.

The IMF staff also proposed to the IMF Executive Directors that they should agree to the RBI’s request:

At the moment, the Fund holds the equivalent of US$27.5 million in gold with the Reserve Bank of India in Bombay. The Fund has received a letter from the Reserve Bank stating that it has recently opened an office at Nagpur, which is situated about 520 miles from Bombay in the interior of the country.

The office is in the Bank’s own building, and it contains a special vault for storing the Bank’s stock of gold. The special vault was constructed partly to enable gold to be stored at a comparatively safer place and partly to relieve the pressure on vault accommodation at the Bombay office. The Reserve Bank is transferring its own gold to Nagpur and inquires whether the Fund would object to the movement of the Fund’s gold.”

The staff document went on to explain the logistics of the move:

“The arrangements for transport would be made under the supervision of the military, and safe custody arrangements at Nagpur would be subject to the same security conditions as are observed at present in Bombay. The Fund’s gold would continue to be held under earmark, and the normal procedures which gold depositories follow in relation to the Fund would continue to be observed.”

A critical point in this IMF document, beyond the Indian gold transfer, is that the IMF staff viewed it as an opportunity to propose more general wording for Rule E-1 so as to allow IMF gold to be stored in any location within the designated countries. The Staff proposed to the Executive Directors.:

“Although Rule E-1 is not free from ambiguity, the more obvious reading of it requires that gold held in India shall be held in Bombay.

The question of the physical transfer of gold may be raised by other gold depositories of the Fund. For example, in the United States, there have been occasions when official stocks of gold have been held simultaneously in New York, Denver, San Francisco and Fort Knox.

The staff believes that it would be advisable to amend Rule E-1 so as to give the Fund more flexibility in dealing with a proposal of the kind made by the Reserve Bank of India. Accordingly, it recommends that Rule E-l should be amended…”

(Source: EBS/56/39, “Gold Depositories of the Fund”)

An IMF Executive Board meeting in November 1956 about the move of the Fund’s gold to Nagpur, approved on January 9th, 1957 (Meeting 57/1),  deemed that “it is agreed that the Fund’s gold held with the Reserve Bank of India shall be held at Nagpur.”

The Executive Directors also used the opportunity of the 1956 amendment to Rule E-1 to delete the reference to Shanghai as an IMF gold depository (‘without prejudice’). This is explained below.

And so, in 1956 the Rule E-1 sentence

Gold depositories of the Fund shall be established in New York, London, Shanghai, Paris, and Bombay

became

Gold depositories of the Fund shall be established in the United States, United Kingdom, France, and India

and the phrase “at places agreed with the Fund” was added as follows:

“The gold of the Fund shall be held with the depositories designated by the members in whose territories they are located at places agreed with the Fund”.

Reserve Bank of India, Nagpur
Reserve Bank of India, Nagpur

 

IMF gold, anywhere

Since the 1956 Rule E-1 persists into the current Rule F-1 (see Part 1), it opens up the possibility that IMF gold could be stored in any central bank gold vault (or other outsourced vaults) in any of the four jurisdictions of the US, UK, France and India, and even in China in the future if China looked to use its “without prejudice” option to be re-listed in the current day F-1 Rule list.

For example, the wording of Rule F-1 suggests that IMF gold held at the FRB New York vaults could be transferred to another Federal Reserve Bank vault as long as the other Bank had secure storage facilities.

Whether, in terms of Rule F-1, this transferability extends to US Treasury storage locations such as Fort Knox is unclear; the IMF staff document from 1956 seemed to think that US Treasury locations were feasible storage locations since it mentions them as indirect justification for changing the Rule E-1 wording.

There appears to be legal authority for the US Treasury and Federal Reserve Bank to use the Treasury’s Mint institutions for storing foreign central bank gold. Such arrangements were even being discussed as early as the 1940s as the following ‘Treasury Department, Inter Office Communication’ letter from a Mr. Luxford to a Mr. Dietrich makes clear:

“The quantity of gold available in New York for sale to foreign governments for earmarking by the Federal Reserve Bank of New York has declined to such an extent that it will soon be necessary to ship gold from Fort Knox to New York, or make other arrangements for earmarking.

It has been suggested that, to avoid the tying up of transportation facilities and the high cost of shipping, arrangements be made whereby the Federal Reserve Bank can, with the consent of the governments concerned, earmark gold while it is still in the Mint institutions.”

The letter goes on to describe a proposal whereby the FRB could earmark foreign central bank gold in the vault of the Denver branch of the FRB of Kansas City, or even lease private bank vaults in Denver, but if this didn’t solve the space issue, then compartments in Fort Knox and the Denver Mint were available:

“Mr. Howard has contacted the superintendents at the Fort Knox and Denver institutions and I am informed that the following spaces are available:

1. Fort Knox – two compartments which, when filled completely, could hold approximately $1,000,000,000 in gold.

2. Denver – three compartments which, when filled completely, could hold approximately $450,000,000 in gold.”

 Luxford concluded that:

“I believe that there is legal authority for the use of the mint institutions for the purpose outlined above.”

(Source: ‘Treasury Department, Inter Office Communication’, Sept 1943, Clinton Library, gold files)

Fort Knox model

So, there appears to be a legal precedent for foreign central banks, governments and international institutions to hold earmarked gold at US Treasury storage locations. These arrangements would be very useful if the US Treasury needed gold at the FRBNY and, for example, the Treasury conducted a gold location swap with the Bundesbank or IMF, swapping Treasury Fort Knox gold for Bundesbank or IMF gold.

The IMF is legally allowed to engage in location swaps for its gold and has done so numerous times in the past with entities such as the FRB and the BIS. Some of these IMF gold location swaps are covered in Part 3.

According to the current Rule F-1, IMF gold could also be stored, for example, in Bank of England provincial branch office vaults (assuming there are any of these vaults still operational). The Bank of England has in the past stored HM Treasury and other customer gold in its branch offices, for example in Liverpool, Birmingham and Southampton. Some of these branch offices have now closed but the Bank of England still maintains various agency offices across the UK.

In theory it’s possible that IMF gold could be transferred from the Bank of England’s London vaults to secure storage at one of the Bank’s provincial locations or even to emergency storage locations in England or Wales that have, at various times in the past, been considered by HM Treasury and the Ministry of Defence.

The IMF’s Article XIII, Section 2(b) also seems to open up the possibility that the IMF’s gold could be stored in other locations entirely, even in other countries. Remember that Article XIII, Section 2(b) states:

“(b) The Fund may hold other assets, including gold, in the depositories designated by the five members having the largest quotas and in such other designated depositories as the Fund may select”.

The IMF’s Articles will always have precedence over its Rules and Regulations, due to Rule A-1 which states

“A-1: These Rules and Regulations supplement the Articles of Agreement and the By-Laws adopted by the Board of Governors. They are not intended to replace any provision of either the Articles or the By-Laws.”

There is another clause in Article XIII, section 2(b) referring to an emergency, which is pretty self-explanatory:

“In an emergency the Executive Board may transfer all or any part of the Fund’s gold holdings to any place where they can be adequately protected.

There is therefore plenty of legal scope for the IMF’s gold to be stored in locations that at first glance might not appear obvious.

 

Shanghai Surprise

The IMF Executive Board confirmed the five gold depositories of the Fund in November 1946, including the Central Bank of China, Shanghai. However, no IMF gold was ever held in Shanghai because no IMF member country (including China) ever deposited gold to the IMF at Shanghai.

The removal of the reference to Shanghai as an IMF gold depository during the 1956 amendment had its origins in 1949. In 1949 the IMF Executive Board discussed a proposal that Shanghai should be temporarily removed from the gold depositories list due to political instability in the country at that time.

The following Executive Board minutes illustrate the discussion of the proposal that was recommended by the Board Chairman Camille Gutt. The discussion involved Frank Southard (F A Southard), the US Executive Director to the Fund, who had helped plan the Bretton Woods conference in 1944, and Y C Koo, who was subsequently Treasurer of the IMF, and who was part of the nationalist Chinese delegation that attended Bretton Woods:

Gold Depository

The Executive Board considered a recommendation by the Chairman that, in view of recent developments in China, the Fund should remove Shanghai from the list of gold depositories for the time being.”

“Mr. Southard said he assumed the action would be of a temporary character. Mr. Koo said his Government had no objection on the understanding that the action was temporary. However, the Government would wish to reserve the right to raise the matter again with the Fund at an opportune time.

The decision was: In view of recent developments in China and under the emergency provisions of Article XIII, Section 2(b), Shanghai is for the time being removed from the list of depositories in which the Fund may hold assets, including gold. Members shall be so informed. It is understood that China may, at an opportune time, raise the matter again.”

(Source: Executive Board Meeting 465, 21st July 1949)

Central Bank Of China 1940s gold unit

While the decision to temporarily remove Shanghai as a gold depository had been taken in 1949, it re-emerged as an issue in 1956 when the amendment to Rule E-1 was being discussed at a meeting. This was because the Executive Board wanted to ensure that the changed wording to Rule E-1 did not prejudice the previous decision to temporarily remove Shanghai as a gold depository.

The Acting Chairman in the 1956 meeting was H. Merle Cochran, deputy Managing Director of the Fund. The Executive Director for China (representing the Taiwan based government) was Mr Tann:

The Acting Chairman stated that, in order to make it clear that the proposed action would not prejudice a previous decision temporarily removing Shanghai from the list of depositories, the staff wished to recommend the addition of the following paragraph to the decision proposed:

(c) The amendment of Rule E-1 as set forth in paragraph (a) above is without prejudice to the decision of the Executive Board at Meeting 465 (July 21, 1949)”

“Mr. Tann said he had no objection to the staff’s proposals and particularly welcomed the additional paragraph put forward by the management since it would leave no doubt that the 1949 decision was not being nullified.”

(Source:Executive Board Meeting 56, 29th November 1956)

The 1956 amendment to Rule E-1 was adopted by the IMF Executive Board on 9th January 1957, and then reviewed and accepted by the Fund’s Board of Governors at the 12th IMF annual meeting 1957 where Per Jacobsson, Managing Director and Chairman of the Executive Board highlighted to the Governors that

“On November 29, 1956, Rule E-1 was amended to provide for greater flexibility in the location of the Fund’s gold held with designated depositories.”

(Source: Draft letter by Per Jacobsson to the Chairman of the Board of Governors, twelfth Annual Meeting of the IMF)

On paper, the reinstatement of China as a gold depository of the IMF looks possible, but in reality would be complicated by a number of issues, not least the unravelling of claims and representations that could arise from Taipei and Beijing over the 1949 agreement with the IMF.

With Shanghai now re-emerging as a dominant player in the global gold market, its fitting that the story of the IMF’s Shanghai depository should not be forgotten even though it never really existed.

The Nagpur gold vault, which does exist, is itself a relatively forgotten IMF outpost.  But it still contains, or is said to contain, both IMF and Reserve Bank of India gold. For this reason, the Nagpur gold vault, and some of its details, will be the subject of a future post.