Up To $80 Billion Gold-Backed Loans Are Falsified, Chinese Auditor Warns

Tyler Durden's picture


As the probe into alleged fraud at Qingdao continues to escalate (with liquidity needs growing more and more evident as Chinese money-market rates surge), Bloomberg reports that China’s chief auditor discovered 94.4 billion yuan ($15.2 billion) of loans backed by falsified gold transactions, in "the first official confirmation of what many people have suspected for a long time - that gold is widely used in Chinese commodity financing deals." As much as 1,000 tons of gold may have been used in lending and leasing deals in China and Goldman reports that up to $80 billion false-loans may involve gold. As one analyst noted, this was unlikely to have a significant impact on the underlying demand for gold in China and as we have pointed out before, any unwind of the Gold CFDs would lead to buying back of 'paper' gold hedges and implicitly a rise in prices.


As Bloomberg reports,

China’s chief auditor discovered 94.4 billion yuan ($15.2 billion) of loans backed by falsified gold transactions, adding to signs of possible fraud in commodities financing deals.


As much as 1,000 tons of gold may have been used in lending and leasing deals in China, where commodities including metals and agricultural products are used to get credit amid lending restrictions, according to World Gold Council estimates.


Of the as much as $160 billion in transactions projected by Goldman, $80 billion may involve gold, $46 billion copper, $13.8 billion iron ore and $10.3 billion soybeans, according to a March 18 report.


Steps by the Chinese government to rein in credit by raising borrowing costs in recent years created a surge in commodities financing deals that Goldman Sachs Group Inc. estimates to be worth as much as $160 billion.


The Chinese agency that stockpiles strategic commodities is checking to ensure its copper purchases are free of collateral risks while the customs authorities issued new rules to help prevent goods being pledged multiple times as collateral, people with direct knowledge of these matters said previously.

How the deals worked...

In some commodities financing transactions, owners of raw materials sitting in ports use receipts from warehousing companies to get credit from banks, which they put to work in high-yielding investments before repaying the debt.


Other deals involve a Chinese buyer placing orders for commodities with overseas companies and then applying for a letter of credit from a lender, which they use to import the materials. The buyer can then sell the consignment in the domestic market and use the money onshore at a higher interest rate before repaying the original loan.

But the flow is expected to continue...

“This is the first official confirmation of what many people have suspected for a long time -- that gold is widely used in Chinese commodity financing deals,” said Liu Xu, a senior analyst at Capital Futures Co. in Beijing.




Mark To, head of research at Wing Fung Financial Group in Hong Kong, said the audit office’s report was unlikely to have a significant impact on the underlying demand for gold in China.




The global flow of bullion from west to east that’s helped to make China the world’s largest user will probably last for as long as two decades as rising incomes spur demand, according to the China Gold Association.

*  *  *

As we commented previously:

When we previously contemplated what the end of funding deals (which the PBOC and the China Politburo seems rather set on) may mean for the price of other commodities, we agreed with Goldman that it would be certainly negative. And yet in the case of gold, it just may be that even if China were to dump its physical to some willing 3rd party buyer, its inevitable cover of futures "hedges", i.e. buying gold in the paper market, may not only offset the physical selling, but send the price of gold back to levels seen at the end of 2012 when gold CCFDs really took off in earnest.


In other words, from a purely mechanistical standpoint, the unwind of China's shadow banking system, while negative for all non-precious metals-based commodities, may be just the gift that all those patient gold (and silver) investors have been waiting for.  This of course, excludes the impact of what the bursting of the Chinese credit bubble would do to faith in the globalized, debt-driven status quo. Add that into the picture, and into the future demand for gold, and suddenly things get really exciting.

Here's our previous epxlanation of gold's move... if we are right that somehow China managed to push gold lower via gold CFDs, then the unwind pushes gold higher:


Here's how that might work:

In the gold markets, the paper or synthetic 'demand/supply' dominates pricing as opposed to the non-precious metals which have at least a grain of fundamental sense to them still


Throughout 2012/2013 - as the gold CFDs were booming, Chinese demand for physical gold was soaring as the price plunged (due to the forward hedging required in the CFD transactions which pressured gold swaps/futures lower and thus dominated pricing)


As CFD unwinds hit en masse, these flows must unwind (cover hedges and ensure the underlying physical is there... and if not buy it)


This will pressure gold futures prices higher and because unlike in non-precious commodities where spot markets wag the tail of the futures markets - spot gold will likely be dragged higher also (as we know the demand for the physical has been high).

So unlike in the industrial commodities - where the CCFD unwind drives prices down as the image above shows, thanks to synthetic manipulation and domination of the paper gold (and silver) market, the opposite occurs in PMs.

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Thu, 06/26/2014 - 10:33 | 4897643 Meat Hammer
Meat Hammer's picture

The world has liquor dick. Blow already!

Thu, 06/26/2014 - 10:36 | 4897661 gh0atrider
gh0atrider's picture

Wooh-wee!  This is gonna be the big one!  As in a Fred Sanford style big one!

Thu, 06/26/2014 - 10:37 | 4897669 Top Gear
Top Gear's picture


Thu, 06/26/2014 - 10:51 | 4897724 camaro68ss
camaro68ss's picture

Keep stacking bitchez

Thu, 06/26/2014 - 11:24 | 4897874 BaBaBouy
BaBaBouy's picture

All GOLD News Indications Are That GOLD Would Be SOARING, Like $50. / $100. Per Day.

The GOLD "SUPER MANIPULATION" Continues ???????????????????

Thu, 06/26/2014 - 11:25 | 4897882 F0ster
F0ster's picture

Don't look a gift horse in the mouth!

Thu, 06/26/2014 - 12:21 | 4898119 Pinto Currency
Pinto Currency's picture


In the summer of 2013 the LBMA traded 290M oz of gold per day according to Goldcore http://www.zerohedge.com/contributed/2013-08-02/lbma-data-beyond-smoke-and-mirrors

These hedges could be covered in a morning on that pretend exchange.


Thu, 06/26/2014 - 12:51 | 4898308 BaBaBouy
BaBaBouy's picture

""These hedges could be covered in a morning on that pretend exchange.""

Your Correct...


China Or Any Other Real Trading Has Little To Do With It...

Thu, 06/26/2014 - 13:27 | 4898378 Pinto Currency
Pinto Currency's picture


Yes, if the hedges are on the SGE then that would be interesting.

However, my understanding is that to sell forward on the SGE, you must first deposit a bar in the exchange vault.

The bars are not there so it is likely that the hedges were put on elsewhere.

Thu, 06/26/2014 - 11:27 | 4897888 RevRex
RevRex's picture

Gold would rise under these circumstances in an UNRIGGED market

Thu, 06/26/2014 - 12:25 | 4898203 Anasteus
Anasteus's picture

Just wait... and keep stackin'

There is not too much time left.

Thu, 06/26/2014 - 10:52 | 4897725 Grande Tetons
Grande Tetons's picture
“[Gold] gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.”  Uncle Warren..

Financial guru my ass. 

Thu, 06/26/2014 - 10:58 | 4897755 fonzannoon
fonzannoon's picture

and Italian Uncle Warren (1 min 30 sec in)




Thu, 06/26/2014 - 11:07 | 4897792 tmosley
tmosley's picture

"Up to" means "at least".  Need to learn governmentese.

Thu, 06/26/2014 - 11:11 | 4897810 Long-John-Silver
Long-John-Silver's picture

I don't bury my Gold. I have "Boating Accidents" and let the fish watch it.

Thu, 06/26/2014 - 11:43 | 4897983 Winston Churchill
Winston Churchill's picture

Alas, my boat sank,so now I garden.

Thu, 06/26/2014 - 14:20 | 4898846 RaceToTheBottom
RaceToTheBottom's picture

Gold is one of the best additions to a garden.  It never looked better.  Of course security is paramount...

Thu, 06/26/2014 - 14:23 | 4898862 Mercuryquicksilver
Mercuryquicksilver's picture

I sold my boat for gold, what to do now?

Thu, 06/26/2014 - 14:57 | 4899069 giggler321
giggler321's picture

Hope that KNower was wrong predicting the need for a boat because that metal will just drag you to the bottom.

Thu, 06/26/2014 - 17:30 | 4899802 Canuckistan Al
Canuckistan Al's picture

Personally mine sits at the bottom of my fish tank full of piranahs (which I sadly underfeed due to lack of fiatscos to feed them) becuase of my stacking habit.

The fish tank has a big sign that says "Go ahead...make my day!"

Thu, 06/26/2014 - 10:52 | 4897733 dead hobo
dead hobo's picture

$80 billion. Is that considered to still be a lot of money? That's 2.5 months of Fed electro-cash or a few Chinese empty cities. I'm having a hard time grasping the magnitude of this fraud since so many other frauds of comparable size seem routine now. What's the real cost in human terms ignoring all the junk investing that may be declared a loss?

Thu, 06/26/2014 - 11:28 | 4897896 gh0atrider
gh0atrider's picture

snowflakes and avalanches

Fri, 06/27/2014 - 01:27 | 4901205 JustUsChickensHere
JustUsChickensHere's picture

The avalanche is already starting to sweep down.  What you can hear is the rumble of it in the distance as it picks up speed and rushes toward us.

Thu, 06/26/2014 - 11:59 | 4897794 holgerdanske
holgerdanske's picture

This is nothing we have not been warned about. Another conspiracy theory becoming a conspiracy fact.

Logically one would now expect gold to increase in price, because some of it is clearly "missing".

The powers to be will say because somthing is missing, some must be sold to get the money togeter.


So are we going to see gold rise or drop?

Long term no doubt, short term, paper money out of both ears!

Thu, 06/26/2014 - 19:12 | 4900162 SAT 800
SAT 800's picture

I have to agree with the premise of the article; this anouncement will be bullish for gold prices. Both because hedge will be bought back and because of the psychology of the gold market. "uncertainty" and hocus-pocus add weight to the arguments of the pro-gold buyers in wealthy european and Chinese families; who have family histories telling them already, that "currencies don't always work out as planned, or as promised". This information is certainly available to Americans, but it's a matter of first person experience for elder statesmen of European Wealth.

Thu, 06/26/2014 - 10:37 | 4897649 LawsofPhysics
LawsofPhysics's picture

The implosion of the global eCONomy will be awesome, should the shadow banking sector ever be forced out of the shadows.  This will only occur when people all over the world stop trading and start starving.  Still accepting worthless paper promises in exchange for your labor?  Tick tock....

Get long guillotine manufactures, beat the rush.

Thu, 06/26/2014 - 10:45 | 4897703 joego1
joego1's picture

You mean when the Fed comes out of the shadows.

Thu, 06/26/2014 - 10:53 | 4897738 LawsofPhysics
LawsofPhysics's picture

Please.  Look at history, like other central banks/bankers, the Fed will simply cease to exist along with all the real assets that used to be in the treasuries of the government they stole from. 

We need to remember the names of these fuckers such that we can hunt them and their children down in the future.  I'd argue many are hiding in plain sight already.

Thu, 06/26/2014 - 11:28 | 4897903 RevRex
RevRex's picture

Why wait for the future tough guy?

Thu, 06/26/2014 - 11:45 | 4898000 LawsofPhysics
LawsofPhysics's picture

Let us know when and where, many of have already served, have you?

Thu, 06/26/2014 - 12:31 | 4898231 Almost Solvent
Almost Solvent's picture


A head on a silver platter?

Thu, 06/26/2014 - 17:03 | 4899699 LawsofPhysics
LawsofPhysics's picture


Thu, 06/26/2014 - 11:11 | 4897809 Kirk2NCC1701
Kirk2NCC1701's picture

"Where there's a steal, there's a way" -Kirk

Same as always.  You'd think that people'd learn:  Trust if warranted, but verify anyway.

Thu, 06/26/2014 - 11:12 | 4897813 RaceToTheBottom
RaceToTheBottom's picture

Now do people still expect China and Russia, not even mentioning India, to act differently than WS re gold?


Human nature, biaches.  

Thu, 06/26/2014 - 10:34 | 4897652 Notsobadwlad
Notsobadwlad's picture

So what! All that means is that China is the same as the west.

Thu, 06/26/2014 - 10:35 | 4897653 Sudden Debt
Sudden Debt's picture


Thu, 06/26/2014 - 10:41 | 4897658 Uncle Remus
Uncle Remus's picture

I'm shocked...


the unwind of China's shadow banking system, while negative for all non-precious metals-based commodities, may be just the gift that all those patient gold (and silver) investors have been waiting for. 

Gawd, I hope the lock and hindges on my safe are up to the exponential value explosion this implies.

Thu, 06/26/2014 - 11:12 | 4897815 holgerdanske
holgerdanske's picture

I hope your hindges don't suddenly become un-hindged!! ;-)

Thu, 06/26/2014 - 15:07 | 4899126 Tinky
Tinky's picture

I hope that neither of you enter a spelling bee.

Thu, 06/26/2014 - 20:01 | 4900328 Uncle Remus
Uncle Remus's picture

Spelling nazi? Really?

Thu, 06/26/2014 - 23:50 | 4901074 StychoKiller
StychoKiller's picture

"Verbogeny is one of the many pleasurettes afforded a creatific thinkerizer!"

Thu, 06/26/2014 - 10:36 | 4897660 buzzsaw99
buzzsaw99's picture

it's only paper and will be papered over.

Thu, 06/26/2014 - 10:36 | 4897664 JustObserving
JustObserving's picture

$80 billion falsified?  They are pikers - the Fed and the BOE have falsified trillions

Thu, 06/26/2014 - 11:03 | 4897766 RaceToTheBottom
RaceToTheBottom's picture

Don't worry, they are still learning

Thu, 06/26/2014 - 12:20 | 4898176 NO SOLICITING

Don't worry, they are still printing...  Fixed it for ya!

Thu, 06/26/2014 - 11:16 | 4897830 Anasteus
Anasteus's picture

But $80 billion falsified gold means almost 2000 mt of physical at highly suppressed price. Nearly one year gold production has been defrauded, and that's something!

And that's just what we know right now, most likely the tip of the iceberg.

Thu, 06/26/2014 - 11:22 | 4897866 quasimodo
quasimodo's picture

Very astute points, which is why this will start making headlines in the MSM soon.


Thu, 06/26/2014 - 10:37 | 4897665 ParkAveFlasher
ParkAveFlasher's picture

Please fasten your safety belts, and be sure to keep arms and other extremities within the car for the entire ride.  Have a pleasant day.

Thu, 06/26/2014 - 10:37 | 4897666 Typing Typer
Typing Typer's picture

Oh, so this is one factor as to why the price of gold has not been going up as much as it should, because the Chinese were not really buying as much as was being said!

Another factor is outright price manipulation, of course.

Thu, 06/26/2014 - 10:40 | 4897681 kowalli
kowalli's picture

Wrong - paper and physic gold - 2 different things... They just do what west was doing all time to get free cash.

Why the fuck they should use real gold to get money?)

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