These Five Trends In China Will Change The Gold Market

Tyler Durden's picture

Via HardAssetsAlliance.com,

Apple spent about five years developing the iPhone, which has changed the smartphone market forever. Until the release, however, nobody could imagine what impact the iPhone would have on the market.

And most consumers didn’t know about it at all.

The same thing is happening with China and gold right now. The gold market will soon be very different than from what we see today - largely due to the current developments in China.

China’s influence will impact not just gold investors but everyone who has a vested interest in the global economy, stock markets, and the US dollar. After all, China will be a dominant force in all, as most analysts project.

Here are the five trends in China that will change the gold market forever…

(Hedge fund manager Dan Tapiero talks about some of these trends in his short interview, especially the #5 listed below.)

Trend #1: China now officially participates in the gold price fix

China has officially established a daily yuan price fix for gold.

Gold fixing was historically held at the London Bullion Market Association (LBMA). China was not part of that process, so it started its own pricing benchmark.

The Shanghai Gold Exchange’s program includes 12 “fixing” members, 10 of which are Chinese banks. The new gold benchmark will better reflect local market flows and, just as important, reduces gold’s price dependency on the US dollar.

The program has profound implications as the gold trade continues to move from West to East. It will increase China’s influence over the gold price and expand the yuan’s role as a global currency.

Trend #2: China also participates in setting the silver price

China Construction Bank, one of the country’s largest, recently joined the elite group of banks that set silver’s official daily price.

The Chinese bank now bids prices with HSBC, JPMorgan Chase, Bank of Nova Scotia, Toronto Dominion Bank, and UBS. That means China now has direct influence on the price of this key industrial and monetary metal.

These two moves makes sense, since some of the world's top gold and silver consumers are in the East—India, Russia, Turkey, and of course China.

It is clear China wants more influence over gold and silver prices—and now it will get it.

Trend #3: The renminbi is in the IMF basket

Last November, the IMF added the renminbi to its reserve currency basket. The prestigious basket will include the yuan along with the dollar, euro, pound sterling, and yen when calculating the value of the Special Drawing Rights (SDRs).

The long-term implication is that the yuan may one day become as recognizable as the dollar or euro.

It also means China must accumulate enough bullion reserves to stand on the world stage. And by any measure, it doesn’t have enough.

Some analysts believe China has more than the official 1,797.5 tonnes it reported in March, but that amount is 4.5 times less than 8,133.5 tonnes the US holds. Even if China doesn’t want that much, the current total represents only 2.2% of its total reserves.

This means that not only does China need to continue buying gold in massive quantities, it will at some point need to announce it holds a much higher amount. And that announcement will light a fire under the gold price.

You may not trust the numbers coming out of Beijing, but keep in mind that China’s biggest goal is to become a first world economy. It wants to be on the same footing as the US, Japan, and Europe.

And one way to achieve that is to accumulate a lot more gold.

Trend #4: Chinese gold production is slowing

China produces more gold than any other nation.

 

 

But even the world’s top producer isn’t immune to the effects of the four-year bear market in gold. Mine production is slowing and is poised to decline for at least several years just like everywhere else.

That’s because the cost of production has risen, ore grades are falling, and reserves in the country are limited.

And get this: China doesn’t export gold in any meaningful amount. So whatever gets produced there, stays there.

Bottom line: China’s gold production won’t make it to world markets. Its output is in decline and won’t be available to meet global demand.

Trend #5: Lack of other alternatives for Chinese investors

This trend is explosive…

As hedge fund manager Dan Tapiero points out, Chinese investors will be increasingly attracted to gold because they won’t want their savings at a zero percent interest rate.

Yet, Beijing has made it clear that it will bring rates lower. So what will investors buy? Government debt yields just 1–2%. High-yield corporate debt pays more, but only 15% of Chinese debt is rated by foreign agencies like Moody’s and S&P, so it comes with a lot of potential credit risk. The stock market wiped out many investors, and real estate petered out.

UBS analysts agree:

Deterioration in China's macro backdrop could trigger flows towards gold; there are a limited number of investment alternatives and gold is poised to benefit should outlooks across the different options turn sour… rotation into gold ETFs would be a relatively easy switch for local equity investors and could gain further traction if equity markets continue to weaken.

That’s not all.

Chinese savers have huge exposure to a devaluation of their currency, as their wealth is tied directly to the fate of the renminbi. Devaluation fears have prompted massive capital outflows from both the currency and the country—some of which is fleeing into gold.

Looking at the big picture over the next 3-5 years—these changes signal that China will be a big driver of the gold price.

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youngman's picture

Me too..dont forget me....I am a buyer

kliguy38's picture

at 17 bucks an ounce?? dontchA  know the cabal will push it to 7 an ounce....so wait....wait and wait......

gdogus erectus's picture

Oh stop teasing me with articles like this. How much more can I take? I already listen to KWN three times a day for my daily confirmation.

Muh Raf's picture

Who writes this blatant crap? "Gold fixing was historically held at the London Bullion Market Association (LBMA). China was not part of that process, so it started its own pricing benchmark." The old LBMA fix process was swapped out a year ago and with a brand new set of members - no less than 3 of those new members are the largest 3 Chinese banks. Also Standard Chartered is involved in the new Shanghai Renmibi fix, as well as the existing Lodnon fix. At least 4 members are identical in both fixes so it's ridiculous to think that there will be any signifcant implied variation between the fixes other than market based drivers. And yes, 30% of the current London fix 'squad' is Chinese, so this claim, amongst others in this article, are total bollocks.

deKevelioc's picture

Some analysts believe China has more than the official 1,797.5 tonnes it reported in March, but that amount is 4.5 times less than 8,133.5 tonnes the US holds. Even if China doesn’t want that much, the current total represents only 2.2% of its total reserves.

 

Complete BS.

John Kich's picture

Obama will not finish his second term! Banned independent documentary reveals the truth. This will scare millions!

https://www.youtube.com/watch?v=K8VdXZ_bi7M

Laowei Gweilo's picture

the odd thing is, most of the people I know are buying USD (and possible "cheap" AUD and CAD) to diversify from yuan -- not more gold. I say "more" because gold is still popular, moreso maybe in the south? But I've never very little change with family, friends, or acquaitiances, but I see a lot more people buying foreign FX out of yuan concerns.

I suppose because they want a foreign currency with a foreign bank rather than local gold or physical gold... I'm not sure why. I don't disagre with the logic of the analysis at all. Just sharing my anecdotes that don't reflect it (yet). (And to reiterate, still a lot of people buy gold, especially by Western standards; I just mean I haven't seen any change really in the last year whereas I've seen a striking change in foreign FX).

fiddlerpaul's picture

Yes the FX world will have to have a massive hemorrage before people lose trust in currency jumping tactics like that.

SuperRay's picture

Another book-talker. Maybe they'll suppress the price even more than the western criminals. I am sooooo tired of this BS. But just scream, punch the wall, and keep stackin'

old naughty's picture

elite's plan, being carried out...

but what is the (hidden) agenda?

SilverDoctors's picture

#1 is ALREADY a GAME CHANGER...and its only been 1 week! 
Bullion traders and trade desks that we speak with on a regular basis have all noted a major change in how gold and silver are trading over the past week.
Bill Holter of Jim Sinclair's JSMineset are warning this is the END OF DAYS for the financial system, and "We Might Not See October."

Buckle Up!! 

Theonewhoknows's picture
Theonewhoknows (not verified) Apr 26, 2016 8:52 PM

Those trends can end up in China being able to introduce gold-backed yuan. This is, of course, the last resort of US vs China collision course. They are more opportunists and traders rather than warmongers and will probably use this as a leverage to get more influence over markets and geopolitically. Chinese already secured first chain of nearest island which the US had to surrender in terms of control. Taiwan would be next step, maybe even solving dispute with Russia in favour of China? Who knows. Definitely the US needs weaker Russia to accept alliance with the US against China. For now it's not happening. For now even the real amount of gold China hold is unknown. Time is on the Chinese side as with their investments (AIIB, The New Silk Road and above article) it is US that has to correct it's path to continue being a hegemony. Can Trump do this? Last 10, presidents only made things worse. It will be interesting duel of giants. For now the US is being held hostage between fake economy indicators which the FED will use to present the beautiful picture and continue doing wahtever they're doing. OR they can eventually present true data - when everyone will be already convinced (even the most staunch liberal) and have excuse to cut rates and print their way out of debt, bail out everyone and prepare for hard debt reset. 

lasvegaspersona's picture

The existence of ETFs and other derivative markets means the price of gold is underpriced. For every ounce bought in derivative form it is that much less pressure on the physical market.

If the Chinese are buying gold ETFs that will continue the support of price suppression.

It is automatic, no skullduggery involved, no dishonesty...just 'investors' happy to have a way to bet on the price of gold with no interest in holding the real asset. It allows fractional reserve sale of gold. They will be prolonging the pain, not easing it.

Bopper09's picture

 8,133.5 tonnes the US holds.  REALLY.  REALLY.  This is still reported as fact.  Really?  Really?

 

Fucking criminals.

Yukon Cornholius's picture

I wonder how they could prove that? I'm thinking of a word that rhymes with schmAUDIT.

OneOfUs's picture

Where do you suppose physical gold is stored/hidden by locals? I ask because if war ever does break out and I find myself forced to fight overseas I'm going to be sure to bring my metal detector with me.

Lurk Skywatcher's picture

The Nazis worked out its probably in their mouths. They also worked out a good way of getting it out of their mouths.

Food Loaf Junkie's picture

Good spots to look in houses are under stairsteps and behind trim around doorways, doors and windows, false ceilings in closets and false panels in walls.

Dan'l's picture

China may be a big driver of gold, but if you look at the charts, gold goes up when we have inflation. Gold went down in 2008 when the market crashed.

Deflation isn't good for gold. The only thing that will help PMs is the coming fiat disaster in the USA, but who know when that will play out and how much more illegal manipulation will hurt gold?

Yukon Cornholius's picture

How do you deflate gold? Take protons away? Is it gold then?

zeropain's picture

So china wants cheaper gold and silver. Got it.

umdesch4's picture

Aw come on. China has anywhere between that reported BS amount, and 4500 tonnes. They bumped that reported number up by the minimum they felt necessary to get into the "hell in a handbasket" SDR basket. At some point, which I'm sure nobody can predict, they'll start fixing the price upwards. That's just my gut feeling. I don't actually know shit. At least I know enough to be stacking at what I feel are bargain prices.

BobEore's picture

Yawn.

Yuan and gold. Two items from which a 1001 tales of oriental fantasy are spun - giving gullible westerners s chance to blow bubbles from the hookah-pipe of never-ending huckster hopium dealers.

Eastern and Western elites work together on the financial manipulations which have driven holders of gold and silver to despair for the last five years. It is obvious now to anyone who actually thinks this thing through.

But, an entire industry of advertorial media scribes has grown up tasked to repeat talking points that lead away from the truth. China and JPM are not enemies. Far from it. The bankers in Shanghai are not working from a different script than those in London or NYC. Nor are the politician in Beijing working at odds with their counterparts in the West.

http://www.worldbank.org/en/news/press-release/2016/04/13/world-bank-and...

When the decision is made to release the brakes on the metals, by those who wish them cheaply available for now, then we will see markets change. And it won't mean less "manipulation" - only different "manipulations." But that's not what pm sheeple want to hear - so cue the endless "CHINA WILL SAVE US" elevator muzik loop.

mosfet's picture

I think it's a good idea for China to encourage their people to invest in gold as opposed to housing & stock bubbles.  The fact that housing sales in Western USA dropped %23 in March alone is probably largely due to Chinese capitol controls going into effect.

I'm looking to upgrade to a home near the Pacific so I'd view the Chinese abandoning housing markets in favor of gold as a win/win for myself and others looking for housing on par with local wages.  I walked through a $2.2 million open house last weekend (built over a corn field & no where near the ocean).  While it was nice and fairly new, it was an ordinary house (not  a mansion) and not remotely worth the asking.  Similar would go for under $330K in most cities.  Looked up the mortage @ 3.6%, it'd run $3.7 million w/interest or $10K/mo for 30 years (+$2.7K/mo for property taxes).  You'd have to be pulling down $700K yr minimum for it to eat only %40 of your net paycheck...Median income here is only $75K.  The cars parked out front of it and same homes in the development were basic Honda's, Ford's, occasionally a Mercedes but not a single Porsche, Ferrari, Lambo to be found.  So what gives?  Either the fools paying these prices think they'll find a greator fool to sell to, or this is foreign money pouring into an already popping bubble.  Either way...very dumb money about to pay the price for ignoring blatent lessons taught 7 years ago.

 

umdesch4's picture

"foreign money pouring into an already popping bubble"

West coast of North America? You probably hit the nail on the head with the above quote. It's ridiculous, from our perspective, but it isn't from theirs. Honestly, if I were a semi-rich person from any one of a dozen other countries, I'd be buying real-estate in Vancouver too, regardless of the price. Even if that bubble pops, it can't go to zero, because it's an actual, physical structure (even if it's a "crack shack") and a plot of land, in a comparatively stable country. With NIRP everywhere else, and the ridiculous risks involved in anything non-physical, what are you going to do? Buy 60 pounds of gold? (That's about $1.2M USD at today's gold prices) That's some serious boating accidents happening right there.

Darth Rayne's picture

I have given gold a great deal of Critical thought. It is the final bubble in this credit cycle. It may very well hit 10,000 an ounce as pension portfolios hit 10% of their current values. https://davidwatkinson.blogspot.co.uk
One ounce of gold should represent a lifetimes savings, or the average house cost but theory and practice are not the same. Every child should have a gold sovereign, every adult should learn to critically think.

Jungle Jim's picture

"Soon," eh? I do not think that word means what you think it means. Soon means *soon*, as in "at hand" or "right away," or "any day now." "Soon" does NOT mean in 6 to 12 to 18 months, much less in 3 to 5 to 7 years, or longer.

Anyway, as far as I can see, the whole world, and especially the so-called metals "market," is holding its collective breath waiting to hear whatever folderol the Fed spews forth tomorrow. I will don my Amazing Criswell turban and gaze into my two-foot-diameter crystal ball and foretell that -- no matter *what* the Fed says or doesn't say, gold *will* go down.

cardis's picture

chinese gold cash costs and all-in sustaining cash costs? Please, thanks.

Vuke's picture

Do you want Chinese figures or real figures?

InnVestuhrr's picture

I wonder how much of the alleged gold that is in vaults or personal possession is actually real gold vs fake ?

Once the Chinese get heavily involved in gold trading you can be sure that there will be plenty of fake gold flowing around. What are you going to do when buying and selling, assay every piece, every time ?

dearth vader's picture

Gold will shine - okay, no objection to that, but tell me, sir:

Why do you expect the Chinese to end the blatant manipulation of the markets and bring about honest pricing?

Aren't they the most savvy market manipulators and gamblers of them all?

DosZap's picture

China will do what they always have done, BEAT the prices down to where they can LOAD up,and then the HAMMER DROPS.

Not until.