Chinese Banks Bar Clients From Buying Precious Metals

In an attempt to avoid another retail-driven momentum meltup similar to what happened with Chinese stocks earlier this month when government-media first encouraged Chinese investors to buy stocks only to backtrack days later when local markets soared sparking fears of another stock bubble on the mainland, Reuters reported that Chinese regulators and major banks have been rushing to curb precious metal trading by domestic investors to temper speculation that could send prices explosively higher, something we hinted at just last week.

The scramble to limit risks comes as gold prices hit record highs this week, spurred by investors hunting for safe haven assets in markets rattled by worries of rising coronavirus cases, lofty equity valuations, and a plunge in the U.S. dollar which prompted Goldman to contemplate if the days of the world's reserve currency are numbered.

Industrial and Commercial Bank of China (ICBC), the country’s largest bank said on Wednesday it would bar its clients from opening new trading positions for platinum, palladium and index products linked to precious metal from Friday. That directive, according to the lender’s customer service department, was in response to “violent price volatility” and "the need to control risks." The reality? It is neither in China's, nor any other government's interest, to see gold prices soaring as they likely would if tens of millions of Chinese speculators rushed to bid up the precious metal.

Similarly, Agricultural Bank of China said it had recently suspended new businesses related to gold, while Bank of China also said it halted new account openings for platinum and palladium trading.

Meanwhile, the Shanghai Gold Exchange said on Tuesday that gold and silver holdings were high, and it would take risk-control measures if warranted to protect investors.

It's odd how investors are never "protected" when stock prices soar... but only when gold and silver do.

The Shanghai Futures Exchange, where gold and silver futures contracts are traded, also urged its members to strengthen risk-management efforts and invest rationally.

"Gold remains a niche investment in China due to limited investment channels,” said Frank Hao, an analyst at Hywin Wealth Management in Shanghai. "Investors mainly rely on purchasing paper gold products at commercial banks as a way to counteract risks."

Chinese investors have also been actively buying up gold ETFs, whose turnover has jumped in recent weeks. Huaan Gold ETF, Asia’s biggest gold exchange-traded fund, has seen its assets under management soar more than 68% to over 11.8 billion yuan ($1.69 billion) since end-2019.

Hao said any further gains in gold may spur more speculation, despite regulatory attempts to tamp it down.

"If the gold price rises past $2,000, some more hot money will certainly flow into the market, and some investors will divert their stock investments to gold," he said.

Which really says all one needs to know: when it comes to stocks, nobody is worried about the "hot money" flowing into the market, in fact it is encouraged. But when gold explodes higher and it may "divert" stock investment to gold the authorities start to panic and do everything in their power to limit its ascent.