Submitted by Alasdair Macleod via GoldMoney.com
,
This month the physical gold market will undergo radical
change when the four London fixing banks hand over the twice-daily
fix to the International Commodity Exchange's trading platform on
20th March.
From 1st April the Financial Conduct Authority will extend its
powers from regulating the participants to regulating the fix as
well. This will transfer price control away from the bullion banks
allowing direct access to the fixing process for all direct
participants and sponsored clients.
From this flow two important consequences. Firstly, the London
market is changing from an unregulated to a partially regulated
market, reducing room for price manipulation. And secondly, the
major Chinese state-owned banks, assuming they register as direct
participants, have the opportunity to dominate the London physical
market without having to deal through one of the current fixing
banks. No announcement has been made yet as to who the direct
participants will be, but it is a racing certainty China will be
represented.
Implications of becoming a regulated market
Under the current regime a buyer or seller on the fix has to
deal through one of the four fixing bullion banks. The information
gained by them from seeing this business is crucial, giving them a
quasi-monopolistic trading advantage over all the other dealers.
Instead, buyers and sellers will be anonymous during the auction
process.
The new platform should, therefore, ensure equal opportunity,
eliminating the advantage enjoyed by the fixing banks. Crucially,
it will change market domination from the privileged fixing members
in favour of the deepest pockets. These are almost certain to be
China's through the state-owned banks which already control the
largest physical market in Asia, the Shanghai Gold Exchange
(SGE).
China's gold strategy
China actually took its first deliberate step towards
eventual domination of the gold market as long ago as June
1983,when regulations on the control of gold and silver
were passed by the State Council. The following Articles extracted
from the English translation set out the objectives very
clearly:
Article 1.These Regulations are
formulated to strengthen control over gold and silver, to guarantee
the State's gold and silver requirements for its economic
development and to outlaw gold and silver smuggling and speculation
and profiteering activities.
Article 3.The State shall
pursue a policy of unified control, monopoly purchase and
distribution of gold and silver. The total income and expenditure
of gold and silver of State organs, the armed forces,
organizations, schools, State enterprises, institutions and
collective urban and rural economic organizations (hereinafter
referred to as domestic units) shall be incorporated into the State
plan for the receipt and expenditure of gold and silver.
Article 4.The People's Bank of
China shall be the State organ responsible for the control of gold
and silver in the People's Republic of China.
Article 5.All gold and silver
held by domestic units, with the exception of raw materials,
equipment, household utensils and mementos which the People's Bank
of China has permitted to be kept, must be sold to the People's
Bank of China. No gold and silver may be personally disposed of or
kept without authorisation.
Article 6.All gold and silver
legally gained by individuals shall come under the protection of
the State.
Article 8.All gold and silver
purchases shall be transacted through the People's Bank of China.
No unit or individual shall purchase gold and silver unless
authorised or entrusted to do so by the People's Bank of
China.
Article 12.All gold and silver
sold by individuals must be sold to the People's Bank of
China.
Article 25.No restriction shall
be imposed on the amount of gold and silver brought into the
People's Republic of China, but declaration and registration must
be made to the Customs authorities of the People's Republic of
China upon entry.
Article 26.Inspection and
clearance by the People's Republic of China Customs of gold and
silver taken or retaken abroad shall be made in accordance with the
amount shown on the certificate issued by the People's Bank of
China or the original declaration and registration form made on
entry. All gold and silver without a covering certificate or in
excess of the amount declared and registered upon entry shall not
be allowed to be taken out of the country.
Additionally, China has deliberately developed her gold
production regardless of cost so that she is now the largest
producer by far in the world today. State-owned refineries process
this gold along with doré imported from elsewhere. None of this
gold leaves China.
The regulations quoted above formalise the State's monopoly over
all gold and silver which is exercised through the People's Bank,
and they allow the free importation of gold and silver but keep
exports under very tight control. On the basis of these regulations
and as subsequently amended the People's Bank established the SGE,
which remains under its total control. The intent behind the
regulations is not to establish or permit the free trade of gold
and silver, but to control these commodities in the interest of the
state.
This being the case, the growth of Chinese gold imports recorded
as deliveries to the public since 2002 is only the most recent
evidence of a deliberate act of policy embarked upon thirty-two
years ago. China had been accumulating gold for nineteen years
before she allowed her own nationals to buy any when private
ownership was finally permitted. Furthermore, the bullion was
freely available, because in seventeen of those years gold was in a
severe bear market fuelled by a combination of supply from central
bank disposals, leasing, scrap, rapidly-increasing mine production
and investor selling, all of which I estimate totalled about 76,000
tonnes in all. The two largest buyers for all this gold for much of
the time were the Middle East and China. The breakdown from these
sources and the likely demand are identified in the table below
taken from my article for GoldMoney on the subject published last
October, where a more detailed discussion of global bullion
distribution during those years can be found.
Put in another context the cost of China's 25,000 tonnes of gold
equates to roughly 10% of her exports over the period, and the
eighties and early nineties in particular, also saw huge capital
inflows when multinational corporations were building factories in
China. However, the figure for China's gold accumulation is at best
informed speculation, but given the determination expressed in the
1983 regulations and subsequent events it is clear she had
deliberately accumulated a significant undeclared stockpile by
2002.
So far China's long-term plans for the acquisition of gold
appear to have achieved some important
objectives.Deliveries to the public through the SGE since
only 2008 totalled 8,459 tonnes, gross of returned scrap, probably
more than 9,500 tonnes since 2002 given estimated domestic mine
production of 1,352 tonnes between2002-2007.
With such a large commitment to this market, we must now
anticipate the next stage for China's gold policy, which is why the
changes in London may be important.
China now has the opportunity to take a dominant role in
London, without having to direct its order flows through the fixing
banks. Therefore, it is no exaggeration to say that from 20th
March, China will be able to control the global physical gold
market, which will permit her to manage the price. She has the
deepest pockets, backed by the largest single stockpile.
China's motives
China's motives for taking control of the gold bullion
market have almost certainly evolved.The regulations of
1983 make sense as part of a forward-looking plan to ensure that
some of the benefits of industrialisation would be accumulated as a
counterparty risk free national asset. This reasoning is similar to
that of the Arab nations capitalising on the oil-price bonanza only
ten years earlier, which led them to accumulate their hoard for the
benefit of future generations. However, as time passed the world
has changed both economically and politically.
2002 was a significant year for China, when geopolitical
considerations entered the picture. Not only did the People's Bank
establish the SGE to facilitate deliveries to private investors,
but this was the year the Shanghai Cooperation Organisation (SCO)
formally adopted its charter. This merger of security and economic
interests with Russia has bound Russia and China together with a
number of resource-rich Asian states into an economic bloc. When
India, Iran, Mongolia, Afghanistan and Pakistan join (as they are
committed to do), the SCO will cover more than half the world's
population. And inevitably the SCO's members are looking for an
alternative trade settlement system to using the US dollar.
At some stage China with her SCO partner, Russia, will force the
price of gold higher as part of their currency strategy. You can
argue this from an economic point of view on the basis that
possession of properly priced gold will give her a financial
dominance over global trade at a time when we are trashing our fiat
currencies, or more simply that there's no point in owning an asset
and suppressing its value for ever. From 2002 there evolved a
geopolitical argument: both China and Russia having initially
wanted to embrace American and Western European capitalism no
longer sought to do so, seeing us as soft enemies instead. The
Chinese public were then encouraged even by public service
advertising to buy gold, helping to denude the west of her
remaining bullion stocks and to provide market liquidity in
China.
What is truly amazing is the western economic and political
establishment have dismissed the importance of gold and ignored all
the warning signals.They do not seem to realise the power
they have given China and Russia to create financial chaos by
simply hiking the gold price. If they do, which seems to be only a
matter of time, then London's fractional reserve system of
unallocated gold accounts would simply collapse, leaving Shanghai
as the only major physical market.
Therefore the failure of the London bullion market to see
strategically beyond its short-term interests has opened the door
to China's powerful state-owned banking monopoly to control the
gold bullion market. This is probably the final link in China's
long-standing gold strategy, and through it a planned domination of
the global economy in partnership with Russia and the other SCO
nations.
