Best of the Week
Most Popular
1. 2019 From A Fourth Turning Perspective - James_Quinn
2.Beware the Young Stocks Bear Market! - Zeal_LLC
3.Safe Havens are Surging. What this Means for Stocks 2019 - Troy_Bombardia
4.Most Popular Financial Markets Analysis of 2018 - Trump and BrExit Chaos Dominate - Nadeem_Walayat
5.January 2019 Financial Markets Analysis and Forecasts - Nadeem_Walayat
6.Silver Price Trend Analysis 2019 - Nadeem_Walayat
7.Why 90% of Traders Lose - Nadeem_Walayat
8.What to do With Your Money in a Stocks Bear Market - Stephen_McBride
9.Stock Market What to Expect in the First 3~5 Months of 2019 - Chris_Vermeulen
10.China, Global Economy has Tipped over: The Surging Dollar and the Rallying Yen - FXCOT
Last 7 days
Gold Bullhorns Quieted for a Day, at Least - 22nd Feb 19
US Auto Loans - Americans Missing Car Payments Is a Symptom of a Much Bigger Problem - 22nd Feb 19
Stock Traders Must Be Cautious Part III - 22nd Feb 19
Stock Traders Must Stay Optimistically Cautious II - 22nd Feb 19
Sheffield FlyPast Footage - "Mi Amigo" US Bomber Crash Memorial Endcliffe Park - 22nd Feb 19
Sheffield "Mi Amigo" Memorial Fly Past , BBC Crew Setting Up Stage for Breakfast TV Endcliffe Park - 21st Feb 19
Stocks Closer to Medium-Term Resistance Level - 21st Feb 19
The Stock Market’s Momentum is Extremely Strong. What’s Next for Stocks - 21st Feb 19
QE Forever: The Fed's Dramatic About-face - 21st Feb 19
Gold Technical Perspective – Why So Bullish? - 21st Feb 19
Sheffield "Mi Amigo" Memorial Fly Past at 8.45am on 22nd Feb 2019 - 20th Feb 19
Here’s The Real Reason You Stress About Money - 20th Feb 19
Five Online Marketing Predictions that will Matter in 2019 - 20th Feb 19
Has Gold Price Reached Upside Resistance Near $1340-1360? - 20th Feb 19
So Many Things are Not Confirming Stock Market Rally - 20th Feb 19
Forex Trading Management: The Importance of Being Prepared - 19th Feb 19
Gold Stocks are Following This Historical Template - 19th Feb 19
Here’s Why The Left’s New Economic Policies Are Just Stupid - 19th Feb 19
Should We Declare Emergency for Gold? - 19th Feb 19
Why Stock Traders Must Stay Optimistically Cautious Going Forward - 19th Feb 19
The Corporate Debt Bubble Is Strikingly Similar to the Subprime Mortgage Bubble - 18th Feb 19
Stacking The Next QE On Top Of A $4 Trillion Fed Floor - 18th Feb 19
Get ready for the Stock Market Breakout Pattern Setup II - 18th Feb 19
It's Blue Skies For The Stock Market As Far As The Eye Can See - 18th Feb 19
Stock Market Correction is Due - 18th Feb 19
Iran's Death Spiral -- 40 Years And Counting - 17 Feb 19
Venezuela's Opposition Is Playing With Fire - 17 Feb 19
Fed Chairman Deceives; Precious Metals Mine Supply Threatened - 17 Feb 19
After 8 Terrific Weeks for Stocks, What’s Next? - 16th Feb 19
My Favorite Real Estate Strategies: Rent to Live, Buy to Rent - 16th Feb 19
Schumer & Sanders Want One Thing: Your Money - 16th Feb 19
What Could Happen When the Stock Markets Correct Next - 16th Feb 19
Bitcoin Your Best Opportunity Outside of Stocks - 16th Feb 19
Olympus TG-5 Tough Camera Under SEA Water Test - 16th Feb 19
"Mi Amigo" Sheffield Bomber Crash Memorial Site Fly-past on 22nd February 2019 VR360 - 16th Feb 19
Plunging Inventories have Zinc Bulls Ready to Run - 15th Feb 19
Gold Stocks Mega Mergers Are Bad for Shareholders - 15th Feb 19
Retail Sales Crash! It’s 2008 All Over Again for Stock Market and Economy! - 15th Feb 19
Is Gold Market 2019 Like 2016? - 15th Feb 19
Virgin Media's Increasingly Unreliable Broadband Service - 15th Feb 19
2019 Starting to Shine But is it a Long Con for Stock Investors? - 15th Feb 19
Gold is on the Verge of a Bull-run and Here's Why - 15th Feb 19

Market Oracle FREE Newsletter

The Real Secret for Successful Trading

Will the Shangai Fix fix the Gold Market?

Commodities / Gold and Silver 2015 Mar 10, 2015 - 05:48 AM GMT

By: Michael_J_Kosares

Commodities

John Maynard Keynes once remarked that “A debtor nation does not love its creditor, and it is fruitless to expect feelings of good will.” In the case of the financial arrangement between China and the West including the United States, I might add that the opposite is also true, particularly when that creditor thinks its debtor might be in over its head.  Each, though, has learned to live with the other in this complicated and intricate web of debt and money, interlocking national balance sheets and intertwined commercial interests we call the international markets.  To not do so is to act against one’s own national interest.


goldstandard5I expect this synergy to carry over when later this year China inaugurates its own version of a gold fix in Shanghai and three Chinese state banks join the London Bullion Market Association’s new London fix later this month.  I am not among the group that foresees a hot gold war between the Shanghai and London fixes, between China and the West. More I believe we will see a balancing of interests – a cold war of sorts between the physical metal-based Shanghai business and the paper-based London business. China would not be seeking admission to the international gold club in London if it did not intend to adhere to some common ground rules – if in fact a quid pro quo of some sort had not been agreed.

That is not to say though that the new gold market mechanisms will fall short of being transformative.  To the contrary, I would counsel to expect major changes in 2015. At the top of the list I would put the likelihood of Shanghai forcing London to honor its pricing by delivering real metal into the China market.  The three state banks China has stationed in the new London eleven-member fix regime will act as a conduit for those deliveries – a mission for the time being likely to keep the flow through the London-Zurich-Hong Kong-Shanghai pipeline moving at a steady pace.  In the process, China might force a level of honest settlement too often avoided in the previous gold fix regime.  More on that further on . . .

The price of gold in China

The question on everyone’s mind is whether or not we should expect to see China bid the gold price higher within this new mechanism?

At the moment and for good reason, China remains a buyer of gold and that is state policy. Strip away the economic jargon and the United States, in blunt terms, owes the Peoples’ Republic of China $1.3 trillion, the single largest amount of money one nation state owes another on earth. The rest of the world owes China about $2.7 trillion.  China, in a certain sense, has become the world’s sovereign banker with no one even a close second. Japan is next nearest in line with $1.26 trillion in foreign exchange reserves.  In no uncertain terms, China has put itself on the front line of the now raging global currency war and, if it is not careful, could become its principal victim.

China, over these last several years, has come to its own way of dealing with this issue through what can only be described as an enterprising and aggressive gold acquisition program. Some estimate its gold hoard to have risen from 1054 metric tonnes (the official number) to 5000 tonnes (the generally accepted figure among experts) with one estimate, released last week, at an incredible 30,000 tonnes (a number I find difficult to justify).  Koos Jansen, one of the top experts on China’s gold mobilizations, puts the overall import figure from 2007 through 2014 at 8800 tonnes.  That number, based on actual movement of physical metal through the Shanghai Gold Exchange, might be closest to the truth.  No one, though, is quite certain how those imports are divided among China’s central bank, its state bank counterparts and the Chinese people themselves. Whatever the real number, China arguably has conducted the most ambitious gold mobilization since the United States built its prodigious 20,000 tonnes Treasury hoard following World War II.

A hilltop assessment of current supply-demand fundamentals tells us that China may have already reached the point of diminishing returns with respect to tapping existing sources for the metal. Over the past two years, the exchange-traded funds were drained of everything except what still belongs to strong-handed investors. Global gold mine production has flat-lined at roughly 2800 metric tonnes and may be poised for a decline. On the demand side, central banks as a group are net buyers of the metal.  National repatriation efforts may be a hidden source of demand not often discussed among analysts.  China already competes with India, the rest of Asia, the Middle East and western investors for the existing supply. If it is indeed successful in establishing settlement in exclusively physical metal on the Shanghai Exchange, the narrowing supply-demand dynamics are likely to act as a catalyst for higher prices – perhaps the primary catalyst for higher prices, something that has not been the case for decades.

Will the physical gold market dog finally wag the paper market tail?

There is one more important aspect to the analysis worth highlighting. If the gold market has reached some sort of watershed wherein the amount of available gold begins to dwindle and possibly dry up entirely, then China’s strategic economic interest would best be served by higher global bullion prices – the so-called second leg to its long-term gold market strategy.

A yuan-based price coupled with physical settlement and increased domestic demand could end up becoming the hammer that breaks paper trading’s grip on the international gold price. China’s policy makers, under such circumstances, need do nothing more than sit back and watch as physical demand from China drives prices higher through the new market mechanisms.  It would become an ultimate irony should statist, communist China become the driving force that restored free market economics in the gold market. In the end, the ability to monitor, defend and advance the value of its gold reserves might be the real driving force behind China’s application for admission to the international price-setting club.

So it is that I see China’s latest forays in the international gold market as an attempt to fuse with and influence the current market structure rather than circumvent or supersede it.  China, in my view, seeks synthesis not antithesis, and though some might be disappointed in the strategy, I see it as bracing for gold’s future and even more bullish for gold in the long run than a policy of confrontation.  By taking its seat at the gold pricing table, China inadvertently will act as a proxy for gold coin and bullion owners all over the world.

Given the flow of economic power from West to East, it seems fitting that gold should ride the crest of that wave.  After all, the East’s interest in gold is based in its ancient culture and that abiding attachment is unlikely to disappear anytime soon. Time is on China’s side and on the side of the gold accumulator who owns his or her metal outright and can afford to sit back and watch the show.  On the Chinese calendar, 2018 will be the year of the Earth Dog.  By then, the physical market dog might finally wag the paper gold market’s tail, instead of the other way around.  In the end, the old aphorism still holds true:  He (or she) who owns the gold makes the rules.

If you are looking for a gold-based analysis of the financial markets and economy, we invite you to subscribe to our FREE newsletterUSAGOLD’s Review & Outlook, edited by Michael J. Kosares, the author of the preceding post, the founder of USAGOLD and the author of “The ABCs of Gold Investing: How To Protect And Build Your Wealth With Gold.” You can opt out any time and we won’t deluge you with junk e-mails.

By Michael J. Kosares
Michael J. Kosares , founder and president
USAGOLD - Centennial Precious Metals, Denver

Michael J. Kosares is the founder of USAGOLD and the author of "The ABCs of Gold Investing - How To Protect and Build Your Wealth With Gold." He has over forty years experience in the physical gold business.  He is also the editor of Review & Outlook, the firm's newsletter which is offered free of charge and specializes in issues and opinion of importance to owners of gold coins and bullion.  If you would like to register for an e-mail alert when the next issue is published, please visit this link

Disclaimer: Opinions expressed in commentary e do not constitute an offer to buy or sell, or the solicitation of an offer to buy or sell any precious metals product, nor should they be viewed in any way as investment advice or advice to buy, sell or hold. Centennial Precious Metals, Inc. recommends the purchase of physical precious metals for asset preservation purposes, not speculation. Utilization of these opinions for speculative purposes is neither suggested nor advised. Commentary is strictly for educational purposes, and as such USAGOLD - Centennial Precious Metals does not warrant or guarantee the accuracy, timeliness or completeness of the information found here.

Michael J. Kosares Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules