Golden moves

More of it is heading to China

When Samuel Montagu set up his merchant bank in 1853, the British Empire was in its full pomp. The Great Exhibition – showcasing goods from across the empire – had been held in London two years earlier. That same year, gold had been discovered in Australia and Montagu hoped to cash in.

Along with four other institutions (NM Rothschild, Mocatta and Goldsmid, Pixley & Abel and Sharps Wilkins), Montagu founded the London Gold Market. In 1919 the quartet launched a daily fixing to establish a reference price for the bullion they held in the city’s vaults.

The twice-daily London Gold Price Fix still acts as the precious metal’s main reference price, although none of the original members exist in their original form (Samuel Montagu, for example, was purchased by HSBC in 1992).

Recent moves by the Chinese government suggest it now is becoming increasingly serious about shifting this process eastward – to reflect China’s status as the world’s largest producer and consumer of gold (last year it imported 1,000 tonnes, 10 times more than it did just five years earlier). In a recent article, National Business Daily says, “China is actively competing for a voice on gold pricing”.

Beijing has persuaded the London Bullion Market Association (LBMA) to let its banks in. Bank of China and China Construction Bank became members last year shortly after the LBMA launched an electronic price-setting mechanism. ICBC Standard Bank has just joined their ranks after purchasing Barclay’s bullion vault in London last month (it can hold 2,000 tonnes and is one of Europe’s largest says the BBC).

But of far greater threat to the City of London’s hold over gold is the recent launch of a renminbi-denominated Gold Price Fix by the Shanghai Gold Exchange. And a number of precious metals trade magazines say the new pricing mechanism is superior to London’s, which has been dogged by accusations of price fixing. Unlike London, the Shanghai Gold Exchange is based on physical delivery. It has also tried to minimise the potential for collusion by incorporating two groups of price setting members: financial institutions and a group of producers and end users such as Shandong Gold and Hong Kong’s Chow Tai Fook Jewellery.

China’s determination to make its mark has also come at a time when gold has just witnessed one of its best quarters in 30 years. From January to March, gold prices rose 17% to $1,237, while the World Gold Council reported overall demand was up 21% over the same period. The World Gold Council says the first quarter saw global demand of 1,290 tonnes. Of this 618 tonnes were purchased by gold-backed exchange traded funds (ETFs), much of which flowed into London vaults.

Nevertheless Chinese investor demand is growing quickly. China’s first gold ETF was launched three years ago and there are now four, backed by 17.5 tonnes of gold, up from 11.1 tonnes at the end of 2015.

Retail demand, on the other hand, was down 19% thanks to a strike by Indian jewellery workers and a decline in Chinese consumer appetite.

Consumers may be wary, but National Business Daily says the central bank is not. Last July, it revealed its gold reserves for the first time in six years. Since then it has published monthly updates.

According to the official figures, China’s reserves amounted to 1,808 tonnes of gold at the end of April compared to 1,658 tonnes in July 2015 and 604 tonnes in July 2009. This makes it the world’s sixth largest holder, with the US still holding the top spot on 8,133.5 tonnes.

However, many believe the government is being economical with the truth over its actual holdings. One gold analyst from MiningWealth concludes that Beijing is happy to underestimate what it holds “in order to accumulate at lower prices”.

In fact, Bloomberg Intelligence estimated last year that Chinese reserves were closer to 3,500 tonnes, while a gold expert was adamant in telling CNN that “China has a lot more gold than they declare”.

Current strategies suggest Beijing’s holdings only look set to increase.

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