China's Central Bank Clamps Down On Gold, The Only Safe-Haven Left

The People's Bank of China continues to increase their gold holdings and strengthening its hold on the local gold market by banning the establishment of gold trading platforms. Officials for the bank urge their peers to favor gold buying as its the only safe haven left.

12/27/2011 @ 4:33PM
Agustino Fontevecchia
Forbes

The People’s Bank of China (PBoC) continues to strengthen its hold of the local gold market, banning the establishment of gold trading platforms and channeling everything through the Shanghai exchanges, according to an official notice released Tuesday. At the same time, a senior PBoC official urged his peers to favor further gold buying saying “no asset is safe now, the only choice to hedge risks is to hold hard currency – gold.”

Gold investors in the U.S. may still doubt whether fundamentals are in place for the yellow metal to continue its decade-long rally; Chinese authorities definitely aren’t. On Tuesday, the PBoC decided to ban local regions, institutions, and individuals from setting up gold exchanges, while prohibiting other exchanges from establishing any gold trading platforms.

“Since 2001, […] China’s gold market has developed very rapidly, formed [by] a combination of cash and derivatives, institutions and individuals [through] a multi-level structure,” read the release. At the same time, illegal means of investing in gold have sprung across China, from exchanges to gold trading platforms, according to the PBoC.

Thus, all gold trading will be channeled through the Shanghai Gold Exchange and the Shanghai Futures Exchange. The measures are designed to “safeguard economic and financial security and social stability,” given that gold “is an important component of [the PBoC’s] international reserves.”

Chinese gold demand, both retail and financial, has surged as of late. China’s gold consumption doubled to about 20% of global supply in the last decade, while its reserves have climbed to 1,054 tons, or about 1.8% of its foreign exchange reserves.

Senior officials at the PBoC have been pushing to increase the country’s official gold holdings. Zhang Jianhua has been among the most outspoken. On Tuesday, head of the PBoC’s research bureau, said:

The Chinese government should not only be cautious of the imported risk caused by rising global inflation, but also further optimize its foreign-exchange portfolio and purchase gold assets when the gold price shows a favorable fluctuation.

No asset is safe now. The only choice to hedge risks is to hold hard currency – gold.

Interest in Chinese gold has drawn some heavy hitters. Billionaire George Soros and Alibaba Chairman (and Yahoo’s partner) Jack Ma have placed their bets on Chinese retail demand for gold via the IPO of jeweler Chow Tai Fook. Interest for gold in general has exploded over the last decade, with physically-backed ETF GLD becoming the second largest ETF by assets.

Gold prices have taken a big hit of late, though. The yellow metal is down more than 16% from its August highs, while gold mining stocks like Goldcorp, Newmont, and Barrick Gold have been mixed.

But China seems intent on developing its gold markets and increasing its exposure. PBoC’s Zhang Jianhua made it clear that his fear is currency debasement and an dangerous exposure to the U.S. dollar. China, with the second largest economy in the world and the greatest foreign exchange reserves, can have a big effect on any asset class it sets its eyes on, potentially providing further support for gold prices in the medium run.

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