Tag Archives: gold

China Said Issuing First Gold Import Licences To Foreign Banks

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IF SHANGHAI’S GOLD futures market is to take off, it will require greater participation by foreign investors than hitherto. That in turn will mean letting more foreign investors in to the physical market. Reuters reports the first signs of that, saying ANZ and HSBC have been granted the first gold bullion import licences to be given to foreign banks. The news agency attributes its intelligence to unnamed sources. Neither bank would comment on the report, but it gains credibility from the fact that the pair were the first two foreign banks allowed to trade gold futures on the Shanghai Futures Exchange.

The People’s Bank of China said last September that it would increase the number of bullion import licences. Expanding the number of banks able to import gold to 12 from the current nine (China Everbright is also said to have been given a license) would also ease the demand pressures on the metal. The government controls import volumes with quotas. Nonetheless, last year gold imports more than doubled to at least 1,060 tonnes. As a result, China displaced India as the world’s top gold importer.

The exact volume of imports is uncertain. China doesn’t make pubic the volume of its gold imports, so we have to rely on the export volume from Hong Kong, which is the source of most of the bullion entering China. That is the number quoted above.

The constraint on supply means that physical gold usually sells in China at a modest premium to the world price. That is currently $15 an ounce, down from the $30 an ounce it reached in April and May last year. The new licences, if confirmed, won’t make much of a dent in that, but this Bystander expects more new licences for foreign banks to follow.

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Work To Resume On Myitsone Dam?

This Bystander is getting reports that suggest Myanmar may be gearing up for the resumption of work on the Myitsone Dam, if not immediately then at least once the summer rains are done. Myanmar’s President Thein Sein unexpectedly and unilaterally pulled the plug last September on state-owned China Power Investment Corp.’s hydropower project in Kachin state near the headwaters of the Irrawaddy river. We now are told that in the past two weeks Myanmar government soldiers have been re-evicting 100 local villagers who were originally relocated from the area but since the project’s suspension have returned to reclaim their old homes. Soldiers have also been leveling the remains of the village, according to Kachin activists.

Ethnic Kachins, who have been fighting the Nawpyidaw government for greater autonomy for their state, particularly since a 17-year old truce broke down last June, have been at the forefront of the opposition to the dam. Environmental groups say it will damage the ecology of the Irrawaddy, the country’s main waterway. Some 2,000 villagers were moved out of five villages in 2009 and 2010 so construction could start. Apart from being removed from ancestral homes that will be submerged by the reservoir created to feed the turbines, they complain that they have been resettled on land too barren to farm.

The latest round of clearances followed by a week a call by China Power Investment’s president, Lu Qizhou, to restart work on the dam. President Thein had said it would remain suspended for the duration of his term of office, which runs until 2016. But we here the sounds of backtracking. Reports say a compensation deal has been hacked out and discussions continue to get work restarted. Yet it remains a thorn in the side of relations  between Beijing and its old ally in Naypyidaw, which is now as less steadfast one as it opens more to the outside world. The fighting in Kachin, refugees spilling over the border into Yunnan and drugs- and gun-running are making China’s western reaches more unsettled than Beijing cares for.

Plus it wants the power. The Myitsone dam was to be the first in a series of seven on the upper Irrawaddy that would eventually supply hydropower to western China. Planning work on the other six has continued and China Power Investment employees have remained on site at Myistone, where, we are told, they have been mining for gold with CPI’s Myanmar partner in the dam project, Asia World, Myanmar’s Mining Enterprise No. 2 and Hka Ka Bo Mining.

Large-scale panning of gold on the Irrawaddy and Chindwin rivers is to be banned when existing one-year mining permits expire later this year. Discharges of mercury and the other highly toxic waste chemicals are polluting the rivers, while the open mining is eroding the top soil. We have no independent confirmation of CPI gold mining, but many gold mines in Kachin state not operated by the military and their friends are operated by Chinese interests. Truckloads of gold-containing earth are seen being driven back to China for processing.

It may be the re-evictions are to prevent interference with the gold-mining operations. One other factor to consider is the weather. Work on the dam would anyway be suspended during the rainy season, from June to October. Many workers from Sinohydro, the sub-contractor building the dam for CPI, were already off-site last year when President Thein made his announcement about suspending the project. Even if work restarted tomorrow, there would be only two months before the rains come. Yet such is the political pressure from Beijing to restart the project, a resumption of work once they cease looks a more than fair bet.

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A Glittering Year For China’s Gold Bugs

Demand for gold in China shot up by 20% last year, according to the World Gold Council’s latest Gold Demand Trends report. Some of that reflects a long-standing Chinese affection for the metal; some a newer obsession with all things conspicuously luxurious. The Council says Chinese consumers bought 510.9 tonnes of gold jewelry in 2011, worth $25.8 billion and a 13% increase over the previous year (the global market shrank 3%). China surpassed India as the world’s largest market for gold jewelry in the second half of last year, the Council says.

The fastest growing demand for the metal in China came from investors, however. Only a slither of that is likely accounted for by the People’s Bank of China. Globally, central banks more than quintupled their net gold buying last year from 2010’s levels, to 439.7 tonnes, to diversify their foreign exchange reserves and reduce exposure to the travails of the two main reserve currencies. However, China’s is not among the eight central banks the Council names as prominent official buyers, with Mexico and Russia’s accounting for nearly half of net purchases.

Instead it was individual Chinese, now able to buy more easily through both the official exchange in Shanghai and unofficial exchanges in other big cities, that were the driving force behind China’s investment demand in 2011. In a year that saw the gold price hit a record of $1,895 an ounce in September before falling back, consumers bought a record volume of 258.9 tonnes of gold bars and coins, worth $12.9 billion, up 38% on 2010’s purchases. Domestic investors saw gold both as a traditional hedge against the year’s high inflation and as a better alternative than stocks, property or cash savings in an uncertain year. The appreciation of the currency meant the metal’s price rose by only 4.3% in yuan terms over 2010 compared to its 8.9% rise in dollar terms.

With the gold price pulling back 15% from its record high, authorities cracking down on illegal trading and inflation moderating, will China’s gold bugs be as bullish in 2012? “Signs of economic slowdown in China, and the increasing maturity of the market, are likely to result in a deceleration of recent growth rates, evidence of which was already coming through last quarter,” the Council warns.

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America Demotes China As Its Banker

How do you get tough on your banker? As we know from Wikileaks, that was the rhetorical question U.S. Secretary of State Hillary Clinton posed to Australia Prime Minister Kevin Rudd in 2009. She may not realize it but she has just changed banker, from Beijing to New York.

New figures from the New York Federal Reserve Bank show that its holdings of U.S. Treasury securities now exceed those of China (via FT). Thank the Fed’s quantitative easing, under which it has been buying up Treasury debt under several programs that the New York Fed conducts, the New York Fed now holds $1.1 trillion of U.S. government paper. China holds $896 billion-worth and Japan $877 billion, according to the U.S. Treasury’s most recent data on foreign holdings. Foreigners hold $2.6 trillion of U.S. Treasuries in all.

Once the Fed’s quantitative easing program is complete in June, the New York Fed may be holding $1.6 trillion in U.S. government debt, close to Beijing and Tokyo’s combined total.

Footnote: If China isn’t buying U.S. debt, what is it buying? Gold, or at least ordinary Chinese are buying it by the ingotful, according to the FT:

China’s gold imports are estimated to have more than doubled from a year ago in the run-up to Chinese new year, putting the country on track to overtake India as the world’s largest consumer of the precious metal.

We noted late last year that China’s gold bugs were shining bright. They have clearly not lost their luster. The FT quotes the estimate of one banker that China has imported 200 tonnes of gold over the past three months.

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China’s Gold Bugs Shine Evermore Brightly

China is approaching another ‘world’s largest’ designation, this time world’s largest consumer of gold, a title currently held by India. Since August, when the government made it easier for consumers to buy gold and more banks to import it, demand has soared in what is already the world’s largest gold producer as investors have sought insurance against rising inflation, falling property and stock markets and uncertainties over currencies from the yuan to the dollar to the euro. A bull market in bullion won’t have hurt, either.

Shen Xiangrong, chairman of the Shanghai Gold Exchange, describes the situation as a “private gold hoarding boom“. Shen said that the gold transaction volume on the exchange in the first 10 month of this year, at 5,015 tonnes, was 43% higher than in the same period of 2009, with transaction values topping 1.3 trillion yuan ($195 billion). China does not normally make public its gold trade figures, but Chen, who was speaking at a gold conference in Shanghai, said that imports in the first 10 months of this year were 210 tones, a 480% increase on the same period a year earlier.

On an annualized basis, China’s gold imports would reach 250 tonnes this year. Applying a simmer projection to the official gold output numbers, domestic production could reach 325 tonnes for 2010. Combine the two and it puts China, at 575 tonnes, up from 400 tonnes in 2009 and stealing up on upon India’s total gold demand last year of 612 tones. India’s imports, too, have been on the rise this year, so its overall demand is likely to have increased, as well, but it seems a case of when, not if China’s demand overtakes it. A measure of how far China has been satiating its appetite for gold is that a decade ago demand was 200 tonnes.

With world gold prices touching (nominal) highs, Chinese investors are going to be exerting increasing influence on the gold price. The Shanghai Gold Exchange is studying new products such as spot options and exchange-traded certificates to exploit the new interest, Shen says.

Another potential purchaser of gold is the central bank. Xia Bin, an advisor to the People’s Bank of China, has echoed recent calls for the bank to add to its gold reserves as a way to boost the credibility of the yuan’s internationalization. Gold accounts for 1.6% of the reserves held by the People’s Bank of China, according to the World Gold Council. With $2.65 trillion in foreign-exchange reserves, it has plenty of cash with which to increase that share.

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China Gets A Greater Strategic Taste For Gold

There is a whiff of coordination to a couple of published comments suggesting the country should convert some of the dollars it is holding in its foreign-exchange reserves into gold to avoid losses from a weakening dollar. Shao Fenggao, an official at China Construction Bank, writing in China Business News, echoed a similar sentiment expressed by Meng Qingfa, a researcher at the China Chamber of International Commerce, in the International Business Daily, a newspaper affiliated with the Ministry of Commerce, whose minister recently said dollar issuance in the U.S. had gotten “out of control”, exporting inflation to China.

China’s foreign-exchange reserves are the world’s largest. They hit a record $2.65 trillion at the end of September, but gold accounts for less than 2% of the total, an extremely low percentage by global standard. In raw terms, China owns 1,054 tonnes of gold, as best is known; the U.S. holds 8,133 tones. If China did up its gold holdings, it would be doing so after a bull run that drove prices of the metal to new records, but if it did so on any scale, say to match America’s holding, as some officials have suggested, it would reinvigorate the gold bugs who have taken a breather recently. The China effect would be just the same on gold as on any other commodity.

Another straw in the wind of the changing attitude towards gold is the easing of import controls on gold bullion last month, letting Chinese investors buy more on global markets. Beijing used to fret that too much gold coming into the country would mean a drain on its stocks U.S. dollars. Those are less valuable assets to preserve these days, and will only be increasingly so as the yuan strengthens against the dollar. Switching foreign-exchange reserves into gold would also be a move in the direction of strengthening the yuan’s credibility as a global reserve currency — a double reason for buying gold.

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Beijing In No Rush To Buy IMF’s Gold

People close to the central bank are pouring cold water on the idea that China should buy the large stock of gold the International Monetary Fund is looking to unload. Li Yang, a former advisor to the bank, was quoted by Reuters as saying it would be cheaper to buy domestically mined gold than buy it from the IMF, which last month sold 200 tonnes to India at $1,045 an ounce (which adds up to a total bill of $6.7 billion). Not that China couldn’t afford a similar purchase given its $2.3 trillion in foreign reserves, but the very size of those reserves also undermines what would be the main reason for buying the metal, to diversify away from the dollar. It just wouldn’t make that much difference. And apart from being nice to the IMF, why buy its gold when the metal is selling at record prices? In April, China, which is the world’s top producer and consumer of the metal, said it held 1,054 tonnes of gold, an increase of 76% from its previous announced stock six years ago.

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China Becomes A Gold Bug

China says it is now the world’s fifth largest holder of gold. Hu Xiaolian, head of the State Administration of Foreign Exchange, told Xinhua that China’s gold reserves stood at 1,054 tonnes at the end of 2008. That is up by 454 tonnes from the last time the country made the size of its gold holdings public five years ago. China, which is the world’s largest gold producer, is now owns more gold than Switzerland and is one of only six countries to hold more than 1,000 tonnes of the metal.

Hu’s announcement is further evidence of Beijing’s diversification of its foreign exchange reserves away from dollar-denominated assets, though to keep things in perspective, the gold holdings are worth $31 billion at current prices, versus foreign exchange reserves of  nearly $2 trillion, and the U.S., the world’s largest holder of gold has 8,134 tonnes, according to the World Gold Council.

The question for investors is whether Beijing plans to buy more and, if so, how much. Intriguingly, the IMF has a 400-tonne holding it has indicated it wants to sell.

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All That Glitters

China is now the world’s biggest gold miner. South Africa had boasted that title since 1905. But no longer. China mined 4 tonnes more in 2007 (276 tonnes vs 272 tonnes), says London precious metals consultancy GFMS, enough to vault it into top spot.

It is already the world’s leading producer of aluminum, zinc and lead; the second largest of tin; and among the top 10 in copper, nickel and silver.

China and South Africa mined 22% of the world’s yellow metal last year between the pair of them. Though China’s gold production has grown 70% in the past decade, South Africa’s has halved, Stricter safety regulations and rising production costs have made it a tougher business, even though price of gold has hit record levels. The same is true for other leading producers, such as Australia, Canada and the U.S., one reason that world gold production fell 1% last year.

China, meanwhile, has a large number of small-scale mining operations that are not over-troubled by safety regulations. Silicosis in miners from uncontrolled silica dust and arsenic and cyanide waste run offs from the mines are chronic problems.

GFMS notes that demand for gold, particularly for jewelry, grew strongly in China last year. And on the investment side, the Shanghai Futures Exchange has just launched the country’s first gold futures contracts, which should give Chinese companies even more influence over world gold prices.

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