China Flexes Its Gold Muscle

Beijing (May 16)  China has made another move in its strategy to assert its weight in the gold market. China’s ICBC Standard Bank has agreed to buy Barclays’ London precious metals vaulting business.

With this purchase, it will be the only Chinese bank with a vault in the U.K. Barclays vault can hold 1,800 tonnes of precious metals and is one of the largest in Europe. The terms were not announced and the deal is expected to close in July. Just last week ICBC joined with the London Bullion Market Association to become a market maker to clear metals trades.

In April, People’s Bank of China said it would begin setting a benchmark for the price of gold twice a day in yuan or renminbi. The Chinese are the world’s largest producer, importer and consumer of gold, yet the prices are set in London and quoted in dollars. The prices have been set in London not only for decades, but centuries.

“Their strategy is really more about having a local official renminbi price,” said Will Rhind, chief executive officer of the World Gold Council. “There is concern about trade moving out of London, but this actually increases the awareness and value and importance of gold in the world.”

Rhind said that, until recently, the Chinese weren’t allowed to own gold for investment purposes. “Gold is one of the best outlets available to Chinese investors. They buy gold as a form of savings,” he said.

“The Chinese, Russians, Indians and several Arab nations have been aggressively accumulating gold for several years now,” said David Williams, director of Strategic Gold Corp. “Two major reasons for this are debt defense and dollar defense. Gold is being used to counter the overwhelming influences of fiat currency debt loads and the dollar dominated world trade situation.”

Williams said he fully expects more of this kind of activity from China, Russia and even possibly OPEC nations. He believes it’s a positive move for the gold market.

Gold prices hit a 15-month high of $1,303 an ounce in May. The Chinese demand for gold jewelry fell 17 percent in the first quarter of 2016 according to the World Gold Council. The weak economy in China began to take its toll on these shoppers.

In addition, supply was constrained as a new national standard for hallmarking jewelry in China was set for May 4. Retailers had to adjust their inventories and replace it with new stocks that met the new Chuk Kam hallmark for 99 percent purity.

On the investment side, the Chinese see gold investments as a way to protect and preserve their wealth. The PBOC which added 10 tons of gold in February, another nine tons in March and overall has added 139 tonnes since July 2015. At the same time, China has been selling off its U.S. Treasury holdings.

The effects on U.S. jewelry companies are difficult to determine. Karat-gold jewelry equals 5.6 percent of retailers sales in the U.S. A Signet spokesperson said the company relied on the prices out of London and had no comment on China’s moves. Tiffany & Company had no comment.