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Oct 2014 - East West Struggle

  • What happened in September 2014 ?
  • The gold price tumbled down about US$100/oz from ~US$1320/oz as shown in Figure 1a , with Goldmans re-iterating their forecast (in early Sept 2014) of $1050/oz by y/e December 2014, and stating "short" gold, based on a stronger US economy and strengthening US$.
  • As a delegate commented at China's (Govt participated, first) Gold Congress in Beijing from 10 to 12 Sept 2014, "Everyone knows that Goldmans talk their own book. If they have the financial power to cause (manipulate?) that to happen & make money for their clients,what's wrong with that?"
  • At the Congress, China was clearly frustrated with the gold price. More than one presenter stated "in 2013 : we (China) produced the most physical gold (~428t in 2013), consumed the most gold (~1100t), and traded the most gold in Asia (>40kt in 2013), but yet we have little control over the gold price, especially outside of our normal trading hours (ie Comex)".
  • China believes one of the main issues affecting the gold price is the strength of the US$,with gold showing a classic inverse correlation to it. The US$ index has continued to strengthen because there is no alternative reserve currency, with the € (Euro), £ (GBP) and ¥ (JPY) all in trouble.
  • ICBC (and China) appears to firmly believe that in the long term, gold has to rise, simply from its direct correlation with the combined world central bank's balance sheets as shown in an ICBC presentation, with the current movements in the gold price shown in Figure 1b, described as "a short-term fluctuation in a long-term rising chart". It has to be recognised that China does not think of gold from a < 1-year viewpoint, it takes more of a 5, 10 or 20-year outlook and beyond.
  • Aside from the significant rising jewellery and investment demand for gold and silver in China and its manufacture into everyday objects such as plates, cups, goblets and tea-pots with a further 200m people expected to join the middle class to form 500m by 2020; current gold holdings in China are apparently ~5g/capita, compared to the world average of ~23g/capita.
  • Against this background, on 29 September 2014 (being the one-year anniversary of the official launch of Shanghai's FTZ [free trade zone]) the International Board was to be formed by China in Shanghai's FTZ. The two initial aims of the International Board are the establishment of a recognised daily world gold benchmark in RMB/g (with physical trading backed by a 1000t gold vault) and the internationalisation of the RMB as a reserve currency.
  • However, on 18 September, China's Premier Li Keqiang launched its international gold bourse 11 days earlier than planned (due to the weak gold price ?). All gold transacted within the FTZ has to be physically backed and held in the currently 1000t FTZ vault. Known as "Shanghai Gold" contracts they are denominated in RMB/g. The main contract was expected to be the 25kg bars. Gold control was targeted to be first, then silver, then platinum and then spot.
  • China has planned for this internationalisation, and the rest of the western world is scrambling to catch up. Singapore announced it was having trading difficulties with its 25kg US$/oz launch now delayed from September to "sometime in October". At the Congress, the CME (Comex) stated in a presentation that they would be launching a new 1kg US$/oz physical contract in Hong Kong later this year (date not specified) - which all infers that the western world were not fully prepared for it.