The CEO of Bullionstar.com, Torgny Persson, was at the LBMA conference on June 25th and filed the following fascinating report to a blog site that I read from time to time during a lunch break confirming exactly what the Chinese think about their true local demand and the future of the derivatives/physical battle for price control.
“Following up on our brief discussion before, I’ve continued to follow your excellent blog and have some breaking news for you. I’m writing to you from the lunch break at the LBMA forum in Singapore today.
Among the speakers were Xu Luode, Chairman of the Shanghai Gold Exchange, and Zhou Ming, General Manager of the precious metals department for ICBC.
Mr. Xu started his speech by referring to the official figure of demand for the Chinese gold market 1189 tons, as published by WGC, but mentioned twice that the figure for consumption is likely higher. Later in the speech Mr. Xu mentioned and I quote the official translation in the headphones “..as the Chinese consumption demand of gold hit 2000 tons in 2013”. There you have it. The chairman himself said it out straight.
Other key takeaways from the Chairman’s speech:
– The government and the government agencies are strongly supporting the gold market development in China generally and the Shanghai free trade zone specifically.
– There’s a London fix for gold, there should also be a fix in China.
– The free trade zone will open up the Chinese gold market internationally. Settlement will be in RMB but with the possibility to freely exchange to other currencies.
The chairman focused especially on the strategic opening up of the Chinese market internationally and China influencing the international gold market.
Mr. Zhou’s speech was equally interesting.
According to Mr. Zhou, the commercial bank retail volume including sale and repurchasing in China was 500 tons in 2013, up 165 % compared to 2012. Of this ICBC stands for 200 tons. The four largest banks have 80% of the market.
Mr. Zhou also mentioned that the transaction increase for paper gold was up 27 % in 2013 i.e. much less than the physical demand. The volume of the OTC gold derivates market in China in 2013 was 550 tons according to Mr. Zhou and the market for interbank borrowing and leasing was 1300 tons in 2013 up 160% compared to 2012.
ICBC has over the last years restructured their precious metals department with a speciality branch in Shanghai. ICBC has more than 300 dedicated warehouses for gold in 36 provinces and more than 20 million gold clients!
The customers buy for ‘personal use’. It’s rare that anyone sells back.
Mr Zhou also interestingly mentioned that ICBC “can not meet the demand of the market” and that we will see “the price of derivatives delinking from the (physical) spot price”. He said that fluctuations will affect the pricing system in gold but that the market will retreat to the fundamental analysis of gold supply and demand to rebuild the current market structure (my comment: obviously hinting that the physical Chinese market will take over the current derivative markets flawed price setting mechanism). He was talking about the shift of trading distribution and price transmission mechanism in the light of this.
To summarize, I was stunned about the frank and straightforward remarks by both of the above gentlemen and just wanted to share with you as I know many in the industry including big media is reading your blog.
See attached pictures of Mr. Xu and Mr. Zhou from the LBMA forum one hour ago.
LBMA Singapore 2014 Xu Luode
LBMA Singapore 2014 Zhou Ming