The tension between centrality, on the one hand, and competition, on the other, is probably the oldest of all market structure issues.- Arthur Levitt
"Show me the Structure of a Market and I will tell you who benefits from that structure. Show me that and I will show you how that market is gamed"-VBL
UPDATE- 2:14 PM EDT
China's Stated Gold Reserves are now 1670 Metric Tonnes
REUTERS Sept. 7: China's gold reserves rose to 58.95 million fine troy ounces (oz) at the end of August, from 58.79 million fine troy ounces at the end of July, the central bank said on Wednesday. (Reporting by Beijing Monitoring Desk; Editing by Himani Sarkar)
- GFMS assessed Chinese demand at 867 tonnes for 2015.
- Estimates of true Chinese demand are north of 2,250 tonnes for 2015 [Click for Section]
China Will Confiscate its Domestic Gold
The quote by Arthur Levitt above is apt. China is explicitly a centralist economy. The US may be headed in that direction as well slowly. But China does not need the propoganda skills that the US employs to remove our freedom. That's not to say they don't have those skills. They just have a market structure that obviates the need to candy coat what they want if the time comes.
Market structure is key to an institution successfully controlling that which it needs to control. China's Gold market is an example in extremis of how market structure can and will determine the end game for the powers that created or influenced the structure's creation.
China is not a Democracy. It is capitalist statist entity projecting itself that it is moving towards democracy. Not true. We will show using market structure as our guide the likely path of Gold ownership in the future should a crisis occur.
China is Getting Ready For Center Stage
Let's be straightforward. China will at some point confiscate the Gold in its country. Most likely during a crisis of faith in its or some other currency. Also likely when the IMF states that Gold will become part of a new basket of currencies to better represent a stable medium of trade. Imagine if you will, the point where soft money is no longer trusted. Countries like China and the US can simply point to their Gold reserves and say, " No problem, we have Gold. If you need it for international trade, then by all means we can accommodate you."
There does not need to be a Gold Standard. There just needs to be Gold in a country's possession. Think of it as Financial Detente. "We have it but don't want to use it unless absolutely necessary. So you can trust our currency." You don't demand Gold for international trade, and we won't".Currencies continue to be debased with the "promise' of a nuclear option of instant commerce slowdown if anyone uses the Gold Option. And the Yuan's entry into the IMF currency basket on October 1 is a first material step.
China “Owns Gold Through its People"
That is a direct quote from a Chinese banking official. What does that even mean? It means that China has directed its citizens to be buyers of Gold. Every swoon in Chinese stocks brings more Chinese gold buying. The Yuan's inclusion in the IMF SDR and China's subsequent pitching an SDR bond to its people is also a potential Gold play. China is using its companies, exchanges, banks and people as piggy banks for when it needs its Gold. Then it will likely confiscate it "for the good of the country"
Not your Father's Central Bankers
The question becomes then, How much Gold do the major economic powers of the world have on hand? You cannot know, for they are not done buying. And unlike the Central Bankers of old, these Supranationals understand that transparency in purchases of Gold only creates a higher price. They finally get it. You do not go on the front page of Barron's touting your investments until you are done buying. And they are patiently buying.
Control vs Ownership
What does give us a clue if not to the actual amount of Gold held by China is the market structure of the Chinese Bullion Market. That gives us a much better idea of how much Gold they own and/ or control. Controlled assets are a step away from being owned. You may own your house, but the bank controls it via the mortgage.When your house is worth 200% of its current value, and inflation is raging and you are turned down for a home equity loan, you will feel it.
Gold Delivered in China, Stays in China- that last guy ain't leaving China
Chinese Gold Market Structure
- China owns the PBOC
- The PBOC owns the SGE
- All Gold in and out of China must pass through the SGE
- The overwhelming majority of Gold in China is stored in SGE vaults
- China created an interbank Gold market expressly so its free standing banks can act as agents for the PBOC in buying more Gold
- The SGE: because of its stored Gold and its designated status as the intermediary for China's interbank Gold market is the only Bullion market in China
- China's free standing banks are under the PBOC thumb both commercially and legally.
- China has encouraged its citizenship to buy Gold, even going so far as to pitch the first IMF bond issue that includes the Yuan as part of the currency basket. "To buy the Yuan is to own Gold" we imagine is their motto
- If the PBOC wants to own all the Gold in the SGE vaults, it merely has to tell those banks to buy it, and they will comply.
- More deviously, the PBOC can simply seize that gold as it owns the SGE, its assets and its vault
The structure above lends itself to easy confiscation if China ever needed to. It can confiscate all the gold held at the Shanghai Gold Exchange (SGE)and Hong Kong markets.
Why are they accumulating Gold? To divest themselves of USD exposure.
- China is awash in Dollars from treasury purchases over the years. Those purchases were to lend the USA money so it could keep buying Chinese goods. The trade deficit between the two countries was offset by China loaning their main customer money. China has been testing the waters for years on the USD's dominance but careful not to talk too harshly for fear of killing their own bond holdings.
- Meanwhile they started cutting global deals wherein they paid for goods in USD. Soybeans in Argentina, Oil in Africa, Oil in Trinidad. All these countries were only too happy to do the trades, for their own currencies are pegged to the USD. Therefore, they needed dollars in their vault to back their own currency. Additionally, China used their negotiations to secure more votes at the UN, especially from African countries. But it is the market structure that cannot be ignored.
- We would also not be surprised if the US and China worked hand in hand to keep US bonds stable as China started unloading its holdings in 2011. It is logical to help your biggest trading partner divest itself of Dollar risk. Adn who will be long dollars when it is over? The Brics and countries tying themselves to the USD peg. Aren't we the safest credit risk in the world? Then why are our own rates not negative reflecting that?
So how much Gold does China own or Control?
First some observations on how Gold is moved around when it is.
In the Chinese domestic gold market nearly all physical gold supply and demand flows through the SGE because all bullion import into the domestic market is required to be sold first through the SGE and there are rules and tax incentives that funnel nearly all domestic mine output and scrap supply through the central bourse. As gold in the Chinese domestic market is not allowed to be exported, the amount of gold withdrawn from SGE designated vaults therefore serves as a decent indicator for wholesale demand.
- 95% of all gold imported into China since 2000 has remained in China.
- Gold is not allowed to be exported without the PBOC's consent, merely being traded form one "bank" to another without ever really leaving the SGE vault.
- Imported or mined Gold placed in the SGE vaults is not PBOC Gold but rather hoarded by private investors (likely as agents for the PBOC)
- PBOC gold purchases cannot be traced from global trade data or SGE withdrawals because these are technically private market transactions.
- The PBOC can and does avoid customs reports when transferring Gold to different holding places by declaring their Gold as "monetary". Monetary Gold's dollar value is not listed. That part of the form is left blank. So the amount transferred is not disclosed.
- the PBOC presses a button and that Gold is confiscated.
- the SGE does not publish the amount of Gold held in its vaults.
- Withdrawals form the SGE happen on occasion, with that Bullion usually becomes an official holding of the PBOC (2.6 tonnes in 2015)
- Relocated to the LME or other places outside government agencies including China's State Admin of Foreign Exchange (S.A.F.E.)
- What is S.A.F.E.'s Functions?
- drafting laws, standards, policies and reform of the forex administration system
- risk management and monitoring of balance of payments and the external credit and external debt
- development and supervision of the foreign exchange market,
- setting Renminbi convertibility / exchange rate policy
- operations and management of foreign exchange reserves, gold reserves, and other foreign exchange assets of the state.
When you combine the public Gold reserves of China with the Gold controlled by the PBOC through owned or controlled intermediaries, China may have as much Gold or more than the USA publicly claims it has.
In the Gold Survey 2016 report by GFMS assessed Chinese demand at 867 tonnes. Try again.
As gold in the Chinese domestic market is not allowed to be exported, the amount of gold withdrawn from SGE designated vaults therefore serves as a decent indicator for wholesale demand.
Estimates of true Chinese gold demand in 2015 must have been north of 2,250 tonnes (import 1,575 tonnes, mine output 450 tonnes, scrap supply 225 tonnes)-Koos Jansen
And that Gold is all the PBOCs if they ask for it.
This is What They Let You Know.
What About the USA and other Countries?
Rest assured, any country in the know is repatriating its Gold in anticipation of a new world order where the IMF SDR replaces the USD. Some examples
As other countries take their Gold back from us...
We take ours back from them
Europe through 2014
Gold Confiscation in the USA?
Not likely.They do not have to. Just follow the example, accidental or otherwise of the Xetra-Gold delivery issue.
- Don't deliver
- Blame someone in the chain
- Obfuscate the issue
- Placate with an alternative
Or this could happen
- TheGov't declares force majeure because oftheflight of Gold out of theUSA.
- All physical futures contracts are now cash settled temporarily
- Gold transactions receive new VAT treatment
UPDATE 6:40 you cannot make this up-soren k.
So what does one do if that is the case?
Buy Silver now.
- It won't be confiscated but it will be hoarded by the Govt like Oil
- JPM owns more than any other firm on earth.
- Through subsidiaries JPMorgan owns or controls between approximately 432 million- 582 million ounces of silver. Estimated value of physical silver and silver mining shares owned and/or controlled by JPMorgan is between approximately $9-$11 billion.
- When Gold rallies, do you think Silver will be left behind?
- When Gold is only government domain, what will take its place in the public eye as a tracking stock?
More on this later as we sift through the JPM 13f and thier own corporate structure. But for now, something to think about.
Behavior between Fed Hawk talk and today's Payrolls
Articles by Vince Lanci
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