China sends ripples through the global gold bullion market, and no one noticed

  (photo credit: INGIMAGE)
(photo credit: INGIMAGE)

Last week an event occurred which was completely missed by the mainstream media. The People’s Bank of China (PBOC) took the next important step to encourage a wider and less wealthy section of Chinese citizens to purchase gold and silver bullion. The PBOC opened the facility for citizens to convert renminbi cash savings held in the public’s own bank accounts to be converted into physical gold at the click of a button.

As we saw back in 2010, the PBOC began sending a message to all global liquidity providers that they are going to defend the value of these gold positions for their own citizens. This freshly introduced gold savings program advises citizens to make regular monthly purchases with the expected return of these investments to rise solely from gold price appreciation. This sends a clear message that the gold price is going to rise from current levels. London bullion dealers are already increasing their gold bullion buyback rates above the spot price as they struggle to source enough stock at the current gold price due to a tight international market.

This program is the next leg of a multi-decade incentivised gold purchase call to Chinese citizens. The last time China incentivised her citizens to buy gold bullion bars and coins was directly after China removed controls on precious metals in 2010. Some investors may recall when state-owned Chinese television channels began openly advertising investing in gold on mainstream television in conjunction with house-sized billboards with advertisements to encourage China’s growing middle class to buy gold as an investment. 

China plans to enrich its citizens with the gold market and as seen in 2010, they are also sending a message that they will protect the gold price from a collapse given the gold price exposure its citizens will have. The movement of a few dollars here and there is irrelevant, it is the larger downside moves that will be bought into by Chinese institutions to support prices. 

For reference, the gold price was benchmarked in London at $1100 in 2010 when the Chinese government started to advertise gold investment to its population.  By no coincidence, not once since then has the gold price traded below that level. In fact, since then we regularly see Shanghai gold trading at prices that are at a $50 premium to the gold spot price. 

Now that the next leg of this multi-decade plan to enrich its citizens has started, the PBOC is moving the focus to include hundreds of millions of smaller clients who currently have little or no exposure to gold, it tells us that the PBOC is considering the current gold price as undervalued and is once again preparing to defend these millions of purchases from a major crisis.

Some investors may ask, why now? Following gold becoming a Basel III compliant first tier asset on the 1st of January 2023, the PBOC now have some control of the physical markets to underpin and take advantage of gold price declines. Gold bullion liquidity providers are now forced to be net stable funding ratio compliant, making the conversion of western denominated paper gold into physical gold being a seamless and very frictionless operation.

What is also impressive about the gold savings scheme is that physical gold can be withdrawn from the Shanghai exchange on a t + 0 basis, which is immediate. Therefore, these purchases constitute real bullion held in the name of each client's personal account rather than unallocated bullion. Given that this new Chinese retail demand is competing with PBOC and BRICS+ central bank buying, the scale of this additional physical gold demand should not be underestimated. 

For context, China's population is currently 1.5 billion people. The top five Chinese banks have over $103 trillion in assets which is 6.93 CNY to one dollar, making their assets around 14.86 trillion dollars. This new move will send ripples through the global physical gold markets which is already being felt by dealers in London.

China’s latest drive for its citizens to increase their gold holdings is a strong signal to global investors that China believes that gold is undervalued at its current market price but also signals that they will not encourage their citizens to place their wealth into gold bullion and allow them to make a loss on that investment. China will play its role in underpinning demand should the market begin to fall below current levels to prevent prices from falling. 

Speculators have been selling paper gold contracts in response to higher consumer price inflation because they believe that higher inflation will lead to central banks raising their base interest rates, increasing the opportunity cost of holding non-yielding gold and silver bullion. Other investors believe that western central banks are trapped by their own government’s indebtedness and cannot sustain current interest rates without provoking another financial crisis.

An interest rate pivot is very likely to signal to the market that G10 currencies are due for further depreciation on foreign exchanges which could lead to a scramble for safe haven assets such as gold bullion bars and coins. Perhaps it is this that China is trying to position its citizens to gain from. One thing is for sure, that a higher revaluation of the gold market will lead to a major tilt in global wealth from west to east with major gold consuming nations China and India’s populations seeing a fast increase in their wealth due to their exposure to gold. 

This article was written in cooperation with Amberley Hills IG Ltd