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China's Gold Trade Financing "Only Small Part" of Leasing Boom

Gold bullion leasing surged in China in 2013. Bulk remains in the industry says new report...
GOLD TRADE financing in China accounts for "only a small portion" of the country's recent surge in gold leasing, according to a leading precious metals consultancy.
This counters claims from other analysts, notably Goldman Sachs, who believe gold bullion makes up a significant part of China's trade financing, where physical commodities are borrowed and sold to raise cash for other investments, or used as collateral to raise still more loans.
"Imported gold is being used via gold loans and letters of credit to raise low cost funds for business investment and speculation," said market-development organization the World Gold Council in its recent report, China Gold Market: Progress & Prospects.
"If bad debts lead to liquidation of collateral," says Scotia Mocatta, part of Canada-based Scotiabank, in its latest monthly analysis, "then distress selling of gold could be seen."
But deregulation of China's gold market from 2010 invited a surge in gold leasing, says London-based consultancy Metals Focus. Because it allowed banks to lend gold to end-users such as manufacturers in a bid to improve the availability and flow of metal to the domestic industry.
In 2013, "robust physical demand" from Chinese end-consumers – now the world's heaviest private buyers – then "led to a rapid expansion of gold leasing," says the consultancy's new Precious Metals Weekly. Because with gold's volatility jumping with Chinese demand during the spring 2013 price crash, fabricators grew "desperate to cut exposure to adverse price movements, with gold loans offered by commercial banks being an obvious solution."
Metals Focus notes that gold bullion leasing via the Shanghai Gold Exchange reached over 1,100 tonnes in 2013, rising some 180% from the previous year. "The key question here," it says, "is what portion of this 1,103t borrowed gold is tied up by pure 'financing' flows." 
Citing field trips to Shanghai, plus other market intelligence, "Our understanding is this only accounts for a small share of the overall leasing market," the consultancy says, attributing China's "growing appetite" for gold leasing to supply-chain management by jewelry and investment bar manufacturers.
Analysts at other leading banks have recently argued over quite how large the stock of gold bullion used as collateral to raise loans in China may be, with UBS rejecting Goldman Sachs' gold trade finance estimate as "far too large".


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