Gold News

Gold Price Jumps as China Debt-Market Rule Sinks Stocks, Yuan

The GOLD PRICE rose sharply Tuesday lunchtime in London, touching $1219 per ounce as Western stock markets fell hard following a 5% plunge in Shanghai, spurred by a change in China's debt market.
 
Major Western government debt prices rose, pushing interest rates lower, as weaker Eurozone debt fell.
 
China's main gold contract closed Shanghai trade 1.4% higher in Yuan terms on solid volumes. But it had earlier slipped to a slight discount against Dollar spot prices as the Chinese currency extended its fastest drop since 2008 to a second day.
 
"After sitting at [premiums] around +$2.50 to +$3.00 yesterday," says a note on Asian trade from Swiss refining and finance group MKS, "buyers were happy to scoop up metal here, which kept the spot gold buoyant above $1200."
 
Local traders attributed the Yuan's sharp decline – down to its lowest level vs. the Dollar since July – to "a late reaction to Monday's [weak] trade data," MKS adds, "as well as an expectation of a near term cut" to the required reserve ratio of Chinese banking deposits against loans, meaning looser of monetary policy.
 
Announced Monday, the new rule from China Securities Depository & Clearing Corp. won't allow anything other than AAA-rated bonds to be used as collateral for raising short-term loans through so-called "repo" agreements.
 
The change, says Bloomberg – quoting analysis from Haitong Securities Co. – "means about 470 billion Yuan ($75.8 billion) of outstanding debt can no longer be pledged" in such deals, where the borrower and the lender agree the repurchase of the asset at the end of the loan.
 
In particular, complex "funding vehicles" issued by local government will be blocked as collateral.
 
Such LGFVs now total CNY 17.9 trillion ($2.9 trillion), swelling 67% between 2011 and 2014.
 
Beijing raised concerns over local government debt by publishing a detailed audit in January.
 
The politburo of Premier Li Keqiang then capped new borrowing in October, saying it would not bail out authorities who failed to meet repayments.
 
To formalize local government borrowing instead, rules barring the sector from issuing exchange-traded bonds have recently been eased.
 
"China, for all its talk about economic reform, is in big trouble," reckons Anne Stevenson-Yang, research director of J Capital, speaking to Barrons last week.
 
"The country is now submerged by the tsunami of bad debt that begets further unhealthy credit growth to service this debt."
 
Official China data say GDP grew four-fold over the decade to 2014. China's private-sector gold demand rose 15 times by value over that period on the most widely-accepted data, overtaking world India as world No.1 by weight in 2013.
 
Dollar prices for London wholesale gold traded 2.0% higher for the week so far as New York trading began Tuesday.
 
Gold prices also rose sharply for non-Dollar investors, hitting a 7-week high in Sterling and a new 19-month high against the Japanese Yen.
 
Silver meantime rose 2.5% from last week's close in Dollar terms, touching its best level since the end of October at $16.82 per ounce.

Adrian Ash is director of research at BullionVault, the world-leading physical gold, silver and platinum market for private investors online. Formerly head of editorial at London's top publisher of private-investment advice, he was City correspondent for The Daily Reckoning from 2003 to 2008, and he has now been researching and writing daily analysis of precious metals and the wider financial markets for over 20 years. A frequent guest on BBC radio and television, Adrian is regularly quoted by the Financial Times, MarketWatch and many other respected news outlets, and his views from inside the bullion market have been sought by the Economist magazine, CNBC, Bloomberg, Germany's Handelsblatt and FAZ, plus Italy's Il Sole 24 Ore.

See the full archive of Adrian Ash articles on GoldNews.

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