Has the PBOC Taken Control of The Gold "Market"?

(July 12, 2018 - by Craig Hemke)

The evidence is mounting, and we invite you to consider the implications.

First, a few items of background information. Perhaps these are unrelated, perhaps they are not.

• In 2013, a major Chinese conglomerate called Fosun International purchased One Chase Manhattan Plaza from JP Morgan: https://money.cnn.com/2013/10/18/news/china-jpmorg... Why would this be significant? Because it’s the same property that houses a massive underground gold vault ... that just happens to be directly across the street from the New York Fed: https://www.zerohedge.com/news/2013-03-02/why-jpmo...
• Next, ICBC (Industrial and Commercial Bank of China) purchased the lease of DeutscheBank’s massive London vaults in early 2016. ICBC then petitioned to join JPM, HSBC, Scotia, Barclays and UBS as a member of the London Daily Fix process: https://www.telegraph.co.uk/finance/commodities/12...
• Soon thereafter, ICBC also bought a massive London gold vault from Barclay’s: https://www.theguardian.com/business/2016/may/16/b...
• Most recently, the World Gold Council announced the offering of a new gold ETF to supplement the existing GLD. The custodian of the gold for this new fund? You guessed it ... ICBC: https://www.prnewswire.com/news-releases/icbc-stan...

Fast forward to the summer of 2018. Two weeks ago, our fellow columnist here at Sprott Money, David Brady, wrote an insightful piece regarding a new correlation for the global gold price—the USDCNY—which is the exchange rate of US$ to Chinese yuan. Though the PBOC maintains a "peg" for this rate, the rate is allowed to fluctuate if the PBOC deems it necessary. Before we go on, I urge you to read David’s column: https://www.sprottmoney.com/Blog/gold-the-chinese-...

Now consider this. Since the PBOC began to actively devalue the yuan versus the dollar four weeks ago, the price of COMEX gold has tracked the yuan nearly tick-for tick. This is clearly shown on the chart below. We’ve taken the USDCNY and inverted it to CNYUSD. This is shown in candlesticks. The price of the Aug18 COMEX gold is represented as a blue line.

However, upon further review, this is not an entirely new phenomenon. Below is the same chart, only extended back for a full twelve months. What do you see here? Does the global gold price appear to be influenced by physical supply and demand? Is it driven by safe haven demand or inflation risk? Or, instead, is the USDCNY exchange rate the principal driving factor of price in 2018?

And so, here’s where it all gets quite interesting. What are the implications of China assuming control of the global gold price and the existing physical distribution centers in London and New York? Many have long speculated that the Chinese government and the PBOC have stockpiled thousands of metric tonnes of physical gold over the past two decades. It should come as no surprise that the world’s largest holder of physical gold would want some measure of control over its price. As David pointed out in his column, "he who owns the gold sets the rules". But to what end would China be driving price?

By linking the dollar price of gold directly to the yuan, the PBOC has eliminated for now a level of foreign exchange risk to their gold portfolio. Have they done this to enable themselves to continue acquiring physical gold from the west at a "set price" ahead of further yuan devaluations? Is the PBOC planning for a trade war or a liquidation of their massive U.S. treasury position? Or, instead, are they planning for something much more significant?

A few years ago, this billboard was spotted across Asia. At the time, many wondered if there was a subliminal message being sent regarding the future of the yuan and its role in the global currency system. In light of all the recent moves by Chinese entities in London and New York—and given the now-prevalent correlation between the yuan and dollar price of gold—it’s time again to consider the possible implications.