Why China may be selling off its gold, silver, platinum and diamonds
- by admin
The world’s largest gold market has been auctioning off its physical assets at a rapid clip in recent weeks as Chinese authorities prepare for a massive devaluation of the yuan and the global financial system.
The move is the latest sign that China’s central bank is preparing to tighten monetary policy to stave off a run on the nation’s massive gold reserves.
The gold market, which has been volatile for decades, has been the most contentious in recent years, with analysts predicting an eventual collapse of the value of the precious metal and a surge in the prices of its precious stones.
The auction in Shanghai on Friday, which drew some $100 million from Chinese companies, was the largest gold sale in China’s history and the first since authorities began cutting off gold sales after Beijing’s announcement in November that it would start the long-awaited devaluation in June.
The price of gold has already fallen about 80% from its peak of more than $1,500 per ounce in 2015, and some analysts say the government may try to halt the auction by capping gold purchases or cutting off the flow of foreign reserves to the country.
Gold prices fell by about 10% from the end of 2016 to mid-September, the most volatile month on record, according to the London-based Metal Exchange Group.
The government’s move has triggered a flurry of activity, with banks across China and overseas auctioning precious metals such as gold, platinum, and sapphire for as little as 1% to 3% of the world’s market.
“They are trying to do what they can to protect the gold market,” said Charles M. Davis, chief executive of metals broker Metal Capital Group, a unit of the Chicago-based London-listed London Bullion Market, which owns about 2.4 million ounces of gold.
“The gold market is in a tailspin right now.”
The central bank’s announcement sparked a surge of interest in gold in China, a country where more than 80% of households own some form of gold or precious metal, according the Beijing-based China National Gold Association.
Gold is the most widely traded commodity in China.
“It was the biggest gold auction in the history of the gold price, and it will be the largest in the world for a while,” said Michael T. Cramer, chief investment officer at TD Ameritrade in New York.
“This is the biggest thing in the gold bull market in the past decade.”
A government spokesman said in an e-mail that the government has made “unfortunate decisions” in recent months to curb the market and that it will continue to do so.
But he said it was important to stress that the gold auction was voluntary and would not be subject to government controls.
“We are not going to shut down gold trading, nor will we cut gold,” the spokesman said.
Gold was valued at about $6,000 an ounce in December 2015, but has since plunged to about $1 a pound, its lowest level in a decade.
China has the world’ second-largest reserves of gold, behind the U.S., and the country has been selling its holdings of the metal as its economy slows and global tensions over North Korea mount.
The country’s central government has said that the devaluation will be gradual and the government will allow its domestic markets to take advantage of the opportunity to buy gold, but some analysts have questioned the timing.
“If you go back 20 years ago, we wouldn’t have seen a central bank devaluation at all,” said Brian S. Lee, chief economist at the Boston-based consulting firm Macroeconomic Advisers in New Orleans.
“I think that the decision is probably based on political fear, because they don’t want to be seen as interfering with the gold markets.”
China’s gold auctions have been the subject of some of the most heated exchanges on Wall Street, with gold analysts saying the government was doing little to help the market.
At the time of the first gold auction, in January 2016, China’s government said the yuan was too weak and that the currency needed to be stabilized.
China’s authorities have since eased their stance on the yuan, allowing some companies to trade in yuan instead of the hard currency, while the government also announced the suspension of all government auctions of gold for the next two years.
The Shanghai gold auction is scheduled to begin at 11:59 p.m.
ET (11:59 a.m.) on Friday.
The first of the auctions will be held in Hong Kong on Aug. 8.
The second is scheduled for Aug. 10 in Hongxiang, a city in southern China’s Guangdong province.
“China is a big market for gold and we hope the market will respond to the changes in the Chinese economy and currency,” said Mr. Davis of Metal Capital.
“But it will take a while to stabilize the market.”
The Shanghai auction will mark the first time China has hosted
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