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Robin Bromby in The Australian: Shanghai gold surprise in store

Section: Daily Dispatches

By Robin Bromby
The Australian, Sydney
Monday, October 6, 2014

If you want to know what China will do in the future, it's usually a good thing to look at its past.

Don't trust us --- listen to the late Chinese communist leader, Zhou Enlai. "Past experience, if not forgotten, is a guide to the future," he said in 1972. He was talking about the relationship between China and Japan, but let's take another example, this time gold, which tumbled again to close the week at $US1,191 an ounce.

Keith Goode, probably Australia's most experienced gold analyst, now running his own outfit at Eagle Research, was struck by what the Chinese are doing in Shanghai.

... Dispatch continues below ...


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Putting together his thoughts after attending China's first gold congress --

-- Goode says the gold bears have trumpeted reduced gold imports through Hong Kong as a clear sign China's gold consumption is falling dramatically. But these same people have failed to realise that, with the new Shanghai free-trade zone, China no longer needs to import through the former British colony.

Why Shanghai? Simple, says Goode: It is because Shanghai was once the gold trading centre of the world. Until the fall of the Qing dynasty in 1912, Shanghai accounted for about 60 per cent of all gold traded around the world. Gold trading was revived there in 1921 and lasted until Japan captured the city. Now the Shanghai Gold Exchange is the third largest in the world, after New York and London.

Last Monday was the first anniversary of Shanghai's FTZ, where gold trading is backed by the contents of a 1,000-tonne vault. Goode then quotes one Chinese presenter at the congress making the point that his country was the world's leading gold producer (428 tonnes last year), consumed the most (1,100 tonnes), and traded the most Asian gold futures -- then adding: "But yet we have little control over the gold price."

A China Gold Association video shown at the congress described the $US200-an-ounce fall in April last year as a "black swan, one in a 2-million-year event." Goode suspects the real meaning of that comment was that China does not intend to allow that to happen again; in April 2013 Shanghai was not trading when Comex in New York was open. Now it is.

He believes China is still on course to made the yuan a reserve currency, backed by gold. China last reported its official gold holdings in 2009 at 1,054 tonnes. He thinks the figure may now be around 6,000 tonnes and the Chinese are waiting until they have 9,000 tonnes stored away before they announce they have passed the United States to become the world's biggest holder (a theory Pure Speculation has previously advanced).

Goode says Russia is accelerating gold buying (another 7 tonnes in August). "With the increased level of co-operation between Russia and China, does Russia know China's intentions and is adding gold reserves as fast as possible?" he wonders. Kazakhstan is also buying up.

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