Chinese regulators and major banks are taking measures to curb the trading of gold and other precious metals by investors in order “to cool the gold rush”, Reuters reported Wednesday.
Gold prices hit record highs this week as investors look for safe-haven assets amid worries of rising coronavirus cases, the sinking U.S. dollar, low-interest rates, and increasing tension between the U.S. and China.
Major Chinese banks have taken measures to prevent customers from buying gold, platinum, palladium, and other precious metal-related products through them. The Shanghai Gold Exchange also says it may take necessary measures to curb gold trading to “protect investors.”
Chinese Banks and Regulators to ‘Cool Gold Rush’
Starting Friday, the Industrial and Commercial Bank of China (ICBC), the country’s biggest lender, has barred customers from opening new trading positions for platinum, palladium and index products linked to precious metals. For ICBC, precious metals include gold, silver, palladium, platinum. Transactions can be made in various currencies, including the RMB and U.S. dollars. A reporter called the bank to inquire about the reason for this prohibition. The bank’s customer service said it was for the safety and protection of customers due to heavy price fluctuations of these assets recently and “the need to control risks.”
Two other Big Four Chinese banks have made a similar move. Agricultural Bank of China said it recently suspended new gold-related businesses. Meanwhile, Bank of China (BOC) said it has halted new account openings for platinum and palladium trading.
The Shanghai Gold Exchange is also seeing high levels of gold and silver holdings. The exchange said this week that it would take risk-control measures to protect investors if warranted. Moreover, the Shanghai Futures Exchange, where gold and silver futures contracts are traded, has urged “its members to strengthen risk-management efforts and invest rationally”, the news outlet conveyed.
Chinese investors also actively trade gold exchange-traded funds (ETFs). The assets under management of Huaan Gold ETF, Asia’s biggest gold ETF, has increased more than 68% to over 11.8 billion yuan ($1.69 billion) since the end of last year.
Frank Hao, a Shanghai-based analyst with Hywin Wealth Management, was quoted by Reuters as saying: “Gold remains a niche investment in China due to limited investment channels … Investors mainly rely on purchasing paper gold products at commercial banks as a way to counteract risks.”
Chinese regulators are wary of the risks associated with speculating in commodity prices after some 6,000 clients of the state-owned Bank of China tried to buy on a dip in crude prices in April, using a crude oil futures product known as Yuan You Bao. However, the values kept plunging well past zero, catching investors off-guard.
Bank of China settled Yuan You Bao at minus $37.63 per barrel and later agreed to settle with more than half of its customers facing losses, taking about a 7 billion yuan hit. Most banks soon halted sales of the products after the catastrophic losses at Bank of China. Sources told Caixin publication that more than 100,000 Chinese retail investors flooded into the market though paper crude products and never expected prices to fall below zero.
With the price of gold reaching all-time highs this week, people are speculating that $2,000 is not far away. Goldman Sachs recently revised its 12-month gold forecast to $2,300 an ounce. Some others are predicting even higher prices for gold. Despite regulatory efforts to clamp down gold trading, Hao believes:
If the gold price rises past $2,000, some more hot money will certainly flow into the market, and some investors will divert their stock investments to gold.
Recently, the gold market was shaken when it was discovered that about 83 tons of fake gold bars had been used as collateral for loans worth 20 billion yuan from 14 financial institutions in China.