China finds massive hole in $80bn gold financing industry

Earlier on in the day gold touched a low of $1,306.80, after news that China’s chief auditor discovered 94.4 billion yuan ($15.2 billion) of loans backed by falsified gold transactions.

The investigation revealed that since 2012 25 bullion processors made a combined profit of roughly $150 million from the loans.

The World Gold Council, which last week inked a deal with the 510-member China Gold Association to promote the metal, estimates as much as 1,000 tonnes of gold may be tied up in lending and leasing deals.

“This is the first official confirmation of what many people have suspected for a long time – that gold is widely used in Chinese commodity financing deals,” Liu Xu, a senior analyst at Capital Futures in Beijing told Bloomberg:

“Any scaling back by banks of gold-backed financing deals might lead to a short-term reduction in Chinese imports and also spur some sales by companies looking to repay lenders.”

Ole Hansen, Head of Commodity Strategy at Denmark’s Saxo Bank says the physical demand from China has been important as an off-set against the reduced demand for paper gold through exchange traded funds and futures.

Holdings in the world’s physical gold-backed ETFs have fallen to levels last seen during the height of the financial crisis and after a short burst of inflows earlier this year, liquidations have continued. More than 800 tonnes left gold ETFs last year.

China overtook India last year as the world’s number one importer of gold after demand surged by more than a third to 1,035 tonnes, but there has been a steep drop-off this year.

Customs data for May from Switzerland – the main trading hub for the global physical trade in gold – showed a 59% drop in exports to Hong Kong to just over 10 tonnes.

Cargoes going to mainland China plummeted by 83.5% to a mere two tonnes, compared to 37 tonnes back in February.

The gold revelations follow a probe into into allegations that several companies pledged the same copper, iron ore and other industrial metals held at the port of Qingdao as collateral for loans to different banks.

Beijing is stepping up efforts to curb the country’s vast shadow banking system and the revelations could see a further clampdown on this lending practice which have been a key part of the commodities trade – particularly in iron ore and copper – for years.

Investment bank Goldman Sachs pegs the value of the commodity-backed financing industry in China at $160 billion of which $80 billion may involve gold, $46 billion copper and $13.8 billion iron ore, with the rest soft commodities including soybeans.

Image by ThisParticularGreg