Last October, I attended the LBMA/LPPM Precious Metals Conference 2019 in Shenzhen, China. Here are some of my takeaways.
Last October, I participated in the London Bullion Market Association’s (LBMA) annual Precious Metals Conference, which was hosted this year in Shenzhen, China. Participants ranged from investment bank precious metals traders to logistics firm representatives, equipment manufacturers, refineries, and miners to even some central bankers who came from all over the world.
This article has some of my notes, remarks, and opinions on the conference. The article is more of a collection of personal notes rather than dig deep analysis on the tone of voice of each presenter, and further implications, which I may discuss in later articles. If you find this article interesting or if you have some questions, you can reach out to me via, for example, Twitter @SamLaakso.
As I mentioned, the participants ranged from miners to central bankers and everything in between. And although the only thing the people had in common was a link to the gold market—as well as a company willing to pay a pretty penny for the entrance fee—some of the presenters and gold market veterans shed heavy words and true insight.
The conference was structured so that there are speeches, presentations, and panel discussions. In between, some chit chat, connecting, and a few drinks. These were segmented into sessions, of which there were eight in total. Out of all of the sessions, I would argue that sessions one and two were the most interesting because the sessions revolved mostly around the future of gold both in China and globally with insight from a range of big names from the Chinese gold market.
The welcoming session included speeches from Paul Fisher, the Chairman of the LBMA, John Metcalf, the Chairman of LPPM, People’s Bank of China, Jie He from Shenzhen Municipal People’s Government, Jiao Jinpu, the Chairman of Shanghai Gold Exchange (SGE), Xin Song, the Chairman of China Gold Association, and Yan Jiang, the President of the Shanghai Futures Exchange (SFE).
Most prominently, I remember the speeches from Jiao Jinpu from the SGE and Xin Song from the China Gold Association. The SGE Chairman emphasized the need for new global standards and open development on gold trade across various gold markets. More strikingly, he openly said that the SGE is looking to make the Renminbi denominated gold price as the global standard in the near-term future. At first, I was rather shocked to hear such a statement from a top-level Chinese spokesman in a conference held by the London Bullion Market Association. But soon, it enlightened me that he wasn’t going to be the only Chinese to lay heavy opinions about the future of the gold market.
The Chairman of the China Gold Association, on the other hand, focused on the gold market in China. Although Mr. Song also highlighted the need for new global standards, including wider use of the yuan-based gold price and the transition from ounces to grams, he spent most of the speech talking about the creation of a so-called gold culture in China. The core idea behind the gold culture is to make gold a known safe haven asset amongst the Chinese public.
Both the Chairman of SGE and the Chairman of China Gold Association were looking for better dialogue between gold markets on new standards. Still, the implication of new standards to the global gold market isn’t a new thing by any means. The fact that more trade is conducted based on local currencies and grams has been a slow but advancing process. After all, changing industry standards is not a quick transform even though there’s lots of support for the new standards, especially amongst Eastern markets.
After the welcoming session there were a couple of keynote speeches, one of which was by former IMF economist Zhu Min. The presentation was filled with graphs and statistics much as you’d expect from an IMF economist, but for an academic, Mr. Min did a great job in presenting his agenda.
Min argued that the next five years would define the next 50 years for China’s GDP growth. He pointed out that much like countries in South America and Eastern Europe, China’s manufacturing sector is contracting, and the Chinese economy is quickly transitioning from a manufacturing economy into a service economy. He argued that in order to become a fully-fledged developed nation it is critical for China’s private sector to catch up on productivity relative to western economies. According to Mr. Min’s studies, China is currently lagging badly behind Western economies when it comes to productivity rates.
Funny enough, the low productivity was also present in the conference itself. I’ve never seen so many waiters in one place as I did during the Monday evening gala dinner. There was one waiter for forks and knives, another for the wine bottle, and at least three waiters for the food at any given moment not to even mention the supervisors who needed to give consent for the waiters on almost every small task. Not to sound bitter, but the service wasn’t even quick even though the waiters seemed to be in a rush at all times.
After the keynote speeches came arguably the most interesting session titled Innovation in the Chinese Gold Market, which was a series of presentations. The presenters in session two were Wang Zhenying, the President of the SGE, Kent Wong Siu-Kee, the Managing Director of Chow Tai Fook (CTF, one of China’s largest jewelry manufacturers), Li Baoquan, from the Precious Metals Department in Industrial & Commercial Bank of China (ICBC), Li Tao, Head of Precious Metals of Ping An Bank as well as Wang Deying, the Vice President of Bosera Asset Management.
Mr. Zhenying from the SGE proudly presented how the SGE has been building a gold road between the East and the West with the Shanghai International Gold Exchange (SGEI) allowing imports and exports of gold both to and from China. The SGEI may not be a new phenomenon, and some critics have said that the launch of the SGEI has been an utter failure in terms of volumes. Still, looking into the future, the President of the SGE said that they’re working closely with the Russians in an effort to link or possibly combine the Chinese and the Russian spot gold markets rivaling the western markets with more muscles.
He also mentioned that the SGE had launch a silver benchmark price, which began trading on October 14, denominated in RMB instead of USD and weight in kilos instead of ounces.
After hearing the SGE’s plan for global domination (joke), it was Ping An Bank’s turn. The Head of Precious Metals of Ping An Bank made it clear from the beginning that the bank was the leader in gold-related financial services in China. As the name of the session would suggest, Mr. Tao introduced some of the bank’s innovations, one of which was Online Recovery for jewelry. Customers can deposit gold jewelry and other gold items to a gold account offered by the bank.
Similar services can be found elsewhere as well, but what was unusual was the speed of the service. The bank’s representative said that they pick up the items from the client’s home and via their logistics chain, the client should have a compensation for his or her gold within a single day. Ping An Bank also offers leasing for gold so that you can earn interest on your gold stored by the bank.
Towards the end of his speech, Mr. Tao made a case for institutional demand for gold in China. Much to my surprise, he argued that there have been some challenges in getting the institutional investors, including pension funds, municipals, and so on, to invest in gold. He said that many service providers have been targeting the institutions on gold for many years without success. In his opinion, this was, however, subject to change over the next few years.
Mr. Tao argued that the annual demand for physical gold in China could go from the current 4,500 tonnes to as high as 10,000 tonnes per year—a jaw-dropping moment for myself and many others in the audience. I later discussed this particular presentation with a Canadian investment bank precious metals trader who noted in a slightly sarcastic tone, “Sounds like they’re quite bullish on gold. I mean, that’s their business, right.”
Whether the 10,000 tonnes per year estimate was merely hype for the bank’s extremely bullish view on gold, or an actual figure based on potential demand, there’s no doubt that if the Chinese pension system starts allocating assets into physical gold, demand will increase significantly.
As a continuation of China’s gold culture ambitions, Wang Deying from Bosera Asset Management introduced China’s exchange-traded products (ETPs) for gold. For anyone who doesn’t know this already, the Chinese markets are very different from the Western markets.
If you look at a stock board in Shanghai or Hong Kong, you won’t find the names of the companies, but instead, every company is assigned with a number, so you have to know which number represents the company you follow. Except for a few, the Western markets are mostly settled on transaction + 2 days basis (T+2). This is because, in the past, settling trades took a lot more man-hours to do as there was physical paperwork included in the process, and so time was given to settling parties to get their papers in order.
In China, the capital markets are rather new, and so they’ve been able to adopt better standards with the advent of technology. This is why stocks in China are settled on a T+0 basis instead of the old T+2 standard. Also, day trading is forbidden in most of the Chinese markets, which means that you cannot buy and sell the same asset on the same trading day. Apart from technical, even the default tick colors are inversed. In China an uptick is marked in red whilst a downtick is marked in green. Chinese markets really are different.
Mr. Deying said in his speech that there are four major gold ETPs in China that are settled on a T+0 basis. The fact that the Chinese have a T+0 settlement standard is rather impressive on its own, but what really struck me was the concrete efficiency and the scale of the Chinese ETPs.
Bosera had partnered with the Amazon equivalent of China, namely Alibaba a few years earlier. As a result of the cooperation, Chinese citizens can use Alibaba’s Alipay to transact in Bosera’s gold ETP without commissions. What this means is that people can easily flip between fiat and the gold ETP with the money they have on their Alipay account. Similar projects can be found in the West as well, but to have one of China’s largest private enterprises onboard in the monetization trend of gold makes the other service providers seem small.
There were numerous small niches that could be sensed throughout the event. As could be expected, the most important speeches were all scheduled for the first day. But out of 18 speeches held on the opening day, 14 were held by Chinese presenters of which 12 spoke only Chinese during the presentation. Luckily for other Westerns and myself, there were interpreters.
In addition to the fact that the Chinese dominated the opening day presentations, they were almost absent on the second day of the event. They also didn’t hang around after the speeches but were quick to exit the event after the applauses. Also, as you probably figured out already, the second day of the event was truly secondary relative to the first day.
Some participants also noted the absence of Indians this year. They said that last year in the annual LBMA event held in Boston, almost 50 percent of the participants were Indian whilst this year, only one in ten were from India. When I asked the Indian minority for some explanation to this, they all concluded that local political gyrations had severely affected the demand for gold in India in 2019. Therefore the event participation rates also tumbled.
The LBMA representatives seemed quite troubled throughout the event, especially when the Chinese told us that they want new global standards undermining LBMA’s standards. All speeches weren’t about how the Chinese gold market is huge and great. Throughout the conference, there was a major emphasis on cooperation and easier flow of metals across global markets by both the Chinese and the Westerns. Nonetheless, you couldn’t help noticing some drops of sweat from the LBMA folks—maybe it was just the heat.
LBMA representatives also discussed the “kilobar list,” which refers to a global database on LBMA certified kilobars. They told us that they’re looking to discuss with market participants on what to include in the kilobar database.
Having undergone a significant rebranding over the past years, LBMA also said that they are committed to bringing a message to global central bankers: Gold is a liquid asset, and the LBMA-i data now backs that statement. Even though the LBMA-i data sets have been criticized by the gold community as far too opaque and therefore untrustworthy when I asked actual traders from investment banks who participate in the collection of LBMA-i data they deemed the data accurate. One trader also said that the collection of the data costs a fortune to the banks.
Some of you may know I’m not really into cryptocurrencies, although I recognize the potential for blockchain. There’s a general atmosphere of frustration towards blockchain-based gold companies amongst the old-timers at the fair. The frustration was mainly focused on blockchain solutions related to responsible sourcing—the physical world just doesn’t mix well with the digital world, especially when you’re dealing with a material that is easy to re-melt time after time. By this I mean that there are lots of new blockchain solutions to keep a record for the source and the lifetime of a gold bar—from ground to investor.
The problem is that the gold has to be recorder to the blockchain after it has been mined but there’s no way to fully verify the original source of the gold in question. It all comes down to human interaction and the Know Your Customer practices of the industry. Blockchain solutions to responsible sourcing offer merely a tool but is by no means a way to stop “dirty gold” from flowing into the market.
Also, to be fair, the gold-backed crypto market is tiny. These companies that the old-timers represent may deal, transport, or refine more gold on a single order than what is held by all of the gold-backed cryptos combined.
The LBMA 2019 Precious Metals Conference was an interesting event with a lot of small niches. Session two was, in my humble opinion, the most remarkable with lots of interesting topics. I was left with the feeling that the Chinese are way ahead of the curve in precious metals related innovations and that the Chinese market has immense potential even though China is already the world’s biggest producer, importer, and consumer of physical gold.
Another remark I’d add is that the LBMA Precious Metals Conferences aren’t necessarily the place for gold fanatics or gold bugs. The fact that gold was doing well was a positive thing, yet most participants didn’t care for the price action of gold. These people were simply in it for business, and although higher gold prices may mean more business, many of the gold market participants aren’t long or short gold but merely middlemen.
Now, I’m not an expert on the Chinese gold market. Our researcher Jan Nieuwenhuijs has a lot more insight into the Chinese gold market than I do. I recommend everyone who wants to know more to read his articles on the topic. If you have any questions or comments about the conference, please engage with me, either on social media or the comment field below.
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