China Banks Now Permitted To Trade Gold Futures

Tuesday, March 25, 2008

This could be the next boost for the gold market. According to the official Chinese news outlet,
Chinese commercial banks will be allowed to trade gold futures in the domestic market, according to a notice released on the regulator's official website here on Monday.
China gold futures trading was launched in January, but domestic banks were barred from trading by the China Banking Regulatory Commission.
According to the notice, domestic banks that meet certain requirements, such as having capital adequacy ratio of more than 8%, can apply for a trading permit.
"That's great news for the gold futures market, which is not operating that well," said Hu Yuyue, an expert with Beijing Technology and Business University.
"Commercial banks can provide more liquidity and stability to the market, after all, they hold huge capital," said Hu.
"Gold futures trading can also help domestic banks to improve competitiveness against overseas banks as financial derivatives are supposed to be the largest revenue sources for leading banks," he said.
Non-interest income usually accounts for at least 50 percent of bank revenues in developed countries and the proportion can reach 80 percent for some banks.
However, Chinese banks depend heavily on the margins between deposits and loans.
The Shanghai Stock Exchange started trading in gold futures on January 10 and the June contract debuted trading limit up, outpacing COMEX prices by as much as 10%.
It may be a very early call, but the sudden participation of banks from a country where gold is seen as the ultimate money due to its unlimited convertibility and its role as the only asset that is not somebody else's obligation, this appears to me as the biggest fundamental shift we have seen in the gold market in many years.
This new milestone can be classified as bullish. Once turnover builds up, we may see a convergence between the so-called global spot price and China prices, which are regularly higher.
Given that the Chinese appear to have a much better understanding of the role of gold as the ultimate money in comparison to the Bush administration participating banks could strengthen the lever that one day in the not too distant future will lead to a short squeeze of dimensions hitherto unseen.
After all, this is another step to global dominance by China that certainly does not come out of thin air but is part of a strategy to enter global capital markets step by step.
All calls for an end to the recent commodities rally, like the one from Citigroup yesterday, look more like desparate statements from late-comers to the biggest secular bull market in motion these days.
I've been hearing it a lot lately that investors are waiting for a pullback to enter precious metals, energy and commodity markets. Now may be the last time, as fundamentals definitely shift in favour of real assets, compared to the 100s of billions central banks have been printing lately.
Gas Rationed, Wheat Harvest May Drop by 50% - Commodity Bull Will Rage Ahead
Hopes for double digit crude prices are getting buried in China too. Chinadaily reports that gasoline rationing is currently spreading from the industrialized south to the northern parts of the country, blaming a part of the woes on hoarding by producers and dealers.
Shanghai is left with 10 days of diesel supplies, says the report:
Shanghai, the country's economic center, is now being affected, with rationing, long queues and power-off filling machines becoming common at filling stations.
The Shanghai Economic Commission said on its website that the city has enough diesel to last more than 10 days.
CNPC and Sinopec emphasized that China had enough oil to ensure a stable supply and the fuel-supply crises of the second half of last year would not re-emerge.
According to the National Development and Reform Commission (NDRC), China's top economy planner, refined oil output, mainly produced by the two oil giants, surged 10.5 percent in the first two months of this year. The stockpile rose 28 percent, compared with the beginning of this year.
China regulates gas prices. The National Development and Reform Commission (NDRC), China's top economy planner, raised the prices of gasoline, diesel oil and aviation kerosene by 500 yuan ($70.91) per tonne in November, almost a 10 percent rise, to narrow the gap between steep international crude prices and state-set domestic oil prices. Oil rose more than $20 a barrel since.
A much graver situation may develop in wheat. has a report that a disease will wipe out 10% to 20% of this year's Chinese harvest, while a more serious epidemic could actually halve wheat production.
An outbreak of sharp eyespot disease (SED), which affects cereals, is threatening 72.46 million mu (4.83 million hectares) of wheat in China's major producing regions, according to local agricultural authorities.
SED might erode the wheat output by 10% to 20%, while a more serious epidemic could cut output by as much as 50%, officials from the Henan Oil and Grain Product Quality Inspection Center told Interfax. "As it is still the early growth stage for wheat, the impact on output might be reduced, although wheat quality may be downgraded," an official from the center said.
A lot of fundamentals may keep all forecasts for lower commodity prices what they are: Wishful thinking.
Last reminder: A raging bull market like the one we see in all commodities wants to throw everybody out of the saddle. Be prepared for a rocky, but ultimately steep climb in the coming months that will see its usual seasonal weakness in the warmer months.
The OilDrum has a very informative and extensive analysis on the food outlook until the year 2050. Don't miss out on it as it will whetten your mouth for more agriproducts.


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