The Strategist

Gold: a dainty bit for investors all around the world

05/18/2016 - 16:20

Chinese ICBC Standard Bank obtained one of Europe's largest warehouses for precious metals from the British financial conglomerate Barclays. The safe is located in London. It is capable to keep 2 ths. tons of gold or another precious metal, which is equivalent to the sum of more than $ 80 billion.

ICBC Standard will be the first Chinese bank with its own storage and related businesses in the UK.

The parties expect that the transaction, value of which was not disclosed, will be completed in July.

The storage’s exact location is carefully concealed. It was built in 2012 to become the sixth commercial storage of this type in the London area, reports The Guardian. According to some information, the facility’s security measures include a door that can withstand "a direct hit from an RPG", fingerprint sensors, electrified roof and deep basement with no possibility of digging.

Barclays plans to completely cease providing services related to storage and trade of precious metals. On the other hand, ICBC Standard and, accordingly, ICBC itself, plans to become the largest financial Chinese institution in this sector. Therefore, the Chinese will receive not only the storage, but also the associated contracts with the consent of third parties. The British company used the vault to store precious metals of pension funds, central banks, sovereign wealth funds and other investors.

Most of the physical trade in gold and silver passes through the London clearing system. Last week, ICBC Standard Bank also joined it, becoming the first new member in the last decade. London clearing system for trade in gold, silver, platinum and palladium is managed by London Precious Metals Clearing Limited (LPMCL), currently owned by five banks. Among them, excluding Barclays, are HSBC, JP Morgan, The Bank of Nova Scotia and UBS.

Every year, non-cash transactions of gold amount to 140 thous. tons worth more than $ 5 trillion, according to Bloomberg’s data.

Recently, the trading volume has been increasing, says Financial Times.

Now, Barclays’ place will be taken by ICBC Standard, which last month has already received approval from the LPMCL as a market maker.

ICBC plans to become one of the leading Chinese players in the precious metals market, so buying a vault in London was quite a logical step. "People investing in precious metals want to know that their investments are secure."- commented John Spall of G Cubes Metals.

London accounts for 46% of world trade in gold. Meanwhile, share of Shanghai, which occupies the third place in terms of trade, is only 5.1%, which is why the Chinese financial business is rooting in London. 
Earlier this year, ICBC Standard Bank Group had planned to rent a similar London vault with capacity of 1.5 ths. Tons, owned by Deutsche Bank. The largest bank in Germany had also been a participant of the London clearing system, but left the network in 2015. In general, Western banks have started to withdraw from this sector mainly due to increasing pressure from regulators and their fines for manipulated pricing.

Not only Chinese banks but China as a whole are increasing the gold reserves. From 2009 to 2015, the country's national gold reserves increased by 60%, from 1054 to 1658 tons.

Major international investors are now aiming on gold, too. At the beginning of 2016, well-known billionaire George Soros spent $ 264 million purchasing shares of the world’s largest gold mining company Barrick Gold. Thus, Soros made a major investment in the US market by becoming the owner of 1.7% of the company. Later in May, another billionaire Stan Druckenmiller called the gold his biggest currency investment while the world’s central banks are experimenting with negative interest rates.

More even, the gold began also attracts sovereign investors. Germany has launched process of repatriation of its gold from foreign repositories.

According to some economists, countries buying gold could potentially ready themselves to a return to the gold standard. The latter has increasingly being discussed in the public space, particularly among US presidential candidates.

Since the beginning of the year, gold has risen in price already by 19.7%, from $ 1,063 thousand up to $ 1,272 thousand per ounce, which is equal to 31.1034768 grams.