30.06.2020 – Special Report. Raised eyebrows at gold bugs: A new counterfeiting scandal shakes the precious metal market. The Kingold affair is probably the biggest gold scam ever. The financial world is amazed by the machinations in China. The question is how high the proportion of counterfeit precious metal in the People’s Republic really is. We examine the consequences for the gold market.
Fake gold as collateral
Massive gold scam in the Middle Kingdom: More than a dozen financial institutions in China have lent around 20 billion yuan or around 2.8 billion dollars to Kingold over a period of five years. They received gold as collateral. So they thought. But the collateral was gilded copper. The case was uncovered by the business paper “Caixin”. Probably the recently published case is one of the reasons for the recent setback in the gold price.
At least 4 percent of Chinese reserves falsified
According to the report, Wuhan Kingold Jewelry Inc. has used a total of 83 tons of fake gold as collateral to obtain fresh cash. This quantity represents about 22 percent of the annual production in the Middle Kingdom. In total, around 4 percent of the Chinese gold reserves reported for 2019 were thus fake. This could only be the tip of the iceberg – because in Kingold’s case the People’s Liberation Army is apparently involved. And no one in China dares to dig deeper into the matter. This is how Kingold CEO and major shareholder Jia Zhihong used to manage mines owned by the army. Yes, there are mines in China. According to “Caixin” there was a similar case in 2016 in the northwestern province of Shaanxi, where the gold bars turned out to be tungsten products.
Kingold – the name probably does not remind by chance of Kinross Gold, one of the largest gold mine operators in the world – is the largest private gold processor in the Chinese province of Hubei and listed on the Nasdaq. Kingold burned a total of 16 billion borrowed yuan, or around 2 billion euros; the lenders are sitting on bounced loans and counterfeit bars. The scandal came to light in February when one of the financiers, the Dongguan Trust, tried to cash in the gold because of outstanding loans. In May, the Minsheng Trust finally discovered that its bars were also counterfeit. As late as June, Minsheng Kingold took Kingold to task: The company’s chairman flatly denied the forgery and pointed out that the low purity was the fault of a supplier. And how could the gold be counterfeit if insurance companies had taken out cover? They refused to pay compensation to the cheated financial companies – Kingold had been damaged and the company had not reported any damage. By the way, none of the cheated funds came from the province of Wubei, where Kingold’s links with the army and the dangers they posed were apparently well known.
The market still trusts the stock figures
But does this mean that the price of gold will now come to its knees? Not at all. The damage is limited to the system of Chinese shadow banks. As long as non-state institutions in China have been tricked and no more fraud of this kind is uncovered, the level of official gold reserves in the market should not be seriously questioned. However, if new fraud of this magnitude were to come to light, it could quickly put a heavy damper on the price of gold and bring some funds to their knees – even internationally.
That speaks for gold
Currently, however, there is still much in favour of the yellow metal. It is not clear whether the global economy will quickly come out of the deflationary corona recession. And whether at some point the massive aid programs against the corona lockdown will not turn into hyper-inflation. In both cases, gold helps as a store of value. In times of revolution, paper money is always threatened with a loss in value – only hard assets such as gold, silver, land, food, fuel and weapons are then in demand.
Goldman and Bank of America see new price record
This is compounded by an expansive monetary policy. No wonder that Goldman Sachs has just announced a new record price for gold on a 12-month horizon – it is expected to reach 2000 dollars. The Goldman Sachs cited the devaluation of the dollar and ultra-low interest rates as reasons. The Bank of America sounded the same horn, pointing to resistance levels at $1,800 and $1,900 an ounce. If this is broken, new highs until the end of 2020 are likely. As fundamental reasons, the BoA pointed to the hesitant reopening of the economy and the again increasing number of corona cases.
Cup with handle
We think: All these are rather tentative classifications. Because if you look at the long-term chart since the 2011 record of around 1,909, it looks very much like a cup with a handle. And if we are correct in our reference to these basics of chart analysis, then gold would run sideways for a while at the old high and then fizz upwards like a rocket. Let’s wait and see.
Edison Investment Research takes a similar view: a price of $ 3,000 an ounce is possible, specifically: $ 3,281. For the investment boutique, this house mark results from the gutting of the dollar by the Federal Reserve in the course of the QEInfinity, i.e. the almost endless buying up of US Treasuries.
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