PBOC Governor Zhou Xiaochuan On Gold

The next quotes are from a speech that Zhou Xiaochuan, governor of the People’s Bank Of China from 2002 till present, gave at the LBMA conference in 2004.

Give Full Play to the Gold Market’s Investment and Hedging Functions 

The establishment and development of China’s gold market marks the basic completion of the construction of a market for major financial products in China, which will provide better micro grounds for China’s macro economic adjustment. For further development, China’s gold market should gradually realize three transformations: from commodity trade to financial product trade, from spot transactions to futures transactions, and from a domestic market to integration with the international market.

First, China’s gold market should move from commodity trade to financial product trade. Gold is a commodity that combines the attributes of a currency, financial commodity and general commodity. Despite the declining function of gold as currency in the world, the activeness and development of investment activities with gold as the target indicate that gold still has a strong financial nature and remains an indispensable investment tool. In major financial centre’s in the world, the gold market – together with the money market, securities market and FX market – constitutes the main part of the financial market.

How best to transform China’s gold market from commodity trade into financial product trade? In light of current conditions, developing individual gold investment business is a practical option. At present, up to 12 trillion yuan stays in domestic residents’ saving accounts. The launch of individual gold investment, therefore, will allow residents to change currency assets into gold assets.

At the macro level, it will expand channels for changing savings into investment, thus adjusting the money supply; in the micro aspect, allowing citizens to trade and keep gold can improve social welfare, benefiting both the country and the population. Moreover, with the dual attributes of common commodity and currency commodity, gold is a desirable instrument for hedging. Therefore, developing gold trade for individuals is practical.

Secondly, China’s gold market must grow from spot transactions to that of gold derivatives. …The development and improvement of the gold derivatives market can effectively improve the gold market’s hedging, investment and financing functions.

Thirdly, China’s gold market must integrate into the global market Therefore China will further open up the market and quicken its steps toward integrating into the international market. China should actively create conditions for its gold market to become an important part of the international gold market.

From the perspective of the central bank, the development and improvement of the gold market will facilitate the improvement of regulating instruments for monetary policy and macro adjustment system. On the one hand, gold still bears the marked nature of money under the modern financial system. Though gold currency has been less important as a value measurement since the Bretton Woods System collapsed, the fluctuation of gold prices remains a key reference for central banks to judge the level of inflation.

Furthermore, central banks still hold a considerable amount of gold as official reserves. Gold reserves, FX reserves, and special drawing rights in the IMF form the international reserves of a country, jointly assuming the function of warding off risks. The establishment and development of China’s gold market marks the basic completion of constructing a market for major financial products in China, including markets for currency, securities, insurance and foreign exchange. A complete financial market system will provide more solid and efficient micro grounds for China’s macro economic adjustment. Therefore, China’s aim is, through the three transformations, to establish a safe and effective system for gold trading and to give full play to the gold market’s function of investment and risk warding, thus promoting the development of China’s gold market. We will strive for this aim with members from the international financial industry, and in particular, the global gold fraternity.

At the LBMA conference in 2012 Xie Duo, who works at the financial markets division of the PBOC, presented the following slide:

it’s expected the PBOC will be able to produce hi-res slides in 2078

Most missions accomplished! And this was before Shanghai Gold Exchange physical delivery entered its frenzy stage..