World gold prices could come under pressure if the Chinese authorities curb the use of letters of credit (L/Cs) to purchase the precious metal for financing related reasons rather than to meet market demand.

A recent report suggests that Chinese buyers may have cornered almost a third of annual global gold production.

L/C curbs

The report published by the World Gold Council (WGC) said gold was not as widely used for raising money as copper, which saw prices drop to a 3.5 year low in March, partially due to pressure from the Chinese authorities to curb financing related L/C openings.

Last year, several Chinese banks stopped issuing L/Cs for copper imports after pressure from government on banks not to support the practice. (DC World News, 31 May 2013).

Shadow banking

The practice involves L/Cs being opened, ostensibly for commodity imports, but then being used as tools to raise cheap finance for real estate purchases, speculation on high yielding assets, and interest rate or currency arbitrage.

The WGC says that the use of gold for purely financial operations is a part of the much wider growth in shadow banking.

Gold cornered

The council reckons it is feasible that by the end of 2013, China could have cornered a cumulative 1,000 tonnes of gold.

That accounts for almost a third of annual global production and is worth about US$43 billion at current prices the WGC report says.

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