Why does finding 83 tonnes of fake gold in a Chinese Vault have major impact on the Global Shadow Banking industry and how is that likely to affect you?
Before we talk about the fake gold, let’s look at Shadow Banking and what it is.
Shadow banking is a generic term used to describe financial activities that take place between non-bank financial institutions globally.
Some of the different types of institutions you would find using the shadow banking system are investment banks, mortgage lenders, money market funds, insurance companies, hedge funds, private equity funds and loans which are not regulated.
The shadow banking system is not regulated, and has successfully fought against regulation, on the grounds that, unlike traditional banks and credit unions, the organisations which operate in the shadow banking industry do not take “over the counter” deposits from clients.
Derivatives, mortgage bundle packaging and peer-2-peer lending have been major growth areas in the shadow banking system. The value of these types investments is unknown but it has been estimated that derivatives alone are in the quadrillions of dollars value bracket. The Chinese shadow banking system is said to be worth $3 Trillion per year.
Since 2017, China entered the derivatives market directly targeting risky financial practices such as excessive borrowing and speculation in equities. This has had a flow-on effect of boosting the Chinese Share Market and creating a “cannot fail” attitude of many investors in the Chinese Markets.
Shadow banking institutions were deemed to be the innovators in the financial markets and were able to finance deals, such as real estate and other major lending which would normally, not be accepted due to rules on capital and liquidity that are required by traditional lenders. These regulations are in place to prevent bank failures, runs on banks and supposedly financial crises.
China is now at the centre of one of the biggest gold scams in recent times. This is due to a company call kingold. The company is supposed to have taken out risky high value loan for various projects which failed due to various economic circumstances.
The loans were backed by gold assets (83 tonnes of gold valued at 14 billion yuan) and insurance company’s underwrote the loans due to the gold backing. Kingold defaulted on loans and the lenders attempted to seize gold bars to cover the defaults. However, it was discovered that 83 tonnes of gold, set aside as assets for the loans are in fact, gilded copper.
There are major repercussions from this in the shadow banking system as 5 Chinese banks were behind the loans and it is unknown how they will be affected and if the market could collapse. 83 Tonnes of Gold equates to 22% of China’s annual gold production affecting the gold market.
The credibility of the insurance companies is affected as they failed to audit the gold.
In addition, US lawmakers have started removing Chinese companies from the US share markets as they have failed to allow auditing.
In 2008, the shadow banking system (called the sub-prime market) was the catalyst for the credit crunch and subsequent global recessions. The system broke down as a result of several economic situations which affected the public and institutions being able to meet the payments. This was exacerbated by the hurricane which hit New Orleans where many home owners were uninsured and just walked away from their mortgage payments. In addition many mortgages were coming out of the fixed term adding to borrowers unable to make payments.
Asset security was undervalued or the value not even know and trust between banks ceased to exist. In his book, Mervyn King, the current Bank of England Governor, says that if he and Hank Paulson, his equivalent in the US were trying to keep the markets working. They were just 30 minutes away from the total collapse of the financial markets and fiat currency.
Wind forward to 2020, history is repeating itself and stability in the shadow banking system is on shaky ground. Instead of the hurricane, we have the coronavirus outbreak with the economic repercussions from the fallout. We are facing a perfect storm which could trigger one of the biggest economic crashes in history.
Financial education is key to protecting your wealth and your future. Bullion is definitely a major investment opportunity, as I write this, which should not be overlooked. Both Silver and Gold provide a hedge against downturns and insecurity within the markets.
For example, over the past month as all this news is breaking together with coronavirus second wave, gold has risen in price by 5.30% and silver has gone up 6.79%.