Probably Not
Media reports that Chinese gold demand may be slipping abound, but so far this year, although Chinese demand may currently be down a little it is holding up overall at historically high levels.
We see a number of headlines out there suggesting that Chinese gold demand is slipping with the implied suggestion that with the heavy buying levels seen in 2013 falling away the gold price will suffer accordingly. But the figures to date defy the gold-gloom merchants with withdrawals out of the Shanghai Gold Exchange (SGE) in the first 12 weeks of the year close to total world new mined gold production from outside China itself. For the 12 week period these sales have totalled 532 tonnes suggesting an annual total of 2,305 tonnes should this level of sales continue throughout the year (and the first couple of months are historically weak ones for Chinese gold demand). Add to this China’s own gold production of around 430 tonnes we come up with 2,735 tonnes which is close to current estimates of total world new mined gold output – but assumes China’s own gold production is not routed through the SGE which we believe to be the case. While SGE sales over the past three to four weeks have indeed slipped back from those seen right at the beginning of the year, they are still running at historically high levels and while March figures are not expected to match last year’s massive sales record, overall first quarter Chinese gold import figures for 2014 will definitely be substantially in excess of those of a year earlier.
China's Data Sources
In general there are two principal sources of Chinese data for gold sales and imports. These are the monthly gold export statistics published by the Hong Kong Special Administrative Region’s statistics department regarding gold movements into mainland China, and the detailed weekly statistics issued by the SGE which will include the net gold imports from Hong Kong and are thus sharply higher than the Hong Kong figures alone.
For a number of years Western analysts have been taking the Hong Kong figures as the only ones available with the assumption by much of the media that these constitute virtually all Chinese gold imports. We have argued on Mineweb that gold is also imported into China through other ports of entry and nowadays that seems to be the mainstream consensus too, although it is recognized that Hong Kong remains the assumed entry point for the largest proportion of Chinese gold imports. That there are indeed other import routes has just been confirmed by Switzerland which is now publishing a more detailed breakdown of its gold export statistics. And, according to Koos Jansen, whose excellent analysis on his website – In Gold we Trust – is the source for much of the above data, the latest published Swiss figures now differentiate between gold being exported to Hong Kong and that to mainland China. The figures for February were Hong Kong 98 tonnes and mainland China 37 tonnes.
Cross-Border Trade
While a significant part of China’s gold imports does come via Switzerland, where the refineries have been working overtime to remelt standard good delivery gold bars and scrap gold down to the smaller sized units in which the Chinese prefer to buy their gold, the metal is also exported to Hong Kong and China from other sources as well. There is believed to be cross border gold trade from Russia and other countries will also undoubtedly be exporting gold direct. Last year there was also talk of North Korea having to sell some of what are believed to be large gold reserves direct to China to help ward off some of its ongoing economic woes. (North Korea does not report its gold holdings to the IMF so the true level of these is unknown outside that secretive country and the reports may have been pure speculation.)
Now gold premiums do appear to have fallen back in Shanghai recently suggesting demand is indeed slipping, but all the figures we have seen indicate that even so demand remains at a high level and any such dip is a reaction down from the February import levels (which were a comfortable record for that month).
With net sales out of the big SPDR Gold Trust (ARCA:GLD) gold ETF reversing so far this year from heavy sales last year to minor purchases this, Jansen poses the question as to where this continuing flow of metal into China – and into other nations too - is coming from. Gold movement from West to East already appears to be exceeding newly mined supply, while scrap sources of gold have declined with the lower metal price. Data from supply/demand analysts like GFMS suggest that jewellery demand for gold has also been rising while newly mined output is probably flat with lower gold prices seeing mine closures and new project delays and cutbacks (offset to an extent by high grading at mines with that capability).
Continued Supply Squeeze
Everything to this observer suggests a supply squeeze continuing to develop, which will have to impact prices positively sooner or later, regardless of interest rate levels, Fed tapering etc. And, as we have pointed out here before Fed tapering should be a bit of a red herring given that the European Central Bank, representing almost as large a market as the U.S. is currently doing the reverse and, if anything increasing easing and further lowering interest rates. The gold market is currently too U.S. driven with blinkered investors there mainly ignoring what is happening in the rest of the world. The squeeze on physical gold which is in process will ultimately gain the recognition in the U.S. it requires and gold prices will surely recover? But then gold can defy all logical reasoning, but overall still probably remains the best long term hedge against monetary value depreciation.
By Lawrence Williams