Chinese Gold – the real story

On Friday we posted the key points of the WGC’s 2014 gold report.  In that report they state total Chinese consumer demand was 814t, far less than the 2100t (Shanghai Gold Exchange (SGE) based) numbers we report.  So what gives?  Well firstly WGC state as follows:

“The flow of gold into China has far exceeded the amount needed to meet domestic jewellery and investment demand in recent years. The role of the commercial banks in using this gold for financing purposes has been well documented, including in our report, Understanding China’s gold market, and this activity expanded in 2014. To some extent, this helps explain why Shanghai Gold Exchange delivery figures are significantly higher than consumer demand.”

So despite the gold clearly going into China, because it is going to banks they classify it as ‘stocks’ instead of demand/consumed…?  

The SGE numbers do need to be adjusted for the small amount that is exported by foreign banks.  For example, after another huge week of demand to the week ending 6 Feb, the headline figure of 315t ytd is 289t after that adjustment.  The most accurate number for 2014 is at least 1834t, comprising the conservative estimate of 1200t imports (1100t actual in Nov and estimate of 1200-1300t by the SGE chairman for 2014 end), 452t domestic mine supply, and 182t scrap/recycling.  

These are very, very big numbers and 2015 is off to an incredible start if you consider the first 5 weeks have seen 39% of the total 2014 WGC number already.  It takes on new meaning too when you consider what the LBMA had to say at a conference in June last year:

“I was at the Shanghai Derivatives Forum at the end of May and one of the speakers was a representative of the [China] Gold Association. He gave us quite an interesting insight into the flavour of what is going on in China from a strategic perspective. Some of the things he talked about included that China planned to change the landscape of world gold markets. He talked about having a strong currency and about having that currency backed by gold, like the US dollar [was, its not now?]. He also talked about people holding more gold and encouraging more people to hold gold. That is not just individuals, but also the central bank. From that perspective, it is also getting gold into the country in terms of encouraging domestic gold production, but also investing in international mining companies and sourcing the product from them. China has got a very friendly gold strategy.”

The Chinese can see the world’s reserve Fiat currency as the Ponzi scheme it is, abused by its issuer.  Whilst few could verify the statement above as fact most would have to admit it ‘feels’ right…