Gold Rallies on China Opening the Gates

China has long been the world’s biggest consumer of gold, ahead of India since 2013.  Whilst also the world’s largest producer, China is still the world’s largest importer.  However as a communist regime, the amount of gold allowed to enter the country is, as with most things, controlled by the Beijing.

The chart below is gold withdrawals from the Shanghai Gold Exchange, seen by experts as the most accurate measure of total Chinese consumption:

The chart is remarkable not just from the perspective of the over 20,000 tonne of gold consumed since the GFC, but in the large dip seen in 2020 when the rest of the world was devouring the precious metal amid the COVID chaos.

In terms of official imports, since COVID struck, they have averaged around 10 tonne per month or $600m worth per month.  That is a fraction of the 75 tonne or $3.5b per month seen in 2019 which itself was less than the voracious consumption from 2013 peaking in 2015.  And reports say they won’t be mucking around now the quotas are lifted.. From Reuters:

“China has given domestic and international banks permission to import large amounts of gold into the country, five sources familiar with the matter said, potentially helping to support global gold prices after months of declines.

China is the world's biggest gold consumer, gobbling up hundreds of tonnes of the precious metal worth tens of billions of dollars each year, but its imports plunged as the coronavirus spread and local demand dried up.

With China's economy rebounding strongly since the second half of last year, demand for gold jewellery, bars and coins has recovered, driving domestic prices above global benchmark rates and making it profitable to import bullion.

The local premium is now about $7 to $9 an ounce, according to gold traders in Asia, and would probably have increased further if more imports to satisfy demand had not been allowed.

About 150 tonnes of gold worth $8.5 billion at current prices is likely to be shipped following the green light from Beijing, four sources said. Two said the gold would be shipped in April and two said it would arrive over April and May.

The bulk of China's gold imports typically comes from Australia, South Africa and Switzerland.

The People's Bank of China (PBOC), the country's central bank, controls how much gold enters China through a system of quotas given to commercial banks. It usually allows metal in but sometimes restricts flows.

"We had no quotas for a while. Now we are getting them ... the most since 2019," said a source at one of the banks moving gold into China.”

As stated above too, India is the second largest consumer of gold in the world.  From that same Reuters article:

“India's demand for bullion has also rebounded from a pandemic-induced slump, with record-breaking imports in March of 160 tonnes of gold, an Indian government source told Reuters this month.

China and India typically account for some two fifths of the world's annual demand for gold.”

Since the news, gold has rallied $50 but more structurally the backdrop of out of control deficits, monetary stimulus, bubble-like markets and burgeoning debt remain.  On top of this, we now have the world’s biggest consumers back in the game.