There is no doubt at all that Chinese demand for physical gold is having, and will continue to have, a huge impact on global gold flows and on the supply/demand balance, but making sense of the various figures quoted by the media is difficult and often counter-intuitive.
For the serious follower of gold, perhaps there are two statistical analysts whose handles on Chinese data should be an absolute must to follow as they look far deeper into the statistics that are available to view – the Hong Kong net gold import figures into mainland China and the withdrawals from the Shanghai Gold Exchange (SGE) – the true indicator of Chinese physical gold demand. SGE figures are published weekly in Chinese so tend to be ignored by most of the global media while Hong Kong gold import/export figures are released monthly (in English) and are seized upon, misleadingly of late, by the press as a proxy for what is actually going on in terms of total Chinese gold demand.
Two of the best statistical analysts for understanding what is really going on in Chinese gold demand are Netherlands-based Koos Jansen, who has his own website ingoldwetrust.ch, but nowadays writes mostly for Singapore gold dealer bullionstar.com, and Australia’s chart king, Nick Laird, who again publishes his data on his own site sharelynx.com, and many significant gold-related ones on goldbroker.com. Do take a look at these sites for an understanding of what is actually happening now in terms of Chinese gold demand, as ever since the second quarter of the current year Hong Kong import/export statistics have become further removed from being a true indicator of Chinese demand and imports. This is because the Middle Kingdom has hugely eased the path for gold to be imported into China through other ports of entry which are now handling the major part of the country’s gold coming in from abroad.
This becomes hugely apparent if one views Nick Laird’s latest chart showing Hong Kong net gold exports to China, SGE withdrawals and the ratio between the two. As can be seen from the chart (shown below) from the period between mid 2011 up to April of the current year there was a strong correlation between the two main sets of statistics, but for the past four months the two sets of figures have drifted hugely apart as the new gold import routes have opened up. As the chart showing the correlation between the two shows, Hong Kong net gold export figures into the Chinese mainland are currently running at only around 15% of SGE withdrawals and falling – yet still some of the mainstream media has taken these falling Hong Kong figures as a direct indicator (and a very misleading one at that) of an enormous drop in Chinese gold demand.
If one looks at SGE withdrawals on a month by month basis, it is also true that these do show a mid-year decline in Chinese demand – but not by nearly as much as a reliance on the Hong Kong figures would suggest – with a climb back to around 2013 demand levels in August, and from data picked up by Koos Jansen (and no doubt by Nick Laird too) this demand has been accelerating. For example the latest available weekly withdrawal figure from the SGE was a very large 44 tonnes, following on from an even larger 50 tonnes the previous week. These figures were immediately ahead of China’s Golden Week holiday so will probably have been distorted higher but taken with the prior weekly figures the indication is that total Chinese SGE withdrawals during September will have been around 190 tonnes plus. This, of course, equates to an annual rate of over 2 200 tonnes. This annual level will not be achieved in 2014 due to the weaker mid-year demand, but is an indicator that full year Chinese demand remains at a very high level indeed and the gloomy mainstream media talk of a 40%-50% downturn this year should be taken as absolute rubbish. At current demand levels – and the final quarter of the year tends to be strong in China – we are looking at perhaps as little as a 10%-15% decline from the huge 2013 record.
But how much should be read into these figures in terms of likely gold prices ahead? In 2013, for example, the gold price fell back sharply despite the huge demand from the East and Middle East. This was primarily because of the very large outflows from the gold ETFs which primarily took place in the main gold price-setting markets of the West. This year Eastern demand may have fallen back a little, but has picked up strongly in the past few weeks, and although we have seen some gold liquidations out of the major ETFs in the West this has been nowhere near on the scale we saw a year ago – indeed in some months the ETFs have actually seen small inflows.
With the latest Reuters reports of rising gold purchasing in China and India again – the two biggest global markets for gold – and increasing gold premiums in both countries over and above the London price – we could well be poised for a significant turning point in the gold price based on fundamentals at least. By all accounts gold mine production is peaking while demand still continues to rise and gold supply, which is calculated by precious metals analysts Metals Focus as having been in deficit last year, could be heading that way again this year too.
There is considerable geopolitical turmoil in the world which has to boost safe haven demand, at least in some areas and it is becoming increasingly apparent that the global economy is not recovering as fast as many had hoped. The US Fed is getting nervous about the idea of allowing interest rates to rise, while the Eurozone is looking at more Quantitative Easing.
All these factors might be seen as positive for gold, and all things being equal would probably lead to a sharp rise in the gold price in the months ahead. But then all things are not equal. The western commodity markets are hugely distorted by the big money playing the futures market with amounts of paper gold enormously in excess of physical gold availability perhaps by as much as a factor of 100 or more. Should market participants start demanding settlement in physical gold there would be a massive increase in gold price and undoubtedly some of the big short position holders would be bankrupted. But, unfortunately for the pro-gold sector, this seems very unlikely to happen.
However there has also been a move in the East to set up new international commodity exchanges which will deal only in physical metal – notably in Shanghai with the international arm of the Shanghai Gold Exchange (SGEI) located in the Shanghai Free Trade Zone, and in Singapore with the Singapore Precious Metals Exchange (SGPMX). There are also reports that CME Group will launch a physically deliverable contract in Hong Kong later this year and in the Middle East, Dubai is said to be preparing to launch a physical contract too. The effect of these new trading options will be limited initially, but as they gain traction and physical gold continues to move from West to East, which shows no signs of coming to an end, then there could be some dramatic gold price moves ahead in the medium to long term.