Chinese gold demand 456 tonnes at 9 weeks.  On track for another strong year.

Chinese gold demand as represented by SGE withdrawals is just 2 tonnes higher than at the end of the same week last year suggesting another 2,000 tonne plus year.  How will this impact China and the world gold market..

Lawrie Williams

With Shanghai Gold Exchange (SGE) withdrawals for the week ended March 6th at 45 tonnes – up 7 tonnes from the 5 days straddling the Chinese New Year holiday – withdrawals for the year to date are almost exactly on a par with 2014, when Chinese demand, as represented by SGE withdrawals, was the second highest on record at a little over 2,100 tonnes for the full year.  Thus year to date withdrawal figures are 456 tonnes as opposed to 454 tonnes a year ago.  The figures to date suggest that Q1 SGE withdrawals will come to around 580 tonnes – possibly higher if the lower gold prices currently prevailing serve to stimulate Chinese demand as low prices have often done in the past.

As can be seen from the chart below from Nick Laird’s www.sharelynx.com group of websites, Chinese demand tends to start the year strong ahead and around the Lunar New Year holiday, then fade away in the middle of the year and then build up again sharply in the final 4 months.   nickl

Chart courtesy of www.goldchartsrus.com and www.sharelynx.com

The latest SGE figures show that Chinese demand for gold – in comfortably the world’s largest current gold consumption market – remains alive and strong and is continuing to lead the flow of physical gold from West to East which seems to be continuing unabated.

Physical gold demand, as represented by official imports, in the other truly major gold consumer, India, appears to have faded in the weeks leading up to that country’s budget at the end of February when it was widely believed that import duties on gold and silver would be relaxed.  In the event this did not happen, so some element of pent up demand held over from the weeks ahead of the budget date seems likely to materialise – as may a return to an increase in volumes of smuggled gold.

Thus physical gold demand looks to remain strong but, as expected, not quite at the levels seen leading up to the Chinese New Year.  Going forward demand levels will be followed with great interest.  Even though 45 tonnes is well below the levels seen immediately prior to the New Year holiday, if maintained over the full year would amount to 2,300 tonnes plus.  As the Chinese middle classes expand the gold-owning section of society is expanding also.  While there may be blips up and down along the way we can probably expect Chinese demand to remain at around at least 2,000 tonnes a year going forward with an overall upwards trend.  If we have indeed reached peak new mined gold production at a little over 3,000 tonnes, with declining output likely ahead, then the market is going to be stretched as more and more of the global gold stock moves east.

And even a significant rise in the gold price is unlikely to alter this trend.  It will take several years to re-establish and build major new mining projects.  What a gold price rise may do is actually drive production downwards as miners may then find it profitable to mine ever lower grades, while the lower gold prices have done the opposite forcing many miners to mine higher grades and thus push up production when logic might suggest output should fall.

A single country consuming two-thirds of the world’s new mined gold supply, which is what is happening at the moment, creates a huge market imbalance that just cannot continue indefinitely without impacting the gold price.  If the three big Chinese banks which qualify do indeed become significant players in the new LBMA Gold Price mechanism which comes into effect on Friday, then it is possible that things will indeed change as far as pricing is concerned.  (However, as pointed out in an article on Mineweb today it is not yet certain that these Chinese banks will indeed be among the initial direct participants in the new benchmarking system: See Fixing the Gold Fix – with or without the Chinese banks?)

While some maintain China also has an interest in keeping the gold price down to enable it to build its own reserves at the lowest possible cost, it also has the task of avoiding a hard landing as its economy is being restructured.  This could be seen as helping that huge number of its citizens who have been persuaded to buy gold to feel wealthier (the spending community) and could go some way towards maintaining the necessary positive perception on its economy among its ever growing middle class citizenry which it needs to keep on side.

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