It is so frustrating when top bank analysts ignore the data from the Shanghai Gold Exchange (SGE) and instead rely totally on data from the World Gold Council as supplied by GFMS. The WGC admits itself that its figure of Chinese gold consumption ignores an important proportion of the gold flows into China. Thus in its latest analysis, Barclays comes up with the WGC line that China is back to being the world’s second largest gold consumer after India, having fallen from first place 1n 2013, and then bases its assumptions as to China’s gold consumption growth accordingly. Barclays Bank analyst, Suki Cooper, continues on this path and states that perhaps by 2020 China could be consuming half the world’s gold output. By our reckoning it already is – and more!
Last year’s withdrawals out of the SGE, which by law handles all China’s gold imports and domestic production, came to 2,102 tonnes – down from 2,197 tonnes in 2013 – which is already equivalent to around two-thirds of global new mined gold output. Cooper relies on the WGC data for her analysis which puts Chinese consumption at a miserly 814 tonnes, but this ignores financial elements of demand and gold disappearing into the Chinese banking system which the WGC admits may be substantial. If these are not elements of ‘Chinese consumption’ – a matter of semantic interpretation of what is ‘consumption’ – they are certainly relevant as gold flows, and it is gold flows into Chinese hands which have to be the most important statistical data in terms of the global gold market.
This myth about Chinese gold consumption is perpetuated by mainstream media outlets, such as Bloomberg which appears to treat Hong Kong net gold exports to China as the country’s total import figure. Take this recent Bloomberg headline and read the article to understand what we are saying: China’s Gold Imports From Hong Kong Tumble 32% From Record. Reading the article one would assume that China’s total gold imports fell by 32% in 2014. But China moved the goalposts last year and allowed far more in previously controlled imports through other ports of entry. If one reads Swiss and U.S. official statistics in detail these show that well over 30% of gold exports from these two nations (and Switzerland is by far the largest exporter of gold to China) are now going directly to the mainland rather than via Hong Kong, and that is all-change since 2013. Indeed we reckon that perhaps as much as 36% or more of China’s gold imports are now coming in directly to the mainland rather than via Hong Kong. China itself doesn’t report these flows and Hong Kong probably wouldn’t if it hadn’t maintained its monthly statistical import/export data from the time it was a British colony. China remains a country of contradictions! But does Bloomberg mention this in its article? No!
We would guide you rather to analyses from China gold watcher Koos Jansen who writes for www.bullionstar.com and who works with what information is available directly from China including data published only in Chinese. His latest estimate of Chinese gold IMPORTS, in 2014 was at least 1,250 tonnes to which must be added China’s own gold production of 452 tonnes, plus scrap supply. On this estimate gold imports plus domestic production alone total at least 1,700 tonnes – still a little short of the SGE withdrawals of 2,102 tonnes for the year, but hugely in excess of the WGC consumption figure. These imports PLUS domestic production are being absorbed within China – gold exports are prohibited – so if this doesn’t represent Chinese gold consumption, what is happening to the perhaps 1,000 tonnes of gold that can’t be accounted for over and above the WGC figures!
Note: The WGC qualifies its data thus: “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.
Jansen sets much of this out, including other prior anomalies in WGC figures from the past in his recent examination of the WGC and SGE data in an article which is well worth reading entitled How The World Is Being Fooled About Chinese Gold Demand.
One additional anomaly, which is not specifically related to WGC figures but to virtually all analyses of Chinese consumption, is where should we place Hong Kong’s own consumption which may be tiny in comparison with that of mainland China, but is significant nonetheless. After all Hong Kong is a Special Administrative Region of China, so surely its consumption should be lumped together with that of mainland China in assessing total Chinese demand? The WGC put this at 39.1 tonnes in 2014 so even on WGC figures, which we feel hugely understate the picture anyway, Chinese consumption, including that of Hong Kong, does indeed come out greater than that of India!
But back to the start of this article, given that the Barclays analysis suggests ever growing demand, if one takes what we see as the true gold flow into China of 2,100 tonnes in 2014 and increases this at a conservative 5% a year, we have China alone taking in perhaps 90% of global new mined gold output by 2020 – not 50% as the Barclays analysis suggests. Non-Chinese demand is perhaps around 2,500 tonnes a year, while global scrap supplies are currently around 1,100 tonnes. Even assuming there is no growth in either of these figures over the next five years, they do suggest a very substantial global gold supply deficit ahead, and growing given there are virtually no big new gold mines in the pipeline to replace aging existing operations and ever-falling grades. Even if this all stimulates a very significant gold price increase – far more than the $2,000 an ounce predicted in another report from ANZ bank analysts citing substantial Asian gold demand growth (doubling by 2030) – this can’t lead to substantial supply growth given the long lead times in bringing new operations on stream. Indeed significantly higher gold prices could even lead to gold output falling initially as existing operators are able to mine lower grades to preserve mine lives before any totally new production can kick in.
But, we would suggest, that a $2,000 gold price by 2025 and $2,400 by 2030 as the ANZ analysts suggest, given the likely enormous deficit in gold supply suggested by their consumption growth figures, again hugely underestimates the price potential should these demand figures come about – and in our view these figures may themselves well prove to be conservative given the potential wealth growth in China and India, as well as in other gold-hungry nations over the next decade.