China on a gold standard? Food for thought at least

By Lawrie Williams

Earlier this week I penned an article based on a talk by Ken Hoffmann, Bloomberg’s Global Head of Metals & Mining Research at the Global Mining Finance Precious and Base Metals Conference in London.  This was published on Mineweb and has already attracted extremely strong readership from around the world – See: Will China go for a gold standard? The jury is out!

In it, Hofmann set out what some might consider an off-the-wall appraisal of possible Chinese moves to back its currency with gold to try and help cement the yuan’s position as a potential future reserve currency.  This, it feels, could go a long way towards other countries’ central banks accepting the yuan as an integral part of their foreign currency holdings, perhaps even pari  passu with the U.S. dollar.

Hofmann puts forward the viewpoint that the Chinese are exasperated by the West trying to treat the nation as a second class citizen on global trade and economic organisations, despite it being the world’s second largest economy – or some would even put it at No.1.  The Chinese administration is also of the opinion that the U.S. is obstructing Chinese efforts to gain a place at the global table commensurate with its economic standing as the U.S. sees China as a competitor to its global dominance of trade, and all the advantages that brings to the U.S. economy and place in the world order.

Other media picked Hoffmann’s hypothesis up, but in effect only appeared to look at how much gold China would need, or what gold price would be required, to fully back the yuan with gold in the manner of the old gold standard – perhaps with the implication that this is some kind of crackpot idea which puts Hoffmann in the ‘gold cultists’ mega-price camp.

Yet this was not really what Hoffmann was suggesting.  He effectively said that he did not know how China could achieve this but that the Chinese tend to view things in a totally different manner to the West and can move at lightning speed in comparison and might, by thinking outside the box, come up with some solution which could satisfactorily at least partially link the yuan to gold.  This would hugely enhance the currency’s status in the eyes, perhaps not of the major Western central banks, but for state banks in other parts of the world – notably in Asia, Africa and Latin America where there may be a more natural positive association with gold as a key indicator of financial strength. Indeed in many cultures gold is viewed  as the ultimate in financial probity and a symbol of wealth and power, regardless of the opinions of today’s mostly Keynesian economists who say that gold has no place in the modern financial system.

Central bankers are opposed to gold because it imposes disciplines, and ever since President Nixon dropped the dollar’s gold backing, the world’s central banks have seemed to have gradually seen this as carte blanche to allow monetary easing on an unprecedented scale and bring the global economy to the perilous state it finds itself in today.  Today’s economists, except perhaps those who follow the Austrian School, and bankers are almost unanimous in their opinions that gold should play no place in global economic thinking.  Yet the major Western nations’ central banks are for the most part hugely reluctant to part with any of their accumulated gold reserve – something of a contradiction in attitudes.  Gold obviously still has a place deep down in their collective psyches!

Today, at Bloomberg’s own  Precious Metals forum in London, Hoffmann gave a further short talk setting out the hypothesis – seeing the possibility of China going down this route as a possible Black Swan scenario.  While, in a short article released at the event he admits that the backing of the yuan fully by gold is an exercise that is highly unlikely and that in any case the Chinese government would not wish to have its monetary policy hands tied to the extent a traditional gold standard would suggest.  Indeed he admits that while the debate on this is an interesting one, ‘the idea of China on the gold standard is likely to remain in the alchemist’s lab for now’.

So what Hoffmann has done is to bring the idea of a Chinese introduction of some form of gold standard into the debate and for that he should be praised rather than vilified by those who find the whole idea counter to their own views.  The Chinese are indeed capable of springing surprises on the West.  As pointed out earlier the Chinese have a different way of thinking than us westerners.  They tend to operate with the kind of long term game plan no longer even considered in most capitalist countries and with a centrally controlled economy are perhaps far better placed to implement economic reforms which are to their ultimate benefit which might be considered impossible in the Western thought train.

So while a Chinese return to some kind of gold standard may be extremely unlikely, one perhaps should not write the idea off as totally impossible, and Hoffmann has done us a favour in getting us to think outside the box ourselves.

China-driven AIIB sees currency wars heating up – Holmes

By Frank Holmes – CEO and Chief Investment officer for U.S. Global Investors –www.usfunds.com

Tuesday marked the last day that countries could submit their applications to become founding members of the new China-led Asian Infrastructure Investment Bank (AIIB). As of this writing, a little over 40 nations have either already been approved or have applied for membership, including strong U.S. allies such as Britain, Germany and Australia.

Notable absentees, as you can see below, are the U.S. and Japan.

Countries that Have Joined or Applied to Join Asian Infrastructure Investment Bank (AIIB)

Conceived to serve as an alternative to Western-dominated sources of credit such as the World Bank, International Monetary Fund (IMF) and Asian Development Bank, the AIIB will aim to invest in regional infrastructure projects ranging from energy to transportation to telecommunications.

The new development bank, which is expected to launch later this year, will have $100 billion in capital to begin with—a massive mountain of money, to be sure, but it falls far short of the estimated trillions that will be necessary to fund Asia’s astronomical infrastructure demand.

China’s creation of its own global bank highlights the country’s desire to wield more control over funding such projects. It currently commands only 5.17 percent of the vote in the World Bank and 3.81 percent in the IMF.

China is aiming for its currency to become part of the Special Drawing Right (SDR), the International Monetary Fund's composite currency unit.

And so the currency wars continue to heat up. China’s move demonstrates its ongoing efforts to establish the yuan as a global reserve currency on par with the U.S. dollar. It’s no secret that the country wants the yuan to become part of the IMF’s Special Drawing Right (SDR), a composite currency unit that now consists of the dollar, Japanese yen, British pound sterling and euro. The founding of the AIIB might very well bring the country closer to realizing these goals.

A-Shares Headed Higher

Chinese stocks are currently having a moment. Mainland A-shares, as measured by the benchmark Shanghai Composite Index, are up an incredible 92 percent for the 12-month period on the back of strong recent performance in the financial, property and infrastructure industries.

There’s generally a high correlation between the A-share market and China and Hong Kong, but the A-shares have outperformed by a wide margin over the past year.

Shanghai Composite's Breakout Continues

Last Wednesday the index fell a slight 0.8 percent, ending a 10-day rally that contributed 12 percent, its longest winning streak in 23 years.

Chinese policymakers have recently eased quota controls for foreign investors in mainland stocks and bonds, as they promote the yuan to be accepted as an SDR. The potential for greater inflows into the market should help the Shanghai Composite head even higher.

Our China Region Fund (USCOX) has participated in this rally through the Morgan Stanley China A Share Fund and a closed-end fund.

Read more about China:

  • China Consumes More Gold Than the World Produces
    “What’s not so well-known—but just as amazing—is that China’s supply of the precious metal per capita is actually low compared to neighboring Asian countries such as Taiwan and Singapore.”
  • China Just Crossed a Landmark Threshold
    “One of the most headline-worthy developments is China’s $16.3-billion infrastructure initiative intended to revive trading routes along the centuries-old Silk Road. Thousands of miles of railways, roads and pipelines will link Beijing to major markets all over Asia, Africa and Europe.”
  • China Wants to Conduct the World’s High-Speed Rail Market
    “In recent months, Chinese Premier Li Keqiang has emerged as the nation’s top salesman for what he calls the ‘New Silk Road’—miles upon miles of high-speed transportation connecting all corners of the world. His plan might very well become one of China’s most lucrative exports and culturally significant contributions to the world: fast, efficient and reliable railways.”

Chinese and Indian growth targets will benefit gold hugely

Julian Phillips’ daily roundup of what is happening in the gold and silver markets and the market forces driving them

The gold price remains under the influence of arbitrageurs working the gold price, the euro and the dollar exchange rates even after the announcement, with details of the E.C.B.’ quantitative easing policies. The immediate impact of this statement and following details was to see the euro continue to fall, as Draghi wants. The process of digesting the statements will continue today and fully impact next week. In the meantime, gold is now sitting just below $1,200 but not so far as to break down.

Please note that the dollar index has jumped this week to 96.80 a new high. But gold has just about kept pace with the rise, taking gold up against all other currencies.

Asia too has been lackluster this morning. The government of China announced yesterday that growth [GDP] will only target 7% this year. This number does not tell the full story at all. The government has built the infrastructure for the nation, now it needs to get its people to use it fully and develop a consumer [demand] driven economy that brings with it sustainable growth. This is the hard part. But from a gold investor’s standpoint this is positive news as it is the new wealth and the growing wealth of the current middle classes that will buy gold. Efforts to increase their wealth, as is the target of the government, will benefit gold hugely. Bear in mind a greater Chinese level of demand for gold will take it beyond the capacity of the gold market supplies to satisfy it.

With Modi’s government in India setting similar goals for his middle classes Indian demand for gold will steadily increase too.

ETFs and Markets

There were no sales or purchases from or into the SPDR gold ETF or the Gold Trust yesterday. The holdings of the SPDR gold ETF are at 760.799 tonnes and at 165.46 tonnes in the Gold Trust.

New York closed at $1,198.00 down $1.40 in a thin market still dominated by currency issues. Asia took the gold price up slightly to $1,198.90 before London pulled it down to $1,194. London then Fixed the gold price at $1,196.50 down $3.25 and in the euro, at €1,090.602 up €4.561, while the euro was at $1.0971 down nearly three quarters of a cent again. Ahead of New York’s opening, gold was trading in London at $1,196.40 and in the euro at €1,093.25.

The silver price closed at $16.21 up 3 cents. Ahead of New York’s opening it was trading at $16.05. We feel that the silver price may well drop much faster than gold if the gold price falls further, but as Asian demand comes in we expect the silver price to recover quickly once more.

Julian D.W. Phillips for the Gold & Silver Forecasters – www.goldforecaster.com and www.silverforecaster.com

 

Does China have 30,000 tonnes of gold stashed away?

A highly respected analyst quotes research suggesting that China built up a huge stash of gold between 1979 and 2003, and has been adding to it recently – and all without declaring this to the IMF.

Lawrence Williams

A note from very well respected analyst and China watcher, Simon Hunt*, has come up with the intriguing suggestion that China may actually have as much as 30,000 tonnes of gold hidden away in various accounts rather than the 1,054.6 tonnes it declares to the IMF.  It is widely believed that China has indeed been accumulating additional gold for its reserves secretly over the last few years, but Hunt’s note also cites research by Alasdair Macleod of Gold Money published last year that China has accumulated some 25,000 tonnes of gold when the gold price was very low between 1983 and 2002.  Hunt rates Macleod’s research very highly, referring to him as the world’s top gold analyst.

Hunt goes on to state that China is planning to link its currency to gold within the next three years, but first will have to make some swingeing internal financial reforms which will have a strong impact on global financial markets – and not a positive impact!

He also comments that his dealings with the Chinese suggest that the country does not wish the yuan to become THE or A global reserve currency, but just wishes to be able to trade directly in yuan rather than via a dollar route – a process which is already under way as it has set up bilateral trade deals in yuan  with around 28 countries already and has established a trading hub in Zurich.

I’ve gone into this in a bit more detail in an article published on Mineweb.com – See: Could China actually have 30,000 tonnes of gold in reserves?.

This suggestion may seem a bit far fetched, but China has a penchant for ultra long term planning as a centrally planned economy, and certainly had the wherewithal, and perhaps the incentive, to achieve this given its huge trade surpluses and a desire to be less reliant on what it has seen as a vulnerable  U.S. dollar in its foreign currency reserves.

As an added note though, well known gold analyst Martin Murenbeeld reckons these huge stock figures should perhaps just be classified as wild estimates.  He says the question that needs to be asked is where the supply might have come from?  “Did GFMS, CPM, etc all miss the supply side – assuming the 30,000 tonne demand stockpile is correct?” he says.  “In short, the data tabulators didn’t just miss the demand side of the market, they also missed the supply side. How likely is that?”

*Simon Hunt has been in the commodity analysis business for many years.  He was one of the two founders of hugely respected metals commodities consultancy Brook Hunt which nowadays has been absorbed into Wood Mackenzie and nowadays runs his own commodities advisory service in Simon Hunt Strategic Services – www.shss.com

 

 

Into Africa – China’s resource investment target

Frank Holmes, Chief Investment Officer for U.S. Global Investors, in his keynote panel presentation at the Cape Town Mining Indaba, reckons that China has already passed the $100 billion outward investment mark.  One of the key areas for this is to tie down future supplies of vital natural resources and Africa is a vital area for much of the Asian dragon’s resource investment.

Back in July 2013, the think tank Heritage Foundation predicted that China’s outbound investment “could very well exceed $80 billion [by the end of the year] and is on course to breach $100 billion by about 2016.”

With all due respect to the Heritage Foundation, China just beat the forecast by a couple of years, exceeding the $100 billion mark at the end of 2014. For the first time, in fact, China invested more capital outside its own borders than it did inside. As legendary Major League Baseball player and coach Yogi Berra once quipped: “It’s tough to make predictions, especially about the future.”

Be that as it may, it’s now estimated that within the next decade, China will have invested a staggering $1.25 trillion into the global market.

It was once said that the sun never sets on the British Empire. Now the same might be said of China’s growing influence around the world.

In 2014, China Channeled Over $100 Billion into 156 Countries and Regions Around the Globe

“As China’s domestic infrastructure expansion matures and the yuan’s purchasing power rises, Chinese companies are seeking overseas opportunities so they’re not pigeonholed in any one marketplace,” says Xian Liang, portfolio manager of our China Region Fund (USCOX).

When you consider world economies using purchasing-power parity, China’s actually surpassed America’s in the second half last year.

Gross Domestic Product in Absolute Terms, GDP on Purchasing Power PArity Valuation
click to enlarge

One of the most headline-worthy developments is China’s $16.3-billion infrastructure initiative intended to revive trading routes along the centuries-old Silk Road. Thousands of miles of railways, roads and pipelines will link Beijing to major markets all over Asia, Africa and Europe.

Many are already likening the new Silk Road undertaking to the Marshall Plan, the large-scale U.S. program that aided Europe following World War II and helped secure America’s role as the world’s leading superpower.

Into Africa

We all know that China is a big place with lots of people. As such, it requires unfathomable amounts of resources, for which it’s spending historic amounts of money. Between 2005 and June 2013, China spent $202 billion globally on energy and power, $100 billion on metals and $18 billion on agriculture.

Much of this capital is being channeled into Africa, home to about 60 percent of the world’s uncultivated arable land. If irrigated and optimized properly, Africa’s land has the potential to supply the same percentage of the world’s food needs. The continent is also home to 30 percent of the world’s minerals, with a large percentage of the deposits being platinum, diamonds and gold.

Eleven African Countries Are Among The Top Ten Global Resource Countries In At Least One Major Mineral
click to enlarge

Since 2005, China’s spending in Africa has jumped 30 percent, and in 2009 it became the continent’s largest trading partner, surpassing the U.S. Every year it exchanges around $160 billion in goods with Africa, but with China’s middle class growing in number and demanding a higher quality of living, we expect that figure to surge.

Goods Trade with Africa in 2013Its largest trading partner among all African countries is South Africa, where I’m attending the 2015 Investing in African Mining Indaba and participating in a keynote panel on mining opportunities on the continent. Twenty years ago, we were the initial speakers at the creation of this event when there were only around 100 attendees. Last year, there were over 6,000, making it the biggest mining conference in Africa.

Some economists are suggesting that Africa is shaping up to be “China’s Second Continent,” the title of New York Times journalist Howard W. French’s 2014 book. Just as the Roman Empire reshaped and brought together disparate European cultures through its sophisticated network of roads, China’s presence in Africa promises to have a long-lasting effect on the continent’s financial wellbeing. Roads, mines, hospitals, schools and other important infrastructure are being financed and built at a rapid pace. Last November, for example, China Rail Construction Corp. signed a $12-billion high-speed rail construction deal with Nigeria.

Cape Town

Funneling Capital Around the World

Back in December, I discussed at length Premier Li Keqiang’s desire to turn China into the go-to country for the world’s high-speed rail construction. The country also shows signs of becoming a major creditor on the scale of the World Bank. According to Business Insider, it’s already overtaken other nations as a “primary source of credit for the developing world.”

The article continues: “When China invests in one country, it quickly becomes the biggest creditor, sometimes to the extent of altering the economic and diplomatic scenario.” Many developing countries now owe China many times more what they receive from the International Monetary Fund.

Last week, for instance, we learned that Chinese President Xi Jinping promised $250 billion in investment in Latin American countries over the next decade. China will be buying copper from Chile and Peru, oil from Venezuela and soybeans from Brazil and Argentina. Xi and Argentine President Cristina Fernandez de Kirchner also agreed on a deal that would see China cooperate with the Latin American country on two nuclear power plants.

The packaging displays the U.S. flag on the front and pictures of Smithfield, Virginia, home to Smithfield Foods, on the backIt’s not just developing countries China has invested in. Since 2007, the U.S. has received around $72 billion. Among the American brands that Chinese companies have purchased are AMC Entertainment, Inc., IBM’s personal computer division and meat giant Smithfield Foods. WH Group, which owns the Shuanghui brand, acquired Smithfield in 2013 and is now introducing imported U.S. pork to the local Chinese market.

“Because of various food-related scandals in the last five to seven years, the average Chinese citizen tends to trust foreign food brands more than domestic brands,” Xian says.

This is just one of many examples of the Chinese preferring American brands to others. Buick, the best-selling automobile manufacturer in the Asian country, sold 1 million vehicles in 2013—810,000 of those in China.

China Ramping up Business Creation

Indeed, the U.S. continues to be the engine of the world in a time of Chinese and European deflationary risks. Having said that, I’m troubled by the fact that American business startups have been steadily declining over the past 30 years. For the first time in 2008, the “death rate” of businesses crossed above the “birth rate.”

U.S. Business CLosings Hold Steady while Business Startups Decline
click to enlarge

Although Gallup says that “there has been no definitive answer as to why the rate of U.S. startups has declined so precipitously,” it seems likely that ever-expanding and restrictive government regulations play a huge role.

Now compare this to what’s happening in China:

China's Reduction of Red Tape Has Increased Busines Start-ups, Despite Slowing Growth
click to enlarge

Back in October, I pointed out that China has slashed hundreds of lines of red tape in an effort to jumpstart economic growth and encourage business startups. Even though its real GDP growth is slowing, the country has become much more efficient at fostering business activity.

Frank Holmes is CEO and Chief Investment Officer for Fund manager U.S. Global Investors – www.usfunds.com

China’s very strong gold demand start to 2015 – 61 tonnes in week 1

Lawrence Williams

The SGE has reported a very strong, but perhaps not exceptionally so, start to Chinese gold demand in 2014 with 61 tonnes withdrawn from the Exchange in the year’s first trading week. Article submitted to mineweb.com

Gold withdrawals from the Shanghai Gold Exchange (SGE)  have been picking up even further ahead of the Chinese New Year, but at 61 tonnes in the first full week of 2015 (January 4th to 9th) cannot be described as exceptionally high – not compared with last year for example when withdrawals in the week from January 5th to 10th came to a shade under 80 tonnes.  But, as we’ve pointed out here before, the date of the Lunar New Year falls over 2 weeks later this year than it did last, so the build-up of gold buying ahead of the actual holiday could well prove to be a little lower week-on-week anyway being spread over the additional 19 days compared with a year ago when the Lunar New Year fell at one of its earlier possible dates (January 31st).  Chinese domestic demand may even be a little lower than the SGE figures suggest at about 58 tonnes as an estimated 3 tonnes was moved through the International section of the SGE, the SGEI, which handles gold trade which is not part of the domestic market.  (The SGEI only came into being later last year.)

What effect the recent rise in the gold price will have on Chinese demand over the remaining runup to the actual New Year date remains to be seen.  Shanghai gold premiums were running at a highish level – around $7/ounce – ahead of the recent price rise.  Week-on-week demand may now thus fall back a little if current gold price levels are maintained while the higher prices are digested by the Chinese buying public.  But overall we would expect purchases to remain at an elevated level over the next four weeks ahead of the holiday when it is traditional to give gold, gold jewellery and gold trinkets as gifts.

While China is seen to be in something of an economic downturn, it should be remembered that the nation’s GDP is actually still growing, but at a much slower rate than during its massive growth phases of a few years ago.  The official target is for a little over 7% GDP growth this year and even if this level is not achieved, growth will remain which suggests the accumulated wealth of the Chinese people will be growing too with more people being drawn into the potential gold purchasing arena.

It sometimes seems that the true extent of Chinese gold demand, as represented by withdrawals from the SGE, is just not fully understood by the Western gold markets.  Koos Jansen, who probably follows the Chinese figures closer than anyone, has just published a chart on www.bullionstar.com of Chinese monthly gold demand set against global new mined gold production.  The chart is appended below – I think Mineweb readers will find it interesting as it demonstrates how dominant China is in terms of soaking up much of annual total global new gold supply.  It does not take scrap supply into account, but this has been falling back over the past couple of years due to the lower gold price – and of course China on its own only accounts for around half of total global gold consumption!

Actual gold imports are obviously a separate element from total domestic demand.  Chinese imports are estimated to be around 1,200 to 1,300 tonnes last year, while production from its own mines may come out to be as much as 450 tonnes, with the balance being taken up by domestic recycling of scrap.

 Chart published courtesy of www.bullionstar.com

The other thing the above chart shows is the almost inexorable growth of gold demand within China over the past 5 years and further demonstrates what has to be a huge flow of gold from weaker hands in the West to what are deemed to be far stronger hands in the East.  Jansen in his latest article on bullionstar delves rather further into this gold flow examining statistics on gold exports to China from the world’s major gold trading countries.

If we add some of the other major gold importers into the picture – notably India which on several months last year showed imports actually exceeding those of China – the figures suggest a huge drain of physical gold into Asia.  This thus shows a draining of supplies that are not being replenished by new mined global gold – the balance being provided by scrap and, over the past couple of years, by liquidations from the major gold ETFs held in the West.

In 2013 the supply of gold to the markets from the ETFs was substantial, at as much as 880 tonnes by some estimates, while net sales out of the ETFs last year fell to perhaps less than a quarter of those seen in 2013.  The prospects of further sales out of the ETFs are diminishing unless there is a major gold price crash as more and more the gold ETF holders remaining are seen as being there for the long term with the weaker holders having mostly liquidated their positions.

 

The beginning of the end for gold and industrial metals price falls?

Lawrence Williams

Or the end of the beginning? … Looking at mixed fortunes ahead for gold, iron ore and base metals – positive, flat to negative and slightly upbeat respectively.

Latest article by Lawrie published on Mineweb.com.  Go to Mineweb.com to read this and other articles on precious metals, base metals, industrial metals and minerals and mining of all types.

The title of this article could be taken two ways, but our meaning in using it – courtesy of London metals and mining commentator David Hargreaves’ Week in Mining newsletter, which used aspects of the famous Winston Churchill wartime quote in its title and conclusions this week – is that are we perhaps actually nearing the bottom of the prices downturn virtually across the board in resources?

As the newsletter points out –  the Brent crude oil price has fallen through $50/bbl, iron ore is staring down the abyss, copper has a look of testing $6,000 per tonne on the downside, while gold has picked up to $1,200 plus etc.

In currencies, the US dollar continues its rise against all, or at least most, others, with the Euro testing nine-year lows. The Eurozone has moved into deflation as the forthcoming Greek elections could put in power a political party which could well implement a default on the country’s debts and lead to Grexit – the possible Greek exit from the European Union.

Further on the geopolitical front, Islamic fundamentalist-inspired terrorism has hit the headlines again with the Paris shootings at the Charlie Hebdo offices, the totally unprovoked murder of a policewoman attending a traffic accident and subsequent hostage taking leading to more deaths.  Rhetoric from leaders of ISIL, which now dominates large swathes of Syria and Iraq, preaches extending Paris-type events to other Western nations and calls for new attacks on airlines.  All very disturbing for a mostly rather less volatile and less religiously committed Western World.

These French terror attacks are probably partly aimed at stirring up anti-Islamic feeling within the majority populations in Europe in particular as a way of polarising potential civil strife to the ultimate advantage of the extremist elements involved.   It is estimated that around 5% of the European population follows Islam, and in France, with its strong former colonial connections in mostly Muslim North and West Africa, the Islamic faith may account for as much as 10% of the population – a very sizeable minority indeed.  Political parties with an anti-foreigner agenda are springing up across Europe and this could escalate as the ‘faith’ polarisation becomes stronger and stronger.  Virtually all the Islamic faith followers in Europe abhor the French killings, but if these result in anti-Muslim retaliation (which they are beginning to) the prospect of alienating this very big minority of the European population, leading to ever more blood on the streets, is very real indeed.

While the Russia/Ukraine situation has stayed out of the headlines since the beginning of the year, recently completely overshadowed by the Paris events, it has not gone away.  There remains the prospect of new European sanctions against Russia, ostensibly over its annexation of Crimea, but as we pointed out in a recent article these sanctions are damaging to Europe too, and could become more so should Russia raise the retaliation stakes.  Also the Russia/Ukraine situation may be much more complex than most observers have been prepared to recognise.

See: 2015 Black Swans – or another BRIC in the wall

This plethora of problematical geopolitical events has the potential to further destabilise the European economy, which is already in recession and entering a prospective period of deflation.  The events represent an almost unprecedentedly disturbing start to the year and we have to hope against hope that they do not continue throughout 2015 or the consequences for global economic recovery could be dire.

To all this we have to add China.  While the forthcoming year of the sheep suggests a period of calm and prosperity in the Chinese Zodiac, the slowdown in the country’s economy suggests otherwise, although GDP is still said to be growing at a rate of around 7% per annum.  Because of its huge impact on global metals demand, the Chinese slowdown from double digit GDP growth, with the major mining companies gearing up to meet the kind of demand growth those figures suggested, has had a dramatic impact on demand for raw materials – particularly for iron ore and copper.  There is the suggestion that inventories have been run down and demand could pick up as the year progresses.  However there is no doubt that the Chinese building and construction sector is slowing which doesn’t hold out great hope for an iron and steel pickup, although for copper the expansion of the country’s high speed rail network could provide some much-needed stimulus.

But Chinese individual wealth has still been growing over the last several years.  This is showing up in terms of automobile imports which are continuing to rise.  China, for example, is nowadays Jaguar/Land Rover’s biggest market on the luxury car front.  While an economic slowdown – but probably not a recession – is on the cards, the economy is still growing at a rate which Western nations would love to see.  While the government is no longer looking for growth at almost any cost, it does seem to be prepared to help counter any prospective serious economic decline through lowering interest rates and other measures and perhaps the hard landing which some have predicted will thus be held off.

So where does all this leave us in terms of metals prices going forwards?  Stagnation in Europe and lower growth in China, perhaps slightly alleviated by a weak recovery in the U.S., may not be auspicious for iron ore, although we suspect it won’t fall much lower.  Copper, as the main element in the base metals picture is a slightly more complex situation to forecast.  Assuming China does need to rebuild stocks and continues to invest in electrically intense infrastructure development, and, with many analysts predicting a supply deficit in the current year, then the red metal could well be at or near its bottom and due for at least a weak recovery in price.

Gold is another matter altogether.  The price is still seemingly being controlled by activity on the futures markets, but the European travails could lead to rising safe haven demand as a wealth protector should the EU start to unravel, while Chinese demand looks as though it should remain strong throughout the year ahead.  Continuing strength in the US dollar against other currencies would normally mean a decline in the dollar gold price, but recently gold has been holding up remarkably well in dollar terms, which means it has been a very good buy in other currencies – notably the euro.

So what is the overall view in our opinion?  Oil – flat to weaker as long as Saudi Arabia continues to pump it at current rates; iron ore flat to weak also with the three biggest producers all having expanded capacity heavily over the past year, but with demand, particularly from China, at best stagnant for the time being; base metals perhaps slightly positive, but not significantly so; gold’s fundamentals continue to look good, but then they have for the past couple of years and the price has still tanked.  Overall though gold, and the other precious metals, on balance, should probably continue to see positive gains ahead with the possibility of a major kick upwards should additional geopolitical problems materialise, or current ones escalate.

Chinese buy 29 tonnes of gold in last 3 days of 2014

Lawrence Williams

Gold demand in China remains strong in the build-up to the Lunar New Year, with gold price premiums on the SGE rising to 7%. Article as published on Mineweb.com .  Check out Mineweb for more articles on mining, metals and minerals.

In releasing the latest information on Chinese gold withdrawals, the Shanghai Gold Exchange (SGE) both confirmed that total withdrawals for the year came to over 2,100 tonnes, only 3.6% down on the previous year’s record, but also that withdrawals for the final three trading days of the month amounted to some 29 tonnes suggesting that demand remains strong ahead of the Chinese New Year.  Indeed with a longer runup to the Lunar New Year this year – the actual date is February 19th – the second latest date in the Western calendar on which the Chinese New Year can fall, we can expect strong gold withdrawal figures out of the SGE for both January and February.

In the Chinese Zodiac 2015 is a Sheep year (also known as Goat or Ram year) and denotes both calmness and prosperity.

If last year’s pattern of gold buying ahead of this date is followed then January could be a very big month for Chinese gold demand indeed.  Last year gold withdrawals from the SGE that month were actually substantially higher than at the start of the record 2013 year – and if demand in the last quarter of 2014 is anything to go by, they could be at close to record levels again this year.  Traditionally Chinese New Year celebrations involve gold gifting, and January tends to be the month that gold traders and banks stock up ahead of the date and holiday period surrounding it.

Anecdotal reports suggest that this is already the case with high demand levels already being seen at the beginning of the month.  Reuters reports, for example, a Shanghai trader as saying “We saw consistently strong buying this week, premiums and volumes are better than what we saw in the last month.”  As confirmation SGE premiums for gold have risen to $7 an ounce as demand grows.

Withdrawals from the SGE have been averaging over 50 tonnes a week for virtually all of the past three months.  With the actual date of the Chinese New Year falling more than 2 weeks later than it did last year when it fell on January 31st we can probably expect a slower, but more prolonged, build-up this year.   Judging by the increased premiums, if the Shanghai trader is correct we could also see something of a boost in the early January figures.