China - gold's No1 producer and consumer is taking control of the market
With China now the world's No. 1 producer and consumer of gold, and the prospect of Chinese and Indian demand alone exceeding 1,000 tonnes a year in the next few years, gold's price looks to be under new control.
Author: Lawrence Williams
Posted: Friday , 08 Jan 2010
LONDON -
It now looks for sure that China, in 2009, overtook India as the world's largest gold consumer. The ‘Middle Kingdom' had already surpassed South Africa and the U.S. as the world's largest gold miner a year earlier. Latest figures out of Beijing suggest that gold demand in China grew by an estimated 13.8% to around 450 tonnes in 2009, while India's estimated consumption last year is put at only around 210 tonnes - about half its consumption level in 2008. Much of the disparity last year was due to a decline in Indian buying as purchasers were put off by higher prices.
This year initial projections suggest that although Indian demand may well recover to near 2008 levels, Chinese buying will keep it well ahead - but then projections made in January are prone to tempt fate. Even so, the reported pre-Chinese New Year surge in gold buying by the general public in China could mean this year's disparity in the figures becomes even wider.
On the production side, China's output reached a new high of 282.5 tonnes for the first 11 months of the year suggesting an overall total of around 310 tonnes for the full year, assuming November's monthly output figure of just short of 28 tonnes was maintained in December.
What does remain to be seen though is how much of this assumed 310 tonnes will have been picked up by the general public, and how much by the State, and the suggestion is that the State may well have retained it all, which means the public is buying imported gold. Although Chinese reporting of State holdings can be obscure to say the least as it differs depending on which government entity technically holds the gold. China has in the past not reported official gold reserve growth until the gold is physically moved into Central Bank coffers - if then!
This all makes the estimates of non Central Bank gold supply and demand virtually impossible to assess accurately (if indeed this has ever been really possible) given the unknown of where the world's largest producer's gold is actually going - depending on what statistics the Chinese are prepared to release to the outside world. Digging too deeply locally could end one in jail, as Rio Tinto's iron ore pricing negotiators have found out to their cost!
What is apparent though, and this has been confirmed by various statements and anecdotal evidence, is that the Chinese government and Central Bank is wary of the declining value of the dollar, given the nation's enormous dollar reserves, and is feverishly pushing state entities into diversifying its reserve base - hence the suggestion that all China's newly mined gold may well be sitting in government coffers - and also why China doesn't appear to have stepped in to buy IMF gold. It can happily expand its gold reserves surreptitiously which doesn't rock the markets too much.
If, for example, China had bought the IMF gold on offer, the signal this would have sent to the markets could have led to a huge gold price surge and a consequent devaluation of the dollar and, given China's enormous dollar holdings, this doesn't make economic sense. Far rather buy the gold under the table from its own producers and hide it from the world at large until such a time it may be economically expedient to announce it.
Given the Chinese populace is taking its lead from the government and, apparently, buying gold as an ultimate insurance policy either as jewellery or bullion, should the price start slipping back substantially it would be easy for China to announce it has taken another couple of hundred tonnes into its reserves and the market would bounce back again, so protecting its' citizens investments. This is pure speculation of course, but does seem a logical way of looking at Chinese economic policy with respect to gold and its own public.
Take the following comments from Nidhi Nath Srinivas of India's Economic Times:
"Since 2003, Beijing has been buying most of the gold excavated and refined locally. It was a perfect strategy. No one in the international market became the wiser and the bill was paid in yuans. Today, China has more than 1,000 tonnes in its official vaults, up 75% in six years. Its gold reserves are now the fifth-largest among national central banks after the US, Germany, France and Italy. This insurance helped mandarins in Beijing sleep easier at night.
"But the public still had no such hedge. So, Beijing has begun actively encouraging people to invest up to 5% of their income in gold and silver. The biddable Chinese have diligently followed this advice. Full-year 2009 private demand in mainland China could outstrip India by a fifth."
Given China's explosive growth, which has to be bringing ever more and more of its enormous population into the urban middle classes with ever increasing purchasing power, this ongoing rise in purchases by the Chinese public is likely to continue to expand. China may not have the gold purchase gene ingrained into its psyche like India, but gold has still had an important place in the Chinese mind, and now the rising wealth means more and more people have the purchasing power to buy some - even if in pretty small amounts.
But you can't rule out India either. Its population is on a similar scale to China's, and may even outstrip it in the years ahead and its economic growth is rapid, although not as substantial as China's. The Indian government has also taken the lead, through its 200 tonne purchase ofIMF gold, and the state too is sanctioning its own institutions (state controlled banks and the Post Office) to sell gold coins and bullion to the people. As the Indian gold buying public becomes more used to the current higher gold price levels - and there is at least a suggestion that this is already happening - then demand there is likely to return and increase. It may not take more than say five years, assuming growth continues at the current rate in China and India, for combined demand to reach 1,000 tonnes a year. Now that's an awfully big hunk out of world gold production (over 40%) - and there are a lot of other countries where gold purchase is endemic in the system, not to mention the U.S. gold bugs who have been soaking up the U.S. Mint's allocations of Eagles and Buffaloes and the ever growing ETF investment in bullion. On these grounds alone perhaps the recent growth in the gold price is more than justified, and there is the suggestion that there is more to come.
Obviously, though, where there is huge gold investment, at some stage disinvestment could materialise which could wipe the smile off gold investors' faces, but while economic turmoil continues - and it ain't over yet' - this seems unlikely to happen except perhaps in terms of forced liquidations if there is another stock market collapse. And, as we saw in October 2008 when funds were having to offload anything of value to preserve liquidity, gold held up best of all and was the first to bounce back to prior levels.
With China now the world's No. 1 producer and consumer of gold, and the prospect of Chinese and Indian demand alone exceeding 1,000 tonnes a year in the next few years, gold's price looks to be under new control.
Author: Lawrence Williams
Posted: Friday , 08 Jan 2010
LONDON -
It now looks for sure that China, in 2009, overtook India as the world's largest gold consumer. The ‘Middle Kingdom' had already surpassed South Africa and the U.S. as the world's largest gold miner a year earlier. Latest figures out of Beijing suggest that gold demand in China grew by an estimated 13.8% to around 450 tonnes in 2009, while India's estimated consumption last year is put at only around 210 tonnes - about half its consumption level in 2008. Much of the disparity last year was due to a decline in Indian buying as purchasers were put off by higher prices.
This year initial projections suggest that although Indian demand may well recover to near 2008 levels, Chinese buying will keep it well ahead - but then projections made in January are prone to tempt fate. Even so, the reported pre-Chinese New Year surge in gold buying by the general public in China could mean this year's disparity in the figures becomes even wider.
On the production side, China's output reached a new high of 282.5 tonnes for the first 11 months of the year suggesting an overall total of around 310 tonnes for the full year, assuming November's monthly output figure of just short of 28 tonnes was maintained in December.
What does remain to be seen though is how much of this assumed 310 tonnes will have been picked up by the general public, and how much by the State, and the suggestion is that the State may well have retained it all, which means the public is buying imported gold. Although Chinese reporting of State holdings can be obscure to say the least as it differs depending on which government entity technically holds the gold. China has in the past not reported official gold reserve growth until the gold is physically moved into Central Bank coffers - if then!
This all makes the estimates of non Central Bank gold supply and demand virtually impossible to assess accurately (if indeed this has ever been really possible) given the unknown of where the world's largest producer's gold is actually going - depending on what statistics the Chinese are prepared to release to the outside world. Digging too deeply locally could end one in jail, as Rio Tinto's iron ore pricing negotiators have found out to their cost!
What is apparent though, and this has been confirmed by various statements and anecdotal evidence, is that the Chinese government and Central Bank is wary of the declining value of the dollar, given the nation's enormous dollar reserves, and is feverishly pushing state entities into diversifying its reserve base - hence the suggestion that all China's newly mined gold may well be sitting in government coffers - and also why China doesn't appear to have stepped in to buy IMF gold. It can happily expand its gold reserves surreptitiously which doesn't rock the markets too much.
If, for example, China had bought the IMF gold on offer, the signal this would have sent to the markets could have led to a huge gold price surge and a consequent devaluation of the dollar and, given China's enormous dollar holdings, this doesn't make economic sense. Far rather buy the gold under the table from its own producers and hide it from the world at large until such a time it may be economically expedient to announce it.
Given the Chinese populace is taking its lead from the government and, apparently, buying gold as an ultimate insurance policy either as jewellery or bullion, should the price start slipping back substantially it would be easy for China to announce it has taken another couple of hundred tonnes into its reserves and the market would bounce back again, so protecting its' citizens investments. This is pure speculation of course, but does seem a logical way of looking at Chinese economic policy with respect to gold and its own public.
Take the following comments from Nidhi Nath Srinivas of India's Economic Times:
"Since 2003, Beijing has been buying most of the gold excavated and refined locally. It was a perfect strategy. No one in the international market became the wiser and the bill was paid in yuans. Today, China has more than 1,000 tonnes in its official vaults, up 75% in six years. Its gold reserves are now the fifth-largest among national central banks after the US, Germany, France and Italy. This insurance helped mandarins in Beijing sleep easier at night.
"But the public still had no such hedge. So, Beijing has begun actively encouraging people to invest up to 5% of their income in gold and silver. The biddable Chinese have diligently followed this advice. Full-year 2009 private demand in mainland China could outstrip India by a fifth."
Given China's explosive growth, which has to be bringing ever more and more of its enormous population into the urban middle classes with ever increasing purchasing power, this ongoing rise in purchases by the Chinese public is likely to continue to expand. China may not have the gold purchase gene ingrained into its psyche like India, but gold has still had an important place in the Chinese mind, and now the rising wealth means more and more people have the purchasing power to buy some - even if in pretty small amounts.
But you can't rule out India either. Its population is on a similar scale to China's, and may even outstrip it in the years ahead and its economic growth is rapid, although not as substantial as China's. The Indian government has also taken the lead, through its 200 tonne purchase ofIMF gold, and the state too is sanctioning its own institutions (state controlled banks and the Post Office) to sell gold coins and bullion to the people. As the Indian gold buying public becomes more used to the current higher gold price levels - and there is at least a suggestion that this is already happening - then demand there is likely to return and increase. It may not take more than say five years, assuming growth continues at the current rate in China and India, for combined demand to reach 1,000 tonnes a year. Now that's an awfully big hunk out of world gold production (over 40%) - and there are a lot of other countries where gold purchase is endemic in the system, not to mention the U.S. gold bugs who have been soaking up the U.S. Mint's allocations of Eagles and Buffaloes and the ever growing ETF investment in bullion. On these grounds alone perhaps the recent growth in the gold price is more than justified, and there is the suggestion that there is more to come.
Obviously, though, where there is huge gold investment, at some stage disinvestment could materialise which could wipe the smile off gold investors' faces, but while economic turmoil continues - and it ain't over yet' - this seems unlikely to happen except perhaps in terms of forced liquidations if there is another stock market collapse. And, as we saw in October 2008 when funds were having to offload anything of value to preserve liquidity, gold held up best of all and was the first to bounce back to prior levels.