LEADING ANALYSTS are split over the prospects for China’s private gold buying in 2018, as a “healthy outlook” from one consultancy contrasts with a “tough year in store” from another.
“China’s gold demand is likely to have peaked in 2013,” says Thomson Reuters GFMS, “and is very unlikely to return to those levels in future, regardless of the state of the domestic economy.”Thomson Reuters GFMS
China and India and their Gold Buying
Most notably, household demand for gold bars was “sluggish” through most of 2017, GFMS says, while consumer taste in jewelry continues to shift away from pure gold to lower-carat fashion items sold at higher mark-ups.
Having risen for 3 years running however, China’s gold investment demand is set to grow another 6% in 2018 counters analysis from Metals Focus, while the gold jewelry market “bottomed out in 2016 and is undergoing a modest recovery.
“The main driver behind this promising turnaround has been the improving Chinese economy and its positive impact on consumer sentiment.”Metal Focus
Data from China’s National Bureau of Statistics say the world’s second-largest economy grew 6.9% in Yuan terms in 2017 – yet again meeting the Beijing politburo’s official target – with gross domestic product expanding to more than CNY 82 trillion.
Household gold demand for jewelry and investment combined grew 4.2% by weight meantime, recovering more than half of 2016’s steep fall according to data compiled by Metals Focus for mining-backed market-development organization the World Gold Council.
On a quarterly basis, China’s private jewelry and investment gold demand historically peaks in the January to March period, when the Lunar New Year holidays and gift-giving celebrations spur the heaviest household buying.
On BullionVault’s analysis, 2013 was the only year since at least 1997 when Chinese household spending as a proportion of GDP peaked outside of Q1, rising to a record peak at 0.94% as Yuan and global prices then sank in gold’s worst quarterly crash for 3 decades.
China’s Household Gold Buying as a Percentage of GDP
“The reality is that the Chinese community is shifting from treating gold jewelry as a safe haven asset to a fashionable complementary, this is especially noticeable with younger generations.”Samson Li, Senior GFMS Precious Metals Analyst
Metals Focus also notes China’s changing tastes, but sales of 999 purity items “were flat [in 2017] compared to the sharp declines recorded in previous years,” leaving sales of both lower-carat fashion and higher-carat luxury pieces “to lift the total” weight demanded overall.
Here in 2018 “show rooms were very busy during our visits to Shenzhen in January,” Metals Focus goes on, also reporting and forecasting growth in sales of gold investment bars through non-bank channels, plus greater interest “from sophisticated, often high-net worth investors looking at gold as a portfolio diversifier.”
GFMS also points to gold as investment diversification, tempering its more gloomy outlook with the caveat “barring any huge market panic”.
“Most coverage of china’s debt problem has rightly focused on its corporate sector.Chinese households, however, are quickly catching up. This is bad news.”Financial Times’ Alphaville Blog
Latest available data suggest Chinese households had outstanding debts equal to some 106% of their disposable income, the FT explains – very nearly the same level as US households, but shooting from just 40% a decade earlier while US indebtedness “has been basically flat” since falling after the global financial crisis.
Now the No.1 gold consumer nation by weight for 5 years running, China has also been the No.1 gold-mining producer since 2007, although output fell over 9% last year amid tighter environmental regulation of the sector by Beijing.
Among official reserves, the People’s Bank of China remains the 21st Century’s heaviest gold buyer to date. Now reporting the fifth largest total (behind the US, Germany, Italy and France) with bullion reserves of 1,842 tonnes, the PBoC has added more than 1,447 tonnes since the start of 2000. That’s just ahead of the 1,406-tonne addition taking Russia to No.6 among national gold holders with reported reserves near 1,839 tonnes.
China’s Real Reason for Buying Gold
China has spent the last 6 years importing thousands of tons of gold and buying all of its own domestic production. The China Gold Association (CGA) Yearbook listed net imports in 2013 at 1,524 tonnes, with an additional 428 tonnes from domestic production, a sum total of 1,952 tonnes. In 2014, China imported at least 1,250 tonnes and domestically mined 452 tonnes, for a sum total of 1,702 tonnes. Total imports amounted to more than 410 tonnes in the first two months of 2015 alone, which is a big jump from 2014 demand.
On April 20, 2015, Bloomberg Intelligence estimated that The People’s Bank of China tripled its holdings of gold bullion, since April 2009, to 3,510 metric tons. That means, more or less, the Chinese government has purchased virtually all of its domestic gold production over the last 6 years. The estimate is based on trade data, domestic output and the figures published by the China Gold Association. That means that the Chinese government is the second largest gold-holder in the world, outmatched only by the USA, which claims an alleged hoard of 8,133.5 tons of the yellow metal.
Bloomberg speculates that China is buying gold because it intends to bolster the acceptability of the Chinese yuan in international commerce. The line of thinking is that large gold holdings make currencies more credible candidates for reserve currency status. Yet, a gold-backed currency is not likely to impress the staunchly anti-gold IMF, or increase the likelihood that the Chinese yuan will be added to SDR. But, it is just the opposite.
The IMF was founded by western nations, and the nation with the largest number of voting shares is the United States. For historical reasons, most Western nations, and particularly the USA, continue to be anti-gold. During the 1920s, America gave lip-service to being on a so-called “gold standard.” However, in common with most western nations, it printed far more paper money (fiat currency) than the gold reserves could back up.
What Does the Main Chinese Consulate Say?
In other words, whoever controls the price of gold against their currency controls the price of gold against any other currency that gold is denominated in.
When China increases the number of yuan it takes to purchase one ounce of gold, the dollar will respond by rising in value, even though China will not be pegging its yuan directly against the dollar. The dollar’s rise could only be capped by a concerted effort by the USA.
Control over the worldwide currency markets is why China wants to control the gold market. It is already taking affirmative steps to establish that control, and that is what is behind the announcement that the Shanghai Gold Exchange will establish a yuan-based gold fix before the end of 2015. The chairman of the SGE, Xu Luode, has been not been shy about it. He has very openly stated that China intends to control the gold market.
Why Do Some Nations Hold More Gold?
As an asset, gold is entirely speculative.
It provides no income or dividends, and has few industrial or medical applications. Investors buy it only in the confidence that humans’ peculiar and enduring fascination with the lustrous metal will ensure its value through the decades and centuries to come.
Unlike other securities, its price is not dictated to any large extent by supply and demand.
“Gold trades more like a currency and its price is driven more by monetary considerations such as inflation, interest rates and exchange rates.”Nitesh Shah, ETF Securities Commodity Strategist
As “Trumpflation” expectations grow, along with anticipation that the US Federal Reserve will begin hiking interest rates more rapidly next year, the gold price has duly fallen. Even a new Sharia standard for investing in gold, which could see some of the $2 trillion currently invested in Islamic Finance assets reallocated to physical metal and other products, the price impact would be limited, said Shah.
Don’t Trust the State
One historical reason to hold physical gold has been a suspicion of fiat currencies, and the government or central bank’s ability to manipulate them. Since the Bank of England abandoned the gold standard in 1931, when the pound stopped being redeemable for a fixed amount of gold bullion, a long period of political calm and relatively stable inflation has endured in Britain, with the brief interlude of the 1970s. This may have allowed Britons to become distanced from the idea of holding physical gold at all.
To what extent has a collective memory of wartime occupation or hyperinflation shaped the attitudes of some European nations? Ross Norman, chief executive at Sharps Pixley, sees a connection between Germans’ appetite for gold and their propensity to save four times as much as their British counterparts.
“The UK may have faced spiralling inflation in the 1970s, but the Germans have lost their wealth three times in 100 years. The UK has enjoyed a long period of economic and political stability, and the option of buying financial insurance has been less compelling, perhaps.”Ross Norman
According to Ash, developed and less stable markets have different patterns of gold demand. He points to Turkey, which has been overtaken by Germany in recent years as the world’s fourth largest buyer.
“With terror attacks, a coup and Isis on its doorstep, Turkey is now looking to liquidate its gold. It accumulates when times are good in preparation for when they aren’t.”Ash
The Same the World Over
Of course, tax is another factor which could dictate a particular nation’s attitude to holding physical gold, rather than a security. Bullion bars are liable for UK capital gains tax, while some coins are not. And many investors would prefer to hold shares in mining companies, whose risk profile offers higher returns than physical bullion, not to mention the costs of storing and insuring physical metal in a vault.
It has been historically poor access to other kinds of savings vehicles, particularly in rural areas, which has made the metal a key staple of any portfolio. India has to import most of the gold it consumes (around $25bn a year), and years of sustained demand` has caused the country’s current account deficit to widen, and the rupee to weaken, producing a cycle in which “you keep buying gold because the rupee keeps going down,” says Ash.
It has also proved useful for avoiding tax. In October, Shekhar Bhandari, executive vice-president of Kotak Mahindra Bank, told Reuters that “black money” – funds obtained illegally or not declared for tax purposes – accounts for 10 to 30 per cent of the country’s gold demand. Prime Minister Narendra Modi has imposed a 10 per cent tariff on imported gold, and much is traded on the black market.
“The fact that wholesale Indian gold prices have been well below London quotes this year suggests there is a lot of metal around on the black market,.”Ash
There was another rush to buy the metal last month after Modi announced another corruption-busting measure – the demonetization of all 500 and 1,000 rupee notes which made up 86 per cent of cash in circulation in the country. It has been a hugely disruptive venture, and a lack of new bills has brought about a cash crunch, right in the middle of India’s wedding season when demand for gold jewellery is highest. As a next step in his fight against black money, it is rumored that Modi has set his sights on gold holdings themselves.
The Chinese government may also be changing its attitude. Before 2004, private citizens couldn’t buy gold at all. But when the US Federal Reserve implemented quantitative easing in 2009, China accused America of monetising its debt.
“State television adverts were broadcast encouraging Chinese citizens to go out and buy gold.It was a fascinating response.”Philip Naylor-Leland, British Aristocrat
Now, it is thought that Beijing authorities have restricted gold imports to curb the outflow of dollars from China’s shores. It seems that distrust in a government, and the currency it controls, is the primary motivation for buying gold, however you choose to hold it.
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