LAWRIE WILLIAMS: A true measure of Chinese gold consumption
For some time now, we have been embroiled in an argument with the major independent precious metals analysing consultancies over the true measure of China’s annual gold absorption. We have suggested that the Shanghai Gold Exchange’s (SGE’s) published monthly withdrawal figures provide an extremely close correlation to the country’s annual gold accumulation totals, whereas the consultancies have disagreed strongly, all coming up with often differing reasons why the SGE figures bear absolutely no relation to true Chinese gold consumption. They have usually come up with far lower figures for annual Chinese gold consumption than we have, although their estimates seem to bear little relation to likely Chinese gold accumulation totals based on known gold imports (from those countries which publish country-by-country breakdowns of their gold exports) plus China’s own domestic gold production plus an allowance for imports from unknown sources and scrap supply.
Now our position has been somewhat vindicated by the latest research by Matthew Turner of Macquarie in a recent post on this site: CHINA’S GOLDEN APPETITE Official Data at Last from the LBMA’s Alchemist publication. Turner comments that China’s gold import data is now fully confirmable from official sources and totalled 1,506 tonnes in 2018. Add in China’s own production – estimated at 404 tonnes (see World Top 20 Gold 2018 – Countries, Companies and Mines) and add in a comparatively small amount for scrap conversion and we have a grand total close to the 2018 SGE gold withdrawals announced total for the year of 2,054.54 tonnes. This compares with Chinese gold consumption estimates by the principal gold consultancies of around 1,150 tonnes which clearly cannot represent China’s full annual gold demand, being lower than gold imports alone, but presumably relates to a far tighter definition of what makes up ‘gold consumption’.
To our mind the market should ignore these ‘gold consumption’ figures as the total amount of gold absorbed by China is far more relevant to global supply/demand fundamentals and this is clearly around at least 2,000 tonnes plus – a figure which ties in closely with the SGE gold withdrawals data. QED!
One reason for the apparent disparity is the consultancy figures almost certainly ignore gold going into the Chinese financial sector and Chinese banks all hold varying amounts of gold, and these amounts could be quite significant. We have speculated before that because the Chinese banks are state-owned and controlled they may well be holding gold on behalf of the government as non-reportable gold reserves as part of the state’s overall gold holdings. China has a track record of accumulating gold in non-reportable accounts and only releasing data on the supposed total national reserve position as and when it seems to be opportune to do so. There is always considerable speculation that China’s real gold holdings are far higher than the 1,874.3 tonnes as currently reported to the IMF. Some speculate that Chinese reserves may well already match Germany’s 3,369.7 tonnes with the aim of matching or exceeding the USA’s 8,133.5 tonnes.
The question of course remains can we trust any country’s official gold reserve figures given they are mostly unaudited and unchecked by the IMF which relies on the reporting countries for the accuracy of their figures. Almost certainly some of the gold bars which may, or may not, be in a country’s reserve figure would not classify as ‘good delivery’ bars nowadays and would need re-refining if they were to be truly tradable.
What is apparent from Turner’s article is that the analysis of China’s annual gold imports is no longer subject to speculative interpretation, but is fully available and transparent for those who know where to look. However it does not solve the continuing speculation over the country’s gold reserve position. It does conclusively prove though that China is indeed currently the world’s No.1 accumulator of gold – by a large margin. Its gold import figures alone are around double those of India, the world’s second largest consumer and if we add in domestic gold production from its mines and imported concentrates it is the world’s top consumer by a huge margin. Undoubtedly some of this is finding its way into unreported gold reserve holdings, but as is always the case with China, exactly how much still remains the subject of speculation.