LAWRIE WILLIAMS: China and India step up to the gold demand plate
As always appears to be the case, statistics on gold demand can be contradictory which is perhaps why gold’s fundamentals are so difficult to tie down. Take the World Gold Council (WGC)’s latest Gold Demand Trends report which suggests global gold demand fell by 18% (228 tonnes) during Q1, compared with the admittedly very high (record) figures achieved in Q1 2016. But within the report there do appear to have been some major anomalies.
Firstly, the slump in assessed demand was largely for two reasons – sharply reduced gold ETF inflows and a fall in Central Bank gold reserve increases. But, it should be noted, that gold inflows into the ETFs did remain positive over the quarter and the Central Bank figures were skewed by China’s non reporting of any gold reserve changes since its currency was accepted as part of the IMF’s Special Drawing Rights (SDR) in October last year. In Q1 2016, China had announced additions of 35.2 tonnes to its official reserves – some 15% of the fall in assessed gold demand during the latest quarter. If one takes China out of the equation other Central Bank gold additions came to a positive 7.4 tonnes – and on its reserve reporting track record China’s zero reserve addition figure has to be considered suspect.
As for ETF inflows, these totalled 109.1 tonnes – some 233 tonnes lower than the exceptional inflow figures recorded a year earlier – so if one adds the gold ETF inflows to the fall in central bank purchases, together they account for some 309 tonnes (136%) of the assessed demand fall!
That means that overall global gold demand from ‘normal’ activities actually grew by 81 tonnes in Q1 – a figure largely ignored by the mainstream financial media which seems all to willing to knock gold at every opportunity.
Coming back to Central Bank shortfalls, can we believe the China figures at all? One should recall that up until July 2015 China only reported any reserve increases at five of six year intervals maintaining the pretence that it was not adding to its reserves monthly, as it obviously was. But, in the immediate runup to the IMF decision to re-jig its SDR make-up to include the yuan, the Asian nation began announcing monthly reserve increases. Once the yuan officially became a part of the SDR, China has reported zero gold reserve increases. Can this just be coincidence?
China is known to favour building its gold reserve as an important facet of securing its place in the global trade picture and its whole gold reserve adding policy has always been shrouded in secrecy. Some China-watching analysts will argue that, in fact, its real gold reserve is far higher than the officially stated figure of 1,842.6 tonnes. After all it has been the world’s largest gold producer for some years now.
So where has the additional ‘normal demand’ come from? US Mint statistics suggest that if anything US bullion demand has been falling, but European coin and bar demand has been high given the political uncertainties engendered by a spate of elections and the fallout from the Brexit decision of last year. and uncertainty of what this will mean for both the UK and Eurozone economies But the real area for demand increase has been Asia and the Middle East, with India in particular seeing a huge pick up from its depressed 2016 figures. Chinese demand is reported as being strong too. Indeed between them the two countries imported at least 250 tonnes of gold in March alone - and given that the amounts of smuggled gold into India are anecdotally still running high (a recent estimate put it at over 100 tonnes annually) and the Chinese gold imports have been calculated from known sources only, then there’s a strong likelihood that March demand from these two leading gold consuming nations may have exceeded the total amount of new mined gold produced globally that month – an estimated 260 tonnes.
GFMS has just reported that India’s April gold demand is also substantially above last year’s depressed figure while the recent weakness in the gold price will also likely have stimulated demand in these two price sensitive nations We would not be surprised to see Indian demand this year exceed 1,000 tonnes again, although the WGC puts it a little lower. Chinese demand, going by known gold imports plus its own production and an assumed scrap supply, is perhaps nearer 2,000 tonnes, so between them the two nations may well account for around 90% of all new mined gold. Unless we start seeing major outflows from the gold ETFs as in 2013/14, Indian and Chinese demand alone should be more than sufficient to provide underlying support, and even boost, the global gold price.