LAWRIE WILLIAMS: China gold imports still hugely significant despite earlier cuts
Gold investors may have had their attention drawn to reports that China has been severely curtailing its gold imports earlier this year. This is true – at least in part - with significant cutbacks in May, June and July, but the Middle Kingdom nonetheless still remains a hugely important importer and consumer of gold – and the gold import numbers appear to have been beginning to pick up again.
So far this year (to end-August), according to Nick Laird; www.goldchartsrus.com figures, China has imported a shade under 700 tonnes of gold as against 1,126 tonnes to August 2018 and 864 tonnes in the first 8 months of 2017. It is still on track for imports over the full year to exceed 1,000 tonnes, which together with the country’s own domestic gold production, plus an allowance for gold scrap recycling, would probably still put China’s annual gold absorption at around 1,600 to 1,700 tonnes. This is well above the figures publicised by major consultancies like GFMS and Metals Focus, which seem to limit their consumption estimates to only some limited demand categories. This latest figure would still leave China as comfortably the world’s largest annual consumer of gold, despite the apparent slowdowns implemented earlier in the year and supported by lower Shanghai Gold Exchange withdrawal data so far this year.
But does this signify a global gold demand slowdown. We don’t think so because of the big pick up in gold inflows into the gold-based ETFs around the world which has happened at the same time, along with the overall gold price advance. Gold is up around 13% year to date and even silver, which has been underperforming gold so far, is up 9% this year, despite the latest sharp price falls. These are reasonably respectable performances vis-a-vis equities which have the overhanging ongoing likelihood of a major crash ahead according to many respected financial commentators.
According to the World Gold Council, Gold ETFs added some 292 net tonnes of gold up until end-August, and the figures have risen further since. The biggest gold ETF of all, GLD in the USA, has alone added 126 tonnes of gold to its holdings since the beginning of the year, and as a guide to global inflows in the past month, added around 31 tonnes in September alone. Assuming global totals rose at a similar rate to those of GLD, global ETF holdings will have risen by a total of around 360 tonnes of gold year to date – countering most of the fall-off in Chinese imports.
Total global gold production, while it may not have peaked quite yet - with continuing production growth in countries like Australia, Russia and Canada countering declines in many other gold producers like China and South Africa - is pretty well flat. Maybe it will rise between 0.5 and 2 percent this year depending on whose data one follows. Peak gold may not be with us yet, but it is close, so we are not expecting any big supply increases, National demand reductions, like that we are seeing this year in China, is the primary supply/demand balance factor – but as we have pointed out above, this is largely being counterbalanced by ETF gold inflows, plus continuing central bank purchases, so the actual supply/demand fundamentals are little changed by the Chinese gold import curtailment, big though it may be, which will thus have little direct impact on the gold price.
Ed Steer has published a graphic in his daily newsletter demonstrating that movements in the gold price correlate extremely closely to COMEX trades by Managed Money traders, which brings an interesting context into precious metals price movements in that the other precious metals are all influenced by the gold price. I quote Ed: “If they're [the managed Money Traders] buying, the act of them doing that is what causes prices to rise -- and if they're selling, prices fall. It has nothing do with interest rates, the stock market, the Fed...or the price of tea in China.” Of course some of the factors that Ed notes as not being relevant will influence the aforesaid Managed Money traders’ decisions whether to buy or sell! Nevertheless it’s an important observation, and one which is well-supported by the graphic Ed supplies.
Overnight trade and early activity in Europe today saw a further sharp gold price downturn, although silver was less affected. It seems that every time gold looks as if it might approach the $1,550 mark, as it did early last week, it is brought back down very sharply driven by activity in the COMEX futures market. It is already picking up a little and we wouldn’t be surprised to see it regain the $1,500 level in the next few days – geopolitical events continue to create uncertainty, and the latest Chicago PMI data is far from encouraging for the U.S. markets, but perhaps positive for gold. However, beware if it gets to the $1,530s or 40s as it may well be brought back down heavily again, although we see this as a short to medium term temporary setback in an overall ongoing upwards movement in precious metals prices. The world remains an uncertain place and that tends to be positive for gold and silver in particular.