LAWRIE WILLIAMS: China’s gold absorption, not retail consumption, is the key to global gold flows
There have been two schools of thought regarding the measurement of Chinese gold demand – those who have followed the figures put out by the major precious metals consultancies and the World Gold Council, and the hugely higher figures suggested by Shanghai Gold Exchange (SGE) withdrawal figures.
In truth we find the mainstream consultancy and WGC figures increasingly hard to live with, despite the analysts pouring scorn on the SGE figures which, to this observer, look much more likely if one relates them to known mainland China gold imports alone – let alone adding in the nation’s very substantial domestic new gold output. For example, if one goes by mainstream consultancy GFMS China gold consumption figures you find an annual total under the consultancy’s latest report of something well south of 1,000 tonnes for 2015 and with the added comment that Indian consumption was ahead of that for China for the second consecutive year.
But – and this is a big but – it all depends on how one defines consumption. As far as gold jewellery demand is concerned this is probably all very true. But GFMS also comments that Chinese bank holdings of gold increased by as much as 400 tonnes over the first three quarters of the year bringing total bank holdings to some 1,900 tonnes at that time – and presumably to over 2,000 tonnes by the year end. This is all gold being absorbed by the Chinese market in some form or another. Interestingly if China treated its commercial bank holdings in the same way that Turkey does, then the country’s total gold reserves (Central Bank plus commercial banks) would probably be close to 4,000 tonnes, which does correlate pretty well to some estimates of total Chinese gold holdings, rather than the 1,762 tonnes the Central Bank reports to the IMF.
Given that China’s commercial banks are in effect state enterprises could these commercial bank holdings be one of the ways China hides its full gold reserve total? Obviously this is speculative, but with China doing its best to obfuscate its true gold reserve and demand figures, speculation is all we have to try and work out what is happening in terms of gold flows into the country – never to come out!
And the obfuscation of gold data has been upped another notch already this year with the SGE no longer publishing its actual withdrawals data any more. Last year 2,596 tonnes were withdrawn from the Exchange – a figure the Chinese Central Bank describes as total Chinese gold demand. But obviously what it sees as demand and what consultancies like GFMS see as demand are two totally different figures and it seems to this observer that much of the difference, as noted above, is made up by what the Chinese commercial banks are absorbing. It is difficult to see the necessity for them to hold perhaps 2,000 tonnes of gold plus unless this is being held on behalf of the state.
Nevertheless whatever GFMS defines as consumption, the key to the nation’s gold absorption – and to global gold flows – is the total of metal coming in against the total going out – and the export of gold is prohibited. In analysing Chinese total gold demand we suggested that this can be reconciled to a large extent by taking known gold imports, plus China’s own gold output, plus estimated scrap gold going into the SGE – and the grand total of all this has probably been well over 2,000 tonnes plus last year (See: Are China’s gold imports rising or falling? and Chinese Gold Assoc figures equate domestic gold demand to SGE withdrawals).
So if this premise is correct and actual Chinese gold absorption last year is represented by the SGE withdrawals figures, how can we estimate the figure in years ahead if the SGE (presumably by order of its controlling entity – the Chinese Central Bank, the Peoples Bank of China) is no longer to publish its weekly withdrawals figures (See: CHINA Stops Publishing SGE Withdrawal Figures)? Overall the data suggests that China is 'absorbing' over 80% of global new mined gold output (of around 3,150 tonnes in 2015) entirely on its own. No wonder London gold inventories are falling so fast and COMEX registered gold stocks have fallen to only around 2 tonnes!
Perhaps the best way ahead is close monitoring of Chinese gold import statistics published by the exporting nations. Hong Kong, Switzerland, the UK, the USA, Australia etc. all publish gold export data broken down by country, and while these may not in combination account for total Chinese gold imports, they will account for an extremely large proportion of them. Time was when Hong Kong’s published gold export figures could be taken as a proxy for mainland Chinese imports, but no longer given that far more gold – probably more than 50% nowadays – is entering the mainland directly rather than being routed via Hong Kong. So now a bit more work is needed. But monitoring the flow of known imports, adding in China’s own consumption, plus making allowances for imports from unreported sources and for domestic scrap supply will give us an indicator of what is really going on here. Not ideal, but given that China seems to be trying to make estimates of the true gold flows into private and state-controlled hands as difficult as possible as part of its own long term political/financial agenda it is the best we non-mainstream analysts can do.
Meanwhile it may well suit China to have the world’s major media view Chinese consumption as reported by the major precious metals consultancies and the World Gold Council, but as we have shown above, in terms of true global gold supply and demand it should be the Chinese gold absorption figure which is key to real global gold flows and this is hugely different from reported 'consumption' figures.