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LAWRIE WILLIAMS: Chinese gold demand falling, not rising

One measure of Chinese gold demand which we follow is the level of gold withdrawals from the Shanghai Gold Exchange.  With the publication today of the figure for May of 138.08 tonnes it appears that withdrawals to date this year are marginally down on those of a year ago – and substantially below the record seen in 2015. This is contrary to some other reports which suggest Chinese gold demand is stronger this year than last and may again be approaching record levels (see table below).

Table: SGE Monthly Gold Withdrawals (Tonnes)

Month

2017

2016

2015

% change 2016-2017

% change

2015-2017

January

184.41

225.08

255.42

- 18.1%

 -27.8%

February*

148.24

107.60

156.36

+37.8%

-5.2%

March

 192.25

183.24

213.35

 +4.9%

 -9.9%

April

 165.78

171.40

195.45

 -3.3%

 -15.2%

May

 138.08

147.28

162.15

 -6.2%

 -14.8%

June

 

138.51

195.67

 

 

July

 

117.58

285.50

 

 

August

 

144.44

265.27

 

 

September

 

170.90

259.98

 

 

October

 

 153.25

176.29

 

  

November

 

 214.72

202.71

 

  

December

 

 196.37

228.21

 

    

Year to date

828.76

834.30

982.73

- 0.7%

- 15.7%

Full Year

 

 1,970.37

2,596.37

 

 

Source: Shanghai Gold Exchange, Lawrieongold.com

 

Even though SGE gold withdrawals may be down on 2016 and 2015, though, they do remain substantial by world levels, being equivalent to around 60% plus of all global new mined gold, and with Indian demand as represented by imports making a strong recovery this year (some reckon the annual Indian total may reach 1,000 tonnes again), these two nations alone will account for around 90% of all new mined gold – and gold flows into Asia as a whole, particularly if one adds in smuggled gold into India which some estimates put at over 200 tonnes, look like exceeding the global new mined total alone. 

With the major gold ETFs adding to their gold tonnage totals so far this year, and taking into account gold consumption throughout the rest of the world – notably in Europe – then we could be heading for a substantial undersupply of new physical gold which, logically, should drive the gold price higher.  Scrap supply will probably make up much of this balance, but the major analytical consultancies see this as continuing to drop which should be a positive for gold’s fundamentals.

But what has been apparent over the years is that supply/demand fundamentals for gold seldom seem to make much short term impact on the gold price, although they probably do in the long term.  It is investment demand, and thus what the gold investor is prepared to pay for the metal, which is the prime price driver, perhaps kept in check by the bullion banks playing the paper gold , continuing high overall levels of Asian demand, price suppression becomes something of a rearguard action only, with the overall trend higher prices.

So what really is happening with Chinese demand.  SGE withdrawals are only a fraction down on last year’s level when the overall annual total figure was the fourth highest on record and one suspects the full year total, if the current pattern continues, will be around the same as in 2016 at close to the 2,000 tonne level.  With global new mined gold production probably plateauing – it may not be falling yet, indeed could rise a fraction this year – this still remains a substantial level and if gold ETF inflows continue, albeit at a fairly slow pace, and Indian demand comes out at anywhere near where current estimates see it, then the upwards pressure on the gold price may well continue – and there are plenty of prospective geopolitical events out there which could lead to its take-off as the ultimate safe haven investment.  We are thus optimistic on the gold price going forwards – but are also conscious that gold often confounds so the gold investor could still be in for a bumpy ride.

07 Jun 2017

About the author

Lawrence Williams

Lawrence (Lawrie) Williams is a well known London-based writer and commentator on financial and political subjects, but specialising in precious metals news and commentary. He is a qualified and experienced mining engineer having graduated in mining engineering from The Royal School of Mines, a constituent college of Imperial College, London – recently described as the World’s No. 2 University (after MIT).

e: lawrie.williams@sharpspixley.com

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