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LAWRIE WILLIAMS: Chinese gold demand heading for 2,000 tonnes this year

Chinese gold demand this year, as represented by withdrawals from the Shanghai Gold Exchange (SGE), are currently 4.5% up on a year ago and if this margin is maintained through the remainder of the year, the full year figure could total around 2,050-2,060 tonnes as against 1,970 tonnes in 2016.  However this would still be well down on the record 2015 year when SGE withdrawals totalled 2,596 tonnes for the full year.

In the latest full month (August), SGE withdrawals came in at 161.41 tonnes compared with 144.44 tonnes during the same month a year ago.

As we have pointed out before it is a contentious point as to whether SGE withdrawals are actually a measure of total Chinese gold demand.  The various major gold-focused consultancies come up consistently with far lower figures, but regardless, DSG withdrawal figures have to be a year-on-year measure of the overall strength of Chinese gold demand given the lack of other published official data.  We would also emphasise that the published SGE withdrawal figures come out far closer to known Chinese gold imports (as published by countries which break these figures down - notably Hong Kong, Switzerland, the U.K., the U.S.A. and Australia) plus China’s own gold production of around 450 tonnes.  If one adds in a couple of hundred tonnes for scrap conversion one comes up with gold flows absorbed by China as being very close to the SGE withdrawal totals – something which seems to be ignored by the consultancies which seem to have a limited definition of demand.

See below a table of month by month gold withdrawal figures for the past three years as published by the SGE.  In our view they are certainly the best measure of actual Chinese gold absorption available given the country does not allow gold to be exported..

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

 155.51

138.51

195.67

 +12.3%

-20.5%

July

 144.71

117.58

285.50

 +23.1%

 -49.3%

August

 161.41

144.44

265.27

 +11.7%

 -39.2%

September

 

170.90

259.98

 

 

October

 

 153.25

176.29

 

  

November

 

 214.72

202.71

 

  

December

 

 196.37

228.21

 

    

Year to date

1290.39

1235.13

1729.17

+  4.5%

- 25.4%

Full Year

 

 1,970.37

2,596.37

 

 

Source: Shanghai Gold Exchange, Lawrieongold.com

So what does all this mean in terms of global gold demand.  With some estimates suggesting that Indian demand may be returning to previous levels, and certainly substantially higher than a year ago, China and India between them will account for around 90% of global new mined gold supply – and at long last this latter figure is beginning to turn down.  Peak gold appears at last to be with us having been predicted to come about ever since the gold price saw its huge turndown in 2011/12.  Major new discoveries have been few and far between and the big new mines which were in the development pipeline back then are now in production, while older operations are seeing falling grades and diminishing output.  The lower gold prices of the past five to six years saw gold exploration fall and capital for big new projects extremely difficult to raise so the industry may see a slow production decline for many years to come.

A rising gold price – it breached the $1,350 level overnight last night – is not necessarily a panacea.  It may lead to a pick up in exploration but the development time for a new mine from discovery to production nowadays is probably 10 years plus for a project of any significant size.  Meanwhile a higher gold price can prompt miners to return to mining lower grades to extend mine lives – which itself leads to lower metal production.  We are thus in something of a slow downward gold production spiral, while demand in Asia and the Middle East in particular is running strong.  A pick up in American and European demand in particular, which appears to be beginning to happen, could put increased pressure on the gold price and certainly puts $1,400 in its sights by the end of the year. 

There are moves to keep the gold price under control, but the lower dollar index is seeing the price rise in dollar terms at least, and it is the dollar price which the markets look at.  With the dollar index falling below 92 today, gold could see further rises as it does its job in wealth preservation.

08 Sep 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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