LAWRIE WILLIAMS: Goode insights on China gold
I am indebted to Australian consultant Keith Goode of Eagle Research Advisory for some specific insights into China’s gold policy and where the nation thinks prices will move next year and beyond. Some of the information was published in Keith’s regular column in the December edition of Australia’s Paydirt magazine, but Keith emailed me some highlights and other previously unpublished thoughts and data, all stemming from information he gleaned at the China Mining Conference held in Tianjin in late October. For the record Keith’s full submission to Paydirt can be read on his website by clicking here.
The insights are fascinating, covering, among other things, China’s One Belt One Road initiative, its quid pro quo relationship with nations in which it invests, what and what is not included in Chinese GDP figures (which he comments are just a number), who is, or is not, in favour with the Chinese based on who, and which countries, were allowed to present papers at the conference and who was excluded, and data on industrial metals imports. Despite apparent oversupply such imports are still being landed and stockpiled to be used as a cheap source of raw materials in the future. China looks long term in a way the West does not which can be a major source of misunderstanding by many Western analysts.
Keith also picked up local feeling on what China will do in the global currency field now that the yuan has been accepted into the make-up of the SDR, albeit at a lower level than perhaps the size of the Chinese economy would suggest – no doubt due to the U.S., which dominates the IMF, doing its best to protect the dollar and preserve its position in world trade for a little longer – possibly to no avail.
But it is Keith’s understanding of the Chinese attitudes to gold that I will dwell on here. China considers gold in an entirely different manner from other commodities and it appears to be seen in the country’s mindset as very much key to its cementing its place in the world order.
Consider the following from Keith’s notes: Gold cannot be sold "short" (jailable offence since last year/2014). He sees the price downside as being limited as China wants its mines to keep producing gold and at ~US$1100/oz ~30% of China's gold mines are uneconomic, and at ~US$1000/oz ~50% of China's gold mines are uneconomic – yet the mines keep producing regardless. He comments further that uneconomic mines are still kept going, but in this case it may provide subsidies and /or pay the workforce in staple food rather than cash so the workers can continue to feed their families, but if the mines become profitable again the workers would receive backpay. The Chinese gold price expectation was seen as being in the range of US$1050 to US$1400/oz in 2016. The recent falls are seen by Goode as a retest of Comex vs Shanghai as in who does control the gold price. Gold was not expected to go down to $1000 given China’s ultimate financial power as being able to set a gold price bottom through utilisation of its enormous foreign currency reserves.
China's official gold reserves are being reported on a monthly basis now (seen as one of the IMF requirements for yuan SDR status), and is increasing by 15t to 20t of gold per month. But there is still debate over what China's banks actually completely hold as some also group gold into their ‘currency’ holdings.
Re the IMF’s decision to include the yuan in the SDR, until the decision was announced , China knew that it has to support the US dollar because the US effectively has a veto vote as to who can be allowed to participate in the SDR basket – but now the decision has been made one could perhaps see a steady yuan devaluation down to what the Chinese might see as an acceptable level. This is already happening.
Away from China, Goode sees the other catalyst for gold as being the forthcoming US election, as in the Dow appears to be being kept up because the Democrats probably don't want it to fall ahead of the poll - far better to potentially blame any subsequent collapse on the Republicans (post election after 8 November 2016 if a Republican President is elected). Post the election the US dollar can then fall too, it would dovetail nicely with its historical pattern of 6 years up, 10 years down - 2016 would be 6 years up after the previous fall.
There are many more insights in Goode’s report as linked at the start of the article. While they are indeed an Australian’s perception of what may be going on in China, he has been attending the annual China Mining Conference over several years now so he has been well versed in understanding the way the Chinese work and think and some of the nuances in terms of speaker protocols.