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LAWRIE WILLIAMS: Metals Focus sees strength in Chinese gold demand in 2018

In our view the ultimate gold price driver is likely to come down to the overall level of Asian demand and there are some mixed indicators here.  Indian demand, as indicated by February gold import levels may well have been slipping but, according to the analysts at one of the world's top independent precious metals consultancies, Metals Focus, the trend in Chinese demand is looking positive this year – and China remains the world’s largest gold consumer.  Indeed with China’s own domestic gold output estimated as slipping by 9% last year (it’s still comfortably the world’s largest gold producer), the impact on Western supply/demand fundamentals could see the Asian nation needing to import more gold in the current year to meet higher demand in the face of the lower domestic supply.

Metals Focus takes the view that the Chinese jewellery market bottomed out in 2016 and is undergoing a modest recovery. This stance also mirrors an optimistic general market consensus on the sector.   According to the consultancy’s team of analysts in London and Hong Kong, last year, most Chinese jewellery manufacturers enjoyed modest growth.  Estimates are for a 3% rise in gold jewellery consumption in the country to 647 tonnes, following three consecutive years of declines. The consultancy reckons that 2018 started on a similar note, with sales benefiting from stock-building in advance of the Spring Festival. Visits to show rooms across the border from Hong Kong in Shenzhen in January saw some very busy trade.  Furthermore Metals Focus’ contacts suggested most retailers returned, either in end-January or early-February, for another round of buying, to replenish inventories, anticipating strong Chinese  New Year holiday sales. Following the week long holiday break, feedback continued to be positive, with reports of wholesalers having come back into the market when businesses re-opened on 22nd February. 

The consultancy sees the main driver behind this promising turnaround as the improving Chinese economy and its positive impact on consumer sentiment. Importantly, the recovery of the past 12 months is seen as sustainable, in the sense that demand is now stimulated by designs and gifting occasions, rather than the bargain hunting that fuelled the 2013 spike. In terms of the outlook for total jewellery consumption, based on the assumption that the Chinese economy overall will experience another year of growth that the consumer perceives as solid, Metals Focus forecasts jewellery demand will enjoy another modest increase in 2018.

 The consultancy also reports that gold bar demand was even stronger, with sales in 2017 up by 10% year on year to 283tonnes, the third consecutive annual increase with bars sold outside banking channels continuing to outperform sales from banks.  There was, apparently, a growing interest for gold from sophisticated, often high-net worth, investors looking at gold as a portfolio diversifier. Another important factor behind the strength of investment demand has been the lack of the alternative investment assets; the Chinese Government extended property purchase restrictions to more cities throughout 2017, while the stock market has still not entered another bull market.

Gold bar sales, were, however, lower in January but picked up again in February.  As for the rest of the year, Metals Focus is conservatively optimistic about bar sales, forecasting a 6% year on year rise, as the China-specific factors that underpinned demand in 2017 are likely to remain in place.

So far the figures for gold withdrawals from the Shanghai Gold Exchange are largely supportive of the Metals Focus view seeing a small increase across the first two months of the year (see: SGE gold withdrawals down in Feb but up YTD)  despite the Chinese New Year holiday falling wholly into February this year.

08 Mar 2018

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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