LAWRIE WILLIAMS: New Hong Kong gold exports support record high China demand forecast
Whatever the major mainstream analysts and the World Gold Council may say we would put Chinese domestic gold demand as running very high this year – almost certainly exceptionally so. Shanghai Gold Exchange (SGE) deliveries would certainly support this premise, running around 312 tonnes higher year to date than in China’s record 2013 consumption year at the same time as we have already reported (See: Another 53.4 t gold withdrawn from SGE. YTD 2061.9 t) and heading for an annual figure of probably well over 2,600 tonnes. Now we see reported net Hong Kong gold deliveries to the mainland at a 10 month high of a considerable 97.42 tonnes in September. Hong Kong remains one of the principal import routes for gold into mainland China but is no longer so dominant in those terms for its figures to be taken as a proxy for total Chinese gold imports.
So, Shanghai Gold Exchange deliveries, imports via Hong Kong, direct imports from Switzerland and the UK, direct imports from the rest of the world, the apparent build-up of Chinese Central Bank gold holdings, China's own annual gold production, the amount of gold tied up in financial transactions etc. – all these are either known knowns or unknown knowns in trying to assess he true level of Chinese gold imports and demand. While some of this is reported by the countries exporting gold to China, the country does not itself quantify its imports. It is thus difficult, if not impossible, to assess what is the real nature and size of true Chinese gold demand, but all indications are that 2015 will indeed be a record year – and keep China comfortably ahead of India as the world’s top consumer whatever GFMS may say in its latest analysis report for the first three quarters of the year.
There are a number of professional analysts out there who earn a living out of their own researched assessments of what is going on – and are adamant that they are correct in their assumptions and calculations, but their figures often don’t seem to add up in the light of what seems to be overwhelming statistical evidence which may contradict their figures. We also feel that some of their assumptions are mostly speculative in trying to make sense of their sometimes contradictory figures.
The biggest fly in the ointment of the analytical assumptions is the enormous level of deliveries to the Chinese market out of the Shanghai Gold Exchange this year. Whatever the analysts say this has to be a strong indicator of overall demand, although perhaps not of consumption as they measure it. As we have pointed out before, the analysts do not include the use of gold in Chinese financial transactions as being part of their demand assessments. To us this is still gold being consumed in China – even if it does not meet the analysts’ strict interpretations of what is consumption. Yes, it can be returned to the markets when these transactions unwind, although it tends to be rolled over instead – but then other forms of traditionally-consumed gold may also find their way back to the market through gold for investment sales and scrap supplies. With extremely low mark-ups for most gold jewellery in China (and India too), the jewellery market is very different from that in the West.
What is perhaps only now coming to light is the enormous level of the ‘financial’ gold involved in Chinese transactions. Speaking at last week’s LBMA meeting in Vienna, Jiang Shu, Chief Analyst of the Shandong Group, noted that over 1,300 tonnes of gold is tied up in such transactions. This would account for much of the differential between SGE deliveries and analysts’ ‘gold consumption’ figures. Gold imports from known sources, plus China’s own gold production, plus scrap looks to be heading for the 2,000 tonne mark or more this year, while SGE deliveries have already exceeded this level. With India adding between 800 and 1,000 tonnes of imported gold to the equation this accounts for virtually all the world’s newly mined gold leaving the rest of the world (which according to the analysts consumes about as much gold as India and China together) to be supplied from the balance of global supply – notably from scrap – but given the relatively low gold price and thus falling scrap supply – this is insufficient to meet the balance of demand. This physical gold is coming from somewhere – if not from privately held vaulted gold, then perhaps from central bank holdings in the form of leased or swapped gold. But, leased and swapped gold remains in central bank accounts as though it is being held as physical metal – an obscurity which more than matches any Chinese obfuscation of its gold import and demand figures.
As an aside, much is made in the West of China’s supposedly collapsing economy – yet figures from Chinese online giant Alibaba out today would seem to belie this. Alibaba revenues to end-September have risen 32% year on year. While there may have been something of a slowdown in gross merchandise volumes it would seem that reports of a collapsing Chinese economy are somewhat overdone.