LAWRIE WILLIAMS: What is China’s real gold demand?
As we pointed out here in our article on the latest GFMS Gold Survey update of a day ago – See: GFMS ups gold price forecast but fundamentals could be seen as gloomy and our note on the slightly misleading reporting on the latest Hong Kong gold export figures to mainland China in the same article, all as reported is not necessarily as it is presented. It is thus encouraging that analysts from German bank, Commerzbank, have highlighted some of these same anomalies in their latest note, out earlier today, with some additional data suggesting that Chinese gold demand is actually higher year to date than last year, whereas GFMS implied that on its definitions, consumption is hugely down in H1 2016.
Commerzbank analysts make the following comment: “According to data from the Census and Statistics Department of the Hong Kong government, China imported 70.9 tons of gold from Hong Kong on a net basis in June. Although this was significantly less than in the very high-volume previous month, it was nearly twice as much as last June – putting net imports back at their March and April level. China imported 413.6 tons of gold net from Hong Kong in the first half of the year, just shy of 12% more than in the same period last year. Thus gold demand in China has picked up again noticeably in the second quarter after getting off to a subdued start to the year.
“By contrast, Thomson Reuters GFMS claims that Chinese gold demand is weak, saying that latest figures show that it plunged by 25% year-on-year in the second quarter and by 20% year-on-year in the first half year.”
As we noted in our own article, much of this discrepancy of an apparent rise in Chinese gold imports, but alongside a very significant decline in what GFMS defines as consumption, ignores the quite substantial volumes of gold flowing into the Chinese mainland for use in financial transactions and perhaps in other areas of commerce apparently not covered in GFMS stats. Surely what is truly Chinese demand is represented by gold inflows into the country plus China’s own gold production of around 450 tons. Together this makes for a hugely different figure than that which appears to be assessed as Chinese total demand?
Commerzbank also notes on global demand that “Second-quarter physical gold demand on a global level declined by 22% to 715 tons, which Thomson Reuters GFMS attributes to weak demand in Asia. Having said that, this calculation does not take account of the gold ETFs. If these are factored in, gold demand grew by 7% to 947 tons. According to Thomson Reuters GFMS, the first six months of the year saw record-high inflows of 568 tons into gold ETFs, but interest among ETF investors has abated considerably of late.”
Also what we don’t like about these assessments, from either GFMS or Commerzbank, is the enormous weight seemingly put on gold imports into the Chinese mainland from Hong Kong as though this is the only source of gold for China. By our reckoning, the Hong Kong figures perhaps only account of 60% or less of China’s gold imports. On this basis, taking the 60% figure, supplies of physical gold into China in the first half of the year is more like 550 tonnes of imported gold plus 225 tonnes of domestically produced metal – totalling around 775 tonnes and extrapolating forwards some 1,550 tonnes for the full year – perhaps more as second half Chinese figures tend to exceed first half ones. If we add in gold scrap supply that figure might be as much as 200 tonnes or so more. That is where we would assess real Chinese demand as lying as being the total gold flows being taken up in some form or other within the Middle Kingdom – as gold, once it goes in, doesn’t come out again except in the net trade with Hong Kong. Some could be going into the Chinese Central Bank which has added around 61 tonnes to its reserves so far this year according to its official reporting to the IMF, but it is generally believed to source this directly without it appearing in any Chinese import figures. But even if it is sourcing it domestically this figure represents only a fraction of the discrepancy between the various, and varying, Chinese consumption/demand statistics prepared by analysts worldwide.