According to most mainstream analytical consultancies, Chinese gold demand is seen as being around 1,000 tonnes this year – perhaps less. But meanwhile gold deliveries out of the Shanghai Gold Exchange are running at record levels and heading for well over double this level. Why is there such a huge disparity in these estimates and what does it mean for the gold market?Â
by Lawrie Williams
Of all the key drivers of the gold price, it is Chinese gold demand which is the most disputed. China and India are indisputably the world’s two largest gold consumers, but while the latter’s consumption is relatively easy to get a handle on as gold imports – figures which are released by  official bodies- are taken to directly represent demand, given that the nation’s own gold output these days is virtually zero. In fact, India’s demand is perhaps a little higher given there is still a perhaps significant amount of additional supply smuggled into the country to avoid the 10% import duty. Estimates put this at anything between 100 and 300 tonnes, but no-one really knows!
But Chinese demand is far harder to assess. Hong Kong and Macau, which although officially a part of China, are still treated as separate entities in terms of overall demand, may both import gold and export it to the Mainland, and as far as Hong Kong is concerned these figures are reported in detail. Time was when Hong Kong was by far the primary import route for gold into Mainland China, and some analysts, who should know better, still appear to consider the Hong Kong net export figures to Mainland China as a proxy for total Chinese gold imports, but since the beginning of last year, China moved the import goalposts, and a much larger proportion of gold now flows into China directly, bypassing Hong Kong altogether. There always was some gold coming in directly, but now the amounts are far larger.
We can get something of a handle on this from the world’s biggest gold refiner and re-exporter, Switzerland, which does report detailed export statistics with most of its re-refined gold going to India, Hong Kong and Mainland China. Of its recent Hong Kong and China exports around 40% has been going to Mainland China directly.
But there are also certainly some major gold flows from other countries directly to China – some from Chinese-owned and managed mining operations elsewhere in the world – and detailed statistics are just not available for these, either from the exporting nations or from China itself. The big mainstream precious metals consultancies like GFMS, Metals Focus (which now provides statistics for the World Gold Council) and CPM Group, all will have taken account of some of this but they are all hugely out of sync with what some consider to be the best indicator of Chinese gold demand – physical gold withdrawals from the Shanghai Gold Exchange (SGE).
In theory gold should not be able to be round-tripped through the Exchange, but there probably is an element of this. In trying to explain the enormous discrepancies between their own Chinese consumption figures and the SGE figures consultancies seem to come up with varying reasons, although part of their assessment differences relate to what they actually classify as consumption. In general they all ignore gold which is being used in Chinese financial transactions, which may be large, and gold flowing directly into Chinese bank vaults. The writer would classify this as consumption too – after all it is gold going into China and not coming out again.
Be all this as it may SGE gold deliveries so far this year have been enormous and are running at record levels – 1,658 tonnes for the year to date, equivalent to around 80% of global production of new mined gold on its own. This is a big new record for SGE gold flows running nearly 200 tonnes higher than in the record 2013 year at the same time and around 450 tonnes higher than at the same time a year ago.
But meanwhile the mainstream precious metals consultancies tell us that Chinese demand is falling this year. It is hard to reconcile this viewpoint with known SGE withdrawal figures. But whatever relationship SGE physical gold flows have to actual Chinese consumption it has to be a very significant indicator at the very least of the direction of TOTAL Chinese physical gold demand and this suggests it is moving upwards strongly, whatever the impact of the nation’s current economic downturn and whatever the consultancies and the World Gold Council may reckon.
Indian demand this year is also seen to be picking up well, and here the consultancies seem to be in sync with known gold import figures – even if they don’t take smuggled gold into account. Various estimates put Indian demand as likely to be between 900 and 1,000 tonnes this year – probably higher if we include the illegally imported gold. Add this to Chinese demand as expressed by the SGE and we have a figure, as South African specialist gold analyst, Julian Phillips suggests (See: Gold fundamentals suggest big physical supply shortfall ahead) which looks like it could even be in excess of total world supply (new mined + scrap) consumed by these two nations alone (and they may only account for around half total world gold consumption.)
If Phillips is right in his estimates (and perhaps they are a little high as he’s estimated Chinese demand by taking the past three week’s vey-high-for-the-time-of-year SGE withdrawal figures and extrapolating them forwards) then one wonders where on earth all this physical gold will come from. Outflows from the big gold ETFs have been diminishing – indeed most recently they have seen inflows – and COMEX warehouse stocks are getting low and have recently had to be bailed out by the reclassification of some gold in JP Morgan’s vaults into the registered (available) category. This would all seem to point for a potentially serious physical gold supply squeeze ahead. Maybe we are getting close to crunch time!
