China’s Role in the Gold Market by Dan Popescu, GoldBroker
“When China will have a right to speak in the international gold market, pricing will get revealed.” Shanghai Gold Exchange Chairman Xu Luode (1)
Chart #1: Gold vs China’s Yuan
We cannot understand today’s gold market without understanding the role China and, in a different way, India play in it. The gold market in general is very opaque and the Chinese one, in particular, is even more. In this article, I will look at China’s role in the gold market. In 1950, communist China prohibited private ownership of bullion and put the gold industry under state control. Fifty years later the People’s Bank of China abandoned its monopoly on the purchase, allocation and pricing of gold. In 2004, for the first time since 1950, private persons were permitted to own and trade gold. China has become the most important physical gold market in the world. It is now both the number one producer and consumer of gold. The World Gold Council, in a recent report on China and gold, expects the Chinese private sector gold demand to be at least 1,350 tonnes by 2017. Today China is the world’s largest market for gold bars, in part because of successful development initiatives by the major chinese banks.
In an excellent recent article in the Gold Forecaster entitled “China has control of the Gold Price”, Julian D. W. Phillips says,“China is not only the main force in the global gold market, but they control the gold market. They play their control very cleverly, so that it is not apparent. China has found a way to buy gold without pushing up the gold price. China, through their selected bullion banks, are buyers of gold both on the retail and on the ‘official’ markets in both London and New York ‘on the dips’. The People’s Bank of China does not buy gold directly. It uses agents who, when the P.B.O.C. decides it is in the national interests to revise their gold reserves, deliver the gold, bought on their behalf, through S.A.F.E., the agency buying for them.To ensure prices stay low, the gold China buys comes mainly from ‘off-market’ sources. Do not be misled: China is doing all it can to support lower gold prices so it can acquire gold sold off by other gold investors. In this way, it is controlling gold prices! China wants to control this rate and manage the internationalization process without being vulnerable to ‘attack’, which could disrupt its control. It is with this in mind that China is accumulating gold in ‘official’ hands and in Chinese citizens’ hands. We are convinced that if it suits the nation’s interests, the Chinese government will require its citizens to hand over their gold to them. We do not believe that China has set a ‘ceiling’ on the amount of gold it will acquire!” (1)
The World Gold Council also says, “The major increase in gold supply to the Chinese market in 2012 and especially 2013 could be partly related to large-scale official purchases.” (2) China has been also a major buyer of gold mines across the world. What this pattern of buying does is to draw in a huge volume of gold, taking stock out of the market and away from traditional buyers, and for a long time.
Gold demand in China could not have flourished as it has without the blessing of the authorities. I was intrigued at first by this active encouragement from a government, and even more so by a communist and totalitarian one. Not only gold is an alternative to official currency, but it is also out of the reach of the government, if needed. I concluded that the Chinese government is encouraging its people to save in gold, among other reasons, also to constrain hoarding of foreign exchange paper that would have put pressure on the Chinese Yuan. With very few investment opportunities, hoarding would have been done in foreign exchange and mostly in US dollars. I observed this phenomenon in the late ’90s in Europe, before the introduction of the Euro. The “black market” run to convert its local currencies (French franc, Italian lira, German mark, etc.) to US dollars so it will avoid having to declare them to the authorities, even if it had to pay extra fees. This had the effect of pushing the US dollar up.
Another valid hypothesis is that, as the World Gold Council’s recent report, China Gold Market: Progress and Prospects, says, “China’s leaders regard the public’s gold holdings as part of the nation’s reserves that could be called upon in an emergency” and that “South Korea’s mobilisation of the public’s gold stocks during the Asian financial crisis impressed the Chinese.” (2) This is also what Julian D. W. Phillips said in his recent Gold Forecaster report that I cited above.
China’s growth since 1980 has been phenomenally high (graph #2). China’s economy has taken off since Deng Xiaoping’s economic reforms in 1978. Continued high national savings (graph #3) fully financed Chinese investment and sustained it at a very high level.
Chart #2: Chinese GDP and GDP Growth
In 1978, China’s per capita income stood at just over US$200 in current dollars. In 2013, this figure had increased to US$6,850. We can observe, in graph #3, that the gross national savings rate of China versus that of the US. China’s saving rate increased from already a high level of 39.2% in 1990 to 51.4% in 2012, versus an already very low level of 18.7% for the US in 1990 to just 20.3% in 2012.
Chart #3: Gross National Savings as a Percentage of GDP
The World Gold Council also says, “The major increase in gold supply to the Chinese market in 2012 and especially 2013 could be partly related to large-scale official purchases.” (2) Investment in gold has undoubtedly benefited also from the limited selection of alternative forms of savings in China. Most investors in China that look to own gold want it in physical form and in their own direct possession, because of a lack of trust in third-party custodians. The World Gold Council says, “In China there is, to some extent, a German-style popular memory of past hyperinflation that continues to influence attitudes and behaviour today.” (2) Therefore,Chinese consumers buy 24-carat gold as a counter to currency devaluation.
In chart #5, we see that China and India represent together 54% of global gold demand, with China 31% and India 23%. The United States and Europe only represent 12% of global gold demand, with Europe 8% and the US only half of Europe’s demand of 4%. China and India between themselves are consuming more gold than the world is actually mining.
Chart #4: Gold – Consumer Demand – Total (Jewelry, Bars & Coins)
What is interesting in the gold consumption per capita chart (chart #6)