Figures for net Chinese gold imports through Hong Kong in May have now been released, and, while they did not quite come up to the record level seen in March at 136 tonnes, at 108.8 tonnes they were still the second highest total on record, and comfortably in advance of April’s 80 tonnes.
In April, it is thought that the level of net imports could have been far higher but traders were taken by surprise following the exceedingly high March import figures which had used up their quotas and a subsequent rundown of stocks that month which had not been fully replaced by the time of the big April 12 gold price fall which had appeared to stimulate huge physical demand.
In retrospect, the scenes of crowds stampeding the dealers to try and secure gold that month may have been exacerbated by what is now known to be a shortage of stock which forced price premiums to almost unprecedented levels.
The initial very steep price fall on April 12 hugely stimulated demand throughout the East in particular, although there were also reports of high levels of physical demand elsewhere too.
Gold’s price performance since then falling even further has perhaps diminished the huge demand surge. In addition, India’s draconian measures to try and cut gold imports on the face of things seem to be being successful in keeping volumes down – at least official volumes are seen to be sharply lower, although smuggling, which won’t find its way into the official statistics may mitigate this fall-off a little in reality.
There is also the feeling, if not perhaps the evidence yet, that even Chinese demand is weakening a little. We still see occasional reports of gold traders being mobbed and of high premiums for physical gold, although, again, these seem to be falling off, perhaps due to an increasing feeling that lower prices are here to stay – at least for a little while – reducing the buying urgency from the feeling that prices could have bottomed out. Even so, as the May figures show, demand continues to run high.
Thus China will certainly become the world’s No. 1 gold consumer this year – if indeed it was not already. (China is not forthcoming with its overall consumption statistics). So far net imports through Hong Kong for the first five months of the year have totalled over 413 tonnes – double those of a year earlier when China imported just over 830 tonnes in the full year
But it is still worth looking at the overall impact of Chinese purchasing on the total global demand for physical gold. Assuming imports hold up at anywhere near current levels, China is going to take in around 1,000 tonnes of gold this year through Hong Kong alone. There are no figures available for gold imports via any other routes, yet these are likely to exist, but even if we rule these out, China’s overall imports will be at unprecedented levels and continuing to rise annually, although again the slowdown in the country’s economy could put a small dent in the continuing popular demand.
Chia’s own gold production from its mines and as a byproduct from its smelting and refining sector exceeded 400 tonnes last year and is heading to between 420-450 tonnes by 2015 according to official estimates. This suggests Chinese gold imports plus its domestic production will, this year, account for comfortably over 50% of global new mined gold output, which is currently estimated at around 2,700 tonnes annually. Indeed global gold output could start to fall with lower gold prices leading to mine closures (already beginning to happen) and new project and expansion deferments.
For example it has been estimated that over 50% of South Africa’s output (nowadays only the world No.5 gold miner) is uneconomic at the current gold price, and there will be a large number of other mines around the world which will certainly be making a loss at current all-in sustaining production costs.
However, given that these ‘all-in’ costs take account of capital already spent to bring a mine to production in the first place as well as ongoing exploration activity which can be cut, then perhaps the production fall-off may not be as great as some might anticipate, but ongoing global output, which has been pretty flat for the past few years, is still likely to fall back failing a very sharp recovery in the gold price.
But what will this huge dominance of gold demand by China mean for the gold price? Perhaps not a lot initially failing some significant announcement that the country has been quietly increasing its gold reserves substantially. Increased demand from China is, at least to an extent, currently being offset by falling demand from India and liquidation of holdings out of the big gold-backed ETFs, although other significant gold buying countries in other parts of Asia, Russia and the Middle East are also seeing substantial increases in imports and holdings, but these do tend to pale into insignificance when set against the enormous Chinese demand.
But if the demand continues at this kind of level, with stocks of physical gold continually moving from vulnerable western hands to more stable eastern ones then at some stage there will be a very apparent shortage of physical metal in the West. Increasingly gold trading will move from exchanges like COMEX to Shanghai and Hong Kong. COMEX may become an effective irrelevance in the gold market dealing only in ‘paper’ gold (which it effectively is already) and the physical gold price momentum will move to the east. Currently it is COMEX which is setting the global gold price. In the future it will be Shanghai if the current trend continues – and then it will be a wholly different ballgame!