David Chaston reports on China's gold rush and the public and private demand underpinning strong prices for gold

By David Chaston

In September China reportedly imported 140 tonnes of gold, more than it did for the whole of 2010 when approximately 120 tonnes were imported.

This surge of buying and importing followed the sharp drop in the gold price at the end of the quarter, after it hit a record high earlier in the month (see chart below).

The People's Republic of China does not disclose its level of total gold imports but many see the Hong Kong import figures a reliable proxy for its overseas buying.

Heavy buying on price dips reinforces the view that China has a long term plan to increase its national gold inventory. Clearly it can't just enter the market publicly and buy as that would raise price expectations significantly. But this surreptitious strategy allows it to accumulate on a long-term basis for a long-term goal.

Speculation is that it wishes to build a gold holding at least as large as that held by the US - about 8,000 tonnes - although some think its ambition is an even larger holding. That would allow it to position the Yuan as a global reserve currency and reap the kind of benefits the United States  has been able to since the US dollar became the de facto global reserve currency.

New golden standard 

China is currently the world's largest producer of gold, and it is also now the largest importer.

It has some way to go to overtake the U.S. levels of official 'reserve' gold holdings. It apparently had 1,050 tonnes on hand at the end of 2010 worth about US$57 billion. This holding backs less than 2% of its forex reserves.

To get to U.S. levels, it will need to spend at least US$400 billion or a bit less than a quarter of its international reserves, assuming the gold price does not change from current levels.

So it needs a long-term strategy, if using gold is part of the plan to internationalise the renminbi/yuan and bidding the price up makes it a fearsomely expensive project.

The U.S. gold holding represents about three quarters of its forex reserves. 

Heavy production

Current internal production levels are actually unknown, but thought to be about 300 tonnes per year and rising (267 tonnes in 2007). Imports into China have been running at about 60-70 tonnes per year (before this latest surge) although may have risen to more like 350 tonnes annually recently.

However, much of this production and import activity will be for private Chinese holdings. The Chinese people are keen holders of the precious metal on their own private basis. For the Chinese government to acquire a dominant official gold holding, a timeframe of well in excess of twenty years will be required.

It has been estimated that all the gold ever mined totals 165,000 tonnes, worth more than US$9 trillion at today's value. Governments hold some 28,500 tonnes in their reserves and agencies like the IMF hold another 3,000 tonnes, with about 2,150 tonnes held by other known funds. On top of this, the gold mining industry is thought to be sitting on about 50,000 tonnes of proven reserves.

Of all this inventory, the estimate is that more than half is held privately as jewellry.

But if China's monetary authorities are on a serious long-term buying program of at least 7,000 - 10,000 tonnes, this activity alone will clearly underpin the price of the metal for decades. 

According to a report by Ft.com, this year's imports, estimated at 350 tonnes, will help power China towards its target.

The last two months of this year are likely to see China’s gold imports surge further ahead of Chinese New Year, supporting gold prices, according to Ms Kong and reported by ft.com. “We’ve noted a quite strong seasonality in gold prices, typically prices go up in the months before the Chinese New Year.”

Investment demand for gold in China has been particularly strong this year as a hedge against inflation. Chinese bank deposits offer negative real interest rates, and other outlets for investment have been limited as Beijing has curbed property sales and the stock market has performed poorly.

Rising household incomes and a tradition of giving gold have also buoyed China’s gold demand. “Growth in jewellery demand has been over 13 per cent year on year, a very positive number especially compared to the rest of the world,” said Cameron Alexander, senior analyst at GFMS, the consultancy. He puts China’s total gold imports at about 350 tonnes this year.

China has liberalised regulations for importing gold over the past year, widening the number of banks authorised to import gold. “China’s gold demand will continue to increase as per capita income increases,” said Shi Heqing, a Beijing analyst with Antaike. “There aren’t many investment channels available in China other than the stock market, property market and some commodities.”  

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