Considering Chinese Demand
It's one of those things. You hear about it every day but never stop to really think about it.
This began as an email discussion with my friend, Ned, yesterday. All of us in Turdville are aware that the Shanghai Gold Exchange has physically delivered something like 1200 metric tonnes of gold, year to date. That's a staggering number and it far exceeds the amount delivered through London and dwarfs the level delivered through the Comex. Prior to yesterday, I looked at that number and thought, "Wow. That's a lot.", but I never stopped to ask the follow-up questions:
- To whom is this being delivered? AND
- Once it's delivered, where does it go next?
Let's start by looking at this handy chart. Note that, at this current pace of delivery, Shanghai is currently delivering each month the entire global mine supply. No wonder they were temporarily "out of stock" back in May! How long can this continue?
OK, now for some additional background. Recall that, since about 2006, the Chinese government has been aggressively promoting gold buying by its citizens. This campaign really began to pick up steam in 2009 following The Great Western Financial Crisis. A quick Google search returns all sorts of articles which describe this policy. Here are just a few examples: http://www.mineweb.co.za/mineweb/content/en/mineweb- gold-analysis?oid=88452&sn=Detail & http://www.bullionbullscanada.com/index.php?option=com_content&view=article&id=2545:china-urges-citizens-to-buy-gold-silver&catid=48:gold-commentary&Itemid=131 & http://news.goldseek.com/GoldSeek/1267715760.php & http://www.forbes.com/sites/gordonchang/2012/01/29/why-are-the-chinese-buying-record-quantities-of-gold/
We also know that officially reported Chinese imports are soaring. In just the first four months of this year, China has imported through Hong Kong nearly 500 metric tonnes of gold. This adds to the 834 metric tonnes that they imported in calendar year 2012. http://www.bloomberg.com/news/2013-02-05/china-gold-imports-from-hong-kong-gain-to-all-time-high-in-12.html
(Charts courtesy of ZH)
So where is all this gold going? I first wrote about it nearly a year ago. Much of it is being recast into kilo bars that, I believe, will ultimately be used to provide a hard asset backing to a future Yuan. http://www.tfmetalsreport.com/blog/3924/gonefor-good
But that still doesn't explain the almost-daily, 15-25 metric tonnes of physical delivery in Shanghai. This is why Ned and I were so perplexed.
So, next, I did what any sensible person would do, I rang up Andrew Maguire. His decades of experience in working the international wholesale market makes him the best source I have for answers to these questions. The conversation went something like this:
Me: "Andy, where the heck is all this gold going?"
Andy: "It's not going anywhere."
Me: "What do you mean?"
Andy: "I mean exactly that. Shanghai settles all that bullion each day to domestic wholesalers. That metal is then shipped off to Chinese dealers and refiners for domestic consumption."
Me: "So wait a minute. You're telling me that public demand in China is currently soaking up 250 metric tonnes per month or nearly ALL of the publicly-reported global mine supply?"
And then I started thinking...Well how hard would that be to do? 250 metric tonnes is about 8,000,000 troy ounces. The current population of China is 1.344 billion. If only 25% of the population is taking their government up on the idea of gold ownership, that's 336,000,000 people or, roughly, an amount equivalent to the entire population of the United States!
So now let's say that these 336,000,000 people buy, on average, 1/40th of an ounce every month. That works out to be about 3/4 of a gram or about $35 worth at $1400/ounce. Working the math backward we get: 336,000,000 people buying .75 grams = 252,000,000 grams and 252,000,000 grams = 252 metric tonnes.
Hmmm. Well how about that? Makes you look at stories like this in a different light, doesn't it? http://usa.chinadaily.com.cn/china/2013-06/12/content_16611576.htm
A crowd of customers waits in front of a gold store to shop during a promotion, in Jinan city, East China’s Shandong province on June 11, 2013.
People crowding around a gold products counter jockey for position to pick up something in a gold store which sold its products at a price of 299 yuan per gram in a promotion – about 50 to 70 yuan lower than the normal level, in Jinan city, East China's Shandong province on June 11, 2013. The promotion attracted nearly 10,000 people who rushed to the store despite restricting each customer's shopping time to 15 minutes. While gold markets in the US and Europe saw panic selling, China has just seen a surge in gold sales in the past few months. Chinese households came under the spotlight with their generous purchase of the gold products amid a global fall of the gold price.
OK, then. So, do you still think that the Spec Shorts are on the right side of the trade, that price is going lower and that the "bull market" in gold is over???
Hmmmm. Chew in that over the weekend and then come back for more on Monday. It's going to be another interesting week.