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Where is all the Missing Gold in China? Supply & Demand Statistics reveal a 520-ton Gap
China is now the #1 nation in gold supply and demand. That much we know, but some of the details are murky, due to Beijing’s long-standing policy of not disclosing the details of their official holdings. In fact, Forbes published an intriguing article recently (March 18), entitled, ”China’s Secret Vaults: Where is all the Missing Gold?” The story reads like a mystery novel, so let’s start with what we know for sure.
China is the World’s #1 Gold Supplier (and Buyer) – By a Long Shot
For most of the 20th century (and up to 2006), South Africa was the world’s#1 gold producer, but due to the depletion of their mines and the union-related violence and work stoppages in South Africa, several other nations have leap-frogged over South Africa, which is now holding tenuously to the #5 spot, barely ahead of Peru! In 2012 – the last full year for which there are reliable global statistics – China is the #1 gold producer by a long shot, mining 60% more gold than the world’s second-place producer, Australia.
The Top Five Gold Producing Nations (2012), in tons
(i.e., metric tonnes, equivalent to one million grams, or 2,205 pounds, or 32,150 Troy ounces.)
Estimates for China’s 2013 gold production are around 430 tons, based on the latest industry estimates, keeping China in the #1 spot by a rising margin, since most other leading gold producing nations have a flat or slightly falling annual output. Despite rising domestic production, China is also #1 in the world in gold imports and total gold demand, surpassing India in the top spot for 2013, partly due to onerous gold import restrictions in India, but also due to the powerful long-term demand curve (since 2002) in China.
Before the Chinese Communists took control in 1949, only the Chinese central bank could import and export gold. After Mao Zedong died in 1976 and Deng Xiaoping took control in 1978, sales of gold coins were allowed in small quantities in 1979. In 1982, gold jewelry was legally permitted, and then gold bars were legalized in 2000. Finally, in 2002, the Shanghai Gold Exchange opened. It’s no coincidence that gold began rising in 2002. By unleashing private demand in 2002, the nominally-Communist leaders of China unleased a half-century of pent-up demand. Chinese demand since 2002 is a major source – along with gold ETFs in the West – of the powerful first leg of gold’s bull market, running from 2001 to 2011.
In 2013, Chinese demand for gold (primarily in the form of bars and coins plus high-karat jewelry) rose 32% from 2012, reaching a record high, but we don’t know exactly how much gold China consumed! We have to extrapolate from China’s gold imports, which reached 1,158 metric tons (over 35 million Troy ounces) via Hong Kong in 2013. Adding in the domestic production, total demand is almost 1,600 tons.
China’s Semi-Secret Quest to Stockpile Minerals (Including Gold)
China is trying to stockpile (maybe even corner) several key minerals. A new book (“By All Means Necessary: How China’s Resource Quest is Changing the World, by Elizabeth C. Economy and Michael Levi, published by the Council on Foreign Relations) shows how “China is looking outward to find the massive quantities of resources needed to maintain its economic expansion.” China is trading for these minerals in Africa and in the rest of the developing world, often forming unholy alliances with despots -allegedly funding a despot’s Swiss bank account in exchange for his nation’s scarce natural resources.
China leads the world in imports of key industrial resources, like copper or zinc, so why should gold be excluded from their global strategy? The Chinese central bank is accumulating gold for their huge ($3+ trillion) foreign exchange hoard – the largest in the world by far. Officially, the Chinese central bank only holds 1,054 tons of gold, or barely 1% of their total foreign exchange holdings. However, that data is about five years old: The last time the People’s Bank of China reported its gold holding was in 2009.
Jeffrey Nichols, managing director of American Precious Metals Advisors, thinks that China has more than doubled its official gold reserves to over 2,700 tons. Nichols, an expert in global metals demand statistics since the mid-1980s, says that China’s central bank added 654 tons from 2009 to 2011, 388 tons in 2012, and 622 more tons in 2013. That’s a huge percentage of annual gold demand, but it would still represent less than 3% of China’s total foreign reserves, leaving China plenty of room to buy more gold.
So….Where is all that “Missing Gold” in China?
There are so many conflicting statistics and theories about Chinese gold demand that there is a distinct possibility that Beijing is stockpiling hundreds of tons of gold discretely, through both official and secret sources. According to Forbes’ China-based gold correspondent, Su-ching Jean Chen, “speculation abounds about a large trove of gold that seems to be missing from the global market. Analysts calculate that up to 500 tons or more are stashed away, based on the difference between China’s domestic gold production of 428 tons in 2013 plus its estimated gold imports of at least 1,158 tons, and its annual demand of about 1,066 tons.” That’s 1,586 tons of supply vs. 1,066 tons of private demand, leaving a gap in demand of about 520 tons. Naturally, the chief suspect is “clandestine buying by China’s central bank.”
While the Chinese central bank is likely accumulating the bulk of that 520-ton “demand gap” in official statistics, a second theory involves gold stockpiling by 12 Chinese commercial banks. Zhu Zhigang, Vice Chairman of the Gold Association of Guangdong (province), says that “unknown quantities” of gold were accumulated by 12 banks that received licenses to import gold into China since 2012. Before 2012, only four banks were allowed to hold gold. In addition, two major international banks, HSBC and the Australia and New Zealand Banking Group, were added to the list of approved gold-storage banks in early 2014.
A third theory involves domestic jewelry fabricators stockpiling gold at today’s cheap prices in order to fuel growing demand for gold. In 2013, there were some shortages in gold at leading jewelers in China, a situation which caused riots among customers. They want to avoid any such riots this year so, in addition to buying gold from the Shanghai Exchange, they are also storing gold “on loan” from China’s producers.
Hundreds of millions of Chinese citizens are growing richer by giant steps. They are able to afford gold for themselves and for their loved ones for the first time in their lives. They are also beset with chronic “bubbles” in real estate and stocks, making those investments seem too dangerous. Chinese banks are unreliable, making gold a preferable store of savings over bank accounts. In the meantime, the Chinese yuan is losing value, partly to secure trade advantages, making China’s domestic currency worth less. This pushes gold up in terms of the Chinese yuan. All these factors make gold a valuable form of savings.
China is the world’s most populous nation, at nearly 1.4 billion people. Demographers estimate that there are 401.5 million households in China. If each family bought just one ounce of gold per decade – one-tenth of an ounce per year – that would amount to 1,250 tons of gold demand per year, plus whatever the central bank buys. It’s conceivable that China could consume 50% of the newly-mined gold over the next decade, creating a supply shortage in other global markets, thereby driving the price of gold much higher.