If you’ve been buying or investing in gold for any length of time, you’ll probably be aware that China has been acquiring a lot of gold over the last several years. It seems that their appetite for the yellow metal knows no bounds. An that demand really comes to light with all the withdrawals from the Shanghai Gold Exchange (SGE).
That’s because those withdrawals represent physical metal. Unlike us in the West who play with paper contracts, Chinese investors on the SGE take physical delivery of metal once a trade concludes. Where all that gold ends up is not known but it’s a good bet that the bulk of it ends up in government reserves, and with institutional and private investors.
The 2016 numbers are out and it appears that the amount of gold withdrawn is actually less than in the record-setting year of 2015 (and also less than in 2013 and 2014). Nevertheless, withdrawal numbers are still very high:
Over 63.3 million ounces of gold were withdrawn by Chinese investors from the Shanghai Gold Exchange, their primary gold exchange, in 2016.
Let’s put that into perspective: that’s 64 times more than all of the gold Eagles sold by the US Mint last year!
Another way to look at it is this: check out how much of total global gold production those withdrawals represent:
If you look around, you’ll come across articles about how China’s demand for gold is falling. Yes, it is, at least in 2016, but the country is still gobbling up nearly two-thirds of worldwide gold production! The story isn’t that demand is down, but rather that it remains consistently elevated.
Why Chinese Demand For Gold Will Remain High
There’s may be several reasons as to why China will remain motivated to buy gold, but certainly one of those reasons is due to currency devaluation.
The fall in the yuan is bigger than many investors realize. Here’s what’s happened to the value of the yuan against the US dollar.
2016 saw one of the Yan’s worst annual losses against the dollar in more than two decades.
So why is is falling so rapidly? Because Chinese leaders have deliberately cheapened the currency to boost their economy. A cheaper currency makes exports more competitive.
One of the ramifications of this policy is that it unsettles investors who then go looking for other investments for their savings. And one of them is, of course, gold. That’s why withdrawals of physical metal from the SGE have been so high.
This trend for buying gold shows no signs of stopping, either. In just one week earlier this month (January 2017), $52 million poured into a Chinese gold ETF. Bloomberg reported it was “the biggest inflow into a commodity-linked ETF of all countries.”
The devaluing of their currency isn’t the only reason the Chinese are into buying gold. Another is because they have few other alternatives (Bitcoin is one option though it’s very volatile nature means it’s not for the faint-hearted).
Here’s how one UBS analyst puts it:
|Deterioration in China’s macro backdrop could trigger flows towards gold; there are a limited number of investment alternatives and gold is poised to benefit should outlooks across the different options turn sour.|
Many analysts predict that the Yuan will continue to fall and so Chinese investors will have little choice but to continue to hedge with gold.
The International Money Fund (IMF) has warned that fiscal and market risk in China is growing, too.
So everything points to Chinese investors remaining hungry for gold. Physical metal withdrawals from the SGE can be expected to remain high this year (2017). So a large chunk of the gold mined globally this year is going to end up in Chinese hands.
China, itself, is the world’s top producer of gold. Yet little of what it mines is ever exported and their own production does not meet domestic demand for gold, which is why they import so much from other gold mining nations.
The Chinese already control much of the Bitcoin market, so it’s no surprise that their consistent acquisition of gold will eventually matter to the gold market.
The U.S. still has the greatest influence over the price of gold, but the day when China’s influence over the gold price will be as great is drawing ever closer.
And then it won’t be long before China surpasses it.
China’s hunger for gold is a long-term trend that will have major ramifications for the market.
Their buying trend is one to keep an eye on over the next few years.