Gold In China – Update November 2012

Lots of news is coming out of China these days. We’ve selected the three most valuable insights and quote them in this article.

Today Mineweb wrote that gold demand in Q3 had fallen compared to a year earlier and that the decrease was due to decreased demand out of China as the Chinese economy is slowing down.

Global gold demand dropped 11 percent in the three months to September from record levels seen in the same period last year, dampened mainly by fading Chinese fervour as its economy slowed, with stronger Indian demand stemming a larger fall, the World Gold Council said.

Chinese gold consumption fell 8 percent in the July to September period to 176.8 tonnes, the WGC’s quarterly demand trends report showed on Thursday, with both jewellery and investment demand hurt by a slowing economic growth.

“The fall in Chinese demand coincides with weaker economic numbers in China in Q3,” the WGC’s managing director of investment research Marcus Grubb said. “There is some evidence that the economic situation is stabilising in China and recovery is starting… it’s possible that the stimulus measures have worked and the economy has bottomed out.” “If that’s true, we won’t see a repeat of this Chinese weakness in the fourth quarter,” he said.

Earlier in the week, Bloomberg reported that China’s hunger for gold is increasing as the country is looking to add substantially to their gold reserves in the coming years. Zerohedge writes:

  • China needs to add to its gold reserves to ensure national economic and financial safety, promote yuan globalization and as a hedge against foreign- reserve risks, Gao Wei, an official from the Department of International Economic Affairs of Ministry of Foreign Affairs, writes in a commentary in the China Securities Journal today.
  • While gold prices are currently near record highs, China can build its reserves by buying low and selling high amid the short-term volatility, Gao writes in newspaper
  • China’s gold reserve is “too small”, Gao says

BullionVault published live a summary from the London Bullion Market Association conference in Hong Kong on Monday (12th November). The general director of the People’s Bank of China, Xie Duo, gave a speech and reiterated the government’s commitment to keep the gold market healthy. He also underlined the importance of the natural demand coming out of the market and China’s citizens.

All this adds up to “big progress in the Chinese gold market,” Xie Duo said. “But there is still a long way to go.” And which way is that? Remember, we are in China.

“Frankly speaking, this success is the result of free choice by the market and the support of policy,” Xie went on. “The government took effective measures to guarantee smooth development.”

In particular, late last year it banned the “illegal” gold market, closing down all trading centers outside the officially recognized and managed Shanghai Gold Exchange and the Shanghai Futures Exchange (SHFE). The concern was that “the gold price rise had led to a surge in domestic demand, and that led to margin-trading businesses using overseas derivatives contracts as the underlying asset. That was very risky because of the leverage. So the government is fighting the underground market.”

To us, all of this shows that China will continue to be a major driver of the physical gold (and silver) market. The “signs of a slowdown” are probably rather a temporary cool down of what was becoming an overheated situation. We particularly like the role of the government and the commitment to grow the physical gold market in a sustainable way. That’s clearly in contrast to the Western countries that are not not in favour of gold for reasons that we keep on presenting on our site (the ultimate proof being Mr Bernanke’s reactions to Ron Paul’s questions about gold)


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