China is now world’s largest gold producer and consumer

Move over India. China is officially now the world’s largest producer and consumer of gold and is garnering the world’s attention. With Indian policymakers showing no signs easing the rigid controls on gold, the focus of all markets participants is trained on the other Asian major, China. With 400 tonnes of domestic production and over 600 tonnes of physical imports in 2013, China’s gold consumption has now exceeded a thousand tonnes, making it the real mover and shaker of the world gold market. China’s voracious appetite for the yellow metal is the result of rising wealth among its young population, rapid urbanisation and evolving lifestyles.

Physical asset

Like Indians, Chinese too like to hold gold in the physical form; and again like India, China is also a price-sensitive market. Demand for jewellery fabrication in China has been growing robustly at well over 10 per cent a year since 2008. Retail demand for bars and coins has not lagged behind either. Little wonder then that last year, physical demand in the form of jewellery and coins hit a record high. An interesting feature of the gold market over the last 12 months has been that the physical metal has been flowing from the west to the east.

With large-scale redemptions in ETPs since mid-April 2013 (estimated at over 600 tonnes), after the price meltdown from $1600 an ounce to $ 1200/oz levels, a significant part of the outflow has reportedly moved to China.

Currently, ETP holdings aggregate an estimated 1,850 tonnes. With prices beginning to move down, the risk of further outflow has increased. In recent years, China’s gold demand growth has far outstripped its GDP growth. Trade data from the US, the UK and Switzerland point to large shipments of gold to Hong Kong from where the goods move over to the mainland.

Additionally, gold coin shipments from Switzerland to China and Hong Kong have also been rising. The big question market participants are asking is whether such aggressive trade will sustain.

There is consensus that China’s appetite for gold will continue for some years and import volumes will stay at elevated levels because domestic production falls far short of demand. However, the growth in import volumes may slow down, especially if market prices are seen as unattractive. Over the last five years, China’s domestic production of gold has been growing on an average at eight per cent a year. Interestingly, ten years ago, the Asian major allowed foreign investment in gold mining which obviously is showing results. Not much information is available on the Chinese central bank’s purchases but until five years ago, reserves were built from domestic production rather than from imports.

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