Why China Wants Low Gold Prices?

Julian D. W. Philips / Gold Seek

One question that has not been asked sufficiently is,“How can China buy well over 2,000 tonnes of gold without sending the gold price rocketing?”

In the U.S. people believe that the gold price will fall even further in 2014 despite indications that Chinese demand will continue at current high levels if not rise even more. This is because U.S. investors have been selling gold to move into the rising equity market. With the developed world focused on events in its own part of the world it is assumed that their influence will dominate the financial world including gold. But this ignores events in the emerging world and their hunger for gold.

With ‘normal’ annual supply to the gold market around 4,000 tonnes annually you would have thought that such a heavy Chinese demand would have propelled gold prices higher. But it didn’t. We have explained why in earlier articles last year. We will write more about this in the future, but in this article we will look at just why the Chinese prefer to see low prices continue.

There are two primary reasons why they want low prices to continue:

1)   It encourages Chinese retail demand. – With Chinese middle class numbers set to rise considerably as the government there pushes their growth emphasis to the service sector, more and more Chinese will save and a good proportion of that will go into gold. So low gold prices will accelerate the volume of gold bought. Higher prices lower the overall volume of gold bought. The nouveau riche of China will invests in relation to the size of their disposable income, so the more gold they can afford with that, the greater the total volume bought.

2)   It has increased the supply of gold to China. – Low gold prices has discouraged developed world demand and encouraged more selling of gold in 2013, making a greater volume of gold supply to be made available for the Chinese to buy as it implies that the rest of the world’s gold demand remains subdued. Add to this is the choking off of Indian demand since August 2013, taking the now second largest gold buyer out of the market. Over a year this would remove 800+ tonnes of demand from the market.

As simple market theory tells us, the greater the demand over supply is, the higher gold prices will rise. So how can one buy gold in huge quantities without driving up gold prices? The answer has to be by buying gold outside the market and not buying in the market where gold prices are set. Another answer is to ensure that where one does buy in a market where prices are set, one buys “on the dip”. In other words don’t buy when prices are rising, buy when they are falling and only take the gold that is on offer in the market.

Market Fragmentation