The Chinese Gold Vortex

SOURCE:[Eric Sprott] – After a long and agonizing winter which was attributed to the so-called “Polar Vortex”, we thought it would be appropriate to highlight for precious metal investors the implications of what we call the “Chinese Gold Vortex”. Over the past year, we have been very vocal about what we consider an aberration: the complete disconnect between gold supply and demand fundamentals and the actual price of the metal.

We have shown in February Markets at a Glance (MAAG) that, for all of 2013, demand from emerging markets, particularly China, was extremely strong, outstripping world mine supply by a fair amount. But this extreme tightness in the physical market was not reflected in gold prices. We have since then discussed many signs of manipulation in both the paper and physical gold markets (ETF flows, Indian intervention, LBMA fixings, to name a few).

This month’s Markets at a Glance presents an update on the demand dynamics in China, discussion around new evidence of manipulation and concludes with an illustrative example of the opportunity in gold equities.

Supply and Demand

While the year is still young, we have been able to gather a few data points from China and they are truly impressive. The table below shows Chinese net imports of gold for the first two months of 2014.1 So on average, each month this year, China has imported about 204 tonnes of gold, up from about 143 tonnes last year.2

Chinese data is taken from the Hong Kong Census and Statistics Department. Swiss data is taken from the Swiss Customs Administration, which started reporting gold exports to specific countries in 2014.

To put these numbers in perspective, for the full year 2013, total mine supply excluding China and Russia averaged 192 tonnes per month (see the February 2014 MAAG for details on the methodology).3 Basically, China is currently vacuuming, on a monthly basis, all of the world’s mine production plus an additional 10 tonnes. But that is only China; anecdotal evidence from other countries suggests that demand remains strong in other Emerging Markets, where Central Banks keep adding to their gold reserves. Moreover, whereas last year’s ETFs contributed (unsustainably) to supply, this year has so far seen net inflows into gold bullion ETFs.

What immediately comes to mind is: where does all this gold come from? As we have long argued, gold to Emerging Markets has been supplied by Western Central Banks for many years.4 Recent data substantiates this claim. A closer look at Swiss import and export data shows that it imports most of its gold from the US and the UK and exports most of it to China and Hong Kong. For example, in the first two months of 2014, the UK has exported over 233 tonnes of gold to Switzerland; this is more than half of the Chinese net imports over the same period (remember the UK doesn’t produce any gold). Similarly, the US, which has a monthly gold production of about 19 tonnes, has exported, in the month of January alone 56 tonnes, most of which went either to Switzerland or to Hong Kong directly.5 So where does all this gold come from? It is supplied by Western Central Banks, which according to our analysis have very little gold left.

While it is still early, the Chinese Gold Vortex is firing on all cylinders and data so far this year suggests that demand will far outstrip supply.

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The Chinese Gold Vortex

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