China Buys Gold ! By Adrian
Ash, BullionVault - Posted Monday, 29 March 2010
Still
waiting for that headline, plus the $5000 rapture it will
bring...?
"CHINA BUYS GOLD" is the story
that all commodity journalists want to break, and the headline
that gold bugs the world over most want to read.
Because if (or when) the People's Bank of
China shifts from quietly adding domestic mine output to its
reserves...and starts buying gold bullion in the international
market instead...the rapture of $5000 gold will be upon us.
It's unlikely to play out like that, however
– not until 2016 at least. First because Beijing's policy
wonks aren't so stupid. And second, because "China buys
gold" is already old news.
Mistaking a part for the whole – and assuming
that China means the People's Bank alone – means missing the
huge growth in private Chinese household demand of the last
5 years.
Rising 85% by weight since 2004, China's
private gold demand has more than quadrupled in Dollars. It
pretty much doubled by value in terms of both Dollars and
the Renminbi in the last two years alone, rising to $13.6
billion in 2009.
Overall, China accounted for more than 14%
of global gold investment and jewelry demand last year on
the World Gold Council/GFMS data – a close second to the 16%
of private world hoarding swallowed by India.
Now the World Gold Council forecasts that
China's annual gold consumption has the potential to double
in the next 10 years. Its new report notes the link between
China's gold demand, runaway GDP growth, and phenomenal household
savings rate. But it doesn't put a figure on that relationship
– itself a blunt rebuke of the idea that modernization and
consumer capitalism would see gold cast off as a barbaric
relic...
Based on World Bank estimates of China's household
savings rate – probably worth some $660bn last year – the
proportion of private savings spent on gold investment and
jewelry each year has almost doubled to 2.1% since the market
was deregulated in 2001.
Yi Gang, deputy governor of the People's
Bank of China and administrator of the State Administration
of Foreign Exchange (SAFE), recently estimated that private
households own some 3000 tonnes of gold. Two-thirds of that
has been accumulated in the last 5 years alone. Those 1890
tonnes outweigh by four times the gold bought by SAFE and
then transferred to the People's Bank between 2002 and 2009.
Perhaps that's been just as Beijing intended.
Gold Mining output is a strategic target in the regime's current
5-year plan. Sending money offshore to plug the widening gap
between local supply and demand, private citizens help reduce
China's side of the global trade imbalance. They've also,
all told, drained some $44bn from the banking system by swapping
cash and bank-deposits for metal since the start of 2004.
They'd clearly like to buy more, too.
"The size of the gold market is limited,"
Yi went on. "So China's [official] purchases of gold
in the global market would push up global prices...China's
domestic Gold Prices are related to global prices, so Chinese
consumers will face higher prices and they won't like it."
The People's Bank, in other words, is sticking
with its policy of buying domestic mine production for its
own reserves – rather than open market supplies – because
it's worried about upsetting China's voracious gold-buying
public. Which is awfully sweet of the Communist dictators.
Trouble is, based on below-ground reserve
estimates and the surge in China's mine output, China's gold
mines could be all gone within six year says data from the
US Geological Survey. So if the People's Bank finds good cause
to keep buying gold in 2016, it will have to turn either to
the global market...or pick up non-mine supplies closer-to-home...where
it will just happen to find an extra 6,000 tonnes, according
to the World Gold Council's projections, added to today's
privately-held jewelry, coins and bars.
Handy!
Nationalizing private gold was what the US
government did, under F.D.Roosevelt, when it banned private
gold-bar and coin ownership in 1933. Which was a pity. Because
that post-inflationary slump known as the Great Depression
– which merely paused, and didn't halt, the United States'
progress as world No.1 economy – would have proved a great
time to preserve wealth with gold.
The Treasury confiscated gold – on pain of
a $10,000 fine or imprisonment – at the price of $20.67 an
ounce. Then raising the value of its hoard to $35 an ounce,
Washington banned private dealing in non-adornment metal,
leaving anyone who neglected to turn in their US-held gold
a fugitive the moment they tried to sell it. Clinging onto
gold outside the domestic US, on the other, and remaining
free to realize its value, meant enjoying a 90% drop in the
price of listed US equities, plus a halving in the cost of
living.
That's something China's private gold-buyers
might want to bear in mind today...if only they can get money
offshore to buy gold and keep it there.
Adrian Ash
Formerly City correspondent for The Daily
Reckoning in London and head of editorial at the UK's leading
financial advisory for private investors, Adrian Ash is the
editor of Gold News and head of research at BullionVault –
winner of the Queen's Award for Enterprise Innovation, 2009
– where you can buy gold today vaulted in Zurich on $3 spreads
and 0.8% dealing fees.
(c) BullionVault 2010
Please Note: This article is to inform your
thinking, not lead it. Only you can decide the best place
for your money, and any decision you make will put your money
at risk. Information or data included here may have already
been overtaken by events – and must be verified elsewhere
– should you choose to act on it.