“Why”, investors, business people and precious metals speculators all over the world are wondering, “is China buying so much gold?” Answers to this question may well have a bearing on how China does business with the rest of the world, and on how the rest of the world may be affected by it.
On March 14, 2012, Mineweb (
www.mineweb.com
) posted a report entitled, “China Consolidates Position as World Number One Gold Miner.” To give you a little perspective upon China and gold, I will quote some information from the Mineweb report. The Report stated in part:
“The most recent figures from China’s Ministry of Industry and Information Technology note that China, already the world’s No. 1 gold miner since 2007, continued its dominance in world gold production with output rising last year by 5.89% to 360.95 tonnes. The most recent statistics also show that the country’s gold mining sector continued to expand in January with a rise of about 3.69% from the same month a year ago, suggesting that we may well see further annual gold mine output growth in 2012.”
The Report then went further to state:
“China’s ever-increasing gold output though is still nowhere near the country’s huge appetite for consuming gold which rose to perhaps some 800 tonnes in 2011…”
With China being the number one gold producer in the world it may seem a bit incongruous to some as to why it has been and why it continues to buy enormous quantities of gold. Current world financial conditions and economic provide some answers to why both the government and the private sector in China is after gold.
On January 29, 2012, Forbes Magazine (
www.forbes.com
) published an insightful article entitled, “Why Are the Chinese Buying Record Quantities of Gold?” Here are some excerpts from that article:
“Analysts believe China bought as much as 490 tons of gold in 2011, double the estimated 245 tons in 2010. “The thing that’s caught people’s minds is the massive increase in Chinese buying,” remarked Ross Norman of Sharps Pixley, a London gold brokerage, this month.
So who in China is buying all this gold?
The People’s Bank of China, the central bank, has been hinting that it is purchasing. “No asset is safe now,” said the PBOC’s Zhang Jianhua at the end of last month. “The only choice to hedge risks is to hold hard currency—gold.” He also said it was smart strategy to buy on market dips. Analysts naturally jumped on his comment as proof that China, the world’s fifth-largest holder of the metal, is in the market for more.”
The Article goes on to report:
“So why are individuals now buying gold? The easy answer is that the demand is only seasonal, as Jeff Wright of Global Hunter Securities believes. The Chinese traditionally buy gold presents in the run-up to the Lunar New Year, which started a week ago. Yet gift-giving does not begin to explain the surge in gold purchases that started as far back as July. November was the fifth-consecutive month of China’s record gold purchases from Hong Kong.
A better explanation for the gold-buying binge of Chinese citizens is that they are using the shiny commodity as an inflation hedge, as the Financial Times recently suggested. Yet the buying of gold has increased while inflation has eased. And that means there must be another explanation. The best explanation is that individuals in China are using gold as a substitute for capital flight.”
Other reasons for China’s continuing to purchases of large quantities of gold could include wanting to compete with purchases of gold by other countries, including the U.S., and wanting to increase its stock piles of gold relevant to gold stockpiles held by the U.S. and other countries. In an article dated November 13, 2012 on the Mineweb site (mineweb.com), entitled, “People’s Bank of China has to add to its gold holdings: LBMA” by Michael Allan McCrae, Mr. McCrae writes in part:
“With only 2% of reserves allocated to gold, the People’s Bank of China has to start buying more bullion, said David Gornall, chairman of the London Bullion Market Association, which is holding a gold conference in Hong Kong.
“When comparing China to the U.S., it would seem that in China, gold asset allocation can only go in one direction, said Gornall.
He noted that the US has a 75% allocation to gold, and those gold prices overall have been supported by central bank buying.”
The reasons why China is buying so much gold are complicated and quite speculative. This gold purchasing by China however is supporting and even increasing gold prices world-wide. It would seem therefore that other countries, including the U.S. may well be in competition with China for gold to purchase and that this competition may well increase the price of gold for everyone.
Hawkeye in China
– LEX Smith