China Still Buying Most Gold – Gold Goliath

Posted on :Apr 09, 2015

Gold is down today against a stronger U.S. dollar index. Gold last reported a.m. is $1196.10 down $7.90 and silver is $16.27 down 25 cents.

According to GFMS at Reuters, China is still in the number one position when it comes to gold purchases.

By: Lawrence Williams  

The third of the detailed annual analyses of global gold supply and demand from the major precious metals consultancies, Gold 2015, was launched today by GFMS, and contains few, if any surprises, pretty much drawing similar conclusions to earlier reports put out by CPM Group in New York (See: Further downside on gold prices limited – CPM), and Metals Focus in London (See: End of bear cycle for gold in 2015 – Metals Focus). All three reports suggest that further downside in the gold price is now relatively limited and that gold investors may well start to see some improvement ahead.

Even so, all are predicting that in the short term the gold price will still likely fall further before there is any pick up, which may start coming in perhaps by the end of the year, or in 2016. The GFMS base case scenario therefore is for gold to average $1170 an ounce this year – fairly close to where it is now, but this does suggest further short term prices below this level – and then picking up to average $1250 next year with buying in Asian markets recovering. However, GFMS does recognise that  geopolitical conflicts could affect prices on the upside.

What some may consider surprising, given that it seems to differ from World Gold Council statistics issued in February, and largely supplied by GFMS, is that Gold 2015 places China back as the world’s No. 1 gold consumer in 2015, whereas the WGC figures suggested that India had overtaken the Asian Dragon last year. These figures exclude bank activity, and if this was incorporated China would come out hugely in advance of India – the position we have taken on Mineweb all along. The GFMS table of global gold consumption (in tonnes) by the top 20 consuming nations is shown below:

Top 20 Gold Consuming Nations (tonnes) excluding bank activity:

 

Country 2014 demand Percent of global total
1. China 895 24.2
2. India 852 23.1
3. USA 242 6.5
4. Germany 129 3.5
5. Japan 119 3.2
6. Turkey 119 3.2
7. Thailand 93 2.5
8. Russia 93 2.5
9. Iran 79 2.1
10. UAE 71 1.9
11. Vietnam 69 1.9
12. Saudi Arabia 67 1.8
13. Indonesia 58 1.6
14. Egypt 58 1.6
15. Canada 58 1.6
16. South Korea 55 1.5
17. Hong Kong 44 1.2
18.   U.K. 41 1.1
19. Brazil 35 1.0
20. Pakistan 33 0.9

Source:  GFMS, Thomson Reuters

As can be seen from the table, China and India continue to dominate global gold consumption, with Asian and Middle Eastern nations providing another 11 of the top 20 consuming nations. The gold flows from West to East thus remain enormous and if bank transactions are added in the figures would be even greater, with Chinese banks said to hold another 1,400 tonnes of gold plus in their vaults from a recent estimate from Macquarie.

There are, of course, a whole host of other take-aways from the 116 page report (GFMS’s 49th in the series). It suggests that demand and dollar prices are in the process of building a base with the early months of 2015 continuing the stabilisation seen in 2014 following the ‘hurricane’ that swept through the gold market in 2013. This suggests that western gold investors are likely to begin to return, but perhaps not yet.  As did Metals Focus in its report, GFMS anticipates that gold could well benefit once the uncertainties surrounding Fed interest rate rises are behind us.

Further short-term weakness is expected in the dollar gold price (GFMS is looking for perhaps slippage down to around $1100 during the year), but prices in other currencies may well already have bottomed as the dollar is seen as likely to remain strong against most others. But again prices are seen as beginning to rise again as the year-end approaches with better prices anticipated for next year.

Official sector gold purchases last year amounted to 466 tonnes net, up 14% from 2013 and the second highest level since the end of the gold standard. The Russian central bank was the biggest such gold purchaser in 2014 with 173 tonnes, while several CIS countries also increased their gold holdings. GFMS expects this sector to remain a source of demand for gold over the medium term.

A renewed shift in physical gold demand from West to East may have lessened last year but remains a key factor as shown in the table above. This is expected to pick up further again this year as GFMS sees markets continuing to stabilise, with Asian markets reasserting their power in terms of price support.

A positive point noted by the consultancy for last year was that global jewellery fabrication, apart from in China where it fell back sharply, increased overall by 6%.  Even though the China market fell back drastically, GFMS points out that it was still higher than in 2012 and thus the second highest on record, while Indian jewellery fabrication reached a new record despite the import restrictions. India and China between them accounted for 54% of the world’s jewellery, bar and medal demand in 2014.

Investment demand was hit by a big decline in Asia – notably in China – but is expected to at least start to recover this year, while sales out of the big gold ETFs continued, but at a much lower rate. The scope for such sales this year would look to be further reduced.

The lower gold prices during 2014 were bad news for producing miners with probably around half of the mining sector in the red on an all-in sustaining costs basis at current price levels despite considerable success in bringing these costs down. We plan to write a more detailed assessment on this in a subsequent article. Global mine supply was seen as rising by 2% over 2013 as projects and expansions in the pipeline already under way came on stream or reached full capacity. But GFMS expects to see production remaining flat this year with a ‘palpable’ decline anticipated thereafter. This is borne out by a big reduction in gold sector corporate activity in 2014.

So not much cheer for the gold investor short-term here, although little comfort will have been expected. The report primarily looks at supply/demand fundamentals whereas prices look to be driven increasingly by the futures markets where a different agenda tends to be in play.

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