China moves to increase gold power — and world supply looks to dwindle
Gold miners are, well, worth their weight in gold because they look likely to be beneficiaries of a seismic event and a trend. Both factors should ensure not only that demand for the metal stays strong, but the gold price remains robust.
The seismic event was China’s launching on Tuesday of a yuan-denominated gold benchmark. This is throwing down the gauntlet in two respects: one, to dislodge the US dollar as the sole currency in which gold is quoted, the first fix this week being 256.92 yuan a gram (equivalent to $1,234.50/oz); and, two, to wrest some power in the global gold market away from London and New York. China is the world’s biggest gold producer, a vital importer of gold, and biggest consumer of the metal, but until now the gold price has been influenced by New York traders and the London fix (which was invented in 1919 by N.M. Rothschild & Son to bring some transparency to the pricing of the metal).
The trend is the fact that gold production is likely to begin falling. Capital Economics in London reports that mine supply is likely to tighten across all the precious metals. Analyst Simona Gambarini sees gold mine output slipping by 1% this year (and silver by 3%).
She points out a fact that is often overlooked: “The majority of the existing gold has already been mined and is now in the hands of investors and/or consumers. However, a fall in mining output will still tighten the market and most of all should positively affect sentiment towards the sector”.
This squeeze on gold supply has Capital Economics expecting a gold price this year of $1,400/oz (against Wednesday afternoon trading in Asia settling around $1,252/oz).
The Wall Street Journal reported recently that Chinese gold miners are aggressively scouting for overseas acquisitions. China consumes about 1,000 tonnes a year of gold, about one-third of global production. And it is feeling the supply squeeze: last year Chinese gold output fell for the first time ever but gold consumption in the country rose by 3.7%.
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China’s new gold benchmark, derived from a contract traded through the Shanghai Gold Exchange, will be set twice daily, just like the London fix with which it is now competing. The Shanghai fix will be decided by a powerful group: the big four state-owned banks, Standard Chartered Bank, the Australian & New Zealand Banking Group, Swiss-based metals house MKS and by the jewellery industry.
Reuters dubbed the move “an ambitious step to exert more control over the pricing of the metal and boost its (China’s) influence in the global bullion market”. Put simply, Beijing is flexing its muscles: it has long been annoyed at depending on a gold price set in US dollars and sees its own preponderance in the gold market as entitling it to set the price of gold.
In the World Gold Council’s view, this move reflects the shift in gold demand from West to East.
In 2010 a newspaper published by the Ministry of Commerce in Beijing said China should boost its gold reserves to the same level as those of the United States (then standing at 8,133 tonnes). At that time, too, Erste Bank of Austria cited another Chinese official who had recently called for reserves of 10,000 tonnes by 2020 — Chinese officials don’t make these sorts of comments off the cuff and without approval — which the Austrian bank said would involve China buying forty per cent of global mine production over the following eight years.
The late Richard Russell, the veteran US newsletter writer who had published The Dow Theory Letters since 1958, at the time posed these questions: ‘Why is China now the world’s leading miner of gold? Why is China literally begging its people to buy and hoard gold? Why has China opened new gold trading facilities? Why is China installing dispensing machines in public places so that people can insert their paper money and buy small quantities of gold? Why is it forbidden to ship or carry gold out of China?”
But here’s another development that should help gold.
The Moscow-based news agency RT is reporting that the Bank of Russia and the People’s Bank of China want to create a joint platform that would unite gold trading by the world’s two biggest gold buying countries. It says a Tass news agency report quotes First Deputy Governor of the Russian central bank, Sergey Shvetsov, thus: “In China, the gold trade is conducted in Shanghai, in Russia it is in Moscow. Our idea is to create a link between the two cities in order to increase trade between the two markets,”
Last year China produced 490 tonnes. Russia is third after Australia with about 295 tons produced last year. Overall, the countries make up 25% of the world gold production, said RT. At the same time, the central banks of Russia and China are the world’s biggest gold buyers, with both central banks frequently adding to their gold stocks.
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