EDITOR: | April 20th, 2016 | 4 Comments

China moves to increase gold power — and world supply looks to dwindle

| April 20, 2016 | 4 Comments
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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%.

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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Comments

  • Gold and Silver Prices and News

    […] China moves to increase gold power — World supply looks to dwindle (Investor Intel) […]

    April 20, 2016 - 4:53 AM

  • Jack Lifton

    Robin,

    I now think that non Chinese “investors” have to take into account the culture and heritage of China. I know of no other nation that has existed in essentially its modern extent, with a homogeneous population,and an agreed single language for 2000 years or that makes plans so far into the future and has maintained a meritocratic bureaucracy (the so called mandarins) for just that purpose all of that time no matter what the political form of the central government has been. The Chinese people all during this period have considered the ownership of gold metal to be a sign of not only prosperity but of good luck. China now does not allow the export of gold, other than for collector items, so there will be no Chinese gold coinage developed for or used in international trade. In addition although the Chinese may issue Yuan denominated bonds with the Yuan defined as so many grams of gold they will NOT BE FREELY CONVERTIBLE into specie outside of China. This constrained convertibility of either currency or coinage into the currency and coinage of other nations makes much of the argument for gold as a store of value moot with respect to China. Assume that I buy Yuan denominated bonds in which the “value” of the Yuan is denominated as a ceratin number of grams or grains of “pure” gold then when I need dollars, pounds, Euros, etc to buy a hamburger or a shot of moutai will I not need to buy them from a trader who can accept Yuan and who has dollars to trade. This will ultimtely be only a Chinese trader or his agent in the place I am making the trade. Thus New York, London, and wherever will be supplanted by Shanghai but the flow of gold will be ONE WAY. Thus if this comes to pass then sometime in this century Shanghai will have ALL of the world’s gold metal and thus will absolutely control the price of gold. At that point (or well before) the other nations will monetize something else or continue with fiat money, right? So ultimately the Chinese will have all of the luck but just the amount of money the rest of the world decides they have.
    Of course it is always possible that the Chinese will adopt the control of natural resources as the underlying value of their currency, and in that case by current trends they will dominate the world through this strategy. If China needs to import nothing that it doesn’t control the production of then it will truly have become the middle (-man) kingdom in every way.

    Your thoughts?

    Jack

    Jack

    April 20, 2016 - 10:45 AM

  • Robin Bromby

    Jack, you are right on: as of now, even, we are seeing a trend towards a one-way flow of gold with reports that the Swiss refinery has long been busy melting down large bars from London and elsewhere in Europe, and recasting them in the smaller sizes preferred by Asian investors. And you’re also correct in pointing to the long history of Chinese love of gold. But the story under the post-1949 Communist regime is also instructive. In my e-book “Gold Always Wins” (available through Amazon), I wrote this:

    “Until 1978, gold production in China had been less than ten tonnes a year. In 1950, after Mao Tse-tung’s Communist Party established its authority over all of mainland China, gold bullion ownership was prohibited and what little gold mining there was (along with everything else in China) came under state control.
    But China never lost its appetite for the yellow metal. In the 1960s, the “Christian Science Monitor” newspaper took very seriously the words of Franz Pick, then the New York-based doyen of the gold bug movement. A refugee from the Austro-Hungarian Empire, the ageing pundit published “Pick’s World Currency Report” and also what he called an advance obituary for the U.S. dollar. One pronouncement of Pick’s got a very big run in the Monitor in 1966.
    ‘When an addict in Harlem buys his drugs, he may well be directly providing Communist China with gold,’ the report began. Pick was just repeating charges made before the United Nations Commission on Narcotic Drugs. It was said some 2,000 tonnes a year of opium and morphine were produced in Yunnan, then shipped to the West through Laos and the [then] Portuguese colony of Macau. Pick argued that the payments for these drugs had enabled China to buy sizeable quantities of gold. Indeed, the Bank of International Settlements estimated China’s 1965 gold purchases as being worth $150 million (that year gold averaged $35.15/oz).
    In a subsequent report, the “Monitor” again quoted Pick, this time saying that China was also raising money for gold purchases through war-torn Vietnam. The Viet Cong, the insurgents serving communist North Vietnam in the civil war against the U.S.-backed South Vietnam, had infiltrated the south and controlled most of the currency black market, through which most American servicemen changed their dollars into South Vietnamese piasters.
    These dollars were sent to Hong Kong where the communist controlled Bank of China changed them into sterling, which was then used to buy gold through the London market.
    China was buying gold because it could not produce enough of its own. But after 1978, when the destructive policies of the Cultural Revolution were finally ditched, the Chinese government turned its attention to (among other things) boosting gold production. The People’s Liberation Army set up a special gold mining unit whose goal was to prospect for gold and develop mines. This move, along with liberalization, meant that China’s gold production by the early 1990s was running at more than 100 tonnes a year. Then between 1994 and 2013 production surged by more than 300 tonnes a year. Between 1994 and 2013, China’s share of world mine output rose from nine per cent to nearly fifteen per cent.
    The shape of the gold industry changed, too. Today about half the gold mined in China comes from the top ten producers, the remainder from the more than 600 mines. In 2010 China moved decisively to do something about its National Gold Group Corporation, a state-owned enterprise with its headquarters in Beijing and which controls about twenty per cent of the country’s gold output; that year the corporation did a deal to acquire half the output of the new Kensington gold mine in Alaska operated by Coeur d’Alene Mines. The mine was expected to average 125,000oz a year.
    That year also saw China Railway Engineering Corp buy a majority stake in a project to develop the vast Las Cristinas gold deposit in Venezuela’s southern jungles in partnership with Canada‘s Crystallex International. The deposit had an estimated seventeen million ounces of gold. Here’s the interesting aspect: the Canadians had held the project for several years but had not been able to clear permission to mine after a dispute with the Chavez government. The Chinese apparently saw themselves as being able to unblock the permitting process. Chinese corporations, they can use their political leverage in treacherous jurisdictions to give them bargaining power over mining rights.
    In 2010 the official “China Daily” reported that Shandong Gold Mining Group planned ‘to expand its bullion output and also grow inorganically through overseas acquisitions’. The company was seeking to increase its output by up to thirty tonnes over the next year to meet domestic demand for gold. South America, Canada and Australia were mentioned in the report as places where Shandong would be looking.

    April 20, 2016 - 7:08 PM

  • Robin Bromby

    This just in: the Hong Kong gold and silver society has just announced plans to develop a gold vault in a district of Shenzhen. This is being billed as being the largest gold vault in the world. It will cost HK$1 billion to develop.

    April 25, 2016 - 5:09 PM

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