The growth of
China’s presence in the global gold market has been phenomenal in the
last dozen years. Prior to this century, HSBC sent a delegation from their
London gold department to see the Chinese financial authorities and were
rebuffed as ‘trying to sell gold to China’. Since then, the
Chinese financial authorities switched on and set off with a purpose.
In 2001, the
Chinese government lifted its final controls on the gold market, releasing a
pent-up demand that since then has become stronger. From 2001 to 2010,
China's annual consumption of gold grew at a 7.5% compounded annual growth
rate. This chart shows how China's demand for gold jewelry has increased from
just over 15.55 tonnes [500,000 ounces] in the late
1980’s to over 373.25 tonnes [12 million
ounces] at the end of 2010, in spite of gold going from $200 $1,650 an ounce.
At the same time, China
has emerged from a minor global player economically to the second largest
economy in the world with its sights set on being the largest. With its
breakneck growth of around 10% per annum over this time, the transformation
in China has been the envy of the rest of the world. Alongside this growth
has been a transformation of Chinese society. From a working class society,
we’re seeing the burgeoning growth of the Chinese middle class with a
commensurate growth in income.
To the gold
market, a more important statistic is the spending and saving patterns of
China. Like the Indian population, Chinese people are generally thrifty,
inclined to save rather than spend disposable income. The Chinese government
has always approved of their saving nature, but they have until recently only
had bank deposits as a safe place to save. Inflation has robbed many of the
benefits of savings and the Stock exchange –not for the ordinary middle
class man across China—has been too much of a gamble.
government not only lifted all restraints on the gold market but also
actively encouraged gold buying while stimulating the development of a
nation-wide gold distribution system through their leading banks. The number
of foreign banks now allowed to import gold has jumped. As the system of
distribution has reached countrywide, the choice of gold as a savings option
has grown. Over time, the rise of the gold price to the extent that
they’ve seen (i.e. - their savings in gold grow much faster than inflation)
has confirmed the wisdom of gold as a prudent savings and investment means.
Their traditional respect for gold, as money, was established in past
generations and continued right through to this day, now with government
blessing. Consequently, since the gold price took off in 2005, on a per
capita basis, per capita investment in gold in China has more than doubled
since 2005. Demand for gold as an investment has grown at a 14% annual pace
since the Chinese government deregulated the local gold market in 2001.
The Rise of Chinese Middle Classes
The rise in gold prices
and consumption has coincided with a dramatic rise in China's per capita
incomes. As you can see from the chart on China’s per capita income
from 1970 to 2010 the Chinese suddenly have a life. The rise from the $3,000
level in 2000 to roughly $7,000 in 2010 has resulted in the rise of a middle
class that is enjoying choices it has never had before.
In 2010, China became
second only to the U.S. with a middle class population of 157 million people,
according to the Organization for Economic Co-operation and Development
(OECD). Since then it has continued to grow at a rapid pace. With the U.S.
middle class comprising roughly half its population and China with a
population at 1.4 billion people and the U.S. at 300 million, the future
holds the possibility of a middle class being larger than the population of
not only the U.S. but including the Eurozone’s 400 million people, i.e.
700 million people. Yes, it’s mind boggling!
So not only
will the Chinese middle classes grow but their disposable income will grow
too. As you can see in the chart on the growth of the percentage of their
savings entering the gold market, this percentage will keep rising –this tells us that our projections are
likely to prove conservative!
Chinese Buy Physical Gold (not derivatives or gold shares)
A dramatic difference
between western investors and Asian ones is the belief in the metal itself
and not a derivative that is ‘related’ to gold. All these savings
in Asia are headed into the physical metal. In the developed world, only a
small proportion of investment funds find its way into gold bars, coins, and
pure gold jewelry. Consequently, the U.S. accounts for only 8% of gold
bullion demand whereas Asia accounts for more than 70% of gold coin, bar, and
pure gold jewelry demand. What impact will this have on demand for gold?
With a rising
percentage of savings going into gold and a middle class capable of growing
to twice the developed world’s middle classes, potential gold demand per annum bin China has the capacity to grow to
over 3,000 tonnes per annum.
The fact that
the People’s bank of China is buying all local production makes it
clear that there will not be enough gold available to accommodate this
Impact on Total Global Gold Demand
Total annual mine
production, at below 3,000 tonnes, is insufficient
to satisfy such demand and with scrap gold supplies at around 1,650 tonnes –not necessarily the amount available in
future years—it is impossible to escape the conclusion that the future
for gold is to see prices rise to the extent that is prompts current holders
to sell. Add to Chinese demand that of the rest of the world, and we can see
that prices have to rise to moderate future demand to the point that demand
matches this supply level –for there just aren’t any more major
easily-mined gold deposits out there to grow supply to this extent.
that these numbers have ignored central bank activity in the gold market.
These numbers have also ignored any reformation of the global monetary
system, which may include an incorporation of gold to bolster confidence in
currencies. (Some countries may feel it necessary to confiscate their
citizen’s gold for this purpose too.)
as Gold Hub
From these extrapolations, we can see that
China, in time, will become the heart of the gold world. The Chinese
government is moving towards China controlling what it deems important. This
includes the gold market. Already we’re seeing reforms to ensure that
the gold market holds its standards high and ranks next to the
professionalism of London. With demand at its current levels, gold imports
unrestrained and its own gold production now the world’s largest
national production level, China is inexorably moving to the heart of the
gold world. It’s therefore expected that China will aim to do what it
can to exercise administrative dominance over it.
Current gold market professionals
and market makers would do well to learn Mandarin Chinese…
Changes to the Gold Market, Asia Gold FIX