How Much Gold Does China Buy?

(November 5, 2013 - by Patrick Heller)

Yesterday, Du Haiqing, the vice general manager of China Gold Group (China’s largest gold producer) told a gold industry conference in China that China’s current gold consumption level cannot be sustained.

According to the China Gold Association, China consumed 832.18 metric tons (26.75 million ounces) of gold in 2012. In 2013, Du projected domestic gold production to be 430 metric tons for the year, none of which is exported. For the first nine months of 2013, China has imported 855 metric tons of gold through Hong Kong. Even if no more gold were imported after Sept. 30, that would still put 2013 demand at 1,285 metric tons (41.3 million ounces).

Du not only said that the current level of gold consumption is unsustainable, but that total demand starting in 2014 may fall below 1,000 metric tons (32.15 million ounces).

I suspect that not only was Du’s demand forecast wrong, but that he was deliberately lying when he made these statements. Sadly, China’s financial intentions are masked by hiding them behind statements of lesser officials, who are often engaged in misdirection. By having Du say that demand will drop, low gold prices will likely continue longer than they otherwise would. The result would be that China could buy more gold at bargain levels.

 China has become aggressive over the past two months in signing agreements to use its currency in international transactions in place of the U.S. dollar. The Chinese yuan is at a disadvantage versus the dollar because, for decades, it has largely been a restricted currency, circulating almost exclusively in the domestic market. One means to expand the international acceptance of the yuan would be to give the currency a gold backing. The actions of China’s central bank appear to be headed in this direction.

 China last updated the size of its gold reserves in 2009. Analysts vary in their calculations of how much gold has been added to reserves since then. However, all agree that the quantities have been massive. Depending on who you listen to, China likely has total gold reserves that would now rank it somewhere between second and fifth largest of any central bank.

China is constantly opening up the domestic gold market to make it easier for private citizens to acquire sold. On top of that, some analysts project that China’s central bank could accumulate as much as 5,000 metric tons (160+ million ounces) of gold in the next few years. This massive combined demand will not be met with annual domestic and imported supplies of less than 1,000 metric tons.

I can see only one reason why Chinese gold demand might decline. If the price of gold were to soar, at some point it would affect demand. The Chinese were regularly buying gold even when it topped $1,900 in September 2011. To me, the price of gold would have to surpass $2,000 in order to affect Chinese demand.

Consider yourself informed.