The Key Factors Driving Gold: Part 2

GAVIN WENDT: Part two of Gavin’s look at the positive factors are driving gold’s resilience.

China Remains the World’s No 1 Gold Purchaser

The latest GFMS data shows China maintaining its No. 1 position in terms of gold purchases for 2014.

Significantly, GFMS notes that Chinese imports of gold and deliveries from the Shanghai Gold Exchange (SGE) considerably exceeded the quoted consumption figure, owing to growth in gold leasing, increased holdings by commercial banks to back paper products and possibly some double-counting of gold due to round-tripping to Hong Kong.

Altogether the 20 nations included in the global Top 20 table account for almost 85 per cent of total global gold consumption and, interestingly, no less than 13 of them can be classified as being in Asia and the Middle East, with China and India between them accounting for 47.3 per cent of GFMS-calculated global consumption.

What’s also interesting is GFMS data with respect to the Top 20 gold consuming nations on a per-capita consumption basis.

India is only in 19th place, whilst mainland isn’t even in the Top 20.

The natural conclusion is that there is the strong potential for a huge percentage increase in gold consumption in both these nations, as per-capita wealth grows.

Official sector gold purchases during across the world amounted to 466 tonnes net, which was up 14 per cent from 2013 – and the second highest level since the end of the gold standard.

The Russian central bank was the biggest such gold purchaser during 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.

Something else worth conjuring with from the Chinese perspective is its accelerated efforts to make its currency, the yuan, a viable competitor to the US dollar.

This situation has in turn renewed speculation that the Chinese government has stockpiled gold as part of a plan to diversify $3.7 trillion in foreign-exchange reserves.

Bloomberg Intelligence suggests that The People’s Bank of China could have tripled its holdings of bullion since it last updated them during April 2009.

Its estimate of 3,510 metric tons is based on a combination of trade data, domestic output and China Gold Association figures.

To put this figure into perspective, a stockpile of this size would rank second only to the US on 8,133.5 tons.

Speculation has been growing that China could be preparing to update its disclosed holdings, as its policy-makers are currently pushing to add the yuan to the International Monetary Fund’s (IMF) currency basket – known as the Special Drawing Right – which includes the dollar, euro, yen and British pound.

The issue might come before the IMF’s meetings on the SDR, either during May or October.

The theory is that the Chinese believe that even a partial gold backing of the yuan will hugely enhance the global financial credibility of its currency in moving it to the next level in global trade.

Its inclusion in the SDR basket would be a part of this and, with the size of its economy set to overtake that of the US, its un-pegging from the dollar would further improve its global convertibility and help make it a de facto reserve currency as far as global trade is concerned.

The IMF still holds 2,814 tons and most central banks have some on their balance sheets, with Russia more than tripling its holdings since 2005.

China is the world’s largest gold producer and purchaser, however, the volume of metal held by its central bank when it last reported back in 2009 accounts for just one per cent of its foreign-exchange reserves.

These same foreign exchange reserves have surged more than fivefold within a decade – and are currently the biggest in the world – driven by China’s enormous export volumes over the past decade.

The natural concern for China is that most of its reserves are held in US dollars – and adding gold and other assets to its reserves would ease its reliance on the dollar.

Typically, the nations with the world’s most liquid currencies tend to hold a wide range of foreign-exchange reserves.

China’s capacity to expand its gold reserves has been reinforced by comments by Ashish Bhatia, the World Gold Council’s director, central banks and public policy, in New York.

His view is that it’s ideal for central banks to hold between 4 per cent and 10 per cent of their assets in gold, which compares with China at one per cent based on its last published figures.

If China continues to increase its gold purchases then this will naturally be hugely supportive for the gold price.

Russia Aggressively Expanding its Gold Reserves

The Russian central bank added one million ounces of gold (31.1 tonnes) to its holdings during March after a two-month hiatus, bringing its total reserves to 39.8 million ounces (1,237.9 tonnes).

Russia’s central bank’s strong gold buying pattern over recent years (which saw it purchase 150 tonnes during 2014 and 77 tonnes during 2013), is being seen by some as a potential geopolitical weapon and a way of adding credibility to its currency position.

Gavin Wendt is the founder of MineLife, publisher of the MineLife Weekly Resource Report

 

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