Nearly two weeks ago I was set to attend the Bloomberg Precious Metals Forum but was, at the last minute, unable to attend. From what I hear there were some interesting discussions and presentations. As ever, Lawrie Williams over at Mineweb provided some of the best coverage. I particularly enjoyed his briefing on Bloomberg Industries’ Global Head of Metals and Mining, Ken Hoffman’s presentation. Mr Hoffman presented Bloomberg’s official statistics on India and China’s gold demand and compared them to the global mining supply.
We have long pointed towards the large discrepancy between gold mining rates and gold purchases by India and China. As the above ground gold stock continues to increase by less than a few percent each year, one has to ask how this leaves the amount of gold that is available to be purchased given both China and India’s growing demands.
As Lawrie points out below, India’s gold consumption figures are still impressive, despite import restrictions and China’s figures are likely to be under-reported given the mainstream’s sources for information. Whilst physical gold demand is certainly down at the moment, gold mining supply is also likely to fall in the near future given the cost per ounce when mining versus the market price. It is also worth remembering that countries such as India and China approach gold investment in a very different fashion and a poor gold price combined with a stimulus-fuelled recovery does not put them off gold investment. A totally different approach to that seen in the majority of Western investors.
In opening last week’s precious metals forum in London, Bloomberg Industries Global Head of Metals and Mining, Ken Hoffman, kicked off with some of the latest stats which showed that China and India between them are consuming more gold than the world is actually mining. The Bloomberg figures suggested that China was consuming gold at a rate of 5.15 million ounces a month and India – even at a reduced rate through import restrictions – 2.85 million ounces a month, making a total of 8 million ounces a month. And these figures may even understate the case given the Bloomberg figures for China are based on gold imports through Hong Kong and China’s own production, whereas gold is also imported through other points of entry.
Meanwhile Bloomberg calculates global new mined gold output at some 7.44 million ounces a month making for a deficit of 0.56 million ounces a month.
Now the above figures would have been prepared before the latest April figures for China’s gold imports from Hong Kong showing a fall both month on month and year on year – although following exceptionally strong January and February figures.
But of course China and India are not the only big consumers of gold and this bears out reports from major forecasting analysts like GFMS that gold is fundamentally in deficit at the moment if one takes into account investor demand – even though this may be waning given the torrent of adverse media coverage based on price predictions from many of the major banks. Last year the gold price slumped, largely due to additional supply to the market through sales out of the major gold ETFs, but while sales out of the ETFs have ebbed and flowed this year so far it is highly unlikely such big sales volumes can be repeated this year. The general consensus is that much of the gold remaining in the ETFs is in much stronger hands now – while that which has flowed east is also in strong hands and far less likely to be put back into the market than that held in the West. So even though Chinese demand may be slowing, it remains very large by any other standards – and the return of positive, although still small, premiums on the gold price on the Shanghai market, currently reported at US$2-3 an ounce – suggest that demand is indeed remaining fairly strong.
Bloomberg analysts also predict that global gold output will fall around 1% this year, and should Indian demand return in strength should the new Modi government relax the current import restrictions, as many expect, the deficit in the fundamental supply/demand position for gold could be significant. While scrap sales of gold provide a lot of the balance – and have at times put the fundamental market into surplus, these are far lower at the lower gold prices being experienced at the moment.
Of course one of the big unknowns is whether China has been building its own gold reserves without reporting this to the IMF. Under Chinese logic this can be achieved by putting this gold into a separate account from its announced forex holdings and thus not having to report it. Bloomberg takes a calculated guess that it has indeed been building gold reserves and these are now likely to be nearer 3,000 tonnes plus than the reported 1,054 tonnes – the official level for the past five years. The suggestion is that the Chinese central bank continues to accumulate gold.
Overall, Hoffman commented that Chinese and Indian attitudes towards gold are very different from many investors and traders in the West and that people in those two nations understand the value of gold which is seen as having protected its holders from financial downturns for hundreds of years. He also pointed to Chinese’s longterm view, with Chinese state-owned companies investing in overseas gold mining projects, as they have been for copper, seeing these two metals as key to the future of the country’s economy.