Spot the difference: There's a gold-buying mystery in China.
Gold imports to China in the last 3 months of 2011 totaled 227 tonnes or more. China's gold mining output added a further 100 tonnes of supply. Yet on the best available data, end-user demand in the Middle Kingdom only reached 191 tonnes.
You can see the gap – some 136 tonnes or more. Who's buying the difference? The Financial Times thinks it knows.
"China central bank in gold-buying push," announced the FT in a headline last week. "It does appear the People's Bank of China has been a significant buyer," said a Reuters columnist, repeating what he'd just read in the Pink 'Un.
So fill yer boots, Western investors! Beijing has got $3 trillion in foreign currency reserves, and at last it is out buying gold in the open market!
Or at least, it "could be", as two market-leading analysts were quoted below the headline. The "apparent surplus in the domestic market" might have something to do with central-bank buying, said Philip Klapwijk, head of Thomson-Reuters GFMS, the source of those end-user demand data. "There is absolutely a discrepancy in the...figures," the FT also quoted Marcus Grubb, investment director at market-development group the World Gold Council.
"The obvious inference is that the central bank is buying."
But jumping from that inference to a "gold-buying push"...?
The import, mining and demand data came from three different sources, the third of which (Thomson-Reuters GFMS) is unofficial, and aims to cover end-user sales in the world's second-largest gold market and its most populous nation. Not easy;
The demand data are highly likely to be revised – upwards – by GFMS, who supply the World Gold Council's quarterly Gold Demand Trends, from where the FT took the end-use numbers. Currently the best data available, GFMS's numbers have certainly been revised – upwards – quarter-on-quarter over recent years. But even on first release, China's jewelry and investment demand shows annual average compound growth of 36% since 2001. Try keeping track of that in real time;
Sure, a revision to end-demand of 136 tonnes will not happen. But would a 75% hike be any less likely than the People's Bank of China growing its stated reserves (still officially 1,054 tonnes, as they have been since 2009) by more than 13% inside three months that saw the gold price average $1,684 per ounce, its highest level in history outside the $1,702 record of July-October last year?
Our guess? We doubt that China's central bank bought one ounce in every eight sold worldwide during the last three months of 2011. We doubt it even bought a "significant" chunk of the missing 136 missing tonnes either. Not only because of that near-record high price. Nor simply because – having tried so hard to hide its gold-market bids to date – Beijing would surely work harder to cover its tracks today. No, we think Beijing's policymakers were not the "mystery" buyer because, starting this month, they went and made importing gold just a little bit harder for China's bullion brokers.
Importers now need to seek permission from both the People's Bank and its State Administration of Foreign Exchange (SAFE) – the very agency through which it bought gold between 2003 and 2009, when it last updated the world on its official holdings. So if it were pushing to buy gold – and already pushing to pay very nearly the highest prices in history – why would Beijing also want to temper supply?
"In the medium term we do know the Chinese central bank and other Asian central banks with large foreign exchange reserves have been increasing their holdings of gold," as Marcus Grubb of the World Gold Council told the Financial Times. Plugging some of last quarter's gap "is consistent with that." But plugging a "significant" portion, let alone the whole 136 tonnes as the FT's headline is at pains to imply?
Both the WGC's Grubb and GFMS's Klapwijk in fact added that other government agencies, such as sovereign wealth funds, or private-sector players like bullion banks, or investment institutions, or simple stock-pilers would be likely candidates, too. Supply-chain players would certainly make sense as prime suspects.
New Year 2011 saw a scramble to secure supplies push local prices sharply higher. Well ahead of last month's 2012 Lunar New Year holidays, the Hong Kong premium tripled to reach the same level, rising $3 per ounce above the world's benchmark gold price (i.e., the quote from London banks). Gold imports to China through Hong Kong then peaked in November – right in the middle of the "mystery" buying. They fell hard in December, and stayed quiet (according to anecdotal reports) as the festivities drew closer in January.
So, stockpiling in readiness for China's busiest single week of gold demand would make a very obvious inference. It could easily swallow 136 tonnes, too. Stock-piling is common in base metals and oil. Standard Bank's commodities team now reckon silver stockpiles in China are equal to 15 months of fabrication demand. And if Beijing were really on the bid for imported metal, then why, immediately after January's Chinese New Year celebrations – the single biggest event on China's gold buying calendar – did it set China's gold importers a new hurdle?
No doubt China is buying gold direct from its miners. South Africa did the same when it was No. 1 for annual production, and it's plain from Russia's steady accumulation that it's using the same route, as well. Such metal is then lacking for retail consumption, so to ensure lots of supply for what proved another strong Chinese New Year, importers booked early and often. Trouble is, gold imports through Hong Kong alone more than trebled in 2011, outweighing the country's domestic mine supply. So then, immediately after New Year – and only two weeks after trade-deficit hit India doubled its gold and silver import duties – the authorities moved to temper the flow of metal.
China's private gold buyers have needed no help from over-excitable headlines to date. But they have needed Beijing's blessing – and its policy on gold now looks conflicted, to say the least. Happy to deregulate since 2002, it's allowed private sales of gold to treble as a proportion of China's fast-growing GDP, reaching more than 0.6% in full-year 2011 when judged off the GFMS data. That private accumulation has enabled China to diversify its national holdings – "national" meaning just what it says in a state which remains very much controlled if no longer quite communis today. No doubt the People's Bank has also bought a little more gold for its own stash too, albeit adding a lot less than the 1,400 tonnes which GFMS reckon has gone into private-sector possession in the last two years alone.
Now China's massive trade surplus is fast shrinking, however. The rate of foreign-currency hoarding is slowing right alongside, but its gold imports just overtook domestic mine output for the year as a whole, let alone the fourth quarter. Building the central bank's gold reserves would only worsen that gap. Making a "push" to buy gold – and at near-record prices – looks a long way from certain.
Adrian Ash runs the research desk at BullionVault. Formerly head of editorial at Fleet Street Publications - London's top publisher of financial advice for private investors - he was City correspondent for The Daily Reckoning from 2003 to 2008, and is now a regular contributor to a number of investment websites.