The eyes of the entire world will be focusing on China in the final few days of October. The Central Committee of the Communist Party will meet in Beijing from Oct 26-29 to discuss a new five year plan for the country’s economy which will be enforced between 2016 and 2020.
This will be a very important event considering the Chinese won’t want to lose their face and it’s unlikely they will reduce the growth targets. Keep in mind when the previous five year plan was revealed, China promised the markets it would double the size of its economy by 2020, and this would mean it cannot lower its growth target of 7% per year.
But, will the country be able to achieve that target? The economy has been losing momentum and even though the country reported a huge trade surplus of approximately 60 billion Dollar (or approximately $12B more than anticipated), but the import numbers for goods entering China fell by a stunning 20% and the sales numbers
So, yes, China will have to do ‘something’ to keep its economy going and one of the few instruments the policy makers can use are obviously the interest rates and make more money available to improve the access to cash in the financial system.
But what intrigues us even more is the question whether or not China will continue to buy gold. Even though its economy is no longer what it used to be anymore, China continued to purchase more physical gold to store it in its vaults. In September, the country added almost half a million ounces gold to its foreign currency reserves at a total purchase price of approximately $600M. That doesn’t sound like a lot of money (and the run rate is just $7-7.5B) per year, but there’s more to this story than just the headline numbers. In the third quarter of this year, China has added approximately 1.65 million ounces of gold to the vaults and remains on track to acquire more than 5 million ounces during the entire year.
Even though we all know these numbers probably don’t come even close to the true gold imports in China, it is interesting to see the gold import rate is actually increasing. In the six years in between China’s gold reserves update in 2009 and the update earlier this year, the average gold purchase rate was just 100 tonnes per year. That’s nice, but at 50 tonnes per quarter, China has DOUBLED the official buying pace.
Source: Wall Street Journal
But there’s more to the story than just that. In the Chinese case, it’s not just the ‘official’ gold import numbers that matter, but the total withdrawals of gold from the Shanghai Gold Exchange. Those numbers are showing us a much clearer picture as the total gold import in China in Q2 2015 was a stunning 216 tonnes (or approximately 4 times higher than the official gold imports).
That’s not surprising as the Chinese government has been slowly pushing its citizens to increase its exposure to gold and it definitely looks like a large part of the population has been obeying as the annualized total gold consumption in China is in excess of 25 million ounces of the yellow metal. Just to put things into perspective, in just ONE quarter, the total Chinese gold consumption was higher than the gold consumption in the USA in the ENTIRE year 2014. The previous image also shows the ‘official’ gold reserves are just a small part of the total gold reserves of the country.
Meanwhile, China’s best new friends, Russia, are still buying more gold as well, as recent filings with the International Monetary Fund tell us the country has bought almost 4 million ounces gold despite seeing the total value of its reserve assets drop due to the low oil price. Whereas the ratio of gold vs total reserve assets in July 2014 was just 9.83%, the ratio has now increased rather sharply to 13%.
The recent increase in the gold price should not be surprising nor be unexpected. Gold is the only monetary asset you can rely on during these uncertain days.
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