 |
| China Retail Gold Survey 2013: Results index |
| Methodology |
Commentators calling the decline of the Chinese economy clearly haven’t told the country’s gold market investors. China’s economy is growing at its slowest rate in three years – 7.5% in the second quarter – but Shanghai premiums on gold bullion stood at more than $30 an ounce above the international benchmark set by London pricing, at the time of writing in mid-July.
Why? Partly, this is because household consumption is a very low part of GDP in China, so it’s not so odd for demand to be increasing at a household level while overall GDP growth declines. But it’s also because physical demand for gold in China is robust both at the individual level and through central-bank buying. According to gold market observer Goldseek, gold exports from Hong Kong to China were up 68% year on year by early July.
China has its own gold market, the Shanghai Gold Exchange. And although this market is not yet a driver of the global gold price, it is becoming steadily more important in the world gold market.
Three contracts dominate gold trading on the exchange: Au99.95 (3kg), Au99.99 (1kg) and Au(T+D), which is also based on 1kg of 99.95% purity. Since 2011, total trading volume in the Au99.99 contract has exceeded the Au99.95, but both are considerably exceeded by the Au(T+D) contract, which now accounts for over 75% of activity on the exchange.
Although total volumes in Shanghai are tiny compared with Comex or London, there are a number of interesting facets to the market that suggest scope for greater influence in future. For example, SGE has a night trading session so it can offer a price in line with international trading; in 2011 night sessions accounted for one-third of total trading on the exchange. This clearly suggests an increasing engagement with world gold markets.
 |
It’s also interesting to note that delivery ratios are far higher in China than in other world markets. Delivery ratios – which reflect delivery of actual physical gold, rather than just contracts changing hands – hover between 30% and 40% in Shanghai, yet rarely top 5% on Comex. In April, SGE deliveries overtook mining production.
So it’s possible that, even if Shanghai doesn’t drive global gold prices, it could still have an influence. “Whilst the gold price is unlikely to be powered by the SGE,” writes Jan Skoyles, head of research at The Real Asset Company, in a July report, “as long as the vast volumes of paper gold exist on both Comex and London, we do believe that the SGE could end up driving the edge between the paper gold and physical gold market, and therefore disparities in price between what market participants would deem two different products,”
Still, paper trading in gold shows potential in China too. In June the first gold ETFs in China were launched by Goutai Asset Management and Huaan Asset Management, both of which will buy prompt-delivery gold spot contracts on the Shanghai Gold Exchange. The ETFs will be listed on the Shanghai Stock Exchange and, like other ETFs, will allow investors to buy and sell them on the same day.
The success of these ETFs will depend on just how closely married to physical gold – coins, jewellery, bullion – Chinese buyers really are. China is the world’s second-largest consumer of gold behind India, according to the World Gold Council, but that doesn’t necessarily mean people want to trade it in stock market form. But even if retail investors aren’t convinced, it is worth noting that institutional investors such as the National Pension Fund will be allowed to buy the ETFs too. Although the timing looked strange, Guotai, for one, argued that risks from further slides in the gold price were already factored in, so that any investor who can ride short-term volatility should do well in the longer term.
ICBC and China Construction Bank are the custodian banks for the new ETFs, and the first of those completely dominates our survey of the Chinese gold market this year, leading in most individual products and geographies, as well as for overall gold services.
It’s also worth remembering that China is now the world’s biggest gold mining and producing country, having ended the century-long domination of South Africa in 2007. China now produces more than 370 tons a year and might yet increase it, while the production of such rivals as South Africa, Australia and the US decreases. That cannot help but have an increase on supply-and-demand dynamics, and therefore, in the long term, the price.
And Chinese buyers appear to be indifferent to claims elsewhere in the world that gold’s best days are behind it. China has continued to buy and import gold, as have many other countries in Asia, despite the declines in the world gold price over the past year. “We are watching a fascinating battle play out between this army of Chinese retail buyers and the specs in the west,” Skoyles says. “The future of the gold price is there for the taking.”
