Chinese Gold: Checks in, Never Checks out

China’s relentless growth has been powering the global economic recovery. What will happen when that growth engine slows down? We had a little taste of it this week.

Official data that came out over the weekend showed Chinese exports falling at the fastest rate since 2009, when the U.S. was in recession. Inflation is also running well below Beijing’s official target.

Add the pieces together and it looks like the chance for more 7.5% (or higher) annual growth could be fading. Key commodities that depend on Chinese demand are fading, too.

Copper, for instance, dropped to a nearly four-year low overnight before recovering some of the loss today.

More than a few analysts pronounced China dead the last few years. They were wrong — and could be wrong this time, too.

The Chinese government will release updated industrial production data tonight. We’ll see if it sparks more selling — or a quick recovery.

Gold bars

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At the end of Monday’s Snowden to Young Techs: ‘Save The Internet’ article, I mentioned the possibility China was hoarding gold to prop up its currency.

Below is one of the many astute responses I received. I added bold print to some of the author’s key points.

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Here is a list of key facts and professional estimates to know about China and gold:

  • China last reported its official gold holdings in April 2009 as 1,054 metric tons. There have been no China official gold holding figures since then.
  • Official gold imports to China via Hong Kong in 2013 were 1,108.8 metric tons (over 32 million ounces). Adding that to total China gold imports from all sources, including via Switzerland and Shanghai, combined with domestic gold production of 420-430 tons (13.5-13.8 million ounces) China’s total gold acquisition in 2013 was approximately 2,400 tons (77.1 million ounces). This is over 80% or more of the latest estimates of total global new gold output in 2013 of 2,900 tons (93.2 million ounces).
  • Switzerland’s four refineries are working 24 hours a day in three shifts to meet the demands of the Chinese, primarily for 1 kilo “4 nine” bars (99.99% pure), and experiencing difficulty sourcing gold to meet Chinese demands. The Swiss foresee an eventual squeeze in 2014.
  • As it is illegal to export gold from China, and yet the government is encouraging Chinese consumers to buy gold, this growing gold hoard will remain in China as part of their national wealth base.
  • In 2013, China passed India as the globe’s leading gold-consuming nation.
  • China does not buy gold for commerce. China buys it to build their sovereign wealth for future generations. Gold going into China will not come back to circulate in the globe, at least for the near future.
  • China uses only FOREX reserves for trading or buying assets abroad, especially its U.S. dollars, which it prefers to exchange for long-range acquisitions such as international petroleum, commodity, and industrial assets.
  • The Renminbi (Yuan) price of gold has risen since 2001 by 240%, from 2,200 to 7,500 RMB, making Chinese consumers very happy by buying gold the past 13 years at their government’s encouragement.
  • The RMB is now circulating freely within China’s bi-lateral currency trading agreements with Iran, Brazil, Russia and several other nations. According to Reuters, in January 2014 the RMB passed the Swiss franc to become the seventh most used world payment currency within the top ten currencies.

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Brad: This is fascinating data. It seems clear China really is hoarding gold, but we can only speculate on the reasons. The Chinese government and individual Chinese people may have different goals, too. Perhaps they will move to a currency backed by gold to compete with our world currencies that are backed by just IOUs.

Today the near-term gold futures jumped as high as $1,371.30 per ounce before settling slightly lower. The yellow metal is getting close to the $1,400 resistance Dan Hassey mentioned in his Gold & Silver Update last week.

Where do you think gold is going? You can send me a comment about gold or anything else.

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The U.S. stock market bounced this afternoon after some rough moments earlier in the day. Here’s what I see in the headlines…

  • Crimea is still simmering ahead of a vote this weekend on whether to secede from Ukraine. Ukrainian Prime Minister Arseniy Yatsenyuk met with President Obama today and will address the U.N. Security Council tomorrow.
  • Happy 25th birthday, Web! On this date in 1989, computer scientist Tim Berners-Lee published a paper outlining how to organize information with “hyperlinks” and “URLs.”
  • Fed nominee Stanley Fischer faces the Senate Banking committee for confirmation hearings tomorrow. We will watch carefully to see if his Jedi mind tricks work.

Good luck and happy investing,

Brad Hoppmann

Publisher

Uncommon Wisdom Daily

 P.S. Speaking of natural resources, it’s time to look beyond China. That’s because Tony Sagami has uncovered a company with a gas deposit larger than Australia’s GDP. Get the details on this “Dollar Dynamo” in his brand-new video presentation. Click this link to view it now.

 

Brad Hoppmann originally grew up in Florida, but has lived in Baltimore, Charlotte and New York as well throughout his career. Always an athlete, he played varsity football and water polo at the University of Florida and received All-SEC/SCC honors.