Chinese Gold Buying Moves Markets

Gold is knocking at the door of $1,800 for the first time in six weeks. Alas, thus far today, the solitary traveler has been refused entry.

The spot price has oscillated between $1,790 and $1,800 for the last 24 hours. Silver, meanwhile, is approaching its own round-number threshold. At last check, the bid was a few pennies below $35.

Ordinary Chinese are buying up gold in record quantities… at least if imports from Hong Kong are any indication.

The Chinese government is very careful not to disclose its gold imports… so the best we have to go on are imports via Hong Kong. And those numbers reached a record 56.9 metric tons in September.

Even more notable: The total for July, August and September is about 140 metric tons. The total for all of last year was 120.

And the buying spree isn’t over yet. “Analysts expect the September import surge to continue until the end of the year,” says The Financial Times, “as Chinese gold buyers snap up gold in advance of Chinese New Year, China’s key gold-buying period.”

This is the “love trade” in gold that U.S. Global Investors chief and Vancouver favorite Frank Holmes speaks of. While North Americans and Europeans buy gold out of fear, people in the Middle East, India and China buy it because it’s cultural tradition.

But now the “fear trade” is becoming a factor in China, too. “Investment demand for gold in China has been particularly strong this year as a hedge against inflation,” the FT adds.

“Chinese bank deposits offer negative real interest rates, and other outlets for investment have been limited as Beijing has curbed property sales and the stock market has performed poorly.”

Meanwhile, China’s state-owned gold miner is on a buying spree of its own. China National Gold Group is about to acquire its first foreign mine.

Right now, the company is keeping the location of the mine close to the vest. “It is a relatively large-sized project” in Central Asia, according to Jerry Xie Quan, vice president of subsidiary China Gold International Resources Corp.

Gold bugs might remember this subsidiary by its former name — Jinshan Gold Mines. China acquired a 42% stake in 2008.

And this is only the beginning of the acquisition pipeline: “Xie said China Gold was also negotiating potential mine acquisitions in Canada and Mongolia,” reports the South China Morning Post, “which are either in advanced development or close to starting production.”

China is already the world’s biggest gold producer. And it’s well on its way to toppling India as the largest gold consumer. According to J.P. Morgan figures, retail bullion demand from China and India amounts to 2,000 metric tons per year — about 85% of worldwide annual production.

So what’s the endgame? The Chinese government hasn’t formally declared its gold holdings since April 2009, when it announced there were 1,054 metric tons.

People in the know believe the government is taking all the country’s newly mined gold into its reserves without formally declaring it.

Put that together with all the purchases by individuals and, according to Lawrence Williams at, “the combined offtake… will soon be getting perhaps close to one-third of total world gold output and rising ever faster.”

“The logical conclusion,” he goes on, “is that China is building its total reserves within the country in terms of both its government holdings and as an investment for individuals, as it is convinced that the only way for the gold price to go is upward, and perhaps the only way for the US dollar and euro to go is downward.”

Addison Wiggin
for The Daily Reckoning