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CHINA GOLD: MORE THAN MEETS THE EYE

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The gold world has lately been abuzz with news and speculation about the true volumes of gold supply, private-sector demand, imports, and central-bank reserve accumulation.

In recent weeks, every gold analyst and pundit seems to be jumping on the bandwagon.  But this is nothing new for our clients and readers of NicholsOnGold.

For several years now, we have suggested that China's actual annual gold production, consumption, and imports have been running considerably higher than that suggested by official and semi-official statistics coming out of the Asian giant - and that China's central bank has been accumulating many tons of gold each year but for now chooses not to report these purchases in the country's official reserve statistics.

Indeed, I've been talking about surreptitious gold accumulation by the People's Bank of China (the PBOC) ever since my speech to the China Gold & Precious Metals Summit in 2008 (see https://nicholsongold.com/2008/12/the-world-economic-crisis-and-the-outlook-for-gold-speech-to-the-china-gold-summit-december-4-2008/) -- and I've been reiterating this theme in speeches and reports ever since.Underestimated Supply

China's total gold supply from domestic mine production and other sources is, without a doubt, much higher than reported or discussed by analysts and observers of the Chinese gold scene. Actual gold mine production - and supplies from other sources - could easily be close to 400 tons and possibly much more.  Here's why:

  • The China Gold Association (CGA) numbers reflect production by their members only -- but omit gold mined by non-members. These include many small, often rudimentary, unofficial mining operations some of which are illegal existing in the "underground economy," no pun intended.
  • The CGA data also excludes production from mines owned and operated by the military, which is significant according to my sources. And not to be overlooked is by-product output from the country's copper, silver, and other metal-mining activities. Again, this is significant though hard to know just how significant.
  • Also missing from the CGA reports are the huge quantities of gold contained in copper and other precious-metals bearing concentrates imported and processed by Chinese smelters and refiners.
  • In addition to these unreported sources of supply, analysts and commentators seem to forget about secondary supply -- that is from recycling of jewelry, investment bars, and industrial scrap. Just to get an "order-of-magnitude" possibility, in recent years global secondary supply from scrap recycling has contributed more than one-third of total world supply. If scrap contributed only five or ten percent of China's total gold supply it would still be quite important.
  • Western analysts estimate China's total gold imports last year were around 490 tons -- but there is little mention of "illegal" imports -- that is gold smuggled into China. We know smuggling is quite significant in some countries -- Vietnam and India, for example. We can only imagine how many tons of gold in the form of tael bars, wafers, coins, investment-grade jewelry, etc. is carried into China each year by travelers and professional smugglers.

Central Bank Gold

Now, what about net purchases and total official reserves held by the People's Bank of China?

Chinese miners and refiners are required to sell each and every ounce of gold output to the state gold-buying authorities.  But, it seems that some of this (more or less the volume of unreported production, as discussed above) is retained by the PBOC and other government entities acting on behalf of the central bank.

It is not at all unreasonable to conclude that the Chinese government may be squirreling away perhaps 50 to 100 tons a year into accounts that will eventually be included in the country's reported official reserve figures - and one might speculate that these figures could turn out to be considerably higher.

In my most recent speaking tour on behalf of clients across China late last year and published on my website on December 15th (see https://nicholsongold.com/2011/12/797/), I said:

In recent years, China's central bank, the People's Bank of China, has also been a significant buyer.  Two and a half years ago - in April 2009 - the PBOC revealed it had bought some 454 tons of gold over the preceding six years, an average of about 75 tons per year.

Since then there has been no hard evidence of additional buying . . . but my guess is that your central bank continues to buy regularly from domestic mine production and scrap refinery output - perhaps as much as 50 to 100 tons per year.  For its part, the PBOC not long ago said it will "seek diversification in the management of reserve assets," possibly implying their intention to accumulate gold without actually saying so.