US NATIONAL DEBT

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A Note on China’s Gold

November 8, 2013

Jeffrey Nichols, Senior Economic Advisor to Rosland Capital, had the following comments on the current gold-market situation and outlook:

It won’t take a collapse of the dollar or some doomsday scenario to catapult the price of gold well above its September 2011 all-time high of $1,924 an ounce. 

A decline in the greenback’s value and international prestige may be in the cards.  So, too, might troublesome inflation, a collapse on world equity markets, or another financial crisis of some sort.  But these are not necessary prerequisites for gold to resume its long-term price ascent. 

Indeed, not withstanding the possibility of further gold-price weakness in the next year or so, I am confident China’s insatiable appetite for the metal can single-handedly lift its price well above its historic high. 

Private gold investment was banned in China and the domestic market was tightly controlled for more than five decades following the Communist Party victory and ascension to power in 1949.  But, ever since the legalization of private gold investment and the gradual liberalization of the market beginning in 2002, China’s appetite for gold – reflecting both pent-up demand and rising prosperity – has been growing steadily year after year. 

In recent years, China’s central bank, the People’s Bank of China, has very likely also been a significant buyer of gold.  A few years ago, in April 2009, the PBOC revealed it had purchased some 454 tons (about 14.6 million ounces) over the preceding six years – an average of about 75 tons per year. 

Since then, there has been no official data or hard evidence of additional acquisitions – but we believe the central bank has continued buying regularly from domestic mine production and scrap refinery output perhaps as much as 50 to 100 tons or more each year.

Over the past few years, we have repeatedly expressed the view that China’s actual gold-mine production, secondary supply from old jewelry and industrial scrap, jewelry consumption, investment, imports and central bank purchases have each been more than indicated by the available statistics or generally believed by analysts of the gold scene. 

The China Mining Association (CMA) estimates the country’s gold production may reach a record 430 tons this year, up about seven percent from their 2012 estimate of 403 tons.   Meanwhile, total gold consumption is expected to rise at least 20 percent from 832 tons last year to over 1,000 tons this year, according to the China Gold Association (CGA).  

However, we believe mine production and supply from other domestic sources has year after year run well ahead of these “official” estimates – and this year’s total domestic supply will total well over 500 tons, possibly as much as 550 tons or even more. 

The bottom line is we really don’t have any idea what supplies from all sources add up to.   All we know is that total supply is significantly higher than generally believed!  And, since every ounce of this metal must go somewhere, total gold demand must also be higher than indicated by the available, but incomplete, data.

Even if the recent pace of demand – and the high level of monthly imports – proves unsustainable, Chinese gold accumulation will have a long-run bullish consequences that are not fully recognized by most other gold-market analysts and commentators. 

Simply put, China’s private- and official-sector gold purchases – whether sourced domestically or internationally – are unlikely to flow back into the world gold market any time soon . . . even if prices rise to stratospheric levels.  Indeed, Chinese investors, unlike many of their American and European counterparts, have exceptionally “strong hands” and are unlikely to sell their gold holdings, except under the most dire of economic or political circumstances.

About Rosland Capital

Rosland Capital LLC is a leading precious metal asset firm based in Santa Monica, California that buys, sells, and trades all the popular forms of gold, silver, platinum, palladium and other precious metals. Founded in 2008, Rosland Capital strives to educate the public on the benefits of investing in gold bullion, numismatic gold coins, silver coins, platinum, palladium, and other precious metals. Rosland also helps people who wish to protect their wealth by including a gold or precious metal-backed IRA in their asset portfolio. Click here for more information.

About Jeffrey Nichols

Jeffrey Nichols, Managing Director of American Precious Metals Advisors and Senior Economic Advisor to Rosland Capital, has been a leading precious metals economist for over 25 years. His clients have included central banks, mining companies, national mints, investment funds, trading firms, jewelry manufacturers and others with an interest in precious metals markets.