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China and Gold

A new global power. The world’s most populous country. One of the world’s fastest-growing economy, with the largest GDP measured by purchasing power parity. The world’s largest exporter and second-largest importer of goods. China. What are its links with the gold market?

China’s Gold Reserves

The size of China’s gold reserves arouses many emotions. The official holdings are 1.842,6 tons (as of May 2018), the sixth largest in the world (excluding the IMF’s stockpile). However, many analysts speculate that China’s gold reserves might be much higher than the official number, as the People’s Bank of China had not revealed its official gold reserves for years. Hence, people speculate that China plans to use its gold reserves to back the renminbi and does not want to reveal their true level. It might be the case, but investors should remember that: a) the yuan has a long way toward challenging the U.S. dollar; b) gold accounts for merely 2.4 percent of China’s foreign reserves – even a few times larger it would not be enough to back the currency; c) the country is one of the largest official holders of U.S. assets in the world, so it is not in China’s best interest to challenge the greenback and back the yuan by gold.

Chinese Gold Production, Exports and Imports

China is the largest producer of gold. In 2016, the country produced 455 tons of bullion (the second-largest producer, Australia, mined 270 tons in the same year). However, due to the enormous domestic demand, China’s gold output stays mostly in the country. Actually, China is the biggest consumer of gold: its consumption reached 975.38 tons in 2016, according to China Gold Association. Hence, China has to import a lot of bullion – indeed, the country is one of the biggest gold importers in the world. In 2015, Hong Kong imported gold worth $45 billion. Interestingly, it exported gold worth $54.1 billion (in 2016), but it was an export mainly to mainland China (Hong Kong is a major gold trading hub in Asia).

China’s Gold Market

China is the largest producer and consumer of gold in the world. However, it does not mean that China is a key player in the gold market. Why? Well, the annual gold demand and supply reported by the World Gold Council are only a tiny fraction of gold that is traded in London and New York, the largest market places for gold where the price of gold is formed. So, although the share of Chinese investors operating on these markets is unknown, we believe that Western investors and Western institutions remain the key players in the gold market.

China’s Economy and Gold

Everyone knows that when the U.S. sneezes, the world catches a cold. However, the importance of China’s economy has been recently rising. The best example was 2015-2016 China’s stock market turbulence, which caused a decline in commodity and equity prices around the world, erasing more than $3 trillion in value from global stocks. The devaluation of yuan and the plunge in the Shanghai Stock Exchange during summer 2015 and later in January 2016, set off a global rout, pushing up the price of gold. However, as one can see in the chart below, there is no clear relationship between China’s stock market and the gold prices.

Chart 1: The price of gold (London P.M. fix, red line, left scale) and Shanghai Stock Exchange Composite Index (green line, right scale) from 1997 to 2015.

The price of gold (London P.M. fix, red line, left scale) and Shanghai Stock Exchange Composite Index (green line, right scale) from 1997 to 2015

The key takeaway is that although China is an important player in the physical gold market, its impact on the gold prices discovery process remains limited. Gold is more sensitive to the American developments, such as fluctuations in the dollar’s value or in the level of U.S. real interest rates.

We encourage you to learn more about the gold market – not only about the link between China and the yellow metal, but also how to successfully use gold as an investment and how to profitably trade it. Great way to start is to sign up for our Gold & Silver Trading Alerts. If you’re not ready to subscribe yet and are not on our gold mailing list yet, we urge you to sign up. It’s free and if you don’t like it, you can easily unsubscribe. Sign me up!

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