Gold Demand in Key Chinese and Indian Markets

China gold demand on the rise again but is that even helpful?

Over the past couple of decades, India, and then China, have been by far the world’s two largest gold consuming nations and their combined consumption has been key to the levels achieved by the US dollar gold price. Between them these two nations have probably accounted for a gold intake volume at least as great as the global total of new mined gold in some years. Indeed in the record 2015 year for Chinese gold consumption, that nation, on its own, recorded internal gold flows equivalent to over 70% of global new mined gold production.

However, last year, when the Chinese economy was drastically affected by the Covid-19 coronavirus pandemic, Chinese consumption slipped to around 35% of global new mined gold output. With Indian demand also weak, annual global gold consumption was largely supported by central bank buying and a massive intake of bullion into global gold-backed ETFs – or so it seemed. There is a theory, though, that the latter has just been primarily account adjustments by the big bullion banks in effectively transferring a significant proportion of their large gold holdings from a commodity account to an investment one due to internal policy changes. But even if this was the case, the highly visible ETF gold inflows would have had a positive effect on pricing sentiment.

The tail end of 2020, though, saw ETF inflows turn to outflows and much central bank buying activity disappear altogether. Thus the 2021 levels of Chinese and Indian gold consumption become of ever-increasing importance and interest. And it appears that both may be picking up nicely, but is this too little too late?

For example, the latest February 2021 gold withdrawal figures from China’s Shanghai Gold Exchange (SGE) suggest that the nation’s gold demand/consumption has been rising, possibly substantially, from that of the Covid-19 hit of a year earlier and is getting back towards the levels of 2019 – although still far short of the figures for the record 2015 year and even for 2016 to 2018. Given that February this year will have seen the SGE inactive for a full week for the Chinese New Year, which fell on February 12th, and the immediately following Golden Week holiday, the rise over the 2020 year, when the Chinese New Year fell in late January (25th), is substantial indeed with the SGE then closed for only a couple of February days that year.

The writer equates the level of SGE gold withdrawals as being indicative of China’s total gold demand, even though this is frequently disputed by some other Chinese gold analysts. However we would point out, in support of our premise, that the SGE annual withdrawal total comes out as being close to the sum of China’s own gold output (around 380 metric tons), plus known gold imports from countries which publish these figures in their export statistics, plus a relatively small allowance for gold scrap conversion and imports from unknown sources - in other words the total gold flow into China. As the country does not export gold, this has to approximate to Chinese annual gold consumption. Most other estimates fall well below these known cumulative figures suggesting that they leave out a significant part of Chinese gold consumption – still comfortably the world’s largest.

Table: SGE Monthly Gold Withdrawals 2017-2021 (Tonnes)

Source: Shanghai Gold Exchange, Sharps Pixley.

*Months incorporating Golden Week holidays when SGE closed for a full week
** Cumulative totals for first two months as reported by SGE

Regarding this year’s SGE gold withdrawals to date and their big increase over 2020 figures (80% up so far this year), it should be recalled that in the first half of 2020 China was in the throes of attempted control of, and initial recovery from, the Covid-19 virus pandemic, so figures back then are likely to be anomalously low. They did start to recover a little in the second half of the year, and from August onwards began to show increases on the rather weak preceding year’s figures. As the current year continues, with Chinese businesses and manufacturing pretty much back to normal, with any virus flare-ups being rapidly responded to, we would anticipate gold demand also coming back to near normality – not to the record levels of 2015, but definitely to a higher level than in 2020 and quite possibly higher than the already-falling 2019 monthly totals.

That other key gold consuming nation, India, also seems to have seen gold demand pick up in recent months and this will have been enhanced by some positive tax changes on gold imports. These may not change actual gold flows into India that much, but may enhance the official gold import figures at the expense of the high level of smuggled gold, which will have been largely uncounted by official statistics and thus effectively invisible to those compiling global gold supply/demand analyses. Switzerland, which has a history of refining and exporting a substantial amount of the world’s gold, for example, has recorded India as comfortably the biggest recipient of its gold exports for the past few months which serves to confirm the pick-up in demand there.

The perceived recovery in Chinese and Indian demand could not have happened too soon as far as the gold market is concerned.

Other gold demand sectors like gold ETF purchases and central bank accumulations have been turning down. Investor sentiment looks to have been in favor of seemingly ever-rising equities and bitcoin making them probably viewed as less risky places to deposit money and thus diverting investment capital away from traditional safe haven assets like gold.

There does perhaps look to have been a more nervous tone developing in equities over the past couple of weeks. The writer has continually warned against the likelihood of a day of reckoning ahead for equity markets once the realization dawns on the investment sector of the true impact on the economy of the virus pandemic. Even so the resultant downturn may not be as severe as initially predicted given that the economy has probably been rather more resilient than forecast but it could lead to more interest returning to gold investment – particularly if real interest rates remain very low to negative as they are at the moment.

The US Fed is, however, seeing the economy as remaining weak for now and is not planning any changes to its current accommodative policies. The dollar looks weak and could be trending lower. These developments should favor gold yet it is still drifting downwards. A massive turnaround could be due, but the force no longer seems to be with the yellow metal so don’t hold your breath. Markets tend to be about sentiment and that doesn’t seem to be in gold’s favor. The current gold price hiatus could thus be with us yet for some time to come given favorable economic elements no longer seem to have any positive effect. Longer term gold continues to look positive, but it may well mark time, or even drift some more, in the weeks and months ahead.

by Lawrence Williams

Lawrence (Lawrie) Williams is a highly regarded London-based writer and commentator on financial and political subjects, specializing in precious metals news and commentary. He graduated in mining engineering from The Royal School of Mines, a constituent college of Imperial College, London. He has contributed articles on precious metals to the Financial Times, Sharps Pixley, US Gold Bureau and Seeking Alpha among others.

The opinions expressed in this article are the author's own, do not necessarily reflect the opinions or views of Rosland Capital LLC or its employees, and do not constitute financial or investment advice or recommendations from the author or Rosland Capital or its employees. The author is compensated by Rosland Capital for his articles.