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China's Gold Imports From Hong Kong Surge to Highest Ever? - PBOC Buying?

FX Street,

11 January, 2012

Demand for gold bullion in China continues to surge.

Mainland China's imports from Hong Kong surged to 102,779kg/oz from 86,299kg/oz in October. This is a 20% increase from the already high number seen in October and a 483% y/y increase.

The run into Chinese Lunar New Year has again seen higher than expected Chinese demand for gold and China's voracious appetite for gold is surprising even analysts who are positive about gold.

As Chinese people's disposable incomes gain and concerns grow over inflation and equity and property markets, Chinese consumers and investors are turning to gold as a long term investment hedge.

There is informed speculation that commercial Chinese banks may have taken advantage of the recent price dip to build stocks of coins and bars and accumulate bullion.

China's demand for physical gold bullion has rocketed past India with the country now overtaking India in the third quarter as the largest gold jewellery market according to the World Gold Council.

There is also informed speculation that some of the buying was from the People's Bank of China with one analyst telling Bloomberg that “there is always the possibility that some purchases were made by the central bank.”

As we've stated in the past, the PBOC is gradually diversifying their huge FX reserves and likely will announce upward revision of total gold reserves again in the coming months.

Whether official buying is responsible for the huge surge in gold imports from Hong Kong is more difficult to ascertain The Chinese Central Bank does not release their figures on gold purchases.

As of June, 30, 2009, they held 33.59 million ounces or 1,054 tons. This is the 5th largest holding by country but some officials are on record with regard to Chinese aspirations to hold as much gold as the Federal Reserve's 8,100 tonnes of gold reserves.

What is particularly bullish about the import data is that there is a ban on exporting gold from China so gold bullion is in strong hands in China.

Platinum group metals rose a third straight day due to concerns on supply disruption in South Africa, as the national grid warned about extremely tight power supply in January.  The gold-platinum spread narrowed to just below $165 an ounce, its smallest in two weeks. The price of platinum has been lower than that of gold since September 2011, as gloomy economic outlook dampened sentiment on platinum, while gold's safe-haven appeal helped limit its price decline.

Gold Spot $/oz - 5 Days

Finally, markets were looking forward to a meeting between German Chancellor Angela Merkel and Italian Prime Minister Mario Monti later in the day in Berlin, while IMF's Christine Lagarde, is to meet French President Nicolas Sarkozy in Paris. Markets are also watching Spain and Italy’s plan to sell as much as EUR17 billion in debt on Thursday and Friday respectively.

The continuation of the eurozone crisis and risk of global financial contagion will continue to support gold's safe haven status.

Why Has Gold Been Down?

Outlined in this article are some of the reason as to why gold has been falling in recent months.  (On top of these someone a bit closer to home, Bron Suchecki of the Perth Mint, has outlined how Indian demand has been a big factor too.) So, has the bull market in gold finished?  Well we agree with everything Jeff Clark has to say in the following article – but in particular that we need to look at the longer term picture.  While he is discussing US dollar priced gold, we’ve put together a chart of gold in NZ dollars over the past 3 years.  While there has been a significant fall, we can see this is not the first time in recent history that gold in $NZ has taken a tumble.  And again it looks like gold might well have found a bottom pretty much right at the start of the New Year near it’s 200 day moving average (the red line in the chart)…

From Gold Survivial Guide, NZ

By Jeff Clark, Casey Research

After all, in spite of some short-term fixes, there remains no real resolution to the sovereign debt issues in many European countries. We’re certainly not spending less money in the US, and now we’re bailing out Europe via currency swaps with the European Central Bank. Shouldn’t gold be rising?

Yes, but nothing happens in a vacuum. There are some simple explanations as to why gold remains in a funk.

1.  The MF Global bankruptcy, the seventh-largest in US history, forced a high degree of liquidation of commodities futures contracts, including gold. Many institutional investors had to sell whether they wanted to or not. This is similar to why big declines in the stock market can force funds and other large investors to sell some gold to raise cash for margin calls or meet redemption requests.

2.  The dollar has been rising. Money fleeing the Eurozone has to go somewhere, and some of it is heading into US bonds, which means first converting the foreign currency into dollars.

3.  It’s tax-loss selling season, something that’s also impacting gold stocks. Funds and individual investors are selling underwater positions for tax purposes. Funds also sell their big winners to lock in gains for the year and dress up quarterly reports.

These forces have all acted to depress the gold price.

Notice I didn’t say that gold has suddenly become viewed as a poor safe haven. Nor that many of the world’s major currencies are no longer being debased… nor that global sovereign debt issues are resolved… nor that interest rates are positive. No, the fundamental reasons for owning gold are still intact. So don’t let the selling depress you.

Let’s put gold’s recent price action into perspective. It peaked on September 5 at $1,895 (London PM Fix) and has thus been in decline for about three months. Yet look at the bull market’s biggest three-month correction in relationship to the ultimate trend.

Gold fell 20% from August 1 to October 31, 2008, the biggest rolling three-month decline in our current bull market. And yet, it eventually powered much higher, in spite of many investors and industry experts thinking it had peaked at the time. The final quarter of 2011 ended down 5.5% over the previous quarter.

The point? Don’t confuse short-term volatility with long-term forces. The investor who looks only at today’s headlines is prone to making ill-timed decisions.

I realize that prices could trade lower – but this is why we keep a high level of cash. By the time this bull market is over, our current pullback will probably look something like the small red box in the chart above, with far higher prices in the intervening months and years.

Which makes current prices a buying opportunity. I don’t know if we’re at the bottom of our recent decline or not – but I do know where gold and silver are ultimately headed Casey Research’s Chief Economist and Editor of The Casey Report, Bud Conrad, is convinced gold will hit $2,000 in the first half of this year. If he is right, the opportunity to buy at today’s levels will be fleeting.

In the meantime, stay the course with your precious metals investments, no matter how the short-term picture looks. Gold stocks remain undervalued, and these are turbulent times. They appear to be far from over. Gold remains the #1 asset protector.

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