Increasing demand forgoldby Western investors as evidenced by rising ETF holdings has been the key driver for bullions resurgence in 2016, and now consumption in China also appears to be gaining steam.
One of the most high-profile signs of Chinas continued focus on gold is news from the Peoples Bank of China that itadded a half-million ouncesof bullion, or about 15.6 tons, to its reserves in June, bringing its officially reported holdings to 1,823 tons.
The move is especially significant because the central bank refrained from buying any bullion in May, raising eyebrowsthat perhaps a key source of demand might be drying up. The June purchase, however, eased those concerns, and the PBOC has now purchased the metal for 11 of the past 12 months. Moreover, its latest addition came in an environment of rising prices, meaning that the banks priority was on acquiring more metal rather than waiting for a strategic dip.
Shanghai activity down but not out:Meanwhile, on the Shanghai Gold Exchange, withdrawalsreached 138.5 metric tonsin June, bringing the total for the first half of the year to 973 tons, down from the1,178 tons registered during the same time last year.Though that pace of consumption doesnt suggest a new record this year nor a match of 2015s record2,596 tons, it remains a robust figure.
Thanks to the work of gold analyst Koos Jansen, withdrawals on the SGE are now seen as a more accurate measure of overall Chinese demand than import-export figures from Hong Kong, which only give a partial snapshot.
Confidence in continuing demand:Other sources agree that Chinese gold demand will be sustained. Gold investment rebounding in China,reada July 4 headline in the China Daily. And the World Gold Council which compiles demand figures slightly differently from analysts who stick to the SGE withdrawals data also is bullish. We have quite a confidence that the investment market will grow more healthily in this current situation, and in terms of the overall market demand situation in China, we have confidence that we at least keep a current level of demand around a 1,000 tons of gold, WGC official Roland Wangtold Chinas CCTV.
Brexit seen as bullish for commodities:And besides ongoing Chinese central-bank demand, speculators there are increasinglygetting in on the act. Holdings in Chinas largest gold-linked ETF recently have hit record highs, and trading volumes on Chinese commodity exchanges are surging.
The return of massive trading volumes in Chinese commodities markets was triggered by Brexit, with investors believing that global monetary easing and a pause in U.S. interest rate hikes are very likely and would be bullish for commodities, Cheng Xiaoyong of Baocheng Futures Co.told Bloomberg.
But regardless of ultimate effect of the Brexit on global markets, China has long been preparing to make gold a key element of its massive infrastructure-boosting program known as the new Silk Road.
$2 billion mining deal mulled:Whats the new Silk Road? Its Chinas plan for two interconnected infrastructure networks to better connect its economy with those in the rest of Asia, the Middle East, Africa and Europe, The Wall Street Journalreportedin 2015. One is the Silk Road Economic Belt, an overland route running through Central Asia, and the other is the 21stCentury Maritime Silk Road, which will traverse the South China Sea and Indian Ocean.
Already the largest gold producer in the world, China has long been gobbling up mines and raw materials in foreign countries, or else establishing strategic and diplomatic ties with resource-rich nations in Africa and elsewhere. Increasing its stockpile of gold allows China to implicitly back its currency with precious metals and raise the yuans stature as a potential rival to the U.S. dollar.
Now Bloombergis reportingthat Chinas $40 billion Silk Road Fund is eyeing Glencores huge gold mine in Kazakhstan and its prepared to offer as much as $2 billion for it.
Chinese miners are competing to secure gold assets, because theres a consensus that domestic demand will far outstrip local supply due to fast-growing investment demand, said Wang Rong of Guotai Junan Futures Co. The valuation of gold assets might still have potential to rise given the bullish outlook in the bullion market now.
And so far in 2016, that bullish outlook for gold is largely being fueled by Western investors seeking exposurethrough ETFs. If some of thedire economic forecastsfor China actually start to come true, look for that Western demand to increase even further and for the Chinese to seek protection en masse in the yellow metal that is culturally engrained in their national consciousness as the best way of storing and protecting their wealth.