BullionVault Weekly Update
All the gold in China, again...
Tuesday, 25 June 2023
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All the Gold in China from Adrian Ash Director of Research, BullionVault
So APPARENTLY I was wrong.
Yes, it happens sometimes.
Not as often as my nearest and dearest might claim.
But in the matter of China's gold supply-demand balance, it seems commercial banks didn't see their customers pile into gold-linked accounts this spring, driving the price higher as demand for jewellery, coins, small bars and even ETF trust funds also jumped.
Not on the available data, at least. Which someone has finally gathered and crunched.
"At the end of 2023," explains economist Chen Long...
...formerly at widely-respected consultancy Gavekal and now co-founder of independent Chinese research consultancy Plenum...
"...they had roughly 1,016 tonnes of gold.
"However, their gold holdings have declined massively in the past two years, down about 700 tonnes in 2023 and 600 tonnes in 2022, only rebounding slightly in Q1 2024."
Indeed, "the big four banks cut their holdings in the past two years from 2,064 tonnes to 785 tonnes," says Chen, "with Bank of China cutting the most by 533 tonnes, and the smaller banks have cut theirs as well."
Chen's data come crunching the numbers in quarterly reports issued by China's 17 stock-market listed banks. That's something we haven't managed to do here at BullionVault in 2024. No one else we know has done it for 8 years or so, not in public. Chen's findings now confound what I thought was going on at this spring's new all-time record high gold prices.
My guess was that this year's rush into gold by its No.1 private-sector buyers must surely have included a surge in banking products backed by gold.
First, that's because China is the most advanced nation on Earth for everyone doing everything on mobile apps everywhere, including running their savings and investments.
Second, China's commercial banks reported huge growth in their customers' gold-linked account holdings when the No.1 consumer market really took off in 2010-2016. So this year's surge in gold coins, bars and even ETF demand would have seen gold-linked banking products surge in size as well.
Third, and with bank-account holdings not covered by the data specialists who produce supply and demand figures for the gold market, how else can we explain the gap between China's visible inflows and offtake? |
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No, this table doesn't include gold demand from the Chinese central bank. And rightly not.
On the official data, the People's Bank of China bought 27 tonnes between January and March. But the PBoC doesn't buy gold in China's domestic market (or so it says) and its purchases in, say, London don't show up in the import figures either, because 'monetary gold' is excluded from those numbers.
So the Chinese central bank doesn't show up on the demand side of our imbalanced balance above. Nor does our table have a line for China's scrap gold supply...
...not from old jewellery or micro-chips...
...because no one we know publishes data on that.
So if anything, the supply-side of our table is too light. That only widens the gap between how much gold flows into private-sector circulation and how much the private sector actually buys.
And that gap, according to Chen Long, wasn't filled by commercial banks selling gold-linked accounts to their customers. Or rather, not a certain kind of gold-linked product at least.
"The recent reductions were triggered by the commercial banks cutting commodity-linked derivatives services for retail customers...The regulators and banks have been much more cautious...The then-chairman of the banking regulator publicly warned in 2021 that 'people who speculate on foreign exchange or gold will have a hard time getting rich.' The same year, several large banks moved to tighten services for retail investors to buy gold. Some banks have completely suspended these services."
Such caution and clampdowns aren't news. China, let's remember, is run by an unelected dictatorship which sees its own survival as vital to the long-term safety and security of the nation. That requires tight military, police and political controls. It also means avoiding a financial crisis...
...such as the Western world got in 2007-2012...
...because wiping out people's savings is never a good look, and...longer-term...an uncontrolled crash would most likely hurt long-term economic growth for the world's 2nd biggest population.
That would, for instance, deprive younger Chinese citizens of work...
...including this year's 11 million graduates from university now needing a job.
Cue the stern warnings from Beijing this month about Chinese government bonds. Its central government debt isn't big. By value, the outstanding total equals less than a quarter of China's annual economic output, in fact.
But with GDP growth slowing as the real-estate sector slumps, that small pool of sovereign Chinese debt has found ever-more eager buyers in China's massive financial sector. And that has driven the price sharply higher...
...as shown by the yield which those bonds offer sinking ever lower as a percentage of the price which people are paying to buy.
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"From a macro-prudential perspective," said People's Bank boss Pan Gongsheng last week, "we need to correct and block the accumulation of financial market risks in a timely manner."
Most urgently, he warned, people buying bonds at these high prices risk a nasty crash...repeating last spring's Silicon Valley Bank crash in the United States...when interest rates eventually go up and the price of those bonds comes down as a result.
It's telling that Pan fears an SVB-style crisis. Most banking crashes come when borrowers cannot service their debts, often because interest rates have risen since they took out their loans. But Silicon Valley blew up because it had struggled to find any borrowers...
...just like Chinese lenders are currently struggling to find new borrowers...
...and so SVB was sitting instead on a pile of customer deposits which it had to park somewhere.
SVB chose US government bonds, among other stuff, buying Uncle Sam's debt at what proved to be the very top of the Covid Catastrophe, back when yields were low and prices were high.
By early 2023, the Federal Reserve had hiked interest rates from 0% to two-decade highs at 5% per annum. That meant bond yields also rose sharply. Meaning that bond prices sank. Making SVB unable to pay its customers the cash they had put on deposit.
Gold of course pays no yield. But its price, like China's government bonds, has jumped in 2024. So too has China's household and investor gold buying.
Maybe that's why the People's Bank says it bought no gold in May, snapping an 18-month run of publicly-reported purchases at ever-higher prices. Central-bank buying clearly encourages private investment. So if the PBoC thinks gold has got too hot, too fast, maybe holding off for a month might take some of the heat out of household demand?
Either way, the clampdown on derivatives accounts linked to gold...
...where the investor is in fact betting on gold prices...
...or perhaps simply on 'unallocated' gold accounts, where the customer gets price exposure but no actual ownership...
...means that China's commercial banks need to own less gold to cover their lower exposure to lower customer participation.
That is, of course, very different to what you enjoy by using BullionVault. Here you are nobody's creditor and no-one owes you anything. Instead, you own your gold (or silver, platinum or palladium) and nobody's financial troubles could deprive you of it.
That's why, when you study our balance sheet, you will find only $46 million of gold, silver, platinum and palladium on our books (page 40 of the 49-page PDF of 'Group of companies' accounts' at Companies House here) rather than the $4.5 billion in client holdings proven on the Daily Audit. Only a small chunk of the total belongs to BullionVault (and only so we can ensure there's an offer for you to buy whenever you wish 24/7). The vast bulk of the metal belongs to customers, not to BullionVault. So it doesn't appear on our balance sheet. Maybe a switch to 'allocated' gold might help explain a little of China's deepening gold mystery?
On Chen's maths, comparing supply against demand, "A total of 2,700 tonnes of gold has gone missing in China in the past two years...more than half of annual global gold production."
That is a lot. It's worth about US$200 billion...
"...so much that it is unlikely that one mysterious buyer holds all of it. There are several possibilities that could explain where it has gone."
Chen's possibilities include the People's Bank buying gold in the domestic market but not reporting it. Or maybe China's sovereign wealth fund, China Investment Corporation, has been buying gold and not reporting it either.
Another possibility "is that there are other buyers we do not see," he adds...again suggesting state-run demand. Or maybe some investors have switched from domestic to foreign banks "who also have gold import licenses [and] may have increased their [Chinese] gold holdings without making disclosures."
Or maybe, Chen suggests, China's own commercial banks haven't cut their holdings as much as their quarterly reports suggest? And maybe, we think here at BullionVault, that might be because their customers now want allocated gold, securely stored and insured in a vault in their name, rather than a credit risk or even derivatives product.
Look, China has, over the past couple of years, been living through a protracted real estate slump, something akin to a 'Lehmans moment' of fear, doubt and mistrust, with the stock market almost halving in value from New Year 2021 to February this year.
The web of who owes what to whom remains impossible to untangle, right up until someone goes bust and their creditors have to tell their own creditors that the whole thing is unravelling. And just as the Western world's 'global' financial crisis saw a surge in allocated gold investing after the Lehmans' crisis had hit, so China is now facing the very real problem of who to stick with the losses from the past two decades of over-development and the 'ghost cities' it has long been leaving behind it.
Who wouldn't want a little securely stored and insured gold bullion which they actually own outright?
More on this to come on BullionVault's GoldNews this week. Until then, big thanks for taking our mid-2024 survey if you did, and sorry for intruding if you didn't.
Results and forecasts to follow soon either way!
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| Adrian Ash Director of Research, BullionVault
Key data and market events since our last Update and for the week ahead: |
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