As the gold price fell almost 30 percent between January and June this year, the largest decline since 1983, some 585 tonnes of gold ETF holdings were liquidated as momentum driven investors exited the market. The price fall prompted physical demand in China to reach astonishing levels, however, as mainland consumers rushed to purchase the yellow metal.
The price collapse was seen as an unprecedented opportunity by many to restock gold assets, with Chinese “aunties”, a term of respect for older women who are generally in charge of household budgets, seizing the opportunity to stock up on gold items and seasonal gifts, purchases of which were normally scheduled for the later part of the year. This led to the frenzy in retail activity that was witnessed across the country in the second quarter. The groundswell in demand saw these aunties willing to line up outside retail stores literally for hours in a bid to get their hands on some form of gold product, be it plain jewelry (primarily 24-carat) or investment bars, and in many cases, led to outlets being completely wiped out of all inventory.
This unprecedented wave in consumer demand led to a surge in bullion imports into the country, generating a significant rise in trading volumes of spot contracts on the Shanghai Gold Exchange (SGE), with turnover for the contracts more than doubling in the first half. This was accompanied by a massive increase in delivery of physical gold out of the exchange’s vault and a sharp rise in daily premia, which hit an all-time-high of $56/oz on May 13, against a 2012 average of just $6.5/oz. Volumes also increased in Western markets and the gold futures and options contracts traded on New York’s COMEX saw significant growth in the first half of the year, with average daily volumes increasing by 11 percent.
The vast majority of bullion inflows into China emanate from Hong Kong which still serves as the main conduit into the mainland and often serves as a proxy for Chinese demand (although direct imports through Shanghai are increasing). Hong Kong’s gold imports from major bullion providing countries in the first seven months of 2013 totaled 919 tonnes, up a staggering 162 percent year-on-year in tonnage terms. According to Thomson Reuters GFMS research, Chinese jewelry fabrication surged by more than 40 percent year-on-year in the first half of 2013 to a record 345 tonnes, while demand for physical investment products jumped an astonishing 63 percent for the period to 246 tonnes.
The rate of expansion in gold demand across the Asian giant has been extraordinary in an environment of rising gold prices, with annual growth over the last decade averaging 10 percent year-on-year. Moreover, jewelry fabrication has risen by over 300 tonnes per annum in the last ten years, when most markets globally have witnessed a severe downturn. Indeed, global jewelry fabrication (excluding China) declined by 5 percent over the same period as increasingly expensive gold was substituted for by cheaper materials.
GFMS’ Gold Survey Update 1, which was published recently, suggested several main reasons why the Chinese were purchasing gold at such a fever pitch level earlier this year, and indeed across much of the last decade, explaining why gold plays such an important role in Chinese society. The main thrust of the report centered on consumers increasingly regarding gold as an alternative asset class and a safe method of wealth protection. In addition, the combination of rising income levels and rapid urbanization, coupled with concerns regarding real inflation and limited access to investment products (primarily in rural areas), has seen consumers (predominately female) hoard gold as a means of protecting their wealth. In more sophisticated urban centers investors have also been turning to gold as a means of diversifying assets as tight government controls on the real estate market, a low interest rate environment, and a poor stock market performance have limited investment options for the rapidly expanding middle classes of China.
So, will Chinese Aunties continue to buy at such a frenetic pace for the remainder of the year and beyond? It would seem unlikely, at least in the short term, unless we see another significant drop in the gold price. Recent field research found that having gorged on gold during the price corrections earlier in the year the Chinese market has come off the boil. Demand remains robust in the domestic market, however, with premiums on the SGE still trading around $17/oz, though given the level of stocking that was witnessed earlier in the year, it is little surprise that the market is currently catching its breath.
Longer-term, the role of physical demand from China cannot be underestimated. The country will overtake India as gold’s largest consumer this year at over 1,000 tonnes. Indeed, gold demand in tonnage terms has more than quadrupled over the past decade, while the dramatic rise in gold prices has seen the value of this trade increase by over 1,400 percent, to exceed $50bn per annum. As gold prices end their 13-year bull run we expect Chinese Aunties to play an increasingly important role going forward.
Thomson Reuters GFMS Gold Survey Update 1 is available to download here.