China's gold demand

China’s gold shortage

Soaring gold demand in China has led to a supply shortfall that has widened 10 times since 2007.

China digs up thousands of tonnes of rock and ore each year, but it still cannot produce enough gold to keep up with the country’s soaring demand. Despite being the world’s biggest gold producer since 2007, China’s supply shortfall has deepened by nearly 10 times during the past four years.

Chinese investors remain attracted to all that glitters, even as the price of gold has soared. “The shortage in supply has been deepening very fast; from 48 tonnes in 2007 to 400 tonnes in 2011,” said Song Xin, chief executive of China Gold International, the listing unit of China National Gold, one of the country’s biggest gold producers.

According to the China Gold Association, China’s gold mines produced a combined 361 tonnes of the yellow metal last year, which was 5.8% more than the year before, but not nearly enough to meet the 33% growth in the country’s consumption of bullion, which totalled 761 tonnes.

The increased demand is highest for bullion and coins. “Our customers are high-net-worth individuals as well as common householders,” said Song. “They seem to have lost faith in the stock markets, so they turn to buy physical gold as an investment or as gifts for family members.”

Indeed, no commodity has more value to the Chinese than gold. Gold bracelets are the most popular gifts for newborn babies and brides, and gold zodiac statues are preferred gifts during Chinese New Year or any other occasion.

Moreover, China’s stock markets have been one of the world’s worst performers during the past two years, bond markets are still underdeveloped, deposit rates are negative in real terms and even the long-favoured property market has shown signs of wobbliness.

“China’s fast economic growth has meant that many people have accumulated lots of wealth,” said Albert Cheng, managing director of the Far East for the World Gold Council. “And they have to tuck the money somewhere.”

The Chinese government is also reckoned to be topping up its gold reserves on a continuing basis, even though China’s central bank rarely publicly announces its gold purchases, said Johann Peter Santer, managing director at Superfund.

Demand for gold is also high in Hong Kong, according to Santer. “It took me two years to finally get two gold panda statues from the Bank of China in Hong Kong,” he said. “Every time I went to the main branch, it was always sold out, until one day there were only two left.”

Santer estimates the price of gold will exceed $3,000 an ounce during the next two to three years. “This is good news for us gold producers; we are not worrying about our sales,” said Song of China Gold. “However, the costs of mergers and acquisitions are also growing.”

The company, which is listed in both Toronto and Hong Kong, has been actively seeking overseas M&A opportunities.

“We are looking to buy gold mines with an existing capacity of around 100 tonnes and good potential to expand further,” he said. “We are also interested in some prospecting projects and copper mines, since copper is also in big demand in China. In terms of regions, we like Southeast Asia, the US, Canada and some African and South American countries where Chinese companies already have a well-established presence.

“The investment environment in Southeast Asia is poor, but the region has very good resources and it is very close to China. The developed countries, although have very high standard on environmental and labour requirements and high requiring prices but the profits tend to be stable.”

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