China controls the gold price

Despite beliefs by U.S. banks they are in the driver seat, Julian Phillips argues China has a firm grasp on the price of gold.

In addition to the excellent study of the Chinese gold market by the World Gold Council (WGC), which was recently released, we have received other reports on that ever-so important market that differ in viewpoint. We shouldn’t be surprised by this, not only because of the opaque nature of the Chinese gold market, but also the dearth of accurate statistics that are available on it. Yet, which ones are right is critical to our conclusions. Each paint very different pictures of the future of the gold price.

Nonetheless, what has come through the pages of this and other reports on the gold market is that China is not only the main force in the global gold market, but also that it is firmly in control. With the acquisition of so much gold in the last year and an ongoing persistent demand in the future, they have effective control of the gold price and the market. They play their control very cleverly so that it is not apparent.

You may be asking, so why isn’t the gold price at $2,000 or much, much, higher? It’s because they have found a way to buy gold without pushing up the gold price.

If we are to believe the numbers being put out by the Shanghai Gold Exchange, plus local gold production, government and local buyers absorbed just 400 tonnes short of the entire world’s newly mined gold. This leaves just scrap (a diminishing number at these prices) and all disinvestment (including the 880 tonnes from U.S. gold ETFs plus the 400 tonnes of physical gold sold by Goldman Sachs and J.P. Morgan Chase and both their clients, in 2013) left for the rest of the world.

2014 will be a different matter because the 1,280 tonnes sold out of the U.S. last year has gone and we do not expect it to return. This has reduced supply back to slightly more than 4,000 tonnes. Just this alone creates a demand bottleneck, which has to shrink if the gold price is to remain at current levels. If, of course, India eases gold import restrictions, then demand will expand by another 500 tonnes, thereafter. That supply is not available at current prices!

If the World Gold Council’s number of 1,132 tonnes of gold imported into China is correct, the gold price is likely to trade higher because of the loss of U.S. supply. If we are to believe the numbers delivered by the Shanghai Gold Exchange then the gold price cannot remain at current levels and 2014 will prove a watershed year for gold!

As well as being inscrutable, the Chinese are canny buyers. There have been no reports of Chinese central bank buying, because the People’s Bank of China does not buy gold directly. It uses agents who, when the P.B.O.C. decides it is in the national interests to revise their gold reserves, deliver the gold, bought on their behalf, through S.A.F.E., the agency buying for them.

We are certain China, through their selected bullion banks, are buyers of gold both for the retail market and for the ‘official’ in both London and New York ‘on the dips’. This ensures they are only seen by their bankers, when their dealers have stock to sell. We do not believe that China chases prices. As a result, the bullion banks, licensed to import gold into China, are not visible as Chinese buyers, but just as another professional acting for unknown clients, leaving China’s presence in the market almost unnoticed.

To ensure prices stay low, the gold they buy comes mainly from ‘off-market’ sources. And this is the key to getting volume at the right price. As noted in our last article, the gold price is not an accurate reflection of demand and supply. If China can source gold directly from refiners, gold miners and other markets and use a ‘reference’ price to price that gold, then there is no danger that the sheer volume of gold they buy will disturb the markets where gold is priced.

SEE ALSO: Unpacking the London gold fix

Many gold miners and refiners use the p.m. Gold Fix as a price used for contracts. It is no strange matter for this to happen. It by-passes markets and lowers costs. More importantly there are no on-market rumors inciting professionals to ramp up prices to make it difficult for the Chinese to buy.

China has been a buyer of gold mines across the world. The gold mined there will follow the direct route to China. What this pattern of buying does is to draw in a huge volume of gold, taking stock out of the market and away from traditional buyers.
A vital point that we need to make regarding China is;

China wants ounces of gold and will act to encourage that objective. Price must be used as a tool to encourage more supply.

If this is best achieved by lower prices, then China will act to ensure lower prices. If higher prices are what it takes they will act accordingly. The only word of caution here is that low prices enable the available discretionary savings of consumers in the retail market to buy a greater volume of gold than higher prices would.

While the leading U.S. banks believe they control the gold price and that it will move in the opposite direction to the state of the U.S. economy, the reality is that if China decides to lift prices it can easily do so because it can access more gold. If it prefers lower gold prices it can engineer the situation to leave them low. They have full control in this regard.

Neither U.S. banks, nor high frequency trading has the power to lower their control. Indeed it appears that the Chinese are taking full advantage of those in the U.S. who want to see lower gold prices and making room for them. What these market players are doing is ensuring that gold in the developed world is moving from west to east ahead of a time coming, in the near future, that will require as much gold as possible to be accessible to nations in a changing, turbulent, financial world.

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Legal Notice / Disclaimer
This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Julian D. W. Phillips makes no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of Julian D. W. Phillips only and are subject to change without notice. Julian D. W. Phillips assumes no warranty, liability or guarantee for the current relevance, correctness or completeness of any information provided within this Report and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission. Furthermore, we assume no liability for any direct or indirect loss or damage which you may incur as a result of the use and existence of the information, provided within this Report.

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