In the old days unexplained rallies in the gold price would be attributed to "hedge fund buying" with an insouciant shrug of the shoulders. Meanwhile a bounce in the price off a support level might be supposed to be "Indian buying" coupled with the words "bargain hunting" or the more evocative "bottom-picking."
There was often some truth in those suppositions.
Today gold strength is normally ascribed to the Chinese and with good reason. Hong Kong imports rose by a massive 20% in November over the previous month — which is a trebling over the last 11 months. Hong Kong imports rose from 86 tonnes in October 2011 to over 102 tonnes in November 2011. China exceeded Indian demand for the first time in the last quarterly report issued by the WGC in its World Gold Demand Trends.
All the more surprising then to report that during our visit to Shanghai in December most gold shops were largely empty of clients.
Anecdotal though it is—- we scarcely saw a single client in a gold shop during our weeklong visit. Fine, it was only a week and buying activity could well have been in another region of the country. There is another possible explanation and that is that much of the buying is not retail but by the Chinese banks and most probably the Chinese Central Bank — the People's Bank of China or PBOC.
The PBOC last announced that its gold reserves were 1,054 tonnes two years ago before quietly adding that it had accumulated and additional 454 tonnes of gold since 2003, much to the markets surprise. China holds the world's 5th largest gold reserve but well below what we would expect compared to its peers and compared to the size of its currency reserves. In fact the figure should be expected to be closer to 4,000 tonnes (to do this China would need to buy the entire global gold mine production for the next year or acquire as much gold equivalent to the success of the gold ETF). Either way, if China is quietly acquiring gold to boost its reserves it has a long ways to go.
Encouragingly for gold bull's not only does this provide great support to the gold price, but exporting of gold is banned so this metal is very unlikely to come back to the international market.
It is well known that the Chinese authorities are keen to diversify their reserve holdings away from the risks associated with holding currencies (in particular the US dollar and the Euro). Buying gold is a natural extension of that view as gold has demonstrated time and time again its unique ability to hold purchasing power parity — it is a wealth preserver which sits central to the role and ambitions of a Central Bank.
As one headline aptly put it today "Don't believe in gold? That's OK, Just leave it to the Chinese" — couldn't agree more.
Norman is the owner and chief executive officer of the London-based gold broker Sharps Pixley Ltd.