China's 2012 Gold Imports From Hong Kong Reflect 'Growing Appetite' For Gold

Last year it was reported that China had a huge jump in gold imports showing that China has an increasingly growing appetite for gold. This high level of demand shows an attempt to diversify its currency reserves and China is likely to continue this gold buying trend, according to experts.

Allen Sykora
2/07/2012 @ 1:37PM
Forbes

Chinese gold imports from Hong Kong declined sharply in December from the record levels of November, but nevertheless full-year data reflect a continuing trend toward rising demand from the country, analysts said.

China does not publish official gold-trade data, so analysts monitor imports to mainland China from Hong Kong as a proxy. China’s gold imports from Hong Kong fell 62% in December to 38.8 metric tons from a record level of 102.8 in November and 85.7 tons in October, according to Hong Kong’s Census and Statistics Department.

Still, for the full year, imports from Hong Kong totaled almost 428 metric tons, compared to 119 in 2010.

“This is impressive testimony once more to China’s rapidly growing appetite for gold,” said a research note from Commerzbank. “Given the high level of domestic demand and in order to diversify its currency reserves, China is likely to continue to import large quantities of gold in future.”

Mu Li, a commodity research analyst with CPM Group who tracks the Chinese market, said a number of factors led to stronger Chinese fabrication and investment demand for gold in 2010, which carried over into 2011. These include elevated levels of inflation in China, “relatively low real interest rates” and concerns about the global macroeconomic picture, she said.

“In 2010, there were increased government measures against speculators in real estate,” she continued. “That helped some investors start to look to alternative assets, including gold.”

Other analysts also said rising incomes in China lead to gold buying.

As China converts toward a capitalistic society, the middle class has developed an “insatiable” appetite for not only precious metals like gold but also diamonds, said Mike Daly, gold and silver specialist with PFGBEST. The citizenry is encouraged to buy tangible assets to protect some of their new-found wealth. “They’ve become real gold bugs over there,” Daly said.

Imports Rise In Months Through November Before December Decline

China’s gold imports from Hong Kong rose from early autumn into November. Much of this was anticipation for demand around Chinese Lunar New Year celebrations in January, analysts said.

“That is typically a time when people are going out and buying gold both for commemorative reasons and also investment reasons,” Li said.

Analysts pointed out that the upswing in Chinese demand occurred in conjunction with a sell-off that occurred in gold after the metal hit a record high above $1,900 an ounce in early September. So-called “bargain hunting” set in at the same time jewelry manufacturers and retailers were gearing up for expected Lunar New Year demand, Li said. The now-most-active April contract peaked at $1,925 an ounce on the Comex division of the New York Mercantile Exchange on Sept. 6, then fell back as far as $1,553.40 on Sept. 26 and $1,526.20 on Dec. 29.

“You started seeing some physical buying coming in from the Asian sector,” Daly said. “They were buying dips.”

This was followed by the decline in December imports. Analysts with Barclays Capital cited media reports of ample supply in the Chinese domestic product while spot demand slowed, reducing the need for imports.

Li pointed out that China’s gold imports also fell in December 2010.

“They want to stock up in advance (of the Lunar New Year),” she said. “If they determine they have enough stock…there will be less buying in December. It doesn’t mean there is less demand generally in the country. It just means that a lot of buying has occurred in advance.”

Some might interpret the month-on-month contraction in the December total as negative, said Edel Tully, precious-metals strategist with UBS.

“We, however, think the real outliers were shipments in October and November, which…were greatly in excess of previous months’ volumes,” Tully said. “And while December’s activity is the lowest since July, it’s still 245.2% higher (year on year). Here’s a statistic that should lay to rest any doubts over Chinese gold consumption: the 2011 trend of imports from HK was up 258% from 2010.”

Like others, she said much of the large November imports might have been buying ahead of the Chinese Lunar New Year celebrations last month, particularly to avoid high premiums.

“Nonetheless, we don’t think that reveals the full picture,” she said. “We’ve never dismissed the potential for official sector buying either, although the data certainly contains nothing affirmative in this direction. Bear in mind, too, that trade statistics do not typically reveal the black-and-white story of imports and exports; the grey data, often times more interesting, is not accounted for.”

Meanwhile, Tully said, the decline from November to December has been a frequent occurrence. In the last 11 years, December imports have been less than in the previous month every year except 2009, she said. “So it’s quite possible that there is a seasonal factor at play here.”

Analysts will be monitoring future Chinese data for indications on the trend in demand, particularly in the aftermath of the New Year celebrations, Li said.

“Starting in the latter half of 2011, we observed some slower increases in inflation in China,” she said. “The expectation is that the inflation level will continue to moderate in 2012. That may ease some of the upward support for gold demand.

“However, we do see a lot of interest from investors and consumers in general for both commemorative reasons and investment reasons….We still expect increases in Chinese gold demand for 2012 and for years going forward,” Li said.

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