China Goes Gold Crazy. Why Now?

Image credit: AFP/Getty Images via @daylife

Spurred by a sudden drop in prices, Asians in the last two weeks have gone on a gold-buying binge.  The Indians, the world’s largest net importers of the yellow metal, have been snapping it up of course, and so have the Japanese, now concerned about a falling yen and rising inflation.  Hong Kong residents descended on the stores, but none have been so enthusiastic in stocking up on the commodity as Chinese from the Mainland.

Mainland Chinese purchasers have been ferocious.  First, they emptied stores in their own country.  Caibai, Beijing’s largest gold merchant, had a queue 30 feet out the door on the morning of the 19^th.  “So many people in line,” remarked a customer in Nanjing, where one person splashed out 2.9 million yuan on ten gold bars each weighing a kilogram.  Retailers ran out of stock in Guangzhou.  The China Gold Association reported that on the 15^th and 16^th retail sales of gold tripled across China.  Daily sales soared to five times the usual level at one retail chain.

Global Banks Are 'Divorcing' China Gordon G. Chang Contributor

 
The Biggest Threat To China's Economy Gordon G. Chang Contributor

China Helped North Korea Target American Cities Gordon G. Chang Contributor

Now In China's Rivers: Decomposing Humans Gordon G. Chang Contributor

Volume on the Shanghai Gold Exchange, considered a proxy for the metal’s demand in China, surged, setting consecutive records of 30.4 metric tons on the 19th and 43.3 tons on the 22^nd.  The previous record was 22.0 tons on February 18 of this year.

As Chinese emptied the shelves in their own country, they also went south and swarmed shops in Hong Kong, sometimes in groups.  Chow Tai Fook, the world’s largest jeweler by market capitalization, said some stores popular with Mainland Chinese ran out of gold bars and that demand had not been as strong since the late 1980s.

Demand for “9999” bullion—99.99% pure gold—was five times normal according to Haywood Cheung Tak-hay, president of the Chinese Gold & Silver Exchange Society.  His organization effectively ran out of holdings as members tried to meet supply shortfalls.  “In terms of volume, I haven’t seen this gold rush for over 20 years,” Cheung told the Financial Times.  “Older members who have been in the business for 50 years haven’t seen such a thing.”

What’s behind the unprecedented surge in buying?  Obviously, the Chinese took advantage of a dip in prices—the deepest since 1983—but they kept on buying as the commodity clawed back some of its losses.  

Unlike the Japanese, they cannot be worried about a plunging currency.  Nor can the Chinese be troubled by climbing prices.  For one thing, the consumer price index has been signaling lower Chinese inflation in the months ahead.  In March, the CPI increased just 2.1% from a year earlier, compared to a 3.2% rise in February.  Of special importance were food prices, up 2.7% last month versus a 6.0% spurt the month before.  In Q1, prices increased just 2.4%, about the same rate as the previous quarter. 

Although Beijing’s CPI undoubtedly understates inflation, it nonetheless shows a general weakening of price pressure, something mirrored in the continually falling producer price index.  Because China is still a manufacturing-based economy, the fall in the PPI means the country is actually suffering deflation.  Producer prices fell 1.6% in both January and February and 1.9% in March.

A tumbling PPI is due in part to weakening commodity prices, but global prices are falling largely because of the stumbling Chinese economy.  And that brings us full circle because gold prices plunged on the 15^th in part because China’s National Bureau of Statistics had reported that Q1 GDP growth came in at 7.7%, well below consensus estimates of 8.0%.  

Moreover, the global sell-down on the 15^th—stocks took a beating too—would have been worse had analysts focused on Chinese electricity statistics, manufacturing indexes, and corporate results, all pointing to an economy growing not at 7.7% but in the low single digits. 

It’s probably not a coincidence that the Chinese were the biggest buyers of gold in the last two weeks and, aside from North Korea, China has the most fragile economy in East Asia at the moment.  The concern about the economy is evident throughout Chinese society. 

Especially at the top.  On Thursday, Chinese state media reported that the Politburo Standing Committee convened a special meeting to consider the economy.  Normally, the body takes up economic matters only at fixed times, the beginning, the middle, and the end of a year.  The last time it met to discuss the economy in an April was in 2004.

No wonder the Chinese are now stockpiling shiny yellow ingots, coins, and bracelets.