China’s Secret Vaults: Where Is All The Missing Gold?

Shu-Ching Jean Chen, Contributor
3/18/2014 @ 9:50AM |22,526 views
China’s Secret Vaults: Where Is All The Missing Gold?
China has recently become the world’s largest consumer of gold. Uniquely, it also ranks as both the largest producer and the biggest importer of gold. Yet a big question surrounds the true state of the Chinese demand for gold; the answer would determine how global gold prices are likely to fare. The expectation that Chinese investors will sustain a voracious appetite for gold has helped to spark a recent rebound in gold prices.

Speculation abounds about a large trove of gold that seems to be missing from the global market. Analysts calculate that up to 500 tons or more are stashed away, based on the difference between China’s domestic gold production of 428 tons in 2013 plus its estimated gold imports of at least 1,158 tons, and its annual demand of about 1,066 tons. The Chinese government does not release an import figure, so this number is disputed.
There are at least three ways to account for the mysterious gap in figures.
Most analysts believe it is clandestine buying by China’s central bank, the People’s Bank of China (PBOC), that is behind China’s record demand, even though it has insisted its gold reserves have remained steady since April 2009, at 1,054 tons. This accounts for just 1% of its official foreign reserves, but already makes China the world’s sixth largest holder of official gold reserves.
The gold-seeking analysts point to China’s history of murky financial dealings. When PBOC last hiked its gold reserves early in 2009 it did so overnight, in a big way, abruptly announcing that its reserves had nearly doubled to 1,054 tons, up from 600 tons. A deputy bank governor came out to explain that the increase was due to domestic recycling and purchases on domestic gold exchanges.
In addition to the central bank’s gold vault, there are two lesser known venues in China where gold could be stashed away, one of them (figuratively) underground.
First, Vice Chairman of the Gold Association of Guangdong Zhu Zhigang says that unknown quantities of gold have accumulated at twelve commercial banks that have received licenses since 2012 to import gold into China. They include two international banks, The Australia and New Zealand Banking Group Limited (ANZ) and HSBC, both of which were licensed in January this year. Their gold stocks are not publicly disclosed. Before 2012, only four big state-owned banks were permitted to import and store gold.
Second, domestic gold could be “on loan” to jewelry factories, mostly located in and around Shenzhen. This is a practice invented by Chinese mining companies loathe to sell to the market at prices they deem too low, as was the case in 2003 when the price of gold plunged by 28%.
Most buyers and sellers end up trading physical gold through the officialShanghai Gold Exchange, since companies that sell their gold outside the exchange are required to pay a 17% value-added tax. But instead of selling through the exchange at a low price, mining companies have come up with the idea of “loaning” their gold to jewelry factories in the hope of taking it back to sell on the market when prices rise.
China does not export any of its gold. There are no incentives for Chinese mining companies to export gold overseas, since gold is trading at a premium on the domestic market.
By the end of 2013 Chinese consumers had purchased a record 1,066 tons of gold, 32% more than a year earlier, according to the World Gold Council. The Council asserts there is “no double counting” in the figures for China and Hong Kong. Only Hong Kong and Shanghai are permitted to import gold into China; Hong Kong’s share, at 1,158 tons, is reckoned to be the larger of the two.
Last year, a mismatch in the restocking of gold by jewelry retailers caused a widespread shortage of gold in many cities. Consumers panicked at the empty shelves and queued up in a frenzy of gold buying when it finally became available, just as they had done with foreign milk formula after the scandal over tainted domestic milk in 2008.
The value and status of gold remain high in China, where it represents financial security. This is partly due to the tight control exercised over it by the Chinese government in the past.
Before 1949, only the Chinese central bank could import and export gold. A phased liberalization kicked in slowly after 1979, the year when sales of gold coins were allowed. In 1982 gold jewelry was permitted on the market, then in 2000, gold bars. In 2002, the Shanghai Gold Exchange opened for business.
China’s opening to the gold trade coincided with a long rally in the global marketplace, where the price of gold rose by more than six times since 2002, to over $1,300 per ounce. But it may be that 2013 will be remembered as the peak of the Chinese demand for gold, as Chinese consumers realize that the world is not about to run out of gold.
“This year is different from 2013. It’s possible that consumption will decrease gradually from now on. I think it’s reaching the peak. It’s possible for China to maintain an annual demand of 700 or 600 tons. The Chinese market is still large, but we are likely to be on a par with India’s, or even lower,” says Mr. Zhu of the Gold Association of Guangdong.
Mr. Zhu, who also runs a gold investment consulting company, says that gold no longer seems as sacred to Chinese consumers. As a gauge, he is promoting a popular investment strategy, that each Chinese household should own one kilogram of gold, worth about one quarter of a million yuan (around US$40,700), about the cost of buying a family sedan. At the end of 2013 there were 401.5 million households in China; that would suggest a national stockpile of 401.5 million kilograms of gold, or 401,500 tons, if every family was wealthy enough to pursue this option.
In a report issued in March, HSBC estimated that China has only a fraction of India’s entire gold stocks of 25,000 tons. So there might still be room for additional gold vaults in China’s vast hinterland.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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