image

Commodities

China retains crown as world’s top gold consumer, amid softening yuan and financial market volatility

Chinese investors looked to the precious metal as a safe haven in 2016 as the yuan weakened and stocks disappointed

PUBLISHED : Wednesday, 25 January, 2017, 5:36pm
UPDATED : Wednesday, 25 January, 2017, 10:55pm

China remained the world’s No 1 gold consumer for a fourth straight year in 2016 as a weakening yuan and increased market volatility underpinned investment demand, which partially offset a slump in jewellery purchases as the economy slowed.

Gold consumption reached 975.38 tonnes in 2016, down 6.7 per cent from 2015, according to data from China Gold Association on Wednesday.

China’s gold production also topped the world for a 10th straight year, rising 0.76 per cent in 2016 to 453.486 tonnes.

Among the consumption categories, jewellery buying declined 18.9 per cent on-year to 611.17 tonnes.

However, the investment demand for the precious metal grew rapidly, as investors sought out safe havens amid a declining yuan and financial market uncertainties.

Demand for gold bars jumped 28.2 per cent to 257.64 tonnes in 2016, while consumption of gold coins climbed 36.8 per cent to 31.19 tonnes.

“Appetite for gold coins and bars saw sizzling growth last year as consumers increased buying to hedge against a weakening yuan and a number of ‘black swan’ events, such as Brexit and Donald Trump being elected as the US president,” said Zhang Yongtao, vice chairman of China Gold Association.

The Chinese yuan dropped 6.7 per cent against the US dollar in 2016, the biggest annual decline since 1994. The country’s stock markets were among the world’s worst performers, with the benchmark Shanghai Composite Index down 12 per cent last year.

“International gold prices had a wild ride last year, as a strengthening US dollar and the Federal Reserve resuming its rate-tightening cycle both put downward pressure on the gold, while rising geopolitical tensions provided support to the precious metal,” the association said.

In 2016 gold prices rose 7.8 per cent to a yearly average of US$1,246.14 an ounce, compared with 2015’s average of US$1,156.19 an ounce. For the full calendar year gold was up 9 per cent.

The central bank has also increased its gold holdings. Gold held on reserve at the People’s Bank of China rose to 1,842.57 tonnes at the end of 2016, according to the statement by China Gold Association.

That’s up 11.1 per cent from the 1,658 tonnes held at the end of June, 2015, shortly before the central bank restarted its gold buying programme.

Meanwhile, jewellery consumption was dampened amid slower economic growth, Zhang said.

Zhang expected the demand for bullions and coins to grow further this year, albeit at a slower pace.

“Uncertainties will continue to boost the investment demand,” he said.

Nonetheless, Frank Lee, chief investment officer for North Asia operations at DBS Bank, expects mainlanders will embrace more channels for gold investment, such as the so-called paper gold, which refer to gold certificates issued by banks, futures accounts, or exchange-traded funds.

“Investors bear higher cost when holding physical gold including higher prices and safety box fees,” he added.

Ethan Wang, head of investment strategy at Standard Chartered Bank (China), forecast gold prices to trade between a narrow range of US$1,200 to US$1,300 per ounce this year.

He suggested investors allocate 10 to 15 per cent of financial assets to gold as an alternative investment.

Nonetheless, Wang warned that expectations of US interest rate increases could still put pressure on the metal.

Lee from DBS Bank cautioned that China’s rising domestic inflation may not offer much of a boost to gold prices.

“Despite signs of rising factory-gate prices, the increase is supply-driven due to cuts on overcapacity, and not demand-driven and it will take time to be passed on to consumer prices,” he said.

According to data from the China Gold Association, major gold producers, namely China Gold Group, Zijin Mining, Shandong Gold, and Zhaojin Mining, produced 40.1 per cent of the country’s mineral gold and 49.9 per cent of the total finished gold products in 2016.