China to India: The Global Value of Gold

March 28th, 2014
in gold, syndication

Written by David Parkman

As import regulations dissuade the purchasing gold bullions and finished gold products in India, China takes the lead in gold purchases. Topping out at 1,176.40 tons last year (2013) the demand for both jewelry and bullions has made China the biggest importer and exporter of gold in the world.

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What does this mean for China?

Following a supply crunch in early 2013, China has bounced back granting licenses to import gold to two foreign banks: ANZ and HSBC. This move, coupled with the drop in prices and increased demand for gold jewelry and bullions in China, has boosted the importation and selling of gold. This isn't even accounting for the amount of gold that the Chinese government has been rumored to be stockpiling. However, this accumulation of foreign-exchange reserves should be slowed by the Federal Reserve's tapering of stimulus bond selling.

With China looking to diversify their investments after the US Federal bank started reducing the sale of treasury bonds and the euro zone crisis, and low gold prices; it was a no-brainer. Even though demand in China is at an all-time high, the consistent purchase of gold over 1,000 tons may be unsustainable for the long-term. Regardless, the demand for gold in China is at an all-time high with demands for about 246 tons recorded in January and no sign of demand decreasing, China will be in a state of purchasing all the gold that can be supplied to meet demands of their citizens. The normal purchase level for China may have increased for the time being due to the expanding middle classes interest in gold jewelry and the apparent stockpiling efforts of the government., but this spike in demand creates the danger of gold prices spiking beyond the ability of the Chinese middle class being able to afford and a subsequent drop in sales and demand. If that happens, the Chinese government will have a stockpile of gold that has the possibility of being sold at a loss or, at best, held until it can be released at an even cost to their purchase price.

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What does this mean for India?

A very different story from this time last year as India is suffering under government sanctions on the importation and exportation of gold and there is no relief in sight (except in might's and maybes). As gold supplies are spread thin, the importation of jewelry have increased due to cost and demand; strangling the import of gold bullions. Since it is more economical to import finished jewelry, the manufacturing process has been sent overseas with China being one the suspected trade partners. Even with the 15% import duty and 1/5th of finished goods required to be exported, it is still a cheaper alternative to buying gold bullions to use.

Unfortunately, it seems that gold is finding its way to India by less than reputable means and in increased amounts. In the past couple of months, (January and December) approximately 50 kg of gold has been seized at Tatopani with intelligence indicating that it was being moved to India. To counter this, the details of any purchase of gold (bars of jewelry) over 500,000 rupees (Approximately $8,000 USD) have to be recorded and sent to the government. Even so, if the increase desire for gold in China continues, prices may increase and further reducing the amount legally imported by India unless the import taxes are reduced/dropped.

With a strike on the way by the Indian gold jewelers and bullion dealers, India has to come to some agreement that benefits both the government and the jewelers. With three tax increases last year creating a spike in prices, about $160 above the London cash price in December, India has not solved their trade deficit problems and has exacerbated the gold smuggling problem. Demand for gold in India has not slacked, the World Gold Council projects India will import 900 to 1,000 tons this year, but the high taxes and tariffs will also increase the demand for smuggled, tax free gold. Unless an agreement can be made, India will not see improvement of their trade deficit because the jewelers and gold suppliers will start looking elsewhere for their gold supplies.

What does this mean for Gold?

Currently, this central bank trend of purchasing gold has been bullish for prices; it is hard to say what other factors might be contributing. For the near future, the price of gold can be expected to stay above $1,200 per ounce, by all accounts India will reconsider their import sanctions at the end of March (The end of their fiscal year), at which point, the price of gold may rise due to the renewed interest in importing bullions instead of jewelry. Regardless, the interest in gold still remains strong in India, it's now a matter of where they will purchase their gold, rather than how much they will purchase.

Hopefully, this increase in interest in precious metal investing from China and the possibility of India's market opening back up will keep gold prices stable and reassure skittish investors that it is still a bullish market and the most stable investment resource. With the recent drop in Bitcoin value, the reduction of Treasury bond sales, and the Euro Crisis, Gold remains true to its standard as a sound investment regardless of the global market.

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