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Friday, April 25, 2014 1:28 PM


Reader Question on Shadow Banking and Gold Buying in China


Reader Jason pinged me with a MarketWatch article Will China Drop Gold Next? by writer Craig Stephen.

Stephen notes that for the first time, Chinese demand topped 1,000 tonnes, reaching 1,176 tonnes after a 41% year-on-year gain, not including central-bank buying and that "investors have done well in the past with a simple strategy of buying what China was buying."

Stephen also cautioned about a "worrying explanation" that "a big chunk of China’s gold demand is the spectacular growth in China’s shadow banking, for which that the government is now trying to apply the brakes."

If so, Stephen claims that "raises the possibility of a gold crunch, depending on how the People’s Bank of China flushes out the yuan carry trade by orchestrating a weakening in the Chinese currency."

Does the Story Make Any Sense?

Reader Jason wonders "if the story makes any sense."

The answer is "Yes" and "No".

Given what happened with copper, no one should be surprised if shadow banking operations in China used gold for the same purpose. But does that mean or imply a "possibility of a gold crunch"?

For that, the answer is no.

Shadow Banking Demand Story a Big "So What?"

Here are comments from Pater Tenebrarum at Acting Man, via email

This story is a big 'so what'?

That China buys a few hundred tons more or less is completely irrelevant to the gold price. People continue to make the fundamental mistake of confusing gold with an industrial commodity. You can see it already in the very first sentences: "Investors have done well in the past with a simple strategy of buying what China was buying. So earlier this year, things were looking up for gold when it was revealed that China had swept past India to become the world’s biggest buyer in 2013."

It is completely irrelevant if Chinese gold imports 'swept past India's'. The most relevant factor in gold pricing are macroeconomic drivers and reservation demand. The total gold supply amounts to something close to 180,000 tons by now - which means that the total global gold demand is also for 180,000 tons.

In what way does a few hundred tons here or there matter? The answer is "it doesn't".
I have covered this type of question before. Please see Plague of Gold Bears Now Say "Gold Unsafe at Any Price"; What's the Real Long-Term Driver for Gold?.

Also read I suggest an interview on Gold Switzerland with Robert Blumen: “What’s really key for the price formation of gold?”

Time and time again, you hear talk of demand in India or China going up or down as if it is meaningful. It isn't. You also hear about the price of physical gold vs. paper gold. I suggest you ignore that talk as well.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

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