- A Reuters report misrepresented gold being used for financing deals in China's shadow banking system per a World Gold Council report.
- Since China was a huge source of gold demand last year, this cast doubt on the nature of global gold demand.
- Traders were quick to sell, but sentiment may change after looking more closely at these reports.
More evidence that the mainstream financial media often gets it wrong when reporting on gold (NYSEARCA:GLD) when it comes to anything other than its price comes via this story at Reuters on Tuesday. It seized on a few comments at the tail end of a World Gold Council (WGC) report to craft the sensational and very bearish report China may have 1,000 tonnes of gold tied in financing - WGC which was not only misleading, but violated some very important rules about context.
Author A. Ananthalakshmi, who according to her page at Reuters has recently dealt exclusively with the mundane, day-to-day reporting on the gold market until this offering, exorcises all of the grey area out of the following paragraph found on page 56 of the World Gold Council's 57 page report:
The use of gold for purely financial operations is a form of demand that represents a small part of the much wider growth in shadow banking, which while entirely legal, is considered a grey area. Not surprisingly, there is little hard data on the shadow banking sector but J.P. Morgan recently estimated it at RMB46tn (US$1.7tn), equal to about 84% of China's GDP. No statistics are available on the outstanding amount of gold tied up in financial operations linked to shadow banking but Precious Metals Insights believes it is feasible that by the end of 2013 this could have reached a cumulative 1,000t, equal to a nominal value of nearly $40bn.
It is then offered up as simply this at Reuters:
The use of gold for purely financial operations is a form of demand that represents a small part of the much wider growth in shadow banking. It is feasible that by the end of 2013 this could have reached a cumulative 1,000 tonnes.
Perhaps a few dots would have been appropriate here (i.e., "...") to indicate to the reader that something was left out, namely, all of the uncertainty (e.g., "little hard data" and "no statistics are available") related to the conclusion.
Of course, the implication in the abbreviated version of the paragraph is that a good portion of last year's record gold demand in China could have found its way into their shadow banking system rather than to meet demand from Chinese consumers or the central bank and this is certainly not the case.
Note that the passage above appeared in the section of the WGC report titled "Surplus Gold in the Chinese Market" and it dealt with the question of how it is impossible to reconcile all the various bits and pieces of data that come out of greater China when trying to pin down how much gold is being imported, produced, and purchased.
To be sure, some of this "surplus" gold is involved in financing deals in their shadow banking system as the Chinese seem to use just about anything for collateral these days, however, it's the context here that is key.
China gold data is murky, some would say it is impenetrable.
The Shanghai Gold Exchange delivered over 2,000 tonnes of gold last year, yet both the WGC and the China Gold Association put the nation's gold demand at a little over half that amount.
Other gold market analysts put 2013 China gold demand at well over 2,000 tonnes, meaning that even if the 1,000 tonnes of gold for financing deals over the last few years is accurate, it would have been just a fraction of total gold demand.
Moreover, the People's Bank of China last reported a change in its gold holdings in 2009 when it said that it had doubled over the prior six years.
Given what has happened in the global economy in recent years, it is widely believed that China's central bank continues to buy gold, but no one knows how much and they're not saying.
I wouldn't say either if I wanted to continue to buy the stuff at a lower price and this likely accounts for the lion's share of the "surplus".
But no one really knows.
Simply put, it's not that the headline "1,000 tonnes of gold tied to financing" stemming from a World Gold Council report is bereft of context, it has all the wrong context.
And this surely caused some futures traders to sell gold.
Yet it made for a titillating headline that probably resulted in a lot of page views for Reuters.
For that, well done.
Additional disclosure: I own gold coins and ETFs other than GLD.