China Gold Imports Continue To Impress

Includes: GLD
by: Tim Iacono

More evidence of the record amount of gold (NYSEARCA:GLD) bullion flowing from the West to the East came earlier today when the Hong Kong Census and Statistics Department reported that net gold imports to mainland China totaled 111 tonnes in August.

This was down slightly from 116 tonnes in July and below the record net imports of 136 tonnes in March, however, it keeps China on pace to shatter previous gold demand records this year.

As shown below, this gold buying was spurred by falling metal prices in the spring and, despite many predictions that China's gold imports would fade over the summer, that has clearly not happened yet.

(Click to enlarge)

This marked the fourth straight month of demand exceeding 100 tonnes as China now seems all but certain to surpass India in 2013 as the world's biggest gold buyer.

Through August, China's net gold imports from Hong Kong were over than 700 tonnes - more than the amount of gold that has flowed out of Western gold ETF trusts - and this puts the nation on pace for net imports of over 1,100 tonnes this year.

Much of this metal has taken a familiar route in 2013 - from London (where gold ETF holdings are found), to Switzerland, to Hong Kong, and then into mainland China. Swiss gold exports to Hong Kong rose from 91 tonnes in July to 133 tonnes in August, a record setting pace of nearly 600 tonnes through the first eight months of the year.

Swiss refiners recast gold bullion in popular Western forms (e.g., 400 ounce London Good Delivery bars) into smaller sizes that are more popular in the East and, in a year where there has been great uncertainty in the gold market, one thing is clear - Swiss refiners have been keeping busy.

It's important to remember that net imports from Hong Kong are just one source of gold flows into mainland China. Since the data originates in Hong Kong, it is the most transparent source of gold trade data since the Chinese government provides no demand data at all, save for its central bank gold holdings that were last updated in 2009.

Also worth noting is that gold exports out of China are prohibited by law.

Once gold enters the country, it is unlikely to ever leave and, as such, the Chinese are some of the strongest of the "strong hands" in the global gold market. There is a heavy volume of trade between mainland China and Hong Kong where much of China's domestic gold production is refined, however, the flow of gold from the rest of the world into Hong Kong and mainland China is, basically, one direction only.

The gold price is rising today, in large part due to the growing uncertainty about whether U.S. lawmakers will raise the debt ceiling before a crisis develops next week.

So far, record gold demand in China this year has done little other than to put a floor under the price, however, at some point, Asian demand for physical gold is sure to have a much bigger positive impact.

When that time comes is anyone's guess, but each month that goes by with more huge volumes of gold flowing from the West to the East puts more pressure on the physical supply of gold around the world. This comes at a time when a lower gold price has resulted in marginal mines being shuttered causing gold miners to ratchet down production and cancel further development.

The gold price is currently set in Western markets that are, primarily, paper markets that trade gold derivative products such as futures rather than the metal itself.

If current global gold flows into Asia continue, that pricing system is likely to change.

Disclosure: I am long GLD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. I also own gold coins.