Which Nation Is Really World's No.1 Gold Consumer?

Includes: GLD
by: Lawrence Williams

China and India combined consume around 64% of world's newly mined gold - possibly more.

It has been a point of contention as to which nation is actually the world's largest gold consumer. This article is designed to set the record straight.

World Gold Council gold consumption figures understate the true position for both China and India.

While it may be irrelevant in terms of global gold supply and demand, the cachet of which country is out and out the world's No. 1 gold consumer has become something of a point of contention amongst gold market followers. This article is intended to set the record straight.

For many years India was top dog in terms of annual gold consumption until it was surpassed by China a couple of years ago - and surpassed relatively comfortably. But this year, almost entirely due to what has to be seen as a totally misleading report from the World Gold Council (WGC) back in February, India is seen by many as having regained the top position and time and time again many media outlets in reporting global gold statistics now continually refer to India as No. 1 and China as No. 2, despite enormous statistical evidence to the contrary.

Now, in its latest Gold Demand Trends report, published on May 14th, the World Gold Council itself has confirmed in its statistical analysis (provided by London-based gold consultancy, Metals Focus) that China was indeed the world's leading consumer of gold in 2014, and by a comfortable margin! However there is no reference to this change in position referred to directly in the report - only the publication of new statistics for 2014 which, when compared with the earlier ones, do set out the true position of the two nations' gold consumption figures. According to the WGC's latest figures, mainland Chinese consumer demand totaled 974 tonnes last year while India consumed only 811 tonnes - a comfortable win for the Chinese.

But in this writer's view, even these latest WGC figures underestimate quite substantially the true level of Chinese demand and the consequent gold flows into the Asian Dragon. Part of this underestimation relates to what should actually comprise China in terms of a geographical and political entity. Hong Kong (which is in reality an integral part of China politically, although treated as a separate Special Administrative Region statistically) 'consumed' an additional 61 tonnes of gold bringing total Chinese consumer demand to 1,035 tonnes.

But then this also still underestimates substantially actual gold flows into China. The Chinese don't make it easy to estimate these given some substantial changes to import patterns introduced in early 2014. Prior to this Hong Kong was seen as the primary import route for gold into mainland China, probably accounting for perhaps 90% of gold imports into the mainland. And Hong Kong - as a throwback to its prior British administration - has always produced detailed import/export statistics for gold into, and out of, China. But China has never been forthcoming about its own gold imports directly to the mainland bypassing Hong Kong.

So what changed in 2014? China eased the import path for gold via ports of entry such as Beijing and Shanghai - but still doesn't report these statistics so we have to rely on other countries' published export data to arrive at an indication of what is now flowing into China directly and what is coming in through Hong Kong.

By far the biggest exporter of gold to both China and Hong Kong is Switzerland which has built up a huge business of re-refining gold into bar sizes, coins and medallions that are more acceptable to Chinese and other mostly Asian consumers. By the end of last year Swiss export data showed that of its combined gold exports to Hong Kong and mainland China over 30% was flowing directly to the mainland (How much gold is now going directly to mainland China? 36%?). U.S. export data showed the same pattern. And this year the latest export data from Switzerland showed an even greater proportion flowing directly to the mainland - 44% for Q1. In the past the Hong Kong net gold export figures for mainland China, given its then dominance as the preferred route for Chinese gold imports, served as a very useful proxy for estimating total Chinese gold import figures - but this is obviously no longer the case. So it is nowadays not possible to come up with an accurate figure for total Chinese gold imports, but taking Hong Kong figures, and adding an estimate for direct imports to the Chinese mainland, total annual imports are probably around 1,200 tonnes. Shanghai Gold Exchange (SGE) published gold withdrawals data provides another estimation of Chinese gold flows but while some Chinese officials will suggest that this is a true representation of total Chinese gold demand (2,118 tonnes in 2014), most mainstream western analysts will dispute this saying there is an element of double counting in the SGE figures relating to recycled gold. Also what the western analysts classify as 'consumption' does not necessarily equate to the actual gold flows into Chinese hands with known imports plus China's own gold output (it is the world's largest gold producer) coming to substantially more that their estimates of Chinese 'consumption'. The main discrepancy here is stated to be a volume of gold being taken in by Chinese banks and financial institutions for financial transactions and collateral which they don't classify as 'consumption' but should certainly be considered when calculating gold flows. India's consumption is, in theory, a little easier to calculate given the nation produces little gold itself so officially gold imports equate to gold consumption and India was reckoned to have imported around 840 tonnes in 2014 according to a Bloomberg article, although this is trending higher to perhaps around the 1,000 tonne mark. But because of import taxes, India's true figures will have been distorted by smuggled gold which some have estimated at as much as 250 tonnes last year, but which obviously appears in no official statistical data! All in all therefore it is apparent that China and India remain by far the largest consumers of gold with China still No. 1 and India following fairly close behind - but there is a fair chance that the mainstream analysts' findings may actually substantially underestimate the true consumption figures if we take all elements of gold demand, including the Chinese financial demand element, into account. The latest World Gold Council report suggests that the two companies between them consume around 64% of global newly mined gold, but the above analysis suggests that the proportion could be far higher, and with scrap supplies continuing to decline and with a cumulative lack of sales out of the big gold ETFs so far this year, one may wonder where the continually rising demand from China and India alone can be met, yet alone that for other gold consuming nations and central bank buying. Gold's fundamentals look increasingly positive from this perspective - but the fundamentals don't necessarily seem to call the tune as far gold pricing is concerned these days - financial market forces currently appear to be in the driving seat and may continue to remain so for the foreseeable future.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.