You can add gold to the list of items that China can’t get enough of. It was announced last week that China’s largest gold producer, state-controlled China National Gold Group, signed a long-term contract to purchase gold concentrates from the Kensington Mine in Alaska.
China already has the sixth-largest reserves of gold in the world (1,054.1 tonnes as of June 2010) according to official gold holding statistics but this deal could help them grow faster.
China is one of the few countries in the world that could swing this deal because it has the available smelter capacity to handle this type of gold. In order to extract gold concentrate, it is treated with chemicals to strip the gold particles away and then smelted into bars, etc.
The deal also reflects that the Chinese government wants more gold and it'll do what it takes to get it. China agreed to pay for the gold within days of delivery, much shorter than the industry standard of three-months.
Gold demand in China has seen a significant shift in direction in recent years. The government, which used to restrict how much citizens could own, is now running ads on state television encouraging the middle class to own gold.
As a result, gold demand has increased 13 percent annually for the past five years. Retail investment demand jumped 57 percent during the first quarter of this year despite prices hovering near all-time records. At this pace, the World Gold Council (as pointed out in today’s Globe and Mail: China’s Big Gold Rush) says that China will run out of gold in the next six years.
This is why agreements like the one with the Kensington Mine are important. It provides an innovative source for China to increase its gold holdings without going out to the open market to acquire refined gold.
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Disclosure: Long positions in gold companies