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Chinese Gold Demand Resurgence

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Chinese Gold Demand Resurgence

china-goldFor much of 2015, the markets have been surprised by developments in China's economy. Things never go exactly as one expects, especially when it comes to markets, but this year has been particularly "off-script." One of the main sources of surprise was the dramatic, unrelenting plunge of the Shanghai Composite Index, the country's leading stock index.

Chinese gold demand, which has in recent years rivaled India for the world's top spot in the category, waned in the face of the stock crisis. This was due to many holders of gold in China, large and small, selling off their bullion in order to cover mounting losses in equities.

Now that stocks on the mainland have settled down, however, most analysts are expecting demand for gold to bounce back strongly to close out the year.

Growing Pains

Green numbers indicate losses in the Chinese stock market. Green numbers indicate losses in the Chinese stock market.

Unlike the United States, which has by far the largest stock exchange in the world, China's stock-trading sector is still fairly small and thin in volumes. (Granted, at its peak earlier this year, the Shanghai Exchange surpassed Tokyo to become the world's second-largest; but both countries pale in comparison to the U.S.) Just as an example, trading stocks in China is hardly a free market: the country only very recently enacted reforms to allow foreign capital in its stock markets, and it has firm floors and ceilings for how much an individual stock can rise or fall in a single trading day.

Moreover, the majority of shares for major Chinese companies are held by institutional investors, considering these are state-owned entities. Conversely, the vast majority of total shares (around 85%) are held by individual investors—"mom and pops," if you like. Those numbers are flipped in the U.S., where most households that have exposure to the stock market do so through means other than direct share ownership.

china-stockThis means that not only are individual Chinese investors trading the stocks themselves, but that they are also very inexperienced. It is only recently that Chinese families began holding stocks. Encouraged by the state, many average people put their life savings into the stock markets with the belief that the government would never let them lose value. When equity prices corrected sharply, many had no choice but to sell their gold to stay afloat. Or, at minimum, they weren't buying any additional gold, either.

Chinese Gold Demand Surge?

china-jewelryThe case for a sharp rebound in Chinese gold demand has several salient points. First, the stock market have largely calmed down. Second, many who passed on buying gold while the stock market was booming may reconsider this time, as gold is—rightly—seen as a uniquely intrinsically valuable asset in Chinese tradition. Finally, the gold price is actually cheaper than it was in 2013, when China's annual gold consumption set a new record-high.

While analysts will undoubtedly be revising their projections upward as the traditional bullion-buying event of the Chinese Lunar New Year approaches, it is also beyond doubt that China now plays an increasingly important role in the global gold market.

 

The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.

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