Does China Still Love Gold?

The recent price action in gold and silver has been frustrating for some people. Both precious metals logged gains last year, but continue to remain in consolidation mode. On the positive though, bullion demand is still providing support to prices.

Due to the vulnerabilities of the global financial system and numerous quantitative easing programs, several nations are increasing their gold holdings. According to Bloomberg and data from the Census and Statistics Department of the Hong Kong government, gold imports into mainland China from Hong Kong nearly doubled to an all-time high last year. China, the world’s second-largest economy and the biggest gold consumer, imported a record 834,502 kilograms (834.5 metric tons), including scrap and coins, in 2012. In comparison, the nation only imported 431,215 (431.2 metric tons) kilograms the previous year.

Chinese imports in December increased to a fresh monthly record of 114,405 kilograms, compared to 90,764 kilograms in November and 38,650 kilograms in the same period a year earlier. It should also be noted that the imports only represent private demand and does not account for official sector Chinese purchases.

Central banks are still interested in gold…

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Although the People’s Bank of China has not formally disclosed any changes to its gold holdings in years, it is widely believed that the central bank is purchasing gold to diversify its reserve holdings. Goldcore noted at the London Bullion Market Association gold conference in Hong Kong last year, Chairman David Gornall said, “When comparing China to the U.S., it would seem that in China, gold asset allocation can only go in one direction. The country has only 2 percent of its reserves in the form of gold, compared with the U.S. at 75 percent.”

According to the World Gold Council, countries purchased 373.9 tons in the first nine months of last year. The organization expects that central banks added 450 to 500 tons of gold to their holdings, compared to 456 tons in 2011. In general, central banks became net buyers of gold in 2009 for the first time in decades.

While gold is often the focus of purchases and safe-haven status, silver is also having a record breaking year. In January, the United States Mint sold more American Silver Eagle coins than any other month in the history of the program. The mint sold nearly 7.5 million American Silver Eagle bullion coins last month, compared to 6.422 million coins in January 2011, the previous highest sales month. Newly dated versions of coins typically drive strong demand in January, but this year’s record haul was even more impressive considering the Mint had to halt sales of the American Silver Eagle for more than half of January.

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Disclosure: Long EXK, AG, HL, PHYS