Is China the World’s Biggest Goldbug?

China

Gold became Wall Street’s favorite punching bag after posting its worst annual performance in decades. Many investment firms providing coverage significantly lowered price targets, and headlines reminded investors on a daily basis just how terrible of a year it was for the precious metal. However, one of the most well-known goldbugs is not losing interest in the precious metal.

In 2013, China’s gold consumption surged 41 percent to 1,176.40 tonnes — exceeding 1,000 tonnes for the first time on record, according to the latest statement from the China Gold Association. Demand for jewelry was the biggest contributor, with an increase of 43 percent to 716.50 tonnes, while bullion demand rose 57 percent to 375.73 tonnes. China is the largest gold consumer in the world, followed by India.

Taking a cue from bargain hunters, Chinese gold demand did not diminish amid falling prices. Last year, gold plunged $200 in a matter of only two days during April and logged its worst one-day percentage drop since 1980. It was also gold’s largest decline in dollar terms on record. Gold even fell 5.5 percent in November, a historically a strong month of gains. By the end of 2013, gold fell 28 percent and posted its first negative year since 2000.

The industry association also reported that Chinese gold output increased 6.2 percent year-over-year to a record high of 428.16 tonnes in 2013, which makes China the world’s biggest gold producer for the seventh consecutive year. Interestingly, the data from the China Gold Association does not include demand from the nation’s central bank.

The People’s Bank of China has not formally disclosed any changes to its gold holdings in years, and it’s widely believed that the central bank is purchasing gold to diversify its reserve holdings. In 2009, China announced it boosted its gold reserves by 454 tonnes via acquiring gold quietly over the previous five years. It represented an impressive 76 percent increase in gold reserves. Today, China still shows that it holds 1,054.1 tonnes in reserves, but it’s estimated by analysts to really have around 2,000-3,000 tonnes.

Some market participants believe China is building up its gold reserves to challenge the U.S. dollar, which is currently the world’s reserve currency. A few years ago, China’s official news agency, Xinhua, said, “International supervision over the issue of U.S. dollars should be introduced and a new, stable and secured global reserve currency may also be an option to avert a catastrophe caused by any single country.”

Gold demand from Eastern markets outweighed the West by record amounts last year, but the U.S. Mint is also experiencing strong demand for precious metals. In 2013, the U.S. Mint sold 856,500 ounces of its latest American Gold Eagle coins, representing a 14 percent increase from the 753,000 ounces sold in 2012. Meanwhile, the U.S. Mint sold a record-breaking 42.675 million ounces of American Silver Eagle coins. That is the biggest haul of silver coins sold in a single year since the U.S. Mint started producing the series in 1986.

Looking ahead, it would not be too surprising to see gold prices rebound this year. Since the 1970s, gold has suffered 12 pullbacks of more than 20 percent, according to the World Gold Council. The average length of those pullbacks is 18 months, but the current pullback has been in progress for almost 30 months.

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Disclosure: Long EXK, HL, PHYS

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