Investors Seek Refuge in Precious Metals After Stocks Hit Hard
ADDISON, TX (Nov. 18, 2015) – Institutional and other high net worth investors in China, the world's largest producer and consumer of gold, turned to the metal as a safe haven this year as stocks fell, according to Dallas-based international wholesaler Dillon Gage Metals. After surging in recent years, Chinese equities suffered a sharp selloff this past summer, with the Shanghai Stock Exchange tumbling almost 40 percent in 10 weeks.
Because of China's market structure, weekly metal withdrawals from the Shanghai Gold Exchange (SGE) can be used to monitor the nation's demand, Terry Hanlon, president of Dillon Gage Metals, says. “The SGE is a physical market, with no paper contracts,” he explains. “By law, all mined and imported gold in China must sell through the SGE.” Gold purchases by the nation's end users, not including its central bank, pass through the SGE.
By mid-October, drawdowns in 2015 from the SGE totaled 2,062 tons, a sizable 33 percent above a year earlier.
Meanwhile, Chinese imports have been rising to supplement its mine production. In the past, gold imports typically came in through Hong Kong, but importers now bring the metal in from the UK, Switzerland and other countries. Since Shanghai opened new vaults in recent years, this gold enters the mainland through the SGE.
In July, China's central bank started reporting changes in its gold reserves after six years of keeping them quiet, Hanlon notes. The bank has been adding to reserves, and in September said its holdings stood at 1,693 tons. That makes China the fifth largest gold-holding nation.
The central bank of China has reasons for its new reporting transparency. “China wants the yuan to be part of the International Monetary Fund's (IMF) Special Drawing Rights (SDR) basket,” Hanlon says. ”Officials are building gold reserves to back the yuan, hoping it will become an international currency with reserve status.”
Today's SDR basket includes the dollar, the pound, the yen and the euro, which together determine the value of an SDR – an IMF-created asset to address liquidity issues between central banks.
China's economic growth, though stronger than in other leading nations, is slowing. In a surprise devaluation in August, the central bank reduced the yuan's value, sending it to a four-year low. When they did that, authorities were reacting to a string of weak economic data last summer. The numbers suggested the yuan was overvalued and affecting exports.
As of late October, China's central bank had cut interest rates six times in under a year, eyeing second-half 2015 growth that may dip to a 25-year low of less than 7 percent. This fall, officials are working on a new five-year plan, which will impact gross domestic product growth (GDP). It will have to be approved by the Chinese legislature next year. Planners have signaled a desire to move to slower, but steady, growth led by domestic demand and less dependent on exports.
As for the impact of China's stock sell-off on its residents, households there have less invested in equities than Americans do. Their wealth is mostly tied up in real estate.
China and India are the world's largest consumers of gold, and they alternate between which one leads. China's demand is on a long-term uptrend. But the nation's thirst for bullion, gold coins and jewelry waned in 2014. And its jewelry demand slipped in this year's second quarter, hurt by a slowing GDP and the stock market's slide. Demand is expected to improve this fall and winter, however, because of jewelry giving between the nation's recent Golden Week holidays in early October and Chinese New Year's in February.
In July, the London daily gold-price fix sank to a six-year low of $1,080 an ounce, but has since recovered a bit. Chinese consumers tend to buy gold on price dips.
In the last decade, Chinese gold production from mines grew at a faster pace than in other countries, making it tops in the world, followed by Australia. Chinese output, estimated at more than 462 tons in 2014, stays within its borders to meet industrial and jewelry needs.
Zijinshan Gold and Copper Mine, started up by Zijin Mining in 1993 in Fujian province, is one of the country's big gold producers. Its extraction costs are rising, however. China's open mines extract gold ore from hard rock. Mining from deposits in river beds is another source. The industry contains few large-scale gold mines and has more moderate-sized operations, including a number of smaller, artisanal and often illegal ones. Environmentalists complain about unsafe practices, including dynamite detonation and use of pollution-creating mercury.
Recognizing China's growth as a gold hub earlier this year, the Chicago Mercantile Exchange (CME) launched a physically delivered, kilogram gold futures contract, settled in Hong Kong at CME-approved locations. The CME noted that as gold demand swells in China and the Far East, the physical bullion market is moving eastward.
For more information, please visit www.dillongage.com or call (800) 375-4653.
About Dillon Gage Metals
Dillon Gage Inc. of Dallas (DillonGage.com), founded in 1976, companies include:
• Dillon Gage Metals (www.DillonGage.com/Metals), one of the world’s largest precious metals wholesale trading firms. The firm is an authorized purchaser for all major world mints and maintains inventory in over 20 countries around the world. 800-375-4653
• FizTrade Online Trading (www.FizTrade.com) offers real-time bid/ask trading platform for gold, silver, platinum and palladium. 800-375-4653
• Digital Metals (www.DigitalMetals.com) delivers advanced tools and technologies that enable market participants to be more successful in their businesses. Digital Metals offers cloud-based solutions for the physical precious metals marketplace built upon the Digital Metals Platform. 866-494-3577
• Dillon Gage Refining (www.dillongage.com/refining/why-dg), professional assayers and refiners of precious metal scrap, from low grade to karat scrap. Stone removal services and diamond experts on staff. 888-436-3489
• International Depository Services Group with locations in Delaware, USA (www.ids-delaware.com; 888-322-2431), and Ontario, Canada (www.idsofcanada.com; 855-362-2431), offers secure, efficient and insured precious metals and certified coin depositories that focus of custom business logistics solutions that include storage, fulfillment, inventory managements and many other value added services.
Contact:
Jeffrey Cheatham
Senior Account Manager
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(972) 247-1369
Jo Trizila
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TrizCom PR
(972) 247-1369
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