Why China Has An Insatiable Appetite For Gold

by: Ben Tseytlin - on Gold & Bullion

Total gold demand within China is increasing, and this has important geopolitical implications, one which will ultimately impact both the gold price and those who mine and invest in it. Below are some reasons for this demand, and what it means for the future.

Difference Between The Comex And Shanghai Gold Exchange

The Chinese central bank has increased its reserves significantly over the last few years via this metal, and currently has about 1,843 tones. This reflects a growing demand among Chinese consumers, which has grown by about five percent. However, the key difference between the Gold Exchange in Shanghai and the Comex is that these Chinese exchanges prioritizes the physical metal, whereas the Comex trades mostly with gold derivatives. Because of the size of China’s gold reserves, and their introduction of the Gold panda coin, there has been talk of the Yuan becoming a future reserve currency, similar to the USD and Euro.

How The Chinese View Gold (In Comparison To The West)

Chinese thoughts on gold are distinct from the West. Most Americans, Europeans and Canadians see this metal as being primarily for investment. The Chinese, on the other hand, value the metal for its ability to store value.  The Chinese will acquire as much of it as they can, to increase their position. They see it as a source of protection against fiat currency and the inevitable inflation that comes with it. Granted, many Westerners also hold the same view, but not to the same extent as the Chinese.

China has also given permission for direct imports, which usually goes through Beijing. This gives local jewelers and dealers the opportunity to acquire and use it for their purposes. The output of Chinese mines continues to rise on a yearly basis, making the country the world’s largest producer of the precious metal. At the same time, the Chinese have expanded their overseas activities, investing at least $4 billion in global gold mining programs since 2011.

The Belt & Road Initiative And Tensions With The West

China has initiated a major international project which it calls The Belt & Road Initiative, which focuses on infrastructure and is considered by many experts to be the largest construction project ever undertaken. What most have not mentioned is the impact that this project will have on gold. This is because the Belt & Road Initiative includes almost 70 countries, many of which are situated within Eurasia, with a few others in Asia and even Africa. The project will fuel gold mining, and vice versa.

Many geopolitical analysts have noted however that China’s primary reason for investing so heavily in this metal, and establishing the Belt & Road Initiative, is due to rising tensions with the U.S. The Chinese fear a potential blockade of the South China Sea during a conflict, and this combined with their significant exposure to U.S. treasuries places them in a position where they want alternative trade routes to the ocean and a financial alternative to protect themselves from a possible currency collapse.