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BFI Capital
February 24, 2020

China's Gold Market Not Immune to a Wider Downturn

As the Chinese economy continues to be disrupted by the outbreak of the novel coronavirus and parts of China’s economy come to a virtual standstill, it would be unrealistic to expect that the Chinese gold market, the world’s largest, will not be adversely impacted.

From quarantined cities to lower consumer demand, from reduced flight traffic to closed frontiers and boarders, the economic shock to diverse sectors of the economy, including the domestic gold market, should not be underestimated.

As a reminder, China is the world’s largest importer of gold, the world’s largest gold mining producer, and the country hosts the world’s largest physical gold bourse in the form of the Shanghai Gold Exchange (SGE), an exchange based in Shanghai but which has hundreds of domestic member companies across the country as well as a nationwide network of more than 65 certified vaults across 36 Chinese cities. Add to this a whole range of refineries and Chinese banks that are also heavily involved in the domestic gold market and a Chinese population known for its voracious appetite for investment gold bars, coins and jewelry, and you can see that there are a lot of moving parts that could go wrong amid a slowdown.

Although gold is a safe-haven asset whose price performs well in times of crisis, the slowdown referred to here is in terms of the infrastructure of the market and its smooth and normal functioning. From a purely logical perspective, quarantined cities that resemble ghost towns will not be conducive for employees to return to work, and consumers are not consumers if they cannot leave their houses.

Industrial demand for gold in China could also be affected by a slowing economy. On the supply side, air freight into China is now being affected with less cargo plane traffic and a more or less absence of passenger flights which often carry ‘belly cargo’. This could obviously have an impact on gold import volumes. Likewise, China's ports, the gateways for imported gold bearing mineral material which contributes to China's gold mining output, are now too being adversely affected.

However, as with any rapidly changing situation, it’s still too early to assess what the exact adverse impacts on the Chinese gold market will be, in the same way that no one can quantify at this point what the impact of the virus will be on China’s economic growth, or China’s supply chains, or China’s consumer behavior.

Will the coronavirus turn out to be a Q1 2020 phenomenon, or linger on into Q2 or the second half of the year? At this point in time, no one knows, so we will just have to wait and see. The same goes for the data coming out of China’s gold market, metrics such as gold imports, gold mining production, wholesale gold demand (Shanghai Gold Exchange gold withdrawals), and consumer gold demand. The market will just have to digest this data for January, February and March as it gradually becomes available. That is of course if Chinese data becomes available on a timely basis and is not, for various reasons (face saving or otherwise) delayed.

This is not just an academic concern, as data delays have already started, with for example, China just having announced that the release of January 2020 trade data was being delayed from its previously scheduled date of 7 February, and will now be bundled in with February trade data, to be released at some point in March.

But in a nation famous for saving face and obsessed with the stability and control of its society, these data delays might be compounded and roll on for months, before the Chinese authorities deem it safe to again release data that is free of any sign of economic weakness. The data will also need to take into account that the extended Chinese New Year period, which this year ran on for 10 later more, and is only coming to an end now.

So, while we can't examine much from the Chinese gold market about what's happening right now, except anecdotally, we can review Chinese gold market activity up to the end of 2019, i.e. just before news of the coronavirus outbreak began to take hold. This will be a benchmark for comparative data when it eventually starts coming in and later on for the full year 2020.

Note: This is an excerpt from an article originally published on the website under the same title.

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