By Patrick Heller
In last week’s column, I detailed various ways that official and unofficial reports of precious metals data (supply, demand, inventories, trading volume, etc.) are either kept secret, is misreported or is skewed so as to be misleading. This column was so popular that it was more widely linked at other websites than most of my articles.
This week, I want to zero in on the limits of reliability on gold data coming from China and India, the world’s two largest gold consuming nations.
As I mentioned last week, China’s central bank began purchasing gold reserves in 2003 but did not report these purchases to the International Monetary Fund (IMF) until April 2009. The Xinhua News Agency disclosed on April 24, 2009, that China’s central bank now held 1,054 tons of gold (almost 34 million ounces) instead of the 600 tons (about 19.3 million ounces) that it had stated since at least as far back as 2002.
These gold purchases were made in the London gold market, so they did not come from other sources such as China’s gold mine output (China is also the world’s largest gold mine producing nation), recycling, investor liquidation, or announced government or official agency sales. It is quite possible that some gold China’s central bank purchased had surreptitiously come out of other central bank vaults to the London market (which, if they occurred, such dispositions were not reported to the IMF).
By the way, the disclosure of China’s central bank gold purchase made front-page headlines in the April 25, 2009 edition of London’s Financial Times. In contrast, The Wall Street Journal buried the story that day on page six of section B.
Observers of China realize that the way the Chinese government operates is not open and direct. Changes in policy are signaled by speeches or papers by lesser officials. As has been shown repeatedly over the years, when the Chinese government issues a statement that it is considering something such as acquiring gold, that really means it has already been actively doing it. (Side comment: after China’s central bank began acquiring gold reserves, it later removed prohibitions against private ownership of gold and silver bullion. Still, later, the Chinese government began to actively encourage private citizens to acquire physical gold and silver.)
Because of the secrecy surrounding China’s central bank gold purchases, I wrote in May 2009, “It is entirely possible that China’s central bank gold reserves are much higher than they now confirm.”
This month, the World Gold Council reported that China’s central bank gold reserves were 1,948.3 tons (about 62.6 million ounces). With the Chinese government’s past history of underreporting gold reserves, I suspect that the correct gold reserves are significantly greater than the reported amount.
Further, as I noted in the last column, it is also possible for China to disguise gold acquisitions by having them made by its sovereign investment fund or made as inventory purchases by any government-owned companies or government-sponsored entities. Estimates of China’s effective physical gold reserves today come to as much as 20,000 tons (643 million ounces).
In contrast to the Chinese government gold activity, the Shanghai Gold Exchange activity is a paragon of transparency. Authorized traders on this exchange are not allowed to list any contracts for sale until after the physical gold is in the SGE vaults. About 94 percent of all SGE gold trades result in immediate delivery of the physical bars. Contracts are for kilogram bars (32.151 troy ounces) and are priced in Chinese yuan. Some gold analysts infer China's central bank purchase by reviewing SGE statistics. However, it is possible for the government to acquire gold by other means through the Hong Kong markets and other sources.
Any analysis of the gold market that relies on the accuracy of reports from China’s central bank on its gold reserves, or using only Shanghai Gold Exchange statistics, carries a high risk of being erroneous.
Until China’s central bank began accumulating gold reserves and then allowed (and later urged) private Chinese citizens to acquire physical gold and silver, India was the world’s largest gold consuming nation. A significant percentage of the nation’s population does not have any bank accounts. Literally, many people wear their family’s wealth in the form of gold jewelry.
Gold enters India by three means. The only statistics officially reported are imports of pure gold bars that are reported to customs upon entering the country. This data is likely to be accurate as the government collects import duties on these pure gold bars. Last July, the import tax was increased from 10 percent to 12.5 percent. In January 2012, the tax rate was 2 percent. It was increased to 4 percent in March 2012, to 6 percent in January 2013, 8 percent in June 2013, then 10 percent in August 2013. In addition, India’s imports of pure gold bars were subject to a 3 percent GST tax beginning in July 2017.
As the import taxes on pure gold bars increased in India over the years, the quantity—and the percentage of total imports—of gold entering the country by other means has increased. A sizeable percentage of gold is simply smuggled into the country, mostly originating from markets in the Middle East. Every time the tax rate jumped, the gold smuggling volume surged. But, because smuggling is a criminal activity conducted in secrecy, there are no official statistics on quantities brought into India.
Gold also comes into India in the form of doré bars. Doré bars are crudely produced near mine sites to get rid of most of the impurities from the newly mined gold, which reduces transportation costs. These bars are typically 80-85 percent pure gold and come in varying weights. Doré gold bars are also subject to import taxes, which are slightly lower than for pure gold ingots. They are currently subject to an 11.85 percent import tax plus the 3 percent GST tax. That makes a total of 14.85 percent tax slightly less than the 15.5 percent tax on pure gold bars. Jewelers in India are so sensitive to slight differences in the gold price that some are willing to acquire doré bars at a slightly lower gold price and incur the costs of refining the pure gold from the impurities. While statistics for these bars could be reported, they are not. It is also true that some doré gold bars are smuggled into the country.
In the absence of accurate statistics about all gold imported into India, you can only rely upon the unofficial reports of people in India’s markets for an approximation of how much gold is consumed in that nation. Most observers figure that official pure gold imports now account for less than half of the gold imported into India, and maybe as little as only one-third of the total. Consequently, any market analysis using only India’s official gold import data will have a significant error built into it.
Patrick A. Heller was honored as a 2019 FUN Numismatic Ambassador. He is also the recipient of the American Numismatic Association 2018 Glenn Smedley Memorial Service Award, 2017 Exemplary Service Award 2012 Harry Forman National Dealer of the Year Award, and 2008 Presidential Award winner. Over the years, he has also been honored by the Numismatic Literary Guild (including twice in 2019), Professional Numismatists Guild, Industry Council for Tangible Assets, and the Michigan State Numismatic Society. He is the communications officer of Liberty Coin Service in Lansing, Michigan and writes Liberty’s Outlook, a monthly newsletter on rare coins and precious metals subjects. Past newsletter issues can be viewed at http://www.libertycoinservice.com. Some of his radio commentaries titled “Things You ‘Know’ That Just Aren’t So, And Important News You Need To Know” can be heard at 8:45 AM Wednesday and Friday mornings on 1320-AM WILS in Lansing (which streams live and become part of the audio and text archives posted at http://www.1320wils.com).