Chinese Housewives vs Goldman Sachs

By Jeff Clark from Casey Research

Goldman Sachs is once again predicting that gold will fall, setting a new near-term target of $1,050.

Never mind the schizophrenic gene that would be required to follow the constantly fluctuating predictions of all these big banks; it’s amazing to me that anyone continues to listen to them after their abysmal record and long-standing anti-gold stance.

Sure, the too-big-to-fails can move markets – but they say things that are good for them, not us. For example, while Goldman Sachs was telling clients and the public to sell gold in the second quarter of 2013, they bought 3.7 million shares of GLD and became the ETF’s 7th largest holder.

When I visited China two years ago, guess who no one was talking about? Goldman Sachs. There was news about the US, of course, but the regular diet of journalistic intake consisted of Chinese activity, not North American. And surprise, surprise, the view from that side of the world was materially different than what we hear and read here – and in some cases, the opposite.

Not only have most Chinese housewives – perhaps the most frugal and cautious savers in the world – probably never heard of Goldman Sachs and their call for $1,000 gold – if they had, they would think: 垃圾! (Rubbish!)

Here’s some evidence. Since January 1, gold ETF holdings have fallen by 26%, according to GFMS. But Chinese housewives aren’t refraining from buying and certainly aren’t selling:

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The red dotted line represents the total outflows of GLD through last Tuesday. The gold bars are cumulative monthly imports of gold to China through Hong Kong. You can see that China has absorbed roughly twice what most North American ETF holders have sold. It’s actually more than that, because we only have Hong Kong import data up to the end of July. But the story gets even more dramatic. If you dig into the data further, you find that cumulative gold imports through July surpassed the 26.7 million ounces (831 tonnes) that was imported to China for the whole of 2012.

That means rather than being deterred from buying gold when its price declined this year, the Chinese bought the yellow metal as fast as they could. Further, last year Chinese miners produced 12.9 million ounces (403 tonnes) of gold, all of which stayed in the country.

When you look at physical deliveries from the Shanghai Gold Exchange (SGE) vs. the COMEX and global mine production, you can see a clear trend this year:

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Deliveries at the SGE are significantly greater than those at the COMEX. Delivery ratios on the Comex have consistently been under 10%, in contrast to more than 30% on the SGE. Through June, the SGE has nearly matched all of last year’s total.

What’s even more astonishing: year-to-date deliveries on the SGE are close to global mine production. In the first six months, delivery reached 35.3 million ounces (1,098 tonnes), just 20% less than what all gold companies mined last year.

It is headlines like these that the Chinese read – not what Goldman Sachs writes.

It’s not just the Chinese, of course. India, for now, is still the largest gold market. Despite relentless restrictions from her government, India bought more gold jewelry and bullion last quarter than any other country.

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China and India accounted for almost 60% of the global gold jewelry sector last quarter, and roughly half of total bar and coin demand. Further, both countries saw almost 50% more consumer demand in the first half of the year compared to the same period in 2012. The two countries are again setting records:

• China purchased 8.8 million ounces (275 tonnes), 87% more than last year
• India bought 9.9 million ounces (310 tonnes), 71% more than 2012

It’s true that official Indian gold imports dropped in August, to just 0.08 million ounces (2.5 tonnes), a 95% plunge from July’s volume of 1.5 million ounces (47.5 tonnes). It’s not yet clear, however, that Indian authorities have managed to subdue gold imports as they have been desperately trying to do – keep in mind the widespread reports of gold smuggling. Meanwhile, the wedding season is just ahead, so demand is likely to bounce back up.

Physical demand also soared in Thailand, Indonesia, and Vietnam last quarter, with reports of increases ranging from 20% to 40%. Add it all up and the Asian/emerging countries comprise the lion’s share of consumer demand for gold – about 70%.

It raises the question, are Chinese housewives just smarter than Goldman Sachs?