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Chinese Gold Production Plummets as Demand Increases

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As Asia regains its appetite for gold, production in the region appears to be dropping. The trend could ultimately have an impact on global markets. According to a rare report issued by the China Gold Association, the country’s first quarter gold production dropped  9.3% year-on-year, falling from 111.563 tons in Q1 2016 to 101.197 tons this year. Meanwhile, demand for gold in China surged 14.73%

The China Gold Association said domestic producers reduced output primarily due to persistently low prices. However, the motive doesn’t make much sense to geologist Dave Forest whose article in OilPrice.com points out that gold prices during the first quarter of this year have hovered in the $1,200 per ounce range. That’s almost exactly the same as Q1 2016. If price was really driving down output in China, we should have seen the effect in 2016.

The China Gold Association report did offer another clue, saying miners were also speeding up the process of phasing out antiquated production facilities. Forest explained the implication:

“If true, the shutdown of old and unprofitable gold mines could see China’s production reduced for a prolonged period. Great news for the global market, as it would mean Chinese buyers will need imports to fill the supply gap.”

As we reported yesterday, there is already evidence this is happening. Net imports into China from Hong Kong more than doubled month-on-month in March, rising to 111.647 tons. Q1 gold imports into China increased 64.5%  compared to 2016, according to Forest.

“Even with that jump, the report said overall Q1 gold supply in China was 5.9% lower than a year ago. Suggesting that more supply is needed to fill the gap left by shuttered domestic mines. That’s especially true given that Chinese gold consumption saw a big jump during the quarter, with demand rising 14.7 percent. Keep an eye on these critical trends — if production stays reduced while demand stays strong, we could see increased imports here giving a lift to global prices over at least the next few months.”

Declining output from Chinese mines fits into a broader pattern of flat gold production globally. As we reported last week, worldwide production plateaued in 2016 and many analysts believe the world may be at or nearing “peak gold,” meaning  the amount of gold mined out of the earth will begin to shrink every year, rather than increase, as it has done pretty consistently since the 1970s.

While the media tends to focus more on daily news and short-term fluctuation in prices, it’s important not to overlook basics such as supply and demand. If falling production trends continue, it would put upward pressure on gold prices over the long-term.
 

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