'Trapped' Chinese stock investors key to gold demand

Demand for gold slid to its lowest since 2009 in the second quarter of this year according to the GFMS Gold Survey, a closely watched research report.

Year on year the decline was 14.2% to 858 tonnes and GFMS Thomson Reuters blames much of the weakness on China.

At 35 tonnes retail investment from China fell by 26% and jewellery demand by 23% during the quarter as Chinese investors poured money into local stock markets; a decision they may be regretting now.

The wild swing on the Shanghai and Senzhen exchanges has wiped more than $3 trillion off the value of listed stocks in less than a month.

However the recent dive in equity markets inside the country has not rekindled demand for gold as a safe haven or portfolio diversifier "as might otherwise be expected" says GFMS:

"[That's] partly because investors’ capital is still trapped in the stock market, while some have instead turned to the U.S. Dollar as a safe haven asset, fearing the RMB will depreciate.

"How the domestic stock market performs for the rest of the year will likely continue to have a material impact on Chinese demand for gold."

Beijing has tried various measures to calm Chinese equity markets including halting trade in nearly half of all listed stocks, meaning even those who want to sell cannot.

The market for gold jewellery in China was hurt by a debt crisis where since May there are at least 22 fabricators who are at the risk of default and being sued by lenders.

"Certain banks, especially the medium size and smaller ones, are seriously considering dropping the jewellery industry sector from their loan portfolio," says GFMS:

Industry sources tell us that Chinese banks have directed a total of 80 billion RMB ($13 billion) to companies in the Shui Bei area alone (one of the most important jewellery hubs locating in Shenzhen), and of this approximately 4-5 billion RMB ($0.6-0.8 billion) are already determined as bad/non-performing loans.

'Trapped' Chinese equity investors key to gold demand
Those jewellery makers that are in trouble are now dumping their inventories – selling at a discount to refiners or other fabricators – creating a vicious cycle.

The slump is also evident in bullion imports through Hong Kong. Chinese net gold bullion imports through Hong Kong totalled to 333 tonnes for the first five months in 2015, an 18% year-on-year drop according to the study.

The most recent customs data shows that decline accelerating. In June China's net imports of gold via Hong Kong fell by 48% month on month and 8% year on year to the lowest level since August last year according to HK customs data.

According to GFMS numbers China is still the world's top consumer in the first half of the year at 394 tonnes, just a couple of tonnes ahead of India.

While China played a huge part in pushing the physical market into a surplus of 196 tonnes, more than double the 2014 figure, demand from the official sector also pulled back sharply.

Central banks remained net buyers of gold, but  purchases fell 62% compared to the second quarter last to 45 tonnes.

One bright spot was jewellery consumption in India which increased 2.5% to 158 tonnes during the period, but gross imports into the sub-continent fell 10% to the lowest since the beginning of last year.

For the full year, GFMS is expecting gold demand to come in at around 4,000 tonnes, Leyland told the Reuters Global Gold Forum on Tuesday:

"That's the weakest since 2010, but still 1,000 tonnes per year higher than the 2004-2007 period," he said.

GFMS forecasts gold to recover to $1,175 during the last quarter of the year. That's up just over 9% from five-and-half-year lows hit last week.