Despite being abandoned by the mainstream financial world, one country has been quietly stockpiling massive quantities of gold—China.
In June, Chinese gold imports from Hong Kong rose 58%, indicating strong demand in the world’s top bullion consumer. Net gold imports from Hong Kong to the mainland rose to 55.0 tonnes in July from 37.0 tonnes during the month prior, according to numbers obtained by Mining.com from the Hong Kong Census and Statistics Department. (Source: Chinese gold imports rise 48%, August 25, 2015.)
Gold flows to China, however, may be even higher than what these figures suggest. China does not provide trade data, so Hong Kong figures only serve as a proxy for gold flows to the mainland. However, direct imports through Shanghai and Beijing—for which there is no data available—have gathered pace this year.
Why are Chinese’s Households Stockpiling Gold?
The question is; why are Chinese consumers hoarding massive quantities of gold while investors turn to other assets? Of course, the country’s authorities are notoriously opaque, but we can guess as to why Chinese households and businesses are stockpiling precious metals. The key story: savers are hoarding precious metals before the government massively devalues the nation’s currency.
Earlier this month, China unexpectedly devalued the yuan, with officials in Beijing pitching the maneuver as a “one-off” effort to cool down bubbly financial markets. Most analysts, though, saw the move for what it almost certainly was—a last ditch effort to rescue the country’s export-heavy economy through an epic beg-thy-neighbor currency devaluation.
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And this might only be the beginning. Rumors are swirling that the People’s Bank of China may ultimately be targeting a 10% or more depreciation in order to provide a sufficient boost to exports.
“Some Chinese agencies involved in economic affairs have begun to assume in their research that the yuan will weaken to seven to the dollar by the end of the year,” Bloomberg reported from unidentified public officials earlier this week. (Source: Chinese Agencies Have Begun to Assume Yuan at 7 to Dollar in Research, August 25, 2015.)
“Those projections—which suggest a depreciation of more than eight percent by Dec. 31 and about 20% by the end of 2016—were adopted after the currency was devalued this month and compare with analysts’ forecasts for the yuan to reach 6.5 to the dollar by the end of this year.”
Bottom line; the populace is worried. Authorities could be preparing for a massive depreciation of the nation’s currency in a last-ditched attempt to save China’s economy and starve off an economic collapse in 2016. Households are buying hard assets like gold ahead of time to preserve their purchasing power.
For Western investors, the consequences are clear; growing Chinese demand could put a floor underneath spot rates in 2015, forcing analysts to boost their gold price forecast for the rest of 2015. And if a 3.5% devaluation knocked 1,000 points off the Dow Jones Industrial Average, what would a 20% devaluation do?