Does China want higher gold prices?

September 27, 2018
Pat Heller

On Sept. 14, South China Morning Post, an English language Chinese newspaper, reported that Shandong Gold Mining is seeking to raise as much as U.S.$768 million in a Hong Kong-based initial public offering of H-shares. The purpose of the stock offering is to fund overseas expansion.

Shandong is China’s largest domestic gold mining company, where it controls and operates 12 mines. Its parent company is owned by the Chinese government. In 2016, it accounted for 6.6 percent of domestic Chinese gold production.

The company also owns a 50 percent share of the Valadero Mine in Argentina, which it purchased from Barrick Gold Corp. last summer. Valadero is reported to be the second-largest mine in South America. Some of the funds from this IPO will be used to repay the debt burden of this purchase.

According to Shandong Chairman Li Guohong, the company’s goal is to become one of the world’s top 10 gold mining companies by the year 2020. In 2017, 73 percent of company sales were made to the Shanghai Gold Exchange, which itself is the world’s largest spot physical gold exchange (where 94 percent of contract purchasers receive immediate delivery of the physical metal and sellers cannot offer contracts until after the physical gold has been deposited in SGE vaults).

In the announcement, Guohong stated he was “confident that an upward trend in gold prices will emerge in the next 12 months.” He also projected that U.S. interest rates would steady by the end of 2019 and that increasing geopolitical tensions would increase safe haven demand for physical gold.

Multiple inferences can be drawn from this announcement. In the Chinese culture, political and economic pronouncements are rarely direct and rarely come from the authoritative person. So, observers of China need to examine other sources to discern what is really going to happen. Also, you can be sure that such announcements have been cleared in advance by the government.

First, the fact that Shandong is looking to acquire foreign mines likely indicates that the company may really be seeking additional future sources of physical gold that will be marketed through the Shanghai Gold Exchange rather than through the London or New York COMEX commodity futures and options markets. If Shandong controls foreign mining companies, it will have the ability to control where the production is sold. Further, it will likely also have the clout to force the gold to be sold in China at prices below other markets.

Second, China is already the world’s largest gold consuming nation. When the chairman of Shandong stated he anticipates higher gold prices within 12 months, you may interpret that as a statement by the Chinese government, which has the financial clout to force higher prices any time it wants. Knowing this, other gold market watchers may respond to this statement by themselves acting to purchase gold positions sooner rather than later. This would bring about higher gold prices even if the Chinese did not ramp up their purchases.

In other developments involving China and gold, the Shanghai Gold Exchange announced on Sept. 12 that it was beginning to trade contracts in Chinese Panda gold coins. These 30-gram .999 fine coins will almost certainly experience higher demand because of this expansion of venues. It remains to be seen if this will impact premium levels for these coins.
As reported by Bloomberg on Sept. 15, Barrick Gold Corp., one of the world’s largest gold mining companies, announced that

Chinese partners may get involved in that company’s projects in the African nation of Tanzania. These Chinese parties could provide capital, technical expertise and also the political connections in Africa and South America that North American mining companies do not have. There is a possibility that this partnership could evolve into eventual Chinese control of Barrick.

Stay tuned for developments.