The Lex Newsletter: China’s golden rule

Dear reader,

Worried households in China have lost faith in their local residential property market. Home prices have not only stopped going up, but developers such as China’s Evergrande have gone belly up. A court in Hong Kong ordered its liquidation this week. Lex noted the implications of this decision.

With a property bust well under way and stock prices collapsing — Shanghai’s CSI 300 index wallows near five-year lows — Chinese citizens with any spare cash to invest have a dilemma. They could pour their savings into deposits and perhaps government bonds, but they yield little, perhaps 2 per cent annually. Instead, they have turned to gold.

Gold’s latest rally in dollar terms began in October 2022. It is up about 25 per cent since then to $2,055 an ounce. That has been boosted by Chinese demand.

One reason is that Chinese investors appear to be saving for a rainy day. When asked, the proportion of households keen to save (as opposed to invest) has risen from a little over 40 per cent to about 60 per cent in just four years, according to BMO Capital Markets. That’s the highest percentage since at least 2008.

The nervousness is clear to see. New household savings grew by Rmb16.7tn ($2.3tn) last year, almost four times the pace of loans. Something similar occurred the year before.

As the tendency to pile up savings increases, gold demand has also picked up in China. It is already the world’s largest producer and consumer. Lex has noted before that some central banks have sought to replace US dollar foreign exchange reserves with gold. But perhaps the purchases by Chinese households of gold through jewellery, bars and even exchange traded funds had been missed.

Note that in the largest markets for gold, China and India, demand tends to pick up when the price falls. Not really a surprise. In both countries, citizens have preferred not to chase prices upward. That happened in 2012-2013 when gold prices tumbled. Chinese consumers piled back into gold in record amounts. Having other asset markets that are climbing in value helps.

Since the pandemic, however, something changed. Gold retail demand in value terms has climbed. The tonnage purchased has held up well, also. A new form of TINA trade — there is no alternative — seems under way in China.

Steady purchases by the People’s Bank of China, weak local asset markets and perhaps some nervousness about global political tensions have encouraged the shift towards gold.

While recent data is hard to come by, private gold reserves climbed to about 25,000 tonnes last year, estimates BMO. That is up about a fifth since 2019. Rather than acting as an inflationary hedge, gold seems to have provided local investors with protection against the asset deflation under way in China.

Another sign of heightened demand in the Chinese market is the premium locals will pay for the shiny stuff. In the past two years, Shanghai gold prices (adjusted for currency) have consistently traded above the international benchmark price. By the way, Indian local gold prices consistently trade at a discount.

That persistent premium suggests a tightness of local gold supply. Despite China’s large production, gold exports to mainland China — mostly from Hong Kong, Switzerland and the UK — hit an eight-year high in 2023.

Understandably, gold bugs have grown increasingly excited partly for this reason. What is surprising is that merger and acquisition activity has not picked up more among gold miners. A large one — Newmont of the US acquiring Australia’s Newcrest for $19bn — was agreed in May. Since then, it’s been a little quiet, with mostly smaller deals.

A Chinese state-owned gold miner, Zhaojin Mining, had a go at Australia’s Tietto Minerals back in October. But even that was a small nugget at about $400mn in value.

Watch the gold sector for more M&A this year.

Three good reads

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Do you know all this already? Email me: alan.livsey@ft.com.

1) Lex felt it was time to get something off its chest. Oil prices do not seem to reflect any fear of a Middle East conflagration. Never mind that Brent has tracked sideways for a couple of years. Maybe it has something to do with China’s problems. The country is the number two consumer of the stuff. But there are other reasons to do with tepid demand everywhere except Asia. And now that looks under threat given China’s woes. Inflation-adjusted, the crude price has not moved much in two decades. Don’t expect triple-digit oil to return anytime soon. Not everyone agreed, to put it mildly. Here is what we said.

2) One man who believes in China’s economy is Elon Musk. The multibillionaire leader of electric-vehicle maker Tesla got a shock this week. A court in Delaware ruled against the decision of the Tesla board to award him a 2018 remuneration plan worth $55.8bn. Judge Kathaleen McCormick decided that the board was not acting in favour of shareholders. As Lex pointed out, “his new problem is that, if his appeals fail, his $55bn share pile will return to the company”. He needs that money as he has some big bills to pay.

3) Lex this week also asked some questions about the future of green steel. It is a good idea in theory in that blast furnace steelmaking is one of the heavier carbon-emitting industries. One option is to find cleaner ways to make the steel, including electric arc furnaces to recycle scrap metal and direct reduction facilities. But, mostly, the winners on this front will have access to lots of renewable energy, and that will not work for every mill. Steelmakers might also wish to rethink their inputs, said Lex. Reduce iron ore where green power is cheap, and then ship this to steel mills.

Things I have enjoyed 

Perhaps I’m a little behind the curve, given recent price data, but I’ve been reading a book about inflation. And, yes, I do get out enough, and have friends. What can I say? Someone recommended to me We Need to Talk About Inflation by Stephen King. No, it’s not a horror story. I’m not finished, yet so far, so good. The history of coinage purity and price inflation in past centuries is alone worth the book’s price.

Last year, my wife and I were transfixed by a BBC documentary about Russia’s so-called democratic transition. This is less of a coherent narrative than a collection, in chronological order, of BBC and other news footage in the then USSR. There’s no voiceover, just occasional subtitles. Still, it’s gripping. You may even rethink your view of Vladimir Putin after watching this. I did. It’s appropriately titled Russia 1985-1999: Trauma Zone.

Have a lovely weekend, whatever you are watching or reading.

Alan Livsey
Lex Research Editor