China is reshaping global demand for gold

Resources Corner

Demand for iron ore has come off the boil and gold has caught the eye of Chinese investors. ANZ bank has offered a bullish forecast of the gold price hitting $2,400 per ounce within 15 years.
 
The ANZ report “East to El Dorado: Asia and the Future of Gold” cites the liberalisation of Asia’s financial system as being a key driver of demand for the rare mineral. Gold’s current spot price is hovering around $US1,100 per ounce and while shortages in supply of the metal will always cause volatility, ANZ suggests Chinese central banks will increase their holdings in line with their accumulations of foreign currency reserves.
 
ANZ handles the equivalent of 12 per cent of global primary production which makes it one of the world’s largest distributors. The bank supplied over 20 per cent of China’s gold imports last year.
 
In other resources news Fortescue Metals has declined to pursue a previously announced $US2.5 billion Senior Secured Note offering, BHP Billiton has revealed the demerger of its proposed $US15 billion spin-off South32 will likely cost the company about $US738 million and Rio Tinto says it paid $US7.1 billion in taxes around the world last year.
 
Economics News
 
The bold forecasts by ANZ come amidst volatility in the price of gold. The metal is commonly viewed as a safe haven investment (its price spikes when crisis hits the equity and capital markets). So with the US economy showing strength, gold saw an extended retreat in recent months. However this week investors responded to the likelihood of US rates staying low; as well as fears of geo political stability as Saudi Arabia’s sends rockets into Yemen. The result has been a rally in the gold price.
 
Commentary
 
Finance News Network took the opportunity to speak to ANZ’s commodity strategist in Singapore, Victor Thianpiriya, about the changing nature of demand for this most lustrous of metals.
 
What effect will the boom in Chinese demand have on the economics of gold trading?
 
“The impact is that gold will gradually disconnect from the USD (negative relationship). Its safe haven appeal, we think, will make it a commodity that continues to be sought after by investors into the future. That won’t change. But gold’s negative relationship to the USD will. As China’s economy becomes more influential to global asset prices, China’s real interest rates and demand for gold will drive prices. These are points we make in the report.”
 
Is Chinese demand for gold driven by different forces/motives to those of the West?
 
“China’s demand is currently driven by jewellery, whereas most demand in the west is for investment. In Asia, it is near-impossible to discern the true difference between investment-driven and aesthetically-driven demand for jewellery. Given limited investment options in places like China and India, the two are one in the same. Going forward, the “substitution effect” in Asia means a much larger institutional investor base. Even a small allocation of 1% to gold by 2030, coupled with the “income effect” of rising wealth, will double Asian annual gold demand to 5,000 tonnes by 2030.”
 
Are new gold deposits being found? Or is the discovery rate slowing?
 
“Not only is the rate of discovery slowing, the composition is changing. Mines now are much more expensive than they used to be. The average mine in the world needs to dig up 1 tonne of earth to get 1 gram of gold. In the 1970’s the same tonne of earth would yield 9 grams of gold. So to maintain adequate production to satisfy demand, prices need to make it economical to do so. At current prices, 20% of the world’s gold mines are not making money.”
 
Gold news
 
ANZ Banking Group (ASX:ANZ) has predicted the gold price could more than double by 2030 on the back of strong demand from Asia and a finite supply of the commodity. From a current price of $US1,204 per ounce ANZ has forecast the precious metal could fetch $US2,400 in about 15 years time.
 
Iron ore woes
 
Fortescue Metals Group Limited (ASX:FMG) has declined to pursue a previously announced $US2.5 billion Senior Secured Note offering and refinancing. Fortescue says that it received significant investor interest and the required investment grade ratings. However volatility in US credit markets resulted in unfavourable terms and conditions and higher costs so the company chose not to go ahead.
 
BHP Billiton Limited (ASX:BHP) has affirmed its annual iron ore targets as it continues to tackle the steel making commodity’s price declines. The diversified mining giant’s Western Australia Iron Ore business (WAIO) achieved record production of 124 million tonnes of iron ore in the first half of the 2015 financial year.
 
Earnings results
 
Lynas Corporation Limited (ASX:LYC) has widened its loss in the first half of the 2015 financial year and amended a financing agreement. The rare earths producer booked an interim net loss of $142.2 million, increasing from a loss of $81.5 million the year before.
 
Restructuring
 
BHP Billiton Limited (ASX:BHP) has revealed the demerger of its proposed $US15 billion spin-off South32 will likely cost the company about $US738 million. The diversified mining giant says the charges include stamp duty and cash tax, set up, separation and execution costs, including financial advisor costs.
 
New South Wales focussed coal producer Whitehaven Coal Limited (ASX:WHC) has secured $1.4 billion refinancing. The new senior secured bank facility has been provided by a syndicate of Australian and international banks, subject to conditions being met.
 
Rio Tinto Limited (ASX:RIO) says it paid $US7.1 billion in taxes around the world last year. The global miner has advised the majority of its taxes and royalties were paid in Australia, coming to $US5.6 billion.

-- John Treadgold