Gold flows east as bars recast for Chinese defy slump


By Nicholas Larkin, Chanyaporn Chanjaroen, and Glenys Sim
Bloomberg News
Monday, January 27, 2014

Gold's biggest slump in three decades has been a boon for MKS (Switzerland) SA's PAMP refinery near the Italian border in Castel San Pietro, whose bullion sales to China surged to a record as demand rose for coins, bars and jewelry.

As prices plunged 28 percent in 2013, investors dumped a record 869.1 metric tons from gold-backed funds traded mostly in the U.S. and Europe. Much of that metal is ending up in Asia, where companies such as The Brink's Co., UBS AG, and Deutsche Bank AG are opening new vaults. China's expanding wealth has made the country the world's largest buyer, surpassing India, as imports reached an all-time high.

PAMP Managing Director Mehdi Barkhordar, who credited China's "insatiable" appetite for a sales boost of as much as 20 percent last year, remains optimistic even as growth in the world's second-largest economy slows. "The demand in China is off its peak, but still respectable," he said last week.

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To keep up with orders, MKS added shifts at the PAMP refinery, located about 4 miles (6.4 kilometers) from the Italian border, Barkhordar said in November as he showed off a 1-gram gold piece the size of a fingernail. Furnaces that can process more than 450 tons a year were at full capacity from April to June, melting mined metal, scrap jewelry and ingots at 1,000 degrees Celsius (1,832 degrees Fahrenheit) into the higher purities and smaller sizes favored by Asian buyers.

Brink's, the largest provider of precious-metals logistics and storage, is adding room on top of a vault the company opened in 2012 at the Singapore Freeport building next to Changi International Airport, with a sleek, modernist lobby and a twisting, polished-steel sculpture by Ron Arad that stands 5 meters high. Inside, the gold bars are protected by prison-like barriers, two body scanners and 8-ton, fireproof gates.

"We need additional capacity, so we have to take further space," said Baskaran Narayanan, the 45-year-old Singapore general manager for Richmond, Virginia-based Brink's. "There's a surge in demand for precious metals in Asia, and one can see the focus and movement from the west to the east."

A new Brink's vault in Singapore set to open by March will be the company's fifth in the city state, said Narayanan, who spent two decades in the security industry. The 154-year-old company also is adding space in Hong Kong and mainland China to meet growing storage demand, said Guy Bullen, the firm's senior vice president for the Asia-Pacific region.

Brink's said Asia-Pacific revenue grew 12 percent to $128.9 million in the first nine months of 2013, more than any other region. Deutsche Bank said in June it started a storage facility in Singapore that can hold as much as 200 tons, its largest outside London. UBS, Switzerland's biggest bank, opened one to keep bars for its wealth-management clients in Asia. In Shanghai, Malca-Amit Global Ltd. opened a vault in November that can store 2,000 tons, or a pile valued at $80 billion.

Buyers in the region are snapping up jewelry, coins and gold bars after the price of the metal fell last year for the first time since 2000 and by the most since 1981. Bullion entered a bear market in April and touched a 34-month low of $1,180.50 an ounce in London on June 28, down 39 percent from a record reached in September 2011 of $1,921.15. It traded yesterday at $1,256.80.

Gold rallied for 12 straight years, with gains accelerating from 2008 on bets that measures by the world's central banks to stimulate growth after the global recession would devalue currencies and accelerate inflation. The 70 percent price gain from December 2008 to June 2011 beat global equities and the Bloomberg Dollar Spot Index as the Fed pumped $2 trillion into the financial system. Investors had accumulated 2,632.5 tons, equal to almost a year of mine production, through exchange-traded products by December 2012.

Last year, the sentiment shifted as the Federal Reserve signaled plans to slow bond purchases, while gains in U.S. consumer prices remained in check. The central bank in December said it would cut the pace of bond buying to $75 billion a month from $85 billion.

As debt buying and record-low interest rates from the U.S. to Europe pushed global stocks last month to the highest since December 2007, U.S. consumer-price gains averaged 1.5 percent in 2013, down from 2.1 percent in 2012 and 3.2 percent in 2011. The Bloomberg dollar gauge, a measure against 10 major currencies, rose 12 percent from a three-year low in July 2011.

"Gold got way ahead of itself on the perception that this flooding of the system with money would lead to runaway inflation and a weaker dollar, and that really hasn't happened," said Donald Selkin, who helps manage $3 billion as chief market strategist at National Securities Corp. in New York. "Gold doesn't pay any kind of dividend. There are storage costs if you take delivery, and as a result, it's been in a downtrend."

Investor sales through gold ETPs wiped $73.4 billion from the value of the funds last year and holdings reached the lowest since October 2009 this month, data compiled by Bloomberg show. The SPDR Gold Trust, the largest gold ETP and which is listed in New York, accounted for 64 percent of global sales last year.

Billionaire John Paulson, the biggest SPDR holder, told clients in November he personally won't invest more money into his gold fund because it's not clear when inflation will quicken. The hedge-fund manager, who held his SPDR position in the third quarter after cutting holdings by 53 percent in the previous three months, lost 63 percent last year as of October in his PFR Gold Fund, a person familiar with the matter said.

The slump in bullion forced the world's gold-mining companies to write down at least $26 billion of assets.

Most of the 174,100 tons of gold ever mined is still in circulation. Producers raised annual output 21 percent since 2008 after gold rallied, and more will be mined through 2016, Morgan Stanley estimates. The bank forecasts rising output even as Barrick Gold Corp., the biggest producer, said last year it may curb, close or sell its least-profitable operations to boost returns as the price rout deepens.

Goldman Sachs Group Inc. expects prices at $1,050 by the end of 2014, while Societe Generale SA sees an average of $1,135 this year and $1,100 in 2015. Both banks correctly predicted the decline in 2013. Charles Morris, who oversees about $1.8 billion at HSBC Global Asset Management in London, cut his physical-gold holding to 1 percent, from as much as 15 percent in early 2012.

"In the Western world, we've enjoyed a popular bull market in gold, mainly via the gold ETFs, and it appears to be over," Morris said. "In China, there are a large number of new outlets, including many banks in the provinces, that are selling gold bars. Many Chinese people, who've had limited access to gold in the past, think it's a good idea to have a bar or two as a long-term investment."

The U.K. shipped 1,291 tons to the refining hub of Switzerland last year through November, more than the previous seven years combined and equal to more than five months of mine output, according to data from European Union statistics service Eurostat and Barclays Plc. Macquarie Group Ltd. says that's a sign of the movement from west to east.

Hong Kong exported a record 1,108.8 tons to China in 2013, almost double the total in 2012, according to data from the Hong Kong Census and Statistics Department. Mainland China doesn't publish the data.

Consumer purchases of gold in China surged 30 percent in the 12 months through September to 996.3 tons, overtaking demand in India, where usage gained 24 percent to 977.6 tons, the World Gold Council estimates. In the first nine months of 2013, China was at 797.8 tons, already eclipsing its full-year record of 778.6 tons, set in 2011, and full-year usage may exceed India's all-time high 1,006.5 tons in 2010.

Chinese demand may rise by at least the pace of economic growth, Albert Cheng, Far East managing director at the producer-funded group, said in Rome on Oct. 1. The world's second-biggest economy will expand 7.5 percent this year, data compiled by Bloomberg show.

That's weaker than the average of 8.85 percent growth for the past five years, and the least since 1990. That will help slow the expansion of jewelry demand in China to 5 percent this year after a 19 percent gain in 2013, Barclays estimates.

India's government choked off inbound shipments by raising import taxes on gold three times last year to help pare a trade imbalance that has weighed on the national currency, the rupee. The 24 percent rise in Indian jewelry, bar and coin purchases to 977.6 tons in the 12 months through September lagged the 30 percent gain to 996.3 tons in China, the gold council said.

Premiums in India reached a record $160 above the London price in December. Higher surcharges reflected reduced supply rather than rising demand, Credit Suisse Group AG said in November. The country is seeking to cut imports to 800 tons in the 12 months ending March 31, from 845 tons a year earlier.

Gold demand is increasing as the world's two most-populous nations get wealthier. Per-capita gross domestic product, which indicates living standards, will jump 50 percent to $9,865 in China by 2018 and 32 percent to $1,869 in India, according to the Washington-based International Monetary Fund. That's faster than the 23 percent increase in the U.S.

"India will consume gold for a long, long time because, for the Indian farmer, gold is one of his best assets," said Barkhordar, who runs the PAMP refinery in Switzerland. "He will keep this gold for his daughter's dowry, but he can also use it in case he's short of cash for the next crop."

The surge in orders meant some parts of the refinery worked three shifts instead of the usual two, Barkhordar said. It takes five to six working days to turn mined or scrap gold into a bar, he said. The 200 or so employees at the 110,000-square-foot PAMP facility, located about 3 miles from the Argor-Heraeus SA and Valcambi SA refineries, make bars ranging from 0.3 gram to 12.5 kilograms.

While China overtook South Africa as the world's largest gold producer in 2007, domestic output failed to keep up with the nation's consumption, said Duan Shihua, a partner at Shanghai Leading Investment Management Co. Mines produced 403 tons in 2012, while demand was 776 tons, according to the China Gold Association. Output last year through November was at 392.14 tons, up 7 percent from a year earlier, data show.

The government lifted a ban on bullion trading and opened the Shanghai Gold Exchange in 2002, making buying easier for investors in the most-populous nation. Huaan Asset Management Co. and Guotai Asset Management Co. won state approval in June to list the country's first gold-backed ETPs, and the Shanghai Futures Exchange extended trading hours in July.

Trade also has expanded in Dubai. The emirate accounts for about 25 percent of global physical gold trading, and bullion demand grew eightfold in the past six to 10 years, said Dubai Gold & Commodities Exchange Chief Executive Officer Gary Anderson. The DGCX plans to list a spot gold contact this year to add to its futures offering.

"Many of the positive drivers for gold prices in the past five years have started to disappear," said Jeremy East, who moved to Hong Kong from London in June and is head of metals trading at Standard Chartered Plc. "At the same time, we have seen a significant increase in physical demand for gold in Asia, especially China. The expectation is that Asia is going to play a much bigger role for setting the international prices for gold and also for the whole metals complex."

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