Swiss gold exports

The huge level of weekly Shanghai Gold Exchange delivery numbers is becoming something of a repetitive news item and is perhaps losing its impact, but it shouldn’t.  Week 37 (ending September 18^th) saw another 63 tonnes delivered out of the Exchange, which makes the year to date total 1,892 tonnes – 281 tonnes more than at end week 37 in the massive 2013 record year for Chinese gold consumption.  If we extrapolate from the year to date figure this would suggest total SGE gold withdrawals for the year would come to an enormous 2,650 tonnes or higher – equivalent to over 80% of total global supply of new mined gold.  With SGE deliveries usually rising late in the year in the long build-up to the Chinese New Year, which falls on February 8^thnext year, we certainly shouldn’t discount the likelihood of this level being achieved, or even bettered.  There seems to be no slowdown happening as yet.

Overall, SGE deliveries started to pick up in early July (normally one of the weakest months of the year) and have averaged 62 tonnes a week since then.  The figure for the week ended September 11^th was the third highest weekly total ever

12 week withdrawal figures on SGE to September 18th

SGE Withdrawal week ended	Physical gold withdrawn
July 3rd	44.3 tonnes
July 10th	61.8 tonnes
July 17th	69.2 tonnes
July 24th	73.3 tonnes
July 31st	53.3 tonnes
August 7th	56.1 tonnes
August 14th	65.3 tonnes
August 21st	73.0 tonnes
August 28th	59.9 tonnes
September 4th*	36.8 tonnes*
September 11th	73.7 tonnes
September 18th	63.2 tonnes
Total	729.9 tonnes

*September 4^th figures are for a three day trading week with the Exchange closed for the Chinese Victory Day celebrations on the Thursday and Friday.

These figures fly in the face of the same mainstream analysts’ estimates of Chinese demand this year, which they say is slipping, along with the nation’s declining GDP growth rate – although this is still currently estimated at over 6% .  The disparity between the SGE figures and the analysts’ assessments of Chinese consumption is ever growing – and this year looks as though the difference by the year end may be as much as 1,500 tonnes or more.

As we have noted before, a significant proportion of the difference is down to how the analysts estimate ‘consumption’.  Demand categories such as gold used in financial transactions tends to be ignored by the analysts, yet this is still gold flowing into China and in terms of gold movement from West to East remains hugely relevant.

Jeff Christian of CPM Group, in his recent presentation at the Denver Gold Forum attributed the enormous disparity to a very large proportion of SGE gold being in a loop between jewellery manufacturers and the Exchange which meant that he considers there’s a huge amount of double counting involved.  Yet if this is the case then presumably it would also have applied to 2013 to the same extent and back then there was recognition from all that Chinese demand hit a new record level, although still not as high as SGE gold withdrawals for that year.  With SGE withdrawals so far this year now being 17% higher than at the same time in 2013, then we should expect to see demand as calculated by the analysts at considerably higher levels than even in 2013 – not lower as they are claiming this year.

Jeff Christian and CPM’s view that SGE gold withdrawal figures overstate the demand position by as much as 233% does seem excessive under these circumstances.  It suggests recognition that there is this huge assessed  discrepancy between the SGE figures and actual Chinese demand as calculated by the analysts and then coming up with a theory to fit their own calculations.  This theory is then presented as fact.  I may be doing Christian a disservice here, but given the other mainstream analysts have sometimes come up with differing answers to the massive gap, one has to wonder how accurate any of their Chinese demand assessments actually are.  There is a severe lack of transparency here which presumably the Chinese have no wish to clarify.

If we add up known gold exports to China from Hong Kong, and direct to the mainland, from Switzerland and the UK, all of which publish these data, add in China’s own domestic production plus an assumed level of domestic scrap supply and imports from other nations, all this looks to be heading to a total of 2,000 tonnes or more this year.  This, like the SGE withdrawal figures, is also hugely more than the analysts’ demand estimates.  But this gold is all being ‘consumed’ inside China in some form or other – perhaps including some by the central bank – and continues to demonstrate China’s dominant position in the absorption of global physical gold flows.

According to gold and China watcher Koos Jansen, SGE withdrawals are indeed recognised by the Peoples Bank of China as equating to the country’s real gold demand – but then of course the PBoC has also been complicit in under-reporting the Chinese central bank gold holdings for many years. And there are few outside China who believe that the supposed increase in transparency engendered by now reporting monthly central bank purchases is necessarily any more realistic than the times when information on these purchases was withheld.

The PBoC, of which the SGE is a subsidiary, also tells us that the Gold Exchange rules prevent roundtripping of gold which, if correct, would totally negate Christian’s theory – but then it’s a case of who do you believe to provide the more realistic data – the PBoC, or the World Gold Council, GFMS, Metals Focus or CPM.  Perhaps none of the above.  The analysts are all good at picking up and collating data from reliable sources, but perhaps not from countries like China which can make disinformation into an art form if it suits.

This blog post was originally published on www.sharpspixley.com.  View more of my articles by clicking on the site.