While the upwards restating on Friday of China’s gold reserve position at a much lower level than the market had been anticipating may have disappointed gold investors (China ups gold reserves at last – gold bulls disappointed and China shocks bullion market with small gold reserve increase), the latest reported volume of gold withdrawals from the Shanghai Gold Exchange (SGE) should provide counter encouragement.
We keep on reading in the mainstream media that Chinese (and Indian) gold demand is weak at the moment but this, in China at least, would seem to be belied by the recent levels of SGE gold withdrawals at what is usually a very weak time of year. And the latest figure out of the SGE for the week ended July 10th seems to have been truly exceptional for summer trading. The figure was a fraction under 62 tonnes – the eight largest weekly total ever – at a time of year when SGE withdrawals are usually at the 20-30 tonne level – bringing the total for the year to date to 1,191 tonnes. As I wrote in a recent article on Mineweb (China on track for new annual record gold deliveries), if the momentum keeps up into the usually stronger late third and fourth quarters, Chinese gold demand, as represented by SGE withdrawals, is heading for a comfortable new record exceeding the 2,186 tonnes of 2013.
It should be recognised here though that with China not everything is always as it seems on surface. SGE withdrawal figures nowadays are muddied by the inclusion of withdrawals out of the Exchange’s International section – the SGEI – but these are not reported separately, but just in the cumulative total. SGEI withdrawals do not necessarily have to be landed in China and while they are thought to have been small so far there’s always the possibility that these have been taking off thus compromising the domestic ones. Also, as we have pointed out before western mainstream analysts dismiss the SGE withdrawal figures as not being a measure of true retail demand. (This is partly a matter of what they see as included in demand or consumption which ignores some categories – particularly gold used in financial transactions and as collateral – as well as suggesting there could be a degree of double counting in the SGE statistics (although SGE rules should preclude this).
But as an indicator of Chinese sentiment towards gold, and of gold flows into and within what is still comfortably the world’s largest consumer, SGE withdrawal figures still have to provide the pre-eminent data.
Gold investors should remember too though, that in the previous record year for Chinese gold demand, 2013, the gold price plunged throughout the year with the huge gold flows from West to East seemingly being totally ignored by the markets which set the gold price in New York and London. Prices are set as much – far more in fact – by sometimes dubious dealings on the futures markets than by supply/demand fundamentals. Ultimately, gold pricing, along with most of the world’s available gold bullion, will move to the East but this may still be some time away, but with the probable launch of a Shanghai gold benchmark price setting system later this year, this would seem to be getting ever closer.