While physical gold withdrawals from the Shanghai Gold Exchange (SGE) in the latest reported week were lower than the massive 72 tonnes a week earlier at 53 tonnes it remains high for the time of year. But the key to what has been happening with Chinese demand as represented by SGE withdrawals is where the total for the year to end-July stands compared with previous years.
Looking at this metric we can see from the chart below that SGE withdrawals this year so far have totalled a massive 1,464 tonnes – which is running around 116 tonnes ahead of the huge record 2013 year at the same time and an enormous 370 tonnes ahead of the 2014 figure at the end of July when the annual total came to 2,136 tonnes. If the average monthly withdrawal level (49 tonnes a month so far) for the current year keeps up we will be looking at annual withdrawals totalling more than 2,500 tonnes for the full year – and with Chinese demand tending to be strongest in the last four months and the first two months of the year this level could indeed be a possibility.
If we compare this potential level of annual demand with the likely total of new mined gold this year, China would account for around 75% of the yearly total on its own!
Chart from Nick Laird’s excellent sharelynx.com website
These high SGE withdrawal levels do not necessarily mean that the gold price will pick up accordingly, as witness what happened in 2013 when the SGE figure hit a then record 2,186 tonnes, yet the gold price collapsed from $1681.50 at the beginning of the year to $1201.50 by the year end. However what we are seeing are continuing huge gold flows from West to East (Indian gold imports too are predicted to hit over 1,000 tonnes again this year) which will continue to run down gold inventories in the West, where the price tends to be set. At some stage any loosely held Western physical gold holdings will be depleted to the extent that the low levels will almost certainly have a positive impact on the gold price – although by that time it may well be China which is setting the price anyway.