The latest announcement on gold withdrawals out of the Shanghai Gold Exchange (SGE) for August saw an increase on July withdrawals, but they remain hugely (45.5%) below those for August last year, although admittedly July, August and September 2015 saw exceptionally high levels. If we compare the August figure with 2014 it was still 10.8% down. Year to end-August withdrawals from the Exchange were a massive 28.6% down on the same period of 2015, but only 1% down on 2014 levels when the full year total was a little over 2,100 tonnes, although the current trend suggests that this level may not be reached this year.
Some equate SGE withdrawal figures as equivalent to total Chinese gold demand, although others dispute this suggesting there is a degree of double counting involved. But be this as it may we do have a pretty good handle on Chinese gold imports and together with China’s own gold output of around 450 tonnes a year, these come out as far closer to the SGE withdrawals figure than Chinese ‘consumption’ figures as estimated by the major precious metals consultancies. The main difference is interpretation as to what is actually considered as ‘consumption’ which, for the mainstream analysts is a fairly specific universe which ignores gold imported for use by the financial sector. To us this is till gold flowing into the Chinese mainland, and not coming out again, so should be incorporated in overall demand figures.
To put all this into perspective, China gold follower Koos Jansen, writing on www.bullionstar.com, last year estimated Chinese gold imports, mostly as reported by Switzerland, the UK, Australia, the U.S., Canada and Hong Kong, at 1,575 tonnes to which should be added China’s domestic gold production of around 450 tonnes and a degree of scrap at an estimated 225 tonnes – so an overall total of 2,250 tonnes. In 2015 SGE withdrawals totalled 2,596 tonnes which is far closer to known gold supply from Jansen which he reckons to be probably a minimum.
*February withdrawals figures tend to be erratically low due to SGE closure during the Chinese New Year (Golden Week) holiday which this year was on the week commencing February 8th
But where does this all leave us in terms of Chinese gold demand this year. We would suggest south of 2,000 tonnes according to the SGE figures. With Indian demand also reported as sharply down so far this year the big Asian demand element is obviously slipping sharply, but this has been more than overshadowed by the vast pick-up in demand from the world’s gold-backed ETFs which the World Gold Council has estimated as being up by 679 tonnes to end-August. What you lose on the swings one gains on the roundabouts (carousels to American readers!)
We were hoping for some clarification on the latest reporting of Shanghai Gold Exchange(SGE) gold deliveries in today’s SGE gold data report for week 2 given the seemingly massive figures being reported so far this year and this has not been forthcoming. The announced figures so far this year are so far in advance of anything we have seen beforehand that the natural conclusion is that the goalposts have been moved and this year’s figures can not be compared with last year’s.
For example, the average weekly withdrawals figure from the exchange – the literal translation of the category headline as reported by the SGE is ‘deliveries’ – was around 50 tonnes in 2015. So far this year the reports out of the SGE for weeks 1 and 2, using exactly the same heading in the released table – 本周交割量 – as for last year’s released tables of deliveries, have been 238.2 tonnes in week 1 and 247.2 tonnes in week 2 giving an apparent total for the year to date of 485.5 tonnes. (However there has presumably been a small unannounced adjustment for week 1 as the cumulative total (累计交割量 ) reported by the SGE with the week 2 figures was actually 491.2 tonnes.) These are so much larger than last year’s figures that we are now pretty certain that although the descriptive headline in the tabulated announcement is exactly the same as for last year, the new figures relate to a different statistical make-up.
Koos Jansen, as always, writing on http://www.bullionstar.com , has come up with an explanation for the huge differences between this year’s and last year’s statistics . He draws our attention to an announcement by the SGE dated January 16th (in English) which states:
With a view to distributing market data regarding physical deliveries in a more comprehensively way and helping market participants interpret delivery-related data and reports more accurately, the Shanghai Gold Exchange (the “Exchange”) has adjusted some terms in the Delivery Reports which are included in Market Data Weekly Reports and Market Data Monthly Reports. The adjustments shall be effective as of Jan. 1st 2016 and are clarified as follows:
1.The term “delivery amount” refers to the sum of the trading volume of physical products and the contract delivery volume of deferred products. The term “delivery ratio” refers to the proportion of delivery amount to the total trading volume of both physical and deferred contracts.
2.The term “load-out volume” refers to the total volume of standard physical bullions withdrawn from SGE-certified vaults by members and customers.
3.The terms “accumulative delivery amount”, “accumulative trading volume” and “accumulative load-out volume” respectively refer to the sum of delivery amount, trading volume and load-out volume from the beginning of the year to the statistical time point. The term “accumulative delivery ratio” refers to the proportion of accumulative delivery amount to the accumulative trading volume.
4.Delivery-related data of silver products are added into the reports.
To an extent, this only serves to confuse. According to Jansen – perhaps the foremost expert on things SGE – the old reported withdrawals figure to compare like-with-like would be the “load-out volume” noted as item 2. in the SGE announcement. Unfortunately this is not one of the figures released by the SGE in its new weekly statistical presentations.
So, for the moment, all that we can glean from the SGE figures is that total volume through the Exchange remains very high and those for week 2 were a little higher than for week 1, but the amounts which relate to the old SGE withdrawals figure would seem to remain obscured within the new, supposedly improved, SGE data announcements.
For Koos Jansen’s full explanation of how he sees the latest SGE presentation of its statistics click on: Are SGE Withdrawals Gone?
Analysts at Bloomberg have calculated that China’s gold reserves have grown from 55.38 million ounces (1,722.5 tonnes) at end October to 56.05 million ounces (1,743.3 tonnes) at end-November by taking the announced gold reserve figures in U.S. dollars for the two months and applying the LBMA gold price prevailing at the end of each month to make their estimate. The figures thus suggest that China increased its reserves by 20.8 tonnes over the period – the highest monthly increase in its gold reserves since it started announcing monthly reserve figures back in July.
There still remain doubts about the true levels of Chinese gold holdings, with many analysts believing these are still being understated, as they have been in the past when there were large time gaps – five or six years – between reserve increase announcements. China’s gold reserves are seen as of political significance with the country only letting the world know what it wishes it to believe!
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 18th) 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 8thnext 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 11th was the third highest weekly total ever
12 week withdrawal figures on SGE to September 18th
SGE Withdrawal week ended
Physical gold withdrawn
*September 4th 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.
There is some dispute between Koos Jansen, probably the pre-eminent analyst of Chinese gold matters, andwho writes for bullionstar.com– the copyright holder for the article which follows and the mainstream Western analysts such as GFMS, Metals Focus, CPM Group and Precious Metals Insights as to what should actually constitute true Chinese gold demand. Jansen is adamant in his opinion that SGE gold withdrawals are the true indicator, while the western analysts moostly come up with their figures which may differ by 1,000 tonnes or more as to what constitutes Chinese demand. Here Jansen comments on a recent statement by Philip Klapwijk – as quoted by myself in an article for Mineweb – that some of the difference in the figures could be accounted for by re-exports of Chinese gold (mostly illegally) to Hong Kong for remelting which he put at over 1,000 tonnes last year. Jansen sees this as an irrelevance in the true Chinese demand figure and feels the western analysts come up with spurious arguments to account for the huge differences. Jansen’s article on this follows:
Western Consultancy Firms Continue Making Up False Arguments In An Attempt To Debunk SGE Withdrawals
More false arguments – that should explain the difference between Shanghai Gold Exchange (SGE) withdrawals and Chinese gold demand as disclosed by the World Gold Council – are being spread in the gold space. The most recent argument is gold export from China.
Since 2013 I’ve been writing the World Gold Council (WGC) is grossly understating Chinese gold demand. The aggregated difference between SGE withdrawals and WGC demand from 2007 until 2014 is 3,354 tonnes. Though many arguments have been tested the Western consultancy firms have not been able to elucidate the difference – illustrated by the fact many new arguments keep appearing.
Chinese Gold Export Has Got Nothing To Do With SGE Withdrawals
Against all odds, the ‘export’ argument was presented by Phillip Klapwijk, former Executive Chairman of GFMS, currently Managing Director of Precious Metals Insights Limited (PMI), at the Bloomberg Intelligence Forum in London May 22, 2015, where Klapwijk talked specifically about the ‘supply surplus’ (the difference) in the Chinese gold market. I wouldn’t be writing this post if I would agree with Klapwijk. (PMI is nowadays the main data provider for WGC demand figures.)
In a previous post I’ve expanded on Chinese gold trade rules (click this link to read a detailed analysis). All we have to do now is refresh our memory and have a look at what Klapwijk said in London. There is no transcript of his speech, but Lawrie Williams from Mineweb.com has written an article about Klapwijk’s argument regarding gold export, I assume Williams has reported accurately or Klapwijk wouldn’t have tweeted a link to the article.
The slides from the presentation can be found on the PMI website.
Klapwijk’s argument: gold is exported from China mainland, which explains the difference between SGE withdrawals and WGC demand.
Chinese do export gold – to Hong Kong
…Indeed he [Klapwijk] asserts that this [gold export] has been happening in sufficient quantity to cover virtually all the imbalance between SGE figures and those of the Western analysts over the past two years.
I have a few reasons to believe this is not true:
1) Chinese gold export has got nothing to do with SGE withdrawals as gold is only allowed to be exported from Free Trade Zones, which are separated from the Chinese domestic gold market (the SGE system). It’s prohibited by the PBOC to export gold from the Chinese domestic gold market.
Gold export from China to Hong Kong is nothing new, in contrast to Williams’ headline. Since I’ve been publishing data and charts on gold trade between Hong Kong and China I’ve always included gross import and export.
Not only are these figures well known, it’s also well known gross gold trade between Hong Kong and China has got nothing to do with the Chinese domestic gold market and the SGE system. Gold can only flow in and out of the mainland through processing trade in Free Trade Zones, such as Shenzhen right across the border with Hong Kong. What is net imported into the mainland is done through general trade; this gold is required to be sold first through the SGE. The PBOC does not allow gold to be exported from the Chinese domestic gold market.
Gold that is exported from China is always processing trade from FTZs, it’s not gold from the SGE and therefor can’t have anything to do with the difference we’re after.
It’s pointless to measure total Chinese gold supply by Chinese gross import like Klapwijk does. Gross import has got nothing to do with the Chinese domestic gold market and Chinese gold demand.
Additionally,Round tripping inflates gross gold trade. Round tripping is always done through processing trade; speculators import and export gold from FTZs (usually between Hong Kong and Shenzhen). Because gold used in round tripping can make more than one round – the same batch of gold is imported and exported over and over again – Hong Kong/China gross trade data captures far more gold than is used for genuine processing trade (jewelry fabrication). For example, if 50 tonnes are round tripped 6 times, gross import and export are inflated by 300 tonnes, though nothing has been net imported into the Chinese domestic gold market.
2) Gold is smuggled from Hong Kong to China, not the other way around as Klapwijk states. From Williams’ article we can read:
…the China/Hong Kong border has been pretty porous, with very big movements of gold bullion, much in the form of very low mark-up jewellery and artefacts, from Mainland China into Hong Kong.
The low mark-up artefacts are just round trip products in my opinion. They certainly are not smuggled SGE bars.
Let me describe an example of how gold between Hong Kong and the mainland flows: gold bullion is exported from Hong Kong to Shenzhen, then the bullion is manufactured into jewelry and exported back to Hong Kong where thousands of jewelry shops are located (genuine processing trade). In Hong Kong consumer prices for jewelry are significantly lower than in the mainland because of tax rules, as we can see in the next slide from Chow Sang Sang Jewelry.
As a result, many mainland tourists visit Hong Kong to load up on jewelry and return home. It’s common knowledge mainland tourist can walk across the border without having to declare gold jewelry. Chinese customs at the airport is very stringent on the export side, not on the import side (into the mainland).
So, bullion flows from Hong Kong to the mainland, then back to Hong Kong as jewelry and then it’s ‘smuggled’ into the mainland by tourists. No doubt gold is also smuggled from China to abroad, but I have no data on this.
3) Klapwijk greatly overstates Chinese gold export numbers. Let us turn to another slide compiled by Klapwijk.
Although it has got nothing to do with SGE withdrawals, in the slide above it’s shown China exports 1,000 fine tonnes every year based on Hong Kong customs data. Needless to say, I fully disagree; let’s do some number crunching. If I check the numbers on bullion, jewelry and articles from the Hong Kong Census and Statistics Department in 2013 I get totally different results (source import data, source export data). The next chart is based on my calculations and estimates from looking at Klapwijk’s previous chart.
Quite some discrepancies. For the amount ‘gold bullion’ traded have a look at a screenshot from the Hong Kong Census report below. It’s disclosed Hong kong imported 337 tonnes of bullion from China in 2013 – the disclosed value matches this tonnage. I don’t see how Klapwijk can come up with 250 tonnes.
Moving on to jewelry. After scanning the customs reports there was only one item I could find that can be used: “ARTICLES OF JEWELLERY AND PARTS THEREOF, OF PRECIOUS METALS OR METALS CLAD WITH PRECIOUS METALS (G)”, code 89731. Below you can see a screenshot.
Because the weight is in GRAMS, not in KILOGRAMS as is ‘gold bullion’, the total tonnage is 209 metric tonnes. The total value is 39 billion Hong Kong dollars (HKD). The description of this category tells us the jewelries are made of ‘precious metals’, which can be gold, silver or platinum, it’s impossible to know exactly how much gold content is in the jewelry. Additionally, the total value includes gems and fabrication costs. If we deny silver, platinum, gems and fabrication costs and compute the total value to fine gold tonnes, the outcome is 104 tonnes (at a USDHKD exchange rate of 7.75 and a gold price of 1,500 USD). I don’t see how Klapwijk can come up with 450 tonnes.
Same story for articles, I get 1 tonne in contrast to his 300 tonnes. If someone can tell me what categories in the Hong Kong customs reports do capture a few hundred tonnes of fine gold I would be happy to change my numbers. Until then, China does not export 1,000 tonnes of gold to Hong Kong every year.
If the argument is, gold is smuggled out of China and doesn’t appear in Hong Kong trade statistics, that’s another story. In 2014 gold was trading at a small discount on the SGE relative to international prices for substantial periods, this could have triggered smuggling. But, in this scenario SGE bars (bullion) would have crossed the border with Hong Kong, notlow mark-up jewelry and artefacts.
An update and complete rewrite of earlier article on China’s 2014 gold demand as recorded on the Shanghai Gold Exchange
Gold withdrawals from the Shanghai Gold Exchange (SGE) came to just under 58 tonnes for the week ending December 26th bringing the total for the year to that date to just short of the 2,100 tonnes we predicted back in November (see: China 2014 gold demand heading for 2,100 tonnes). With three trading days still to be reported on it looks as if our predicted level will be exceeded. With demand always strong in the runup to the Chinese New Year, January and early February figures are also likely to continue at a high level given the date of the Lunar New Year falls this year on February 19th, the second latest date possible in the Chinese calendar.
SGE withdrawals are seen by the Chinese as equating to that nation’s total gold demand. There is an argument that there may be a small element of double counting with respect to recycled gold, and the total figures have again been slightly muddied as they now include trade through the new international section of the SGE – the SGEI – which doesn’t necessarily move into Chinese hands, but these amounts are small at the moment and the overall figure still provides an excellent year on year comparison of true Chinese demand figures. See charts below for comparisons with prior years from Nick Laird’s excellent www.sharelynx.com and www.goldchartsrus.com websites. It shows that this year’s SGE withdrawals, due to a late surge, are getting remarkably close in total to last year’s record level and very significantly higher than in 2012 and earlier. Indeed the plots on the first chart indicate that if anything, Chinese demand in the final quarter of this year has actually been running stronger than in the same period in the record 2013 year following a substantially weaker middle section of the current year after a very strong start
Reports that India may have again overtaken China as the world’s largest gold consumer look to this observer to be a flight of fantasy……..
Latest figures from Russia’s central bank show that it purchased a further $720 million dollars worth of gold in November – which equates to around 18 tonnes at the prices prevailing that month.
As we noted in a previous article here – Is Russia really on the ropes: Could it sell its gold? – there has been speculation that Russia could liquidate some of its gold reserves – currently sitting at a little under 1,200 tonnes, worth approximately $45 billion at the current gold price. However this is probably unlikely given President Putin’s strong positive feelings about the place of gold in any future currency realignment. Indeed such a realignment may, perhaps through the ‘law’ of uninteneded consequences, be being brought ever nearer through what looks like a concerted effort by the West to destabilise Russia’s economy as punishment for its actions in Crimea and south eastern Ukraine. What this has done is force Russia to set up bilateral trade deals with more friendly nations, notably China and former Soviet union satellites, bypassing the dollar, and also setting up its own version of the SWIFT international payments system in case the U.S. tries to freeze it out from using it. Anything which reduces the use of the dollar in global trade will likely bring the day when a new reserve currency (or perhaps group of currencies) will come about.
Koos Jansen, now writing for http://www.bullionstar.com, has been great in picking up material from non English language statements by key figures which somehow seem to be completely missed by most mainstream Western media. In his latest post on the bullionstar site he publishes an exchange of questions and answers between President Putin at his annual press conference only yesterday, and Russian journalist Vyacheslav Terekhov of Interfax, at which the Russian President stated categorically that the Russian Central Bank “should not hand out our gold and foreign currency reserves or burn them on the market, but provide lending resources” For the full article click here.
Again as we pointed out in yesterday’s article on the Russian economic situation, 50 years of sanctions against Cuba have still not brought that country to its knees. Yes its people may lack the wealth and ‘stuff’ that most Western countries’ citizens take for granted, but they are still happy to support their leader’s policies when they have the continuing perception that it is the wicked USA which causes the problems. This has served to unite the people behind the government rather than rise up against it. So it is with Russia, which has an enormously more self-contained economic system than Cuba had when U.S. sanctions were first imposed, and it also has a people who have lived through many years of economic deprivation before and come through them, perhaps not happily, but stoically. Support for President Putin and his strong-man policies seems to be overwhelming as long as the American bete noire is out there to be blamed for any deprivations suffered.