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Central Bank Austria Claims To Have Audited Gold at BOE. Refuses To Release Audit Reports & Gold Bar List

After years of gradually securing its official gold reserves (unwinding leases) the central bank of Austria claims to have completed the audits of its 224 tonnes of gold stored at the BOE. However, it refuses to publish the audit reports and the gold bar list. What could possibly be so sensitive to hide from public eyes?

After the Germans had activated a program to repatriate 150 tonnes of their official gold reserves in 2012, which was revised in 2013 to have 50 % of their gold on German soil by 2020, and the Dutch repatriated 123 tonnes in 2014, the Austrians have likely been inspired by these initiatives – if European official gold policy is not adroitly aligned among national central banks behind the scenes. In 2015 the Austrian central bank, the Oesterreichische Nationalbank (OeNB), revealed it would repatriate a significant share of its yellow metal from the UK, where they were storing 80 % (224 tonnes) of their total reserves (280 tonnes) at the Bank Of England (BOE). The Austrians decided to eventually have 50 % of their gold on own soil by 2020 – just like the Germans.

Have a look below at the repatriation schedule of the OeNB for the period from 2015 until 2020. We can wonder why the gold is scheduled to be transported over the course of five years instead of a few months. My guess is this is caused by some kind of friction between the BOE and its foreign central bank clients, in this case the OeNB.

Exhibit 1. Courtesy OeNB. Total OeNB gold accounts for 280 tonnes.

But we know that the OeNB didn’t start to get nervous about the safety of their gold in 2012 or 2015. This started right after Lehman Brothers fell in 2008, as documents show the OeNB slowly started to secure its bullion by unwinding gold loans to commercial banks in 2009. Though, the OeNB publicly disclosed these details after the facts in 2015.

Have a look at the overview below. OeNB gold loans to commercial banks have been brought down from 116 tonnes in 2009 to 24 tonnes in 2013.

Exhibit 2. Source: Bericht des Rechnungshofes Oesterreichische Nationalbank – Gold– und Pensionsreserven, Jubiläumsfonds sowie Sozialleistungen.

I (we) first learned the Austrians were worried about the safety of their gold in the UK through an article from from May 2014. The article noted:

Austria is planning to send auditors to the Bank of England in order to verify the existence of Austria’s gold reserves stored in British vaults.

The Austrian accountability office will sent a delegation to London in order to check on Austria’s gold reserves stored in vaults at the Bank of England. … The measure is seen as a consequence of growing public pressure. There is a rising disbelief among Austrians about the existence of the gold.

I acknowledge the request. Any grocery store is obliged to do an inventory once a year. It is the only way of getting rid of these unreasonable allegations”, Ewald Nowotny, Governor of the National Bank of Austria tells Trend.

Exactly. Any gold owner, and thus many central banks including the OeNB, is obliged to do an inventory once a year to be positive his gold is safe and sound. If central banks truly hold the amount of gold they claim, executing a proper audit and publish the documentation shouldn’t be a problem. Or would it?

Well, it could be a problem if a central bank is obstructed by its custodian to perform audits. In February 2015 we learned the OeNB had some problems with auditing their gold at the BOE. The Austrian Court of Audit (Der Rechnungshof) wrote in a report [brackets added by me]:

Late 2013, the OeNB stored roughly 82 % of its physical gold holdings [224 tonnes] at a depository in England [BOE] and therefore ran a high concentration risk. The current [2015] depository concept lacked adequate measures to reduce this risk. Additionally, the gold depository contract with the depository in England contained deficiencies. With respect to the gold reserves stored abroad, internal auditing measures were lacking

The OeNB had no appropriate concept to perform audits of its gold reserves. … The lack of audit measures represented a gap in the internal control procedures of the OeNB. The OeNB started in March 2014 with the development of an ​​audit program, which included all the gold holdings of the OeNB.

So, although the OeNB was trying to audit their gold at the BOE since March 2014, the results haven’t been as desired, as “the gold depository contract with the depository in England contained deficiencies”, and, “with respect to the gold reserves stored abroad, internal auditing measures were lacking”. Noteworthy to mention is that the BOE sent a letter to its foreign central bank clients in June 2013, openly inviting them to come and audit their gold. Please read bellow the letter obtained by colleague gold blogger Bullion Barron:

As you may know, the Bank of England’s vault operation is somewhat unique in that it facilitates both long term central bank storage and active trading.

I am pleased to tell you that we will now allow inspections of a suitable random sample of your bars. We will follow a principle of doing everything we can to accommodate requests, subject to us maintaining our ability to run the vault efficiently.

The workload associated with these visits, combined with regular operations means that you will need to agree the scope and timing of any inspection with us in advance. Furthermore, there will need to be some constraints around the date, sample size and frequency of visits depending on the overall demand.

Due to the number of customers we have, we may not be able to accommodate your request immediately but, we will do everything we can to accommodate you as soon as is reasonably practicable.

If you would like to discuss further details, please contact your Relationship Manager

First of all, it seems that prior to June 2013 foreign central banks had no auditing rights at the BOE at all. That’s shocking. In addition, this letter was sent in June 2013, but in February 2015 Austrian Court of Audit declared, “with respect to the gold reserves stored abroad, internal auditing measures were lacking”. Why couldn’t the OeNB audit its gold in London by 2015 while the BOE had stated in 2013 to welcome clients for metal inspection?  

In any case, I emailed the OeNB in September 2016 to ask what the status was of the repatriation program – how much had been shipped from the UK to Austria. The OeNB replied:

Due to security reasons we are not able to give information concerning the concrete process and status of the transport of the Austrian gold reserves.

Then I asked if the OeNB had been able to finally audit its gold at the BOE and if they have a gold bar list publicly available disclosing each of their bar’s refinery brand, serial number, year of manufacturing, etc. The OeNB replied [brackets added by me]:

…we can confirm that the Oesterreichische Nationalbank has audited her gold holdings in the UK and also in Switzerland, but we also have to tell you that we won’t send a copy of the audit reports.

I regret, we do not have the required [the gold bar] list online.

Isn’t that odd? In 2014 the President of the OeNB Nowotny stated, “any grocery store is obliged to do an inventory once a year. It is the only way of getting rid of … unreasonable allegations”. Effectively he stated that the only way to proof the existence of the Austrian gold is to do a proper audit. But once that audit is completed the reports should made public or the whole exercise isn’t credible. Actually, by not releasing the audit reports more concern is raised. Can an audit “get rid of … unreasonable allegations” if it’s done in secret and the documents remain classified? I think not.

Consider this…

  1. The audits have been obstructed for at least 20 months (June 2013 – February 2015).
  2. After the audits had been allegedly completed, the OeNB decided not to publish the audit reports. 
  3. The OeNB settled to repatriate 140 tonnes from the BOE. But why not all? Did the OeNB discover a portion of their gold was missing? Have European central banks settled with their custodians (BOE & New York Fed) to receive a slice of what was once deposited? 

Why not full transparency? Why are central bankers always so secretive about their official gold reserves? What could possibly be the reason to hide inventory documents from public eyes? Why doesn’t the OeNB publish a gold bar list? Why doesn’t the Dutch central bank publish a gold bar list (and makes up false excuses)? Why did the German central bank publish a gold bar list that is worthless because it doesn’t disclose gold bar serial numbers, refinery brands and years of manufacturing? Why does it take Austria and Germany another four more years to repatriate gold from the UK and US?

If the OeNB, and many other central banks, keep hiding their documents from us all we can do is worry and speculate. Not because we want to, but because we’re forced to.

BullionStar, though, will keep pushing for more transparency at every central bank around the world. Whether it be the central bank of the Netherlands, Germanythe US, Belgium, Italy, Austria or the IMF.

To be continued…

OeNB Director Kurt Pribil and President Ewald Nowotny.

The Great Physical Gold Supply & Demand Illusion

Gold supply and demand data published by all primary consultancy firms is incomplete and misleading. The data falsely presents gold to be more of a commodity than a currency, having caused deep misconceptions with respect to the metal’s trading characteristics and price formation.

Numerous consultancy firms around the world, for example Thomson Reuters GFMS, Metals Focus, the World Gold Council and CPM Group, provide physical gold supply and demand statistics, accompanied by an analysis of these statistics in relation to the price of gold. As part of their analysis the firms present supply and demand balances that show how much gold is sold and bought globally, subdivided in several categories. It’s widely assumed these balances cover total physical supply and demand, which is incorrect as the most important category is excluded. The firms though, prefer not to share the subtle truth or their business models would be severely damaged.

The supply and demand balances by the firms portray gold to be more of a commodity than a currency, as the gist of the balances reflect how much metal is produced versus consumed – put differently, the firms mainly focus on how much gold is mined versus how much is sold in newly fabricated products. However, in reality gold is everlasting and cannot be consumed (used up), all that has ever been mined is still above ground carefully preserved in the form of bars, coins, jewelry, artifacts and industrial products. Partly because of this property the free market has chosen gold to be money thousands of years ago, and as money the majority of gold trade is conducted in above ground reserves. Indisputably, total gold supply and demand is far in excess of mine production and retail demand.

As most individual investors, fund managers, journalists, academics and precious metals analysts consider the balances by the firms to be complete, the global misconception regarding gold supply and demand is one of epic proportions. Physical gold is a profound anchor in our global financial system and thus it’s of utmost importance we understand the fine details of its trading characteristics. 

Supply & Demand Metrics By The Firms

The firms can argue that the difference between what they present as supply and demand (S&D), as opposed to what I deem to be a more unadulterated approach of S&D is due to contrasting metrics. Accordingly, we’ll discuss their metrics to reveal their infirmity. In a nutshell, the firms only count the physical gold S&D flows that are easy to measure, while leaving out the most important part: institutional supply and demand. 

Although the firms all have slightly different methodologies to measure S&D, from comparisons the numbers appear to be quite similar. For our further investigation we’ll spotlight the metrics and models by GFMS. The reason being, GFMS has been the only firm that was willing to share a full description of their methodology for publication – to be viewed here. Metals Focus (MF) provided a partial methodology, the World Gold Council and CPM Group declined to comment.

Let’s have a look at GFMS its S&D categories. On the supply side is included:

  • Mine supply (newly mined gold)
  • Scrap supply (gold sourced from old fabricated products)

On the demand side is include:

  • Jewelry demand (gold content used in newly manufactured jewelry products bought locally at retail level, adjusted by jewelry exported and imported).
  • Industrial demand (the volume of gold used in industrial applications, for example bonding wire, products used in semiconductors/electronics and dental alloys).
  • Retail bar investment (the net volume of bars that are purchased by individual investors through retail channels).
  • Coin investment (a combination of published data from mints and also a proprietary survey conducted by GFMS detailing where coins are sold).

The above four demand categories summed up are often referred to as “consumer demand” by the firms.

Furthermore GFMS includes:

  • Net hedging (change in physical market impact of mining companies’ gold loans, forwards, and options positions)
  • Net official sector (total central bank selling or buying)
  • ETF inventory build (change in ETF inventory)
  • Exchange inventory build (change in exchange inventory)

The last four categories can be either supply or demand. In example, when central banks (the official sector) in total are net sellers this will be listed as a negative demand figure, as is shown in the S&D balance by GFMS below from 2006 until 2009, when central banks in total are net buyers this will be listed as a positive demand figure, as is shown in the balance from 2010 until 2015. For a clear overview of the GFMS S&D balance please have a look at all line items below.

Exhibit 1. Courtesy GFMS. Global gold S&D balance as disclosed in the Gold Survey 2016.

According to GFMS Supply consists of Mine production, Scrap and Net Hedging. In turn, Demand consists of Jewelry, Industrial Fabrication, Retail Investment, and Net Official Sector. After balancing Supply and Demand this results in a Physical Surplus/Deficit. Then, ETF Inventory Build and Exchange Inventory Build are added/subtracted from the Physical Surplus/Deficit to come to a Net Balance.

GFMS likes to pretend their balance is complete and occasionally articulates any surplus or deficit arising from it is positively correlated to the price of gold, which is anything but true, as I will demonstrate step by step.  

The Firms Exclude Majority Gold Supply & Demand

Most important what’s excluded from the balance is what we’ll refer to as institutional supply and demand, which can be defined as trade in bullion among high net worth individuals and institutions. Usually the bullion in question comes in 400-ounce (12.5 Kg) London Good Delivery (GD) bars having a fineness of no less than 995, or smaller 1 Kg bars having a fineness of no less than 9999. In addition, bullion bars can weigh 100-ounce or 3 Kg, among other less popular sizes, generally having a fineness of no less than 995. Bullion can be traded without changing in weight or fineness, but it can be refined and/or recast for transactions as well, in example from GD bars into 1 Kg bars. In some cases institutional supply and demand involves cross-border trade, when bullion is sold in country A to a buyer in country B, in other cases the bullion changes ownership without moving across borders.

Provided are two exemplifications of institutional S&D:

  • An (institutional) investor orders 400 Kg of gold in its allocated account at a bullion bank in Switzerland – which would be purchased in the Swiss wholesale market most likely in GD bars. This type of S&D will not be recorded by GFMS.
  • A Chinese (institutional) investor buys 100 Kg of gold directly at the Shanghai Gold Exchange (SGE), the Chinese wholesale market, in 1 Kg 9999 bars and withdraws the metal from the vaults. Neither this transaction will be registered by GFMS – or any other firm.

These examples show the S&D balances by GFMS are incomplete.

For illustrational purposes, below is a chart based on all S&D numbers by GFMS from 2013, supplemented by my conservative estimate of institutional S&D. Including institutional transactions total S&D in 2013 must have reached well over 6,600 tonnes.

Exhibit 2. Global gold S&D 2013 by GFMS, including conservative estimate institutional S&D.

GFMS Covers The Tracks With Help From The LBMA

Although GFMS intermittently admits their number are incomplete (they have to), at the same time they’ve been battling for years to eclipse apparent institutional S&D for its audience. Dauntless tactics were needed when in 2013 institutional demand in China reached roughly 1,000 tonnes and over 500 tonnes in Hong Kong. Institutional demand in the East was predominantly sourced through GD bars from the London Bullion Market, which were refined into 1 Kg 9999 bars that are more popular in Asia. For the cover up GFMS went to great lengths to refute the volumes of gold withdrawn from SGE vaults, and accordingly have the London Bullion Market Association (LBMA) adjust statistics on total refined gold by its member refineries. Remarkably, the LBMA cooperated. Allow me to share my analysis in detail.

In 2013 something unusual happened in the global gold market as Chinese institutional demand exploded for the first time in history. Hundreds of tonnes of institutional supply from London in the form of GD bars were mainly shipped to Switzerland to be refined in 1 Kg 9999 bars, subsequently to be exported via Hong Kong to meet institutional demand in China. From customs data by the UK, Switzerland and Hong Kong the institutional S&D trail was clearly visible. From 2013 until 2015 there was even a strong correlation between the UK’s net gold export and SGE withdrawals. Demonstrated in the chart below.

Exhibit 3. Correlation between UK net gold export and SGE withdrawals.

Because of the mechanics of the gold market in China, Chinese institutional demand roughly equals the difference between the amount of gold withdrawn from SGE designated vaults (exhibit 4, red bars) and Chinese consumer demand (exhibit 4, purple bars). In the exhibit 4 below you can see this difference that brought GFMS in a quandary, especially since 2013. For more information on the workings of the Chinese gold market and the size of Chinese institutional demand please refer to my post Spectacular Chinese Gold Demand Fully Denied By GFMS And Mainstream Media.

Exhibit 4. Chinese wholesale demand (SGE withdrawals), versus GFMS consumer demand versus apparent supply.

Stunningly, since 2013 GFMS has tried to convince its readers through numerous arguments why SGE withdrawals crossed 2,000 tonnes for three years in a row, while Chinese consumer demand reached roughly half of this. Yet the arguments have failed miserably to explain the difference – they rationalize only a fraction, read this post for more information.

And GFMS did more to eclipse apparent institutional S&D. They colluded with the LBMA.

To be clear, I cannot exactly measure global institutional S&D. However, let me make an estimate of apparent institutional demand for 2013. Notable, in 2013 a flood of gold crossed the globe from West to East. Chinese institutional demand accounted for 914 tonnes and Hong Kong net imported 579 tonnes – the latter we’ll use as a proxy for additional Asian institutional demand, as Hong Kong is the predominant gold trading hub in the region. 

In total apparent institutional demand in 2013 accounted for (914 + 579) 1,493 tonnes. If we add all other demand categories by GFMS shown in exhibit 1, total demand in 2013 was at least 6,619 tonnes. Be aware, this excludes non-apparent institutional demand.

Exhibit 5. Global gold demand 2013 by GFMS, including apparent institutional demand.

Because nearly all wholesale gold demand in Hong Kong and China is for 1 Kg 9999 bars, the global refining industry was working overtime in 2013, mainly to refine institutional and ETF supply in GD bars coming from London. In December 2013 I interviewed Alex Stanczyk of the Physical Gold Fund who just before had spoken to the head of a Swiss refinery. At the time Stanczyk told me [brackets added by me]:

They put on three shifts, they’re working 24 hours a day and originally he [the head of the refinery] thought that would wind down at some point. Well, they’ve been doing it all year [2013]. Every time he thinks it’s going to slow down, he gets more orders, more orders, more orders. They have expanded the plant to where it almost doubles their capacity. 70 % of their kilobar fabrication is going to China, at apace of 10 tonnes a week. That’s from one refinery, now remember there are 4 of these big ones [refineries] in Switzerland.

As a consequence, statistics on “total refined gold production” in 2013 by “LBMA accredited gold refiners who are on the Good Delivery List”, which the four large refineries in Switzerland are part off, capture the immense flows of institutional S&D – next to annual mine output and scrap refining. On May 1, 2015, the LBMA disclosed total refined gold production by its members at 6,601 tonnes for 2013 in a document titled A guide to The London Bullion Market Association. It’s no coincidence this number is very close to my estimate on total demand (6,619 tonnes), as apparent institutional demand in Asia was all refined from GD into 1 Kg bars.

Here’s exhibit 2 from another angle.

Exhibit 6. Global gold S&D by GFMS, including apparent institutional S&D, versus total refined gold production 2013.

In the table below we can see the LBMA refining statistics for 2013 at 6,601 tonnes.

Exhibit 7. Courtesy LBMA. Screenshot from A guide to The London Bullion Market Association captured by Ronan Manly in May 2015.

After this publication GFMS was trapped; these refining statistics revealed a significant share of the institutional S&D flows they had been trying to conceal. What happened next – I assume – was that GFMS kindly asked the LBMA to adjust downward their refining statistics. First and painstakingly exposed by my colleague Ronan Manly in multiple in-depth posts, the LBMA kneeled and altered its refining statistics to keep the charade in the gold market going.

On August 5, 2015, the LBMA had edited the aforementioned document, now showing 4,600 tonnes in total refined gold production. (Click here to view the original LBMA document from the BullionStar server, and here to view the altered version from the BullionStar server.) Have a look.

Exhibit 8. Courtesy LBMA. Altered document on refining statistics by the LBMA August 2015.

In the altered version it says:

Total refined gold production by the refiners on the List was estimated to be 4,600 tonnes in 2013, owing to recycling of scrap material, above world mine production of 3,061 tonnes (source Thomson Reuters GFMS).

A few important notes:

  • In the altered version the LBMA mentions “an estimate” for “total refined gold production”, while it doesn’t need to make an estimate as all LBMA accredited gold refiners who are on the Good Delivery List are required to provide exact data to its parent body. The exact data was disclosed in the first version of A guide to The London Bullion Market Association, and it stated, “total refined gold production by the refiners on the List was 6,601 tonnes”.
  • In the altered version the LBMA states the refining statistics were sourced from Thomson Reuters GFMS, but the LBMA doesn’t need GFMS for these statistics. The fact they mention GFMS, though, suggests a coordinated cover up of institutional S&D. Not only the firms, also the LBMA publishes incomplete and misleading data.
  • The altered version stated refining production totaled 4,600 tonnes, which is a round number and obviously quickly made up. A few weeks after the numbers were adjusted, the LBMA adjusted the numbers again, this time into 4,579 tonnes (click here to view from the BullionStar server). Clearly, on several occasions there has been consultation with the LBMA to get the statistics in line with GFMS.
  • In the original document the LBMA states, “Total refined gold production by the refiners on the List was 6,601 tonnes in 2013, more than double world mine production of 3,061 tonnes”, while in the altered version they state, “Total refined gold production by the refiners on the List was estimated to be 4,600 tonnes in 2013, owing to recycling of scrap material, above world mine production of 3,061 tonnes”. Notable, GFMS prefers to have total supply focused around mine and scrap production, instead of including institutional supply.
  • The original refining statistics (6,601 tonnes) are still disclosed in the LBMA magazine The Alchemist (#78 on page 24), to be viewed from the LBMA server here.
  • The fine details about how often and when the LBMA changed its refining statistics can be read in Ronan Manly’s outstanding post Moving the goalposts….The LBMA’s shifting stance on gold refinery production statistics.

And so nothing is spared in trying to uphold the illusion of the GFMS S&D balance to be complete. In another example GFMS excluded gold purchases by the central bank of China from its S&D balance. In June 2015 the People’s Bank Of China (PBOC) increased its official gold reserves by 604 tonnes, from 1,054 tonnes to 1,658 tonnes. During that quarter (Q2 2015) all other central banks worldwide were net buyers at 45 tonnes. Thus, in total the Official Sector was a net buyer at 649 tonnes. Now, let’s have a look at GFMS’ S&D balance for Q2 2015:

Exhibit 9. Courtesy GFMS. Global gold S&D balance as disclosed in the Gold Survey 2015 Q2. 

Net Official Sector purchases are disclosed ay 45 tonnes. GFMS decided not to include the 604 tonnes increment by the PBOC simply because it didn’t fit their balance model. A 604 tonnes increment in would have set the “net balance” at -480 tonnes. Readers would have questioned the balance from this outlier, and so GFMS decided not to include the tonnage.

According to my sources PBOC purchases were sourced from institutional supply (from abroad and not through the SGE), which is a supply category not disclosed by GFMS and therefore the tonnage was a problem. (Note, GFMS disclosed the PBOC increment in text, but not in their balance.) For more information read my post PBOC Gold Purchases: Separating Facts from Speculation.

Gold Is More A Currency Than A Commodity

The biggest flaw of the balance model by GFMS is that it depicts gold to be more of a commodity than a currency. It’s focused on mine output and gold recovered from old fabricated products on the supply side, versus retail sales of newly fabricated products on the demand side. In parlance of the firms, how much is produced (supply) versus consumed (demand). Official sector, ETF and exchange inventory changes are then added to the balance. This commodity S&D balance approach by GFMS has caused deeply rooted misconceptions about the essence of gold and its price formation.

The price of a perishable commodity is mainly determined by how much is annually produced versus how much is consumed (used up). However, gold is everlasting, it cannot be used up and its exchange value is mainly based on its monetary applications, from being a currency, or money if you will. Logically the best part of its trading is conducted in above ground reserves. From my perspective the impact of global mine supply, which increases above ground stocks by roughly 1.5 % annually, and retail sales have less to do with gold’s price formation than is widely assumed.

Back to GFMS. Have a look at the picture below that shows their S&D flows for 2015. 

Exhibit 10. Courtesy GFMS. The global S&D flows for 2015.

GFMS pretends total supply is mine production plus some scrap, which is then met by jewelry demand in addition to retail investment, industrial fabrication and official sector purchases. The way they present it is misleading. These S&D flows are incomplete; they suggest gold is traded like any other commodity. But what about institutional S&D in above ground bullion? Trades that define gold as an international currency.

Let’s do another comparison; this time between what GFMS calls Identifiable Investment demand, consisting of…

  • Retail bar & coin
  • ETF demand

…versus my what I deem to be a more unadulterated approach of investment demand, consisting of…

  • Retail bar & coin
  • ETF demand
  • Institutional demand

According to my estimates, in 2015 apparent Chinese institutional demand accounted for roughly 1,400 tonnes (exhibit 4). In the Gold Survey 2016 GFMS states on page 15 [brackets added by me]:

Total [global] Identifiable Investment, … posted a modest 5 % increase in 2015, to reach 990 tonnes.

That’s quite a tonnage between global Identifiable Investment by GFMS at 990 tonnes and apparent Chinese institutional demand at 1,400 tonnes. We should also take into account non-apparent institutional demand, gold that changes hands in trading hubs like Switzerland. Unfortunately we can’t always measure institutional S&D, but that doesn’t justify denying its subsistence.

Have a look at the chart below that shows the large discrepancy. In the next chapter we’ll specifically discuss the significance of investment demand in relation to the price of gold.

Exhibit 11. Global Gold Investment Demand 2015.

My point being: what many gold market participants and observers think is total supply and demand is just the tip of the iceberg. This truly is a staggering misconception created by the firms.

The global gold market. H/t Dan Popescu.

When observing the GFMS balance in exhibit 1 its incompleteness is self-evident. At the bottom we can see the line item “net balance”, which reflects the difference between total supply and total demand. According to GFMS, if the “net balance” is a positive figure there was a surplus in the global gold market, and if “net balance” is a negative figure the market has been in deficit. In the real world this figure is irrelevant. Gold supply and demand are by definition always equal. One cannot sell gold without a buyer, and one cannot buy gold without a seller. Furthermore the gold market is deep and liquid. So how come there is a difference between total supply and total demand in the GFMS balance? As I’ve demonstrated before, because GFMS doesn’t include institutional S&D that in reality makes up for the difference and far beyond. In all its simplicity the “net balance” item reveals their data is incomplete.

Let’s have another stab at this. How can “net balance” exist in the real world, for example in 2009? According to GFMS the gold market had a 394 tonnes surplus in 2009. But how? Were miners left with 394 tonnes they couldn’t sell? Or some supranational entity decided to soak up the surplus to balance the market? Naturally, this is not what happens. Total supply and total demand are always equal, but GFMS doesn’t record all trades.

Moreover, in my opinion the words “surplus” and “deficit” do not apply to gold. There can be no deficit in gold; there will always be supply. At the right price that is. Sometimes Keynesian economists claim there is not enough gold in the world for it to serve as the global reserve currency. Austrian economists then respond by saying that there will always be enough gold at the right price. I agree with the Austrians and their argument also validates why there can be no deficit in gold.  

There is more proof the “net balance” item presented by GFMS is meaningless. Although according to GFMS the market had a 394 tonnes “surplus” in 2009 the price went up by 25 % during that year. This makes no economic sense. A surplus suggests a declining price, not the other way around. Tellingly, S&D forces presented in GFMS balances are often negatively correlated to the gold price, as was the case in 2005, 2006, 2009, 2010 and 2014 (exhibit 1). In conclusion, GFMS S&D balances are not only incomplete, the resulting “net balance” items are misleading with respect to the price. Below are a few charts that demonstrate this conclusion.

If we plot “net balance” versus the end of year price of gold we can see the correlation is often negative. Have a look below. Green “net balance” chart bars show a positive correlation to the gold price, red chart bars show a negative correlation (note, the left axis is inverted for a more clear overview between any “deficit/surplus” and the price of gold). As you can see nearly half of the “net balance” chart bars are negatively correlated to the price of gold.

Exhibit 12. GFMS’ gold market “net balance” versus the gold price. We can quarrel if the “net balance” in 2014 was positively or negatively correlated to the price. I say the correlation was negative as the gold price in 2014 remained flat in US dollars but was up in all other major currencies, in contrast to the “surplus” presented by GFMS.

Mind you, although the “net balance” item is often negatively correlated to the gold price, in the Gold Survey 2016 GFMS states on page 9:

In terms of the Net Balance, 2015 marked the third year in which the gold market remained in surplus, and therefore it is not surprising that the bear market continued.     

And on page 14:

The forecast reduction in global mine output and a gradual recovery in demand will see the physical surplus narrow in 2016, providing support to the gold price and laying the foundation for better prospects.  

GFMS likes to pretend any “surplus” or “deficit” arising from their balance is correlated to the price, but the facts reveal this is not true.

Let us plot the “physical surplus/deficit” line item by GFMS (exhibit 1) versus the gold price. This results in even more negative correlations.

Exhibit 13. GFMS gold market “physical surplus/deficit” versus gold price.

This exercise reveals that a positive correlation between either a “surplus” or “deficit” arising from a GFMS balance and the price of gold is just a coincidence. No surprise when one is aware their S&D data is incomplete.

Remarkably, the last chart was also published in the Gold Survey 2016, but GFMS chose not to invert the left axis and doesn’t disclose what we see is a surplus or deficit. As a result the largest surpluses (2006, 2007, 2009, 2010) seem to correlate with a rising price, though in reality they did the opposite. Compare the chart below with the one above.

Exhibit 14. Courtesy GFMS.

GFMS also publishes S&D balances for silver (a monetary metal that is comparable to gold). For silver the presented correlations by GFMS between a “surplus” or “deficit” in relation to the price are even weaker.

Exhibit 15. GFMS silver market “net balance” versus silver price, as disclosed in the Silver Survey 2016.
Exhibit 16. GFMS silver market “physical surplus/deficit” versus silver price, as disclosed in the Silver Survey 2016.

According to GFMS the silver market is always in deficit, but the price goes up and down. Obviously GFMS neglects to measure institutional S&D for silver. 


In my opinion, when Gold Fields Mineral Services (GFMS) was erected many decades ago they made a mistake to adopt a commodity S&D balance approach. Surely with the best intentions they gather intelligence and retrieve data from the market. But we must be aware this is not the full picture. The most significant data is not disclosed by GFMS.

When it comes to what drives the price of gold GFMS and I agree it’s determined by gold’s role as a currency in the global economy. When reading the chapter PRICE AND MARKET OUTLOOK in the Gold Survey 2016, GFMS shares its insights with respect to the gold price. Factors mentioned are:

  • Turmoil in global stock markets
  • A Chinese hard landing
  • Geopolitical tensions in the Middle-East
  • Central bank stimulus (QE)
  • Global economic weakness
  • Interest rates policy by central banks
  • Low risk asset / safe haven demand

So if these factors drive the gold price, in what S&D category would this materialize? Would (large) investors buy and sell jewelry? Or bullion bars? I think the latter. According to my analysis the price of gold is largely determined by institutional demand, and to a lesser extent ETF and retail bar & coin demand.

Let’s do an exercise to see what physical gold S&D trends correlate to the price. The majority of supply on the GFMS balance consists of mine output and the majority of demand on the GFMS balance consists of jewelry consumption. But if we plot these volumes versus the price of gold in a chart, there is no push and pull correlation. For example, when the gold price surged from 2002 until 2011 jewelry consumption was not rising. Neither was it outpacing mine supply. The opposite happened, to be seen in the graph below. This is because jewelry demand is price sensitive – when the price goes up jewelry demand goes down, and vice versa. Jewelry demand is not driving the price of gold.

Exhibit 17. GFMS retail demand, versus mine and scrap supply versus the gold price.

I also added retail bar & coin demand. Interesting to see is that retail bar & coin demand is on one hand a price driver, moving up and down in sync with the gold price, on the other hand it can be price sensitive having brief spikes when the price of gold declines.

The best correlation between physical S&D in relation to the gold price can be seen in institutional and ETF S&D. One of the largest gold trading hubs in the West is the UK, home of the London Bullion Market that also vaults the largest ETF named GLD. The UK has no domestic mine production, no refineries and national gold demand is neglectable in the greater scheme of things. Therefore, by measuring the net flow of the UK (import minus export) we can get a sense of Western institutional and ETF demand and supply. For example, if the UK is a net importer – import demand being greater than export supply – that signals a net pull on above ground stocks. Approximately one third of the UK’s net flow corresponds to ETF inventory changes, the other two thirds reflect pure institutional S&D.

Exhibit 18. UK net flow versus the gold price.
Exhibit 19. UK net flow, GLD inventory change, gross import and gross export versus the gold price.

In the charts above we can observe a remarkable solid correlation between the UK’s net flow and the gold price. The UK is a net importer on a rising price and net exporters on declining price. The shown correlation can’t be a coincidence, though there’s no guarantee it will prevail in the future.

The two charts above show the gold price is mostly determined by institutional supply and demand in above ground reserves. Effectively, GFMS is hiding the most important part of global physical gold flows.

When I asked an analyst at one of the leading firms why his company doesn’t measure institutional S&D he told me candidly, “because it’s extremely difficult to accurately estimate it”. And it is. As I wrote previously, I can’t exactly measure global institutional S&D either. However, very often publicly available information gives us a valuable peek at it, and it shows to be more relevant to the gold price than what the firms keep staring at. Not knowing exactly what institutional S&D accounts for doesn’t mean GFMS shouldn’t pay attention to it.

But the firms keep trying to uphold the illusion the data they’ve been selling for decades is complete. For if they would plainly confess it was incomplete, future business could be severely damaged.

What I blame these firms is that they’ve created a meme that the gold market is as large as annual mine supply. This has caused all sorts of misconceptions. Often I read analyses based on a comparison between quantitative demand and mine output. Such analyses are likely to jump erroneous conclusions.

H/t Ronan Manly, Bron Suchecki, Nick Laird from


Simplified overview gold flows 2015:


How Constant Is Gold’s Purchasing Power?

An often-perceived analysis in the gold community is that gold is the constant in our global economy. But is this true? Yes and no. Allow me to share my observations. Although gold has an exceptionally constant nature, and we have yet to see another currency that can compete with gold’s constant nature, the reality is, that there is no exact constant in economics. In any market all goods, assets, currencies, etc. continuously fluctuate in value relative to each other due to ever changing supply and demand dynamics. Having said that, in this post we’ll examine gold’s constant nature by measuring its purchasing power in the short (weeks) medium (years) and long term (decades). Additionally, we’ll compare our findings to fiat’s nature.

We will find that when gold is officially recognized as the center of a monetary system – throughout history there have been several forms of gold standards – gold is approximately constant in the short, medium and long term. Since the gold standard has been abandoned, the metal has become less constant in the short and medium term, but has remained impressively constant in the long term. 

In turn, fiat can have periods of being constant in the short term, but will always lose value in the medium term and evaporate in the long term. Thereby, due to fiat’s fragile nature and the current stress in global finance, there are also risks fiat can significantly devalue overnight. Hence, gold is highly suitable to secure one’s purchasing power.

When examining the value of gold we have to measure it in terms of goods and services. In this day and age one might forget the end goal of any participant in the economy is goods and services. All else traded in our vast financial system is merely a means to an end. All sorts of money, but also stocks, bonds, credit default swaps, options, futures, etc., have no use-value for humans as we can’t eat, drink or wear them. Only goods and services we can truly use (for more information regarding use-value please read my post The Concept Of Money.) Therefor, to measure the stability of gold’s value we have to compute the amount of goods and services gold can buy.

For the sake of simplicity, we’ll use publicly available Consumer Price Index (CPI) and Wholesale Price Index (WPI) data to measure the value of goods and services.

Gold’s Purchasing Power In The Short And Medium Term

On occasion we can read gold commentators stating that when the price of gold rises or falls in the short term, it’s actually fiat that is falling or rising. As, according to this analysis gold is the constant. Let’s test if this analysis is accurate. In the week from January 4 until January 9, 2016, the price of gold in British pounds surged 5.9 % from £23,096 pound per Kg to £24,469 per Kg. We can be quite sure that the price of goods and services in the UK remained flat during this period. As a consequence, in this example gold could buy 5.9 % more goods and services at the end of the week, whilst sterling could buy exactly the same amount of goods and services all week long. So, in this particular example, what was more constant? It was sterling. The reason is that currently the international monetary standard is fiat.

Graph created with BullionStar Charts.

Moving on to the medium term. In the chart below I’ve plotted the purchasing power index of gold versus the British pound, based on CPI data and the gold price, from July 2010 until June 2016.


Over this period we can observe that the British pound was more constant than gold in the short term, but it’s purchasing power has been declining in the medium term due to the inherent inflationary policies by the central bank of the UK. Gold’s purchasing power has been volatile in the short and medium term, but in this case has remained its purchasing power over the shown period. Though, it should be clear that if I would’ve adjusted the period gold’s purchasing power could’ve shown an increase or decrease.

Gold’s Purchasing Power in the Long Term

To get the best understanding of his subject, let us zoom out and have a look at gold and the pound’s purchasing power since 1500. The following chart is conceived by Nick Laird from GCRU, based on data collected by himself and Roy Jastram. The chart is perhaps more difficult to interpret than the previous one. To be clear, we can see 3 index lines:

  • The red line reflects gold’s purchasing power index (1930 = 100)
  • The blue line reflects the price of gold index, denominated in British pounds (1930 =100). Note, until 1914 the blue line was mostly straight which shows fixed parities between sterling and gold.
  • The green line reflects the wholesale (/goods) price index, denominated in British pounds (1930 = 100)

As you can see, if the price of gold (blue) transcends wholesale prices (green), as a consequence gold’s purchasing power (red) is escalated – and vice versa.

Courtesy Nick Laird, from GCRU. Note the scale is logarithmic.

Clearly the red line has remained roughly flat, around 100, for hundreds of years! This shows gold’s remarkable constant nature. Note, since the gold standard has been gradually dismantled (1914) gold’s purchasing power became more volatile but remained robust in the long term.

Furthermore, we can see that prior to 1914 wholesale prices were also fairly constant but this is due to the fact sterling was tied to gold during this era. Since the gold standard was abandoned step-by-step from 1914 onwards, the blue and the green line have skyrocketed, evaporating the purchasing power of sterling. Since 1971 the British pound has lost over 93 % of its purchasing power – in 1975 inflation topped 20 %.

We can conclude, while there is no exact constant in economics, the stability of gold’s purchasing power is unprecedented. Not only on a gold standard the metal shows it’s constant nature, but also off the gold standard gold’s purchasing power is remarkably constant, albeit more volatile in the short term.

For the future, if the current fiat international monetary system will breach its limits and has to be re-anchored to gold, I expect gold to become more constant in both the short and medium term when providing a center pillar in finance.

China’s Rising Gold ETF Market: A Hybrid

In 2013 we’ve witnessed the inception of the Chinese gold ETF market. At first demand for the gold ETFs was neglectable, as investors mostly preferred to buy the physical gold directly at the Shanghai Gold Exchange (SGE) or buy jewelry or investment bars through retail channels. This year, however, there has been a major shift in gold ETF demand in China.

The physical holdings of Chinese gold ETFs have surged five-fold from 7 tonnes at the end of January, to 35 tonnes at end of August. The Huaán Yifu Gold ETF, which was holding 23 tonnes in August, entered the global top 15 list.    

Exhibit 1. All physical holdings of Chinese gold ETFs are stored within SGE designated vaults.

The interest in China’s nascent gold ETF market was even mentioned by the World Gold Council in a recent Gold Demand Trends report. In this post, we’ll add some texture to China’s gold ETF market; how are the gold ETFs constructed and how can they be compared to the largest Western gold ETF, the SPDR Gold Trust. At this moment the market share of Chinese gold ETFs is still small – within China as well as globally, but knowledge about the workings of these ETFs will be valuable when they acquire significant market share in the future.

Kindly note, all mechanics and examples presented in this post are simplified.

What Is A Gold ETF?

ETF is short for Exchange Traded Fund. ETFs trade like stocks and its price usually tracks an underlying asset or index. Like stocks, ETFs have a primary market and a secondary market. The secondary market is the stock exchange where most ETF investors trade. What makes ETFs special is the primary market where ETF shares are created and redeemed. Let us use the SPDR Gold Trust (symbol: GLD) to illustrate how the primary market works. Mainly through the creation and redemption process of shares, the GLD share price tracks the gold price.

Primary GLD market participants include (from the prospectus):

  • The Sponsor (World Gold Trust Services, LLC, which oversees the performance of the Trustee and the Custodian)
  • The Trustee (BNY Mellon Asset Servicing, which is responsible for the day-to-day administration of GLD)
  • The Custodian (HSBC Bank plc, which holds the gold bars in custody, there can be sub custodians)
  • The Authorised Participants (the institutions which are authorised to create and redeem GLD shares, at this moment the Authorised Participants are Barclays Capital, Inc., Credit Suisse Securities (USA) LLC, Goldman Sachs & Co., Goldman Sachs Execution & Clearing, L.P., HSBC Securities (USA) Inc., P. Morgan Securities Inc., Merrill Lynch Professional Clearing Corp., Morgan Stanley & Co. LLC, RBC Capital Markets, LLC, Scotia Capital (USA) Inc., UBS Securities LLC and Virtu Financial BD LLC).

GLD is traded on the New York Stock Exchange Arca (NYSE Arca)

Exhibit 2. The (simplified) process of creation and redemption of GLD shares by an Authorised Participant through the Trustee.

If an Authorised Participant (AP) wants to create GLD shares, it needs to deposit gold into the account of the Trust and subsequently the Trustee will provide the AP with GLD shares. The creation application must be made in multiples of 100,000 shares (a block of 100,000 shares is called a basket). Since every GLD share represents approximately 0.1 ounce of gold, in order to create 100,000 GLD shares the AP needs to deposit 10,000 ounces of gold into the account of the Trust. (In reality, 1 GLD share actually represents a little less than 0.1 ounce of gold, the reason for this will be explained later on in this post.)

The redemption process works the other way round. If an AP wants to redeem GLD shares, it deposits 100,000 GLD shares at the Trust and subsequently the AP receives 10,000 ounces of gold.

The purpose of APs creating and redeeming GLD shares is usually arbitrage. As previously mentioned the gold equivalent of 1 GLD share is roughly 0.1 ounce, nevertheless GLD shares and actual gold are traded in two different markets. As a consequence, the price of 1 GLD share can differ from the price of 0.1 ounce of gold. If the price of GLD and the price of gold diverge, this is where arbitrage comes into play for the APs. Accordingly, the arbitrage by APs through creation and redemption of shares contributes to GLD’s price tracking the gold price.

Suppose (simplified), the price of 1 GLD share is $110 – caused by supply and demand for GLD shares at the NYSE Arca – while the price of 0.1 ounce of gold is $100 in the gold market. An AP can grasp this opportunity by buying (or first leasing) 10,000 ounces of gold to deposit in the GLD Trust account after which the Trustee will create 100,000 GLD shares for the AP. The new shares created are then sold by the AP on the stock market, which will cause the price of GLD to go down. The arbitrage opportunity will be used by APs until it’s closed.

If the price of GLD shares is lower than the price of gold, the arbitrage opportunity works the other way around, APs can buy shares, redeem them for gold at the Trustee and sell the gold.

In the aforementioned example trade when the AP (via the Trustee) created 100,000 GLD shares his investment was $10,000,000 (10,000 ounces at $100 per 0.1 ounce). The AP’s revenue was $11,000,000 (100,000 GLD shares worth $110 a piece). The AP’s profit in this exercise was $1,000,000.

($110-$100)*100,000 = $1,000,000

As readers can see from the example, the holdings of GLD were increased by 10,000 ounces of gold. Almost every day the holdings of GLD vary and the change is often caused by arbitrage of APs.

One theory is, when demand for GLD shares is strong (usually by Western investors) and the share price is trending higher than the price of the gold equivalent, the APs jump the arbitrage, create shares and GLD inventory swells. Then, if growth in GLD inventory correlates to a surging gold price (which can be observed in exhibit 3 below) we can speculate the gold bull market in part has been caused by Western investment demand in GLD.

Exhibit 3.

Now we have established the workings of the largest Western gold ETF, we will have a look at how the Chinese gold ETFs are constructed, and compare them to GLD.

China’s Gold ETF Market

Below are the 4 Chinese gold ETFs currently in existence that we’ll discuss.

  1. - Bosera Gold Exchange Open-Ended Securities Investment Fund
  2. - Guotai Gold Exchange Open-Ended Securities Investment Fund
  3. - Huaán Yifu Gold Exchange Open-Ended Securities Investment Fund
  4. - Efund Gold Exchange Open-Ended Securities Investment Fund

In China every gold ETF share represents approximately 0.01 gram of gold. By creating or redeeming gold ETF shares (Chinese) APs receive or deliver a basket of 300,000 shares, which equals to 3Kg of gold. This threshold is much lower than that of GLD, of which a basket equals to 310Kg of gold. The gold acceptable for Chinese ETFs are the spot (physical and spot deferred) gold contracts listed on theSGE – for example Au99.99. Therefore, all the physical holdings of China’s gold ETFs are stored within SGE designated vaults.

Moreover, there is a range of features that make China’s gold ETFs quite different from GLD.

1. Chinese Gold ETF Shares Can Also Be Created Or Redeemed Through Cash

Unlike GLD, which only allows the use of gold to create shares, and only allows the use of shares to redeem gold, China’s gold ETFs also allow shares to be created and redeemed through cash in the primary market. An AP can present cash to the Fund Manager who handles the creation and redemption process for a Chinese gold ETF. The Fund Manager is comparable to the Trustee of GLD. Thereby, through an AP individual investors can create or redeem gold ETF shares with cash as well.

Suppose, a Chinese investor wants to arbitrage the difference between the price of a gold ETF and the price of gold. In this example the price of the gold ETF is higher than the price of gold, so the investor want use cash to create shares to sell on the stock market. The investor can present cash to an AP who in turn will create shares via the Fund Manager. The amount of cash used in this transaction to create shares is equal to the cash value of the spot gold contracts that are needed to create the shares without the use of cash.

Vice versa, in case an investor wants to arbitrage the price of a gold ETF when it’s lower than the price of gold, the investor can present shares to an AP to redeem for cash.

Exhibit 4. Creation and redemption process of Chinese gold ETF shares through cash.

In China the APs can be securities firms and commercial banks. The securities firms are often not SGE members. Therefor, the number of APs that support gold ETF shares creation and redemption through cash is often larger than the number of those that support shares creation and redemption through spot gold contracts. For example, in the case of Efund Gold ETF, the fund has authorised 13 securities firms (APs) to process creation and redemption through cash, but only 2 banks (APs) to process creation and redemption through spot gold contracts (Industrial and Commercial Bank of China and Bank of Communications).

2. The Flexibility Of The Fund Manager

The Trustee of GLD doesn’t have much flexibility in managing the assets. Its duty is mainly processing the creation and redemption orders of GLD shares. Therefore, the gold holdings of GLD are mainly allocated gold and according to the prospectus [brackets added by me]:

Gold held in the Trust [GLD]’s allocated account is the property of the Trust and is not traded, leased or loaned under any circumstances.

In China, the Fund Managers of the gold ETFs have more flexibility. The gold contracts that China’s gold ETFs hold include not only spot physical contracts like Au99.99 and Au99.95, but can also be spot deferred contracts like Au (T+D), and notable all these “spot contracts” may be leased (sometimes swapped) within the SGE system. Additionally, every Chinese gold ETF can invest 10% of its fund assets (5 % of net fund assets in case of Efund Gold ETF) in “other financial instruments” allowed by the China Securities Regulatory Commission (CSRC).

For example, the excerpt below is from the Efund Gold ETF’s prospectus [brackets added by me]:

The investment scope of the Fund [Efund Gold ETF] is liquid financial instruments, including gold physical contracts (including spot physical contracts, spot deferred contracts, etc), bonds, asset-backed securities, bond repos, bank deposits, money market instruments, and other financial instruments which laws, regulations or the CSRC allow the Fund to invest in the future (but these have to satisfy the relevant rules of the CSRC).

If laws, regulations or regulatory institutions allow the Fund to invest in other instruments (including but not restricted to gold derivatives like forwards, futures, options and swaps), after necessary procedures, the Fund Manager will include them into the investment scope.

The portfolio percentage: The fund asset invested in gold spot contracts is not lower than 95% of the net asset value of the Fund.

All the 4 gold ETFs in China can participate in gold leasing. Some can participate in gold swaps and some can pledge the gold to borrow money.

The excerpt below is from the Huaán Yifu Gold ETF Prospectus:

The Fund can do gold lease and pledge gold to borrow money.

Effectively the Fund Manager of the Huaán Yifu Gold ETF can make money by, for example, leasing the fund’s assets.

The excerpt below is From the Guotai Gold ETF Prospectus:

The Fund can do gold lease, gold swap and invest in gold spot deferred contracts, etc, in order to lower the operating expenses and lower tracking error. The Fund does margin trade only for the purpose of risk management and enhancement of the efficiency of the asset allocation.

As a result, the Fund Managers of Chinese gold ETFs have significant flexibility in handling the fund assets. Please remember that all gold leasing, swapping, etc. has to be done within the SGE system and the gold cannot leave the SGE designated vaults.

From the CSRC’s website [brackets added by me]:

Article 4. Gold ETFs may not deposit physical gold into the [SGE] vault or withdraw physical gold from the [SGE] vault. Margin trade is only for the purpose of risk management and enhancement of the efficiency of the asset allocation. 

Exhibit 5. The bottom row shows the minimum percentages the Gold ETFs must invest in “spot contracts”, though some of this gold can be involved in leasing.

3. NAV Per Share Recalculation

Since the inception of GLD in 2004 its share gold equivalent is steadily declining lower than 0.1 ounce of gold. That’s because the Sponsor, Trustee and Custodian don’t provide services for free. They need to earn money and their earnings must come from the Net Asset Value (NAV) of the ETF. In other words, the gold in the Trust is gradually sold to pay for operational expenses. From the GLD prospectus:

The amount of gold represented by the Shares will continue to be reduced during the life of the Trust due to the sales of gold necessary to pay the Trust’s expenses irrespective of whether the trading price of the Shares rises or falls in response to changes in the price of gold.

Each outstanding Share represents a fractional, undivided interest in the gold held by the Trust. The Trust does not generate any income and regularly sells gold to pay for its ongoing expenses. Therefore, the amount of gold represented by each Share has gradually declined over time. This is also true with respect to Shares that are issued in exchange for additional deposits of gold into the Trust, as the amount of gold required to create Shares proportionately reflects the amount of gold represented by the Shares outstanding at the time of creation. Assuming a constant gold price, the trading price of the Shares is expected to gradually decline relative to the price of gold as the amount of gold represented by the Shares gradually declines.

On November 18, 2004, 1 GLD share exactly equaled 0.1 ounces of gold, but by now (September 2016) 1 GLD share equals 0.09542 ounces of gold, a decline of almost 5 % over the course of 12 years. This explains why currently the amount of ounces needed by an AP to create a basket of shares has become less than 10,000 ounces, and continues to decline.

In China’s gold ETF market, although the gold represented by the ETF instruments also decline as with GLD, the share values are periodically re-adjusted to ensure the NAV per share remains (roughly) 0.01 gram of gold.

For example, from the Bosera Gold ETF prospectus:

Fund share re-calculation means the fund manager based on the necessity of the operation of the fund, under the premise that the total NAV is unchanged, adjusts the total fund shares outstanding and NAV per share. 

There is nothing complicated about the re-calculation. There are simply periodic adjustments when the Fund Manager sets the value of the shares (in yuan) higher because the gold content equivalent is elevated, from below 0.01 gram to 0.01 gram, whereby the Fund Manger “adjusts the total fund shares outstanding” downward.

4. Linked Funds

In China, every gold ETF is accompanied by a Linked Fund. The Linked Fund mainly invests in the Target Gold ETF as can be seen in the list below. The Linked Fund is usually a common open-ended mutual fund. While 90 % of the assets under management of the Linked Fund must be invested in its Target Gold ETF, the Fund Manager still has some room for managing the remaining 10%.

Exhibit 6.

For example, from the Bosera Gold ETF-linked Fund’s prospectus:

The Fund mainly invests in Bosera Gold Exchange Open-Ended Securities Investment Fund, gold contracts listed on the Shanghai Gold Exchange, gold futures contracts listed on the Shanghai Futures Exchange, bonds and other financial instruments which the CSRC allows the fund to invest, like securities lending and borrowing, gold lease, etc.

For more clarity I’ve drawn a graph to illustrate the ratios of investment allocation by the Guotai Gold ETF and the Guotai Gold ETF-linked Fund.

Exhibit 7.

Although, at this stage it’s not completely clear to me what would be the benefit for investors to invest in the Linked Fund, as opposed to the Target Gold ETF.

 5. Voting Rights

GLD holders only have limited voting rights. The excerpt below is from the GLD prospectus,

Under the Trust Indenture, Shareholders have no voting rights, except in the following limited circumstances: (i) shareholders holding at least 66.66% of the Shares outstanding may vote to remove the Trustee; (ii) the Trustee may terminate the Trust upon the agreement of Shareholders owning at least 66.66% of the outstanding Shares; and (iii) certain amendments to the Trust Indenture require 51% or unanimous consent of the Shareholders.

In China’s gold ETFs shareholders have more voting rights and can vote to decide on a lot of important issues. The excerpt below is from the prospectus of Bosera Gold ETF:

In one of the following circumstances, based on the consent of the fund manager, the fund custodian or the fund shareholders who hold 10% (including 10%) of the fund shares outstanding, it is mandatory to hold fund shareholders’ meeting:

1. Termination of the fund contract;

2. Change of the operation of the fund;

3. Increase of the remuneration of the fund manager or the fund custodian, but excluding the circumstances in which the increase of the remuneration is mandatory by the requirements of laws or regulations;

4. Replacement of the fund manager or fund custodian;

5. Amendment of the fund category;

6. Amendment of the fund investment target, scope or strategy (excluding the circumstances in which laws, regulations or the CSRC have other relevant requirements);

7. Amendment of fund share holders’ meeting proceedings, voting methods and voting procedures;

8. Termination of listing but excluding circumstances in which the fund no longer satisfies listing requirements and the listing is terminated by the Shenzhen Stock Exchange;

9. Merger of the fund with other fund(s);

10. Other items that have material influence on the rights and responsibilities of the parties to the fund contract and necessitate the fund share holders’ meeting to amend the fund contract;

11. Other items that are required by laws, regulations, the fund contract or the requirements of the CSRC to hold the fund share holders’ meeting.

Even the Linked Fund shareholders of China’s Gold ETFs can participate in voting:

The fund shareholders of the linked fund of this fund can attend or send representatives to attend the fund shareholders’ meeting and participate in voting, based on the share holding of the linked fund. The equivalent number of fund shares with voting rights and correspondent votes are: the product of the total shares of this fund held by the linked fund multiplied by the linked fund shares held by the respective link fund share holder as a percentage of the total linked fund shares outstanding. The result of the calculation is rounded to the nearest whole number.

Ironically, to me there seems to be more democracy and openness in China’s gold ETFs than in GLD. On the other hand, Chinese gold ETFs have a fundamentally different foundation, a hybrid design I would say.

China’s gold ETF market was erected in 2013 and is still evolving. In the future, there may be more complex gold ETF related financial structures that have a big impact on China’s overall gold market. I shall follow it closely.


In exhibit 5 we can see which Chinese commercial bank is the custodians of which Chinese gold ETF. Without a doubt the physical holdings in each Chinese gold ETF (exhibit 1), stored within SGE designated vaults, will appear on the bank balance sheet of the custodian bank. This (important) information will be added to my previous post What Are These Huge Tonnages In “Precious Metals” On Chinese Commercial Bank Balance Sheets? as a new chapter.

The main sources used for this article are the prospectuses from the Bosera Gold ETF, Guotai Gold ETF, Huaán Yifu Gold ETF and Efund Gold ETF, and the prospectuses of the Linked Funds of these Gold ETFs, Bosera Gold ETF-linked fund, Guotai Gold ETF-linked fund, Huaán Yifu Gold ETF-linked fund and Efund Gold ETF-linked fund)

What Are These Huge Tonnages In “Precious Metals” On Chinese Commercial Bank Balance Sheets?

There has been much conjecture since 2014 about the increasing numbers in the “precious metals” category on the balance sheets of listed Chinese commercial banks. By the end of 2015 China’s largest banks were holding RMB 598 billion in precious metals.

Some analysts think that the precious metals on Chinese commercial bank balance sheets are gold reserves purchased on behalf of the Chinese central bank, while others surmise that Chinese banks buy gold at the Shanghai Gold Exchange (SGE) and then lend it out so the precious metals on the balance sheets solely represent leased gold. In the latter analysis it’s then assumed the leasing inflates the amount of gold withdrawn from SGE designated vaults. Most certainly there is leased gold on Chinese banks’ balance sheets, but this can hardly influence SGE withdrawals, as I have previously explained. Read this and this article for more information.

What do we know beyond the gossip about the precious metals holdings on Chinese commercial bank balance sheets?

From studying the annual reports of the respective banks and additional documentation we know the precious metals can be at least the following things (if I find more clues this post will be updated):

  1. Gold savings that belong to the banks’ customers
  2. Gold inventory for the banks’ retail gold business
  3. Gold leasing business
  4. Gold held for hedging purposes
  5. Gold held outside China
  6. Gold in Chinese ETFs.

Since the Chinese silver market was liberalized much earlier than gold I don’t think there is any edge for Chinese commercial banks to have a predominant role in the silver market. So, probably most of the precious metals on the balance sheets in question are gold related.

Below is an overview of the precious metals holdings of listed Chinese commercial banks as of 31 December 2015, measured in yuan (RMB). There are 16 listed Chinese commercial banks on China’s A-share market but Huaxia Bank didn’t disclose its precious metals holding in its annual report. If all aggregated precious metals holdings relate to gold, the upper bound is approximately 2,682 tonnes of gold.

Chinese Banks Precious Metals holdings table 2015 (inc gold)
Exhibit1. Source: Annual reports

Helpful for understanding this article is my post The Mechanics Of The Chinese Domestic Gold Market

1. Customers’ Gold Savings

A substantial amount of the precious metals reflect (fully backed) customers’ gold deposits in the form of Gold Accumulation Plans (GAP), recorded as an asset and a liability on the balance sheets of the banks. However, to me it’s unknown how much gold is exactly accumulated in China through GAPs. 

Let’s go through the annual reports of the Chinese banks having the largest precious metals holdings, seeking for information with respect to GAPs.

According to the 2015 annual report of Bank of China (BOC):

Precious metals comprise gold, silver and other precious metals. The Group retains all risks and rewards of ownership related to precious metals deposited with the Group as precious metals deposits, and it records the precious metals received as an asset. A liability to return the amount of precious metals deposited is also recognized.

From the BOC website its GAP seems to be in its infancy, so I don’t expect it to comprise much gold. ICBC on the other hand, introduced a GAP in 2010 and is thought to be largest in China.

From reading ICBC’s 2015 annual report [brackets added by me]:

Seizing the opportunities arising from customers’ wealth increase and capital market growth, the Bank made efforts to establish a mega asset management business system across the whole value chain and enhance its specialized operating capabilities on the strength of the Group’s asset management, custody, pension and precious metal businesses,

The [ICBC] Group records the precious metals received as an asset. A liability to return the amount of precious metals deposited is also recognized.

On ICBC’s website we read:


According to statistics, by the end of 2014, the business size of ICBC’s GAP was more than 250 tonnes, a 150% YOY increase. GAP clients are more than 1 million.

Screen Shot 2016-08-31 at 4.06.03 pm
Screenshot from ICBC’s Ruyi Gold Accumulation Plan.

In the 2015 annual report by China Construction Bank (CCB):

While consolidating our traditionally advantageous businesses in housing finance and cost advisory service among other things, we actively expanded our presence in … precious metals.

The Bank supported product innovation, provided and optimized new products such as … gold purchase and saving.

The Bank proactively responded to changes in the precious metals market via pursuing marketing expansion, enlarging customer base and enforcing product innovation. The Bank launched innovative products and business models, including gold accumulation plan ….

To me it’s unknown how much gold CCB’s GAP comprises.

All in all, part of the precious metals on the listed Chinese commercial banks’ balance sheets are gold savings held on behalf of clients instead of reflecting the banks own metals.

(Likely, gold saved in Chinese GAPs is not stored in SGE designated vaults.)

2. Bank Gold Inventory

Chinese banks offer a wide range of retail gold investment products for sale at local branches and through internet order. Naturally, any gold inventory for this business is recorded on the balance sheets. From ICBC’s 2015 annual report:

To echo the changes in market demands, the Bank developed a variety of new brands on assorted themes and introduced a slew of products, e.g. Chinese Zodiac Coins and Panda Gold and Silver Coins, under agent sales. The Bank expanded the online channels, through which the flagship store “ICBC Gold Manager” witnessed substantial growth of sales, and it also piloted the direct distribution of logistics suiting to the characteristics of e-commerce.

ICBC gold bars
ICBC gold bars.

According to the World Gold Council roughly 60 % of Chinese retail gold investment demand is supplied through commercial banks. Consequently, Chinese banks’ own gold inventory for retail business can not be neglectable. 

Screen Shot 2016-08-30 at 10.03.27 pm
Courtesy World Gold Council. Note, “retail investment demand” excludes direct purchases at the SGE by individuals and institutions.

Additionally, I have no proof, but it can be that some of the inventory in the vaults of the SGE is appearing on the Chinese bank balance sheets. Most of the banks listed in exhibit 1 have a PBOC gold import license. Once the bullion is imported into the Chinese domestic gold market, often done through consignment, it must be sold first through the SGE. By the time it has arrived in an SGE designated vault and before it’s withdrawn, possibly it’s shown on the balance sheet of the importing bank. Though, this analysis is speculation.

3. Gold Leasing

Probably the largest share of the precious metals on the balance sheets have to do with gold leasing. At the moment, there are no official accounting rules or guidelines related to how to record bank’s gold leasing activities. (In this post, I don’t distinguish between gold leasing and gold lending because the essence is the same.) However, most banks seem to still put gold leasing activity in the precious metals category of their balance sheet. 

Helpful for the coming paragraphs is my post Chinese Commodity Financing Deals Explained (which is about the Chinese gold lease market). 

According to the A-share annual report of the Bank of Communications [brackets added by me]:


Precious metals that are not related to the Group’s trading activities including coins and medallions sales are initially measured at acquisition cost and subsequently measured at the lower of cost and net realizable value. Precious metals that are related to the Group’s trading activities including precious metals lease and [precious metals] interbank lending are initially and subsequently recognized at fair value, with changes in fair value arising from re-measurement recognized directly in profit or loss in the period in which they arise.

Apparently, the Bank Of Communications has its gold leasing business disclosed on its balance sheet in the precious metals category. 

Below is from the 2015 annual report of Shanghai Pudong Development Bank (page 17):

spdb cn


spdb en
Exhibit 2. Source Shanghai Pudong Development Bank

Shanghai Pudong Development Bank saw its precious metals holdings grow from RMB 11,707,000,000 on December 31, 2014, to RMB 28,724,000,000 on December 31, 2015. As the main cause for the growth in precious metals is considered to be “increased physical gold leases”, we must conclude in the case of Shanghai Pudong Development Bank nearly all precious metals on its balance sheet relate to gold leasing. But does this mean Chinese banks buy gold on the SGE and then lease it out? Not necessarily.

Chinese banks mainly do back-to-back gold leasing – simply connecting supply and demand. Banks don’t have much money of their own. They need to borrow money or gold either from savers or in the interbank market to make loans. Would it make sense for banks to borrow money in order to buy gold to subsequently lend out gold? Or would it be more logic for banks to borrow gold to subsequently lend out gold?

From a source who worked at the precious metals trading desk at ICBC in 2014 I was told first hand ICBC has little gold of itself for leasing, most of the gold lend out is borrowed from third parties. These third parties are mostly SGE members or overseas banks that lend gold through the Chinese OTC market. By the way, all commercial bank gold leasing is settled through the SGE system.

ICBC operates in the lease market as an intermediary by connecting supply (lessors) and demand (lessees), while striking a fee. ICBC can borrow gold from international banks or local gold owners with an SGE Bullion Account, and lend the gold to miners, jewelers or speculators. My assumption is that the international gold lease rate is lower than the Chinese gold lease rate, which attracts gold from the international market into the Chinese domestic gold market. (Whenever a gold loan is to be repaid from the Chinese domestic gold market to an international lender, not the physical metal is exported, but funds cross the Chinese border, as physical gold export is prohibited from the Chinese domestic gold market.)

Also note, if banks would buy the gold to lend out, they are exposed to the price risk of gold. In order to cover this risk, banks need to hedge but this will involve additional costs. As a result, the logical solution is for banks to do back-to-back gold leasing.

The Bank of Beijing is a good example to illustrate back-to-back gold lending. Unlike other Chinese banks, the Bank of Beijing does not put gold leasing in the precious metals category. It has a separate line in its books for gold leasing.

According to the 2015 annual report of the Bank of Beijing (page 123 and 132):

Bank Beijing 1jan
Exhibit 3.1. “Leased out” is lending. The unit is RMB million.
Bank Beijing 2jan
Exhibit 3.2. “Leased in” is borrowing. The unit is RMB million.

As readers can see from the excerpts above, the Bank of Beijing indeed does back-to-back gold leasing as precious metals “leased in” (RMB 1,400,000,000) are equal to precious metals “leased out”(RMB 1,400,000,000). I suspect most gold leasing by Chinese banks is back-to back leasing. 

Because the Bank of Beijing has its leasing business noted in a separated line than its “precious metals”, we can see a huge discrepancy between the Bank of Beijing’s precious metals holdings in exhibit 1 (RMB 55,000,000) and its back-to back leasing business in exhibit 3 (RMB 1,400,000,000).

Estimated Chinese Gold Leasing Turnover
Exhibit 4. Total yearly leasing turnover must not be commingled with the amount of gold leased out at any point in time. The latter is unknown as far as I know.

Other banks don’t have a separate line for the gold leased out but as mentioned before, they put it in the precious metals category. A widely-accepted method to treat borrowed gold is to include a liability called “financial liability at fair value through profit and loss”. Readers who can understand Chinese are recommended to click this and this link. The ICBC annual report provides an example of how the liability is recorded.

ICBC 2015 PM liability
Source: the 2015 annual report of ICBC.

In conclusion, back-to-back gold leasing will result in an asset and a liability on the banks’ balance sheets, for most banks highly overstating the precious metals category. When looking at exhibit 4 we can see the enormous growth in yearly Chinese gold leasing turnover, which must have enlarged Chinese banks’ balance sheets.  

According to my analysis a large portion of the precious metals on the balance sheets of Chinese banks is back-to-back leasing, which is nearly all gold that stays inside the SGE vaults, and thus does not impact SGE withdrawals.   

4. Hedging

China’s commercial banks offer derivatives to retail and institutional customers. Bank of China’s Qi Jin Bao is an example. Qi Jin Bao is in fact gold option business. The retail customer pays a certain amount of money (option premium) and buys a gold call option or put option.

For example (simplified): suppose the current gold price is $1300/oz and a retail customer is bullish on gold and believes that the gold price will rise in 3 months time. Therefore, the retail customer buys a 3 months call option with a notional amount of 100 oz of gold at the strike price of $1300/oz from Bank of China and pays an option premium of $35/oz. If the gold price indeed goes up in 3 month’s time, the retail customer will make money. However, derivatives are a zero-sum game. If the retail customer makes money, then the Bank of China definitely loses money. If the gold price goes up to $2000/oz, Bank of China will lose big time. In order to mitigate this risk, Bank of China will (borrow money to) buy gold to hedge the short call position and the gold purchased will appear on the balance sheet.

5. Gold Held Outside China

Gold on the balance sheets of Chinese commercial banks doesn’t necessarily have to be gold held in China. Chinese banks like ICBC, BOC and Bank of Communications have direct access to the LBMA. As a result, gold on the balance sheets of Chinese commercial banks can be located outside China mainland.

On January 29, 2014, ICBC bought 60 % of the existing shares in Standard Bank Plc from Standard Bank London Holdings Limited. After completion of the acquisition, Standard Bank Plc was renamed as ICBC Standard Bank on 27 March 2015. In the 2015 annual report of ICBC (Group), which includes ICBC Standard Bank data, we see that ICBC Standard Bank held RMB 18,426,000,000 in precious metals assets (equivalent to 83 tonnes of gold) on December 31, 2015.

Screen Shot 2016-09-01 at 11.15.03 am
Source: the 2015 annual report of ICBC.

As ICBC Standard Bank can be seen as the international gold arm of its group – ICBC Standard Bank is a London Bullion Market Association market maker for spot trading and a clearing member of London Precious Metal Clearing Limited (LPMCL) – we may assume any precious metals assets of ICBC Standard Bank are not located in China mainland. 

6. Gold in Chinese ETFs

Currently there are 4 Chinese gold ETFs. Namely,

  1. - Bosera Gold ETF (custodian, Bank Of China)
  2. - Guotai Gold ETF (custodian, Industrial and Commercial Bank of China)
  3. - Huaán Yifu Gold ETF (custodian, China Construction Bank)
  4. - Efund Gold ETF (custodian, Industrial and Commercial Bank of China)
Exhibit 5. As of August 2016 the physical holdings in Chinese gold ETFs are 35 tonnes.

According to the prospectuses of all 4 ETFs the physical gold holdings of these ETFs must be stored within SGE designated vaults. Without a doubt the physical holdings in each gold ETF appear on the bank balance sheets of the custodian banks. For more information read China’s Rising Gold ETF Market: A Hybrid.


From the descriptions above, the precious metals holdings on the balance sheets of Chinese commercial banks are quite complicated to decipher. One thing is for sure, it’s not all gold owned by banks and leased out, neither is it all purchased by banks on behalf of the Chinese central bank.

In order for us to learn more exactly what the precious metals on the balance sheets represent we need more information, more investigation is needed by gold analysts. Hopefully this blogpost can serve as a springboard to a better collective understanding.


In addition to Gold Accumulation Plans many Chinese banks offer a variety of (paper) gold hedging and speculation broker services to their clients. For example, in the annual report 2014 from Agricultural Bank of China (ABC) we can read:

… Precious metals

… As a major precious metal market maker in the PRC, the Bank provided customers with precious metal trading, investment and hedging services through … trading of precious metal derivatives … and trading … the Shanghai Futures Exchange and the London precious metals market.

So, through ABC clients can trade paper gold, but these derivatives would be recorded off-balance sheet, or in a separate line next to “precious metals”. More from the ABC annual report 2014:

Our off-balance sheet items primarily include derivative financial instruments, contingent liabilities and commitments. We enter into currency rate, interest rate and precious metals related derivative financial instruments for the purposes of trading, asset and liability management and business on behalf of customer.

Similarly, in BOC’s annual report 2015 we read:

Off-balance Sheet Items

Off-balance sheet items include derivative financial instruments, …. The Group entered into various derivative financial instruments relating to … precious metals and other commodities for trading, hedging, asset and liability management and on behalf of customers. 

Implying, from my judgement, all the precious metals on-balance sheet are not (customers’) paper gold. 

Dutch Central Bank Refuses To Publish Gold Bar List For Dubious Reasons

My hunt for the gold bar list of the Dutch official gold reserves started in 2015. On September 26 of that year I visited a conference in Rotterdam, the Netherlands, called Reinvent Money. One of the speakers was Jacob De Haan from the Dutch central bank (DNB) Economics and Research Division – you can watch his presentation by clicking here.

In his presentation De Haan repeatedly talked about the importance of transparency in central banking. These statements raised my eyebrows, as I submitted a FOIA request at DNB in 2013 to ask for all correspondence between DNB and other central banks in the past 45 years with respect to its monetary gold, which was not honored. From my experience DNB was anything but transparent.

De Haan DNB 2015
Slide  is from Jacob De Haan (DNB) at the Reinvent Money conference September 26, 2015. Red frame added by me.

After the presentation I approached De Haan and asked him, if transparency is so important to DNB, why has it never published its gold bar list? An act of transparency that could be accomplished within minutes. De Haan offered me he would look into that. He gave me his email address and we agreed to stay in touch. 

Jan de Haan dnb
September 26, 2015, at the Reinvent Money conference. On the left is Jacob De Haan, on the right in the orange sweater is me.

The next day I send De Haan an extensive email explicating my request at DNB to publish the gold bar list of the Dutch gold in excel sheet format. I wrote him it wouldn’t take DNB any effort, as I assumed the bar list was readily available.

De Haan never replied to my email, so I called his office in December 2015 to ask what the status was of my request. De Haan’s secretary answered my inquiry was not rejected but still being processed.

Weeks passed but I didn’t get any reply from De Haan.

On February 24, 2016, I decided to call DNB’s press department to ask about my inquiry. DNB’s spokesman, Martijn Pols, told me over the phone the subject was still being discussed internally, he even confirmed De Haan was involved in the decision making. DNB was considering releasing the document while carefully weighing al pros and cons, he said.

In the conversation Pols stated DNB was aware the German central bank (the Deutsche Bundesbank) released a bar list in October 2015 and there was a wish in Amsterdam to mutually harmonize this policy. I added that if DNB would go ahead with the publication their action would only be credible if the Dutch bar list would be complete (disclosing refinery brands, refinery bar numbers and year of manufacturing), in contrast to the incomplete list the Germans had published. Pols was aware of the format the Germans had chosen and took note of my comment. An ensuing question from my side what was holding back DNB in releasing the list could not be clearly answered.

Months passed without any news from DNB. On August 8, 2016 I decided to call Pols again for a status update. He said he would reply over email. A few days later I received an email from DNB Head of Commutations J.W. Stal.

His email to me, translated from Dutch to English, reads:

Dear Mr Jansen,

…. We can share the following information with respect to our gold reserves.

DNB is transparent about the amount (weight) and the value of our gold assets. This information can be found in our annual reports. Thereby, several media have visited the gold vault and video recordings have also been made. However, we do not intend to publish a gold bar list. This serves no additional monetary purpose to our aforementioned transparency policy, however it would incur administrative costs

If you have any further question please contacts us.

Kind regards,

J.W. Stal

Of course, in this day and age any gold bar list from a central banks should be readily available in excel sheet format, and releasing a sheet would not incur any administrative costs.

My response to Stal translated:

Dear Mr Stal,

If the sole reason not to publish the gold bar list is that such an action would incur administrative costs I must conclude DNB doesn’t have the list readily available. Or is my conclusion erroneous? Does DNB have a complete gold bar list readily available or not?

If not, this is worrying because the gold bar list forms one of the most important checks on the existence of the Dutch official gold reserves, which provide essential stability to our economy.

Is the list in your possession or not?

Kind regards,

Koos Jansen

Stal replied:

Dear Mr Jansen,

In response to your email of August 11, 2016, to De Nederlandsche Bank (DNB), we can inform you as follows on our gold reserves and the related gold bar list. DNB has internal gold bar lists, however the conversion of internal lists to documents for publication would create too many administrative burdens.

We maintain our previous email, in which we stated publishing a gold bar list serves no monetary purpose other than transparency. And as previously noted, there are other ways for DNB to transparently communicate about our gold stocks.

We trust to have informed you sufficiently.

Kind regards,

J.W. Stal 

If DNB has its gold bar list properly (digitally) archived there should be no administrative cost whatsoever for publication. The argument presented by Stal makes absolutely no sense to me. If one owns over 600 tonnes of gold, why not have the physical assets accurately inventoried? 

What could possibly be the problem to release the bar list of the Dutch gold located in Amsterdam, New York, Ottawa and London?


I would like to remind you that DNB is the only Western central bank that in recent years has successfully repatriated a significant amount of gold (122.5 tonnes) from the Federal Reserve Bank Of New York through a covertly executed operation. This underlines DNB is fully aware of the importance of its gold reserves in our current fragile financial climate. I think DNB does have the bar list readily available, but it chooses not to publish it for political reasons – think, tensions between its custodians in New York and London.

DNB claims to be transparent but in reality it’s not.

If you click this link you can see the most recent video recording made inside the DNB vault at the Frederiksplein in Amsterdam on April 26, 2016. The gold you see in the video aggregates to 189.9 tonnes and includes the 122.5 tonnes repatriated from the Federal Reserve Bank of New York in November 2014. Note, the gold at the Frederiksplein has been relocated to a different compartment inside the vault room after November 2014, due to the increased volume by the repatriation.

elianne DNB gold
Courtesy RTLZ. DNB vault room, Frederiksplein in Amsterdam on April 26, 2016.

A few noteworthy comments from the DNB employee in the video:

Gold is the ultimate insurance and anchor in monetary systems.

If there will ever be any financial instability we can use the gold to build a new monetary system and offer trust to the public.

Song Xin: Increase Gold Reserves And Join SDR.

The Chairman of the China Gold Association and General Manager and Party Committee Secretary of China National Gold Group Corporation, the latter being China’s largest gold mining enterprise, is Song Xin and happens to be one of my favorite commentators in China. This gentleman made waves in July 2014 when he candidly wrote on Sina Finance that the People’ Bank Of China (PBOC) should slowly raise its official gold reserves to 8,500 tonnes, more than what the US Treasury claims to hold. The article was published in Chinese but translated by BullionStar to share the views by Song Xin with the English speaking world:

For China, gold’s strategic mission lies in the support of renminbi internationalization, and so let China become a world economic power and make sure that the China Dream is realized. … gold forms the very material basis for modern fiat currencies. 

Gold is the world’s only monetary asset that has no counter party risk…

That is why, in order for gold to fulfill its destined mission, we must raise our gold holdings a great deal, and do so with a solid plan. Step one should take us to the 4,000 tonnes mark, more than Germany and become number two in the world, next, we should increase step by step towards 8,500 tonnes, more than the US.

In the next translation further below you will read more on how Song Xin views gold’s role in China’s financial strategy. The bullet points from the article:

  • China continuously accumulates gold reserves to support and accelerate renminbi internationalization.
  • Renminbi confidence and gold are closely related. Gold reserves are the cornerstone for renminbi internationalization.
  • In modern times gold plays an important role in managing economic risk and maintaining China’s financial safety.
  • China is continuously increasing its official gold reserves in conjunction to joining the SDR.
  • The ratio of China’s official gold reserves to its GDP should be more in line with the US and other developed countries. At this moment China’s official gold reserves are still relatively low.
  • The Silk Road economic project, also called “One Belt and One Road” (OBOR), has huge development opportunities for the Chinese gold industry. Song Xin mentions that the in ground gold reserves of countries along OBOR reach 21,000 tonnes. In 2015, witnessed by Chairman Xi Jinping and President Putin, China National Gold Group Corporation and Russia’s largest gold mine Polyus have signed a strategic cooperative agreement and they are promoting detailed relevant cooperative issues at present.

What he didn’t mention is that China is striving to boost gold trade along OBOR to be settled in renminbi through the Shanghai International Gold Exchange.

Is The SDR A Means Or And End For China? 

In the mainstream media we often read China wants the SDR to replace the US dollar as the world reserve currency, based on statements from PBOC Governor Zhou Xiaochuan – among others:

Special consideration should be given to giving the SDR a greater role. The SDR has the features and potential to act as a super-sovereign reserve currency.

Since 2009 China has vigorously pressured the IMF for renminbi inclusion into the SDR. Finally, in 2015 the IMF decided the renminbi would be added to its currency basket in October 2016.

Zhou and other prominent economists at the PBOC are clearly pushing the SDR, but what’s China’s exact strategy?

In advance of the official inclusion of the renminbi into the SDR, which will take place on October 1, 2016, developments regarding the International Monetary Fund’s synthetic reserve currency are unfolding rapidly.

Author of the Big Reset, Willem Middelkoop, reported this August a “Substitution Fund” is being discussed in the higher echelons of the monetary elites, to facilitate dollar exchange for SDRs outside the market, and thus creating an escape from dollar reserves without putting downward pressure on the dollar.

Also in August, The PBOC allowed a division of the World Bank (the IBRD) to issue bonds denominated in SDRs in the Chinese market. The bonds worth $2.79 billion dollars can be created “soon” – presumably within a month. In addition, the Chinese government-linked China Development Bank will issue SDR notes worth somewhere in between $300 million to $800 million dollars. Both issues are “SDR-denominated financial market instruments” called M-SDRs by the IMF. Though experts think the M-SDRs will encounter many practical challenges when implemented and demand will be tepid, nevertheless the intention by the PBOC to launch these instruments is clear.

On the surface we can observe China has a vast interest in the SDR, but is the SDR a means or an end for China? What if China is simply using the SDR as a vehicle to achieve other objectives? For example:

  1. Dethroning the dollar. The SDR can be an excellent tool to unwind the dollar hegemony. In addition the Substitution Fund could help an orderly exit from China’s lob-sided dollar reserves.
  2. Internationalize the renminbi. Inclusion of the renminbi into the SDR boosts global renminbi acceptance as a reserve currency.
  3. Reduce capital outflows from China. With respect to M-SDRs, David Marsh of financial think tank the Official Monetary and Financial Institutions Forum (OMFIF) wrote:

Beijing’s SDR capital market initiative will allow domestic Chinese investors to subscribe to domestic bond issues with a significant foreign currency component, which will help dampen capital outflows… 

I think for China the SDR is just a means to an end. The end being to internationalize the renminbi, which of course is connected to the dollars retreat. And as Song Xin clearly states, “gold forms the very material basis for modern fiat currencies” and, “gold reserves should become the cornerstone … for renminbi internationalization”.

In my humble opinion the financial crisis has shown (once again) the inherent flaws of all fiat currencies. A bundle of some of these currencies will not solve the problems ahead of us; at best provide tools or a next level printing press. I still prefer gold as a store of value.

I find it interesting that Song Xin mentions the importance of the ratio between China’s official gold reserves and GDP. This concept was also brought forward by Jim Rickards. If the PBOC would have 5,000 tonnes of official gold reserves their “gold to GDP ratio” would be roughly on par with to the US, Europe and Russia.  One of the theories about our current international monetary system – that was detached from gold in 1971 – is that it can shift to a new gold anchored system when the power blocks have equalized the chips (Jim Rickards). In other words, if the US, Europe, Russia and China all have a roughly equal ratio of official gold reserves to their GDP, the international monetary system could make a transition towards gold.

Global gold vs GDP

According to my estimates the PBOC has roughly 4,000 tonnes in official gold reserves, in contrast to what is publicly disclosed at 1,800 tonnes. Perhaps the PBOC is “nearly there”.

Song Xin who was also a speaker at the “Renminbi Internationalization and China’s Gold Strategy Seminar” in Beijing on 18 September 2015.

Original source of the article below is the China Gold Association website. [Brackets added by Koos Jansen]

Song Xin, Chairman of the China Gold Association, General Manager and Party Committee Secretary of the China National Gold Group Corporation: Stick to the gold mission and boost innovative development

March 14, 2016

As the sole central enterprise in the gold industry, China National Gold Group Corporation is a firm defender of renminbi internationalization, pioneering demonstrator of the country’s “One Belt and One Road”, and faithful guardian of a happy life for people. It’s the direction that we should strive for.

On March 10 during the two assemblies, Song Xin, Chairman of the China Gold Association, General Manager and Party Committee Secretary of the China National Gold Group Corporation, was the guest in Xinhuanet’s 2016 two assemblies special Interview. In the program Dialogue with New State-owned Enterprises and Cheer up in the “13th Five-Year Plan”, he proposed the conclusions above. Besides, in the in-depth dialogue, Song Xin systematically illustrated topics including the functions of renminbi internationalization, effectively enhancing gold supply, realizing improved quality and efficiency of enterprises, practicing the central party’s “Five Development Theories”, and fulfilling the responsibilities of central enterprises.

About Gold’s Functions: Increase Gold Reserves And Accelerate Renminbi Internationalization. A Close Relationship between Increasing Gold Reserves And Joining The SDR

When the credit lines of paper currency declines and there are enough gold reserves, people can be less worried about the existing credit system and enhance their confidence in the currency.

Last year, China joined the IMF (International Monetary Fund) Special Drawing Rights (SDR), signifying the renminbi’s march towards internationalization.

Song Xin pointed out that the renminbi is closely related to gold. Gold is priced in US dollars throughout the world and in renminbi in China. There is a special relation between the renminbi and gold. We have continuously increased gold reserves since China strove to join the SDR basket of currencies. By the end of February this year, our gold reserves have increased to 1788.45 tonnes. In other words, China has continuously increased its official gold reserves and publicized the amount to the world, keeping a close relation with renminbi internationalization and joining the SDR.

Song Xin 2016:07:26

Further increase gold reserves to adapt to economic strength

China’s existing gold reserves are only about 1/5 of America’s. With the acceleration of renminbi internationalization, the renminbi should further increase its gold reserves in order to reach a level matching the national economic aggregate [GDP], especially if the renminbi wants to become a global currency.

Song Xin mentioned that China’s gold reserves once maintained around 1,054 tons. In the second half of last year, it started to increase these reserves substantially. Now, it has been increased by 70%. The increase range is big, but small compared to that of developed countries. At present, our economic aggregate [GDP] reaches second place in the world, but our gold reserves only reach the sixth place in the world. If the IMF’s reserves are excluded, China’s reserves rank in fifth place according to national rankings.

Possessing sufficient gold can strengthen confidence in a currency

Song Xin said, “There is a remarkable distance between China’s gold reserves and America’s gold reserves. America’s gold reserves are 8,133 tons and it even reached over 20,000 tons before. In those days, America controlled most of the gold in the world, which laid an important foundation for the US dollars to become a global currency.”

Before the Bretton Woods system was disintegrated in the 1970s, gold was directly connected with the US dollar. After the Bretton Woods system was corrupted, gold was disconnected from the US dollar, but America still kept sufficient gold reserves.

Song Xin believes that it has a relation with the global governing system. When the global economic aggregate was not so big, the gold standard had a certain advantage. With the expansion of the economic aggregate, the Bretton Woods system was disintegrated, and gold was disconnected from the US dollar. America announced that gold was unimportant then under this circumstance. However, in fact, when a financial crisis happens in America, its gold reserves don’t reduce at all. Americans firmed up people’s confidence in the US dollar by sufficient gold reserves.

Talk about supply reform: increase the effective supply of gold to boost quality and efficiency of enterprises rather than excess capacity, the gold industry needs to increase supply

In 2015, our domestic gold mine output reached about 450 tons, ranking the top in the world for nine consecutive years. Meanwhile, gold [retail] consumption reached almost 986 tons, surpassing India for three consecutive years and becoming the largest gold consumption country in the world.

Song Xin mentioned that our gold production can’t satisfy consumption demand and it doesn’t include the central bank’s reserves. Therefore, for the gold industry, increasing gold production and rapidly supplementing the gap above are the important missions for the gold industry.

Regarding how to increase the effective supply of gold, Song Xin believes that enterprises in the gold industry should offer more suitable marketing paths, especially customers’ favorite gold jewelries and gold investments with cultural connotation and innovation.

Maintain national financial safety and fulfill political responsibility 

“The political responsibility of the China National Gold Group Corporation is to make enterprises strong, excellent and big. Besides that, it is also to allow staff to enjoy the achievement of enterprise development. More importantly, it is to increase the effective supply of gold, to satisfy the demands of people and country for gold products, and to maintain the healthy and harmonious development of the industry”, said Song Xin.

Song Xin introduced that gold played a very important role in different historical periods. In the revolutionary war period, the underground party delivered abundant gold to Yan’an from the Jiaodong base area in order to get medicine and materials, playing a positive role for the Communist Party to gain victory. In the beginning of reform and opening up, the country’s foreign exchange was in a shortage and our country vigorously increased gold productivity, once amounting to 70% of the whole country’s foreign exchange reserve which is mainly for gold swap transactions and purchasing devices, etc. and guaranteeing foreign exchange demand of economic development. In the new era, gold has played an important role in resisting economic risk, maintaining the country’s financial safety and assisting with renminbi internationalization.

Song Xin thinks that the China National Gold Group Corporation shoulders the important mission of increasing gold reserves and production and adding trust for renminbi internationalization for the country. He said, “Gold reserves should become the cornerstone or ballasting stone for renminbi internationalization, which can improve the gold content of renminbi. In these aspects, the China National Gold Group Corporation is obligated to fulfill its own political duty.”

Chinese historic gold mining 1949 - 2015

Talk about “Five Major Development Concepts”: Explore Profound Meaning Based on Practical Conditions for Enterprise.

Make achievement in the “One Belt and One Road”

With the implementation of “One Belt and One Road”, the China National Gold Group Corporation can accomplish a lot in “going out” and “going out” is an important constituent of our reform and opening up in the new era. “One Belt and One Road” has brought huge development opportunity for Chinese gold industry and enterprises. Song Xin mentioned that the gold [in ground] resources of countries along the “One Belt and One Road” reached 21,000 tons, taking up 41.5% in the world. The gold production of countries along the line reached 1,116 tons, occupying 1/3 in the world. In addition, 6 gold mines are located here among top 20 gold mines in the world.

“The consumption amount of gold jewelry in the area accounts for 82.4% of the global consumption amount. Physical gold item demand including gold bars takes up 77% of the global demand. Gold resource development potential and gold market consumption potential in the area are quite huge, bringing important strategic opportunities for Chinese gold enterprises”, he said.

Song Xin introduced that the China National Gold Group Corporation is constructing mines in Kyrgyzstan and Congo. Last year, witnessed by Chairman Xi Jinping and President Putin, China National Gold Group Corporation and the largest Russian gold enterprise have signed a strategic cooperative agreement and they are promoting detailed relevant cooperative issues at present. Meanwhile, they are preparing to export devices to countries along the “One Belt and One Road” including Russia and Kazakhstan. In the practice of open concept, China National Gold Group Corporation is comprehensive and systematical.

The Power Of The Gold Community: Crowdfunding For FOIA Request Fort Knox Audit Documents Completes Within 24 Hours.

Since 2014 I’ve been investigating the alleged audits of the US official gold reserves. Of course my goal is to figure out if these audits are credible, or if they’re invented by the US government to silence the people that think gold has any value and forms the very material basis for a well-functioning monetary system.

My first post on this subject, A First Glance At US Official Gold Reserves Audits, published on March 27, 2014, was purely based on publicly available reports. Not surprisingly, all those reports together compounded to a logical story. The US government wouldn’t present anything that’s implausible at the surface. That first post was more or less a summary of the official narrative. After that post I decided to dig a little deeper.

According to the Department of the Treasury’s Office of Inspector General (OIG), which is responsible for the audits, the vast majority of the US monetary stock stored at the US Mint had been audited by 1986, 241,247,820.61 fine troy ounces to be precise, as was said by Inspector General Eric M. Thorson during his Statement to the House Financial Services Committee on June 23, 2011:

… the Committee for Continuing Audit of the U.S. Government-owned Gold performed annual audits of Treasury’s gold reserves from 1975 to 1986. … by 1986, 97 percent of the Government-owned gold held by the Mint had been audited and placed under joint seal.

If this is true I would like to see those audit reports, I thought one day. My first Freedom Of Information Act (FOIA) request submitted in 2015 at the US government asked for delivery of all audit reports drafted by the Committee for Continuing Audit of the U.S. Government-owned Gold from 1975 until 1986. Stunningly, the OIG couldn’t find all the documents – nor did the National Archives, the Government Accountability Office or the Treasury. The OIG only had three of the audit reports in question archived. Something was awfully wrong here.

The essence of auditing the US gold stock is to reassure the global economy that in any extreme scenario all dollars in circulation are supported by gold providing essential confidence and credibility. Once it’s proven the gold is there, why throw away the evidence? I wrote about this in my post US Government Lost 7 Fort Knox Gold Audit Reports published on June 2, 2015.

In my post from June 2015 I announced I would submit new FOIAs at several US government departments to get to the bottom of this. And I did, I’ve submitted countless of FOIAs at the US Treasury, US Mint and the OIG, next to asking for information through conventional channels like email and phone calls. Sometimes the FOIAs were not honored, sometimes I received very intriguing bits of information. What I found out, inter alia, was that in between 1993 and 2008, 84,671,927 ounces were re-audited. Meaning, several compartments that were sealed in between 1975 and 1986 had been re-opened to access the bars inside. And strangely, the OIG cannot give me a proper explanation for these re-audits. Believe me, I’ve tried to ask numerous times.

Why was this gold re-audited? Why were sealed vault compartments re-opened and re-audited? These are just examples of questions my research is focussed on.

My interest in the subject did not pass unnoticed at the US government. In recent months I could clearly sense a strong defense by all departments in concert. Emails are not being answered, phone calls are not being returned, questions in my FOIAs are dodged, and in my most recent FOIA an unreasonable amount of money was asked for reports the Mint Director’s Representative writes every year for “notifying the CFO of the completion of the verification” of the Deep Storage gold audits.

Through a FOIA submitted at the OIG late 2015 I obtained the Management Letter for the Fiscal Year 2004 Audit of the United States Mint’s Schedule of Custodial Gold and Silver Reserves March 10, 2005. I the management letter we can read:

5. Policy FIN-09, Deep Storage Asset verifications, paragraph 2v, and MD 8H-3 paragraph 6a, both include the requirement that the Director’s Representative submit a written report to the Chief Financial Officer (CFO) notifying the CFO of the completion of the verification.

After reading this paragraph I thought maybe these reports by the Mint Director’s Representative would disclose valuable information. As the US government was barely talking to me anymore, I submitted a new FOIA request at the Mint in 2016 that stated:

Dear reader,

In the “Management Letter for the Fiscal Year 2004 Audit of the United States Mint’s Schedule of Custodial Gold and Silver Reserves March 10, 2005”, drafted by the OIG, it states:

“Policy FIN-09, Deep Storage Asset Verifications, paragraph 2v, and MD 8H-3 paragraph 6a, both include the requirement that the Director’s Representative submit a written report to the Chief Financial Officer (CFO) notifying the CFO of the completion of the verification.”

I would like to obtain all these reports by the US Mint Director’s Representative to the Chief Financial Officer written 1993 – 2008.

The Mint replied this request would costs $3,144.96 dollars, because it would take forty hours to search the documents – as the requested documents are located at another facility – eight hours to review the documents and additional costs would be added to duplicate 1,200 pages of documentation. I think this is nonsense; it shouldn’t take forty hours to search these documents and I would be surprised if they actually count 1,200 pages. This is just another way of trying to shake me off.

FOIA sponsor
As some of you know, my real name is Jan Nieuwenhuijs.

However, thanks to Henry Young‘s advice on Twitter I decided to launch a crowdfunding campaign on GoFundMe to collect the money! If we all donate a few bucks, who knows what comes out!

After I tweeted about the campaign it quickly went viral. The news was spread on websites such as TFMetals, GoldMoney, GATA and GoldChartsRus – among others – and within a few hours the funding was completed, which shows to me the power of our gold community! I was truly overwhelmed by everybody’s generous donations and support. As of this moment there is even more money collected than I asked for at GoFundMe (please stop donating!). The residual will be saved for when the costs appear to be higher or if they charge me for any other FOIA I’ve submitted. Naturally, I will publicly keep a record of expenditures in the comment section of my GoFundMe page.

Next for me is to transfer the money to the US Treasury and wait what they’ll sent back. If I’m offline for a weeks in September, that’s because I’m digesting 1,200 pages of dense jargon.

I will disclose a list with all the names (mostly Turdites) who have donated in the finished post on the audits of the US official gold reserves. For now, thanks everybody who donated and I’ll keep you posted!!

Spectacular Chinese Gold Demand 2015 Fully Denied By GFMS And Mainstream Media

Debunking the Thomson Reuters GFMS Gold Survey 2016 report. New information provides a more detailed perspective on the Chinese domestic gold market. 

In the Gold Survey 2016 report by GFMS that covers the global gold market for calendar year 2015 Chinese gold consumption was assessed at 867 tonnes. As Chinese wholesale demand, measured by withdrawals from Shanghai Gold Exchange designated vaults, accounted for 2,596 tonnes in 2015 the difference reached an extraordinary peak for the year. In an attempt to explain the 1,729 tonne gap GFMS presents three brand new (misleading) arguments in the Gold Survey 2016 and reused one old argument, while it abandoned five arguments previously put forward in Gold Survey reports and by GFMS employees at forums. Very few of all these arguments have ever proven to be valid, illustrated by the fact that GFMS perpetually keeps making up new ones, and thus gold investors around the world continue to be fooled about Chinese gold demand. For some reason GFMS is restrained in disclosing that any individual or institution in China can directly buy and withdraw gold at the Shanghai Gold Exchange, which is the most significant reason for the discrepancy in question.

According to my estimates true Chinese gold demand in 2015 must have been north of 2,250 tonnes.

The reason I keep writing about this subject (the discrepancy in question) is that it eventually will enable me to show that global physical gold supply and demand as presented by GFMS is just the tip of the iceberg. And, as stated in my previous post true physical supply and demand is far more relevant to the gold price than the numbers by GFMS.

New Information has enabled me to shine a fresh light on the Chinese domestic gold market, so we’ll zoom in once again to get the best assessment of the mechanics of this market. This post is part two of an overview of the Chinese gold market for 2015. In the first part we focused on the (paper) volumes traded on the Shanghai Gold Exchange (SGE) and Shanghai International Gold Exchange (SGEI). In this post we’ll focus on the size and mechanics of the Chinese physical gold market, while at the same time addressing the fallacious information in the Gold Survey 2016 (GS2016).

The Gold Surplus In China According to GFMS

First, let’s have a look at an overview of the key supply and demand data points for 2013, 2014 and 2015, as disclosed in Gold Survey reports by GFMS.

GFMS SD 2013-14-15
Exhibit 1.

Without GFMS mentioning the volume of SGE withdrawals for 2015 (2,596 tonnes) in the GS2016 they disclose apparent supply in the Chinese domestic gold market at 2,293 tonnes. Mine output accounted for 458 tonnes (page 22), scrap supply for 225 tonnes (page 36) and net import was 1,610 tonnes (page 54). The latter is incorrect because GFMS has double counted 63 tonnes Australia exported to China, as demonstrated in my post Australia Customs Department Confirms BullionStar’s Analysis On Gold Export To China, but the let’s not nitpick.

On other pages in the GS2016 we read total (consumer) demand for 2015 was 867 tonnes (page 52), consisting of retail bar demand at 199 tonnes (page 52) and gold fabrication at 668 tonnes (page 41). According to their own data there was a surplus of 1,426 tonnes (2,293 – 867) in the Chinese gold market. Whilst, in 2013 the surplus accounted for 826 tonnes and in 2014 for 917 tonnes, according to data disclosed in previous Gold Survey reports. Meaning, in the past three years GFMS has observed 3,169 tonnes (826 + 917 + 1,426) that were supplied to China not to meet demand, but for reasons that are constantly changing - wait till we get to the plea.

Remarkably, in the GS2016 report GFMS writes:

Hong Kong remained the primary conduit of Chinese gold imports, though its share has been contracting since 2013 … Gold import from this conduit was traditionally regarded as a simple proxy to estimate Chinese consumption … The declining dominance of Hong Kong and the increasing proportion directly routed into Beijing and Shanghai therefore points to the necessity of changes on methodology to calculate Chinese gold demand.

Exhibit 2.

GFMS states that when all Chinese imports came in through Hong Kong this inflow was “regarded as a simple proxy to estimate Chinese consumption”, but now gold is also being imported directly from countries like Australia, the UK and Switzerland, such inflow “points to the necessity of changes on methodology to calculate Chinese gold demand”. How can it be that a couple of years ago Chinese gold import from Hong Kong reflected demand, but a few years later direct massive additional import from the UK and Australia does not reflect demand?

As you probably know (otherwise you can read it here) most of the gold supply in China flows through the SGE. Consequently wholesale demand can be measured by the amount of gold withdrawn from SGE designated vaults. Comparable to the difference between apparent supply and consumer demand shown in exhibit 1, is the difference between SGE withdrawals and consumer demand – the latter being even wider.

Chinese domestic gold market S&D 2015
Exhibit 3.

In the GS2016 GFMS has written a chapter fully dedicated to the humongous difference between SGE withdrawals and their assessment of demand. The chapter is titled “A Review And Explanation Of How China’s SGE’s Withdraw Numbers Are Impacted By Other Trading Activities”. In this post we’ll only briefly discuss whether the arguments are valid, as one of them has to do with China’s highly complex VAT system and I like to expand on this subject in detail in a separated post. However, we’ll expose more of the mechanics of the Chinese domestic gold market in this post, which conveniently demonstrates why nearly all the arguments by GFMS that will be discussed later on are bogus.

This might surprise you, but I actually had fruitful correspondence in the past months with a Senior Precious Metals Analyst at GFMS and a Senior Analyst at Metals Focus (MF). Both gentlemen have been very helpful in sharing their methodology for computing (Chinese) physical supply and demand data. I have to say both of them have answered all my questions. This service is seldom provided by the the World Gold Council, the Bank Of England or the London Bullion Market Association. Based on the information shared by GFMS and MF I’ve refined my view on our on-going disagreement with respect to the Chinese gold demand.

The Mechanics Of The Chinese Domestic Gold Market And Estimating True Chinese gold demand.

Let us refresh our memory regarding the structure of this market. In the Chinese domestic gold market nearly all physical gold supply and demand flows through the SGE because all bullion import1 into the domestic market is required to be sold first through the SGE and there are rules and tax incentives that funnel nearly all domestic mine output and scrap supply through the central bourse. As gold in the Chinese domestic market is not allowed to be exported1, the amount of gold withdrawn from SGE designated vaults therefore serves as a decent indicator for wholesale demand.

However, there are a few possibilities through which SGE withdrawals can be distorted for measuring demand.

  • If metal is in some manner recycled2 through the central bourse. When gold is bought and withdrawn from the SGE vaults and promptly sold and deposited into SGE vaults (for example though process scrap), these flows would inflate SGE withdrawals while not having a net effect on the price of gold, hence the related supply and demand volumes would be deceiving. Although article 23 from the Detailed Rules for Physical Delivery Of the Shanghai Gold Exchange states that bars withdrawn from SGE designated vaults are not allowed to re-enter these vaults, this rule does not fully prevent gold from being recycled through the exchange. If bars withdrawn are re-melted and assayed by an SGE approved refinery they are allowed back into the vaults. And thus, some recycled gold can inflate SGE withdrawals as a measure for true demand.
  • Another example that could distort SGE withdrawals is when international members would withdraw gold from vaults of the SGEI in the Shanghai Free Trade Zone2 (SFTZ), these withdrawals are included in the total SGE withdrawal figure, to store elsewhere in the SFTZ or export abroad1.

For ease of reference we’ll label the amount of gold recycled through the SGE that has no net effect on the price, and gold withdrawn from SGEI vaults that is not imported into the Chinese domestic market as distortion2.

Therefor, in order for us to make the best estimate of true Chinese gold demand we should subtract the amount of distortion from SGE withdrawals. The crux of true Chinese gold demand is establishing the amount of distortion, that’s it.

Previously I assumed the scrap numbers by GFMS mainly reflected gold that was making it’s way back to the SGE and these flows included disinvestment. Both assumptions appeared to be false.

  1. Scrap numbers from GFMS and MF, although they’re certainly not equal, are collected from refiners that are not all SGE members. Implying not all refineries scrap is making its way to the SGE, but is sold through other channels.
  2. Scrap numbers from GFMS and MF include jewelry and industrial products sold back from consumers, they do not include disinvestment that flows directly through refineries to the SGE. GFMS does measure disinvestment at retail level, for example, when people sell bars back to banks these will get netted out to compute net retail bar demand. But if an affluent investor or institution wants to sell (disinvest) 500 Kg they’re likely to approach a refinery directly.

In my nomenclature “distortion2” is the part that inflates SGE withdrawals as a measure for demand, “scrap” is supply from sold fabricated products like old jewelry, and “disinvestment” is supply coming from investment bars sold directly to refineries making its way to the SGE.

As a consequence, these new insights regarding scrap and disinvestment supply have changed my perspective on the Chinese supply and demand balance.

To reach a more clear understanding of what was just described, I’ve conceived an exemplar graph to visually interpret the Chinese physical gold supply and demand balance. Have a look.

Example Chinese domestic gold market S&D
Exhibit 4.

As you can see in the graph above total supply and total demand are exactly equal, this is because one cannot sell gold without a buyer or buy gold without a seller. Consequently we can gauge demand by measuring supply. Please note, in the supply and demand balance shown above, and in our further investigation, two elements are left out. On the supply side I left out stock carry over in SGE vaults from previous years, as this information is not publicly available. On the demand side I left out gold bought at the SGE that was not withdrawn from the vaults, as this information is also unknown.

In all its simplicity the example chart shows that the difference between consumer demand and true Chinese gold demand is caused by direct purchases from individual and institutional clients at the SGE. While GFMS merely counts demand at retail level, by jewelry and bar sales at shops and banks, the real action is at wholesale level, at the SGE.

GFMS fully neglects direct purchases at the SGE (demand) and any corresponding disinvestment to the SGE (supply). Hence our disagreement.

Estimate of SGE withdrawals distribution
Exhibit 5. According to my analysis the PBOC does not buy its gold through the SGE. For more information read my post PBOC Gold Purchases: Separating Facts from Speculation.

At the moment the SGE has almost 10,000 institutional and over 8.3 million individual clients that are able to buy gold directly at the SGE. There is even an SGE smartphone application called “Yijintong” that allows anyone with an internet connection to open an SGE account and trade directly on the SGE wholesale platform enjoying the lowest spreads in China. Furthermore, the SGE counts 183 domestic members and 63 international members.

Exhibit 6. Screenshot Yijintong.

From the SGE (December 2015):

Yijintong is the first professional mobile terminal of state-level gold market jointly researched and developed by the Gold Exchange and all its members …

Yijintong has comprehensive functions and advanced systems, which are compatible with various Android and iOS operating systems. Right now, it possesses market, transaction, search and information functions, so investors can conduct transactions via mobile phones … In early 2016, Yijintong will support mobile phone online account opening. After that, new users will be able to establish Shanghai Gold Exchange’s “Gold Account” business on their mobile phones directly, and avoid the step of visiting stores. It has brought convenience for personal investors to participate in gold and silver transactions.

Investors can log into Yijintong through mobile phones to conduct daily and nightly market transactions and search, utilizing all-day mobile phone services for gold and silver transactions, allowing Yijintong to become a mobile phone gold and silver investment edge tool that integrates functions and practicability, which also helps investors to do well in both work and financial management.

Exhibit 7.

SGE app qr code

Exhibit 8. Download methods: iOS and Android mobile phone users can scan the QR code and open it in the browser to download and install directly.

The China Gold Association (CGA) makes yearly estimates of direct purchases at the SGE. In their Gold Yearbook 2013 direct purchases (net investment) were assessed at 1,022 tonnes, computed as SGE withdrawals minus consumer demand. The CGA neglects any distortion flowing through the SGE hence I stopped using their methodology. Have a look at the screenshot below.

CGA Gold Yearbook 2013 demand
Exhibit 9. CGA Yearbook 2013: framed in black is total demand 2013 in tonnes (Red = jewelry manufacturing, blue = small bar production (sold at ie banks) , purple = industrial material, turquoise = coin manufacturing, yellow = other, green = net investment)

Unfortunately me personally can’t exactly compute true Chinese gold demand, as I don’t have business relationships with all Chinese refineries to gauge disinvestment supply flowing to the SGE. In any case, these are the formulas:

True Chinese demand = net import into the Chinese domestic market1 + scrap + disinvestment + domestic mine output

Although a tad complex, the exact formula including SGE withdrawals is:

SGE withdrawals = net import into the Chinese domestic market1 + (domestic mine output – domestic mine output that not flows to the SGE) + (scrap – scrap that not flows to the SGE) + disinvestment + distortion + (an amount equal to “domestic mine output that not flows to the SGE + scrap that not flows to the SGE” being disinvestment or distortion)

Although not all scrap as disclosed by GFMS ends up at the SGE, it’s definitely all genuine supply and therefore useful in the first formula above. Same goes for domestic mine output.

The part of scrap and domestic mine output that doesn’t travel to the SGE (although being genuine supply) must be replaced by either disinvestment or distortion at the SGE (exhibit 4). Note, in the knowledge direct purchases from the SGE are immense in China (exhibit 9) we can safely assume that disinvestment flows to the SGE are sizable as well.

My new insights unfortunately do not imply that we can make a more precise estimate of true Chinese gold demand. However, I think the best approach is to set the lower bound of true Chinese gold demand at net import1 + mine output + scrap. While I think true demand is likely higher because disinvestment to the SGE can be significant.

Sadly because disinvestment is unknown, distortion is also unknown (exhibit 4)

Let’s return to our discussion with GFMS. The big question is of course, how can total Chinese gold demand by GFMS be 867 tonnes, in a market where mining output accounted for 450 tonnes (source), net imports by my calculations accounted for 1,575 tonnes1, and there is also scrap and disinvestment supply, but export is prohibited and the premium on gold in China was positive throughout the whole year?! This cannot be.

Shanghai Gold Exchange SGE gold premium 2015
Exhibit 10.

I would like to show a real life example to illustrate what’s going on the Chinese gold market: In 2015 the Chinese stock market (the Shanghai Composite Index) declined by 40 % from June till August. Seeking for a safe haven the Chinese bought physical gold en masse directly at the SGE; some weekly withdrawals in July, August and September transcended 70 tonnes. The gold was of course sourced by imports (look at the premium in exhibit 10), yet GFMS doesn’t consider this to be demand.

SCI vs SGE withdrawals
Exhibit 11. 

The Arguments

Although true Chinese demand cannot be less than SGE withdrawals minus distortion, GFMS pretends their arguments can explain the gigantic gap between SGE withdrawals and consumer demand. Illustrated in the chart below.

Chinese domestic gold market S&D 2013 - 2015
Exhibit 12.

All arguments presented can only explain the size of distortion (exhibit 4), not the difference between SGE withdrawals and consumer demand! Actually, I should stop writing here, but I won’t. Let’s briefly go through these arguments to see if they make any sense.

The chapter in question, “A Review And Explanation Of How China’s SGE’s Withdraw Numbers Are Impacted By Other Trading Activities” (Gold Survey 2016), surprisingly lists three new arguments…

  • Tax avoidance (page 56).
  • Financial statement window dressing (page 58).
  • Retailers selling unsold inventories directly to refiners (page 58)

…and one old argument:

  • Gold leasing activities and arbitrage opportunities (in China gold is money at lower cost) (Gold Survey 2016, page 57, Gold Survey 2015, page 78)

Given the fact GFMS has gone all out in this chapter one would assume it to be complete. But strangely, arguments presented in prior Gold Survey reports and at forums have been abandoned. The following arguments were presented by GFMS in recent years:

  • Wholesale stock inventory growth (Augustus 2013) (Gold Survey 2014, page 88)
  • Arbitrage refining (Gold Survey 2014, page 88) (Reuters Global Gold Forum 2015)
  • Round tripping (Gold Survey 2014, page 88) (Gold Survey 2015, page 78, 82)
  • Chinese commercial bank assets to back investment products. “The higher levels of imports, and withdrawals, are boosted by a number of factors, but notably by gold’s use as an asset class and the requirement for commercial banks to hold physical gold to support investment products.” (Gold Survey 2015, page 78).
  • Defaulting gold enterprises sent inventory directly to refiners and SGE (Gold Survey 2015 Q2, page 7)

What happened to arbitrage refining as described by GFMS Senior Precious Metals Analyst Samson Li at the Reuters Gold Forum in 2015? Has this arbitrage opportunity ever existed or did the market change and now the opportunity is closed? I never thought this argument was very compelling. Maybe GFMS changed its mind on arbitrage refining.

What happened to the round tripping of gold between Hong Kong and Shenzhen, put forward in the Gold Survey 2014 and 2015 as a reason that inflated SGE withdrawals? Did criminals stop using this scheme, or did GFMS find out it never inflated withdrawals because gold flows through Free Trade Zones are separated from the Chinese domestic gold market and the SGE system1? In several posts I’ve extensively shown round tripping does not inflate SGE withdrawals, for more information click here.

What happened to the argument Chinese commercial banks buy and withdraw gold at the SGE to back investment products they offer to customers, a practice which boosts import and withdrawals but was not considered demand by GFMS? Or is it demand now, as GFMS dropped this argument from the list? Ok, gotcha.

Now briefly about the new arguments listed by GFMS in the GS2016:

  • Tax avoidance.

The definition of tax avoidance is that it’s a legal way to pay as little tax as possible. However, the scheme GFMS describes in the GS2016 report is tax evasion, which is highly illegal, and worst case the perpetrator can suffer life imprisonment. This is not some legal loophole as GFMS purports (page 56).

We initially became aware of the scheme in 2013 when it first emerged, but based on information gathered from our contacts, the number of industry participants mushroomed in 2014 and 2015 as other traders became aware of the potential loophole.

By writing the scheme is a way of tax avoidance and a loophole GFSM is misleading their readers. In addition, this illegal scheme did not emerge in 2013. The tax rules are now the same as when the SGE was erected in 2002. In fact, if you click here, you can read an article about the same crimes in 2009. But as mentioned before, we’ll save the details for a forthcoming post, when we’ll also address “financial statement window dressing” and “retailers selling unsold inventories directly to refiners”.

About gold leasing that would inflate SGE withdrawals, I’ve written numerous blog posts about this in the past. Best you can read my post Chinese Commodity Financing Deals Explained. In all the posts I’ve written over the years on the subject I’ve stated that the gold leased is not likely to leave the SGE vaults except when the gold will be used for jewelry manufacturing (which is genuine demand). Effectively, all the gold leasing by enterprises, investors and speculators to acquire cheap funding happens within the SGE system and do not inflate withdrawals. Ironically, in the latest World Gold Council (WGC) report it’s written [brackets added by me]:

Over recent years we have observed a rising number of commercial banks participating in the gold leasing market. … It’s estimated that around 10% of the leased gold leaves the SGE’s vaults. The majority is for financing purposes and is sold at the SGE [and stays within the SGE vaults] for cash settlement.

So, I hope to have clarified why according to my estimates true Chinese gold demand in 2015 must have been north of 2,250 tonnes (import 1,575 tonnes, mine output 450 tonnes, scrap supply 225 tonnes). More details in the next post when we will discuss the tax scheme.


1. Estimating China’s net gold import is difficult. For one, because China’s customs department doesn’t publicly disclose its cross-border trade statistics for gold so we depend on bullion export data (HS code 7108) from the rest of the world. Data from Hong Kong, the UK, Switzerland, the US, Canada and Australia is publicly available, but for example data from South Africa is not. Therefor provisional data on China’s net import is not always fully accurate. Only when the CGA publishes the import amount in their Gold Yearbook can we know for sure. My estimate is 1,575 tonnes for 2015.

Net bullion exports to China in 2015: Hong Kong 861 tonnes, Switzerland 292 tonnes, the UK 285 tonnes, the US 6 tonnes, Japan 5 tonnes, Australia 124 tonnes, Canada 3 tonnes.

In China gold is not allowed to be exported from the domestic market (SGE Main Board). However, gold is allowed to be imported into / exported from China through processing trade, usually done in Free Trade Zones. This is the only way gold can be exported from China. Note, processing trade flows are completely separated from the Chinese domestic gold market. For detailed information read my post Chinese Cross-Border Gold Trade Rules.

In order to track how much gold China is net importing, it’s necessary to net out bullion export to China by foreign countries, with import from China by foreign countries (HS code 7108). Although, it’s also possible that bullion is imported into China through processing trade and exported as jewelry (China has a vast jewelry manufacturing industry), which falls under a separated trade category (HS code 7113). Suppose, a jewelry manufacturer in Shenzhen import 2 tonnes of gold from Hong Kong under HS code 7108 through processing trade, processes the gold into jewelry to subsequently export the finished products back to Hong Kong under HS code 7113. This would blur our view on net bullion import by China, however I neglect this phenomenon in my calculations.

The fine gold content in jewelry exported from China (HS code 7113) is very difficult to measure as the total value of the products shipped also contain other precious metals, gems and includes the fabrication costs. Hence, the value and weight of jewelry exported from China does not reveal the fine gold content. The reason why I do not adjust net bullion inflows into China by jewelry outflow is because the gold content in jewelry exported from China is roughly offset by imports of gold doré or gold as a by product in ores and concentrates.

For example, the most recent CGA Yearbook in my possession, covering calendar year 2014 (exhibit 13), states “Chinese domestic and overseas gold mining output” was 512.775 tonnes. In the same report it’s mentioned “domestic mining output” accounted for 451.799 tonnes, implying overseas mine supply accounted for 60.976 tonnes. And thus, I net out overseas mining imported into China (60.976 tonnes) against jewelry exported from China. If I find more information on Chinese cross-border gold trade flows I will adjust my methodology accordingly.

Exhibit 13. Screenshot taken from my hard copy of the CGA Yearbook 2014. We can see framed in blue is “domestic and overseas mine supply”, framed in red is “gold import” and framed in green is “total supply”. Total supply, as disclosed by the CGA, equals SGE withdrawals for 2014, likewise it did for the years 2007, 2008, 2009, 2010, 2011, 2012 and 2013. 

Last but not least, gold can be imported through processing trade into the Shanghai Free Trade Zone (SFTZ) where the Shanghai International God Exchange (SGEI) vaults are located. Potentially, this gold in SGEI vaults, once sold to foreigners is withdrawn and exported abroad (inflating SGE withdrawals). However, a source at ICBC has indicated to me that regarding physical flows the SGEI is mainly used by Chinese domestic banks to import gold into the Chinese domestic market, at least this was the case until December 2015. So I don’t see a possibility there were exorbitant large volumes of gold in SGEI vaults in 2015, or have been withdrawn and exported.

The only noteworthy imports from China (the SGEI) I have observed are by India, which has taken in 370 Kg during 2015 (source Zauba), and by Thailand that presumably bought 7 tonnes (source COMTRADE).

Screen Shot 2016-08-13 at 11.20.26 am Screen Shot 2016-08-13 at 11.21.56 am Screen Shot 2016-08-13 at 11.22.20 am Screen Shot 2016-08-13 at 12.11.32 pmExhibit 14.

iAu9999 & iAu9999 OTC SGE
Exhibit 15. Weekly trading volume of the most popular SGEI contract iAu99.99, traded on-exchange and in the OTC market.

For more information on the SGEI read my posts, Workings Of The Shanghai International Gold Exchange and What Happened To The Shanghai International Gold Exchange?

2. For the sake of simplicity I have categorized under “distortion” everything that is not true demand, namely: process scrap, stock inventory change, arbitrage refining (if it exists), the VAT scheme, smuggling and SGEI withdrawals.

The Gold Price And Global Flows. The UK Net Imported 152 tonnes In June.

On a firmly rising gold price the UK is one of the largest net importers of gold in 2016. The gold price went up 25 % from $1,061.5 dollars per troy ounce on January 1 to $1,325.8 on June 31. Over this period the UK net imported 583 tonnes and GLD inventory mushroomed by 308 tonnes.

In the month of June the UK gross imported 154.2 tonnes, up 22 % from May, and gross export was 1.9 tonnes, down 37 % from the previous month. Net import into the UK resulted in a robust 152.3 tonnes, up 23 % month on month.

Gross import by the UK from Switzerland remained resilient at 68.5 tonnes, up 11 % from May, while gross export to Switzerland was nix.

The most noteworthy gold exporters to the UK in June 2016 were:

UK gross gold import table June 2016

Notable, the UK net imported a record amount from China mainland at 3.2 tonnes. This is very exceptional and has never happened in recent history, as far as I know.

UK Gold Trade China 2012 - June 2016
In general gold export from the Chinese domestic gold market is prohibited – unless the Peoples Bank Of China would make an exception. Therefor, the export of gold from China to the UK was possibly sourced from the Shanghai International Gold Exchange (SGEI) in the Shanghai Free Trade Zone (SFTZ) that technically/physically is separated from the Chinese domestic gold market.

Although the tonnage isn’t staggering, the transfer becomes newsworthy when viewed in perspective. The Chinese have an interest in becoming a dominant player in the international gold market. To strengthen their economy they wish not only for more physical (private and official) gold reserves, another objective is a broad development of gold market infrastructure and integration with the international market. Read what PBOC governor Zhou Xiaochuan had to say in 2004 at the London Bullion Market Association (LBMA) conference :

The establishment and development of China’s gold market marks the basic completion of the construction of a market for major financial products in China, which will provide better micro grounds for China’s macro economic adjustment. For further development, China’s gold market should gradually realize three transformations: from commodity trade to financial product trade, from spot transactions to futures transactions, and from a domestic market to integration with the international market.

…. gold still has a strong financial nature and remains an indispensable investment tool. In major financial centers in the world, the gold market – together with the money, securities and FX market – constitutes the main part of the financial market.

China’s gold market must integrate into the global market. …. China should actively create conditions for its gold market to become an important part of the international gold market.

… gold still bears the marked nature of money under the modern financial system.

In September 2014 the Shanghai International Gold Exchange (SGEI) was erected in the SFTZ, followed by the launch of the Shanghai Gold Fix in April 2016, but up until now both events did not elevate China’s share in the international gold market as the Chinese had hoped for. But the Chinese always set out multiple strategies at once to reach their objectives.

Meanwhile, in the past 14 months four Chinese banks have penetrated the LBMA Gold Price auction. Namely, Bank of China, Bank Of Communications, China Construction Bank and Industrial and Commercial Bank of China (ICBC). In addition, ICBC Standard Bank has become an LBMA market maker for spot trading and a clearing member of “the not-for-profit company London Precious Metal Clearing Limited (LPMCL)” for which it has bought the 2,000 tonnes gold vault from Barclays in May. The vault is located in London.

ICBC Standard Bank on the latest developments:

This enables us to better execute on our strategy to become one of the largest Chinese banks in the precious metals market.

Is it a coincidence that China is suddenly exporting gold to the UK while ICBC Standard Bank was recently accepted as clearing member of the LPMCL and utilizes a gold vault in London? Likely the gold export to the UK is connected to the new clearing and vaulting activities by ICBC Standard Bank. Next to China’s strategy to develop the SGEI for gold trading in renminbi along the Silk Road, they’re actively increasing presence in the London Bullion Market.

However, I don’t think the majority of gold imports into the UK this year – aside from the import from China – are connected to ICBC Standard Bank, the imports mainly reflect Western institutional demand. Net gold flows through London have been correlated to the price of gold long before the Chinese entered the international precious metals construction.

So, although the 3.2 tonnes exported from China to the UK are exceptional, the UK manifesting itself as a net importer while the price is rising is quite normal.

The Gold Price And Global Flows

Here’s a theory hopefully sparking fruitful debate: the gold price is set by physical supply and demand in the West.

Since 2013 when the price of gold declined significantly in all major currencies, we’ve witnessed a massive exodus of physical gold from West to East. In 2013 the UK, housing the London Bullion market, net exported 1,424 tonnes, the highest amount since 1997 when 2,473 tonnes were net exported (source James Turk).

In the 2014 and 2015 the UK continued to be a net exporter. Large wholesale 400-ounce London Good Delivery bars were mainly transported to Switzerland, where being recast into 1 Kg 9999 fine bars for the Asian market. From international merchandise trade statistics we could clearly track the gold flowing from the UK, to Switzerland, to Hong Kong, finally reaching China mainland. We could even see a correlation between UK net export and SGE withdrawals from early 2013 up until December 2015.

UK Gold Trade 2012 - June 2016 SGE withdrawals

Currently China is still buying gold, albeit less than in recent years, but the West has turned into a net buyer as well, pressuring supply and forcefully driving up the price.

Some commentators in the gold space deemed it impossible China was importing 1,400 tonnes on average in the past three years while the price was going down. The price was set purely in the paper markets, so they concluded. According to my analysis China was able to buy the tonnages they did by the willingness of the West to supply the metal – exactly who in the West was so eager to supply is another story.

The falling gold price from 2013 until 2015 and the exceptional tonnages China was importing were caused by strong physical supply from the West. Simplified, if 1,400 tonnes are imported into China, one can observe strong demand, but the corresponding supply had to be at least equally strong (or stronger) on a declining price. The nominal volumes of supply and demand are always equal, the difference in strength between both is what sets the price. In my logic, that is. What happened in the past years was that the Chinese were merely buying the physical supply coming from the West, buying as much as they could. A once in a lifetime opportunity.

As stated in a previous post I think the price of gold can be, and is, easily manipulated through derivatives in the short term. Through leveraged futures contracts or derivatives in the highly opaque OTC market the price of gold can be efficiently managed for short periods. But in the long term the price can only be decided by physical supply and demand. If any entity for example desires to suppress the gold price in the long term then physical metal has to be supplied into the open market or an undeniably vivacious spread will appear between the paper and physical price.

What I’m seeing is that physical gold flows across the globe are highly correlated with the gold price. Have a look at the chart below showing the gold price versus the net flow through the UK (and GLD inventory change). There’s a clear correlation.

UK Net Gold Trade GLD Jan 2012 - June 2016
GLD inventory change makes up about one third of the total UK net flow.

The same correlation can be seen in net gold flows through Switzerland – which can be considered as a proxy for Western demand just like net flows through the UK.

Swiss net gold flow vs gold price 1971 - 2016 june

In general, every time the West starts hoarding in the UK and Switzerland the price goes up, and when they sell the price declines. I think these charts show that there is more correlation between the gold price and physical supply and demand than is widely assumed in the gold space.

UK Swiss Gold Trade 2005 - 2016 June

Take this last chart for example. The UK net importing huge amounts of physical gold coincides with the price going up, and exactly when they turn to net exporting the price goes down. So then how can the price have nothing to do physical supply and demand?

On a small side note. I find it remarkable that research (by Ronan Manly, BullionStar, and Nick Laird, pointed out that the physical float in London was nearly running out in late 2015 and shortly after the UK starts net importing and the price goes up. When in December 2015 the UK net exported 184 tonnes of gold, which was the third highest amount on record, I wrote In February 2016 [brackets added by me]:

When there is no more gold left in London to export, the gold price is likely to go higher on strong global demand induced by economic headwind.

How much gold is left in London? We can make a rough estimate, ….Research by Ronan Manly … and Nick Laird … pointed out there were roughly 6,256 tonnes of gold in London in June 2015. However, of this total at least 3,779 tonnes was monetary gold owned by central banks around the world stored at the Bank Of England (BOE), which is [presumably] not for sale. The remaining 2,477 tonnes in non-monetary gold were potentially for sale. [Note, this number included 1,116 tonnes in ETF gold outside BOE vaults and 1,355 tonnes stored within BOE vaults, leaving 6 tonnes in the LBMA system outside the BOE] 

Courtesy Jesse’s Café Américain.

In any case, we know now that from June until December the UK net exported 390 tonnes of non-monetary gold, which leaves approximately 2,087 tonnes in non-monetary gold in the UK as of 31 December 2015. Assuming the People’s Bank Of China hasn’t purchased some of this gold and covertly exported it to Beijing in the past months.

As long as London is selling gold and China is buying the price can go down. However, if London stops selling (or becomes a buyer) the price can make a reversal.

Australia Customs Department Confirms BullionStar’s Analysis On Gold Export To China.

Since 2015 I’ve stated the raw data published by the Australian Bureau of Statistics (ABS) on gold export to China mainland do not accurately reflect what is imported by China from the land of down under. In my previous post I’ve written Australia’s gold “export to China” should be adjusted by Hong Kong’s gold “import from Australia” as a substantial amount of gold Australia declares to export to China is in fact travelling through Hong Kong. A written statement from ABS now supports this analysis.

Obviously, what we’re after is exactly how much (non-monetary) gold China is importing from all countries around the world. As China doesn’t disclose its cross-border trade statistics for gold, the only way to reach our objective is by establishing net gold export from all countries around the world to China, subsequently to aggregate these numbers and come to an estimate of total Chinese gold import.

One of the largest exporters of gold to China is Australia, but calculating Australia’s gold export to China is complicated, as we need to be cautious to avoid double counting in computing China’s total net gold import. The thing is, ABS bluntly alters any “export to Hong Kong” into “export to China” when they suspect the gold is shipped to Hong Kong but will reach the mainland as its final destination – this is what ABS confirmed to me. Therefor, from using Australia’s “export to China” double counting can arise when any gold flowing from Australia via Hong Kong to China would then be declared as “export to China” by Australia and “export to China” by Hong Kong.

Let us clarify this subject. Have a look at the chart below. If we focus on the period from January 2013 until December 2014 we can observe that Australia’s “export to China” (purple bars, data sourced via ABS/COMTRADE) roughly matches Hong Kong’s “import from Australia” (turquoise bars, data sourced from the Hong Kong Census and Statistics Department). We must conclude that over this period roughly all gold Australia exported to China was transferred via Hong Kong. If we then would sum up Australia’s gold “export to China” to Hong Kong’s gold “export to China” this would result in double counting.

Australia COMTRADE vs HK China april 2016
Exhibit 1. Australia’s “exports to China” versus Hong Kong’s “import from Australia”. All data by ABS I’ve sourced via COMTRADE simply because it’s cheaper. Crosschecks between ABS and COMTRADE show their data is nearly exactly the same.

Historically, Hong Kong has been the main entry point for gold into China. Not surprisingly Australia’s gold “export to China” was all directed through Hong Kong until December 2014, as we can see above. The situation changed early 2014 when China openly stated to stimulate direct gold imports from all over the world, bypassing Hong Kong. Soon after, we’ve witnessed the birth of direct gold export to China from for example the UK.

UK Gold Trade China 2012 - May 2016
Exhibit 2. The UK’s cross-border gold trade with China mainland. Halfway 2014 the UK commenced to export gold directly to China mainland bypassing Hong Kong. Side note: since the beginning of 2016 the UK’s export to China has died out on a rising price of gold, the UK turning into a net importer of gold.

The strategic move from Beijing to stimulate direct import was also mentioned on Chinese state television channel CCTV in 2014, see the clip below starting from 1:30.

Exhibit 3. Courtesy CCTV.

Tellingly, what Australia declared as “export to China” started to exceed what Hong Kong declared as “import from Australia” (exhibit 1) in early 2015. The difference reflects Australia’s direct export to China, which took off in January 2015. To compute Australia’s direct export to China we should subtract Hong Kong’s “import from Australia” from what Australia declares as “export to China”.

When I wrote ABS about my general findings displayed in exhibit 1 they replied [emphasize en brackets by me]: 

… I can confirm that we are reporting basically as you described.

The ABS developed a policy some time ago in relation to reporting country of origin [final destination] for gold exports. The policy dictates that some trade with a reported country of destination as Hong Kong, should be corrected to China. This was based on our investigations at the time, which found that although Hong Kong is a central hub for gold trade, the goods are predominately sent elsewhere in the Asia/Pacific region. We also confirmed that in some cases the destination beyond Hong Kong was not known by the exporter at the time of export. China was assessed as the most likely destination …. We acknowledge that this blanket approach is not ideal, and can lead to the series differing from expectations.

We will continue to report in this fashion in the foreseeable future. However, as some time has passed since the initial investigation we will be conducting a review of the policy discussed above. We will be sure to inform you of any outcomes resulting from the review process.

Exhibit 4. Quote from email of the Australian Bureau of Statistics (ABS) to Koos Jansen.

australian bureau of statistics

Case closed? No, I have a few more thoughts I would like to share.

To come to the most precise amount of bullion net exported from Australia to China mainland we should set up a formula. We have a few flows of bullion between Australia, Hong Kong and China to work with. Some are known and publicly disclosed, some are unknown but can be calculated:

  • We have publicly disclosed by ABS/COMTRADE what Australia declares as net “export to China” (C).
  • Effectively, what ABS declares as net “export to China” (C) either is a direct net export to China (Y) or exported to Hong Kong but disclosed by ABS as export to China (X) as they guess the final destination is the mainland (so C = X + Y). What we want to know is the partition of Y and X, but this is unknown.
  • Then we have also publicly disclosed by ABS/COMTRADE what they consider Australia to net “export to Hong Kong” as a final destination (B). This amount is small but relevant for our formula. (Actually, for us it is not important what ABS thinks the final destination is, as long as we know this gold is arriving in Hong Kong.)
  • Finally, we have publicly disclosed by the Hong Kong Census and Statistics Department (HKCSD) Hong Kong’s net “import from Australia” (Z).

What we want to calculate is Y (Australia’s direct net gold “export to China”), but the only figures published are C and B by ABS, and Z by HKCSD. Fortunately, we can calculate Y from C, B and Z.

We know Hong Kong’s “import from Australia” (Z) equals Australia’s “export to Hong Kong” (B) plus Australia’s export to Hong Kong data that is altered into “export to China” (X). ABS may alter the data but nevertheless the physical gold flows to Hong Kong. Therefor:

Z = B + X

As Z and B are publicly disclosed, from here we can calculate the amount ABS alters from “export to Hong Kong” into “export to China”, which is X.

X = Z – B

By knowing X we can finally calculate how much gold is directly net exported from Australia to China (Y).

C = Y + X

Y = C – X

By using this formula Australia net exported 124 tonnes of gold to China mainland in 2015. In contrast, GFMS that wrote in their Gold Survey 2016 Australia exported 187 tonnes to China in 2015, which is the raw data disclosed by ABS (Australia’s gross gold “export to China”). The numbers by GFMS cannot de accurate.

Screen Shot 2016-08-02 at 9.26.27 pm
Exhibit 5. Quote from the Gold Survey 2016 by GFMS.

One final point. How do we know the gold exports from Australia to Hong Kong are re-exported to China mainland and not for example to Thailand?

Re-exports are products which have previously been imported into Hong Kong and which are re-exported without having undergone in Hong Kong a manufacturing process which has changed permanently the shape, nature, form or utility of the product.

Exhibit 6. Definition of re-exports by HKCSD.

Well, next to the fact ABS isn’t always sure what the final destination is of gold exported to Hong Kong, neither do I. But, once the gold has arrived in Hong Kong we shouldn’t care about ABS data, we must rely on HKCSD’s data. The HKCSD states Hong Kong to re-export hundreds if not thousands of tonnes of gold per year – Hong Kong is one the largest gold trading hubs globally. Therefor, I assume they accurately declare how much imported gold is re-exported. If the HKCSD declares so many re-exports why wouldn’t they accurately declare re-exports from Australia to the mainland?

Eventually, by calculating Australia’s direct net gold “export to China” (Y) through the formula above, and adding Hong Kong’s “export and re-export to China” from HKCSD data we should have the best assessment of China’s net gold import from Australia and Hong Kong.

Hong Kong gold trade June 2016
Exhibit 7. Hong Kong’s cross border gold trade, which in my judgement is one of the most accurate data sets globally. Side note: bullion that was accumulated in Hong Kong during 2013 and 2014 is flowing out since 2015.

My assessment for China’s total net gold import for 2015 is 1,575 tonnes. If we add domestic mine output at 450 tonnes and a few hundred tonnes of scrap supply and disinvestment, total supply has been well over 2,000 tonnes for the year. Not surprisingly SGE withdrawals accounted for 2,596 tonnes in 2015.

I know, I owe you all a respons to the Gold Survey 2016 by GFMS in which they stated Chinese gold demand in 2015 was 867 tonnes – quite a gap with SGE withdrawals. As some of you know, or might have guessed by now, I’ve had some health issues in recent years hence my writing hasn’t been constant. Hopefully, things are turning for the better again and I can continue publishing on the Chinese gold market (my ongoing disagreement with WGC and GFMS), global gold flows and a whole bunch of other planned articles.

Chinese Gold Demand 973t In H1 2016, Nomura SGE Withdrawals Chart False

Chinese wholesale gold demand, as measured by withdrawals from the vaults of the Shanghai Gold Exchange (SGE), reached a sizable 973 metric tonnes in the first half of 2016, down 7 % compared to last year.

Although Chinese gold demand year to date at 973 tonnes is slightly down from its record year in 2015 – when China in total net imported over 1,550 tonnes and an astonishing 2,596 tonnes were withdrawn from SGE designated vaults – appetite from the mainland is still the greatest of all single nations worldwide. At the same time the mainstream consultancy firms (World Gold Council, GFMS, Metals Focus) continue portraying Chinese gold demand to be roughly half of SGE withdrawals, as these firms measure “gold demand” merely at retail level which excludes any direct purchases at the SGE by institutional and individual investors. But to reassure you, Chinese wholesale gold demand still equals SGE withdrawals. 

In the month of June (2016) SGE withdrawals accounted for a robust 139 tonnes, although this was down 29 % from June last year. The reason being for “somewhat subdued” Chinese gold demand in recent months is that the price of gold has risen strongly over this time horizon and the Chinese tend to buy gold when its price goes down, in contrast to Western investors that buy gold when the price goes up. From 1 June until 30 June 2016 the price of gold in US dollars jumped by 9 % from $1,214.70 to $1,325.76. Over the first six months of 2016 the price of gold exploded by 25 % (from $1,061.5 on 1 January 2016). So, since January this year when the price of gold started to rise, the Chinese actually stepped down their gold purchases while Western demand, which can be roughly measured by the net flow in/out of the UK, went up impressively.

Let us have a look at a few charts to come to grips with what’s going on in the Chinese (and international) gold market. Below, we can see a chart showing monthly SGE withdrawals plotted against the end of month price of gold in yuan per gram. In recent years, whenever the price of gold goes down the Chinese step up their purchases (buying the physical supply coming from the West) and whenever the price of gold goes up the Chinese slow their purchases. 

Shanghai Gold Exchange SGE withdrawals June 2016
Since January 2016 when the gold price started rising, SGE withdrawals started declining. Note, for spotting trends, gold bought at the SGE does not have to be withdrawn immediately.

By looking at a weekly SGE withdrawals chart (from before January 2016) we can see the trend just described – “the Chinese tend to buy more gold when the price goes down” – in a more granular fashion. Have a look below.

Shanghai Gold Exchange SGE weekly withdrawals
The SGE published weekly withdrawal data until January 2016.

In contrast to Chinese gold buying behaviour, let us have a look at gold demand from the West. Our proxy for Western demand is the net flow in/out of the UK where the London Bullion Market (LBMA) and the world’s largest ETF’s such as GLD store physical gold. At the beginning of 2016 (when the price of gold started to rise) the direction of the flow has reversed sharply, from the UK being a net exporter to being a net importer.

UK Gold Trade 2012 - June 2016

From being a large net gold exporter in 2013, 2014 and 2015, the UK is now one of the largest net importers. In April 2016 the UK net imported 195 tonnes of gold – while export to China was nil.

If we look at a chart that reflects the net flow of gold into the UK versus the gold price, we can clearly see the correlation. A declining gold price (blue line) coincides with the UK net exporting gold (black line) and vice versa. 

UK Gold Trade 2012 - June 2016 vs goldprice

The impressive gold rally year to date, and the accompanied massive growth in GLD inventory in London, predicts sustaining net gold imports by the UK in May and June. In a forthcoming post we’ll discuss more thoroughly how above ground gold stock is moving between which nations and how this correlates to the price of gold.

International merchandise trade statistics always lag a few months, so I don’t know exactly the total amount of gold China has net imported in H1 2016. That I know of, China has net imported 368 tonnes year to date, according to trade data from Hong Kong covering January-April, the UK covering January-April and Switzerland covering January- May. Australia’s export data is not clear yet. If we project the pace of imports to to six months, China has “at least” imported 512 tonnes of gold in H1 2016.

Supply to the SGE can only come from import, domestic mine output or scrap/disinvestment. As, import accounted for 512 tonnes and domestic mine supply for 225 tonnes, consequently scrap/disinvestment through the SGE must have been approximately 236 tonnes in H1 2016.

Import + mine output + scrap/disinvestment = SGE withdrawals

SGE withdrawals – import – mine output = scrap/disinvestment

973 – 512 – 225 = 236

By using our preliminary estimate of 512 tonnes for China’s net import in H1 2016 and mine output at 225 tonnes, there are currently an estimated 18,444 tonnes of gold within China. Assuming the PBOC has accumulated about 4,000 tonnes by now which has not been supplied through the SGE, that is. For a detailed explanation how I conceived this estimate please read my post “PBOC Gold Purchases: Separating Facts from Speculation”.

Total Chinese gold reserves june 2016

If my speculative estimate of PBOC holdings would be incorrect, and China’s central bank holds what is officially disclosed at roughly 1,800 tonnes, there are currently an estimated 16,244 tonnes of gold within China.

Nomura’s SGE Withdrawal Data Is False

Since I’ve been publishing SGE withdrawals and its relation to Chinese gold demand many others have jumped the bandwagon, though some more successful than others. A few days ago I stumbled upon a “SGE withdrawals chart” from Nomura research with false data.

Courtesy Nomura.

In Nomura’s chart it’s shown that withdrawals from the vaults of the SGE in the first five months of 2016 accounted for 4,425 tonnes. Which of course is false. If that would be true, China should have imported about 3,800 tonnes in five months. No, that did not happen.

What Nomura did is grab the “cumulative delivery amount” from the Chinese Market Data Monthly Reports, instead of the “cumulative load-out volume”. The latter is how the SGE refers to “withdrawals” in English. As I’ve written previously the “delivery amount” is not the same as “load out volume”. The “delivery amount” reflects the volume of gold that changes ownership inside the vaults, computed as the sum of the trading volumes in physical products and the contract delivery volumes of deferred products, whereas “load out volume” tells to the amount of gold that is withdrawn from the vaults.

Let’s have a look at the Chinese Market Data Monthly Report from May, which Nomura used for its withdrawal data for January-May 2016 (“5M16” in their chart).

Screen Shot 2016-07-06 at 1.57.34 pm
Courtesy SGE. Red numbers added by Koos Jansen.

We can see that at number 4 the “cumulative delivery amount” notes 4,425,035.28 Kg, which is exactly what Nomura shows in its chart as “withdrawn”.

By and by, the “cumulative delivery amount” is counted bilaterally. Effectively, half of this amount (2,212,517.64 Kg) is how much physical gold changed ownership inside SGE designated vaults from January until May 2016.

At number 8, we see the actual amount of gold withdrawn from the vaults over this period (counted unilaterally). In the first five months of 2016 SGE withdrawals accounted for 835 tonnes.

Below is the full explanation of the Chinese trade table.

1Delivery amount this month, the sum of the trading volumes in physical products and the contract delivery volumes of deferred products for the reported month, counted bilaterally in Kg.

2) Trading volume this month, the sum of all trading volumes in physical and deferred products for the reported month, counted bilaterally in Kg.

3Delivery ratio this month, the proportion of the delivery amount to the total trading volume of both physical and deferred products for the reported month (1 divided by 2).

4Cumulative delivery amount, the sum of all monthly delivery amounts from the beginning of the year to the statistical time point, counted bilaterally in Kg.

5Cumulative trading volume, the sum of all trading volumes in physical and deferred products from the beginning of the year to the statistical time point, counted bilaterally in Kg.

6Cumulative delivery ratio, the proportion of the cumulative delivery amount to the cumulative trading volume of both physical and deferred products from the beginning of the year to the statistical time point (4 divided by 5).

7Load-out volume this month, the amount of gold withdrawn from the vaults for the reported month, counted unilaterally in Kg.

8Cumulative load-out volume, the amount of gold withdrawn from the vaults from the beginning of the year to the statistical time point, counted unilaterally in Kg.

Venezuela Exported Another 12t Of its Official Gold Reserves To Switzerland In February

According to data released by the Swiss customs department on Tuesday, Venezuela has net exported 12 tonnes of gold to Switzerland in February 2016. In January Venezuela net exported 36 tonnes of gold to Switzerland, in total 48 tonnes was moved in the first two months of this year. 

On 16 March 2016 BullionStar researcher Ronan Manly reported “Venezuela exported 12.5 tonnes of gold to Switzerland on 8 March 2016, via Paris”, based on an article by newspaper El Cooperante. Establishing, Venezuela has net exported at least 60 tonnes of gold year to date. 

Venezuela’s economy is in a tight spot. The country suffers from triple-digit inflation and Credit Default Swap (CDS) data shows that traders see a 78 % chance on default. The foreign exchange reserves of Venezuela declined by 12 % to $13.6 billion US dollars in February, from $15.5 billion US dollars in January of 2016. In an effort to avoid catastrophes Venezuela’s central bank has a strong motive to employ its official gold reserves. 

The gold imported by Switzerland must have been supplied from the official gold reserves of Venezuela’s central bank – Banco Central de Venezuela (BCV) – either as sales or swaps. Documents by the US Geological Survey show Venezuela’s annual gold production stands at approximately 12 tonnes, which is insufficient to be responsible for the large shipments in recent months.

The Swiss customs department publishes trade statistics by weight and value. When using the average monthly gold price to compute the estimated fine gold content from the weight and value disclosed, it shows the gold exported by Venezuela since December 2013 was roughly “99.5 % pure” (see the grey dots in the chart below). In the wholesale gold market bars have a minimum fineness of 995 per 1,000 parts. Data from Switzerland’s trade statistics implies the metal imported from Venezuela is wholesale bullion from the BCV, not mine output that has a lower fineness.

Switzerland gold import venezuela february 2016
Chart 1. The gold imported by Switzerland from Venezuela prior to December 2013 was likely mine output (roughly 80 – 85 % pure), imports after December 2013 from Venezuela must have been supplied by the BCV’s official gold reserves, as the batches were roughly 99.5 % pure. Any estimated purity above 100 %, in reality would be more like 99.5 %.

According to Eurostat no EU member has imported any gold from Venezuela in the past years – Eurostat’s data is updated until December 2015. International Merchandise Trade Statistics provider COMTRADE reports Venezuela hasn’t exported any significant tonnages of gold to countries outside of Europe in recent years either – COMTRADE data is updated until November 2015. However, trade statistics do not grant how much gold is, or is not, crossing borders around the globe. Gold can cross international borders without appearing in trade statistics. As an example, we know the BCV shipped an unspecified quantity of gold out of Caracas to an international destination on 2, 3 and 7 July 2015, while these shipments cannot be traced in any trade statistics at my disposal.

How much unencumbered gold the BCV has left is unknown. For sure Venezuela’s official gold reserves are not as much as the World Gold Council portraits. According to the Council the BCV still holds 361 tonnes as of Q4 2015, though the balance sheet at the BCV website from November 2015 states “Oro [gold] monetario 69,147,656,000”, which is worth $11 billion US dollars at an official exchange rate of 0.16. This equates to roughly 296 tonnes of gold, at a nine months rolling average gold price of $1,152.68 an ounce (which is how BCV gold is valued, pointed out by Ronan Manly). According to the BCV website, Venezuela’s official gold reserves declined by roughly 60 tonnes from February until June 2015 (from 361 tonnes to 301 tonnes).

The 296 tonnes of monetary gold, as per November 2015, are not fully unencumbered, as the central bank has entered into swaps (of at least 50 tonnes) with bullion banks that provided the metal to remain on the BCV’s balance sheets. 

According to my estimates the upper bound of the BCV’s unencumbered gold reserves, as of 9 March 2016, is 152 tonnes, the lower bound is 0 (zero). The upper bound estimate is based on the official gold holdings of Venezuela in February 2012 at 366 tonnes, assuming all was unencumbered at the time, after which I have subtracted:

  • Venezuelan (995 fine) gold exports to Switzerland in 2013 at 8 tonnes. This gold could have been involved in a swap, leaving the metal on the BCV balance sheet, while it should be subtracted from Venezuela’s unencumbered reserves.
  • Venezuelan gold exports to Switzerland in 2014 at 12 tonnes. Again, this could have been gold involved in a swap, leaving the metal on the BCV balance sheet, while it should be subtracted from unencumbered reserves.
  • The 50 tonne gold swap between the BCV and Citibank executed in April 2015 for a tenor of 4 years. Presumably this swap included the 50 tonnes the BCV had already stored at the Bank Of England. The gold in question remained on the BCV balance sheet according to the website the Venezuela Analysis.
  • A 60 tonne decline shown on the balance sheet of the BCV from February 2015 until June 2015.
  • Venezuelan gold exports to Switzerland in September, October, November and December 2015 at 24 tonnes in total. This could have been gold involved in a swap, leaving the metal on the BCV balance sheet, same as in 2013 and 2014.
  • Venezuelan gold exports to Switzerland in January, February and March 2016 of 60 tonnes in total.

The calculation excludes the volumes of:

  • The unspecified quantity of gold exported out of Caracas to an international destination on 2, 3 and 7 July 2015.
  • The gold swaps between BCV and the Bank for International Settlements carried out “in recent years”, as reported by Reuters in February 2016 (these deals can be related, for example, to the exports to Switzerland performed in 2013 and 2014)
  • The gold swap with Deutsche Bank in early 2016, as reported by Reuters in February 2016 (this deal can match the exported metal in January or February 2016).

In theory the lower bound of the BCV unencumbered gold reserves is zero, as the three points above can have caused an additional decline in unencumbered reserves of 152 tonnes, or the central bank has sold or swapped significant tonnages we don’t know about.

Please read my post “GOFO And The Gold Wholesale Market” for an explanation of swaps. 

More references about Venezuela’s official gold reserves can be found in previous posts on BullionStar Blogs:

Venezuela exported 12.5 tonnes of gold to Switzerland on 8 March 2016, via Paris. By Ronan Manly, 16 March 2016.

Venezuela Exported 36t Of Its Official Gold Reserves To Switzerland In January. By Koos Jansen, 19 February 2016.

Venezuela says adiós to her gold reserves. By Ronan Manly, 1 November 2015.

Venezuela’s Gold Reserves – Part 2: From Repatriation to Reactivation. By Ronan Manly, 14 May 2015.

Venezuela’s Gold Reserves – Part 1: El Oro, El BCV, y Los Bancos de Lingotes. By Ronan Manly, 13 May 2015.

SGE Gold Trading Volume 2015 Up 84 % Y/Y Due To International Board

In two parts I will present an overview of the Chinese gold market for calendar year 2015. In this part we’ll focus on Shanghai Gold Exchange trading volumes. In the next post we’ll focus on physical supply and demand flows in Chinese gold market in 2015.

First, let us quickly assess the core volume data of the largest precious metals exchanges in China and the US. Physical and derivative gold trading at the Shanghai Gold Exchange (SGE) in 2015 reached 17,033 tonnes, up by 84 % from 9,243 tonnes in 2014. Gold futures trading at the Shanghai Futures Exchange (SHFE) in 2015 accounted for 25,421 tonnes, up 7 % from 23,750 tonnes in 2014. Consequently, total wholesale trading volume in China (SGE + SHFE) was 42,454 in 2015, up 29 % year on year. In New York at the COMEX total gold futures volume reached 128,844 tonnes for the year 2015, up 3 % from a year earlier. COMEX trading volume was three times as large as the total volume in China.

COMEX vs SGE & SHFE gold volume 2015 pie chart

It’s unknown how much gold is traded in the Over-The-Counter London Bullion Market. However, a survey conducted by the LBMA in 2011 pointed out approximately 680,783 tonnes of gold per year change hands through the London based market.

All tonnages mentioned in this post are counted single-sided.

The Shanghai Gold Exchange

There are a few more interesting data points to be found in SGE trading for 2015 when examining the developments of the specific contracts.

At the SGE two types of gold products (/contracts) can be traded: physical products and deferred products. The physical contracts traded on the Main Board (SGE / domestic market) are:

  • Au50g (50 gram gold bar, 9999 fine)
  • Au100g (100 gram gold bar, 9999 fine)
  • Au99.99 (1 Kg gold ingot, 9999 fine)
  • Au99.95 (3 Kg gold ingot, 9995 fine)
  • Au99.5 (12.5 Kg gold ingot, 995 fine)

The physical contracts traded on the International Board (SGEI / international market) are:

  • iAu100g (100 gram gold bar, 9999 fine)
  • iAu99.99 (1 Kg gold ingot, 9999 fine)
  • iAu99.5 (12.5 Kg gold ingot, 995 fine)

The contracts above cannot be traded on margin and are settled (/delivered inside SGE(I) designated vaults) immediately (T+0), therefor they embody pure physical trading.

The deferred contracts (only traded on the Main Board) are:

  • Au(T+D) (1 Kg per lot, delivery in 3 Kg or 1 Kg ingots)
  • Au(T+N1) (100 gram per lot, delivery in 1 Kg ingots)
  • Au(T+N2) (100 gram per lot, delivery in 1 Kg ingots)
  • mAu(T+D) (100 gram per lot, delivery in 1 Kg ingots)

Because the deferred contracts are traded on margin and there is no fixed delivery date, these derivative products embody paper trading.

All SGE contracts can be traded competitively over the Exchange, but the physical contracts can also be negotiated bilaterally in the Over-The-Counter (OTC) market and then settled through the SGE system. The SGE publishes the volume of these OTC trades.

The most traded contract on the Exchange in 2015 was the deferred product Au(T+D). In total Au(T+D) volume accounted for 5,648 tonnes, up 30 % from the previous year. The second most traded contract was the physical product Au99.99, of which 3,465 tonnes changed hands, up 65 % from 2014 - although, if we include OTC trading total Au99.99 volume for 2015 reached 6,998 tonnes, which would make it the number one contract.

Shanghai Gold Exchange Trading Volume 2015
The contracts Au99.5 and iA99.5 are not included in the chart, as the products have not been traded. This underlines the PBOC, that would prefer to buy 12.5 Kg bars, is not buying gold through the SGE.

Shanghai Gold Exchange Yearly Trading Volume 2002 - 2015

Physical trading (including OTC activity) at the SGE in 2015 accounted for 9,745 tonnes (57%), versus 7,288 tonnes in paper trading (43 %).

The growth in total gold trading at the SGE in 2015 was the strongest since the financial crisis erupted in 2008. According to my analysis one reason for this has been the opening of the Shanghai International Gold Exchange (SGEI) in September 2014.

The SGE system services gold trading for the domestic Chinese gold market. This gold traded over the SGE system is prohibited from being exported. The SGEI is a subsidiary of the SGE located in the Shanghai Free Trade Zone, where international members of the Exchange can import, trade and export gold. In terms of physical gold flows the SGE and SGEI are separated venues. For more information please read my previous post, “Workings Of The Shanghai International Gold Exchange”.

On the surface it looks as if the SGEI has been a failure. The most traded contract at the International Board is iAu99.99. At the start of 2015 iAu99.99 trading was weak and after a short peak in April, volume came down to practically nil throughout the middle and the end of the year. Hence, most analysts stated the SGEI was dead. There are two important points that undermine this statement.

The first point is that iAu99.99 can be traded in the OTC market. When it appeared that trading of iAu99.99 was dying out at the Exchange, in the OTC market activity continued. There is no constant trading in iAu99.99 in the OTC market, but the volumes are significantly higher than iAu99.99 trading over the Exchange (see the chart below).

iAu99.99 SGEI volume

Tellingly, the iAu99.99 trades in the OTC market are all performed in giant batches of 100 or 1000 Kg. Have a look at the data labels in the chart below. We can see that all weekly OTC iAu99.99 volumes are in sizes one hundred (blue bars) or one thousand (red bars) 1 Kg bars. For example, look at the week that ended 3 July 2015, when exactly 73,000 Kg’s were traded. In theory 20,855 Kg’s were traded on Monday and 52,145 Kg’s on Thursday, aggregating to 73,000 Kg’s in total for the week. Though, this coincidence cannot have occurred each and every week. More likely the iAu99.99 traders in the OTC market always buy and sell per 100 or 1000 Kg’s. No other SGE or SGEI contract shows this bulky trading pattern.

Weekly iAu9999 OTC Trading Volume

The second point is that international members of the Exchange are not only allowed to trade the contracts on the International Board, they’re also allowed to trade the domestic contracts, they’re just not allowed to withdraw the metal from domestic vaults. The international members that focus on arbitraging any price differentials between the US and China will prefer the most liquid contracts on the Exchange. So, for this purpose the international members would trade Au99.99 and Au(T+D). Sources at the SGE confirmed to me that indeed international members are trading Main Board contracts.

If we look at the next chart, we can see that since the inception of the SGEI in September 2014 total SGE volume (including domestic, international, physical and deferred contracts) increased significantly. My conclusion is that the gateway of the SGEI has increased liquidity at the Exchange in Shanghai and enhanced the connection between the Chinese and Western gold markets.

Total Weekly SGE Trading Volume

I realize the system of the SGE and SGEI, how trading and physical gold flows are divided, is not easy to understand. The best I can do to clarify this is to present the diagram furnished by the SGE showing how trading in all contracts by all customers is organized (see below). In the next post we’ll examine the physical gold flows going through China and the Shanghai Free Trade Zone.

Screen Shot 2016-03-18 at 5.31.17 pm
Courtesy SGE.

Note, domestic members/customers are allowed to use onshore renminbi to trade all products on the Main Board, but are also allowed to use onshore renminbi to trade all products on the International Board (although load-in and load-out metal from the vaults is prohibited). In turn, international members are allowed to use offshore renminbi to trade all contracts on the International Board, but are also allowed to use offshore renminbi to trade most contracts on the Main Board (although load-in and load-out metal from the vaults is prohibited).

Kazakhstan & China Join Forces In Gold Market

Silk Road Gold Trading Kicks Off

The other day I bumped into a small but potentially important news item on the website of the Shanghai Gold Exchange. The article was published in Mandarin, of course, as the Chinese (authorities) hardly ever publish valuable information in English – most articles published in English have been intentionally written to communicate what the State Council wants the West to hear. In the article it’s described a financial delegation from Kazakhstan visited the Shanghai Gold Exchange (SGE) to discuss cooperation in gold trading along One Belt One Road (OBOR), also referred to as the new Silk Road, that reaches over the whole Eurasian continent. From the SGE (exclusively translated by BullionStar):

A group led by Kairat Kelimbetov, the Chairman of the Board of Directors of the Kazakhstan International Financial Center, visited the Exchange

At noon on 26 February 2016 a group led by Kairat Kelimbetov, President of the Astana International Financial Center and former President of the National Bank of Kazakhstan, visited the Shanghai Gold Exchange and held talks with President Jiao Jinpu. Both parties reached consensus on strengthening cooperation and seeking development in the gold market under the “One Belt One Road” project. Zuo Qihan, Kazakhstan consulate general in Shanghai, Shen Gang, Vice General Manager of the Exchange and Zhuang Xiao, CTO, attended the meeting.

Although the article lacks any detail, we can discover its potential impact if we study the financial and political backdrop.

Kelimbetov has an impressive track record. Previously he served as the Minister of the National Economy, Deputy Prime Minister and Governor of the National Bank of Kazakhstan. Currently, he’s the head of the brand new Astana International Financial Center (AIFC) that was officially launched in January 2016, aimed to become one of the top 10 financial centers in Asia and one of the top 30 financial centers in the world by 2020. The government of Kazakhstan contributes full support to the AIFC .

Kairat Kelimbetov and Jiao Jinpu at the SGE
26 February 2016, on the left SGE President Jiao Jinpu, in the middle AIFC President Kairat Kelimbetov. Courtesy SGE.

The main language spoken at the AIFC is English and the center includes an independent court for financial and investment disputes using English law. Kenneth Rogoff, Professor at Harvard University and former chief economist at the IMF, has said with English law at the basis the AIFC will be a game changer.

The AIFC decree signed in May 2015 at the Astana Economic Forum (AEF) by the President of Kazakhstan, Nursultan Nazarbayev, commands the National Bank of Kazakhstan and the Kazakhstan Stock Exchange to relocate from the city of Almaty to Astana. The AIFC will be installed on the premises of the EXPO 2017 starting from 1 January 2018.

At the AEF Nazarbayev stated the financial crisis that broke out in 2008 is systemic and will only end when the key cause is eliminated: the profound accumulated imbalances in the currency markets. He added that these hidden, latent roots of the crisis have spawned currency wars and economic wars in the form of sanctions hurting many countries. Nazarbayev said, “This is what generates an increase in confrontation between East and West, the U.S. and NATO against Russia and China, … deep reforms are needed for sustained economic growth.”

Nazarbayev may 2015 AEF
Nazarbayev speaking at the AEF 22 May 2015.

Nazarbayev has always been a vocal critic of US supremacy and an advocate of gold. Under his guidance, in 2011 the National Bank of Kazakhstan has taken the pre-emptive right to buy all domestic gold mine output to strengthen its international reserves and develop the local gold industry. In 2012 a (third) large gold refinery, Tau-Ken Altyn, was erected as one of the key projects of the Astana Industrial Park, to ensure all domestic mine output can be refined in Kazakhstan.

President Nazarbayev paid a visit to the Tau-Ken Altyn refinery in December 2013, as can be seen in the video below starting at 1:13. Tau-Ken Altyn can produce 12.5 Kg investment bars for the central bank, as well as 100 gram and 1 Kg bars for personal investment.

Although official documentation is lacking, from the news item at the SGE website I assume the AIFC has included the Shanghai International Gold Exchange (SGEI) for servicing gold trading in renminbi – supporting the internationalization of the renminbi.

It’s unclear if the AIFC has exclusively attracted the SGEI platform for gold trading. On 11 March 2016 Kelimbetov visited London where he held a meeting with the heads of UK government institutions, large investment banks (Goldman Sachs, Morgan Stanley, UBS) and international financial organizations to discuss the AIFC’s progress. Though, Kazakhstan is likely to prefer cooperating with its Chinese partner in gold business, as both nations share a common interests of making a fist against US dollar domination.

The central banks of Kazakhstan and China are among the most aggressive gold buyers in the world. Since 2010 the official gold reserves of Kazakhstan have grown from 67 metric to 222 tonnes. In turn, over the same time horizon China has increased its official gold reserves from 1,054 tonnes to 1,762 tonnes, according to official statistics – it’s thought China’s central bank has significantly more gold than it publicly discloses.

Kazakhstan & China Gold Reserves 2011 2015

The central banks of numerous other countries in (central) Asia are buying gold as well, in example Russia, Belarus, Tajikistan, and Kyrgyzstan, sharing an objective to diversify foreign exchange reserves and unwind the US dollar hegemony.

But increasing their official gold reserves is not all these countries do, it’s part of something bigger. In recent years a vast movement of economic collaborations between countries in Eurasia has unfolded. One of these collaborations is the Silk Road economic project (/OBOR) that was launched in 2013. Partially funded by China’s foreign exchange reserves the project focuses on connectivity and cooperation among countries in Asia, Europe and Africa. Aside from its independent activities OBOR also provides the structure to connect other collaborations, of which the most relevant ones are:

  • The Shanghai Corporation Organization (SCO). The SCO is a political, economic and military alliance, comprising the member states Russia, China, Kazakhstan, Tajikistan, Uzbekistan and Kyrgyzstan, that was launched in 1996.
  • The Eurasian Economic Union (EEU). Launched in 2014 the EEU members Russia, Belarus, Kazakhstan, Armenia and Kyrgyzstan now form a space that is modeled on the European Economic Community.
  • The Asian Infrastructure Investment Bank (AIIB). The AIIB is an international financial institution, erected to support the building of infrastructure in the Asia-Pacific region, launched in 2015 counting 57 prospective founding members. Most Asian (except Japan) and European countries participate in the AIIB.

If we look closely we can observe that China is slowly pushing for more integration of the clubs mentioned above with OBOR. For example, in May 2015 Xi Jinping and Vladimir Putin signed a decree on cooperation in tying the development of the EEU with OBOR and in December 2015 the first discussions were held to integrate the SCO with OBOR. (Chinese state press agency Xinhua has a dedicated Silk Road web page that covers developments regarding OBOR and the SCO, EEU and AIIB.)

Kazakhstan recently opened a logistics terminal in Lianyungang, China, and completed the construction of its Zhezkazgan-Beineu railway to create a better connection for China through Kazakhstan to the Caspian seaports. “All these projects are aimed at increasing the transit potential of both our country and the whole of the Eurasian Economic Union,” said Nazarbayev at the AEF on 22 May 2015. “This is the new Silk Road. Forty countries have showed an interest in free trade with the Eurasian Economic Union. But we must not stop there. I propose to create a new … Eurasian transcontinental corridor.”

Screen Shot 2016-03-15 at 11.23.11 pm
Kazakhstan has a strategic position in Eurasia.

Coincidentally, also on 22 May 2015 the Silk Road Gold Fund was launched at a conference in Xi’an, China, with the subject of “Serve the New Strategy of the Silk Road, Lead the New Development of Gold”. From iFeng we can read (exclusively translated by BullionStar):

Representatives from gold and financial institutions talked freely about bringing gold’s superiority into full play, seizing the historic and strategic opportunity of One Belt One Road [OBOR], strengthening bank-enterprise cooperation and financial-industrial combination, and leading the transformation and upgrading of the gold industry under the economic background of the new normal.

Time will tell to what extent the cooperation between the SGEI and the AIFC will execute what this quote describes. Namely, increasing gold business in the economies along the Silk Road.

A few days later in May 2015 China unveiled the Silk Road Gold Fund to the English-speaking world. From Xinhua:

The fund, led by Shanghai Gold Exchange, is expected to raise an estimated 100 billion yuan in three phases.

…Among the 65 countries along the routes of the Silk Road economic belt … there are numerous Asian countries identified as important reserve bases and consumers of gold.

…About 60 countries have invested in the fund, which will in turn facilitate gold purchase for the central banks of member states to increase their holdings of the precious metal, …

I’m not sure if the National Bank of Kazakhstan will buy its gold through the SGEI anytime soon, more likely some of Kazakhstan’s gold production will be sold through the Chinese exchange.

From all information presented above the intensions of China and numerous Asian countries with respect to gold and the Silk Road are clear. Through OBOR China will not only use its foreign exchange reserves for infrastructure in Eurasia to boost growth and strengthen economic ties and in the region, additionally, gold business is developed and gold is promoted as a key reserve currency.