Although last week only 34 metric tonnes of gold were withdrawn from the vaults of the Shanghai Gold Exchange (SGE), down 6.52 % from the prior week, year to date there has been a staggering 488 metric tonnes withdrawn, up 29 % to compared to last year. Year to date demand will probably come on par with last year when we enter april, as withdrawals exploded in April 2013. What will happen after April is hard to say, this year’s average daily withdrawals stand at 6.7 metric tonnes, last years daily average was 6 metric tonnes (2197 mt / 365). It will all depend on how much floating supply there is left…
At the current pace, 6.7 metric tonnes a day, China will be roughly importing 1700 metric tonnes this year to meet SGE demand. My research has exposed that SGE withdrawals equal Chinese wholesale demand. Not often, but sometimes we can read other analysts or media share the same findings. From the Chinese media (dated January 10, 2014):
China’s explosion in demand for physical gold in 2013 left a deep impression on international investors. The Shanghai Gold Exchange withdrawals for the year up till 27 December 2013 exceeded 2180 tons. Considering the exchange’s position as a hub for domestic gold circulation, in conjunction with a system that forbids withdrawn gold from re-entering inventory, to a large extent the withdrawals number can be treated as the best benchmark for physical gold demand in the Chinese market. Not to mention that the entire 2013 global mined gold production does not exceed 2700 tons. China’s massive demand has to a large extent remade the world’s gold circulation system. Newly mined and stocked gold is moving through trade links in London – Switzerland – Hong Kong – into China in a large scale orientation towards the East. The impact of China’s demand on international gold price will inevitably increase.
Another quite interesting headline in China today:
RMB Internationalization Requires To increase Gold Reserves
A very important condition for the internationalization of the renminbi is to increase Chinese gold reserves, because it increases the world’s confidence in the renminbi and expands it’s flow capacity.
It still beats me why not many other analysts, journalist and blogs have gotten involved in researching the Shanghai Gold Exchange an the Chinese gold market in general, as this unprecedented exodus of physical gold from West to East is talking place right in front of our eyes month after month.
Kindly note, if someone could prove me wrong on my analysis about Chinese gold demand I would be happy the hear it. Comment below or sent me an email at email@example.com.
Meanwhile In The West
Business Insider reports:
In a new note, Goldman Sachs argues that the rise in the price of gold [year to date] has been driven by three unsustainable factors: Weather-induced economic slowdown in the US, a spike in Chinese demand due to credit concerns, and increased geopolitical tension.
So they forecast that future weather conditions in the US will improve their economy and credit concerns and geopolitical tension will soon be dampened?
Goldman also released a report titled: The End Of Chinese Financial Commodity Deals. In which they explain a process called round trippin; circular gold trade between Hong and the mainland to strike an arbitrage profit.
Goldman declines to mention this process of gold export to mainland Custom Specially Supervised Areas and back to Hong Kong are also done from another incentive than for arbitraging. Hong Kong has a booming jewelry industry, in the dense streets of The Special Administrative Region you can find a jewelry store (mostly Chow Thai Fook) on every street corner. It’s estimated that half of all jewelry in Hong Kong is sold to mainland tourist, that can import as much as they like into the mainland. Mainland tourist prefer to buy jewelry in Hong Kong where there’s zero tax on jewelry, whereas in the mainland there’s a 22 % tax on jewelry.
Plausible scenario: a Hong Kong jeweler imports bullion and exports it to the CSS area Shenzhen just across the border, that has a huge jewelry fabrication industry (cheap fabrication). In Shenzhen the jewelry is fabricated and exported back to Hong Kong to be sold in the shops. Note, for trading gold from Hong Kong in and out of a CSS area there is no PBOC permit required. To export gold out of a CSS area into the mainland a PBOC permit is required. I’ve been told this policy is airtight.
Additionally, the inflating of import and export numbers from Hong Kong to the mainland does not influence net export to the mainland. Nor does it influence total mainland net import that supplies the SGE.
Just some thoughts..
Overview Shanghai Gold Exchange data 2014 week 11
– 34 metric tonnes withdrawn in week 11 (10-03-2014/14-03-2014)
– w/w – 6.5 %
– 488 metric tonnes withdrawn year to date
This is a screen shot from the weekly Chinese SGE trade report; the second number from the left (blue – 本周交割量) is weekly gold withdrawn from the vaults in Kg, the second number from the right (green – 累计交割量) is the total YTD.
This chart shows SGE gold premiums based on data from the SGE weekly reports (it’s the difference between the SGE gold price in yuan and the international gold price in yuan).
Below is a screen shot of the premium section of the SGE weekly report; the first column is the date, the third is the international gold price in yuan, the fourth is the SGE price in yuan, and the last is the difference.
A source in the mainland explained me the negative premiums like this:
the SGE is a very illiquid market if you look at the daily volumes. Several slightly larger orders can push the market prices up or down and often traders have to wait tens of minutes to get their orders fulfilled. The price doesn’t track the London spot well. Sometimes the London spot has moved several dollars but the prices on the SGE didn’t budge at all…
The low liquidity on the SGE is mainly because of the much higher commission compared to the SHFE and a much poorer information system. Without the PBoC protection, the SGE should have closed down years ago!
In my humble opinion, the weekly withdrawals and the daily deferred payment direction are more important than the premiums.
The screen shot below is the how the trading on the SGE looks like.
This is AU9999. Look at the upper left corner, you can see the bid and offer prices. Here is how to read it:
卖价5 266.46 100
卖价5= Offer No. 5
266.46 is the Offer price but not the lowest offer. The lowest is 266.20.
100 is the size. The minimum size for Au9999 is 10g. So 100 lots are 1kg.
成交= The price for the last transaction
均价= The weighted average price
涨幅= Movement in percentage
今开= Today’s opening
涨跌= Movement in CNY
最高= Day high
总量= Total volume
最低= Day low
The rest is not very relevant so doesn’t need translation.
You can see how illiquid this market is. The spread between the best bid 266.01 and best offer 266.20 was 0.19CNY.
And for the whole night 21:00-2:30 Beijing Time (The SGE has a night session 21:00-2:30 GMT+8), only 2678 lots were traded. Remember every lot is only 10g.
And you may notice that the Au9999 crashed to 167.50 some time last year. Yes, you read that right. That happened on December 27, 2013.