Koos Jansen
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Koos Jansen
Posted on 11 May 2014 by

Chinese gold demand 694 MT YTD, Silver In Backwardation

Total Chinese wholesale gold demand year to date reached 694 metric tonnes in week 18 (28-4-2014/30-4-2014), annualized 2004 tonnes. During that week 23 metric tonnes of gold were withdrawn from the vaults of the Shanghai Gold Exchange (SGE) in only three days! The SGE was closed on May 1 and 2. If the SGE would have been open for trading five days in week 18 withdrawals could have reached 39.16 tonnes, which is slightly higher than the yearly average of 38.5 tonnes. Chinese gold demand remains robust.

If at the end of December withdrawals have reached 2004 tonnes, the bulk of this had to be imported. Withdrawals can only be supplied by domestic mine output, import and scrap supply. Mine output will approximately be 430 tonnes in 2014. For scrap it’s hard to say how much is being supplied to the SGE, my conservative estimate is in between 200 and 300 tonnes this year. A quick calculation tells us how much China would need to import to fulfill the needs for non-government demand in 2014.

2004 (SGE withdrawals) – 430 (domestic mine output) – 250 (scrap supply estimate) = 1324 tonnes (non-government net import)

Weekly net import can be calculated as:

Weekly SGE withdrawals – 8.3 (430/52) – 4.8 (250/52)

In week 18 net import was 9.9 tonnes (23 – 8.3 – 4.8). Year to date net import is 467.

As regular readers of this blog know SGE withdrawals equal Chinese gold demand because of the structure of the Chinese gold market (designed by the PBOC). The Chinese silver market is very different from gold and can be compared to silver markets in other countries. Silver can be imported by everyone and sold through any exchange. Physical silver is for example being traded on the Shanghai Futures Exchange (SHFE), the South Rare Precious Metals Exchange and the SGE. All different exchanges in terms of contracts and vaulting silver on different locations in the mainland. The SHFE only has vaults in Shanghai, the South Rare Precious Metals Exchange has vaults in Yingtan, Chenzhou and Hechi. Prices on these exchanges can differ.

Map Chinese silver vaults

Two events currently suggest a possible shortage of physical silver in Shanghai. The first; premiums for spot silver on the SGE are rising significantly since March 17. From the weekly Chinese SGE reports we can see Shanghai silver prices transcending international prices by 4 %. The data in these reports cover up until week 18 (April 30). The SGE uses its most traded silver contract Ag(T+D) to calculate premiums. I do not have a terminal for live quotes, however, if I compare the LBMA silver fix with the SGE closing price for Ag(T+D) on May 9, the premium on silver in Shanghai has reached 5.3 %. 

SGE silver premium

Second; on the Shanghai Futures Exchanges all silver futures contracts are trading in backwardation. Meaning the prices for the futures contracts June 2014 – April 2015 are lower than the price of the futures contract for the first delivery month May 2014. Additionally SHFE silver inventory has dropped 57 % from 575 tonnes on February 28 to 249 tonnes on May 9. 

SHFE silver backwardation

Overview Shanghai Gold Exchange data 2014 week 18

– 23 metric tonnes withdrawn in week 18 (28-4-2014/30-4-2014)

– w/w – 32.79  %

– 694 metric tonnes withdrawn year to date.

My research indicates that SGE withdrawals equal Chinese wholesale gold demand. For more information read this.

Shanghai Gold Exchange withdrawals 2014 week 18

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 – 计交割量) is the total YTD.

Shanghai Gold Exchange withdrawals week 18 2014

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).

Shanghai Gold Exchange premiums

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.

Shanghai Gold Exchange premiums

In Gold We trust

 

Koos Jansen
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  • SomeInconvenientFacts

    As before, so again – SO WHAT?!

    Either there is a negative correlation between the price of Precious Metals and the volumes purchased

    or

    There is no global shortage

    because

    even a blind man can see that the price of Gold and especially Silver continue to trend downwards

    there
    is at present no evidence of a causal link between
    supposed Asian demand and price and the fact that large volumes continue
    to be made available for delivery even as the price falls indicates
    that Precious Metals are being pushed from the West
    rather than pulled by demand from Asia

    Occam’s
    Razor – They are only buying in increased volume
    because prices are low
    – the only other
    heuristic interpretation would be that prices are low because they are
    buying (which is absurd)

    What, therefore, is the point of this article (other than to plug ‘investment’ in Silver?)

  • rowingboat

    In December CPM Group predicted production would rise to 15.4m oz (480 tonnes) in 2014.
    http://www.kitco.com/news/2013-12-06/China-Could-Pace-Gold-Production-In-2014-Lack-Of-Transparency-An-Issue.html

    In this article Brent Cook is skeptical about where the gold is being mined from while in one of the reports you found Koos there was a regional summary of proven reserves across China, which summed up to 6,800 tonnes from memory in 2010.

    • In Gold We Trust

      Your comment is back on, my spam filter went crazy. Apologies!

  • Mountain Man

    Thank you Koos! Wonderful information!

    • Keep Stackin’

      Unfortunately Koos has now reverted to the time-honoured trick of suppressing Comments which disagree with his point of view

      • In Gold We Trust

        What account did I block? I got a lot of spam, maybe by accident I blacklisted someone. Do you have a user name I can check for you.

      • In Gold We Trust

        Please drop me an email with the names and addresses of the blocked users. My spam filter has appeared to go all out..

  • Takai321

    Koos, I was wondering if you are aware if the SGE has any arrangements with some of the larger international refiners, like the LBMA has with the Rand Refinery?
    Thanks

    From the Rand Refinery Website

    http://www.randrefinery.com/faqs_gold_sales.htm

    Can I purchase gold directly from a gold mine?

    No – gold mines do not sell finished product. The gold needs to be refined before sale, and in South Africa, this is done by Rand Refinery. Rand Refinery then markets and sells the gold to the London Bullion Market Association in London which in turn has members who sell physical gold to the public.

    The Rand refinery also acquires unfinished gold product from other parts of Africa as well.

    • In Gold We Trust

      “In China only banks with PBOC-issued import licenses can import
      gold. They can import gold bars made by LBMA-approved refiners that meet
      SGE specifications and these bars must be traded through the SGE.”

      http://www.ingoldwetrust.ch/the-round-tripping-myth-and-why-it-doesnt-hurt-chinese-gold-demand

      • Takai321

        Thank You for your response.
        So if I understand this correctly, Banks with PBOC-issued import licenses can try to develop relationships with LBMA-approved refiners that refine Gold Bars that meet SGE specifications like the LBMA has with the Rand Refinery.
        (I wonder why they have to be LBMA-approved refiners if they have to meet SGE specifications. And I wonder why the Chinese government does not specify SGE-approved refineries. Just wondering!)

        From what I am reading at the Rand Refinery website, it appears that the LBMA, thru Rand Refinery, has locked up all or most of the refined gold from South Africa and many other African countries.
        I would just think that Banks with PBOC-issued import licenses would try emulate the Rand Refinery-LBMA type relationship with other refineries in order to secure future finished Gold Product. If we incur Gold shortages in the future, as a few have predicted, then it appears that the LBMA has done a good job of securing a large part of the world’s annual production with their relationships with international refineres. Is my interpretation correct here or am I missing something. Thanks

        • http://goldchat.blogspot.com/ Bron Suchecki

          The LBMA does not enter into contracts with, or buy, gold from anyone. It is just a trade association. The Rand Refinery’s comments in that regard are incorrect. Often in the precious metals business people refer to the “LBMA” as shorthand for saying “bullion banks who are members of the LBMA and who trade in London”. I think this is the way in which the Rand has used “LBMA”.
          Some refiners enter into contractual arrangements with specific bullion banks guaranteeing them a % or other of their output, some have no contractual agreements and sell it to the highest bidder, and some do a mix of both.

          Re the SGE approval, note that the CME refers to LBMA accredited refineries. The reason other exchanges do this is because they do not want to duplicate and incur the cost of the initial and ongoing audit program that the LBMA has in place to ensure that refineries are producing metal of the stated purity. They ride off the back of the LBMA accreditation because it is accepted as being tough and robust and works. In addition, if refiners had to incur the cost of being audited multiple times on the same thing, that costs and refiners may just decide it is not worth the cost and trouble to do so for the exchanges which don’t have the volume. For those exchange they would then have few accredited refiners and their liquidity and market share of the global gold market would be restricted.

          • Takai321

            Thank You for your response. As you are probably aware, the Kaloti Group is currently constructing a new very large capacity gold and precious metals refinery in Dubai. Construction is estimated to be completed in another year and the refinery is expected to begin operations shortly after. I can see how they would like to be LBMA accredited even if they plan on selling the majority of their finished Gold to DMCC. Again, thank you.

  • Me KaChing

    Koos,

    thanks for your valuable work once again. (Yes, I will donate :-)

    What really strikes me today is the silver backwardation in all maturities. If I understand the functionality of futures market correctly, this is huge news. Is this a new phenomenon in Shanghai or has the market been this tight already for a while?

  • In Gold We Trust

    Yes, I was a sound engineer. I approved your comments again. It seems as if my spam filter had gone crazy. I hope everything is normal now and you are free to comment. (drop me an email if your comment doesn’t come through.)

  • vizeet srivastava

    I am a little late to write in the post. I think the reason why demand of Gold in China is going down had to do with the Monetary Tightening. Due to monetary tightening there is lesser money available for gambling and so lesser requirement for collaterel. As gold is used as collateral it requirement is going doing.

  • silbershark

    Silver, A Better Bet Than Gold

  • Abhinav

    hi

    i just want to understand one thing :

    how are the prices of physical silver determined in China and whats the reason for such high premium on silver in China as compared to CME prices

    this premium has to go off at all costs but for the last couple of months it has been increasing inspite of the fact that China Doesnt have much restrictions on imports

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