Koos Jansen
BullionStar Blogs
Koos Jansen
Posted on 21 Jun 2014 by

Hong Kong Is The Key In Global Gold Trade, For Now

It began to dawn on me  when I was writing a post on May 27th about the Shanghai Gold Exchange international board. For the post I added a video from CNBC with Joshua Rotbart, general manager of  Malca-Amit precious metals, a vaulting company that recently openend a 2000 tonnes vault in the Shanghai Free Trade Zone (FTZ). In the video Joshua explains about his business in the FTZ. His position – bullion banks being his clients – gives him a lot of expertise with regard to global gold trade. Listen what he says on 1:40.

[youtube https://www.youtube.com/watch?v=g6fQOQtczpM]

So currently gold being transported to China, had to be imported only by local banks. So a lot of the time the gold is being parked out of China and only transferred and shipped into China when needed. What happens now, is that you can park the gold in the Free Trade Zone and it’s not considered final importation into China. Financial institutions can trade within the facility and then only upon request ship it to China.

Hong Kong Gold Trade With China Mainland

At this moment there are 12 banks (listed at the bottom of this article) that can import gold into China. These banks have a PBOC license to import gold, though for every shipment they need anew approval. Before approval the gold is “parked out of China”, like Joshua says. “…and only transferred and shipped into China when needed”, should be interpreted as only shipped into China when PBOC approval is granted. In the past years most gold that entered China mainland came in through Hong Kong. Why? Because Hong Kong was the parking spot for gold outside of China before it was allowed to be imported. This will soon change as the Shanghai FTZ will take over this role.

In 2013, the year Chinese demand for physical gold exploded, Hong Kong gross gold import was 2239 metric tonnes. The bulk of this was exported to China mainland (net 1158 tonnes), but a staggering 597 tonnes was left behind. Hong Kong is inhabited by 7 million people who couldn’t have bought 597 tonnes of gold in one year. According to my analysis most of Hong Kong’s net import is floating supply that was shipped to the East by the bullion banks, pending for a bid in Asia, likely from China.

Hong Kong gold trade January 2009 - April 2014
From January 2010 to April 2014 Hong Kong net imported 938 tonnes of gold.

Before we jump conclusions over the amount of gold in Hong Kong, I would like to expand on a few reasons that can put this amount in perspective. As some of …

  1. the gold is smuggled to the mainland. Illegally or tolerated by Chinese customs. In China mainland there is a 22 % tax on jewelry, in Hong Kong it’s zero %. Mainland tourist often go to Hong Kong specifically to buy jewelry. Chinese travel agencies even offer jewelry shopping trips to Hong kong. Whatever they buy is tolerated to be brought into the mainland by Chinese customs without restrictions (note, they’re are very stringent when it comes to gold export, only 50 grams per person). About half the jewelry sold in Hong Kong is bought by mainland tourists.
  2. the mainland tourist buy gold in Hong Kong and store it locally.
  3. the gold is smuggled to India or other countries in Asia. Click here for a newspaper article from 1969 about gold smuggling via Hong Kong. This practice has been going on for many decades.
  4. the gold is vaulted in Hong Kong by custodial companies from around the world, like GoldMoney (though GoldMoney only has 2 tonnes stored in Hong Kong).
  5. the gold is possibly purchased by the PBOC or its subsidiary SAFE, but I think this is unlikely. PBOC wouldn’t show up in any customs report.

These arguments are worth mentioning, but I think there still is a few hundred tonnes floating supply allocated in Hong Kong. We’ve heard stories from refineries in the West (Switzerland) that supply is running dry. Perhaps this is not the case in in the East (Hong Kong) – explaining the occasional discount at the Shanghai Gold Exchange.

Shanghai Gold Exchange gold premiums

In April 2014 Hong Kong net imported 13 tonnes, the lowest figure since February 2013. It will be interesting when Hong Kong becomes a net exporter. Have a look at their monthly gold trade since January 2013:

Hong Kong monthly gold trade January 2013 - April 2014

If we look at net import we can see gold piling up in Hong Kong after April 2013, when the price crashed and Chinese demand exploded. Not only the mainland net imported unprecedented amounts of gold throughout 2013, in anticipation there was also a lot parked outside, pending to be imported.

Because China is the largest buyer on earth and there is still a pile of gold waiting next door, the moment Hong Kong will be net exporting could be the tipping point in the physical gold market.

Hong Kong net exported 67 tonnes to the mainland in April, also the lowest figure since February 2013. This is in line with dropping Chinese gold demand in April, measured at the SGE. The link between Hong Kong net export to China en Chinese demand will soon be gone as banks are already moving gold into The Shanghai FTZ.

Hong Kong - China gold trade monthly January 2009 - April 2014

Year to date China net imported 354 tonnes from Hong Kong.

Hong Kong - China gold trade 4-2014

Gold Trade In The Rest Of The World

China was mainly supplied by the UK in 2013, that net exported 1425 tonnes over this period. Chinese demand has been “flat” since March, which caused the UK to become a net importer in April – for the first time since December 2012.

UK Gold Trade 2009 - April 2014

Based on historic trade data there is still bullion in London, that’s for sure, the question is how much of that can be sold when demand from the East will rebound. Though the UK was a net importer in April, they net exported 22 tonnes to Switzerland.

When we look at Swiss gold trade year to date, it’s clear that their booming refining business is fading; total import and total export is dropping – UK net import is down and also net export to Hong Kong is down. Switzerland did have a gold trade surplus every month in 2014, year to date they have net imported 131 tonnes, this is likely to be Western investment demand.

Switzerland gold trade April 2014


I’m very curious what’s gonna happen if physical demand for gold (mainly from China) will rebound in the coming months. Will the UK, US or Switzerland (net) export any gold? My eyes are on SGE withdrawals (Chinese demand) and Hong Kong net gold trade.

Koos Jansen
E-mail Koos Jansen on:

  • Zhang An Ping

    It is unclear to me, based on the empirical evidence of the past decade, that the location or indeed the flow of physical Gold has any material impact on its price; for every Buyer there is a willing Seller, and despite repeated scare stories to the contrary, there is no evidence of sustained depletion of e.g. COMEX warehouse stocks over the past year (where inventories remain pretty much where they were a year ago at 7,500,000 ounces / 257 tonnes) http://static.cdn-seekingalpha.com/uploads/2014/2/9/280094-13919493474739099-Hebba-Investments.png

    I am normally based in China and I am massively long of physical Gold: I want and believe that it will rise in price very significantly over the long term; however, I am unable to see that the purported flows towards Asia have any discernible influence on the timing – or indeed the causation – of any such movement, and my direct personal experience is that “the Chinese” are no more uniform in their investment activities than any other racial, demographic or cultural group. Over the past 15 months the urge to sell in the West has clearly far outweighed the desire of the Chinese to buy bullion, and given the reduction in Swiss throughput, it seems unlikely that last year’s stories of 24 hour shift working and old bars being recovered from the back of the vault had any enduring impact – or indeed any truth in them

    To talk of “China” as a singular construct is nonsense, and what has driven and continues to drive the price of Gold is not wet dreams about barren warehouses in Qingdao or empty apartments in Ordos, but global economic and (to a far lesser extent) geopolitical events. Gold spiked up a little last week – that was because of Yellen, not because they just unloaded another consignment of bars in the Shanghai FTZ

    • maneuvering helmsman

      I believe you are missing the point of the Comex Gold Stocks. There is a steady reduction in Registered Gold (for delivery). Methinks owners of the Eligible 6.51MM oz will not make it available for delivery (changing the status to Registered) unless and until the gold price rises. The size of the Registered gold stocks has been falling since mid 2011.

      • Zhang An Ping

        you simply do not understand COMEX, do you. ALL COMEX inventory is available for delivery, but its not like some kind of shop where naughty short positions can stock up on metal. It is the Short position who decides whether of not to “stand” and deliver, not the Long, and if you haven’t got the metal, you either roll the contract or close out. The idea that only “Registed” inventory is “dealer” or “deliverable” is total and utter nonsense – read Ch 7 of the NYMEX Rulebook

    • In Gold We Trust

      “It is unclear to me, based on the empirical evidence of the past decade, that the location or indeed the flow of physical Gold has any material impact on its price.”

      That’s an interesting discussion.

      Meanwhile, could the explanation be that the price of gold is set in the London paper markets, and supply and demand of physical gold have little influence on the price?

    • In Gold We Trust

      “what has driven and continues to drive the price of Gold is … global economic and (to a far lesser extent) geopolitical events.”

      I often see the price of gold moving in the opposite direction of what these drivers “normally” would cause. (from my memory; QE3, Cyprus, etc). Markets are screwed, in that context I’m interested in who’s buying physical gold.

  • In Gold We Trust

    In many of your comments you complain that I suppress your comments, while in fact I can only approve them when I’m awake. Please stop the endless accusations. I’m trying to have an open debate/conversation in this comment section not “wage war”. Let’s leave it to that.

    Back to the content. From what I’ve understand of the London OTC market is that all contracts are negotiable between buyer and seller. Spot contracts can be traded on margin (leverage) and most accounts are unallocated (paper), which I believe are fractionally backed as the holders of these accounts are unsecured creditors.

    Some more quotes from your link


    Clearing in the London Bullion Market is provided by the not-for-profit company, London Precious Metal Clearing Limited (LPMCL) – which is owned and operated by the six clearing LBMA members: Barclays, Deutsche, HSBC, JPMorgan, Scotiabank and UBS. They utilise the unallocated gold and silver…

    Most traded and settled bullion in London is on an unallocated account basis…. It is the most convenient, cheapest and most commonly used method of holding metal.

    Transactions may be settled by credits or debits to the account, with the balance representing the indebtedness between the two parties. Credit balances on the account do not entitle the creditor to specific bars of gold or silver. Instead the balance is backed by the bullion stock of the dealer with whom the account is held. The client is an unsecured creditor.

    If a client wants to have actual metal, specific bars or equivalent bullion product are ‘allocated’, the fine gold content of which is then debited from the unallocated account. The market convention is that bullion may be allocated on the day it is called for, with physical metal generally available for collection on the next business day.

    Or; the market convention is that bullion may be allocated (if an unallocated account holder wishes to allocate his gold) on the day it is called for, with physical metal generally available for collection on the next business day.

    From Bron:


    BBs can create gold credit (ie unallocated) just like with fiat currencies. So their gold balance sheet can consist of unallocated liabilities backed by promises to repay gold.

    Bron writes these unallocated accounts are part of a sound functioning gold market. Could be.

    All in all, I think the London OTC market is leveraged, has large voice in price discovery, and sensitive for manipulation. Though I have zero hard evidence on that.

    I think we both agree on the the COMEX, hence I didn’t mention it.

    I read Keith as well.

    • The_Spanish_Inquisition

      I think the point is this, Koos: if you buy Gold “spot” via the LBMA, it is there for you to collect tomorrow; and if tomorrow is an inconvenient day for you, then you can have it the next tomorrow. The Gold exists, and You choose when to take delivery. It’s clearly not “paper” and there is apparently plenty of it – as far as I know, no request to an LBMA member for Allocation or next-day physical delivery has ever been declined or dishonoured, and the use of “unallocated” accounts is merely part of the clearing & settlement process, rather than evidence of some nefarious “shadow banking” paper Ponzi scheme. Oops, sorry – I nearly forgot! everything is a paper Ponzi scheme (unless it works in our favour)

      • In Gold We Trust

        Again, from what I understand of it, if you buy London spot your unallocated account will be credited. Do I think there is more “gold” in unallocated accounts than physically backing it? Yes, I do.

Copyright Information: BullionStar permits you to copy and publicize blog posts or quotes and charts from blog posts provided that a link to the blog post's URL or to https://www.bullionstar.com is included in your introduction of the blog post together with the name BullionStar. The link must be target="_blank" without rel="nofollow". All other rights are reserved. BullionStar reserves the right to withdraw the permission to copy content for any or all websites at any time.