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.
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.
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 …
- 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.
- the mainland tourist buy gold in Hong Kong and store it locally.
- 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.
- 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).
- 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.
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:
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.
Year to date China net imported 354 tonnes from Hong Kong.
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.
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.
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.