Koos Jansen
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Koos Jansen
Posted on 6 Jan 2017 by

How The West Has Been Selling Gold Into A Black Hole

Kindly be advised to have read my posts The Mechanics Of The Chinese Domestic Gold Market and The Great Physical Gold Supply & Demand Illusion before continuing.

In December 2016 Chinese wholesale gold demand, measured by withdrawals from the vaults of the Shanghai Gold Exchange (SGE), accounted for 196 tonnes, down 9 % from November. December was still a strong month for SGE withdrawals due to the fact the gold price trended lower before briefly spiking at the end of the month, and the Chinese prefer to buy gold when the price declines (see exhibit 1).

In total Chinese wholesale gold demand reached an astonishing 1,970 tonnes in 2016. But will these huge tonnages bought by China ever have an impact on the gold price? I think it will.

Exhibit 1.
Exhibit 2.

As in previous years, SGE withdrawals were mostly supplied through imports, in 2016 at approximately 1,300 tonnes. And as in previous years, SGE withdrawals were roughly twice the size of Chinese consumer gold demand. The latter is published by all “leading” consultancy firms, such as the World Gold Council and Thomson Reuters GFMS. Because these firms have systematically underreported and eclipsed Chinese gold demand since 2007, a significant share of the financial industry is unaware China has imported 5,000 tonnes in the past years, which is not allowed to be exported. My hypothesis is that this 5,000 tonnes decline in above ground gold reserves outside of the Chinese domestic market will make gold rally stronger in a future bull market than it did in previous bull markets. To the extent many investors are uninformed about the shrinking volume of troy ounces available outside of China, their ignorance will boost any price rally coming.

In this post I would like to share my thoughts on how the gold price is correlated to trade in above ground reserves, and how China has slashed these reserves to the tune of 5,000 tonnes, which will significantly impact the next leg up in gold.

Correlated: The Gold Price And UK Gold Trade

Since many decades large investors in the West set the price of gold. Ever since, the heart of the Western gold wholesale market has been London in the United Kingdom. There is thus a correlation between the gold price and the volume of gold net imported or exported by the UK.

In Asia, on the other hand, gold market participants are more price sensitive, implying they buy low and sell high (the opposite of Western investors). I’ve described this trend frequently on these pages, but the same can be read in books by gold author Timothy Green. In The Prospect For Gold from 1987 Green states:

Exhibit 3. Thank you Nick Laird from Goldchartsrus.com for the book tip!

Before we discuss the connection between Western supply and demand trends to developments in the Chinese gold market of the past decade, let me first recapitulate that global physical gold supply and demand is far in excess of the statistics the World Gold Council and GFMS publish. Below is a chart that shows the quarterly averages of all physical supply and demand categories as disclosed by the World Gold Council from Q1 2002 until Q4 2015. These numbers are more or less the same as figures by GFMS.

Exhibit 4.

We can see that over the course of 13 years, the majority of supply consisted of mine output (73%) and the majority of demand consisted of jewelry consumption (64%).

(Note, the categories official sector, net producer hedging and ETFs can be either supply or demand and volumes can greatly vary per quarter. Though, only in 1 of 52 quarters examined has ETF demand been greater than jewelry consumption (Q1 2009). In all other quarters official sector, net producer hedging and ETFs supply or demand has not been greater than mine output or jewelry consumption.)

If the data by the World Gold Council regarding physical gold supply and demand would be exhaustive, mine output and jewelry consumption should have a positive correlation to each other and the price of gold. But they don’t. Have a look at the next chart.

Exhibit 5.1.

During the bull market from 2002 until 2011 jewelry consumption decreased and it hardly ever transcended mine output. In turn, mine output gradually ascended over this time horizon while the gold price increased six fold! Are the forces between jewelry demand and mine supply driving the medium/long term price of gold? No, clearly not. This shows the data by the World Gold Council is incomplete.

(I should add that mine output does have a correlation to the gold price in the very long term as it can take more than ten years to setup a gold mining project. See the next chart.)

Exhibit 5.2.

In contrast to the data by the World Gold Council, we can observe a strong correlation between the medium/long term gold price and institutional supply and demand flowing through London. View the chart below.

Exhibit 6.

Strangely, institutional supply and demand are categories not included in the World Gold Council’s data – or in any other precious metals consultancy firm’s data that I’m aware of.

Because in the UK there are no refineries, no gold mines and local consumption demand and scrap supply is immaterial, all gold that is visibly (non-monetary) imported and exported must either relate to ETF holdings stored in London, or Western institutional supply and demand. When we compute the ratio between both, ETF flows compound to roughly 35 % of the UK’s net flow (import minus export) and as a consequence approximately 65 % is Western institutional supply and demand. Effectively the majority of the UK’s net flow is Western institutional supply and demand.

Hereby, consider that all supply and demand categories disclosed by the World Gold Council more or less equal each other (exhibit 4), so for the sake of simplicity we‘ll state that total mine output + scrap supply versus jewelry consumption + bar and coin + industrial demand meets outside the UK and doesn’t set the medium/long term price of gold.

The UK’s net flow, on the other hand, is highly correlated to the medium/long term price of gold. Note how nearly every month the change in net flow corresponds with the direction of the gold price (exhibit 6). Less granular, from the moment my data starts in 2005 the UK has been a net importer until 2012 on a rising price of gold. From 2013 until 2015 the UK was a net exporter on a declining price of gold. And in the first quarter of 2016, when the gold price saw its strongest move up since 1986, the UK was a net importer. Coincidence? I think not.

We can conclude that Western institutional supply and demand in above ground gold reserves is driving the medium/long term price of gold. As it’s likely the price of gold could not have gone up from 2002 until 2011 if there had been no UK net imports, and it’s likely the price of gold could not have gone down from 2013 until 2015 if there had been no UK net exports. (Short term the gold price is pushed around in the paper markets.)

We can think of Western institutional supply and demand (the UK net flow) like this: the majority of the gold gross imported into the UK is demand from above ground reserves outside the UK, and the majority of the gold gross exported from the UK is supply to above ground reserves outside the UK. When the UK is a net importer that means there is a net pull on above ground reserves outside the UK, which corresponds to a rising gold price. When the UK is a net exporter the inverse is true.

Here it becomes apparent that the amount of above ground bullion is essential for future price developments.

The Chinese Black Hole

Let’s turn to China. In the introduction I stated China is importing a lot more gold than is known in the financial industry because most investors base their knowledge on data by the World Gold Council. More precise, China has imported 5,000 tonnes from 2007 until 2016 in addition to what the World Gold Council has portrayed through their demand statistics.

Let’s get our minds around this through some charts. As an example, I’ve drawn a chart showing Chinese gold supply and demand for 2015 (last year I have complete data of).

Exhibit 7.

We don’t know every exact data point for China, but we do know GFMS demand (purple) and apparent supply, consisting of domestic mine output (green), scrap supply (yellow) and net import (blue). From here on we’ll use GFMS data, as GFMS publishes scrap supply numbers for China and the World Gold Council doesn’t.

According to GFMS Chinese consumer gold demand in 2015 was 867 tonnes. To meet demand GFMS presents 450 tonnes was domestically mined and scrap supply accounted for 225 tonnes. Indirectly GFMS states China net imported 192 tonnes to complete the supply and demand balance in the Chinese domestic market (exhibit 7). For the additional 1,383 tonnes imported GFMS has floated all sorts of excuses, which I‘ve debunked here and here.

The bottom line is, in addition to the 192 tonnes GFMS reports as imported in 2015 to meet consumer demand, China imported 1,383 tonnes to meet institutional demand and all this metal is not allowed to be exported.

If we repeat the same exercise for every years since 2007, the aggregated net imports by China that have not been included in the statistics by GFMS account for 5,000 tonnes. See the next chart.

Exhibit 8.


You can see now, China has enormously diminished above ground reserves outside of the Chinese domestic market without all investors around the world being fully aware. In my humble opinion this will make the price of gold go up turbo charged next time the West shows interest in the metal.

In The Prospect For Gold Green states:

Exhibit 9.

“Selling gold is not a one way street”, wrote Green in 1987. But guess what. Since a few years – from the moment China became an elephant player in the physical market – selling gold is a one way street! Western sell-offs are transhipped to China but do not return. The global gold game has changed.

Exhibit 10.

The consequence is that there are less above ground reserves outside of China for Western investors to buy in a forthcoming bull market, which will elevate the dollar bid per unit gold – in other words the gold price measured in US dollars per troy ounce.

Courtesy BBC.

Keep in mind, this phenomenon (China importing vast quantities in addition to Chinese consumer gold demand as disclosed by GFMS) has greatly materialized in 2013, when gold entered a bear market after an 11-year run up. In the previous bull market (2002-2012) above ground reserves outside of China had not been slashed yet. So the ramifications of this phenomenon will only be felt during the next leg up.

Is there any proof to substantiate my hypothesis? I think so. Early 2016 there was some renewed interest in yellow metal from large Western investors. When the price of gold started to climb it went practically vertical ending the first quarter of 2016 up 16.7 %, the strongest quarter since 1986. Coincidence? I think not. It went up strong as it did because there were fewer ounces in above ground reserves available.


A study on how much above ground reserves there are outside China will be saved for a future blog post.

Koos Jansen
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  • georgesilver

    So manipulation of the Gold price is fiction.

    • Koos Jansen

      Manipulation occurs short term through paper markets. Medium and long term physical supply and demand prevails. If the price of gold is suppressed (long term) central banks need to supply physical gold to the open market.

    • rowingboat

      a few years ago near the peak, you had one of the GATA guys on King World News talking about a 100-1 explosion of the paper price. When you terribly misunderstand the gold market and the price subsequently collapses making you look like a fool, what recourse do you have except manipulation? This led to a chorus of fools singing central bank supply, many of whom were singing the same tune during the 1990s bear market.

      • Koos Jansen

        In the nineties CBs were openly selling. Now we need proof. Or there is no selling

        • rowingboat

          The narrative back then was far in excess of official CB sales; 25% of total reserves, updated to 50% early 2000s and “gone forever”. A very similar narrative (group-think) occurred in 2013-15, ignoring the thousands of tonnes of NMG that were imported into the UK during the bull market (as well as USA and Switzerland which, like the UK, subsequently dishoarded after the bull run).

          • Koos Jansen

            Are you replying to my blog, or others?

  • Jim

    Your competent and detailed analyses are valuable in helping us better understand the gold markets. With respect to the now long standing and purposeful movement of gold from West to East, can you provide your own conclusions as to why this is being done? Jim Rickards has what seems to be a rather simplistic explanation but I suspect there is more to the ‘story’. Thank you.

    • Koos Jansen

      Until I bump into other evidence, the flow of gold from West to East has been normal market practise. The West thought gold was no longer needed in 2013 so it sold A LOT. China bought what the West was selling. Exactly who was selling in the West and who was buyng in the East I don’t know.

    • rowingboat

      The gold market in 2016 was notable for 2 things: a) very probably a record amount of bullion imported into the UK, more than any year during the last bull market; and b) how easily these imports were accomplished despite China.

      In spite of the narrative, West to East flow is actually reversible and the bullion market much larger and more fluid than most realise.

      When one includes other countries in the so-called “East”… Singapore, U.A.E, Hong Kong, Malaysia, Saudi Arabia, India, Thailand and Turkey (as well as China) bullion flow into these through Switzerland collapsed and actually reversed from February to September in 2016. I calculate a swing of 861mt for this period versus 2015, with most of the gold flowing into the UK instead.

      Undoubtedly these imports were Western institutional demand of which ETF’s are only a minor subset. We have also seen similar hoarding in the USA, which has subsequently declined but interestingly not Switzerland considering 2016 overall.

      • Koos Jansen

        There might be more gold in the rest of the world than the hyperbole blogs suggest. But its getting less. 5,000 tonnes is no pocket change.

        • rowingboat

          I don’t think that’s correct Koos. According to USGS the world is now producing 30,000mt rate per decade; that’s triple the rate in 1980. Stocks in the ROW outside China are still rising, not falling. And we saw last year how flows out of the West can quickly reverse with a mere $200/oz price rise. That’s a very fluid dynamic.

          Another thing to consider is that America has many of these developing nations by the balls because of their explosion of
          US-dollar-denominated debt since GFC. A currency crisis could easily result in liquidation as we saw in the late 1990s (notably 680mt gold exports to Switzerland from Korea).

          • Koos Jansen

            Yeah but (short/long term) all mining is being met by demand categories disclosed by the WGC. What I showed is price is set by institutional flows which are getting smaller. (But WGC scrap will rise significantly if price rises, so, you know, price can change dynamics.)

          • rowingboat

            Last year 2016 was very revealing. I didn’t see any evidence for
            reduced institutional flow, indeed just the opposite. I’ve already discussed the East’s rapid response to this higher demand in the West (starting in Feb 2016) but you also see how South/Central American countries increased their exports to America as well.

            The WGC also underestimates supply. A country will either be
            hoarding or dishoarding in any given period, which is the true reflection of net supply/demand and obtainable from production/import/export data.

          • Koos Jansen

            Would you agree the 5,000 tonnes China imported on top of their consumer demand came from (mainly) Good Delivery bars in the West 2013-2015?
            That 5,000 tonnes increase in China was a decrease outside of China. Additionally the 5,000 tonnes cant come out.
            Sure institutuonal flows continued in 2016 (there will never be a deficit ;-), but price reaction was different this time around.

          • rowingboat

            I would estimate much less, 1000-2000mt decrease outside of China. Linearly extrapolating from the bull market years, America + Switzerland + UK *should* have net-imported 2500-3000mt of global mine output in 2013-15, which didn’t happen. This newly mined gold flowed to China instead.

            America + Switzerland + UK also dishoarded 2700mt in 2013-15 on top of the 2500-3000mt that wasn’t pulled in. Much of that went to China but we also saw increases through Switzerland to other countries as prices fell… UAE, Saudi Arabia, Malaysia, Singapore, Thailand, Vietnam, Jordan, Lebanon, Egypt and HK (net of Chinese imports).

            Despite the West –> East narrative/propaganda in 2016, China, UK and America all pulled in significant gold comparable to the last bull market. UK imports in particular were probably a record. The dynamic completely changed and it was demand in the ROW that collapsed as prices rose… evidenced not only by Swiss trade data in 2016 but also the UK where exports fell to almost nothing for many months.

        • Mr Green

          Regardless of what happened in 2016, I am convinced the Chinese “hoarding” policy will ultimately be felt by the West. If we assume that gold markets, including the paper market continue to operate in today’s status quo, the US, Australian and other stakes and claims may be just enough to prevent mayhem. That said, we live in a highly volatile world where even a misinterpreted joke in a speech by the president elect later this week can send people running for secure investments. This will invariable lead to a (huge) shortage in physical gold and an immediate implosion in paper markets and practices. On a micro level, every singly ounce of gold that has gone into China and does not come back out will incrementally add to prices going up further. Alas, just my two cents…

          • rowingboat

            The gold market absorbed India’s introduction in the 1990s and later China’s introduction with consummate ease. The market is too big, too fluid, too global for there to be shortages.

  • Mr Green

    Having lived in Asia, I would agree with the fundamental finding that the west is selling into a black hole. That said, I think gold is only part of what goes into it. The same goes for resources, currency and other assets. In all, the black hole is only the tip of the iceberg as far as potential trouble on the horizon is concerned. Though a shortage of (physical) gold in the west will probably lead to a bigger spike in prices, an implosion of the paper gold scam will in my opinion have a much bigger impact. Combine this with stock markets that have reached ridiculous levels as a result of ongoing manipulation (for your amusement, look at the numbers of short contracts in the books, markets need to remain high for writers to not take a devastating hit) as well as failing monetary policy and excessive debt creation by governments and central banks and it is a miracle there has not been big trouble yet. Whether it is a run on physical gold, a stock market collaps after any given month’s option expiration date or a meltdown of currencies, the impact will affect everyone for decades to come. To me, the biggest trouble is that the “average Joe” hasn’t got access to sufficient information and is generally unable to interpret the information that is publicly available.

    • rowingboat

      In 2016 the West wasn’t selling into a black hole, it was buying!
      Imports into the UK were probably the greatest ever. America was hoarding gold at a faster rate than during the last bull market. US supply to the East collapsed. Australia sent gold to London instead of HK as premiums in China went negative. Exports of gold from Malaysia, Thailand, HK, UAE and Singapore to Switzerland then on to UK surged. I noticed (via the USGS monthly data) exports from Singapore into USA, which is rare.
      So the East was helping supply Western demand in 2016 as the price rose but, as this demand subsequently waned (as evidenced by the ETF proxy) the gold price ended the year not much higher than it started and well off its peak.

  • Bill Sculti

    I think you underestimate the effect of the paper markets on the demand side. In my eyes, the unlimited fire power by the bullion banks to rig markets to the downside impacts investor sentiment, which directly correlates to reduced demand. Moreso in the West I would think. I guess it depends what your definition of “short term” is.

    • rowingboat

      Investor sentiment in the paper speculative markets became and remained too optimistic as physical demand eased following the price surge in Q1-16. The Monetary Metals basis/cobasis indicated as much, later supported by bullion flow analysis through Switzerland. It would now appear that speculators have become too pessimistic with MM suggesting a significantly higher “fundamental” price:

  • Christoph Weise

    If gold hoarded in China is not allowed to be exported how can it be explained that “price sensitive” hoarders sell gold in London or Zurich in large quantities if the price is right? The selling of physically hoarded bullion in response to price movements is quite effortful and laborious. The trading of physically owned bullion in response to sudden price movements does not really fit the picture of physical gold ownership.

    • rowingboat

      There is a mountain of evidence from available trade data that indeed just exactly that happens. One can track this with only a few weeks delay because the data is freely available to the public. The ebb and flow of bullion around the world is price sensitive, continually evolving and fascinating to observe.

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