Koos Jansen
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Koos Jansen
Posted on 2 Nov 2014 by

Insatiable Chinese Gold Demand Continues Unabated

Friday the latest update was published on withdrawals of the Shanghai Gold Exchange (SGE) and Shanghai International Gold Exchange (SGEI). As I’ve written last week this number does not exactly equal Chinese gold demand anymore, but for the time being it’s a very accurate benchmark.

SGE withdrawals 2014 week 42
Blue (本周交割量) is weekly gold withdrawn from the vaults in Kg, green (累计交割量) is the total YTD.

Total withdrawals in week 43 (October 20 – 24) accounted for 60 tonnes and year to date the counter has reached 1607 tonnes. How is this gold supplied? The SGE is supplied by imported gold, domestically mined gold and recycled (or scrap) gold. The amount withdrawn from the vaults equals total demand equals total supply equals import + mine + scrap, because once bars leave SGE vaults they are not allowed to return before being remelted and re-assayed again and counted as recycled.

SGE withdrawals = import + mine + scrap = total demand 

Import = SGE withdrawals – mine – scrap

Let’s fill in the blanks. SGE withdrawals are weekly disclosed by the SGE and domestic mining will be 451 tonnes in total this year. How much is recycled gold? In the China Gold Yearbook 2014 (that covers the financial year 2013), it was disclosed recycled gold was 247 tonnes in 2013, and 232 tonnes in 2012.

Supply Chinese gold market 2013, China Gold Yearbook 2014
Blue is recycled gold in tonnes, green is total supply. (1506.50 is tonnes imported ex gold from Chinese overseas mines)

Based on these numbers let’s estimate scrap will be 239 tonnes in 2014. Now we can calculate import.

Chinese supply content 2014 week 43

As we can see in the table, China has net imported 46.7 tonnes in week 43 and 1036 tonnes year to date (until October 24). Note, these are estimates, but have proven to be very precise.

I’ve been reporting on these numbers for a while now and sometimes I don’t realize anymore how much gold we’re actually talking about. While 99 % of the financial industry has no idea how much gold is being soaked up by China – because they rely on numbers from the World Gold Council – we (me and regular readers) are almost habituated to these immense numbers. 46.7 tonnes of gold are 3,736 London Good Delivery bars, more than 46 thousand 1 Kg bars and about the same amount as the official reserves of Finland, imported in one week! Additionally, this excludes PBOC purchases, which is not being bought through the SGE, according to an SGE official. Though a CGA official confirmed the PBOC is buying continuously.

12.5 Kg London Good delivery bar.
12.5 Kg London Good delivery bar.
1 Kg gold bar
1 Kg gold bar

Taking a step back and rethink what’s currently going on in the Chinese gold market will be quite an intriguing chapter in history books. “China bought all that gold at those prices while the whole world was watching?”, readers will wonder, “and this wasn’t noticed by any journalists? While clearly the fiat international monetary system came to an end?”, as I imagine.

The pattern is as clear as can be; the lower the price of gold the more the Chinese buy. As of October 31 (week 44) the price of gold fell to $1,172 an ounce. Did the Chinese bought some more?

SGE withdrawals 2014 week 43, dips, Chinese gold demand

I expect they did. Notice that demand in December and January is always elevated in China, there will be strong demand in the coming months.

In 2013 and in H1 of 2014, the gold sold through the SGE could be clearly traced back to its source by official customs data. Most of the gold came from London (home of the London Bullion Market and GLD), which was shipped to Switzerland to be refined in 1 Kg bars and then sent on to China via Hong Kong. The numbers made perfect sense, in 2013 China net imported 1,500 tonnes from the West, they mined about 450 tonnes and recycled gold was 250 tonnes, hence SGE withdrawals accounted for 2,200 tonnes.

In recent months the trade numbers make less sense with regard to the amount of gold sold through the SGE, which leaves the question; who is selling these huge amounts of physical gold – under the radar – for bottom prices to China? I will spent a future post speculating on this question.

SGE withdrawals vs COMEX delivery monthly, Chinese gold demand
Latest monthly SGE withdrawal numbers. Note, “withdrawals” and “delivery” are something different.

I noticed the gold premium on the SGEI jumped from the SGE on Thursday, meaning gold in the Shanghai Free Trade Zone (SGEI) is more expensive than in the mainland (SGE).

Shanghai Gold Exchange gold premium

Foreigners trading on the SGE can not export the gold from the mainland, this is prohibited by the PBOC. Chinese banks (the ones blessed with a PBOC import license) that trade on the SGEI can import gold into the mainland. Effectively the arbitrage opportunity can only be closed one way; if SGEI gold in the FTZ is cheaper than SGE gold in the mainland, the Chinese banks can buy and import gold from the FTZ until the difference is nullified. Of course when SGEI gold is more expensive than SGE gold, the Chinese banks in the mainland have no interest to import SGEI gold.

The fact that trading volume on the SGEI dropped 1.7 tonnes from 4 tonnes in week 43 to 2.3 tonnes in week 44 hints at much of the volume traded on the SGEI is done by domestic banks. Hence SGEI volume drops if it’s price rises relative to SGE prices.

Click here to read a comprehensive analysis of the workings of the SGEI. 


The discount of silver in China compared to London is still hovering below 4 % (measured until October 31).

Shanghai Gold Exchange silver premium 2013

The decline in the discount of silver can be explained by high demand in the mainland, but it can also been caused by high demand from abroad. As we learned last week (click for a detailed analysis) Chinese traders found a way to export silver circumventing a 17 % VAT on silver bullion export – I don’t know the amount of silver involved in the scheme.

Some of the silver that was depleted from the SHFE inventories can have been used for this export scheme. Even more silver can have been exported as the SHFE inventories are not the only stocks in the mainland.

SHFE silver inventory, October 31, 2014

Silver on the Shanghai Futures Exchange (SHFE) is trading in backwardation, since August 6. This also could have been caused by the export scheme. I will try to figure out how much silver was exported through the scheme, as this will provide us more information on the implications it has caused in the Chinese silver market.

SHFE silver backwardation October 31, 2014

One thing is for sure, the declining silver discount in the mainland and concurrent backwardation were caused by high demand, wether from abroad or the mainland.

Koos Jansen
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  • Doolie

    Great News from this article !

    The most fascinating question remaining is ” Who’s gold are the Chinese buying ? ”
    we can even expect the seller to be a proxy seller on behalf of the real seller. The answer for sure will be cryptic.

    Well done Koos – Brilliant deduction work – Thanks

    • rowingboat

      I doubt the answer is cryptic at all, but rather simple math. Before China became a meaningful importer in 2011, which countries were importing the world’s gold production?

      If you take what Switzerland, the UK and other Western nations were importing in the years 2008-12 then subtract what they’re importing now, the difference explains where most of the Chinese gold is coming from – mine production, which used to flow to the West.

      On top of that there is the cumulative effect to consider where much of the gold imported by investors in the West since 2001 has been sold, driving the price lower.

      The WGC data is useful for bottom-up retail demand analysis IMO, but not the investment flows. From their Q2 2014 data, global retail demand excluding China & India is around 1500 tonnes and mine production excluding China is 2500 tonnes. Conservatively China & India together import about 2000 tonnes, so that’s a shortfall overall of 1000+ tonnes, which is having to come from the West.

      If that continues, I’d say we’re about half-way through the process (since 2013 the UK has exported nearly half the gold it imported from 2001-12). Or until the Western narrative changes and investors start pulling gold in again like they used to, instead of pushing it out.

  • Kirill Klip

    Great article, Koos! Some charts and interesting call from Charles Nenner:

    Charles Nenner: Scary Deflation on Horizon, Sees Gold Cycle Bottom at 1150.

    Charles Nenner: “We are at the bottom of the cycle for Gold with $1150 target.” Nobody knows the future for sure, but this interview is very interesting – it was published on October 7, 2014, particularly when you consider the last week blood bath in gold miners which looks like total capitulation. Can Swiss Gold Referendum bring us necessary catalyst?


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