Koos Jansen
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Koos Jansen
Posted on 17 Feb 2015 by

Koos Jansen vs WGC/GFMS/CPM Update

Recently Thomson Reuters GFMS released its global gold demand figures for 2014 in which they stated Chinese demand was 866 tonnes. I briefly expanded on why I didn’t agree with this number by a humongous margin in my post from January 30 – as Chinese supply was at least 1,834 tonnes. Followed by a post released January 31 on the fact that GFMS again had double counted Chinese gold volume traded on the Shanghai Gold Exchange and the Shanghai Futures Exchange. However, this quarrel does not exclude the World Gold Council and CPM Group.

In Gold Demand Trends Full Year 2014 the World Gold Council (WGC) discloses Chinese gold demand at 814 tonnes, far below the tonnage we see being supplied to China. My previous extensive post on my disagreement with WGC demand figures I wrote months ago, hence I feel a strong propensity to update the blogosphere with my latest insights regarding the Chinese market.

Recap; in China gold demand and thus import is greatly stimulated by the government; gold export is prohibited (in general trade), except for Panda coins; all imported and domestically mined gold is required to be sold first through the Shanghai Gold Exchange (SGE) before entering the Chinese marketplace; once gold is withdrawn from the vaults of the SGE it’s not allowed to re-enter these vaults before it’s re-cast into a new bars by an SGE approved refiner; tax incentives push scrap supply to be sold through the central bourse as well, if casted as new bars. Because of the structure of the Chinese gold market many analysts, including myself, use SGE withdrawals as a proxy for Chinese wholesale demand. Read these three posts (I)(II)(III) for more detailed information on the structure of this market. A simplified equation for the SGE is: 

SGE withdrawals = import + mine + scrap

When I started publishing SGE withdrawals and later connected them to Chinese wholesale demand (on September 18, 2013, December 12, 2013 and April 15, 2014) I was merely using numbers published in Chinese – from reports that are now all taken offline (CGA Gold Yearbook 2007-2009 & 2013, SGE Annual Report 2007-2011, China Gold Market Report 2007, 2008, 2010, 2011), the only two dots I connected was aggregated demand and SGE withdrawals, the rest became self-evident. In the next chart we can see total demand from 2004 to 2013 as disclosed by the China Gold Association (CGA) Gold Yearbook 2013, which is written in Chinese and only published in hard copies; the blue bars represent total demand in tonnes (LHS), the red line y/y growth in percentages (RHS).

Screen Shot 2015-02-12 at 11.45.59 PM
Exhibit 1. Chart total Chinese gold demand from the CGA Gold Yearbook 2013, scanned from page 50.

When I say Chinese wholesale demand in 2013 was nearly 2,200 tonnes I’m not making this up, these are metrics used by the CGA (SGE/PBOC).

Gold supply in China has been outstripping the WGC’s demand numbers by literally thousands of tonnes in the past years, to which the WGC is continuously seeking to find arguments that should explain the difference. In vain the Council has published two reports dedicated to the Chinese gold market that were permeated with incorrect statements. Jumping from one argument to the next hasn’t strengthened their case either. The oncoming chart gives you a rough approximation of the difference.

WGC demand vs SGE withdrawals
Exhibit 2. Chinese wholesale demand (SGE withdrawals) vs WGC demand

Kindly note the WGC has revised their Chinese demand numbers 2013 from 1,066 tonnes to 1,312 tonnes. The revision rebutted their initial data by 23 %.

Screen Shot 2015-02-12 at 1.45.02 PM
Exhibit 3.

For this post we’ll use data from 2013 as a model to examine the Chinese gold market.

Chinese Gold Supply And Demand Metrics

According to SGE chairman Xu Luode Chinese consumer demand in 2013 was 2,000 tonnes. In his speech at the LBMA forum in Singapore June 25, 2014, he noted:

Last year, China imported 1,540 tonnes of gold. Such imports, together with the 430 tonnes of gold we produced ourselves, means that we have, in effect, supplied approximately 2,000 tonnes of gold last year.

The 2,000 tonnes of gold were consumed by consumers in China. Of course, we all know that the Chinese ‘dama’ [middle-aged women] accounts for a significant proportion in purchasing gold. So last year, our gold exchange’s inventory was reduced by nearly 2,200 tonnes, of which 200 tonnes was recycled gold. 

The SGE chairman makes a distinction between SGE withdrawals (2,200 tonnes) and his measure of consumer demand (2,000 tonnes), which he calculates by subtracting recycled gold (200 tonnes) from SGE withdrawals. Xu’s consumer demand equates exactly to how much gold was added to Chinese non-government reserves; typically this is what Chinese leaders track, the amount of gold held among the population. Total demand (equals supply) minus scrap = import plus mined gold. Scrap supply doesn’t add to a country’s reserves, only import and mine supply increase reserves.

All players in this game use different metrics to produce supply and demand figures, partially this explains the difference. In this post we’ll examine these metrics and go through the arguments the authority on gold, as the WGC has crowned itself, has brought up to enlighten us in the past years.

To capture a nation’s gold demand the authority only publishes end-user demand data (consumer demand measured at retail level) in the Demand Trends Reports (page 26).

Consumer demand 

The sum of jewelry and total bar and coin purchases for a country i.e. the amount of gold acquired directly by individuals.

If you read the report you’ll notice the WGC measures end-user demand in the form of jewelry, bar and coin demand per country at retail level, next to “ETFs, OTC investment and stock flows” to compute global total investment. But, what if Chinese individuals buy physical gold at the SGE and have the gold withdrawn from the vaults to store the metal at their own discretion? Would this show up anywhere in demand numbers from the WGC? Fact is the SGE has over 5 million individual clients, according to the chairman of the SGE, next to 8,000 institutional clients!

The reason the WGC only discloses end-user demand is because that’s all that matters to the price of gold, if a jeweler has 2 tonnes of inventory this is hedged and therefor has no net effect on the price. But measuring Chinese gold demand at retail level is inaccurate as every single Chinese citizen can open an SGE account, buy gold and withdraw. Most SGE products are denominated is small lots, consumer sizes: 1 Kg, 100 grams, 50 grams, and 10 grams. There is one product to trade 12.5 Kg bars, though this contract has only been active on three days since its inception (total volume since its inception accounts for 3 tonnes, measured unilaterally). SGE customers (potentially every single Chinese citizen) can buy and withdraw bars as small as 50 grams at the SGE, granted of the highest quality.

Screen Shot 2015-02-15 at 12.23.33 PM
Exhibit 4.

This is one of the reasons there is such a huge discrepancy between retail demand (WGC) and SGE withdrawals. Not all Chinese citizens buy their bars at a jewelry shop, au contraire.

The CGA Gold Yearbook 2013 shows us how demand is composed.

Screen Shot 2014-11-12 at 3.44.10 PM
Exhibit 5. Overview Chinese gold demand 2013, from the CGA Gold Yearbook 2013.
  • Red = Jewelry manufacturing (716.5)
  • Blue = Small gold bar production (375.73)
  • Purple = Industrial material (48.74)
  • Turquoise = Gold coin manufacturing (25.03)
  • Yellow = Other (10.4)
  • Green = Net investment (1,022.44)
  • Black = Total (2,198.84)

I think Small gold bar production is the amount of non-SGE bars manufactured by jewelry companies, banks, etc.

If we add jewelry, bar, coin, industrial and other we get 1,176.4 tonnes. This is demand measured at retail level – which is close to what the WGC initially disclosed as demand. Than there is net investment of 1,022.44 tonnes. An SGE employee once told me this simply is a residual of SGE withdrawals minus what is measured at retail level, or, everything bought directly at the SGE that wasn’t sold at retail level. The huge difference between WGC demand and SGE withdrawals is mainly caused by net investment. The Council’s mission seems to be explaining why net investment is irrelevant, coming up with feeble arguments that should support this. Later on we’ll go through the argument list and what type of demand net investment can be.

Now, let’s have a look at the supply side.

Screen Shot 2015-01-30 at 5.12.24 PM
Exhibit 6. Overview Chinese gold supply 2013, from the CGA Gold Yearbook 2013.
  • Purple = Domestic and overseas mine output (445.417)
  • Green = Recycled gold (246.923)
  • Blue = Bullion import (1,506.50)
  • Black = Total (2,198.840)

From this article we know in 2013 China domestically mined 428.16 tonnes and 17.25 came from offshore activities, so actually 1,523.75 tonnes were imported. SGE withdrawals accounted for 2,196.96 tonnes in 2013, meaning 1.88 tonnes (2,198.4 – 2196.96) were imported in the form of ie jewelry that wasn’t required to be sold through the SGE.

In Understanding China’s Gold Market the WGC notes there are two types of recycled gold in China.

Recycling: There are two types of recycled gold: i) Gold-for-cash and ii) gold-for-gold. At a retail level consumers can sell gold for cash or, especially in the case of jewelry, exchange old pieces of gold for new pieces of gold. It may be that in tonnage terms, gold-for-gold recycling is similar in size to gold-for-cash recycling: we recently surveyed 1,000 consumers and found that 8% of gold owners had sold gold-for-cash, while 10% had exchanged gold-for-gold. At a wholesale level banks and jewelers may also sell or exchange gold stock with other suppliers.

I fully agree, again we see the difference in metrics; gold-for-cash is what GFMS measures (150 tonnes in 2013), gold-for-gold is measured by the CGA as a residual.

SGE withdrawals – import – mine – gold for cash supplied to the SGE = 96.923 tonnes

Hence total recycled gold in Exhibit 6 is disclosed at 246.923, this is gold-for-cash and gold-for-gold. More information on recycled gold in China according to CGA metrics we can read in the China Gold Market Report 2008 and 2009:

… At present, gold scrap in China mainly is in two major forms: repurchase of gold bars, only applicable to brand gold bars in reference to real-time gold price, and repurchase of gold jewelry through retailers.

… China’s actual gold recycling likely reached 100 tons in 2008. Physical gold withdrawals on the Shanghai Gold Exchange (SGE) topped 543.19 tons in the year, including gold imports of 81.44 tons by commercial banks, stock carry-over of 31.661 tons from 2007 and 282.007 tons of gold produced in the year. In theory, the gap of 148.082 tons was filled by recycled gold. Therefore the gold recycled in China in 2008 should have amounted to more than 100 tons in 2008.

A few years later (2014) from the WGC in Understanding China’s Gold Market:

Given the complexity of the market there could be many reasons, but the most likely explanation is that the SGE delivery figure includes the flow of recycled gold-for-gold as well as gold-for-cash. As explained previously, while recycled gold-for-gold will increase supply and demand, the net effect is market neutral. For this reason, demand and recycling estimates as reported in Gold Demand Trends and GFMS, Thomson Reuters’ Gold Surveys exclude recycled gold-for-gold. But because the structure of the Chinese gold market requires refined and recast recycled gold to be sold through the SGE [this is not mandatory, tax incentives stimulate refined gold to be sold through the SGE], it is likely the delivery figure captures this circulation of recycled gold-for-gold.

The next flow chart from the WGC is also quite helpful:

Screen Shot 2015-02-14 at 11.59.23 PM
Exhibit 7. Courtesy of the WGC. The red box is painted by me.

I hope it’s clear now what different metrics are used for both supply and demand. If we take another look at the Exhibit-2-chart, supplemented by import, mining and scrap data, it becomes more clear what the difference is.

WGC demand vs SGE withdrawals 2
Exhibit 8. The WGC mainly relies on data from GFMS for its Demand Trends Reports, though it doesn’t publish as detailed information on scrap supply as GFMS, hence I used GFMS’ scrap numbers.

Even if we take out gold-for-gold scrap supply (the green bars represent gold-for-cash scrap) total aggregated supply from 2007 to 2014 was 7,872 tonnes, while total aggregated WGC demand over this period was 5,469 tonnes. Leaving 2,403 tonnes to be explained by the Council in their argument list, which is focused on the ‘surplus’ in the Chinese gold market, but indirectly aimed at debunking the size of SGE withdrawals.

Chinese Commodity Financing Deals

Gold is used in two sorts of Chinese Commodity Financing Deals (CCFD) to raise cheap funds: round tripping and gold leasing (read this post on the details of round-tripping, this and this on gold leasing). CCFD’s are definitely on the WGC’s argument list.

As I’ve mentioned above the WGC has published two China specials to explicate where a few thousands tonnes of gold went missing somewhere on the Asian continent, next to all quarterly Gold Demand Trends.

1) China’s gold market: progress and prospects (April 2014)

2) Understanding China’s Gold Market (July 2014)

In the first report on page 56 it’s stated, “round-tripping can inflate the SGE delivery figures”. This is absolutely not true, as I have extensively written about in The Round Tripping Myth And Why It Doesn’t Hurt Chinese Gold Demand. No need to repeat myself.

Also on page 56:

The ‘surplus’ in the Chinese market mainly stems from either possible official purchases or the extensive use of gold for financial operations.

… No statistics are available on the outstanding amount of gold tied up in financial operations linked to shadow banking but Precious Metals Insights believes it is feasible that by the end of 2013 this could have reached a cumulative 1,000t…

Although the mainstream media got completely carried away with the assumption 1,000t was tied up in CCFD’s, in reality it’s not so worrisome. Because it doesn’t involve round- tripping it can only be gold leasing. Somewhat simplified, only three parties engage in leasing gold to raise cheap funds: jewelers, miners and speculators. In China all gold leasing is settled through the SGE. If miners or speculators lease gold, they would instantaneously sell it spot at the SGE – they would not withdraw – and use the proceeds for investments. Only jewelers would withdrawal leased gold from the vaults to fabricate jewelry, subsequently sell the jewelry and use the proceeds to repay the gold loan. These withdrawals would eventually end up at retail sales. Additionally, it’s not likely a jeweler purchases gold off-SGE to have it refined and bring it to the SGE vaults to settle the lease, because the jeweler can simply buy directly at the SGE to settle the lease. This means gold leasing (CCFD’s in general) does not inflate SGE recycled gold supply.

In my opinion CCFD’s cannot substantially distort Chinese wholesale demand (SGE withdrawals). Occasionally I read numbers on the size of the Chinese gold lease market, though for me it is impossible to say what share is withdrawn or processed within the SGE system. I only know the part that is withdrawn is mostly genuine gold business.

In Gold Demand Trends Full Year 2014 the Council states:

The flow of gold into China has far exceeded the amount needed to meet domestic jewelry and investment demand in recent years [please tell us gold investors how much!]. The role of the commercial banks in using this gold for financing purposes has been well documented, including in our report Understanding China’s Gold Market and this activity expanded in 2014. To some extent, this helps explain why Shanghai Gold Exchange delivery figures are significantly higher than consumer demand.

If the only document they disclose on CCFD’s is Understanding China’s Gold Market, there is nothing new for us to learn. Yes, jewelers can lease gold, have it withdrawn and produce it into jewelry while it’s pending to be sold in retail. But this gold will not return to the SGE, so eventually it will be end-user demand. The part that is pending can partially explain the difference.

Commercial banks can have all sorts of gold (leases, pledges, ETF’s, gold savings accounts, etc) on their balance sheet, this doesn’t mean this gold has left the SGE vaults. In China gold ETF’s are backed by SGE contracts.

Official Purchases

We just read on page 56 from China’s gold market: progress and prospects, the difference might be explained by PBOC purchases. However, on page 9 from Understanding China’s Gold Market:

China’s authorities have a range of options when purchasing gold. They may acquire some of the gold which flows into China; there has been no shortage of that. But there are reasons why they may prefer to buy gold on international markets: gold sold on the SGE is priced in yuan and prospective buyers – for example, the PBOC with large multi-currency reserves – may rather use US dollars than purchasing domestically-priced gold. The international market would have a lot more liquidity too.

That’s what I wrote in this post (April 2014), it seems the WGC turned 1800 and agrees the PBOC doesn’t buy gold through the SGE.

PBOC purchases remain a very tough subject to analyze. I know they buy gold, but I have weak evidence of how much. The theory of China implementing the Turkish model to build official reserves is interesting, yet one of many problems with this theory is that the PBOC has a very strong incentive to diversify $4 trillion in FX reserves from US dollars into physical gold. So, until I bump into any evidence that would suggest otherwise, the PBOC does not buy any gold through the SGE.

Import

There are incredible amounts of gold imported into China. The Council has often noted on the argument list exact data is hard to get by because round tripping and scrap flows may distort import figures. From page 14, Gold Demand Trends Q1 2014:

Trade flows: illustrated last year when gold flowed out of western ETFs, through refineries in Switzerland and to consumers in the East, official trade data can provide insights into global gold flows. Global Trade International Services provide access to a wide range of countries’ trade data and we also monitor individual countries’ trade data, particularly from the Hong Kong Census and Statistics Department. However, looking purely at trade data can be misleading. It can include scrap, doré and concentrates, which would be captured in supply rather than demand. Nuances such as ‘round-tripping’ can affect the data too. So, while trade data plays a valued role in informing a view on global gold flows, it is an imperfect measure of gold demand.

I’ve written an extensive post on why this is not true. In the CGA Gold Yearbook 2013, it’s precisely disclosed how much gold is imported. For other years data is available as well.

Stock Inventory

Next on the argument list is stock inventory. As demonstrated above, if a jeweler has 2 tonnes of inventory this is likely hedged, which makes it for the Council’s metrics not count as demand. From Understanding China’s Gold Market:

… It is, however, indicative that as jewelers expanded, so too did their inventory levels and it is our judgment that across the industry between 75t to 125t may have been absorbed in the supply chain since 2009.

Ok, let’s go along with this, 125 tonnes of gold (at max) is held by jewelers and alike as inventory.

The Shanghai International Gold Exchange

Something the WGC hasn’t listed on the argument list, which they should, is trading on the Shanghai International Gold Exchange (SGEI). Because SGE withdrawals at this stage also capture potential withdrawals from the SGEI in the Shanghai Free Trade Zone, this can distort withdrawal numbers in the domestic market. However, trading on the SGEI has been faint since its launch, so in my opinion it doesn’t play a substantial role now. Read this post for a detailed explanation.

Conclusion

The difference in metrics should be clear; SGE withdrawals are the widest measure to capture demand, whilst WGC demand is said to capture retail demand. Though, I think there is a lot of demand from individuals and institutions that buy directly at the SGE that is overlooked by the WGC.

If we stick to WGC metrics (not count gold-for-gold supply) the only legitimate argument that can explain the difference is stock inventory, either purchased at the SGE or leased at the SGE by wholesalers. According to the Council this accounts for 125 tonnes. Exhibit 8 showed us the gap between supply from 2007 to 2014 (7,872 tonnes) and WGC demand over this period (5,469 tonnes) is 2,403 tonnes. So, the difference is 2,403 tonnes and the only real WGC argument we can find to fill this void is 125 tonnes of stock inventory.

In my humble opinion stock inventory can be higher than 125 tonnes, say 300 tonnes, but this would still not fill the gap. Therefor the WGC massively understates Chinese gold demand. 2014 Chinese gold demand disclosed by the WGC is 814 tonnes, though supply was approximately 1,850 tonnes (excluding gold-for-gold), SGE withdrawals accounted for 2,102 tonnes.

Screen Shot 2015-02-16 at 6.01.17 PM
Exhibit 9. Boxed in red is the total amount of gold withdrawn from SGE vaults in 2014 (in Kg’s)

Gold-for-cash scrap (GFMS’ scrap numbers) supply is not required to be sold through the SGE, theoretically it could be refined into, for example,  goldwire and sold directly to jewelers. Aggregated mine and import supply from 2007 to 2014 is 6,934 tonnes. 

For anyone who is interested in analyzing the Chinese gold market, here are some numbers to begin with:

Chinese supply and demand numbers 2007 2014 SGE WGC GFMS
Exhibit 10.

One last point I want to make; if we look below at the weekly SGE withdrawal chart since 2010 we can see spikes around every New Year / Lunar Year (and from April – September 2013 due to the crash in the gold price) when traditionally the Chinese people buy presents for each other, often gold. Would this chart look the same if SGE withdrawals also contained CCFD’s or official purchases? Or would the chart than look more seasonally independent? In my opinion, IF the PBOC would acquire gold through the SGE the chart would look more seasonally independent.

Shanghai Gold Exchange SGE withdrawals delivery 2015 week 5, dips
Exhibit 11.

CPM Group

Somewhere in November 2014, Jeffrey Christian, Managing Partner of CPM Group, wrote an email to one of my colleagues, arguing SGE withdrawals are not what they seem. The post in which my colleague published the email and responded is taken offline (dead link), but here’s the email in full:

…,

Someone sent me a piece you wrote on gold, in China but also elsewhere.

One comment: You use SGE gold deliveries seemingly as a surrogate of gold demand. A significant amount of the gold purchased by jewelry and electronics manufacturers and used in making products is re-refined and returned to dealers as new or process scrap. I presume you know that. The scrappage rate for most manufacturing of gold products is between 50% and 70%, depending on the processes used in manufacturing various jewelry, electronics, dental implants, catalysts, and other products. This means that the ‘end demand’ of gold that goes off into products to customers is substantially less than the amount delivered, via the SGE or any other supplier anywhere in the world.

For example, let us assume a manufacturer – it could be a jeweler or an electronics component maker – uses sputtering targets, as most of them do for the past many, many years. The new scrappage rate in the manufacturing process is 70%. In this example, let’s say that the manufacturer is using 10,000 ounces per month, buying 10,000 ounces per month through the SGE, having it made into sputtering targets, using the targets (or, in reality, selling them to clients who use them), and then collecting the process scrap, having it re-refined, and returning it to a dealer. In reality, there are various companies involved in this loop, but let’s keep it simple and say, the manufacturer. So, each month the manufacturer is buying 10,000 ounces of gold via the SGE, using 3,000 ounces in products, and recycling 7,000 ounces. At the end of the year, it will have taken delivery of 120,000 ounces of gold, but will have used 36,000 ounces of gold. The remaining 84,000 ounces of gold will have recirculated through the market repeatedly, each time being counted as an SGE delivery. So, if you are trying to guess how much gold is being used in jewelry, electronics, and other manufacturing processes in China by looking at SGE deliveries, you would be over-estimating actual demand or use by 233%.

I assume anyone writing about fabrication demand levels for gold knows this, but thought I would mention it to you in case it’s news to you. I know that when I mention it in presentations to mining executives, institutional investors, Eric Sprott, the WGC, and other gold market participants or observers, they often have no idea of this, and sometimes cannot even understand the processes I am describing.

I hope this helps. See you soon, next year, I hope.

Sincerely,

Jeff Christian

The key takeaway of Mr Christian’s letter is that the scrap rate in China is much higher than we think and it’s all recycled through the SGE (note, in the process he describes the recycled gold is not required to go through the SGE). My reply is, if we look at Exhibit 6 we can see that by the widest measure SGE scrap supply is 247 tonnes. If we subtract all scrap (247) from SGE withdrawals (2,197), we get 1,950 tonnes. Mr Christian notes this over-estimates demand by 233 %. So actual demand was 585.6 tonnes in 2013??

Koos Jansen
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  • Matthew

    Those SGE import figures – is that a quoted number or calculated from SGE deliveries less mine less scrap – they’re very similar to the numbers on imports I calculate – 1,573t in 2013, and 1,318t in 2014 (in fact about 50t lower, so maybe I am overcounting something).

    • KoosJansen

      Most are quoted from the CGA Gold Yearbook 2007-2009 & 2013, SGE Annual Report 2007-2011, China Gold Market Report 2007, 2008, 2010, 2011. I adjusted 2011 by HK net export to CN.

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

    “Mr Christian notes this over-estimates demand by 233 %. So actual demand was 585.6 tonnes in 2013??”

    I don’t understand how you can make this statement. Jeff’s comments about a scrap/demand “ratio” of 233% are derived from an entirely theoretical and simplified example and clearly meant for illustrative purposes only. In no way is he suggesting 233% is a confirmed number anyone should use.

    Secondly, your application of it to get 585.6t demonstrates you don’t understand his example. His point is that if you are only looking a gross demand number (like withdrawals) then you need to be aware that number can include scrap and he provides an example of how big the scrap relative to gross demand could be.

    If you know the scrap figure (eg 247t for 2013) then you don’t need to consider Jeff’s calculations as you can just take that away from the gross withdrawals to get the real underlying consumption (which could include inventory build), in 2013’s case, that is 1951.917t.

    BTW, the CGA’s 1022.44 “net investment” is the same balancing item/plug figure process GFMS/WGC use, which is a nice way of saying “we don’t know”. I would note that as we do know the scrap figure 246.923t, then the real unaccounted for consumption is actually 775.517t.

    • KoosJansen

      Secondly, your application of it to get 585.6t demonstrates you don’t understand his example. His point is that if you are only looking a gross demand number (like withdrawals) then you need to be aware that number can include scrap and he provides an example of how big the scrap relative to gross demand could be.

      Exactly, that’s why I didn’t debate his whole example and simply wrote:

      My reply is, if we look at Exhibit 6 we can see that by the widest measure SGE scrap supply is 247 tonnes. If we subtract all scrap (247) from SGE withdrawals (2,197), we get 1,950 tonnes..

      Why are you so sure to subtract all gold-for-cash from net investment? Maybe 80 % of this went through the SGE and thus came out at the other side as true demand.

    • awgee

      “In no way is he suggesting 233% is a confirmed number anyone should use.”

      Mr Christian says: “So, if you are trying to guess how much gold is being used in
      jewelry, electronics, and other manufacturing processes in China by looking at
      SGE deliveries, you would be over-estimating actual demand or use by 233%.”

      Mr. Suchecki, Mr. Christian seems fairly clear to me in what he is suggesting.

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

        That paragraph begins “For example” which means that everything that follows is an example to illustrate a point and not meant as a hard factual statement about reality. In English it is not necessary to preface every single subsequent sentence with “for example”. It is fairly clear to me that given the context of the entire paragraph that what Jeff is saying is “you, in this example, would be over-estimating actual demand or use by 233%”

        • awgee

          I wish we could communicate directly with Mr. Christian on this, because I think your interpretation of his email is incorrect. I think he relates the percentages as being accurate, and uses the sputtering target amounts as the example. The example is given as illustrative to the process with hypothetical numbers, but he is using the 50% to 70% scrap component as a real world percentage and that is where he is calculating the 233% discrepancy. I think you are adding the, “in this example”, in a context in which it was not intended, whereas Mr. Christian is saying that his 233% discrepancy percentage should be applied
          to guessing,“how much gold is being used in jewelry, electronics, and other manufacturing processes in China by looking at SGE deliveries.”

          If the scrap percentage for gold manufacturers is 50% to 70% and the manufacturers sell all their scrap, only to buy it back again through an exchange, his 233% is indeed accurate, and in the context of his email, I think he believes this to be the case.

          He also thinks that some very intelligent people who have intimate knowledge of the gold industry cannot understand the scrap process as described by Mr. Christian, which to me speaks volumes about Mr. Christian’s perceptions.

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

            The reason I don’t think Jeff meant for 233% to be applied is because that only related to 70%, a 50% scrap rate results in a 100% overstatement. There is a big difference between 100% and 233% and given Jeff used 50-70% there is no way he meant 233% to be a figures to apply across the whole industry.

          • awgee

            Since you call him Jeff, maybe you know Mr. Christian and you can ask him. Yes, there is a big difference between 100% and 233%, but I am not so quick to think Mr. Christian was not implying that 233% should be used across the whole industry, maybe because I do not know him and only know what Mr. Christian has written and said.

            I am aware that he once articulated that the ratio of traded paper ounces to existing deliverable ounces at one of the exchanges was 100:1 and he saw no problem with that. My only other familiarity is this published email in which he explains that some of the most knowledgeable people in the gold industry cannot understand the process he describes. What do you think he meant by that?

            Anywhooz, my limited exposure to Mr. Christian’s thoughts do not lend to generosity with his credibility.

      • Guest

        I wish we could communicate directly with Mr. Christian on this, because I think your interpretation of his email is incorrect. I think he relates the percentages as being accurate, and uses the sputtering target amounts as the example. The example is given as illustrative to the process with hypothetical numbers, but he is using the 50% to 70% scrap component as a real world percentage and that is where is calculating the 233% discrepancy. I think you are adding the, “in this example”, in a context in which it was not intended, whereas Mr. Christian is saying that his 233% discrepancy percentage should be applied to guessing, “how much gold is being used in jewelry, electronics, and other manufacturing processes in China by looking at SGE deliveries.”

        • KoosJansen

          I could ask Jeff to comment…

          In any case I don’t think his letter is a reason to significantly “doubt” SGE withdrawals numbers

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

    Another question, how do you get supply from 2007 to 2014 of 7,872t from the figures in exhibit 10? I get 8822t. Less scrap that gives 6983t. Would that not mean the gap to the WGC’s 5469t is 1514t?

    • KoosJansen

      7,872 is mine + import + gold-for cash, though I used lower import 2014 (1,218t) for this calculation coz I took SGEI volume into account. I like to be on the conservative side.

      If gold-for cash is used by the council as supply it surely is demand wouldn’t you say?

      Or are you saying only import + mine is supply? Skipping scrap all together?

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

        Just because WGC uses it doesn’t mean it is right. Consider this example using Jeff’s figures.

        Month 1 – 10t imported into SGE; industrial users withdraws 10t; sells 3t to customers
        Month 2 – 5t imported into SGE; 7t comes back as scrap; industrial user withdraws 10t; sells 3t to customers

        This results in:
        Imports 15t
        SGE withdrawals 20t
        Scrap 7t
        SGE inventory build 2t
        Industrial user inventory build 7t

        Whats the “real” demand in this situation? I’d argue real price impacting demand is only 6t. Buts here is a question – currently all you have is the first three figures, so how do you get to 6t? You can’t, because you don’t know what the change in industry inventories are.

        Now if we knew what SGE inventory levels were each month, and what deposits were (not only imports, but in-country deposits from say ex-refining), then we would have a better handle on this, but the problem for those in China who wish to make their market seem as big as possible is that by revealing that information we would come up with much lower figures of real demand than what gross SGE withdrawals suggests.

        • KoosJansen

          Ok, let’s think about this:

          1) In Jeff’s example he says the “industrial scrap rate is 70 %”. I’m not gonna spend countless days of research on this to proof it, but the 70 % rate in my opinion is lower in reality.

          2) Why would a sputtering targets manufacturer have its scrap sold to a local refiner that casts new SGE bars?

          Waste of costs: the gold would be transported to the nearest SGE vaults, load-in fees have to be payed, once stored (only short) storage fees at the SGE have to be paid, after the gold is withdrawn load-out fees have to be paid and it must be transport it to the sputtering targets manufacturer’s factory?

          Why doesn’t the sputtering targets manufacturer bring his scrap (whatever percentage it is) to a refiner and asks him to make it into exactly what he needs (form and purity) in return for a little fee? Not all scrap is required to be sold through the SGE.

          3) How many Chinese manufacturers would be in the sputtering targets business? Industrial fabrication in 2013 was 49 tonnes out of 2197 tonnes of total SGE withdrawals. How much of that would be sputtering targets and how much scrap would that have created.

          4) If we take into account point 1, 2 and 3 above we get a better perspective of SGE inventory build and Industrial user inventory build in your example.

          5) China does not want to make their market as big as possible, they like to keep all this information to themselves. The CGA Gold Yearbook 2013 was only published in Chinese hard copies. The other reports they stopped publishing after 201. If China really wanted to make their market as big as possible why not release everything in on Xinhua in English (including net investment, which is a category only disclosed in secret reports and meant to suppress the other categories the CGA does publish for the masses). All the info we have from the size of their market is from Chinese data, secret reports and ie a speech from Xu at the LBMA forum (of which you didn’t hear the part about the size of demand while you were in the room).

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

            1) Jeff said “most” and between 50-70%. The overall average scrap rate across industrial and jewellery manufacturers would thus be lower.
            2) Yes, not all scrap flows back to SGE. Some manufacturers would recycle internally but a point is reached where it does need refining. Refiners would generally resell/resupply metal they receive to others (generally people don’t do toll refining as they don’t want to wait, so they get new gold straight away – this requires the refiner to fund the inventory) but supply of scrap and demand cannot be assured to line up perfectly in a non-toll refining process so that is how it can make sense for a refiner to return metal to the SGE.
            3) I think you are missing the point again – Jeff was just using spluttering targets and their high scrap rate for illustrative purposes and was not saying this was significant part of the market and I’m sure he would acknowledge the points made in 2) that not all scrap flows back to SGE. You are reading him too literally.
            5) China does not need to go to too much trouble to publicise their much larger withdrawal numbers themselves as you are doing a good job of that for them! It is in the interests of the people in the Chinese gold industry for their political and personal careers to have their industry appear as significant as possible, going to LBMA and talking about it doesn’t seem like keeping it to themselves. This is human nature – why do you think London gold market guys decided all those years ago to publish their turnover figures?

          • KoosJansen

            So how much scrap do you think can come of that inflates SGE withdrawals?

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

            I don’t know, I don’t have the time to get in as deep into this figures.
            The question is how did CGA get the scrap figure? What is in it? The CGA has partnered with CPM and the use of the fudge factor “net investment” shows they are using the same methodology as GFMS/WGC. If you think those organisations’ methods are problematic, then so too is CGA’s.
            I’m just trying to give some pointers for you to bring more accuracy to what is really going on in China. Just reporting SGE withdrawals is too high level. You have to strip out anything that is not “real” demand, like leased gold withdrawn to be held as collateral against financing deals, gold withdrawn by a manufacturer, but hedged with futures, to build their inventory to support higher production levels, and then scrap – should it be included in supply and therefore inflate demand or is the supply of it by someone just negative demand which offsets the “demand” of the person taking it?

          • KoosJansen

            Jeff writes:

            One comment: You use SGE gold deliveries seemingly as a surrogate of gold demand. A significant amount of the gold purchased by jewelry and electronics manufacturers and used in making products is re-refined and returned to dealers as new or process scrap. I presume you know that. The scrappage rate for most manufacturing of gold products is between 50% and 70%, depending on the processes used in manufacturing various jewelry, electronics, dental implants, catalysts, and other products. This means that the ‘end demand’ of gold that goes off into products to customers is substantially less than the amount delivered, via the SGE or any other supplier anywhere in the world.

            His point: a significant amount of scrap flows though the SGE, distorting withdrawals numbers.

            The CGA measures scrap simply by subtracting import + mine from SGE withdrawals. Exhibit 6.

            The CGA is obviously playing a game, coz, they report to the world in English demand is similar to WGC numbers, but in Chinese reports (and older reports) they disclose demand is far greater.

            Also note some translations (from Chinese) I’ve published from CGA presidents that unveil the Chinese monetary strategy:

            https://www.bullionstar.com/blog/koos-jansen/building-a-strong-economic-and-financial-security-barrier-for-china/

            https://www.bullionstar.com/blog/koos-jansen/china-aims-official-gold-reserves-8500t/

            https://www.bullionstar.com/blog/koos-jansen/sge-withdrawals-59t-in-week-5-ytd-315t-what-is-china-up-to-with-all-this-gold/

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

            I disagree with Jeff on “significant”. Even if his 50-70% scrap rate is accurate for the whole of industrial and jewellery manufacture, as discussed a fair part of this will be refined and resold at the refinery level, only if there is a mismatch in supply demand at that level will the scrap find its way back to SGE.

          • awgee

            SGE chairman Xu Luode said that the amount of scrap that passed through the SGE was 200 tonnes. Do you have an opinion as to whether or not Xu Luode’s figure is accurate?

          • KoosJansen

            Exhibit 6 shows exact scrap amount at SGE.

          • awgee

            “Jeff was just using spluttering targets and their high scrap rate for illustrative purposes and was not saying this was significant part of the market and I’m sure he would acknowledge the points made in 2) that not all scrap flows back to SGE. You are reading him too literally”.

            Mr. Suchecki, it would appear that Mr. Christian would disagree with your characterization of his comments.

            Here is what Mr. Christian said: ” A significant amount of the gold purchased by jewelry and electronics manufacturers and used in making products is re-refined and returned to dealers as new or process scrap.”

            and

            “This means that the ‘end demand’ of gold that goes off into products to customers is substantially less than the amount delivered, via the SGE or any other supplier anywhere in the world.”

        • KoosJansen

          From a source in the mainland over email (copy-paste):

          No. In his example

          Month 1 – 10t imported into SGE; industrial users withdraws 10t; sells 3t to customers

          Month 2 – 5t imported into SGE; 7t comes back as scrap; industrial user withdraws 10t; sells 3t to customers

          This results in:

          Imports 15t

          SGE withdrawals 20t

          Scrap 7t

          SGE inventory build 2t

          Industrial user inventory build 7t

          1. This gives people the impression that the SGE inventory is owned by the SGE but this is false. I have gold in my SGE account and this end user demand and also inventory build. SGE inventory is either industrial user inventory or end user consumption. SGE inventory is not a separate item.

          2. He mentioned ” I’d argue real price impacting demand is only 6t. ” Ok, it is Bron Suchecki himself that believes that it is the wholesale market (LBMA) that matters. ASE (retail) is irrelevant in his opinion. Now he argues that inventory build (wholesale) is NOT price impacting. He is self-contradictory.

          3. If what he describes were true, then we would have very small inventory turnover ratio (Cost of goods sold/inventory). But Laofengxiang’s inventory turnover is around 5-6, which proves that his case is wrong.

          http://en.wikipedia.org/wiki/Inventory_turnover

          4. What Jeff Christian described is selling raw materials.

          In this example, let’s say that the manufacturer is using 10,000 ounces per month, buying 10,000 ounces per month through the SGE, having it made into sputtering targets, using the targets (or, in reality, selling them to clients who use them), and then collecting the process scrap, having it re-refined, and returning it to a dealer.

          Selling raw materials is regarded as 其他业务收入 (Other Business Revenue) in financial reports in China. (You can ask other Chinese speaking readers to confirm that this is written in the book below.)

          https://books.google.com.hk/books?id=z_XkqwTAyVgC&pg=PA302&lpg=PA302&dq=%E5%85%B6%E4%BB%96%E4%B8%9A%E5%8A%A1%E6%94%B6%E5%85%A5+%E5%8E%9F%E6%9D%90%E6%96%99&source=bl&ots=HqIeg3k_Eu&sig=JQeGw_oS9BiHwGRg1bJ0qLtQUXU&hl=en&sa=X&ei=f4_lVNrOMYT98AXjroLoDA&redir_esc=y#v=onepage&q=%E5%85%B6%E4%BB%96%E4%B8%9A%E5%8A%A1%E6%94%B6%E5%85%A5%20%E5%8E%9F%E6%9D%90%E6%96%99&f=false

          But look at Laofengxiang’s 2013 financial reports (page 79).

          http://pdf.dfcfw.com/pdf/H2_AN201404240005511278_1.pdf

          Compared with 主营业务收入( Main Business Revenue), 其他业务收入 is tiny. If Jeff Christian said were true, then 其他业务收入 would be much larger than 主营业务收入.

          营业收入 Operating Revenue

          主营业务收入: Main Business Revenue

          其他业务收入: Other Business Revenue

          营业成本 Operating Costs (Actually Costs of Goods Sold is more proper but I translated as it is)

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

            1. This gives people the impression that the SGE inventory is owned by the SGE but this is false. I have gold in my SGE account and this end user demand and also inventory build. SGE inventory is either industrial user inventory or end user consumption. SGE inventory is not a separate item.

            I do not see how “SGE inventory build” can give the impression that it was owned by the SGE. It is obvious to anyone reading this blog that the SGE is merely an exchange/warehouse and doesn’t own any gold, just like any exchange in the world. Are you saying that I should have said “SGE inventory (owned by other people) build”? If so, read any of Koos’ posts and you’ll see he never puts in “(owned by other people)” when he talks about SGE warehouse stocks. Yet, I don’t see you claiming he is giving a false impression.

            2. He mentioned ” I’d argue real price impacting demand is only 6t. ” Ok, it is Bron Suchecki himself that believes that it is the wholesale market (LBMA) that matters. ASE (retail) is irrelevant in his opinion. Now he argues that inventory build (wholesale) is NOT price impacting. He is self-contradictory.

            My point about the LBMA refers to their turnover (ie buying and selling “flow”), which is significantly greater than any other exchange and does dwarf retail investor volumes (this does not mean it is irrelevant as price is formed at the margins, but lets stick to one concept at a time). You then go on to talk about inventory, which is a “stock”, and think I’m being self-contradictory. What you have missed is that inventory build has not net impact on the buying and selling “flow” because wholesale users would hedge that accumulation of inventory.
            Wholesale users are not like retail investors and take price exposure, hence any increase in inventories they hold, whether in their business or at the SGE, are hedged. So that is why inventory build should be ignored. My point is that SGE withdrawals are a gross number combined of a) metal that has actually be sold to an end user who is taking a position b) metal that has either been leased or bought, but then hedge with a futures (for example). Just reporting total withdrawals without qualifying it by saying that there is some about b) which has no price impact is giving a false impression about the real gold price moving demand in China.

            3. If what he describes were true, then we would have very small inventory turnover ratio (Cost of goods sold/inventory). But Laofengxiang’s inventory turnover is around 5-6, which proves that his case is wrong.

            In Jeff’s illustrative and not meant to be a perfect representation of reality example (is that sufficiently clear, awgee?) the average inventory is 5 (10+0/2) and the cost of goods sold is 36, giving an inventory turnover ratio of 7.2, not too far from your example (I note that Laofengxiang is in jewellery, not semiconductor business or similar which uses spluttering).

            4. What Jeff Christian described is selling raw materials.

            I would disagree, getting scrap processed is not a “sale” to my mind.

            Selling raw materials is regarded as 其他业务收入 (Other Business Revenue) in financial reports in China. (You can ask other Chinese speaking readers to confirm that this is written in the book below.)

            Incorrect. The accounting entries for the process are:

            Buy raw materials
            debit inventory 10
            credit cash 10
            Sell product
            debit cash 6 (lets assume a 50% gross margin)
            credit main business revenue 6
            debit cost of good sold 3
            credit inventory 3
            Sell scrap
            debit cash 7
            Credit inventory 7

            For your statement that selling raw material (ie scrap) is other business revenue to be true, then the accounting entries have to be

            debit cash 7
            credit other business revenue 7
            debit cost of good sold 7
            credit inventory 7

            No business would do this because the sale of scrap is not a profit making activity, it is merely liquidation of your inventory. To report it as revenue when you make no margin would drag down and misrepresent your real profit margin.

    • rowingboat

      Thanks Bron for your input (you’re overdue for a post on your own blog too may I add politely).

      We probably need a few years of Chinese import data to smooth over these fluctuations in order to reach a quasi ‘steady state’, but clearly there has been a structural shift in China rather like the Indian market in the 1990s where annual imports have since been quite consistent.

      I would also note that the ANZ expects Chinese imports to increase in 2015 partly due to draw-down of inventories in 2014. We shall see, but these sorts of variations will naturally average out over time anyway and the import data will reveal all.

      Have you seen this post by Pater Tenebrarum? http://www.acting-man.com/?p=35868
      Clearly the gold price is correlated with macroeconomic indicators which are scantly discussed, and I wondered whether you observe any of these at your coalface so to speak in the physical market.

  • HYMN

    Wow a great piece of work, really, thank you. So China lets us know what it wants us to know and little else. With all this research we’re still left with a “best guess” based on data the author was able to compile. Mr. Christian is way off is my guess, while Mr. Jansen is much closer to the actual demand and still conservative in my opinion.

    • KoosJansen

      What I’m most interested in is how much China imports every year, next to mine production, as this gold is not allowed to leave the country and is obviously meant to build reserves for …. ;-) But the rest of their gold market is also fascinating.

  • awgee

    It appears that Mr. Christian said, “… and then
    collecting the process scrap, having it re-refined, and returning it to a
    dealer, the process scrap being 70% of the total material that the manufacturer bought.”

    Even if the manufacturer can only use 30% of his material at one time, and even if the manufacturer found it necessary to re-refine his scrap, why would the manufacturer find it advantageous or even necessary to return the scrap to a dealer, just so that the manufacturer can buy it back again?

    Mr. Jansen wrote that “tax incentives push scrap supply to be sold through the central bourse as well, if casted as new bars.”

    Am I reading Mr. Christian wrong? Am I missing something? Help me out here. Why would the manufacturer sell the refined material back to a dealer and then buy it back? Is this really the way that manufacturers of gold products do business?

    Mr. Christian also says, “I know that when I mention it in presentations to mining executives, institutional investors, Eric Sprott, the WGC, and other gold market participants or observers, they often have no idea of this, and sometimes cannot even understand the processes I am describing.”

    Did he truly write that? Is this the same Jeff Christian who is a managing partner at the CPM Group? Again, am I missing
    something, or is he saying that mining executives, institutional investors,
    Eric Sprott, and folks at the WGC cannot understand the process he is
    describing? Does he think they are not intelligent enough to understand the process he is describing? The process is just too complicated for
    them to understand? I think I understand what he is saying and all the people he mentions are much smarter than me. Or maybe I don’t understand?

    According to SGE chairman Xu Luode, “Last year, China imported 1,540 tonnes of gold. Such imports, together with the 430 tonnes of gold we produced ourselves, means that we have, in effect, supplied approximately 2,000 tonnes of gold last year.

    The 2,000 tonnes of gold were consumed by consumers in China. Of course, we all know that the Chinese ‘dama’ [middle-aged women] accounts for a significant proportion in purchasing gold. So last year, our gold exchange’s inventory was reduced by nearly 2,200 tonnes, of which 200 tonnes was recycled gold.”

    Does Mr. Christian think Xu Luode is lying that 200 tonnes of the SGE’s inventory was recycled, (scrap), or does Mr. Christian think Xu Luode is mistaken and just doesn’t know the real numbers concerning the amount of scrap that travels through the SGE?

    How sure are you that Jeff Christian wrote this letter? Maybe it is a hoax?

    • KoosJansen

      It’s not hoax.

      • awgee

        Ok, if not a hoax, can you or anybody please help me to undrestand the recycling process he describes? Do the gold manufacturers truly sell up to 70% of their gold material to have it re-refined, and then buy it back again? Is this an accurate description of the sputtering targets manufacturers process? Gold jewelery maunfacturers? I am not being sarcastic. I truly want to know.

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

          All manufacturing processes have scrap and it is usually not the expertise of the business to recycle scrap. When someone comes to fix your broken window, do you think they get the offcuts from the sheet of glass and melt them down? No, they just give the left over bits of glass to a recycler and buy new sheets of glass from someone else for their next job.
          Why do you think it is any different in gold manufacturing? While not an expert on this, my understanding is that spluttering is used in semiconductor manufacture and given their need for high purity and precise control, I don’t think it is a stretch to imagine that they cannot reuse any gold scrap. For casting of jewellery, I can see that the casting tree and offcuts probably could be remelted and reused, but only so many time as impurities would be picked up with each remelt. Hence every industry has a different % of scrap they need to get externally refined.

          • awgee

            I was mistaken to include all gold manufacturers in my question. I do not doubt that a few gold manufacturers may sell their scrap, only to buy it back again, but I doubt that the percentages are anywhere close to what Mr. Christian is suggesting. Sorry. I should have thought a bit longer before I phrased that question. I thought about it later and realized that it is reasonable to think and likely that some gold manufacturers do sell their scrap and buy it back again. And I think it is reasonable to assume that, “every industry has a different % of scrap they need to get externally refined.” Thanks for your insight. The example I came up with in my head is lumber offcuts being used to make wood pulp products, but I think your glass example is a closer analogy.

          • KoosJansen

            Note, you can edit previous comments posted, for the sake of simplicity.

          • awgee

            Yes, but when I make a mistake, I find it best to acknowledge it.

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