Koos Jansen
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Koos Jansen
Posted on 11 Feb 2016 by

London Was Bleeding 184t Of Gold In December While China Imported At Least 217t

When there is no more gold left in London to export the gold price is likely to go higher on strong global demand induced by economic headwind. At the time of writing the spot gold price is $1,251.80 per ounce, up 18 % year to date, while the S&P 500 is down 9 % year to date. 

In a year that saw strong gold demand from China, in total withdrawals from the vaults of Shanghai Gold Exchange accounted for 2,596 tonnes in 2015, we turn our eyes to the most obvious place for sourcing such quantities of physical gold: London, the heart of gold wholesale market. Since the gold price came down sharply in April 2013 there has been a spectacular drain from the vaults in the London Bullion Market. In 2013 the UK net exported no less than 1,424 tonnes. Whilst net gold export from the UK in 2014 decreased to 452 tonnes, in 2015 the gold exodus from London has accelerated to 573 tonnes.

In December 2015 the UK has net exported 184 tonnes of gold, which is the third highest amount on record, according to data released by Eurostat. Net gold export in December was up 218 % from November and up 3,730 % from December last year. In December 2015 the UK gross exported 213 tonnes of gold – the second highest number on record, which is up 127 % from November and up 315 % from December 2014. The UK’s gross import accounted for 29 tonnes in December 2015, down 20 % from November and down 38 % from December 2014.

UK Gold Trade 2012 - december 2015

In the chart above we can see a clear correlation between the UK’s net gold export (“Total net flow”, the black line) and China’s wholesale gold demand (measured by “SGE withdrawals”, the turquoise line), implying gold import by China is supplied, directly or indirectly, by London. In the chart below we can see the same data as in the chart above, but now I’ve inverted “SGE withdrawals” and moved its scale on the right hand side so the correlation is even more clear.

UK Gold Trade vs SGE Withdrawals

Of total export from the UK in December 29 tonnes were net exported directly to China and a “surprising” 155 tonnes were net exported to Switzerland – from where 59 tonnes were net exported to China. From what we know China net imported at least 217 tonnes in December 2015, which is the highest amount ever (computed from data by countries that export gold to China, 29 tonnes from the UK, 59 tonnes from Switzerland and 129 tonnes from Hong Kong).

SGE withdrawlas vs China gold import monthly
Strong gold import by China in Dec is partially explained by restocking of the Shanghai Gold Exchange vaults that suffered large outflows in July, August and September due to the crashing Chinese stock market and devaluation of the renminbi.

So how come the gold price has been going down from April 2013 until December 2015 while Chinese demand has been so strong? First of all, because the West has been a strong supplier of physical gold. In my view physical supply by the West and the gold price are linked. For instance, if we compare the average monthly gold price to net gold trade by the UK this interconnection becomes apparent.

UK net gold flow vs gold price

We can see that whenever the UK is exporting gold the price is declining – and vice versa. Effectively, China has been able to purchase huge amounts of gold by the grace of London selling the metal. But what if London is running out and global demand picks up on the back of failing QE and negative interest rate policy (NIRP)? In that scenario likely the gold price would climb higher, which, coincidentally, is what we’re seeing at the time of writing. Year to date the gold price measured in US dollars has increased 18 % from $1,061 at 1 January to $1,251.80 at 11 February.

Screen Shot 2016-02-11 at 7.48.41 pm
This graph is conceived with BullionStar Charts.

How much gold is left in London? We can make a rough estimate, although we don’t know how much of this residual is in weak or strong hands. Research by Ronan Manly from BullionStar and Nick Laird from Sharelynx pointed out there were roughly 6,256 tonnes of gold in London in June 2015. However, of this total at least 3,779 tonnes is monetary gold owned by central banks around the world stored at the Bank Of England (BOE), which is not for sale. The remaining 2,477 tonnes in non-monetary gold was potentially for sale (note, this number included 1,116 tonnes that was allocated as ETF gold in London at the time). In any case, we know now that from June until December the UK net exported 390 tonnes of non-monetary gold, which leaves approximately 2,087 tonnes in non-monetary gold in the UK as of 31 December 2015. Assuming the People’s Bank Of China hasn’t purchased some of this gold and covertly exported it to Beijing in the past months.

As long as London is selling gold and China is buying the price can go down. However, if London stops selling (or becomes a buyer) the price can make a reversal.

Koos Jansen
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  • Calvin Chin

    So….we have potentially about one year of Chinese demand (2,500 tons) left available in London vaults for trade? Hmmm

    • sb

      Around 1000mt and the UK is drained at rate 500mt per year by the East. If the West investment demand picks up again as it looks like it is happening now this gold can go within a year. London gold market was in backwardation for around 3 months in 2015, in January that reverted but last few days gofo is slightly negative again probably because of the west demand this time. Adding to this dropping mining production we could see start of the bull gold market.

      • JanNieuwenhuijs

        Or when Western investment demand picks up the gold price will go up, but Chinese gold demand (volume) will go down. Perhaps the Chinese just bought the cheap gold that was for sale since 2013. It is true that when the price goes up the West is buying, when the price goes down the Chinese are buying. In essence, Western physical supply/demand is directing the price of gold.

        • sb

          The price of gold is set in the US by the big speculators, so far they have been pushing price down anticipating higher IRs. London gold was used to keep the physical gold market in synch with the futures. If this reverses now and momentum trading speculators switch to long bets and physical gold demand in the West resurrects then the gold will go up even if China starts to sell gold. This would be a symmetric situation to the one we have had since 2013 but this time gold would be flowing from East to West. If China stops or continues buying that would be very bullish for gold.

          It is hard for me to guess what will happen with China demand. I think there is a chance that they will join the momentum trade especially in the context of depreciating yuan, low IRs and defaults. China created a lot of money after 2008 to keep things running, people who got rich because of this expansion would try to preserve their wealth.

          If it gets very bad there is very likely China will introduce strict capital controls and/or confiscate gold in private hands. Even in this scenario they will probably first sell FX reserves and US treasuries first and leave gold as the asset of the last resort.

          • JanNieuwenhuijs

            I partially agree with you. I don’t think the gold price can only be set in the paper markets. Physical supply and demand dictates the physical price (although the paper volumes can play with sentiment & TA).
            Thousands of tonnes in London were sold since 2013. Was this gold owned by the speculators in New York which they could use to support their paper price? No. It was owned by various investors that sold coz they thought the economy was stable.
            *IF* the price is suppressed by the Fed they need phyz to supply in the free market in order to keep the price low (sourced from Fort Knox, FRBNY, etc) – again, I don’t think the price can be held down only in the paper market.
            It sure is amazing that China was “allowed” to accumulate so much gold in this extraordinary time. Perhaps this was all orchestrated.
            Gold can flow from East to West (it has done so before) but not likely anything out of China. Probably in the next bull run both sides demand gold coz their both in the same shit. And let’s be honest, most Chinese that bought since 2013 did not do so to sell when it’s 30 % higher.
            Confiscation by the State Council is a risk. My friends in the mainland fear this. Perhaps that’s why so many Chinese withdraw and hide it 😉

          • sb

            I agree the 2013 crash was caused by disinvestment of gold by different classes of investors when became apparent that the USA economy was getting better.

            But I think that 2014-2015 continuous bear market was mainly momentum trading by hedged fund as shorting paper gold become a popular trade among speculators. There are many facts confirming this
            a) increasing futures net short position of managed money
            b) negative futures basis
            c) dropping gofo rates in London, they are lately often negative
            d) the fact that only small fraction of the gold sold in London was from ETFs, sold gold was mostly owned by banks, e.g. a few hundred tonnes were from unwound swaps between some banks (mostly likely Citi) and BIS, even BIS leased its 100mt outright owned gold

            The bear market could exist because there was enough gold left in London vaults to sell to East. This pool of gold has been now significantly depleted.

            As for China I agree that it is more likely than not that gold won’t flow back from China to West.

          • rowingboat

            As we have witnessed with India in recent years, the market will find a way if gold trades at a significant premium in London vs. China.

            With a rising price, Chinese consumer demand will probably fall as it will elsewhere in the world. However, investment demand is far more important and will probably increase because Chinese investors too are looking at U.S. monetary policy as key price driver (according to Shandong Group):


          • blasater

            Jan– Totally agree with what you wrote. It is amazing that London and the west have been willing to see so much supply go to China. Central bankers in the West are not stupid people. They must have a plan. I cant help but wonder if they are working out a “Bitcoin” type solution of scarce block-chain to be a gold substitute or replacement. (If such a thing is even really possible). At any rate do you foresee a drop in Chinese drop in demand that will be coupled to collapse of their economy or will demand remain strong? Thanks!

      • rowingboat

        Personally I think we’re already there, re the bull market. I’m looking for proof of falling London holdings and rising price trend. These are the numbers I now have for London, very round numbers:

        3500mt Monetary (Feb 2006 BOE number)
        3000mt NMG split:
        1700mt post 2005 and 1300mt before 2006
        Most of the 1300mt supports the unallocated trading system
        Most of the 1700mt is ETFs, about 1200mt

        I had been looking for one more bearish year of 500mt drain. That drain may still happen but it won’t be a bear because Western investor psychology has changed, a stunning reversal of expectations of Yellen interest rate hikes.

        • sb

          I also think that it is likely we entered another bull market. The world economy seems to be on a verge of another recession, which caused gold to break important technical levels. I am expecting now a pullback in gold, the magnitude of this move will show how strong gold is.

    • rowingboat

      The proper context is to first quantify how much gold had been imported into London, about 4100mt after 2005 (Western institutional demand).

      In the last three years about 60% of that (2400mt) has been dumped (net basis) and exported East because they/we wanted it more. Institutional investors in the West are now re-evaluating their position, so will the trend of the past three years continue or reverse?

  • 59LesPaul

    Any idea how much gold India imported in 2015 and from where?

    • rowingboat

      Click on “Chart” in the link below then scroll down. On the left hand side is a pie chart showing from where India imported its gold in the prior month.
      Switzerland is always the main supplier, approximately half the total.
      From the Swiss trade data, Switzerland exported 517mt to India in 2015.


      • 59LesPaul

        Many thanks.

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