Koos Jansen
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Koos Jansen
Posted on 19 Feb 2015 by

SGE Withdrawals 59t in week 6, YTD 374t: Chinese Gold Soap Extended Another Season

The latest numbers from the Shanghai Gold Exchange (SGE) demonstrate a little over 59 tonnes have been withdrawn from the vaults in week 6 of 2015, down 0.35 % w/w. SGE withdrawals, which are often used as a proxy for Chinese wholesale gold demand, account for an amazing 374 tonnes year to date, up 17 % y/y.

Screen Shot 2015-02-17 at 8.45.16 AM
Blue (本周交割量) is weekly gold withdrawn from the vaults in Kg, green (累计交割量) is the total YTD.

Corrected by the volume traded on the Shanghai International Gold Exchange (SGEI), withdrawals in week 6 were at least 51 tonnes (read this post for a comprehensive explanation of the relationship between SGEI trading volume and withdrawals). Year to date withdrawals corrected by SGEI volume were at least 333 tonnes.

I can’t proof it at this stage, but I think domestic withdrawals are more likely to be 374 tonnes year to date than 333 tonnes. The Chinese import huge amounts of gold which obviously is not going through the SGEI. In addition, it seems unlikely every trade on the SGEI is withdrawn from the vaults in the Shanghai Free Trade Zone to be exported. The SGEI is not yet the place to buy gold.

Shanghai Gold Exchange SGE withdrawals delivery 2015 week 6

Shanghai Gold Exchange SGE withdrawals delivery only 2014 - 2015 week 6

According to my estimates China has imported 280 tonnes year to date (until February 13).

Here’s some more perspective; SGE withdrawals year to date are definitely not less than last year when we experienced how Chinese people can storm their local malls on a mission to buy as much gold as they can (perhaps that’s why this year lifeguards were on the scene to control the shoppers).

Lunar Year Withdrawals

Yes, demand has been huge in China, but not according to the price of gold. Technically speaking it doesn’t matter how much gold is bought to qualify demand, if supply is outstripping demand the price will go in one direction only, down. Officially, by tracking the price this should tell us everything about supply and demand of gold. A declining price means supply transcends demand, until a new price equilibrium is found, and vice versa.

If the price of gold is determined by physical supply and demand of gold we are supposed to believe that since April 2013 (see chart 1) there has been far more supply than demand as the price has come down substantially. Supposedly there has been so much supply, that Swiss refiners expanded their plants and worked in three shifts 24 hours a day to refine all this gold, which they fortunately could dump in China. The decline in the price was an enormous flood of supply and feeble demand!

Perhaps you can read my cynicism between the lines, as in my opinion there is more going on than the official story; for example, all leading Western consultancy firms have underreported 2013 and 2014 Chinese gold demand in both years by roughly 1,000 tonnes. As I have written a few hundred times on these pages: why the mainstream media isn’t covering this remains a mystery.

Most of the big potatoes in the gold realm sort of deny the amount of gold China is accumulating or present inaccurate arguments to defend their understated demand numbers.

On February 17, 2015, Mr Phillip Klapwijk, an analyst with Precious Metals Insights in Hong Kong, previous Executive Chairman of Thomson Reuters GFMS, was interviewed by Jan Harvey and Michael Wagner at the Reuters Global Gold Forum:

Harvey: The period in the run-up to the Lunar New Year is considered a peak season for gold demand in China. From what you have seen, how has buying been this year, compared to last year and the year before?

Klapwijk: In terms of the YoY, my sense is that 2015 is up moderately on 2014 but well below the exceptional demand seen in the same period in 2013.

Hmm, I beg to differ as we can see in chart 3.

Harvey: What sort of consumer trends have been noticeable this year – what sort of products are people favoring, and is gold buying overall as widespread as it has been in the past?

Klapwijk: This is partly a price and timing related phenomenon but also I think speaks to – by Chinese standards – a somewhat ‘soft’ environment for retails sales of jeweler this New Year.

I wrote a lengthy piece a couple of days ago stating retail sales do not make up the majority of gold sales in China.

Harvey: Do you consider withdrawals from the Shanghai Gold Exchange to be a useful measure of demand?

Klapwijk: The withdrawals show what the big picture is for physical “demand”. They are not per se an indication of the total demand for jeweler, investment products or industry.

This is because a good part of the withdrawals represent gold that is used purely for financing and other end-uses that are not equivalent to real consumption.

Wagner: Is financing with Gold a big deal in China?

Klapwijk: Therefore relying on SGE withdrawals to measure the size of and change in true demand is highly misleading. For example, withdrawals in 2013 came to 2,197t and in 2014 to 2,102t. This both overstates the true size of demand and, of course, completely understates the drop in jewelry and especially bar demand last year.

Yes, the difference is mainly the use of gold for financing. 

Harvey: How has that side of the market developed over the last few years? Is it still a growing area of business?

Klapwijk: The use of gold for financing… a kind of “gold carry trade”….has developed tremendously in recent years. Essentially borrowers in the shadow banking milieu are taking advantage of the availability of gold at comparatively very low rates of interest compared to straight forward RMB loans.

An indication of this is that at end 2013 the SGE reported gold loans by members totaled over 1,100 tonnes. My understanding is that number will have grown quite a bit in 2014.

There it is again, the amount of gold tied up in financing deals (CCFD’s) used as an argument to explain elevated SGE withdrawals. In my latest in-depth article on the Chinese gold market I expanded on why this can’t be the explanation as these deals only show up as SGE withdrawals if used for genuine gold business; jewelers leasing gold for production.

In a report the World Gold Council (WGC) released April 2014, China’s gold market: progress and prospects, it was stated:

… 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…

Right, so we’re talking about the same gold, 1,000 tonnes has grown into 1,100 tonnes, but now the source of this number (Precious Metals Insights, Phillip Klapwijk, February 17, 2015) says this is simply the amount leased at the SGE (not disclosing what is withdrawn or not). When I emailed the WGC in 2014 to ask what kind of “financial operations” the 1,000 tonnes actually were, they replied:

Gold leasing: Banks have built up this business to support China’s burgeoning gold industry. Miners, refiners and fabricators all have a requirement to borrow gold from time to time. For example, fabricators borrow gold to transform into jewelry, sell and then repay the bank with the proceeds. It is an effective way for the fabricator to use the bank’s balance sheet to fund its business. Banks have strict policies in place for who they can lend to, and these have been tightened over recent years, but during PMIs field research it identified that, in some instances, organizations other than genuine gold business had used this method to obtain gold, which it would then sell to obtain funding [in this case the gold wouldn’t be withdrawn from the SGE vaults]. It would then hedge its position. According to PMI, this can generate a lower cost of funding than borrowing directly from the bank. Our colleagues in China think this would be a very small part of total gold leasing; the majority of it would be used to meet the demands of genuine gold businesses.

Here the WGC admits leased gold that is withdrawn from the SGE vaults is used for genuine gold businesses and only a small part of total leases is used in shadow banking! I rest my case. 

Koos Jansen
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  • Guy Christopher

    It’s time to face facts. There are powerful forces in play, and have been for decades, to disparage gold ownership, to lie about gold, to misdirect information about gold, to conceal information about gold, all meant to protect the fact that gold is the only money governments trust and all meant to keep public interest in gold at a minimum. It’s all meant for governments to hold wealth in gold while encouraging citizens to hold debt in the form of fiat paper, all meant to protect fiat paper debt. There are many co-conspirators at work in this effort to disguise the true value of gold, including most of the planet’s governments; including many of the world’s “top financial publications” (insert any number of top financial rags here); including many who run bullion businesses; and including cleverly disguised government mouthpieces like the World Gold Council.

    • DameEdnasPossum

      Absolute truth. No doubt.

      You can include on your list of co-conspirators the numerous small-minded bullion trolls spewing their bitter and twisted nonsense across the various web sites such as this. Some do so under their own steam fir questionable readons, while others are undoubtedly on the payroll of the heavy-weights you’ve already mentioned. I expect also that the asshats working derivatives desks who profit from the naked short selling are some of the more sophisticated bullion trolls.

  • rowingboat

    “Yes, demand has been huge in China, but not according to the price of gold. Technically speaking it doesn’t matter how much gold is bought to qualify demand, if supply is outstripping demand the price will go in one direction only, down.”

    Two things here Koos: for every buyer there is a seller so supply always = demand. Second, you’re underestimating reservation demand/supply. When Jim Rickards was telling you they’d be a price explosion within 3-6 months he may have been right for a commodity with a low stock-to-flow ratio, but gold doesn’t.

    Remember that Jeff Christian interview you posted last year, the one where he said everyone was focusing too much on China. In it he said that Western investment demand was quite strong at the time… it was just that these investors were buying from other investors who were selling. In other words, the gold didn’t need to be
    imported like it had been in the bull market.

    Of course China has absorbed much of the selling pressure, which is great, but it only takes a small percentage of former buyers to bail and drive prices lower because of the large stock. Why the selling? Well consider this one example… commercial/industrial credit growth in America is back to boom time levels having replaced QE. How sustainable that is in the face of the oil price collapse remains to be seen, but it helps explain why many former investors have switched from gold into other asset classes.

  • philipat


    Regarding the “missing” 1000 tonnes in PRC. I would be interested to know precisely WHAT The WGC thinks ultimately happens to the “missing” Gold? It cannot be disputed (From SGE official data) that it leaves the SGE as physical Gold. The WGC suggest that it then gets used as collateral (Leveraged or un-leveraged) for various financial transactions.

    But my question is, what happens to it then? It seems to me that EITHER it must remain in the commercial “Financial” sytem as either collateral OR gets converted into investment bullion OR it gets re-cycled through the SGE as “Scrap”. The latter seems unlikely in view of all reasonable estimates of the total annual scrap data.

    But, either way, it does represent real DEMAND for physical Gold. Unless, of course, WGC only wishes to measure and report RETAIL consumption. If so, then they do not measure true DEMAND for physical Gold and another “Relaible” body should step in to measure real demand? After all, in economic terms, we discuss “Supply and DEMAND”, not “Supply and Retail consumption”?

    The WGC’s arguements get more esoteric as time goes by and I wonder if anyone with the ability to think critically still believes a word they say? But, presumably they don’t care, even in the face of their members whose interests they are supposed to represent, including in particular Gold producers.

  • Matthew

    To be fair the FT has written about it, on quite a few occasions – http://www.ft.com/cms/s/0/885b6272-92d4-11e3-9e43-00144feab7de.html#axzz3SYnSQQmh

    A major question for me is to what extent ownership changes and how tightly held it was in the first place. Obviously if I move gold from the UK to Switzerland but retain ownership it doesn’t have any market impact. And if i use gold as money and decide to pay for goods received from overseas in gold to someone else who uses gold as money it shouldn’t have much either. These are just illustrations.

    • KoosJansen

      Great, missed those. Thanks.

      All bullion imported in general trade is not allowed to leave, so everything that enters China can’t get out. I think that answers both of your “illustrations”.

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