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China Net Gold Import 1,212t Jan – Nov

Withdrawals from the Shanghai Gold Exchange (SGE) – currently the best indicator of Chinese wholesale demand – keep up a strong pace.

In week 48 (November 24 – 28) SGE withdrawals accounted for 54 tonnes, year to date 1,867 tonnes have been withdrawn.

Shanghai Gold Exchange withdrawals 2014 week 48, dips

Corrected by the trading volume of the SGE contracts that are available for foreign traders (to take delivery, withdrawal from the vaults and export from the Shanghai Free Trade Zone), the weekly withdrawals in the mainland were 46 tonnes at minimum in week 48; year to date the bottom limit is at 1,841 tonnes.

Putting 1,841 tonnes in our basic equation (import = SGE withdrawals – scrap – mine), we can estimate mainland China has net imported 1,212 tonnes of gold up until November 28. Seasonally December and January are the strongest months for Chinese demand; I wouldn’t be surprised if total Chinese net gold import reaches 1,350 tonnes in 2014.

If nothing changes in the way the SGE reports on aggregated withdrawals from vaults in the mainland and vaults in the Shanghai Free Trade Zone – where foreign traders can take delivery, withdrawal and export – 2014 will likely be the last year in which we can accurately grasp the size of Chinese wholesale demand and total net import by using SGE withdrawals as a proxy. At this stage it’s impossible to know how much of the contracts traded by foreigners are physically withdrawn from the vaults in the Shanghai Free Trade Zone and thus distort total withdrawal numbers as disclosed by the SGE. The next screen shot is from the latest weekly SGE report. In green the total withdrawals are highlighted.

Screen Shot 2014-12-07 at 4.33.05 PM
Blue (本周交割量) is weekly gold withdrawn from the vaults in Kg, green (累计交割量) is the total YTD.

Some more details

Bloomberg came out with a story on December 3, titled Shanghai Gold Trade Passes Record as China Seeks More Sway. There is some additional information I would like to share regarding this article. The writer notes:

The volume of all contracts on the Shanghai Gold Exchange, including those in the city’s free-trade zone, was 12,077 metric tons in the 10 months to October, compared with 11,614 tons during all of 2013, according to data on the bourse’s website.

Screen Shot 2014-12-07 at 10.05.18 PM

  • purple = unit, Kg
  • red = total gold volume traded in 2013, counted bilaterally

1) The SGE volumes disclosed by Bloomberg are double counted. This is because volume, open interest, turnover and delivery – not withdrawals – are all published bilaterally by the SGE. Later on in the article, the writer compares these SGE volumes to the data from the London Bullion Market, that publishes numbers unilaterally. From Koos Jansen, August 2, 2014:

The numbers disclosed of the SHFE and SGE are double-counted. Volume and Open Interest on both exchanges are published bilaterally, in contrast to the COMEX that publishes these numbers unilaterally. Meaning: if the volume disclosed by the COMEX is 1,000, than 1,000 contracts changed hands – 1,000 contracts were sold and 1,000 were bought. If the volume disclosed by the SHFE is 1,000, than 500 contracts were sold and 500 were bought.

To compare SGE & SHFE numbers to COMEX one has to divide the Chinese numbers by 2, only then are all the numbers single-sided. 

Perhaps this is valuable information for you when comparing Chinese and Western precious metals markets.

2) The writer notes the total traded volume includes the contracts traded in the Shanghai Free Trade Zone, hinting at the fact those contracts might have caused elevated trading volumes on the SGE. However, the volume traded in the Shanghai Free Trade Zone has been very low year to date. The contracts traded in the mainland are the ones that caused the overall volume to surge.

SGE weekly gold volumes

For a thorough analysis on the SGE and its subsidiary, the Shanghai International Gold Exchange (SGEI), click here.  

What caused the most recent spike (week 47 and week 48) was trading volume of the Au(T+N1) and Au(T+N2) contracts. These contracts hadn’t been traded since October 2013. The volumes of Au(T+N1) and Au(T+N2) are not disclosed on the English SGE website, just like SGE withdrawal and OTC data.

Screen Shot 2014-12-07 at 9.41.20 PM

  • yellow = date (week 48)
  • purple = unit, Kg
  • green = last week
  • blue = this week
  • red = Au(T+N1) and Au(T+N2) volume, counted bilaterally
  • brown = OTC

3) So what? SGE total trading volume is still very little compared to the Shanghai Futures Exchange (SHFE), let alone the COMEX or the London Bullion Market. However, SGE withdrawal data is extremely significant, but these numbers are almost never disclosed by mainstream media outlets, nor by the World Gold Council, Thomson Reuters GFMS or CPM Group. Bloomberg and Reuters only published SGE withdrawals once (correct me if I’m wrong).

COMEX vs SGE vs SHFE Gold Volume

4) From Bloomberg:

Average daily volumes for the SGE’s 99.99 percent purity contract increased to about 20,427 kilograms (656,743 ounces) in October from 11,704 kilograms a year earlier, according to exchange data. By comparison, an average 17.4 million ounces changed hands daily between members of the London Bullion Market Association, according to the group’s data.

The next screen shot shows total trading volume of all SGE contracts in October 2014, we can see the 20,427 Kg number disclosed bilaterally.

Screen Shot 2014-12-08 at 11.48.54 AM

On the website of the LBMA the clearing amount is disclosed unilaterally.

The clearing statistics represent the net volume of loco London gold and silver transfers settled between clearing members of the LBMA. The data is collected and published on a monthly basis and is based on daily averages.

Screen Shot 2014-12-07 at 11.03.18 PM

Note, 17.4 million ounces (541 tonnes) are cleared daily in the London Bullion Market. But, clearing and volume are two different things! Because the London Bullion Market is an OTC market we know very little of what is taking place in this market, however, the latest estimates of 2011 show the daily volume traded in London is 5,000 tonnes – counted unilaterally.

Screen Shot 2014-12-07 at 11.16.16 PM
173,713,000 ounces are about 5,000 tonnes, traded daily.

In short, Bloomberg compared the monthly volume of one SGE contract, 20 tonnes, which is actually 10 tonnes if counted unilaterally, to a daily amount of 541 tonnes, which is actually more likely to be 5,000 tonnes if counted unilaterally.

The Mainstream Media Versus Gold

One of these weird things happened on Monday November 3, 2014, in the gold space. I published an article in which I reported gold demand in China, measured by withdrawals from the vaults of the Shanghai Gold Exchange (SGE), was exceptionally strong in recent weeks. In week 43 SGE withdrawals accounted for 60 metric tonnes of gold (SGE withdrawals have proven to be the best indicator for Chinese wholesale demand, confirmed by SGE officials). Additionally, I hinted at the fact the Chinese continue to buy more gold whenever the price drops, and the price has been dropping for the past two weeks.

SGE withdrawals 2014 week 43, dips
Exhibit 1. Chinese gold demand rises if the price falls.

The same day Reuters and the Wall Street Journal reported Chinese gold demand was weakening, regardless of the low prices. Let’s go through their analysis. From the WSJ:

Gold prices in Shanghai normally carry a premium to global prices, but that reversed to a rare discount Monday. The premium, which is attributable to capital controls, was $2 to $3 an ounce to London prices about a week ago.

…“You would not have expected Shanghai gold to be at a discount,” said a leading Hong Kong-based executive with an international bank, who didn’t want to be identified. “The physical buying in gold has dried up.

From Reuters:

Unusually, prices on the Shanghai Gold Exchange, the world’s biggest platform for physical trade, are at a discount of around $1 an ounce to the global benchmark, slipping from premiums of $1-$2 an ounce last week.

Both these mainstream media are stating SGE gold was trading at a rare discount on November 3, 2014. First of all, an SGE discount isn’t rare at all, it happens all the time. This is incorrect information from the mainstream media.

Shanghai Gold Exchange SGE gold premium 2008 2014
Exhibit 2. SGE premiums are usually the inverse from the price of gold.

Second, SGE gold wasn’t trading at a discount on November 3, 2014.

I have two data feeds for charting SGE gold premiums. One is from the SGE itself, published in their weekly Chinese reports, the other one I use is from Sharelynx.com, which has setup an automated Excel sheet for me that daily updates many quotes I track. The next chart is based on the numbers from Sharelynx, updated until November 4, 2014:

Shanghai Gold Exchange SGE gold premium 2014
Exhibit 3. According to my data there was no discount on the SGE November 3.

As you can see on November 3 the SGE physical contract Au9999 was trading at a premium to London spot (I also double checked the premium manually). The discount reported by the mainstream media is incorrect information.

In the next chart we can see SGE premiums are correlated to SGE withdrawals. Which makes sense as the Chinese buy more gold when the price drops (exhibit 1) and SGE premiums go up when the gold price drops (exhibit 2).

Shanghai Gold Exchange withdrawals 2014
Exhibit 4. Correlation between SGE withdrawals and SGE premiums.

More from Reuters November 3, 2014:

Since all physical gold trade in China goes through the exchange [SGE], it is seen as a reliable barometer of Chinese demand.

SGE officials, and the China Gold Association, have clearly confirmed withdrawals are the best indicator for Chinese wholesale gold demand. From Scotiabank, September 29, 2014:

First, the withdrawal data reflects the actual gold wholesales in China. In 2013, the total gold withdrawal from the SGE vaults amounted to 2,196.96 tonnes. The President of the SGE Transaction Department said: “This 2,200 tonnes of gold, after leaving our vaults, they entered thousands of Chinese households in the form of jewelry and investment purchases.”

Though Reuters acknowledges all physical gold trade in China goes through the SGE, they refuse to publish the numbers on how much is going through (SGE withdrawals). I think it’s weird mainstream media never report on SGE withdrawals, or the significance of these numbers. If Reuters would have reported on SGE withdrawals on November 3, it would be impossible to commingle with a story of weak Chinese gold demand.

When I first found out about SGE withdrawals in May 2013 I’ve written emails to many mainstream media (Bloomberg, the Financial Times, the Guardian, Reuters, etc.). Hereafter, both Reuters and Bloomberg reported about SGE withdrawals once (that I know of).  Bloomberg, 15 July 2013:

The Shanghai Gold Exchange supplied 1,098 metric tons in the six months through June, compared with 1,139 tons for the whole of last year, according to data from the bourse today. 

Reuters on 18 October 2013:

Physical deliveries from the Shanghai Gold Exchange totaled 1,709.056 tonnes as of Friday, data on the exchange’s website showed. 

After these publications Bloomberg and Reuters stopped reporting on SGE withdrawals. (please comments below if I’ve missed any mainstream media publications on SGE withdrawals).

Reuters reporting on weak Chinese gold demand while SGE withdrawals have been sky high in recent weeks, reminded me of an older article from Reuters. From September 12, 2014:

India’s love affair with gold may be over, as prices slide

Kiran Laxman Salunkhe used to buy jewellery during religious festivals, but sliding gold prices have led the young farmer to break with his family’s traditional investment.

This year Salunkhe has deposited his hard-earned savings at the bank for the first time in a decade…

…”Nowadays it is risky to keep jewellery. Burglaries are rising,” he said. “With a fixed deposit there is no risk.”

That’s right, Reuters’ headline literally stated “India’s love affair with gold may be over”, because Kiran Laxman Salunkhe, a young farmer, stopped buying gold. India’s population is over 1.2 billion people and I’m not so sure if they all stopped buying gold in September to open up a bank account.

India Gold Import September 2014

Recently India’s custom department came out with the gold import numbers from September (when Kiran Laxman Salunkhe stopped buying gold). India officially imported, excluding smuggling, 94 tonnes of gold, which was the strongest month since June 2013. The indians imported this much gold despite the 10 % import duty.

Of course India’s love for gold is part of their culture and is engraved into the DNA of the Indian population. Reuters’ headline and article in itself were ridiculous. The fact that India actually imported more gold in September than they had over a year makes the article completely incorrect.  

Can it be Chinese gold demand is currently very strong, despite the WSJ quotes a leading Hong Kong-based executive with an international bank, who didn’t want to be identified, stating: The physical buying in gold has dried up”? Yes it can.


I always wonder why the mainstream media notes gold premiums denominated in dollars, according to my logic it’s better to note this in percentages. Imagine, for example, the price of gold falls to $200 dollar an ounce in three months, or rises to $4,000 an ounce. What then does a $2 dollar premium in Shanghai tells you when reading back the WSJ article of November 3? Percentages would work much better IMVHO. 

It probably has got something to do with the USD hegemony; the more the USD is used as the ultimate measure of value, the longer everyone will believe it is. In my world all goods, services, assets and currencies constantly fluctuate in value relative to each other. Over the long term, though, gold has proven to have to most stable exchange rate against goods. 

The Great Chinese Silver Market Debate

Bloomberg came out on October 28 with an article about Chinese silver hitting a premium of 17 % this month.

Have a look at Bloomberg’s chart on Chinese silver premiums.

Regular readers know I’m one of the few that reports on the pure price of silver in China being cheaper than in London, because all Chinese commodity exchanges quote silver including 17 % VAT. If we subtract 17 % from the quoted prices, the pure price of silver in China is currently trading at a 4 % discount to London, not at a premium like Bloomberg states. As we can see in my chart below the premium is negative.

Shanghai Gold Exchange silver premium

By the way, silver is still trading in backwardation on the Shanghai Futures Exchange (SHFE), since August 6. This has caused the discount to decline to 4 %.

SHFE silver backwardation October 29, 2014

Obviously Bloomberg and I have a disagreement on the Chinese silver market – comparable to my disagreement with the World Gold Council on the Chinese gold market. Though, the Silver Institute agrees with me on the Chinese silver market. In their report The Chinese Silver Market, published in 2012, they stated: 

As mentioned earlier in this report, since the liberalization of the Chinese silver market, all
silver transactions are subject to 17% VAT in China. In other words, local smelters need to pay 17% tax on silver contained in imported concentrates (typically based on international prices). However, as domestic prices (excluding tax) have been trading consistently lower than the international price, it is not surprising that local smelters tend to prefer low silver content in imported concentrates. It is worth stressing here that silver prices quoted on commodity exchanges in China have already included a 17% VAT.

What is remarkable is that Bloomberg reports on a very high silver premium in China mainland, yet, they link this to a scheme in which traders export ingots labelled as acoustic wire to profit from a tax rebate. Quote:

Silver in China has been the most expensive relative to London in about three years as exporters stepped up overseas shipments to qualify for a tax rebate, draining inventories of the metal.

…exporters boosting shipments by classifying ingot as acoustic wire, said Liu Xu, a precious-metals analyst at Capital Futures Co. in Beijing.

…“It’s an open secret in the local silver industry that a lot of exports have been thinly-veiled attempts to profit from tax rebates,” Liu said. “There isn’t that much demand overseas for acoustic wire for stereos. Yet a lot of shipments this year have been labeled as wire.”

What’s wrong with this story? Why would any foreigner import silver ingots from China when it’s 14 % more expensive than in London? Doesn’t make sense right?

This is my view: it could very well be silver ingots are exported as acoustic wire from China because the pure price of silver in China is cheaper than in London (not more expensive as Bloomberg states). However, to arbitrage the price difference, foreign importers would need to be able to pay the pure price of Chinese silver, excluding VAT.

It can go like this. The exporter buys silver ingots, for example, on the SHFE and is required to pay the pure price plus 17 % VAT. When he would export this as ingots there is no VAT rebate for him from the government, this law was passed in 2008, so he would have to charge his trading partner the price of silver plus 17 % VAT to balance the VAT he paid at the SHFE. If the foreign importer is charged with VAT from another country he can’t get restitution, he would pay for the pure price of silver imported plus 17 %.

The Chinese government implemented the aforementioned law to withhold silver ingots/bullion from leaving the country. Of course silver is exported in many other forms, like in solar panels or acoustic wire. The next quote is from the law passed in 2008 that ended VAT rebates on silver ingot export.

Translated by my friend LK, gold investor from Hong Kong:

Department of Treasury, State Dept of Taxation Notice on Adjustment on Export Rebates of Textiles and other Commodities.

Document Number: Taxation[2008]111.

Issuing Unit: Department of Treasury, State Dept of Taxation

Issuing date: 2008-07-30

To each province, Self-Administrative Region, Municipal, Planning cities (bureaus), State Administration of Taxation, Finance Bureau of Xinjiang Production and Construction Corps:

At the approval of the State Department, export rebates for certain commodity products are adjusted as follows:

1. Some textile, garment export rebate is raised from 11% to 13%; Export rebate for certain bamboo products is raised to 11%. For exact details please see Appendix 1. 

Export rebates for these products are cancelled: Pine kernels, certain agricultural chemicals, certain organic arsine chemicals, taxol and its products, rosin, silver, No. 0 zinc, certain paint products, certain battery products, carbon anode. For exact information please see Appendix 2.

Implementation Timing

The aforementioned export rebate changes take place on Aug 1, 2008. Applicability is determined by the date specified on the form “Export of Goods Customs Declaration (for Export Rebates)”.

Appendix 2. List of goods no longer qualified for export rebates:

Screen Shot 2014-10-29 at 7.47.31 PM

If the exporter ships the ingots as acoustic wire he apparently receives a 17 % VAT rebate (the VAT of acoustic wire is paid back by the Chinese State Administration of Taxation to the exporter). In an article Bloomberg published October 30 they stated:

Outbound shipments of silver this year have at times been classified as acoustic wire as traders sought a 17 percent export rebate used to encourage domestic high-end manufacturing, Liu Xu, an analyst at Capital Futures Co., said Oct. 29.

There you have it, silver ingots don’t get a rebate when exported, acoustic wire does get a rebate. This is how the exporter can sell silver abroad for China’s cheaper pure price. So, the exporter found a way to arbitrage the price difference between Shanghai and London. If the difference is 4 %, both the exporter and the importer can have a piece of the pie. This scheme could perfectly cause high demand for silver in Shanghai and the concurrent backwardation on the SHFE. Bloomberg’s analysis, stating silver is trading at a premium in China, I think is incorrect – wouldn’t be the first time.

Exporting silver ingots as acoustic wire is another example of fraud and circumventing protectionism. Let’s hope governments will realize some day that capitalism can only thrive in free markets.

From the SHFE Rulebook:

Article 44

The contract price of a futures contract means the price including the value added tax, or the VAT, for the contract’s underlying standard grade of commodity delivered at the benchmark delivery warehouse.


Mainstream Media Reports On SGE Physical Delivery

Although I can’t track all media on Shanghai Gold Exchange coverage – maybe they report more on it than I know – but as far as I know the big guys wrote about SGE physical delivery twice now. 

Bloomberg, 15 July 2013:

The Shanghai Gold Exchange supplied 1,098 metric tons in the six months through June, compared with 1,139 tons for the whole of last year, according to data from the bourse today. 

Reuters on 18 October 2013:

Physical deliveries from the Shanghai Gold Exchange totaled 1,709.056 tonnes as of Friday, data on the exchange’s website showed. 

What is important to understand is that the majority of these deliveries are supplied by imports from the west, and they give us very detailed information of Chinese gold demand. The gold exodus from west to east is accompanied by the power shift from the US to China, and underlines the end of the US dollar hegemony. 

Slowly this information is reaching the masses. Slowly, but surely, it will have an enormous impact on power relations between nations. 

In Gold We Trust