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Song Xin: Increase Gold Reserves And Join SDR.

The Chairman of the China Gold Association and General Manager and Party Committee Secretary of China National Gold Group Corporation, the latter being China’s largest gold mining enterprise, is Song Xin and happens to be one of my favorite commentators in China. This gentleman made waves in July 2014 when he candidly wrote on Sina Finance that the People’ Bank Of China (PBOC) should slowly raise its official gold reserves to 8,500 tonnes, more than what the US Treasury claims to hold. The article was published in Chinese but translated by BullionStar to share the views by Song Xin with the English speaking world:

For China, gold’s strategic mission lies in the support of renminbi internationalization, and so let China become a world economic power and make sure that the China Dream is realized. … gold forms the very material basis for modern fiat currencies. 

Gold is the world’s only monetary asset that has no counter party risk…

That is why, in order for gold to fulfill its destined mission, we must raise our gold holdings a great deal, and do so with a solid plan. Step one should take us to the 4,000 tonnes mark, more than Germany and become number two in the world, next, we should increase step by step towards 8,500 tonnes, more than the US.

In the next translation further below you will read more on how Song Xin views gold’s role in China’s financial strategy. The bullet points from the article:

  • China continuously accumulates gold reserves to support and accelerate renminbi internationalization.
  • Renminbi confidence and gold are closely related. Gold reserves are the cornerstone for renminbi internationalization.
  • In modern times gold plays an important role in managing economic risk and maintaining China’s financial safety.
  • China is continuously increasing its official gold reserves in conjunction to joining the SDR.
  • The ratio of China’s official gold reserves to its GDP should be more in line with the US and other developed countries. At this moment China’s official gold reserves are still relatively low.
  • The Silk Road economic project, also called “One Belt and One Road” (OBOR), has huge development opportunities for the Chinese gold industry. Song Xin mentions that the in ground gold reserves of countries along OBOR reach 21,000 tonnes. In 2015, witnessed by Chairman Xi Jinping and President Putin, China National Gold Group Corporation and Russia’s largest gold mine Polyus have signed a strategic cooperative agreement and they are promoting detailed relevant cooperative issues at present.

What he didn’t mention is that China is striving to boost gold trade along OBOR to be settled in renminbi through the Shanghai International Gold Exchange.

Is The SDR A Means Or And End For China? 

In the mainstream media we often read China wants the SDR to replace the US dollar as the world reserve currency, based on statements from PBOC Governor Zhou Xiaochuan – among others:

Special consideration should be given to giving the SDR a greater role. The SDR has the features and potential to act as a super-sovereign reserve currency.

Since 2009 China has vigorously pressured the IMF for renminbi inclusion into the SDR. Finally, in 2015 the IMF decided the renminbi would be added to its currency basket in October 2016.

Zhou and other prominent economists at the PBOC are clearly pushing the SDR, but what’s China’s exact strategy?

In advance of the official inclusion of the renminbi into the SDR, which will take place on October 1, 2016, developments regarding the International Monetary Fund’s synthetic reserve currency are unfolding rapidly.

Author of the Big Reset, Willem Middelkoop, reported this August a “Substitution Fund” is being discussed in the higher echelons of the monetary elites, to facilitate dollar exchange for SDRs outside the market, and thus creating an escape from dollar reserves without putting downward pressure on the dollar.

Also in August, The PBOC allowed a division of the World Bank (the IBRD) to issue bonds denominated in SDRs in the Chinese market. The bonds worth $2.79 billion dollars can be created “soon” – presumably within a month. In addition, the Chinese government-linked China Development Bank will issue SDR notes worth somewhere in between $300 million to $800 million dollars. Both issues are “SDR-denominated financial market instruments” called M-SDRs by the IMF. Though experts think the M-SDRs will encounter many practical challenges when implemented and demand will be tepid, nevertheless the intention by the PBOC to launch these instruments is clear.

On the surface we can observe China has a vast interest in the SDR, but is the SDR a means or an end for China? What if China is simply using the SDR as a vehicle to achieve other objectives? For example:

  1. Dethroning the dollar. The SDR can be an excellent tool to unwind the dollar hegemony. In addition the Substitution Fund could help an orderly exit from China’s lob-sided dollar reserves.
  2. Internationalize the renminbi. Inclusion of the renminbi into the SDR boosts global renminbi acceptance as a reserve currency.
  3. Reduce capital outflows from China. With respect to M-SDRs, David Marsh of financial think tank the Official Monetary and Financial Institutions Forum (OMFIF) wrote:

Beijing’s SDR capital market initiative will allow domestic Chinese investors to subscribe to domestic bond issues with a significant foreign currency component, which will help dampen capital outflows… 

I think for China the SDR is just a means to an end. The end being to internationalize the renminbi, which of course is connected to the dollars retreat. And as Song Xin clearly states, “gold forms the very material basis for modern fiat currencies” and, “gold reserves should become the cornerstone … for renminbi internationalization”.

In my humble opinion the financial crisis has shown (once again) the inherent flaws of all fiat currencies. A bundle of some of these currencies will not solve the problems ahead of us; at best provide tools or a next level printing press. I still prefer gold as a store of value.

I find it interesting that Song Xin mentions the importance of the ratio between China’s official gold reserves and GDP. This concept was also brought forward by Jim Rickards. If the PBOC would have 5,000 tonnes of official gold reserves their “gold to GDP ratio” would be roughly on par with to the US, Europe and Russia.  One of the theories about our current international monetary system – that was detached from gold in 1971 – is that it can shift to a new gold anchored system when the power blocks have equalized the chips (Jim Rickards). In other words, if the US, Europe, Russia and China all have a roughly equal ratio of official gold reserves to their GDP, the international monetary system could make a transition towards gold.

Global gold vs GDP

According to my estimates the PBOC has roughly 4,000 tonnes in official gold reserves, in contrast to what is publicly disclosed at 1,800 tonnes. Perhaps the PBOC is “nearly there”.

Song Xin who was also a speaker at the “Renminbi Internationalization and China’s Gold Strategy Seminar” in Beijing on 18 September 2015.

Original source of the article below is the China Gold Association website. [Brackets added by Koos Jansen]

Song Xin, Chairman of the China Gold Association, General Manager and Party Committee Secretary of the China National Gold Group Corporation: Stick to the gold mission and boost innovative development

March 14, 2016

As the sole central enterprise in the gold industry, China National Gold Group Corporation is a firm defender of renminbi internationalization, pioneering demonstrator of the country’s “One Belt and One Road”, and faithful guardian of a happy life for people. It’s the direction that we should strive for.

On March 10 during the two assemblies, Song Xin, Chairman of the China Gold Association, General Manager and Party Committee Secretary of the China National Gold Group Corporation, was the guest in Xinhuanet’s 2016 two assemblies special Interview. In the program Dialogue with New State-owned Enterprises and Cheer up in the “13th Five-Year Plan”, he proposed the conclusions above. Besides, in the in-depth dialogue, Song Xin systematically illustrated topics including the functions of renminbi internationalization, effectively enhancing gold supply, realizing improved quality and efficiency of enterprises, practicing the central party’s “Five Development Theories”, and fulfilling the responsibilities of central enterprises.

About Gold’s Functions: Increase Gold Reserves And Accelerate Renminbi Internationalization. A Close Relationship between Increasing Gold Reserves And Joining The SDR

When the credit lines of paper currency declines and there are enough gold reserves, people can be less worried about the existing credit system and enhance their confidence in the currency.

Last year, China joined the IMF (International Monetary Fund) Special Drawing Rights (SDR), signifying the renminbi’s march towards internationalization.

Song Xin pointed out that the renminbi is closely related to gold. Gold is priced in US dollars throughout the world and in renminbi in China. There is a special relation between the renminbi and gold. We have continuously increased gold reserves since China strove to join the SDR basket of currencies. By the end of February this year, our gold reserves have increased to 1788.45 tonnes. In other words, China has continuously increased its official gold reserves and publicized the amount to the world, keeping a close relation with renminbi internationalization and joining the SDR.

Song Xin 2016:07:26

Further increase gold reserves to adapt to economic strength

China’s existing gold reserves are only about 1/5 of America’s. With the acceleration of renminbi internationalization, the renminbi should further increase its gold reserves in order to reach a level matching the national economic aggregate [GDP], especially if the renminbi wants to become a global currency.

Song Xin mentioned that China’s gold reserves once maintained around 1,054 tons. In the second half of last year, it started to increase these reserves substantially. Now, it has been increased by 70%. The increase range is big, but small compared to that of developed countries. At present, our economic aggregate [GDP] reaches second place in the world, but our gold reserves only reach the sixth place in the world. If the IMF’s reserves are excluded, China’s reserves rank in fifth place according to national rankings.

Possessing sufficient gold can strengthen confidence in a currency

Song Xin said, “There is a remarkable distance between China’s gold reserves and America’s gold reserves. America’s gold reserves are 8,133 tons and it even reached over 20,000 tons before. In those days, America controlled most of the gold in the world, which laid an important foundation for the US dollars to become a global currency.”

Before the Bretton Woods system was disintegrated in the 1970s, gold was directly connected with the US dollar. After the Bretton Woods system was corrupted, gold was disconnected from the US dollar, but America still kept sufficient gold reserves.

Song Xin believes that it has a relation with the global governing system. When the global economic aggregate was not so big, the gold standard had a certain advantage. With the expansion of the economic aggregate, the Bretton Woods system was disintegrated, and gold was disconnected from the US dollar. America announced that gold was unimportant then under this circumstance. However, in fact, when a financial crisis happens in America, its gold reserves don’t reduce at all. Americans firmed up people’s confidence in the US dollar by sufficient gold reserves.

Talk about supply reform: increase the effective supply of gold to boost quality and efficiency of enterprises rather than excess capacity, the gold industry needs to increase supply

In 2015, our domestic gold mine output reached about 450 tons, ranking the top in the world for nine consecutive years. Meanwhile, gold [retail] consumption reached almost 986 tons, surpassing India for three consecutive years and becoming the largest gold consumption country in the world.

Song Xin mentioned that our gold production can’t satisfy consumption demand and it doesn’t include the central bank’s reserves. Therefore, for the gold industry, increasing gold production and rapidly supplementing the gap above are the important missions for the gold industry.

Regarding how to increase the effective supply of gold, Song Xin believes that enterprises in the gold industry should offer more suitable marketing paths, especially customers’ favorite gold jewelries and gold investments with cultural connotation and innovation.

Maintain national financial safety and fulfill political responsibility 

“The political responsibility of the China National Gold Group Corporation is to make enterprises strong, excellent and big. Besides that, it is also to allow staff to enjoy the achievement of enterprise development. More importantly, it is to increase the effective supply of gold, to satisfy the demands of people and country for gold products, and to maintain the healthy and harmonious development of the industry”, said Song Xin.

Song Xin introduced that gold played a very important role in different historical periods. In the revolutionary war period, the underground party delivered abundant gold to Yan’an from the Jiaodong base area in order to get medicine and materials, playing a positive role for the Communist Party to gain victory. In the beginning of reform and opening up, the country’s foreign exchange was in a shortage and our country vigorously increased gold productivity, once amounting to 70% of the whole country’s foreign exchange reserve which is mainly for gold swap transactions and purchasing devices, etc. and guaranteeing foreign exchange demand of economic development. In the new era, gold has played an important role in resisting economic risk, maintaining the country’s financial safety and assisting with renminbi internationalization.

Song Xin thinks that the China National Gold Group Corporation shoulders the important mission of increasing gold reserves and production and adding trust for renminbi internationalization for the country. He said, “Gold reserves should become the cornerstone or ballasting stone for renminbi internationalization, which can improve the gold content of renminbi. In these aspects, the China National Gold Group Corporation is obligated to fulfill its own political duty.”

Chinese historic gold mining 1949 - 2015

Talk about “Five Major Development Concepts”: Explore Profound Meaning Based on Practical Conditions for Enterprise.

Make achievement in the “One Belt and One Road”

With the implementation of “One Belt and One Road”, the China National Gold Group Corporation can accomplish a lot in “going out” and “going out” is an important constituent of our reform and opening up in the new era. “One Belt and One Road” has brought huge development opportunity for Chinese gold industry and enterprises. Song Xin mentioned that the gold [in ground] resources of countries along the “One Belt and One Road” reached 21,000 tons, taking up 41.5% in the world. The gold production of countries along the line reached 1,116 tons, occupying 1/3 in the world. In addition, 6 gold mines are located here among top 20 gold mines in the world.

“The consumption amount of gold jewelry in the area accounts for 82.4% of the global consumption amount. Physical gold item demand including gold bars takes up 77% of the global demand. Gold resource development potential and gold market consumption potential in the area are quite huge, bringing important strategic opportunities for Chinese gold enterprises”, he said.

Song Xin introduced that the China National Gold Group Corporation is constructing mines in Kyrgyzstan and Congo. Last year, witnessed by Chairman Xi Jinping and President Putin, China National Gold Group Corporation and the largest Russian gold enterprise have signed a strategic cooperative agreement and they are promoting detailed relevant cooperative issues at present. Meanwhile, they are preparing to export devices to countries along the “One Belt and One Road” including Russia and Kazakhstan. In the practice of open concept, China National Gold Group Corporation is comprehensive and systematical.

World Gold Council Rectifies 2013 Chinese Gold Demand

The WGC has revised its estimate of China’s 2013 consumer demand to 1,275 tonnes, up from their initial estimate of 1,066 tonnes.

My research on the Shanghai Gold Exchange and the structure of the Chinese gold market was, inter alia, confirmed in September this year by the work of Na Liu (CNC Asset Management Ltd.). As myself Na concluded Chinese wholesale gold demand equals withdrawals from the Shanghai Gold Exchange and this is far greater than demand reported by the World Gold Council.

The World Gold Council (WGC) has never openly responded to my publications. However, Na met with the WGC Market Intelligence team, the discussion that ensued led the WGC to rectify their 2013 Chinese demand numbers. From CNC Asset Management, November 27 2014:

We are pleased to report that we just had an in-depth discussion with the Market Intelligence team of the World Gold Council (WGC). Our discussion focuses on how to explain the significant gap between China’s consumer demand of gold, as defined and reported by the WGC to be just over 1,000 tonnes in 2013, and China’s wholesale demand, as defined and reported by us to be about 2,200 tonnes based on the Shanghai Gold Exchange (SGE) vault withdrawals during 2013. The following are our takeaways from the discussion:

First, the WGC has revised up its estimate of China’s 2013 consumer demand to 1,275 tonnes, up from their initial estimate of 1,066 tonnes.

Click here to read the full report.

The rest of the report from CNC Asset Management sums up, again, all the reasons given by the WGC that should explain the remaining difference between SGE withdrawals and WGC demand numbers. The WGC has published two reports on the Chinese gold market since April that both failed to clarify the difference. In fact, the reports led to even more speculation about why the WGC was withholding essential data about the Chinese gold market. In September I wrote:

…as time goes by and knowledge about the Chinese gold market is slowly spreading through the international gold space, the more pressure is building on WGC demand numbers regarding China.

According to the China Gold Association (CGA) demand in 2013 was 2,199 tonnes, which leaves a difference of 924 tonnes with the revised numbers from the WGC. The aggregated difference from 2007 until 2013 is 2,172 tonnes. The next chart is scanned from the China Gold Yearbook 2014, which is only published in hard copies written in Mandarin. It shows Chinese gold demand reported by the CGA.

Chinese gold demand by the China Gold Association 2004 - 2013
The blue bars represent demand in tonnes, the red line the yearly increase in percentages.

Chinese gold demand 2007 2013

Additionally, 2014 will at least add 900 tonnes to the aggregated difference. At year end the total aggregated difference will be well over 3,100 tonnes. 

In a forthcoming post I will once again share where I disagree with all the excuses the WGC presents in the CNC Asset Management report. A few more details I have to work out about the gold lease market, after which I can demonstrate the WGC is simply unwilling to accurately report on Chinese gold demand.

From the latest CNC Asset Management report:

…Both the WGC and we at CNC believe that more work needs to be done to understand China’s actual gold demand.

This is very hard to swallow, the WGC has been involved in the Chinese gold market since 1999 and they have two offices in China with numerous Chinese employees, yet they state “more work needs to be done to understand China’s actual gold demand”. 

Additionally, I will share my disagreement with Jeffrey Christian from CPM Group on SGE withdrawals. Mr Christian has recently send an email to Mineweb.com, stating Chinese demand is lower than SGE withdrawals because scrap is higher than most are capable of understanding (including the CGA apparently). A quote from Mr Christian’s email:

…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.

His reasoning reminded me of what he wrote on my blog earlier this year:

Over the years the ‘over-age’ of SGE withdrawals to estimated demand has ranged from 14% to 41%. People may say that one equals the other, but they simply do not.

…I could bore you witless with examples of similarly cavalier use of language and statements from around the world’s precious metals market. I won’t. Many things simply are not as they seem to be, nor as they are said to be.

Meanwhile Chinese wholesale gold demand, measured by withdrawals from the Shanghai Gold Exchange (SGE), remains strong. In week 47 withdrawals accounted for 52 tonnes, year to date the counter has reached 1,813 tonnes.

Screen Shot 2014-12-04 at 11.53.13 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.

Corrected by trading volume on the Shanghai International Gold Exchange (SGEI), Chinese wholesale demand in week 47 was in between 49 and 52 tonnes, year to date in between 1,795 tonnes and 1,813 tonnes. For the next chart I have used the most conservative estimate.

Shanghai Gold Exchange withdrawals 2014 week 47, dips

China Gold Association: 2013 Gold Demand 2199t

We now have official confirmation from the China Gold Association (CGA) that Chinese wholesale gold demand in 2013 reached 2,200 tonnes, in contrast to what all Western consultancy firms and news outlets have been reporting. On September 11 the China Gold Yearbook 2014 (that covers the financial year 2013) was released by the CGA on the China Gold Congress in Beijing.

As you can read below in the translation from a Chinese press release about the China Gold Yearbook 2014, the CGA states Chinese wholesale gold demand in 2013 was 2,199 tonnes; bullion import 1507 tonnes, doré import from overseas mines 17 tonnes and domestically mined gold accounted for 428 tonnes. (scrap supply must have been 247 tonnes)

Why the Western media don’t report on these numbers is “a mystery”. Remember the 1,500 tonnes net imported in 2013 by China exclude PBOC purchases!

China Gold Congress in Beijing 2014
Impression China Gold Congress Beijing 2014.

This was the setup of the China Gold Congress Beijing 2014.

  • Hosted by: the China Gold Association (CGA) and the World Gold Council (WGC).
  • Supporters: the People’s Bank Of China (PBOC), and more.
  • Strategy Partners: the Shanghai Gold Exchange (SGE), the Shanghai Futures Exchange (SHFE), Industrial and Commercial Bank of China (ICBC).
  • Media partners: Reuters, and more.
  • Cooperate Partners: CPM Group, and more.

At 16:00 GMT+8, on September 11, 2014, the China Gold Yearbook 2014 was presented on stage by the CGA.

CGA

Too bad the Western media didn’t catch the content of this report, luckily the Chinese press did notice it.

The information the CGA publishes in English about Chinese non-government gold demand, 1,176 tonnes in 2013, severely understates true non-government gold demand, 2,199 tonnes in 2013, which is only disclosed by the CGA in the China Gold Yearbook 2014 exclusively published in Mandarin hard copies.

Cover China Gold Yearbook 2014 (yes I own a copy)
Cover China Gold Yearbook 2014 (yes, I own a hard copy)

This data is not a secret, yet the Chinese have been trying to hide it as much as possible and it looks like either they’re being helped by Western institutions, or these institutions are ignorant.

All Western institutions and press that attended the China Gold Congress have Chinese employees who can perfectly read the China Gold Yearbook 2014. Like I said, why these institutions don’t publish true non-government Chinese gold demand is “a mystery”. I can tell you this though, 99.99 % of the global financial industry uses the Chinese demand numbers from the WGC, which state 2013 demand was 1066 tonnes. From an investment point of view this can give you an advantage.

As always you have to make up your own mind, in this case on Chinese gold demand. Who do you believe? The WGC? Or the China Gold Yearbook 2014 that states total demand was 2,199 tonnes – data that has been confirmed numerous times by the SGE (as I’ve written here and here)?

Every institution or analyst around the world might use a different metric to measure Chinese gold demand, for me the most import facts that stand out are: China net imported more than 1500 tonnes of gold in 2013, mostly 1 Kg bars which we can trace back to Switzerland and the UK, domestic mining production accounted for 428 tonnes, which didn’t leave the mainland as bullion export is prohibited, and all this gold met non-government demand. Additionally, it’s very likely the PBOC imported another few hundred tonnes on top of the 1500 tonnes. Consider this, from The Death Of Money by James Rickards:

A senior manager of G4S, one of the world’s leading secure logistics firms, recently revealed to a gold industry executive that he had personally transported gold into China by land through central Asian mountain passes at the head of a column of People’s Liberation Army tanks and armored transport vehicles. This gold was in the form of the 400-ounce “good delivery” bars favored by central banks rather than the smaller one-kilo bars imported through regular channels and favored by retail investors.

Now please read the translation by my friend Soh Tiong Hum of the Chinese press release on the China Gold Yearbook 2014:

China Becomes World’s Largest Gold Importer At 1507 MT In 2013

September 11 , 2014

Source: China News Network

China News Network, September 11 (Reporter Liu Yuying) – Chinese Gold Yearbook 2014 released by China Gold Association on September 11 shows that in 2013, Chinese gold import grew 197.98%, to 1506.5 tonnes, thereby becoming the world’s largest gold importer. 

According to the Almanac, 2013 continues 11 years of growth in China’s gold demand with substantial increase in market volume by 92.65 %. Breaking gold demand of 2012 above 1,000 tonnes, gold demand reached 2198.84 tonnes in 2013, of which consumption increased by 41.36%, consumption volume exceeded 1,000 tons, surpassing India to become the world’s largest gold consumer. Based on this number, net investment is deduced to be 1022.44 tonnes, a substantial increase of 230.68 %.

Over the same period, China’s gold production was 445.4 tonnes. 428.16 tonnes came from domestic sources while 17.25 tonnes came from offshore. 

The 2014 almanac says that the increase in Chinese gold demand in 2013 was mainly investment demand, 80% of growth in gold demand came from growth in investment demand.

It is understood that China’s gold supply and demand balance is mainly met through increased imports.

One form of supply is from import of offshore raw materials and finished domestically; the other is direct import of finished ingots.

Commentary in the Yearbook claimed that China’s 2013 gold import nearly doubling is a very big change that has never happened since the founding of China. The reason why China became a destination for foreign gold was mainly because of profit drivers, because there is a premium for RMB gold it is profitable to bring gold to China. As Chinese dependence on foreign gold resources increases, this reality also requires the gold market to open its doors to outsiders.

The World Gold Council Clueless on Chinese Gold Demand?

February 18, 2014 the World Gold Council released the Gold Demand Trends for 2013. According to this report total 2013 Chinese consumer demand was 1,065.8 tons. In my opinion this number is highly disputable.

Chinese Gold Market Essentials

The Chinese gold market is completely structured top down. The main physical (spot and deferred) exchange in China is the Shanghai Gold Exchange (SGE), that serves as the entrance point for imported and mined gold to the Chinese marketplace. Additionally the SGE is supplied by recycled gold. The Shanghai Futures Exchange (SHFE) facilitates the trading of gold futures contracts (to compete with the pricing power of Western markets).

The reason the PBOC requires imported gold to be sold first through the SGE (mined and recycled gold are stimulated to be sold through the SGE by tax incentives) is to keep track of how much gold is added to non-government reserves (jewelry, bar hoarding, etc). The setup is quite simple; to channel import and mine supply through one exchange the PBOC can efficiently supervise the quality and quantity of the gold that enters the Chinese market place. The PBOC likes to knows how many grains of fine gold are being held among the people.

Before gold is allowed to enter the vaults of the SGE it’s assayed by the National Quality Supervision and Inspection Center for Bullion & Its Products that grants a minimum fineness of 99.95. Gold withdrawn from the SGE vaults can only re-enter as recycled gold. After being remelted, by one of the associated refineries (see the list on page 40), and an assaying process the gold can move back into the SGE vaults. Just to make sure on SGE level gold of the highest purity is traded.

SGE

The consequence/purpose of the structure of the Chinese gold market is that SGE withdrawals equal wholesale demand. Confirmed by the fact that total demand reported by the China Gold Market Reports 2007 – 2011 exactly equal SGE withdrawals for the corresponding years. For an extensive analysis read this.

The Great Disparity

In 2013 SGE withdrawals accounted for 2197 tons. The next screen dump is from the last SGE report of 2013, the second number from the right (red – 本年累计交割量) is the total amount of gold withdrawn from the SGE vaults in Kg.

SGE total withdrawals 2013

The World Gold Council (WGC) claims to report on ALL sorts of demand; consumer, investment, industrial and central bank demand. This is from their February 18, 2014 press release:

Global consumer demand for gold at unprecedented levels in 2013 China the world’s largest gold market in 2013 

Consumers around the world bought gold in record amounts in 2013, led by demand in China and India, with China becoming the world’s biggest gold market, according to the latest World Gold Council Gold Demand Trends report. …

In 2013 the gold market saw 21% growth in demand from consumers which contrasted with outflows of 881t from ETFs. The net result was that global gold demand in 2013 was 15% lower than in 2012, with a full year total of 3,756t. …

Central banks

Although down 32% on 2012 they continued to be strong buyers of gold, a trend which began in 2009. 2013 saw net purchases in all four quarters, totalling 369t, meaning 12 consecutive quarters of net inflows. …

Technology

Demand reached 405t in 2013, virtually unchanged from the figure of 407t in 2012.

We can see the WGC tracks consumer (jewelry, bar and coin), ETF (and thus investment funds), central bank and industrial demand. Logic, if one wants to thoroughly analyze the gold market all facets of supply and demand must be taken into account.

So how come there is such a big difference between Chinese demand reported by the WGC, 1066 tons, and wholesale demand, 2197 tons? Why is the WGC missing 1132 tons? One reason is because the Chinese are hiding it. Since 2008 the Chinese have great interest to hoard in the dark in order to diversify their US dollar reserves, strengthen their economy and protect it from external shocks. The China Gold Association (CGA) changed the way they measure demand and all other Chinese gold institutions ceased publishing reports on demand since 2011. The only valuable information they continue to publish are SGE withdrawals. Not often, but sometimes the facts seep through the Chinese press:

China’s explosion in demand for physical gold in 2013 left a deep impression on international investors. The Shanghai Gold Exchange withdrawals for the year up till 27 December 2013 exceeded 2180 tons. Considering the exchange’s position as a hub for domestic gold circulation, in conjunction with a system that forbids withdrawn gold from re-entering inventory, to a large extent the withdrawals number can be treated as the best benchmark for physical gold demand in the Chinese market.  Not to mention that the entire 2013 global mined gold production does not exceed 2700 tons. China’s massive demand has to a large extent remade the world’s gold circulation system. Newly mined and stocked gold is moving through trade links in London – Switzerland – Hong Kong – into China in a large scale orientation towards the East. The impact of China’s demand on international gold price will inevitably increase.

Why consumer demand as presented to the world has been understated since 2008 is because the China Gold Association is manipulating the demand category net investment to suppress other categories like jewelry and bar.  This is an overview from the China Gold Market Report 2010.

Chinese gold demand 2010

According to the China Gold Market Report 2007 net investment was 18 tons. Thomson Reuters GFMS (which is the sole data provider for the WGC), assumed this was gold added to the stocks of banks, jewelers and the mint, as it was withdrawn from the SGE vaults but wasn’t sold on retail level. In 2007 this was probably true. But when Lehman fell the world changed, the Chinese began to overstate net investment to hide true demand. Up until today GFMS states net investment is stock movement changeLet’s have a look at how much net investment was in recent years. Note, in the chart below the “Difference” is approximately net investment, calculated as SGE withdrawals minus WGC consumer demand minus industrial demand.

SGE withdrawals vs WGC

Actual net investment published by the China Gold Market Reports: 2007 – 18 tons, 2008 – 129 tons, 2009 – 147 tons, 2010 – 266 tons, 2011 – 285 tons.

From 2007 – 2013 net investment was roughly 2000 tons. This definitely can not have been stock movement change at banks, jewelers and the mint. According to my analysis this gold was bought at the SGE by investment funds, individual investors and jewelers pretending to be individual investors. In the mainland there is 17 % VAT on jewelry, plus an additional 5 % consumption tax – you do the math.

WGC gold

I contacted the WGC and got in touch with one of their experts based in China. When I asked him what net investment was we had a brief debate after which he had to admit he was clueless on where this gold was going. He told me the Chinese will never disclose this information. I asked him if he would like to collaborate with me to research net investment. I got no response. A week later I asked him if he would grant me permission to publish our email correspondence. He responded to not publish our correspondence as it was meant to be private.

gfms

In the meantime I was emailing a precious metals analyst from Thomson Reuters GFMS about the Turkish gold market. This gentleman was extremely kind and helpful and explained to me in detail how GFMS measures Turkish gold coin production. Very valuable information for me! When I asked him what his take was on Chinese net investment, I got no response.

CPM Group

Jeff Christian from CPM Group did respond after I wrote him an open letter regarding SGE withdrawals. You can read our debate in the comment section of this post. Not surprisingly we couldn’t agree. What was interesting about our conversation was that he said total Chinese net gold import in 2013 was 1411 tons.

CGA

Of course I’ve written a million emails to the CGA, in English and Chinese, no response whatsoever. I called them speaking English, no luck. My friend in the mainland has called them numerous times, they always say the gentleman who wrote the China Gold Market Reports is on holiday. The message is clear…

The mainland officially net imported 1158 tons of gold from Hong Kong in 2013. Total net import according to Jeffrey Christian was 1411 tons (according to me it was 2000 tons), let’s take his number for an example. How can China import 1411 tons and mine 428 tons (that’s 1839 tons) but only demand 1066 tons? Did they import gold without asking for it? Did someone secretly pushed it across the border and now the Chinese are stuck with it? Or is there a lot of demand the WGC doesn’t disclose?

Anyway, I think 1066 tons Chinese consumer demand as reported by the WGC is highly underestimated. To be continued…

January Chinese Gold Demand All-Time Record, 247 Tons

Sorry for the delay in my weekly reporting on SGE withdrawals. Due to the Chinese Lunar new year the SGE was closed from 31-01-2014 til 06-02-2014 (dd-mm-yyyy) so I had to wait a bit longer for the publication of the numbers. What they eventually released were the trade numbers from 5 trading days, January 27 – 30, and February 7.

Lets skim through the news first. Bloomberg just reported that Chinese gold usage, according to the China Gold Association, in 2013 was 1176 tons. First of all I don’t understand this new term usage, nor have I ever understood the term consumption regarding gold. If you have some knowledge of gold you know it’s never consumed, gold is immortal and will be recycled till the end of times. Its immortal property is one of the reasons why it’s the most marketable commodity, hence we started using it as money thousands of years ago. The other reasons are it has the right scarcity, its divisible and subsequently small units can be merged/melted into a large unit (a proces which can be repeated to infinity without any loss of material).

Having said that; How can gold demand (I assume that’s what they mean by usage) be 1176 tons, when China mainland net imported 1123 tons just from Hong Kong, domestically mined 428 tons, and additionally net imported gold through other ports? Regular readers of this blog know the number 1176 tons of demand is false, it was in fact 2197 tons as my research has exposed.

Other mainstream news outlets (like the Financial Times and the Telegraph) are slowly starting to scratch their heads about the Chinese gold market. It won’t take years before the Chinese will fail to hide their true insatiable demand for physical gold. Since 2008, after Lehman fell, the China Gold Association (CGA) has changed the way they measure gold demand. In 2007 they reported in the CGA Gold Yearbook:

In 2007 the amount of gold withdrawn from the warehouses of the Shanghai Gold Exchange, total gold demand of that year, was 363.194 tons of gold, an increase of 48 % compared to 2006…

In other words, SGE withdrawals equal total Chinese demand (in 2013 SGE withdrawals accounted for 2197 tons), as I have been writing about for months! Starting in 2008 the CGA switched measuring gold demand from wholesale level (SGE withdrawals) to retail level in order to suppress demand figures. This way they were able to hide investment demand. (for my full analysis read this)

It’s remarkable the CGA publishes these suppressed demand numbers, which are being copied by western media without any second thoughts, while at the same time the CGA has written reports, which are being ignored by western media, that state Chinese demand surpassed 1000 tons (it was 1043 tons to be precise) in 2011. From The China Gold Market Report 2011, page 28:

Deregulation of the gold control to open the gold market to the public in 2002 led to the constant rise in China’s gold demand, which unprecedentedly exceeded 1,000 tons in 2011…

The China Gold Market Reports 2007 – 2011 all state Chinese demand equals SGE withdrawals (due to the structure of the Chinese gold market designed in 2002). Since 2011 the CGA ceased publishing the China Gold Market. Chinese demand was such that it became uncomfortable for the Chinese authorities to lay their cards on the table.

To continue to report on suppressed demand numbers the CGA has recently signed a partnership with CPM group. Together they hope to gain more credibility in spreading incomplete data – for as long as it holds.

CGA CPM group partneship

For the CGA this is all strategics. I wonder if CPM Group knows what CGA president, Sun Zhaoxue, writes about the gold market in the Chinese media. Allow me to quote a few snippets from exclusive translations I published here and here:

…the United States intends to suppress gold to ensure the Dollar’s dominance, the fall in the price of gold was premeditated, and a part of the currency war.

…The hottest topic at the moment is oil and gold. The ground war we are seeing around the world is I think war for oil whereas gold is the currency war.

…The US owes Germany so much gold but instead of repaying immediately, it sets a 2020 deadline to return the gold. From this example and process as well as some typical factors, this is a downright currency war to maintain the US Dollar hegemony by defeating all other currencies.

…Gold now suffers from a ‘smokescreen’ designed by the US, which stores 74% of global official gold reserves, to put down other currencies and maintain the US Dollar hegemony. Going to the source, the rise of the US dollar and British pound, and later the euro currency, from a single country currency to a global or regional currency was supported by their huge gold reserves. 

…In the global financial crisis, countries in the world political and economic game, we once again clearly see that gold reserves have an important function for financial stability and are an ‘anchor’ for national economic security.

…We need to establish a more clear national gold strategy, continue to grow gold reserves and progressively become a ‘gold-reserve’ nation that is commensurate with the country’s economic strength.

 …To fundamentally solve these problems, the state will need to elevate gold to an equal strategic resource as oil and energy.

In addition, because individual investment demand is an important component of China’s gold reserve system, we should encourage individual investment demand for gold. Practice shows that gold possession by citizens is an effective supplement to national reserves and is very important to national financial security.

In short, Sun knows the world is in a currency war and in war time China will keep it cards close to its chest. I hope the SGE doesn’t stop publishing withdrawal numbers, it’s the best benchmark we have at this moment.

Shanghai Gold Exchange Withdrawal Numbers January 2014

Withdrawals from the Shanghai Gold Exchange vaults in January 2014 accounted for 247 tons, which is an increase of 43 % compared to January 2013. It’s also more than monthly global mining production and an all-time record! China mainland mines about 35 tons per month which is required to be sold first through the SGE. The other 212 tons (247 – 35) had to supplied by import or recycled gold. My estimate is that scrap couldn’t have been more than 25 tons, so import in January was a staggering 187 tons. China is still draining the vaults in the west BIG TIME!

SGE vs COMEX ™ Jan 2014

Because the last SGE weekly report covers four days in January and one in February, I multiplied the weekly amount by o.2 and subtracted the outcome from the year to date number to get to the January total. This number may be revised when the SGE publishes the January monthly report, but I don’t expect a significant change.

[Update 14-02-2014, January SGE withdrawals were 246, I was one ton of, still a record.] 

Overview Shanghai Gold Exchange data 2014 week 5 and 6

– 40 metric tons withdrawn in 5 trading days of week 5 and 6   (27-01-2014/07-02-2014)

– w/w  – 29.9 %

– 256 metric tons withdrawn year to date

My research indicates that SGE withdrawals equal total Chinese gold demand. For more information read thisthisthis and this.

SGE withdrawals 2014 week 5,6

This is a screen dump from the Chinese SGE trade report; the second number from the left (blue – 本周交割量) is weekly gold withdrawn from the vaults in Kg, the second number from the right (green – 累计交割量) is the total YTD.

SGE withdrawals January 2014

This chart shows SGE gold premiums based on data from the Chinese SGE weekly reports (it’s the difference between the SGE gold price in yuan and the international gold price in yuan).

SGE premiums

Below is a screen dump of the premium section of the SGE weekly report; the first column is the date, the third is the international gold price in yuan, the fourth is the SGE price in yuan, and the last is the difference.

SGE premiums

In Gold We Trust