Tag Archives: China’s official gold reserves

Renminbi Internationalization And China’s Gold Strategy

Here we go!

A seminar about gold supporting the internationalization of the renminbi and China’s financial strength was held in Beijing on 18 September 2015. One of the keynote speakers was Song Xin, President of the China Gold Association (CGA), Chairman of the Board of China International Resources Corporation, President of China National Gold Group Corporation and Party Secretary, who believes China’s economic power must be serviced by appropriate gold reserves to support the renminbi. An article written by Song published on Sina Finance in 2014 stated (translation by BullionStar):

For China the strategic mission of gold lies in the support of renminbi internationalization. Gold … forms the base for a currency moving up in the international arena.

If the renminbi wants to achieve international status, it must have popular acceptance and a stable value. To this end… it is very important to have enough gold as the foundation and raising the ‘gold content’ of the renminbi. Therefore, to China, the meaning and mission of gold is to support the renminbi to become an internationally accepted currency and make China an economic powerhouse.

That’s 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.

President of the CGA before Song was Sun Zhaoxue, who shared many of the viewpoints of his successor. In 2012 a famous article from Sun was published in Qiushi magazine, the main academic journal of the Chinese Communist Party’s Central Committee, wherein he plead for stimulating the Chinese citizenry to buy gold next to increasing China’s official gold reserves (translation by BullionStar):

Currently, there are more and more people recognizing that the ‘gold is useless’ story contains too many lies. 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. Effectively, the rise of the US dollar … and later the euro currency, from a single country currency to a global or regional currency was supported by their huge gold reserves.  

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.

Regular readers of this blog will know what Sun wrote in 2012 regarding ‘individual gold investment’ is exactly what has unfolded; through the Shanghai Gold Exchange (SGE) we could see thousands of tonnes of gold moving into the mainland in recent years. According to my estimates Chinese privates gold holdings have reached 12,000 tonnes – next to the People’s Bank Of China’s (PBOC) gold buying program.

Since my last extensive blog post (20 May 2015) on PBOC gold purchases I’ve been able to collect more clues related to the amount of gold China’s central bank has harvested in exchange for its lopsided US dollar holdings. Last week I spoke to an insider with connections at Western bullion banks. This gentleman confirmed proxies of the PBOC purchase gold directly in the London OTC gold market that is shipped to Beijing. Implying much of the 1,750 tonnes that have mysteriously vanished from the London Bullion Market (left London without being disclosed in UK customs statistics) in between 2011 and early 2015 went to China. This supports the analysis the PBOC is buying at a pace of 500 tonnes a year in the international OTC market (not through the SGE) and owns approximately 4,000 tonnes by now.

Furthermore, it seems the writings from Song and Sun correspond with China’s real undertakings in the gold market, which influences our valuation of their words. There are no transcripts from the seminar in September, but I found an article (in Chinese) that summarizes what Song and others have said. Please read the gripping translation below.

CGA

Note, Song is the President of China National Gold Group Corporation, which started an alliance with Russian gold miner Polyus Gold to deepen ties in gold exploration. China and Russia aim to trade (newly mined) gold over the Shanghai International Gold Exchange in renminbi for international institutions and central banks as part of the Silk Road Gold Fund to attract the center of the international gold market towards the East.

Renminbi Internationalization and China’s Gold Strategy Seminar

Date: September 22, 2015. Source 

On 18 September 2015 the “Renminbi Internationalization and China’s Gold Strategy Seminar” was smoothly held in Beijing. The seminar was guided by the China Gold Association and jointly held by the Chinese Gold Research Center of Capital University of Economics and Business and Beijing Gold Economic Development Research Center. It was supported by Zhao Jin Futures, Shandong Zhaojin Investment Co., Ltd., Shenzhen Jinmingzhu Jewelry Co., Ltd. and Chifeng Jilong Mining Industry Co., Ltd.

Over 130 representatives from the governments, banks, gold mining industry, gold investment organizations, jewelry companies and educational institutions attended the seminar. Wang Wenju, Vice President of Capital University of Economics and Business announced to rename the Chinese Gold Market Research Center of Capital University of Economics and Business on the seminar site.

Wang Jiaqiong, President of Capital University of Economics and Business, Song Xin, President of Chinese Gold Association & General Manager and Secretary of the Party Committee of China National Gold Group Corporation, Wang Xiaomei, Deputy Party Secretary of China National Gold Group Corporation, Wei Benhua, Former Director of the State Administration of Foreign Exchange and Former General Representative of Chinese International Monetary Fund, and other leaders and representatives attended the seminar. 13 experts from China Gold Association, Shanghai Gold Exchange, Renmin University of China, Chinese Social Science, Capital University of Economics and Business, China Center for International Economic Exchanges, China Forex Investment Research Institute, Gold Economic Research Center, ICBC, China Construction Bank, Shandong Gold Group and Shandong Zhao Jin Group delivered splendid speeches.

Wang Jia Qiong
Wang Jiaqiong

President Wang Jiaqiong delivered a speech. In his speech, Wang Jiaqiong pointed out, RMB internationalization is a struggling process in need of strategic research. In the seminar, many experts, scholars and entrepreneurs were discussing renminbi internationalization and Chinese gold strategies. They would propose wise ideas and good policy suggestions after brainstorming, playing as a think tank in the development of China. The research team led by Professor Zhu Heliang from our university spent years studying Chinese gold strategy problems and some research results obtained the central affirmation and recognition. All of your arrival can better support our in-depth research on relevant topics and construction of related disciplines.

In the opening ceremony, Wang Wenju announced the renaming of the Chinese Gold Market Research Center of Capital University of Economics and Business, which focuses on the current gold market, to Chinese Gold Research Center of Capital University of Economics and Business with the purposes of better studying gold problems comprehensively, displaying the function of gold in national economy and society, boosting renminbi internationalization and keeping pace with the times. The school would offer vigorous support and hope that the new research center can strengthen team building and display think tank functions.

Song Xin rmb au
Song Xin

In his speech, Song Xin mentioned that the Chinese gold industry has achieved a great-leap-forward development since the new century. In 2014, Chinese gold yield had turned China into the biggest gold producing country in the world for eight consecutive years and the biggest gold consumption country again. Whether in the past, present or future, gold plays a crucial role in the development of human society. Renminbi internationalization has boosted China’s march towards an economic power from an economic giant. The new age has endowed gold with more important missions. Gold has shouldered a heavy responsibility of “increasing credit” for renminbi internationalization and increased the “gold content” for renminbi internationalization. 

Recently, the Central Bank announced to increase gold reserves to the public many times in succession. In fact, it’s the strategic layout and major move for laying the renminbi’s international credit foundation. We always suggest formulating and boosting national gold strategies in pace with national financial strategies positively, further improving the quantity and proportion of gold in national foreign exchange reserves, developing occupancy volume of gold production and increased gold resources. We further suggest perfecting the gold market, promoting foreign currency in individuals, boosting Chinese and western wealth flowing, improving our control power of global gold wealth flowing, accelerating renminbi internationalization, helping the renminbi enter special drawing rights currency basket, rebuilding international currency system, balancing American hegemony process, and positively displaying the due function of gold and the gold industry. Leaders from Capital University of Economics and Business have supported the research on gold problems for a long time. The team led by Professor Zhu Heliang has persistently pursued basic research on gold with outstanding viewpoints. They have obtained relevant departments’ high attention for long. I hope that Capital University of Economics and Business can further display its gathering advantages of majors and talents, and strengthen the cooperation with Chinese Gold Research Center, China National Gold Group Corporation and its subordinate companies.

In the seminar, experts thoroughly analyzed the essence and inherent laws of renminbi internationalization, new positioning and functions of gold in the non-gold standard currency system. They discussed the strategic significance of gold in renminbi internationalization from historical and actual perspectives and Chinese gold strategies in the new age. Experts unanimously regarded gold as playing an irreplaceable role in currency internationalization progress. The important element of gold shouldn’t be ignored during renminbi internationalization. The country should attach great importance to the development of the gold industry and market and increase gold reserve from a strategic height.

The seminar is the “prelude” of the first renminbi internationalization and Chinese Gold Strategy Research Project jointly carried out by Chinese Gold Research Center of Capital University of Economics and Business and Beijing Gold Economic Development Research Center. After the seminar, key viewpoints were to be collected and submitted to related departments. Chinese Gold News will set up a special column and publish solicited articles about “renminbi Internationalization and Chinese Gold Strategies”. Meanwhile, two organizations will organize special research teams, focus on the topic research of “renminbi internationalization and Chinese Gold Strategies”, and open the research results for publication. With national major strategy research as their own duty, the two organizations have formed a strategic alliance in terms of promoting renminbi internationalization and adjusted research directions of Chinese gold strategies in order to make effort and contribution to the prosperous cause of China.

COMEX Deliveries vs SGE Withdrawals

Withdrawals from the vaults of the Shanghai Gold Exchange, a number by which we can measure Chinese wholesale gold demand, accounted for 47 tonnes in week 42 (26 – 30 October 2015). Strangely, this is a weak number if we compare it to the rest of this year. Still, 47 tonnes of gold equals 47,000 one-kilogram bars, or 3,760 London Good Delivery bars – withdrawn from the vaults in just one week.

Year to date, an astonishing 2,165 tonnes of gold have been withdrawn from the vaults. The yearly record for withdrawals from the vaults of the Shanghai Gold Exchange (SGE) stands at 2,197 tonnes, set in 2013. Probably this record has already been surpassed by 6 November, though the numbers have yet to be released on 13 November. With 8 more weeks left on the calendar SGE withdrawals are set to reach 2,680 tonnes in 2015.

Shanghai Gold Exchange SGE withdrawals delivery 2015 week 42

This year’s strong SGE withdrawals have likely been supplied by a higher share of recycled gold than in previous years, which doesn’t mean Chinese gold import was not robust in recent months. Cross-border trade statistics from around the world are slowly being released and all data signals elevated gold exports to China, matching strong SGE withdrawals. Total Chinese gold import 2015 is likely to transcend 1,350 tonnes of gold.

COMEX Deliveries vs SGE Withdrawals

Across the pond at the COMEX gold futures exchange in New York there is a lot less physical gold going through the vaults. Year to date COMEX deliveries have reached a mere 40 tonnes. Though, in my opinion comparing COMEX deliveries to SGE Withdrawals is meaningless.

Frequently I receive inquires from gold investors around the world that like to verify their Chinese gold demand numbers. Some of the numbers they present are totally outrages, ranging from 20 to 60 tonnes of Chinese gold demand a day. Often, this is based on a misunderstanding regarding the term “delivery”. The same misunderstanding explains why we can’t compare COMEX deliveries to SGE withdrawals.

On any gold (futures) exchange in the world “deliveries” reflect the amount of physical gold that traders prefer to hold over a derivative contract, which requires the long contract holder (buyer) to pay the short contract holder (seller) the notional value of the futures contract in full in a addition to the margin (down payment). When physical gold is delivered through a futures exchange this is not automatically dropped off at the buyer’s doorstep. The amount of gold delivered is the amount of gold inside the vaults of the exchange that changes ownership from a short to a long. The process of delivery inside the vaults of the exchange can be repeated indefinitely, ownership of gold can change from person X to Y, from owner Y to Z, from Z to X, etc. Delivery captures gold demand to a certain extent – traders at an exchange opting for physical gold instead of a derivative contract – but delivery cannot be compared to SGE withdrawals that capture wholesale gold demand for China.     

(SGE) Withdrawals reflect the amount of gold that leaves the vaults of the exchange. Because of the unique structure of the Chinese gold market (nearly) all physical gold in China is traded through the SGE and therefor SGE withdrawals are an indicator for Chinese wholesale gold demand. Note, foreigners cannot buy, withdrawal and export gold from the SGE system. International investors have little incentive to purchase physical gold on the COMEX (or any other futures exchange) as delivery and withdrawing metal from the vaults in New York is a devious process compared to buying gold at a local bullion distributor. International investors looking to buy physical gold are more likely to buy spot gold contracts or directly call a refinery. In China delivery of gold futures contacts on the Shanghai Futures Exchange is practically nil, as futures contracts are not a convenient way to buy physical gold.

COMEX withdrawals are neither an indicator for (US) gold demand because the structure of the US gold market is different form the market in China. Consequently, it makes no sense to compare COMEX withdrawals or deliveries, to SGE withdrawals.

Some gold blogs depict COMEX deliveries to resemble anything more than “change in ownership of gold in the vaults of the COMEX in New York”. Furthermore, some look at SGE deliveries as if this has anything to do with Chinese gold demand – while only SGE withdrawals are an indicator that can be used to measure gold demand.

At the SGE all Chinese citizens are able to buy spot gold through an SGE account that can be opened at a Chinese commercial bank. The spot gold contracts, officially called physical contracts in the SGE rulebook, which are offered by the SGE are Au99.5, Au99.95, Au99.99, Au100g and Au50g. These physical contracts are not derivatives so the buyers and sellers do not have the option to take or make delivery; change in ownership of the metal is mandatory when the contracts are traded. Physical contracts can’t be traded on margin and when they are exchanged the physical gold always immediately changes hands.

The SGE also offers spot deferred contracts, which can be described as futures contracts without any predetermined delivery date. Every day traders of SGE spot deferred contracts have the option to take or make delivery. The spot deferred contracts offered by the SGE are Au(T+D), mAu(T+D), Au(T+N1) and Au(T+N2). On the English website of the SGE we can see the delivery volume of the spot deferred contracts in the daily reports – click here to view. Let’s have a look at an example, below is the daily report of 9 November 2015.

Screen Shot 2015-11-09 at 12.58.37 pm
Delivery volume of SGE spot deferred contracts on 9 November 2015 was 43.248 tonnes, counted bilaterally.

We can see the spot deferred contracts show delivery volume and the physical contracts not. The delivery volume reflects the amount of physical gold in the SGE vaults that has changed ownership between traders of spot deferred contracts; it has nothing to do with Chinese gold demand. Though, this delivery volume is erroneously used by some to measure Chinese gold demand. 

Also important to mention is that this delivery volume on the SGE is counted bilaterally. So, if one contract is delivered (1 short hands over gold to 1 long) the volume will show “2” (1 short + 1 long). In contrast, COMEX delivery is counted unilaterally (“1″ contract delivered means 1 short hands over gold to 1 long). In the example above SGE delivery volume is 43.248 tonnes, this volume would be displayed on the COMEX website as 21.624 tonnes.

SGE withdrawals are only published in the Chinese weekly reports. Below we can see a screen shot of the most recent report.

Screen Shot 2015-11-09 at 10.38.29 amScreen Shot 2015-11-09 at 10.36.47 am

The number framed in red is the amount of gold withdrawn from the vaults in the current week denominated in Kg’s counted unilaterally (46.5651 tonnes in between 26 – 30 October 2015). The number framed in blue is the amount of gold withdrawn from the vaults year to date (2,165.4422 tonnes) counted unilaterally.

The misunderstanding regarding COMEX deliveries versus SGE withdrawals is fuelled by some blogs that disclose SGE withdrawals labeled as SGE deliveries. Confusing readers to think deliveries are an indicator for demand. While, deliveries are not the same as withdrawals.

Chinese Gold Demand 559 MT YTD, Up 22 %

In week 13 (24-03-2014/28-03-2014) 36 metric tonnes of gold were withdrawn from the vaults of the Shanghai Gold Exchange. This is the fourth week in a row withdrawals are below the weekly average year to date, which is currently is 43 metric tonnes. Chinese physical demand is dropping from extremely high at the beginning of this year to high in recent weeks. The weekly average of the last four weeks was 35 metric tonnes.

An “at the back of an envelope” calculation: weekly domestic mining is 8.3 tonnes, scrap can’t be more than 5 tonnes (a high estimate), which leaves 21.7 tonnes to be imported per week at recent demand (35 – 8.3 – 5 = 22.7). The year to date weekly average, 43 tonnes, would require to import 29.7 tonnes per week.

That’s it for now, I’m writing a bigger piece on the Chinese gold market in respons to recently published analyzes by Alasdair Macleod, Zero Hedge and Monetary Metals. Stay tuned.

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Overview Shanghai Gold Exchange data 2014 week 13

– 36 metric tonnes withdrawn in week 13 (24-03-2014/28-03-2014)

– w/w + 0.66 %

– 559 metric tonnes withdrawn year to date

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

SGE withdrawals 2014 week 13

This is a screen shot from the weekly 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 week 13 2014

This chart shows SGE gold premiums based on data from the SGE weekly reports (it’s the difference between the SGE gold price in yuan and the international gold price in yuan). It seems as if the change of the premiums on the SGE are the inverse of the direction of the price of gold.

SGE premiums

Below is a screen shot 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

Open Letter To CPM Group

To CPM Group,

On January 15, 2013 CPM Group released a Market Alert addressing the facts and fantasies being spread throughout the mainstream media and the financial blogosphere regarding Chinese central bank gold purchases. An endeavor much appreciated by me as I’m highly concerned with credible figures. In the article various subjects about the Chinese gold market are discussed, not on all do I wish to comment, but there was one I feel obliged to respond to. At one point CPM stated:

One of the commentators added gold deliveries via the Shanghai Gold Exchange to gross supply figures, apparently unaware that the gold involved in these deliveries gets re-delivered repeatedly via the exchange over time. Adding this gold to supply is confusing new supply with market turnover. 

Because I have been the most active reporter on SGE deliveries (or actually withdrawals) chances are this “one commentator is me. Hence my desire to share my point of view on this matter. I have written extensively on this in the past (which you can read hereherehere and here) but would like to present the rules as disclosed by the SGE and the implications from it on Chinese demand for physical gold once again.

Physical delivery on futures exchanges relates to the amount of gold in the vaults of the exchange that changes ownership after settlement between long and short contracts, a process that in theory can be repeated to infinity and therefore a completely inaccurate indicator for physical supply and demand. The Shanghai Gold Exchange, however, does not only publish data on physical delivery, they also publish data on the amount of physical gold that is being withdrawn from the SGE vaults. There has been confusion about the difference between SGE deliveries and withdrawals because the SGE has been naming withdrawals as deliveries inconsistently. The numbers I’ve published on this website always related to the withdrawals from the SGE vaults (these numbers are only released by the SGE on their Chinese website).

The crucial SGE rule that makes the withdrawal numbers significant is this: once SGE bars are withdrawn from the vaults they are not allowed to be re-depositedThis rule can be found in the SGE rule book (#23), and, for example, is disclosed on several ICBC webpages regarding gold products.

(2) According to the Shanghai Gold Exchange rules, physical gold taken out of the warehouse cannot be taken into the gold warehouse designated by the Shanghai Gold Exchange again.

To be absolutely positive please call the SGE (phone number; 0086 2133189588), they speak fluent English and will confirm this rule.

The rule implies these withdrawals can’t be re-delivered. The purpose of the rule is that SGE bars are granted to be of the highest quality, no one can counterfeit an SGE bar and bring it in the vaults. The same rule applies on the Borsa Istanbul:

Once gold bars have been released from the Istanbul Gold Exchange vaults, they cannot be re-admitted to the Exchange vaults. They must be melted again and assayed and tested by an Istanbul Gold Exchange approved authority. Such re-melted gold is admitted in the Istanbul Gold Exchange again essentially as new gold bars and can then be traded.

We can compare this type of policy with the LBMA Chain of Integrity. Bullion Management Group, which is an LBMA associate, states on its website:

If the documentation and the background checks passed scrutiny, then all bars coming from outside the Chain of Integrity are re-assayed and re-cast to Good Delivery standards.

The SGE rule, combined with the Chinese laws that require all imported and mined gold to be sold through the SGE, implies that the withdrawals are equal to total Chinese gold demand. The following quote is from the Chinese media, translated by Soh Tiong Hum:

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.

I sincerely hope this information will clear up some of the misconceptions of the Chinese gold market.

Kind regards,

The Big Reset, Part 1

The sole reason why I became interested in gold is because of the book “Overleef De Kredietcrisis” (How To Survive The Credit Crisis), written by Willem Middelkoop – the Dutch equivalent of Jim Rickards – in 2009. This book opened my eyes and interest for economics and I didn’t stop reading and writing about it ever since.

Willem Middelkoop 2011

Middelkoop had written four books in Dutch when he decided to switch to English, his latest book has just been relesed: The Big Reset. This book is about the War on Gold and the plans behind the scenes to create a new gold-backed world reserve currency. I had the privilege to do a Q&A with Middelkoop about his latest book. The Q&A will be published on this website in two parts.

The Big Reset

How did you started to invest in gold?

Because of the books by Indian economist Ravi Batra in the1990’s I became aware of the anti-cyclical nature of gold. Through my internet research in 1999, when the internet bubble was getting pretty scary, I had learned about GATA and learned a great deal about fiat and hard money. After I took profits on my real estate investments in Amsterdam between 2001 and 2004 I started to invest in physical gold and silver and bought my first shares in precious metal companies in 2002. In the following yearns I experienced that investing in junior mining and exploration companies who worked on new discoveries delivered the best results. This first led to the publication of the Gold Discovery Letter and in 2008 to the start of the Gold Discovery Fund, which was renamed Commodity Discovery Fund in 2010 because some investors like the commodities more than gold. We have some 600 high net-worth Dutch investors and invest in (junior) mining companies. 50% is gold related, 25% silver related. We also have some Rare Earth and base metal investments. Because of the ongoing ‘World Championship Currency Debasement’ we expect much high prices for precious metals in the next few years.

Your new book is named The Big Reset, isn’t our current monetary system sustainable?

No, we now have arrived at the point where it is not the banks, but the countries themselves that are getting in serious financial trouble. The idea that we can ‘grow our way back’ out of debt is naive. The current solution to ‘park’ debts on to the balance sheets of central banks is just an interim solution. A global debt restructuring will be needed, as economists Rogoff en Reinhart recently explained in their working paper for the IMF. This will include a new global reserve system to replace the current failing dollar system, probably before 2020.

So you are not on your own with this call?

Right after the near death experience of the global financial system at the end of 2008 the IMF and others started to study the possibilities for a next phase of the financial system. In 2010 the IMF published a study titled ‘Reserve Accumulation and International Monetary Stability’ for a financial system without a dollar anchor. The United Nations called for ‘a new Global Reserve System’ based on the IMF’s Special Drawing Rights (SDR’s) a year later. The SDR was created in 1969, at the time the London Gold Pool couldn’t hold gold at $35 and the U.S. lost over 10,000 tons of gold because countries like France and the Netherlands returned excess dollar reserves to the U.S. treasury and demanded physical gold. This development led to the end of the gold backed dollar in August 1971, when President Nixon closed the gold window and the first dollar crisis started. It led to the run up of gold towards $880 in 1980. The UN idea is endorsed by China who has publicly stated several times that it is dissatisfied with the present dollar-orientated system. In 2009 China’s Central Bank Governor Zhou Xiaochuan advocated a new worldwide reserve currency system. Late 2013 the Chinese state press openly called to ‘de-Americanize’ the world’. In an official op-ed the idea for ‘the introduction of a new international reserve currency  to replace the dominant U.S. dollars’ was mentioned again. According to the London based think thank Official Monetary and Financial Institutions Forum (OMFIF) it will take many years before the renminbi will mount a credible challenge to the dollar. The euro is not suitable either.

How will this change unfold?

Our financial system can be changed in almost every way as long as the main world trading partners can agree on these changes. Two major problems in the world’s financial system have to be addressed, the demise of the U.S. dollar as the world reserve currency and the almost uncontrollable growth of the worldwide mountain of debts and central banks’ balance sheets. A reset planned well in advance can and probably will consist of different stages. So currently the U.S. together with the IMF seems to be planning a multiple reserve currency system as a successor of the current dollar system. But this system which still include and center around the dollar, but other important currencies will be added at its core. OMFIF has published an interesting study last year. They remarked:

‘This marks the onset of a multi-currency reserve system and a new era in world money. For most of the past 150 years, the world has had just two reserve currencies, with sterling in the lead until the First World War, and the dollar taking over as the prime asset during the past 100 years. The pound sterling  has been in relative decline since the Second World War. The birth of the euro in 1999 has turned the European single currency into the world’s no. 2 reserve unit, but it has been now officially accepted that the dollar and the euro share their role with smaller currencies. The renminbi has attracted widespread attention as a possible future reverse currency. But it’s still be some years away from attaining that status, primarily because it is not fully convertible.’

Some American insiders have even been calling for a return to the gold, isn’t it?

In an open letter to the Financial Times in 2010 titled ‘Bring back the gold standard’, the very well connected and former President of the World Bank Robert Zoellick pointed out he wants to use gold as a reference point in order to reform the current failing financial system. Mr. Zoellick explained an updated gold standard could help retool the world economy at a time of serious tensions over currencies and U.S. monetary policy. He said the world needed a new regime to succeed the ‘Bretton Woods II’ system of floating currencies, which has been in place since the fixed-rate currency system linked to gold broke down in 1971. He said the new system.

‘is likely to need to involve the dollar, the euro, the yen, the pound and a renminbi. The system should also consider employing gold as an international reference point of market expectations about inflation, deflation and future currency values. Although textbooks may view gold as the old money, markets are using gold as an alternative monetary asset today.’

According to the famous publisher Steve Forbes, who was also an advisor for some of the presidential candidates in 2012,  ‘the debate should be focused on what the best gold system is, not on whether we need to go back on one.’ So it was at no surprise for me to see an interview with professor Robert Mundell in Forbes magazine, in which he argued for a return to the gold standard. Mundell can be seen as one of the architects of the euro, and has acted as an advisor to the Chinese government as well. Mundell said:

There could be a kind of Bretton Woods type of gold standard where the price of gold was fixed for central banks and they could use gold as an asset to trade central banks. The great advantage of that was that gold is nobody’s liability and it can’t be printed. So it has a strength and confidence that people trust. So If you had not just the U.S. dollar but the U.S. dollar and the euro tied together to each other and to gold, gold might be the intermediary and then with the other important currencies like the yen and Chinese Yuan and British pound all tied together as a kind of new SDR that could be one way the world could move forward on a better monetary system.’

And China supports these ideas for a currency reset?

As you know Chinese Central Bank Governor Zhou Xiaochuan advocated a new worldwide reserve currency system as early as 2009. He explained that the interests of the U.S. and those of other countries should be ‘aligned’, which isn’t the fact in the current dollar system. Zhou advised to develop the SDR’s into a ‘super-sovereign reserve currency disconnected from individual nations and able to remain stable in the long run’. According to some experts the IMF needs at least five years more years to prepare the international monetary system for a worldwide introduction of SDR’s to be used worldwide. Some doubt if we will have the luxury to wait that long. The fact China is stopped buying U.S. Treasuries in 2010 and have been loading up on gold ever since tells a great deal. Chinese high level officials have indicated China wants to grow their gold reserves ‘in the shortest time’ to at least 6,000 tons, in anticipation for the next phase of world financial system. A recent report by Bloomberg suggest The People’s Bank of China and private investors has been accumulating over 4,000 tons since 2008. The Chinese are afraid the U.S. could surprise the world with a gold revaluation. Wikileaks leaked a cable sent from the U.S. embassy in Beijing early 2010. The message, which was sent to Washington, quoted a Chinese news report about the consequences of such a dollar devaluation as it appeared in Shanghai’s Business News:

‘If we use all of our foreign exchange reserves to buy U.S. Treasury bonds, then when someday the U.S. Federal Reserve suddenly announces that the original ten old U.S. dollars are now worth only one new U.S. dollar, and the new U.S. dollar is pegged to the gold – we will be dumbfounded.’

Can you explain the love for gold by the Chinese?

They know, even from their own history, gold has been used again and again to rebuild trust when a fiat money system has reached its endgame. As you might know, from your own studies, the main academic journal of the Chinese Communist Party’s Central Committee published an article in 2012 that sheds a light on the Chinese monetary or should we say gold strategy. The article [exclusively translated by In Gold We Trust] was written by Sun Zhaoxue, president of both the China National Gold Corporation (CNG) and the China Gold Association (CGA). Sun stated:

‘Increasing gold reserves should become a central pillar in our country’s development strategy. The state will need to elevate gold to an equal strategic resource as oil and energy, We should ‘achieve the highest gold reserves in the shortest time. Individual investment demand is an important component of  China’s gold reserve system; we should encourage individual investment demand for gold.’

According to my research the Chinese are now in the final stage to grow their gold reserves to 6,000 tons. They want to grow these reserves towards 10,000 tons before 2020. That amount will bring the Chinese on par with the U.S. and Europe on a gold/GPD ratio. This opens the door to a possible joint US-EU-China gold supported financial system like the IMF’s SDR-plan. Such a reset could also be backed by Russia since they have accumulated over 1,000 tons, most of it since the start of the credit crisis in 2008.

Do China (and Japan) have the same debt problems like the western countries?

According to John Mauldin, author of ‘The End Game’ and ‘Code Red’ China is ‘even more addicted to money printing than the US or Japan’. Despite national financial reserves of almost $4,000 billion, China has been confronted with its own debt crisis, after Chinese banking system’s assets grew by $14 trillion between 2008 and 2013. The old Chinese communist leadership still remembers how they succeeded to grab power because of the monetary problems between 1937–1949. Their main goal is to avoid social unrest like China experienced during a period of hyperinflation after World War II.

What do the Chinese know about the War on Gold?

Sun Zhaoxue explained in 2012:

After the disintegration of the Bretton Woods system in the 1970s, the gold standard which was in use for a century collapsed. Under the influence of the U.S. Dollar hegemony the stabilizing effect of gold was widely questioned, the ‘gold is useless’ discussion began to spread around the globe. Many people thought that gold is no longer the monetary base, that storing gold will only increase the cost of reserves. Therefore, some central banks began to sell gold reserves and gold prices continued to slump. Currently, there are more and more people recognizing that the ‘gold is useless’ story contains too many lies. 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.

He then also explained how the US is debasing the value of its currency in a move to get rid of too much debt:

‘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.  Especially noteworthy is that in the course of this international financial crisis, the US shows a huge financial deficit but it did not sell any of its gold reserves to reduce debt. Instead it turned on the printer, massively increasing the US Dollar supply, making the wealth of those countries and regions with foreign reserves mainly denominated in US Dollar quickly diminish, in effect automatically reducing their own debt. In stark contrast with the sharp depreciation of the US Dollar, the international gold price continued to rise breaking $1900 US Dollars per ounce in 2011, gold’s asset-preservation contrasts vividly with the devaluation of credit-based assets. Naturally the more devalued the US Dollar, the more the gold price rises, the more evident the function of US gold reserves as a hedge.’

Additional proof of the Chinese knowledge about the gold price suppression can be found in message leaked by Wikileaks from the American Embassy in Peking about a Chinese newspaper report:

‘The U.S. and Europe have always suppressed the rising price of gold. They intend to weaken gold’s function as an international reserve currency. They don’t want to see other countries turning to gold reserves instead of the U.S. dollar or Euro. Therefore, suppressing the price of gold is very beneficial for the U.S. in maintaining the U.S. dollar’s role as the international reserve currency. China’s increased gold reserves will thus act as a model and lead other countries towards reserving more gold. Large gold reserves are also beneficial in promoting the internationalization of the RMB.’

The office building of JPMorgan with its largest private gold vaults at Chase Manhattan Plaza, opposite to the New York Federal Reserve building, has been recently sold to the Chinese. This indicates the US and China seem to be working together in advance towards a global currency reset whereby the US, Europe and China will back the SDR’s with their gold reserves so the dollar can be replaced.

NYC-view02-China-WEB

More about the War on Gold next week in Part 2

Synopsis of The Big Reset: Now five years after the near fatal collapse of world’s financial system we have to conclude central bankers and politicians have merely been buying time by trying to solve a credit crisis by creating even more debt. As a result worldwide central bank’s balance sheets expanded by $10 trillion. With this newly created money central banks have been buying up national bonds so long term interest rates and bond yields have collapsed. But ‘parking’ debt at national banks is no structural solution. The idea we can grow our way back out of this mountain of debt is a little naïve. In a recent working paper by the IMF titled ‘Financial and Sovereign Debt Crises: Some Lessons Learned and Those Forgotten’ the economist Reinhart and Rogoff point to this ‘denial problem’. According to them future economic growth will ‘not be sufficient to cope with the sheer magnitude of public and private debt overhangs. Rogoff and Reinhart conclude the size of the debt problems suggests that debt restructurings will be needed ‘far beyond anything discussed in public to this point.’ The endgame to the global financial crisis is likely to require restructuring of debt on a broad scale.

About the author: Willem Middelkoop (1962) is founder of the Commodity Discovery Fund and a bestselling Dutch author, who has been writing about the world’s financial system since the early 2000s. Between 2001 and 2008 he was a market commentator for RTL Television in the Netherlands and also appeared on CNBC. He predicted the credit crisis in his first bestseller in 2007.

Link Willem Middelkoop

Zhang Bingnan: Gold Safeguarding National Economy

The next translation I present is from a speech by Zhang Bingnan, financial expert for CCTV and vice president of the China Gold Association, an institution that acts as a bridge between the Chinese government and gold producers in protecting business interests and providing information, consultancy, co-ordination and intermediary services for them. Zhang has 20 years of research and management experience in economic sectors in China’s gold industry. One of his studies was “A Study on Optimal Scale of China Gold Reserves” in which he proposes the Chinese official gold reserves to be 5787 – 6750 tons by 2020.

Estimated PBOC gold reserves growth

Because his study was done in 2012 the estimates are too low in my opinion, as Chinese demand for physical gold exploded in 2013 and may continue this strong pace in the future.

SGE yearly withdrawals

The gold withdrawn from the SGE vaults is equal to Chinese gold demand (which I have exposed here), excluding PBOC purchases.

Zhang has done many studies, inter alia a five part analysis on gold’s role in the modern economy, and came to the conclusion that gold is an essential part of the current monetary system. At the same time he states China needs to further study gold’s role in a future monetary system.

Zhang held his speech just before the one held by Tan Ya Ling, that I published last week, hence the reference Tan made to Zhang’s theory on gold for the future economy.

Translated by Peiying Peng:

Zhang Bingnan

Zhang Bingnan: Gold Is Safeguarding National Economic And Financial Security

May 7, 2013, Beijing – sponsored by the Capital University of Economics and Business, co-hosted by the Chinese Gold Market Research Center, Jing Yi Gold Co and CPM Group the Chinese gold market trends seminar 2013 was held.

Hexun network’s exclusive Gold Report broadcasts, Secretary-General of the China Gold Association, Zhang Bingnan delivered a speech at the conference. He stated that the scientific development of the gold market needs a supporting theory, the sustainable development of the gold industry needs a supporting theory, and the ordinary Chinese citizens, who are incorporating gold into their portfolio to avoid risks, need a supporting theory.

He also said that recently gold has gained worldwide attention; the media have also reported on the Chinese gold rush by the Chinese aunties. In fact, the rush to grab gold is not just limited to the Chinese aunties, this gold buying binge is spread throughout the whole world, from Shanghai, Beijing to Hong Kong, Mumbai and New York.  It should be said that this craze for gold buying is global. Therefore, it is not just China that is buying gold in bulk, but also the rest of the world.

So why this global rush to buy gold in large quantities during the gold price fall this time? In 2008, after the Gold price pushed through $1,030, it also fell twice for 10%, and then further fell 30% in the following 6 months. Why did we not see any gold buying rush then? In fact, once we see the Chinese aunties rushing to buy gold, we need to really thinking deeply about the underlying reason from this phenomenon. Why the falling price in 2008 did not lead to a global demand for buying gold?  And why is it happening this time around? I think it’s because after this round of global financial crisis, more and more people around the world have a clearer understanding that gold is safeguarding national economic security and financial security. Its importance of protecting ordinary people’s portfolio is increasing. 

2013 May China gold conference

In 2008, people might still be in the craze of seeing the stock market rising from 6,000 points to 10,000 points, people might still indulge in buying a house and see its value double in a few years. During that time, Freddie Mac, Fannie Mae stocks were still at more than 160 US dollars per share. Nobody had a clear view as what we have today regarding asset protection and scientific configuration of their portfolio.  It is this round of global financial crisis that has made us increasingly recognizing the irreplaceable importance of gold in safeguarding national economic security, and safeguarding ordinary people’s assets.

Why did the governments around world have changed their policies, after 20 consecutive years of net selling of gold, to net buying since 2010? Last year the governments around the world had net purchases of 534 tons of gold, accounting for 18.8% of total gold production worldwide that year. Why are governments around the world in recent years started to buy gold in different options? Why after this fluctuation of the gold price, people around the world are buying gold in different options? Compare to 2008, I think we have a clearer understanding of the global gold rush. The reason behind all this is that gold has become increasingly important and popular after this round of financial crisis. This reason has little direct correlation with short-term price fluctuations.

He also told Hexun network’s exclusive Gold Report, the future of gold depends on the role of gold in the financial system. The further we understand this, the further gold can go. Therefore we still have not fully understood the nature of the gold, the true pattern of the gold market. This is the case for our own theorists, our gold market, and our financial sector. So symposiums such as this one will further discuss and research on this topic.

Through this round of global financial crisis, we are increasingly aware of the importance of gold. It may be more and more important to include gold into the top-tier design, including top-tier design of the national financial security, and also ordinary citizens’ asset protection.  From this perspective, we still have a long way to go.

 

China’s FX Research Center: Gold Is The Strategy

The next translation I present is from a speech by Tan Ya Ling, President of the China Foreign Exchange Investment Research Institute, given on a gold conference May 7, 2013 Beijing. Probably it’s not the whole speech as the title of the original article mentions oil, but the article itself doesn’t.

When I googled Tan Ya Ling I found a site that sells a video box (2013) from Tan Ya Ling called Currency Wars.  A concept the Chinese have been familiar with for many years. In 2007 a book, that oddly hasn’t been translated in English, came out with the same title, written by Song Hongbing. A quote about this book from Wikipedia (please click and read):

Currency Wars by Song Hongbing, is a bestseller in China, reportedly selling over 200,000 copies in addition to an estimated 400,000 pirated copies in circulation and is reportedly being read by many senior level government and business leaders in China. Originally published in 2007 the book gained a resurgence in 2009 and is seen as a prominent exponent of a recently emerged genre labeled “economic nationalist” literature.

…The book looks back at history and argues that fiatcurrency itself is a conspiracy; it sees in the abolition of representative currency and the installment of fiat currency a struggle between the “banking clique” and the governments of the western nations, ending in the victory of the former. It advises the Chinese government to keep a vigilant eye on China’s currency and instate a representative currency. The book, published in 2007, also correctly described and warned of the various forms of derivative speculation used by WallStreet which eventually became the causes of massive margin call sell offs and the stock market crash in late 2008.

Translated by LK:

Tan Ya Ling: Gold Is The Strategy, Crude Oil Is The Tool

Pusblished on: May 8, 2013 17:46 from: HeXunNet

May 7, 2013, Beijing—Hosted by the Capital University of Economics and Business, the Gold Market Research Center, Jingyi Gold Co. and CPM Group, is the first gold market discussion and development trend research: The World Gold Market Investment Report. The press conference was held on the 7th of May in Beijing.  Hexun.com reports exclusive on this conference. Tan Ya Ling, President of the China Foreign Exchange Investment Research Institute states that the gold price will definitely rise:

Tan Ya Ling Length
Tan Ya Ling

She pointed out that liquidity has contributed to the special situation now. The Gold market has gone thru periods of i) actual need and then ii) investment need was the most important factor, and has now entered the period where speculation is the main thing. Investing in gold needs a well-crafted strategy (with specific goals); just like economic development in China, we also need to find the model that is suitable for China, using suitably-adapted investment thinking, and only then can we establish ourselves in the gold market, and have control over it.

The recent report from the European Council has transpired worries on the recovery of the Euro area…. Some analysts think, investor confidence is essential for the gold market, and this is why Euro area economic problems have led to sluggish precious metal markets.

… she personally very much agrees with the view that the disintegration of the Euro area is unavoidable, but we do need to rationally see what this would really mean for the gold price… If the Euro area falls into an economic crisis, then the creditor nations would definitely like them to sell their gold reserves, just like how the news came out on Cyprus.

… for/if the Euro area to fall into crisis, then the forces / operators behind will definitely tempt them to sell their gold reserves. If this happens, the position of the USA will become even stronger. But can the USD keep its shine forever thus? The risk of the USD getting out of control still exists, and the USD has its cyclical strong and week trends. It is very likely that the world monetary system will need a restructuring, and then gold pricing will go back to the USD; but we must not forget what this gold price will mean for the USD!

We must not confuse the strength/weakness of the USD with the USD monetary regime, or the policies of the USA in this area. For now, the USD cannot be replaced in the short term; in the intermediate term, the chance of getting the USD replaced isn’t that great either, but in the long term, the USD will need to / will like to be ready to have a replacement for itself.

The gold market consists of spot and futures, as well as denomination in RMB and USD, but why do the Chinese people only like to hoard physical gold, and not futures? If too much gold is hoarded, this will invite the greed of other nations and they will come for it prepared. For now, our physical market has become very developed, but even in view of such prices and great future trends at the same time, we still need other ‘accessory/ancillary mechanisms’ to be in place and in functioning proportions in order to invest in physical gold safely.

Investing in gold is a strategic game with strategic goals. We cannot just look at the price and shift asset allocations. We need to follow and act according to the developments and changes in the markets; after the growth of the physical market, the futures market without doubt is now a better choice. Gold is very much intimately connected to the whole financial markets and macro-economic dynamics. When we invest, we need to think about / develop our own theoretical principles, and only after we have found our own thinking with respect to the needs of China, can we establish our presence in the gold market, and preside over it without getting thrown back out.

China Accumulates Gold For The “World Dream”

Gold will return to the international monetary system and China will have a great influence in how this will play out. In 2013 China has imported 2000 tons of gold, quickly becoming one of the most powerful voices at the IMF table. In the following translation we can read how Mr. Zu He Liang, director at the Chinese Gold Market Research Center, sees a future for gold.

Translated by Yi Zhang from Dublin California.

Closely Followed Gold Prices reflects the Pursuit of the “World Dream”

By Zu He Liang

May 7, 2013, Beijing – The 2013 World Gold Market Trend Conference. This conference was co-sponsored by the Capitol University of Economics and Trade, The Chinese Gold Market Research Center, Economic-Trade Gold Limited and the CMP Group. The 2013 World Gold Market Report was broadcasted live exclusively through the He-Xun Gold Network. At the conference, Mr. Zu He Liang, Director of the Chinese Gold Market Research Center stated that the fact that the entire world is paying close attention to the price of gold shows that we are all pursuing a “World Dream”. The “World Dream” is nothing but a pursuit for world peace, the healthy and stable development of the world’s economy, and a world which is fair to every country and its citizens. The pursuit for gold reflects mankind’s pursuit for the “World Dream”.

2013 May China gold conference

Gold represents mankind’s yearning and aspiration for stability, and healthy economic development; it is a wonderful wish. You may all know the following: In 1917, the British proposed a gold standard. From the formal establishment of the standard in 1816 to the beginning of the First World War in 1914, there were 59 countries that implemented the gold standard. During the implementation process, every country voluntarily participated in and proactively established this system. During the span of the 100 years in which the gold standard was established, the world economy was quite stable- there was no inflation, and wealth distribution was very fair. Due to the fact that the gold standard is such a great standard, every country who participated benefited a great deal from it. This is the main reason why so many countries voluntarily followed this standard. By proposing such a standard, the UK had not only benefited a great deal from it, but also brought numerous benefits to all of the participating countries. This is why the gold standard had been kept for a very long time.

After the implementation of the gold standard, why was the United States willing to take over the baton and implement the Bretton Woods System? The focus was also to stabilize the economy, and to have other countries peg their currencies to the US dollar. In the course of implementing the Bretton Woods System, the dollar’s dominance was established. The interest of other countries will have to follow that of the US. Therefore, when there are conflicts of interest between US and other countries, such a system cannot last forever. The Bretton Woods System was later disintegrated. The world financial crisis in 2008 is the worst financial crisis in history; why is it the worst? The reason stems from the fact that there is not an objective “thing” to measure national interest with the interests of the world. We haven’t yet found an alternative to gold which can play a better stabilizing role under these circumstances. We have been trying- for example, we found this thing called SDRs, but SDRs have its limitations. It’s impossible for SDRs to play the same stabilizing effect as gold.

During the future development, President Xi proposed the Chinese dream. In the process of chasing a “World Dream” through the pursuit of gold, we aspire to seek peaceful development in the world. In this process, we still haven’t found a stability factor which is inherent in the system. Since gold had played a stable role in the process of human development, we will put focus on it. We think gold will continue to draw much attention from the whole world.

 

Last year, we organized a seminar on the Chinese gold market; I suggested that we are now in an era of gold investment. In the process of realizing the “World Dream”, prior to the second golden age (standard), there are many opportunities for gold investment. Behind these reflections, we should think more on the strength of gold.

SGE delivery 16-20 December 55 Tons, 2128 Tons YTD

In the end stage of 2013, in between 16 – 20 December, the “Chinese Aunties” have withdrawn 55 tons of gold from the vaults of the Shanghai Gold Exchange. That’s more than the official gold reserves of Finland and most likely more than what has been globally mined that week. The Chinese gold rush has been in an upward trend in recent weeks. Lets see how much gold will be drawn from the vaults in the last trading week of 2013. The yearly total of withdrawals, which equal Chinese gold demand, are on track to reach 2169 tons.

SGE gold premiums remained stable over this period around 1 %.

Overview Shanghai Gold Exchange data week 51

– 55 metric tonnes withdrawn in week 51 (underlined in blue two images below), 16-12-2013/20-12-2013
– w/w  + 8.81 %
– 2128 metric tonnes delivered year to date (underlined in red two images below)
– weekly average 41.7 tonnes YTD, 2013 estimate yearly total 2169 tonnes.

Source: SGEUSGS

For more information on SGE withdrawals read thisthisthis and this.

SGE weekly 51

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

SGE week 51

This chart illustrates SGE gold premiums based on data from the 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

On December 28 there was a podcast released on SilverDoctors.com named: PM FUND MANAGER: 57 TONS OF GOLD DRAINED FROM SHANGHAI VAULTS IN PAST WEEK! It’s a conversation between the Doc and Dave Kanzler.

My comment on the part where they talk about the SGE (starts at 6:50):

The Doc states correctly that in between 9 and 13 December 2013 there were 50 tons of gold withdrawn from the SGE vaults (look a few images up at the screen dump from the Chinese SGE weekly report, I drew a green line under this amount of withdrawals). The Doc also states there has been roughly 2100 tons of gold withdrawn year to date which equals Chinese demand according to the PBOC (underlined in red). Again correct, IMVHO.

Then Dave Kanzler responds that is was actually 57 tons in that week (9-13 December). From this moment on Dave an the Doc start talking about two different subjects. The Doc refers to gold withdrawn from the vaults, where Dave refers to the amount of gold in the vaults that changes ownership at the end of a trading day through settlement between long and short contracts (a process that can be repeated into infinity, not quite significant data for gold investors that are interested in demand). I know this not only because they state different numbers, I know this because it’s clear where Dave gets his data from. Dave looks at the English SGE website that only publishes data on gold ownership changes in the vaults (if you check the website it exactly coincides with Dave’s numbers). The Doc looks at the Chinese SGE website (or my blog) that publishes how much physical gold actually leaves the vaults and tells us a lot about Chinese demand.

On a second note the title of the podcast bears a false statement. In week 50 (nor 51) there has not been 57 tons of gold being withdrawn from the vaults of the Shanghai Gold Exchange.

I wrote an open letter to Andrew Maguire once on the same matter.

Happy new year!

SGE Physical Delivery 2073 Tons YTD, 50 Tons From 9-13 December

The amount of gold withdrawn from the Shanghai Gold Exchange vaults has been increasing in recent weeks. After an explosive week in April, when 117 tons of gold were withdrawn, weekly averages came down to a constant 40 tons throughout the year. At the end of October it seemed Chinese demand for physical gold was declining, but since  November weekly physical delivery has been north of 40 tons. In between 9 and 13 December 50.4 tons of gold were withdrawn from the vaults. Year to date 2073 tons have been withdrawn, which equals to Chinese gold demand according to the PBOC.

Premiums in Shanghai have remained around 1 % over international spot in recent weeks.

USGS estimated total world mining production would be 2700 tons this years, but this estimate was made before the price collapsed in April. After the price drop numerous mines were shut down and thus total world mining production will be far lower than what was expected in January. It could very well be that SGE physical delivery in week 50, which was 50.4 tons, surpassed global mining production, which was estimated at 54.9 tons, but we can only be sure about this when we have the official mining data at year end.

 

Overview Shanghai Gold Exchange data week 50

– 50 metric tonnes delivered in week 50 (withdrawn from the SGE vaults), 09-12-2013/13-12-2013
– w/w  + 13.8 %
– 2073 metric tonnes delivered year to date
– weekly average 41.46 tonnes YTD, 2013 estimate yearly total 2156 tonnes.

Source: SGEUSGS

For more information on SGE delivery read thisthisthis and this.

Shanghai Gold Exchange gold withdrawn from vault week 50, 2013

Screen dump from SGE trade report; the second number from the left (本周交割量) is weekly physical delivery, the second number from the right (累计交割量) is total delivery YTD.


Shanghai Gold Exchange withdrawals from vault week 50

Gold premiums on the SGE based on data from the weekly reports. Difference between SGE gold price in yuan and international gold price in yuan.

SGE premiums week 50, 2013 

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 week 50

In Gold We Trust

SGE foreign exchange gold system

Building A Strong Economic And Financial Security Barrier For China

Presenting another translation of an article from one of the leaders in the Chinese gold industry. The original version appeared on 1 August 2012 in Qiushi magazine, the main academic journal of the Chinese Communist Party’s Central Committee. Sun Zhaoxue is the president of China National Gold Corporation, China’s biggest mining company. He is also president of the China Gold Association, that acts as a bridge between the Chinese government and gold producers in protecting business interests and providing information, consultancy, co-ordination and intermediary services for them. In the article he explains that China needs to hoard gold in order to safeguard the country’s economic stability and to strengthen its defense against external risks.

In 2011 Sun received the award economic person of the year on state television channel CCTV, as you can see in this video (opens in new window). Watch how the show, broadcasted on prime time with orchestral music, moving camera’s and women in cocktail dresses, emphasizes the importance of gold and glorifies the guy digging it up. In his acceptance speech Sun said the price of gold will rise and China should seize the opportunity to act accordingly.

On the Lujiazui financial reform and opening up Forum in 2009 he said China should not only boost it’s official reserves, civil hoarding is just as important for economic stablilty, he recommends to invest 20 % of savings in gold.

Although other sites (ie the Financial Times) have quoted from Sun’s oncoming article, none of them published the whole thing. This MUST READ is translated for us by Soh Tiong Hum (click for his very interesting +Google page).

the state will need to elevate gold to an equal strategic resource as oil

Building a strong economic and financial security barrier for China

- Actively build and implement national gold strategies

Published 1 August 2012, Author: SUN Zhaoxue

Because Gold possesses stable intrinsic value, it is both the cornerstone of a countries’ currency and credit as well as a global strategic reserve. Without exception, world economic powers established and implement gold strategies at the national level. China is the world’s second largest economy, in order to enhance core competitiveness in a shorter period of time, an important aspect is an integrated policy of gold exploration, production, trade, consumption and investment so as to strengthen China’s control of this strategic resource, thereby effectively safeguard the country’s economic and financial security in the process of globalization and strengthen defense against external risks.

First, rediscover the status and role of gold reserves from a strategic height

After the disintegration of the Bretton Woods system in the 1970s, the gold standard which was in use for a century collapsed. Under the influence of the US Dollar hegemony the stabilizing effect of gold was widely questioned, the ‘gold is useless’ discussion began to spread around the globe. Many people thought that gold is no longer the monetary base, that storing gold will only increase the cost of reserves. Therefore, some central banks began to sell gold reserves and gold prices continued to slump. Affected by this point of view, the growth of gold reserves for China, the world’s largest gold producer, began to slow.

Indeed, since mankind’s discovery of gold, gold because of its stability and rarity became mankind’s important method of exchanging labor and wealth. Along with the deepening of economic globalization gold stabilized societies and economies, prevented inflation, increased national credit-worthiness and stabilized exchange rates. It possesses a status that is irreplaceable by other capital assets. Especially since the outbreak of the international financial crisis, gold’s safe-haven against inflation is increasingly prominent, its strategic position in the reserves of wealth regained world attention and central banks became net buyers of gold.

Currently, there are more and more people recognizing that the ‘gold is useless’ story contains too many lies. 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.

Especially noteworthy is that in the course of this international financial crisis, the US shows a huge financial deficit but it did not sell any of its gold reserves to reduce debt. Instead it turned on the printer, massively increasing the US Dollar supply, making the wealth of those countries and regions with foreign reserves mainly denominated in US Dollar quickly diminish, in effect automatically reducing their own debt. In stark contrast with the sharp depreciation of the US Dollar, international gold price continue to rise breaking $1900 US Dollars per ounce in 2011, gold’s asset-preservation contrasts vividly with the devaluation of credit-based assets. Naturally the more devalued the US Dollar, the more the gold price rises, the more evident the function of US gold reserves as a hedge. Although the international financial crisis was established in the US, the crisis failed to shake the dollar’s status as an international currency. US net wealth did not appear to diminish with the same degree of the dollar’s decline, an important reason why the US’ 8,133 tons of gold reserves play a role. 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.

After 30 years of reform and development, China has become a highly open country, not only moving in tandem with the world economy, but is playing an increasingly important role in the way the setup of the world economy changes. Therefore to win over new changes and challenges in the international post-crisis era, China must not only advance the internationalization of the Chinese RMB supported by a massive economy, but also view gold reserves as an important parameter and achieve a logical ratio between gold reserves and economic output. This requires us to make a forward looking judgment on the scale of gold reserves, build and implement quickly a national gold strategy that is suitable to China’s economic development.

Second, effort to increase domestic resource integration is our main channel to increase gold reserves

Because gold is a natural currency, from assuring national economic development and
security, to hastening the advancement of RMB internationalization, increasing gold reserves should become a central pillar in our country’s development strategy. International experience shows that a country requires 10% of foreign reserves in gold to ensure financial stability while achieving high economic growth concurrently. At the moment, the US, France, Italy and other countries’ gold accounts for 70% of forex reserves. Entering the new century, China increased its gold reserves twice in 2001 from 394 tons to 500 tons, and in 2003 to 600 tons. After the international financial crisis erupted, gold reserves were increased to 1054 tons but gold reserves account for less than 1.6% of forex reserves – a wide gap compared to developed countries.

 

Due to China’s huge forex reserves, it’s difficult in the short term to make gold a main channel to accumulate forex reserves like the US and European countries. It’s especially true that as global gold prices make new highs, increasing gold reserves also become more difficult [Author includes an idiom ’风物长宜放眼量’ from Mao Zedong here; idiom says that there are many setbacks and frustrations in life but one should adopt a long-term horizon to analyze a problem in order to find solutions]. We need to establish a more clear national gold strategy, look at benefits over a long term as a starting point, amply make use of two markets, two resources, continue to grow gold reserves and progressively become a ‘gold-reserve’ nation that is commensurate with the country’s economic strength. Based on current conditions, apart from accumulating gold from international markets at opportune moments, the main channel to implement a national gold strategy is to increases domestic gold integration through increasing gold production, this in order to strengthen the all-round development of China’s economy and financial ‘breakwater’.

 

In the new century, under the guidance of systematic development, China’s gold industry ushered in a period of accelerated development and in one fell swoop got rid of the ‘poor gold country’ hat. From 2007 to 2011, China’s gold production took global pole position and established a complete industrial system of gold, effectively supporting the national gold strategy. There are still many shortcomings in our current gold industry, particularly prominent problems include: generally small scale mining, low proven reserves, unconsolidated mining concessions, recovery of mining by-products, development order, environment protection and other aspects of uneven development. Statistics show that there were more than 500 Chinese regions that mine gold in 2011, making up more than 700 gold mines, yielding an average of 0.5 tons per mine. The world’s largest gold producer Barrick Gold Corporation of Canada produced 239.5 tons however.

To address this situation, China is also increasing gold resource integration efforts in recent years. However, due to long-standing lack of development of gold resources on strategic planning, and in recent years an illusion of wealth brought by the gold bull market, a variety of aspects of social capital have been involved in mining. To fundamentally solve these problems, the state will need to elevate gold to an equal strategic resource as oil and energy, from the whole industry chain to develop industry planning and resource strategies. First, we must restrict access, from a technical, financial, security and environmental protection perspective, to improve the access threshold for exploration of gold. To raise the barrier of entry will gain the efficiency of mining. Second, to further improve mining management we must increase resource integration efforts, further develop and expand main gold exploration and development companies into leading enterprises, so as to achieve projects of scale. Third we should encourage key enterprises that are competitive to penetrate globally so as to avoid loss of bargaining power, because domestic enterprises consist of small players.

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. World Gold Council statistics show that Chinese individuals possess less than 5 grams of gold per capita, a significant difference to the global average of more than 20 grams. This shows that there big potential for private ownership.

Third, committed to the promising and rigorous implementation of the national gold strategy

Formed in early 2003, China Gold Group Corporation is both China’s largest gold production and sales enterprises, but also the gold industry’s only state owned enterprise. Under the direction of scientific development [this term appears several times – it can mean using a systematic approach or can also refer to a government directive] over the past 10 years, China Gold Group Corporation always adhered to building an excellent business, preventing financial risks and servicing the national situation as a top priority China Gold is committed to promote the coordinated development of gold industry’s exploration, mining, processing, consumption and investment in the industrial chain for a healthy development of China’s gold market, in order to contribute to the effective implementation of the national gold strategy. In 2012, China Gold Group Corporation’s total assets will exceed more than ¥60 billion yuan, sales revenue will exceed ¥100 billion yuan. Currently, the Group has a daily processing capacity of 150,000 tons of ore, business scope covers the entire value chain and has grown into China’s gold industry leader. The group has to play a leadership role as state-own enterprise, to turn the gold industry into an important pillar of stable national economic growth under the national gold strategy.

 

In the “Twelve Five” period [abbreviation for central policy 5-year plan; 12-5 is the plan for period 2011-2015we will target the gold industry with cutting-edge technology and continue to increase investment in science and technology for the implementation of a technology driven strategy to promote the optimization and upgrading of the gold industry. At present China Gold Group Corporation has three R&D projects incorporated into the “Twelve Five” National Science and Technology Support Program, appointed by the Ministry of Science to be a green gold mining technology feasibility study project.

The company plays a major role in promoting large-scale research projects. Through independent innovation and integrated innovation we address the constraints of gold exploration, mining, smelting and other areas of industry challenges, and continuously improve the comprehensive development and utilization of mineral resources capability. Meanwhile, we should focus on projects as an opportunity to revitalize the national equipment manufacturing industry as its mission, find ‘win-win’ models of cooperation for mining companies and equipment manufacturers, actively support localization of major equipment to promote the continuous innovation of major mining equipment producers.

To bear national responsibility and increase national gold reserves in the “Twelve Five” period, China Gold Group Corporation must firmly grasp the lifeline of resources with methods such as exploration to increasing proven reserves, merger and acquisition, base construction and opening up offshore gold resources to accelerate increase of national gold reserves. On the one hand, we should make full use of own research and manpower, increase number of talents, funds and equipment to carry out prospecting, achieve the highest gold reserves in the shortest time; on the other hand actively secure local government support to increase regional integration, breakthroughs, scientific development, achieving higher efficiency, to solve the gold industry’s problem of being resource-inefficient and environmentally destructive because of mining small, scattered, isolated, far’. In the near term, China Gold Group Corporation will, on the 20 national regions identified for gold production, speed up consolidation of small mines into a batch of technologically-advanced, environmentally friendly, ‘role-model’ enterprises that can produce 3-8 tons annually. Concurrently, actively implement a globalization strategy that will exploit overseas resources and increase channels to grow China’s gold reserves.

We should advocate to ‘store gold among the people’ and guide a healthy positive development in this segment. In recent years, the domestic gold industry’s rapid growth provided good conditions for various uses of gold, as well as create space for this business to grow faster. China Gold Group Corporation has to catch the opportunity, while increasing its supply capacity, to push ‘store gold among people’ strategy, actively extend the business value chain, increase gold investment types, encourage and promote individuals’ gold investment and consumption. Foremost, maximize the utilization of nearly 1600 China Gold retailers, increase sales channels, optimize sales network, strengthen branding and achieve to ‘store gold among the people’ and thus ‘store wealth among the people’. This is the objective under our gold strategy.

World economies are shaken and insecure, causes of instability are coming together and uncertainty is growing. The world economy faces new changes, new challenges and new opportunities, therefore we must relook the status and function of gold from a strategic height and create and implement a national gold strategy, to strengthen our country’s ability to counter complex situations. This is the only way for China’s gold industry to adopt a scientific evolution, to push China from across the milestone from a ‘large gold country’ to a ‘strong gold country’.

(Author : China Gold Group Corporation General Manager, President of China Gold Association)