Tag Archives: Chinese gold policy

China Stops Publishing SGE Withdrawal Figures

UPDATE 11 MARCH 2016: THE SGE HAS CONFIRMED TO CONTINUE PUBLISHING SGE WITHDRAWALS! 

My research into the Chinese gold market started in 2013 when I noted the significance of a number published on a weekly basis in the Chinese Market Data Weekly Reports on the website of the Shanghai Gold Exchange (SGE) regarding the amount of physical gold withdrawn from the vaults. It appeared to me the total amount of gold withdrawn from the SGE vaults on a yearly basis exactly equaled total Chinese gold demand as disclosed in the China Gold Market Report. Consequently, weekly SGE withdrawals served us as an interim indicator for total Chinese (wholesale) gold demand. Subsequently, I started publishing SGE withdrawals every Friday, accompanied with an analysis about the Chinese gold market, which gradually exposed the true size of the Chinese physical gold market. By 2015 the whole gold space was focused on SGE withdrawals!

In addition, genuine Chinese gold demand greatly exceeded Chinese gold demand as reported by the World Gold Council, whose supply and demand data is tracked by most investors around the world. The discrepancy stimulated me to thoroughly investigate the Chinese gold market and SGE withdrawals. Throughout the years all evidence I collected pointed in the same direction; Chinese gold demand is roughly twice as much as what was widely assumed across the globe and SGE withdrawals provide a spy-hole to track the Chinese gold market! However, at the same time my findings were spreading through the gold space the Chinese slowly started to cover their tracks.

Shanghai Gold Exchange SGE withdrawals yearly 2007 2015

The Motive

After the crisis in 2008 it became even more apparent in the higher echelons of the Communist Party that the international fiat monetary system was not sustainable. The development of the Chinese gold market, that has its roots in the late seventies but leaped forward in 2002 when the SGE was erected, had to accelerate to protect the Chinese economy from future turmoil. Being the second largest economy globally but in arrears regarding physical gold reserves – as a result of a closed market since the Communist Party came in power in 1949 – China has a strong motive to buy gold in secret. For, if they would openly buy the volumes they do the gold price would swiftly be affected, damaging China’s window of opportunity in coming on par with Western gold reserves.

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And so, the Chinese decided to roll out more measures to hide their insatiable gold demand. On top of being dishonest about their true official gold reserves and eclipsing gold import data in regular customs reports, the Chinese ceased publishing the (English) China Gold Market Reports and SGE Annual Reports – and by 2014 all existing reports were taken offline. The yearly (Chinese) Gold Yearbook by the China Gold Association was no longer digitally published, only in hard copies. When I asked my contact at the SGE last year if I could purchase a copy of the China Gold Market Report I was told, “due to new regulatory measures the reports are not publicly available anymore”. Be aware, in all the aforementioned reports total Chinese gold demand consistently equals SGE withdrawals – confirming the significance of SGE withdrawals – and the reports exactly disclose total Chinese gold import.

SGE Withdrawals Not Disclosed In Most Recent Data

But hiding the reports was not enough for the Chinese gold market architects. Apparently, the publishing of SGE withdrawals had to be discontinued, as it simply attracted too much attention to the true size of the Chinese physical gold market. The (Chinese) Market Data Weekly Reports on the first two trading weeks of 2016 at the SGE listed no withdrawal figures.

In an announcement on the SGE website from 11 January 2016 it stated the giant bourse would henceforth publish its weekly “delivery amount” (total deliveries from both spot deferred products and physical products) and “load-out volume” (withdrawals). Though in week 1 there was no “load-out volume” published and the disclosed “delivery amount” excluded delivery of physical products as I reported last week. The reporting by the SGE in week 1 did not match the announcement.

The 2016 week 2 report is different, now it seems the top left number (247,201.86 Kg) in the overview table indeed resembles total deliveries of all spot deferred products (114,536 Kg) plus total deliveries of all physical products (182,833 Kg). Yet, the sum of both deliveries is 297,359 Kg according to my calculations, not 247,203 Kg. So, I’m probably missing something, in any case SGE withdrawals are not disclosed!

Screen Shot 2016-01-25 at 11.32.10 pm
Overview table 2016 week 2 report. The “delivery amount” is the total amount of gold that has changed ownership in one week. 
Screen Shot 2016-01-17 at 5.49.15 pm
Overview table 2016 week 1 report including translations.

When I called the SGE I was told the “load-out volume” (withdrawals) will not be published anymore, a statement that matches the new reports. This is a disaster for the gold community. SGE withdrawals provided a unique transparent metric for Chinese gold demand and it’s gone. However, the fact the Chinese stopped publishing SGE withdrawals once again strongly confirms the importance of these numbers from the past! Until December 2015 these numbers gave us a direct measure of Chinese wholesale gold demand. The truth became a little uncomfortable for the Chinese.

Ah well, I guess I’ll be focusing more on other gold markets from now on ;-)

In China Everyone Can Buy Gold At The SGE

The Shanghai Gold Exchange launched a smartphone app for customers to trade gold.

It’s advised to have read The Chinese Gold Market Essentials Guide before you continue.

The main reason there is such a large discrepancy between Chinese gold demand as disclosed by the World Gold Council (WGC) and the amount of gold withdrawn from the vaults of the Shanghai Gold Exchange (SGE), the latter being a measure for Chinese wholesale gold demand, is because of direct purchases by individual and institutional clients at the SGE. Whilst the WGC, and many other consultancy firms, measure Chinese gold demand strictly by how much gold is sold through retail channels, the reality is that in China every citizen can open an SGE account and buy gold directly in the wholesale market (the SGE). Such direct purchases at the SGE are not captured in retail demand.

As we all know many wealthy Chinese invest in gold. In the knowledge these people all have direct access to the wholesale market, we can ask ourselves, why would any of them buy gold at retail level? Naturally, Chinese women prefer to buy gold in the form of jewelry because that’s an investment they can flaunt with. But if gold is not bought to flaunt with rational investors would always prefer to pay the lowest price for the gold content. That is, at the SGE.

A Chinese investor that wants to invest, for example, 100,000 RMB in gold will likely open an SGE account through which he can exchange his fiat money for physical metal. At the SGE the investor is granted to pay the lowest price. His purchase at the SGE , however, would then not be counted in retail demand.

My estimate is that half of the gold withdrawn from the vaults of the SGE is bought by wholesale customers that process the metal into gold products, like jewelry, that are eventually sold to the private sector. The other half of the gold withdrawn from the vaults is purchased directly by the private sector (individual and institutional clients). Have a look at the next chart:

SGE distribution

Currently the SGE has almost 10,000 institutional and over 8.3 million individual clients. If those 8.3 million clients all buy 100 grams of gold a year that would be 830 tonnes of gold. Of course we don’t know how much all the individual and institutional clients buy every year, though, the total number of institutional and individual clients can easily explain the huge volumes of gold withdrawn from the vaults on a yearly basis. In 2015 no less than 2,596 tonnes of gold were withdrawn from the SGE vaults – in comparison 2,860 tonnes were globally mined.

Shanghai Gold Exchange SGE withdrawals yearly 2007 2015

Previously I’ve written how easy it is for Chinese citizens to open an SGE account and start trading. As of December last year people with an SGE account can also trade gold on their smartphone (Android or iOS) through the Yijintong app that provides access to the SGE trading system. Within a couple of weeks from now “SGE Gold Accounts” can also be opened through this application. Below I’ve displayed a couple of screenshots from Yijintong:

The announcement by the SGE regarding the launch of the new mobile trading software was published on 10 December 2015. BullionStar decided to translate the article as it once again exposes what the Chinese gold market is all about. For an orderly, healthy and strong development of the Chinese gold market all enterprises and citizens have direct access to the central SGE trading system overseen by the PBOC. Accordingly, everyone in China can buy gold directly at the SGE and thus Chinese gold demand measured at retail level is anything but complete.

Next is the translation of the article, at the end you can find the QR code for downloading the software yourself.

State-level Gold Market Transaction Terminal “Yijintong” Was Formally Released

December 10, 2015

With the increasing growth of residents’ wealth in recent years, gold and silver investment has become a trend. However, numerous precious metals transaction platforms and software of varying quality have brought many risks to vast investors on the way to wealth. In order to guarantee investors’ legal rights and guide the healthy development of gold market, “Yijintong”, an authoritative and professional transaction terminal integrating market, transaction and online account opening has emerged.

“Yijintong” breaks a cocoon after painstaking efforts for half a year

In December 2015, the Shanghai Gold Exchange “Yijintong” app was formally released and has entered into the trial operation stage. It is the first professional mobile terminal of state-level gold market jointly researched and developed by the Gold Exchange and all its members after half a year. The first batch of online members include China Bank, Industrial Bank, Shanghai Pudong Development Bank, China Everbright Bank, Ping An Bank, Postal Savings Bank, Ningbo Bank and Haitong Securities. Members who agent personal business in exchanges such as the Agricultural Bank of China, China Securities, China Construction Bank, Bank of Communications, China Minsheng Banking Corp will join the system in succession.

“Yijintong” has comprehensive functions and advanced systems, which are compatible with various Android and iOS operating systems. Right now, it possesses market, transaction, search and information functions, so investors can conduct transactions via mobile phones after opening an account online. In early 2016, Yijintong will also be supporting mobile phone online account opening function. After that, new users will be able to establish Shanghai Gold Exchange’s “Gold Account” business on their mobile phones directly, and avoid the step of visiting stores. It has brought convenience for personal investors to participate in gold and silver transactions.

Authoritative, convenient and comprehensive “Gold Splendor”

Shanghai Gold Exchange has always been dedicated to the healthy and orderly development of the Chinese gold market under the guidance of the Central Bank [the PBOC] leaders for years. It strives to serve entity industry and members in order to offer an open, fair and transparent transaction platform for investors. Now, it has gradually formed to an abundant market system of domestic and overseas markets integrating bidding (spot and derivatives), asking, leasing and financing. Up until November 2015 the Gold Exchange counted 246 members globally, 183 domestic members and 63 international members, next  to almost 10,000 institutional and over 8.3 million individual clients.

As the first domestic professional mobile terminal released by the state-level gold market, “Yijintong” has attracted the market attention after it was released owing to its identity of “being jointly released by the Shanghai Gold Exchange and members”. The gold market and investors have welcomed its authoritative information and fair and transparent transaction functions.

While taking functional practicability and user experience into consideration, Yijintong has taken the lead in realizing rapid declaration via mobile phones, real-time account search and internal reference of professional investment, helped investors sell or buy gold, open or close transactions, as well as utilized professional data and information to better grasp the investment opportunities on the precious gold market. One thing to point out is that the Gold Exchange and members jointly released the system. Investors can access to transactions through “Yijintong” without changing the existing business structure, agency relations and risk responsibility system of the Gold Exchange, members and investors.

Investors can log into Yijintong through mobile phones to conduct daily and nightly market transactions and search, utilizing all-day mobile phone services for gold and silver transactions, allowing Yijintong to become a mobile phone gold and silver investment edge tool that integrates functions and practicability, which also helps investors to do well in both work and financial management.

Download methods: iOS and Android mobile phone users can scan the QR code and open it in the browser to download and install directly.

SGE app qr code

 

The Chinese Gold Market Essentials Guide

Everything there is to know about the Chinese gold market and the true size of Chinese private and official gold demand. Start here.

This post will guide you through all relevant articles that have been published on BullionStar Blogs over the years that elucidate the mechanics of the Chinese (domestic) gold market and genuine Chinese gold demand. If you are new to the Chinese gold market or like to refresh your memory, this post provides a staring point from where to navigate through all segments of the Chinese gold market you like to study. For example, Chinese gold demand metrics, the Shanghai Gold Exchange (SGE) system, Chinese cross-border gold trade rules, the Chinese gold lease market and official gold reserves held by China’s central bank the People’s Bank Of China (PBOC).

The BullionStar blog posts that collectively clarify all facets of the Chinese gold market are titled Chinese Gold Market Essentials. Whenever the mechanics of the Chinese gold market develop all Chinese Gold Market Essentials will be updated or new ones will be published, as to remain a comprehensive knowledge base on the largest physical gold market in the world at all times. All Chinese Gold Market Essentials have been recently rewritten and the post on PBOC gold purchases contains many very important new insights. 

Topical data such as monthly Chinese gold import numbers will not be updated in the Chinese Gold Market Essentials, however, this data will be published in new blog posts appearing on my BullionStar Blogs homepage, accompanied with a link to this webpage to be complete.

If there is anything unclear, if you have additional information or if you have a suggestion to improve the Chinese Gold Market Essentials, please send me an email at koos.jansen@bullionstar.com.

Understanding The Chinese Gold Market Step By Step

The unique structure of the Chinese domestic gold market, the SGE system, and why the amount of physical gold withdrawn from the vaults of the SGE (published on a weekly basis) can be used as a measure for Chinese wholesale gold demand is explained in part one: The Mechanics Of The Chinese Domestic Gold Market. It also provides a basic understanding of contrasting metrics applied to measure Chinese gold demand, and the difference between SGE withdrawals and Chinese consumer gold demand as disclosed by the World Gold Council, which has aggregated to at least 2,500 tonnes from 2007 until 2015. For whatever reason, the World Gold Council and its affiliates continuously present feeble arguments that should explain the difference. The Chinese Gold Market Essentials debunk these arguments where necessary, back up by facts, and reveal genuine Chinese gold demand.

More detailed rules regarding cross-border gold trade in and out of the Chinese domestic gold market and Free Trade Zones in China are discussed in part two: Chinese Cross-Border Gold Trade Rules.

When fully comprehending the mechanics of the Chinese domestic gold market and Chinese cross-border gold trade rules you can continue reading Workings Of The Shanghai International Gold Exchange about the international subsidiary exchange of the SGE set up to become the major gold trading hub in Asia. Related is SGE Withdrawals In Perspective that discusses how trading activity on the Shanghai International Gold Exchange (SGEI) can potentially blur our view on Chinese wholesale gold demand when measured by SGE withdrawals.

Congratz! At this point you have a thorough understanding of the Chinese gold market. To Study more about the difference please continue with Chinese Commodity Financing Deals Explained, which is mainly about the Chinese gold lease market. The post also includes many links to additional posts about the Chinese gold lease market, among others, a paper written by the PBOC in 2011 exclusively translated by BullionStar. For a detailed study on the difference, and thus genuine Chinese gold demand, please read Why SGE Withdrawals Equal Chinese Gold Demand And Why Not (The Argument List).

Finally, please read PBOC Gold Purchases: Separating Facts from Speculation for studying the amount of gold accumulated by China’s central bank in recent years in addition to private reserves. At the end of the post you can find an overview of the estimated amounts of above ground gold in China (privately owned gold and official holdings). This post has collected many new contributions in recent months, a must read!

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.

Gold Price Manipulation Goes Mainstream On German TV

Public TV channel 3sat, which is a cooperation between Germany, Austria and Switzerland, broadcasted a short documentary on gold price manipulation on May 9, 2014. More and more mainstream news outlets are covering the allegedly gold price manipulation, after evidence is pilling up and many other market manipulations, like LIBOR, are coming out. From the Financial Times February 23, 2014:

Global gold prices may have been manipulated on 50 per cent of occasions between January 2010 and December 2013, according to analysis by Fideres, a consultancy.

The findings come amid a probe by German and UK regulators into alleged manipulation of the gold price, which is set twice a day by Deutsche Bank, HSBC, Barclays, Bank of Nova Scotia and Société Générale in a process known as the “London gold fixing”.

Fideres’ research found the gold price frequently climbs (or falls) once a twice-daily conference call between the five banks begins, peaks (or troughs) almost exactly as the call ends and then experiences a sharp reversal, a pattern it alleged may be evidence of “collusive behaviour”.

“The behaviour of the gold price is very suspicious in 50 per cent of the cases. This is not something you would expect to see if you take into account normal market factors,“ said Alberto Thomas, a partner at Fideres.

Oddly enough this article from the Financial Times was removed from their website two days after publication.

One of the most extensive researches that has been done on gold price manipulation is by Dimitri Speck in his book “The Gold Cartel”. On his website there is a chart that illustrates what Fideres’ found about the London gold fix. Dimitri Speck was, amongst others, interviewed by 3sat for the documentary.

London Gold Price Fix Manipulation Chart, By Dimitri Speck

I do not agree with everything that’s being said in the video, for example they state Chinese gold demand was 1066 tonnes in 2013, which is based upon numbers from the World Gold Council I happen to disagree with, or that it’s not necessary to invest in physical gold stored outside the banking system, though I thought it was worth sharing this clip with subtitles for the English speaking world. Germany is one of the few Western countries where there is a broad consensus about the importance of gold and sound money.

Press the captions button and choose English. Translated by Behfar Bastani.

Transcript:

Presenter: Good evening and welcome to the business magazine Makro. For many people, the purchase of gold represents a safe reserve for bad times. No wonder that, at the height of the financial crisis savers were queuing up at gold dealers. Throughout history, gold has served as a promise of reliability and stability. But today there are considerable doubts as to whether that promise remains valid, because an examination of gold prices reveals machinations fit for a financial thriller.

Narrator: London, the most important gold market in the world. Whether the price of gold rises or falls is determined here. Twice a day, a handful of bankers confer on the phone to fix the daily price of the precious metal. Thus arises the most important reference value for physical gold, used by businesses ranging from jewellers to gold mines. There is no public oversight for the “Fixing”. Apparently, this lack of restraint has led to serious manipulations of the gold price, as pointed out by a current investigation which has detected strange price movements spanning a number of years.

Rosa Abrantes-Metz: The setting of the gold fixing is, in my view, problematic. It opens the door for abuse and manipulation. There is absolutely no transparency in the arrangements made during the private phone conversations of this small group of participants as they decide what the price of gold should be.

ad-728x90-arrow-gold

Narrator: Experts have long complained that this system is particularly susceptible to manipulation. Only five banks participate in the London gold fix, thus far including the Deutsche Bank. In the more extreme futures markets, where bets are made on gold price developments in future months, the quantities that exchange hands are of quite different magnitudes.

Folker Hellmeyer: We have a situation where this market is dominated by three essential players, three banks, in the USA. These banks have a market share on the order of 80 percent. In other words, we are talking about an almost monopolistic structure which of course also provides the power to manipulate the market.

Narrator: And which power is apparently being abundantly used. The futures market, intended to provide predictability and stability for future prices, is controlled by the following three banks: HSBC, Citibank, and JP Morgan. Their tool: paper gold securities.

Thorsten Schulte: It is possible to simply sell scraps of paper, thereby creating fear, especially fear among those who possess gold in its physical form, and who may then arrange to sell their metal, eventually resulting in such a a wave of fear …

Narrator: The gold price has been attacked in this fashion time and again, often with massive price declines within a matter of a few minutes. Yet, there is quite a bit more to the story.

Dimitri Speck: Gold is the opponent of debt based moneys, i.e. currencies, and in particular the US Dollar. Therefore, the US Federal Reserve has an interest in a weak gold price, and the US government protects the manipulation of the gold price by the private banks.

Narrator: For years, the US Federal Reserve has served as the lender of last resort. Gold must be weak if a loss of confidence in the US Dollar is to be averted. It has been difficult to prove that this is a rigged game with a stacked deck, but if the gold market manipulations are indeed encouraged in addition to being condoned, that would explain why oversight bodies have thus far turned a blind eye to it, despite years of massive conspicuous activities in the futures markets, as with the gold fixing in London.

Presenter: Incidentally, the Deutsche Bank intends to withdraw from the gold fix. As of now, no other bank has expressed an interest
in filling that spot. Too many banks are scared to damage their good reputation in London. Gold is a speculation commodity with a high symbolic power. Its price is therefore strongly influenced by many fears and hopes. Here are a few facts about that from our Makroskop.

Narrator: 31.1 grams, the weight of one ounce of refined gold. The precious metal is regarded foremost as protection in times of crisis. Gold climbed rapidly during the financial and economic crisis. Currently gold trades for about USD $1300 per ounce. Yet the more hopes grow for an end to the international economic slowdown, the more the price of gold declines. The US government continues to hold the largest governmental gold reserves at 261.6 million ounces, over 8100 metric tonnes. The US is followed by Germany, Italy, France, and China. But the largest demand comes from the Middle Kingdom. From gold coins to gold bars, the Chinese are accumulating large quantities. In 2013 the Chinese acquired 1065.8 tonnes, moving for the first time ahead of the Indians who purchased 974.8 tonnes in 2013. Jewellery accounts for the highest portion of the demand. In China, jewellery sales have tripled since 2004. They represent about 30 percent of worldwide demand. About 400 tonnes was purchased by businesses. In particular, China’s electronic manufacturers need industrial gold for production. Meanwhile, in the mining sector, China has risen from being a small player to become the number one gold producing country. In the past tens years, Chinese gold production has more than doubled from 217 to 437 tonnes.

Presenter: Today, the course of the gold market is being set by China. What are the worldwide consequences of this? Let’s talk about that with the chief editor of the Frankfurter Börsenbrief.

Presenter: A very good evening to you, Mr. Bernhard Klinzing. These days the flow of gold seems to be from the west to the east, as we have just seen. There are considerably more buyers in Asia than in the developed western countries. What do you attribute this to?

Klinzing: The reason is that India and China, which together make up half the gold market, do not have state provided elder care, which is valued differently there. Inflation fears are another factor. “The Chinese are the Germans of Asia”, it is said, and so they sit on gold.

Presenter: We have seen that the price of gold is heavily manipulated. There are manipulators that are apparently backed
from the highest places. Do you believe that, or do you regard it as a conspiracy theory?

Klinzing: I don’t believe that based on the Deutsche Bank and the London fix, but based on what we just saw from the Americans I absolutely do see that danger, because there is a quasi “Edward Snowden”. His name is Paul Roberts and he worked at the US treasury department and he has confirmed that the Fed, together with a number of banks, are preventing gold from rising above $1400 per ounce by continually providing gold bids which put downward pressure on the price.

Presenter: Given the unsound loans that came to light in the Libor scandal or the forex markets, do you believe that this is only the tip of the iceberg in the gold trade?

Klinzing: I would say that we are only seeing a snow ball from the iceberg while a lot more is hidden at the bottom. The banks earn a hefty sum whenever they fix the gold price by as little as 1/10th of a US Dollar upwards or downwards. You can see that with Goldman Sachs who published studies predicting gold’s decline to $950 per ounce while at the same time increasing their own gold positions by 20%. That does not match up. Presenter: What are some consequences for other market participants? You stated that the banks are lining their pockets, but what are some of the consequences?

Klinzing: Yes, there is a hedge fund manager by the name of William Kaye who has said that the German gold is no longer stored in the vaults of the Fed in New York, but has already found its way to China because the Fed needed the gold in order to carry out its market manipulations. This is as yet only a suspicion, and it may even be a conspiracy theory, but the Germans were denied an opportunity to touch or take samples of their own gold in New York.

Presenter: One could hardly think up a better plot for an economic thriller. I would like to talk about investors again. Is gold a good investment for the, let’s say, small investor?

Klinzing: One should not construct a portfolio with only gold, that much should be clear. But of course gold is a very attractive portfolio addition, whereby investors can insure the value of their portfolio against currency risks. Because if the Euro rises, the value of gold falls, so you can participate only less than possible, therefore invest always in a currency protected fashion.

Presenter: How can I do that as an investor?

Klinzing: There are certificates for doing this, there is no need for an investor to store gold in their own vault or under their pillow. For that there are very good solutions on the financial markets.

Presenter: Before we wrap up, what are your thoughts on how the gold price develops further from here?

Klinzing: We can see that in China the standard of living is rising, the middle class will grow from 300 million people to 500 million by 2020, and urbanization is accelerating. This means that there will be much more demand for gold from China, as well as from India. I don’t believe that gold will break $1400 per ounce this year, but we will see a new gold rally in the next few years.

Presenter: An overview of the gold price from Bernhard Klinzing of the Frankfurter Börsenbrief. Thank you for being on the show with us tonight. Dear viewers, if you have any questions for our studio guest, please visit the Makro blog where Mr. Klinzing will be available for a little while longer after the show. On our homepage you will also find additional background material on the topic of gold.

In Gold We Trust

SGE Withdrawals Equal Chinese Gold Demand, Part 3

On April 4, 2014 Alasdair Macleod published an extensive analysis on the Chinese gold market. I felt obligated to respond to it by sharing my point of view and explain where I disagree with his analysis. I think his estimates are largely overstated because he double counts certain demand categories. He states Chinese gold demand in 2013 was 4843 metric tonnes, according to me it was 2197 metric tonnes (my estimate excludes some hidden demand and PBOC purchases on which I have no hard numbers). Setting out our differences was incidentally a good occasion for me to write another in-depth analysis on the Chinese gold market.

I highly respect Macleod, who was probably working in finance when I was in diapers, and I’m very grateful he has been using my findings about SGE withdrawals and the structure of the Chinese gold market. I see very little commentators stepping into this realm, though it’s truly the most important economic event happening in our time. Having said that, my concern is the accuracy of the data being spread. I present my analysis:

For all clarity please note I make a clear distinction between deliveries and withdrawals since a couple of months, as they do not relate to the same data. The SGE uses the term deliveries inconsistently which has caused for confusion.

Let’s go through the aspects of the Chinese gold market in random order; PBOC demand, the SGE, domestic mining, mainland net import and Hong Kong trade.

PBOC Gold Purchases

Macleod states all Chinese domestic mine supply is soaked up by the PBOC, according to my analysis this is not likely to be the case.

The main objectives for the PBOC to accumulate gold are:

– Supporting the renminbi for its internationalization (adding trust and credibility)

– Owning hard currency as the cornerstone of capitalism.

– Owning reserves that protect the Chinese economy from external/internal shocks and inflation.

– Owning reserves that are not controlled by a foreign nation (the US).

– Diversifying its excessively large USD reserves prior to an irrevocable USD devaluation.

– Hedge their exorbitant USD reserves.

In my opinion the PBOC (or its proxies SAFE and CIC) does not purchase gold from domestic mines or from the SGE. The PBOC’s incentive is to exchange USD’s for gold, preferably buying undervalued gold with overvalued dollars. Hence the PBOC buys in utmost secrecy, not to affect the market.

It wouldn’t make sense for the PBOC to buy gold from domestic mines because they would have to pay in RMB. This wouldn’t fit all their objectives mentioned above. Additionally Chinese law dictates all domestic gold mining output is required to be sold through the SGE (page 15). Last, I personally have never come across any evidence the PBOC has bought domestic mine supply in recent years.

Before the liberalization of the Chinese gold market in 2002 the PBOC did buy all domestic mine supply because the PBOC had the monopoly in the Chinese gold market; the PBOC was the Chinese gold market. A brief history lesson from SGE president Wang Zhe in 2004:

In April 2001, the governor of the PBOC announced the abolishment of the gold monopoly with a planning management system. In June of that year, the weekly quotation system for the gold price officially came into operation, which adjusted the domestic gold price in accordance with the price on the international market. The Shanghai Gold Exchange (SGE) officially opened on 30 October 2002, representing an important breakpoint in the revolution of China’s gold system, and reflected the great progress being made.

From chairman of the SGE board, Shen Xiangrong, in 2004:

After the PBOC abolished the monopoly on gold allocation and management, the SGE assumed the basic role of allocation and management of gold resources, stipulating the healthy and orderly development for gold production, circulation and consumption.

When the SGE was launched in 2002, the gold market wasn’t liberalized overnight, as one can imagine. It took a couple of years before the market functioned as the PBOC had intended. The intensions were, inter alia, to let the free market set prices and all imported and mined gold was required to be sold first through the SGE. The reason to channel fresh gold (import and mine supply) through one exchange is to keep track of the gold added to non-government reserves (jewelry, bar hoarding, institutional buying, etc). By requiring all fresh gold to flow through the SGE the PBOC can efficiently supervise the quality and quantity of the gold that enters the Chinese market place. The PBOC wants to know exactly how many grains of fine gold are being held among the people. Additionally scrap gold is allowed to be sold through the SGE, but because this type of supply doesn’t affect reserves, it isn’t required to be sold through the SGE (it doesn’t have to be monitored).

The structure of Chinese physical gold market with the Shanghai Gold Exchange at its core entails SGE withdrawals equal Chinese wholesale demand. This has been published by the SGE Annual Reports, China Gold Market Reports and CGA Gold Yearbooks 2007-2011 (I’ve written and extensive analysis on this theorem which you can read here). Unfortunately only a fraction of all these reports is publically available; if you study the rest and gather all bits and pieces you can make an informed analysis.

Through analysing data from 2002 to 2011, after 2011 the Chinese were reluctant to publish reports as this information became too sensitive, we can clearly see how the SGE and the Chinese gold market have developed.

The next table is from the China Gold Association (CGA) Gold Yearbook 2006.

Exhibit 1. The number circled in yellow is a typo (see exhibit 2).
Exhibit 1. The number circled in yellow is a typo (see exhibit 2).

I made a translated version:

Exhibit 2. I corrected the typo.
Exhibit 2. I corrected the typo.

Whilst we can see that SGE withdrawals grew from 2002 to 2006, moreover the table exposes SGE withdrawals grew relative to total supply.

The next table shows SGE withdrawals compared to total demand; the top row shows SGE withdrawals, note another typo, the bottom row is SGE withdrawals relative to (%) total demand. These tables illustrate the PBOC’s intention to match supply, SGE withdrawals and demand. Although they didn’t immediately succeed in 2002 when the gold market started to liberalize, in 2007 the CGA reported for the first time SGE withdrawals equalled demand for 100 %. As mentioned before, in the years after 2007 this continued to match (as I have demonstrated here)

Exhibit 3. The number circled in yellow I know for sure is a typo because I cross-checked the number with two other reports.
Exhibit 3. The number circled in yellow I know for sure is a typo because I cross-checked the number with two other reports.

From the CGA Gold Yearbook 2007:

2007年,上海黄金交易所黄金出库量363.194 吨,即我国当年的黄金需求量,比2006年增长了48.02%,低于供给增长率8.82个百分点。

In 2007, the amount of gold withdrawn from the vaults of the Shanghai Gold Exchange, gold demand of that year, was 363.194 tonnes of gold, compared to 2006 increased by 48.02 percent, 8.82 percentage points lower than the growth rate of supply.

Regular readers of my research are familiar with the equation:

Import + Mine + Scrap = Total Supply = SGE Withdrawals = Wholesale Demand

In this post I will show/repeat two examples to proof this equation. Example one; this is a quote from the China Gold Market Report 2008:

Exhibit 4.
Exhibit 4.

For the sake of simplicity I left stock carry-over out of my equation. Second example; this is a screen shot from the China Gold Market Report 2010:

Exhibit 5.
Exhibit 5.

It states domestic mining output in 2010 was 340.88 metric tonnes, 40.72 % of total supply, net import (others) was 240 tonnes and total supply was 837.20.

Now let’s have a look at SGE withdrawals in 2010. From The SGE Annual Report 2010:

Exhibit 6.
Exhibit 6.

Exactly 837.2 metric tonnes. Last but not least, total demand as disclosed by the China Gold Market Report 2010:

Exhibit 7.
Exhibit 7.

Also 837.2 metric tonnes! We know this 100 % match has occurred from 2007 to 2011 by reading the reports from those years. There are no signs SGE withdrawals stopped matching total supply and demand ever since. In 2013 total SGE withdrawals accounted for 2197 metric tonnes (boxed in red, Kg – 本年累计交割量)

Exhibit 8
Exhibit 8

My point being, I think all this clearly exposes Chinese domestic mine supply is being sold through the SGE, not to the PBOC. Does the PBOC purchase gold on the SGE? I don’t think so because all physical gold on the SGE is quoted in RMB and, again, it wouldn’t fit the PBOC’s objectives mentioned above to exchange RMB for gold. On top of that I have several sources in the mainland, including a teacher in economics and the gold market at the Henan University of Economics and Law in Zhengzhou City, that all tell me the PBOC would never buy gold on the SGE.

Commercial banks like ICBC do offer a few trading products in USD, but these do not incorporate physical delivery/withdrawal. These products merely offer Chinese citizens and businesses more trading flexibility.

Exhibit 9. From the ICBC website about USD precious metals account.
Exhibit 9. From the ICBC website about USD precious metals account.

The PBOC (or SAFE) is more likely to make gold purchases overseas in exchange for USD; this way they can fulfill all their objectives. It’s not hard for the PBOC to do this without the shipments showing up in global trade data.

UK customs (HMRC) recently wrote:

Exhibit 10.
Exhibit 10.

The UK net exported 1425 metric tonnes in 2013, most of which ended up in China. When looking at UK trade we should bear in mind these enormous amounts of gold exclude monetary gold.

Exhibit 11.
Exhibit 11.

All data I gather from the SGE, UK customs, Switzerland customs and Hong Kong customs do not relate to any PBOC purchases (click here to see how much gold was exported from the UK, through Switzerland, through Hong Kong to the mainland in 2013). The amount of gold bought by Chinese consumers, investors and institutions I can make fairly good estimates for (it simply equals SGE withdrawals).

Exhibit 12.
Exhibit 12.

My estimates on PBOC official gold holdings are pure guessing, based on common sense and anecdotal stuff (though it doesn’t take a rocket scientist to know the PBOC has increased it gold holdings since 2009, when it was last updated to 1054 metric tonnes). More on that later.

SGE Vaults

In Macleod’s article there is much emphasis on SGE vaulting, though to my knowledge this amount is currently unknown. This is how the SGE works: SGE members make gold deposits, they sell this gold and the buyers have the option to withdraw the gold from the vaults. From the data I have we know yearly SGE deposits and withdrawals have been approximately the same from 2007 to 2011. Deposits can transcend withdrawals as some SGE account holders purchase Au (T+D) deferred contracts, perhaps later withdrawing the gold. Withdrawals can transcend deposits because there can be stock carry-over from previous years (see exhibit 4).

Exhibit 12.
Exhibit 12.
Exhibit 13.
Exhibit 13.

The SGE does not own its own vaults. There are merely SGE designated vaults owned by, for example, commercial banks. Needless to say, SGE withdrawal data relates to physical gold that leaves SGE designated vaults.

The next table is from Macleod’s article.

Exhibit 14. Screen shot from Macleod’s article. Coloured boxes have been added by me.
Exhibit 14. Screen shot from Macleod’s article. Coloured boxes have been added by me.

First of all he mixes deposit and withdrawal numbers and presents these as vaulted gold numbers (blue boxed numbers are deposits, orange boxed numbers withdrawals). Compare the numbers in the top row with exhibit 13 (and 4, 6, 8, 12 and this). In 2013 the 2197 tonnes were not vaulted, they were withdrawn! One more exhibit from the China Gold Market Report 2008:

Exhibit 15. At the end of 2008 SGE inventory was increased by 8 metric tonnes.
Exhibit 15. At the end of 2008 SGE inventory was increased by 8 metric tonnes.

According to my analysis Macleod’s vaulted numbers are false and thereby his vaulted gold increase numbers, as presented as demand in the following table I took from his article.

Exhibit 16. Screen shot taken from Macleod’s article.
Exhibit 16. Screen shot taken from Macleod’s article.

Additionally he adds vaulted scrap and mine supply to Chinese demand, while this is already included in SGE withdrawals (Exhibit 5, 6, 7, and this). This is double counting.

Hong Kong And Mainland Gold Trade

Exhibit 17.
Exhibit 17.

The amount of net exports from Hong Kong to the mainland is clear. Very little of the gold imported by Hong Kong from the mainland was bullion withdrawn from the SGE vaults.

A very long and complicated story short: In the mainland there are two types of trade; general trade and processing trade. General trade can be considered as normal trade. If gold is imported in general trade this is required to be sold through the Shanghai Gold Exchange. Only 12 banks have general trade licenses from the PBOC, though for every shipment they need anew approval.

1. Industrial and Commercial Bank of China
2. Shenzhen Development Bank / Ping An Bank
3. Agricultural Bank of China
4. China Construction Bank
5. Bank of Communications
6. China Minsheng Bank
7. Bank of Shanghai
8. Industrial Bank
9. Bank of China
10. Everbright
11. HSBC
12. ANZ

It’s not likely the PBOC would approve bullion gold to be exported in general trade. Additionally there are a few jewelry companies that have PBOC licenses, but these also have to ask for permission for every trade they conduct. The PBOC has a very firm grip on gold trade.

Processing trade is something else. In this trade form raw materials from abroad are imported, processed into products and then these products are required to be exported again. This processing is usually done (there can be exceptions) in Customs Specially Supervised Areas, or CSSAs. Processing trade doesn’t require a permit from the PBOC, as the gold that is imported will be exported after being processed. To export gold from a CSSA to a non-CSSA (that’s the rest of the mainland) a PBOC license is required. An example for a processing trade would be; gold from Hong Kong is exported to Shenzhen (a CSSA just across the border from Hong Kong and well known for its vast jewelry fabrication industry), then the gold is fabricated into jewelry and imported back into Hong Kong. This trade would show up in Hong Kong’s customs report, but it would not affect Hong Kong net export to the mainland.

Exhibit 18.
Exhibit 18.

Processing trade explains the Hong Kong imports from the mainland. Most of the gold Hong Kong imports from the mainland is balanced by Hong Kong exports or re-exports to the mainland, as the PBOC is not likely to allow the mainland to export gold in general trade.

Macleod states correctly that Hong Kong gold re-exports to the mainland, gold that is virtually not processed in Hong Kong, are all 1 Kg bars refined overseas imported into Hong Kong and sent forward to the mainland. Regarding Hong Kong exports to the mainland, gold that is processed in Hong Kong, he states this refers mainly to jewelry fabricated in Hong Kong which is shipped to the mainland and sold directly without going through the SGE. I disagree:

1) There is no evidence for this. Just because the gold is declared in Hong Kong as export doesn’t say anything about its shape or form. There are many refineries in Hong Kong, all capable of casting 1 kg bars to export to the mainland. Hong Kong gold export to the mainland can also be 1 Kg bars destined for the SGE.

2) In China mainland there is a 22 % tax on jewelry (17 % VAT and 5 % consumption tax), these costs are added to the bullion and fabrication costs of the jewelry. This makes a 24 carat bracelet (most aunties buy 24 carat for investment purposes) of 100 grams much more expensive than the spot price of 100 grams of bullion on the SGE, which is free of VAT and consumption tax. Why would a Chinese jeweler fabricate its products in Hong Kong where wages are at least twice as high and then import them into the mainland? Assuming this company has a PBOC import license. It’s more likely Chinese jewelers buy bullion on the SGE in the mainland, the SGE has no vaults in Hong Kong, fabricate the jewelry and then sell it, all in the mainland.

Macleod adds Hong Kong gold exports to the mainland (211 metric tonnes in 2013) to Chinese demand, I don’t. Additionally he adds total Hong Kong net gold import (597 tonnes in 2013) to Chinese demand. I don’t.

Exhibit 19.
Exhibit 19.
Exhibit 20.
Exhibit 20.

We know some of the gold Hong Kong net imported in 2013 ended up in the hands of mainland citizens. Because in Hong Kong there is zero tax on jewelry, there are many mainland citizens making trips to Hong Kong to purchase jewlery and walk back across the border without being bothered by customs. It’s estimated half of the jewelry sold in Hong Kong is bought by mainland tourists.

Exhibit 21.
Exhibit 21.

There are also mainland citizen that purchase gold in Hong Kong and store it locally in safety deposit boxes at banks or private vaults. Unfortunately I don’t have any hard numbers on this hidden Chinese gold demand (yet). One could take half of the jewelry sales numbers from Hong Kong reported by the World Gold Council, but I have my reasons not to trust those numbers.

Hong Kong net imports can also be explained by the fact many gold brokers in the world offer vaulting services in Hong Kong (GoldSilver, GoldMoney, etc). In 2013 Malca-Amit Global Ltd opened a vault in Hong kong, with a capacity of 1000 metric tonnes, which can be used by investors worldwide. This is why Hong Kong net import isn’t solely Chinese demand.

My Estimate On Chinese Total Gold Reserves Held In The Mainland

Let’s put together some data and try to work out how much gold the Chinese people and the central bank have been accumulating in the past decades. In exhibit 5 we found a clue suggesting China has probably been a net importer since the nineties.

Exhibit 22.
Exhibit 22.

This means we don’t know how much of the gold China domestically mined prior to that period has been exported, but after, lets say, 1995 all domestic mining did not leave the mainland. My best estimate of how much gold was being held among the Chinese population in 1995 is 2500 tonnes, according to Albert Cheng from the World Gold Council (page 55). Starting from that year I will try to make a conservative estimate on how much gold the Chinese have been accumulating.

According to the PBOC their official reserves in 1995 accounted for 394 tonnes, Chinese mines produced 108 tonnes that year; our starting point is 3002 tonnes (2500 + 394 + 108) in 1995. Subsequently I added yearly domestic mining, cumulative, as the Chinese didn’t net export any gold since that year. In 2001 The PBOC announced their official reserves had increased to 500 tonnes and in 2003 they announced having 600 tonnes. Because the gold market wasn’t fully liberalized in those years I have subtracted these gains from cumulative domestic mining. Just to be on the conservative side, also because I have zero trade data from 1995-2001.

The official subsequent update to 1054 tonnes by the PBOC was in 2009, when the gold market was fully liberalized. This gain I didn’t subtract from cumulative domestic mining, as I believe this was imported monetary gold. The increase in PBOC holdings from here on is pure guessing, though I feel comfortable raising their holdings to 3500 tonnes in 2013.

Import I have calculated using Hong Kong net exports to the mainland (my data begins in 2001), net gold imports numbers disclosed by Chinese gold reports (2007-2011) and analysing SGE withdrawals (2007-2013), using the equation:

mine + scrap + import = SGE withdrawals

import = SGE withdrawals – scrap – mine

The end result is this:

Exhibit 23.
Exhibit 23.

The chart above I think is conservative as it excludes hidden demand on which I have no hard numbers (yet):

– Mainland tourist buying jewelry in Hong Kong and storing it locally or bringing it home.

– Potential gold smuggling via tunnels from Hong Kong into the mainland.

– Undeclared gold import by affluent Chinese circumventing all authorities (customs, SGE).

Taking this into account it’s safe to say there is now more than 14000 metric tonnes of gold in China mainland. Divided by 1.3 billion people that’s 10.7 grams of gold per capita.

In Gold We Trust

Guest Post: Thoughts Behind PBOC Gold Purchase Policy

Written by one of my sources in the mainland, LK:

In the early parts of 2009 without being anticipated, China came forward and announced that its official gold reserve had leaped from 600 tons to 1054 tons. They haven’t announced any changes since then. This lack of communication is usually said due to the wish not to disturb the market (so they can buy gold more cheaply), but I found an article by Chinese gold analyst and columnist Xiao Lei last month suggesting much more thoughts are given by the Chinese authorities to this strategy. We have not seen this view being discussed in the English speaking world.

Xiao Lei
Xiao Lei

A few more words about 2009

That the PBOC should be, and has been, buying gold as a strategic reserve asset is no secret. Officially, the 454 tons increase in 2009 was done over the years since 2003, but Xiao Lei believes that it might have been amassed quickly from 2008 Q4 through to 2009 Q1 during the markets sell off (when gold fell from $1000 to $700 an ounce).

The 2009 announcement was interesting. In Xiao Lei’s words:

This high-profile announcement served the purpose of demonstrating China and the world that the PBOC has the capability to both stabilize and protect its financial markets (that depends on trust). It has indeed been increasing its gold reserve steadily, thus accumulating that one asset which the financial systems can ultimately depend on should all else fail.

The action not only showed a good quick return (at $900, even before the full price recovery), but also won much accolade and public encouragement within the country for the central bank to continue its gold-buying program. And for those who took note this was an endorsement, all said and done without disturbing the price.

This is the type of cues and support we should be watching for from China!

2009 to 2011

This bull phase saw the gold price double. Xiao Lei thinks that during this period, the PBOC has gone to the market at least 3-5 times. Other developing nations were also buying and declaring their increases, all in all leading to higher acquisition prices. If China were to announce a higher holding level now at about $1250, Xiao says that the central bank would face some pressure from public commentators it would rather do without.

During this time, different members of the PBOC senior management have repeatedly mentioned that gold purchases should only be done at opportune times without disturbing the market. YI Gang, the Director of the State Administration of Foreign Exchange and Deputy Governor of the PBOC, even said that China is a big gold country already and if the PBOC buys too much, it would lead to higher prices for China’s gold-consuming citizens, whether for wedding dowry or new year tradition, and this would not be good. All these suggest that the PBOC has now become mindful of its shadow in the market unlike before. It also paints a central bank that is sensitive to public opinions – something we are not used to seeing anywhere.

 

2013 The Stars Lined Up

The bear market from 2011 is almost a god send to the mandarins tasked with amassing the gold hoard. The market came to them without the aforementioned shackles:

1. Calls for foreign exchange reserve diversification were gaining momentum

This referred to the internal opinion within the country. Holding on to US Treasuries came under increasing pressure in media discussions, sometimes even turning accusatory. With the official gold reserve percentage so low, it is hard not to do anything but.

2. Shanghai Free Trade Zone (FTZ) received approval in 2013. RMB internationalization would be much more rapidly achieved with gold trading.

Gold is an international standardised commodity with plenty of liquidity. With gold, China does not have to open up its internal securities and debt markets for trading (which are not ready), and still has plenty RMB to use as unit of account and currency for trade. There is already a 2000 tons vault in the FTZ open for business (and the USD-denominated gold board has NOT received approval).

3. Liquidity and lower cost of gold purchases

As gold is a long term strategic asset, the price of gold is not an absolute concern on the books. As long as the acquisition does not cause a serious price reaction, the acquisition is a success. This is how it is viewed.

4. Cover from the “Dama” Aunties!

Because of media scenes of the wet market aunties flocking to and queueing up at the gold stores buying up everything, attention was well diverted away from the true needs of the PBOC to buy gold. Xiao actually wrote that PBOC’s buying did not raise concerns with the international monetary bodies and the markets just took the buying as regular consumer behavior, barely noticing the official sector, with the exception of a few specialized analysts (that’s you and us!). Moreover, there is no way of telling how much of the gold supplied to China will be ending up at the PBOC.

5. Trend of the time in history

Germany is being given the cold shoulder. The big direction is certainly to get your own gold and back on your own ground. So buying in size is in fact along the path of least resistance, the trendy thing to do.

Conclusion

As few realize that gold is a strategic asset in national security, few must realize that the announcement of gold reserves of a major country is also an important strategic decision that will only come from the highest of ranks. The deep implications this has on prices, perceptions and what it may provoke from the other players makes this an important card that will only be used casually by incompetent fools.

Through this article, we have learnt something about China’s internal interactions on this matter and what issues the PBOC is having to find itself sensitive to. The author Xiao Lei further remarked that not only will the timing and situation of the next announcement be carefully chosen, the actual level that will be announced will be decided with reasons too – meaning that the full holding will unlikely to be all plainly divulged.

2013 was in many ways a total bonanza, and one would be very naive to think that the PBOC would pass up on this golden window given their good understanding of the subject as seen in various speeches and writing within the nation!

LK

The Chinese Government’s Gold Policy, From The Horse’s Mouth

Notes from the translator, LK:

“This is a detailed policy memo from the country’s highest government to let the various ministries and department know of the direction, intentions, progress and steps of development of the many facets and components of the gold market that serves both the gold industry and other areas of finance.

So they sure are in it for the long haul and mean it well for everybody. I’d say this is pretty convincing of our possible future landscape!

I consider this one big piece of the jigsaw, as so far as there has been little of what China thinks or is doing, other than buy buy buy.”

Here we go..

  State Council logo

A Communication On How We Should Help Develop The Gold Market.

The Opinions From:

People’s Bank of China (PBOC)

National Development and Reform Commission (NDRC)

Ministry of Industry and Info Technology of the PRC (MITT)

Ministry of Finance (MOF)

State Administration of Taxation of the PRC (SAT)

China Securities Regulatory Commission (CSRC)

To various bodies including and not limited to:

To: PBOC Shanghai HQ, branches, provincial capital city center branches, sub-provincial city center branches, provincial development and reform committees, CSRC, national inland revenue, SGE, SHFE, State owned banks, share-ownership commercial banks etc.

2012-03-07

1. The importance of understanding a healthy development of the gold market

The gold market is an important component in the make up of financial markets. Gold has both financial and commodity attachments. Good efforts to develop the gold market will enable it to play a unique function not found in other financial assets, complementing and helping the other markets in finance, completing our financial system helping in both breadth and depth, raising our market’s competitiveness and readiness to respond to crises, contributing to stability and security of our finances.

Developing our gold-related industries will not only help raise the competitiveness of these industries, but also help other mining and resource industries. Since the reform started, our gold industries have developed steadily along the supply chain which includes exploration, mining, refining, trading, investment, value-added and retail sectors. A well-functioning gold market can help these sectors in financing needs, risk management, cost-lowering, supplying market information to these enterprises, helping them make production and operation plans, thus help restructure and raise the standard of these industries.

The tradition of gold investment and consumption is with our people/citizens. As the private sector grows at speed and living standard upgrades, private demands for gold jewellery, coins and investment gold are also growing quickly. A gold market with a rich diversity of products will help develop new investment channels, satisfy the varied demand, help investors make appropriate asset allocations, raise investment returns and protect our wealth assets.

2. Next-step clarification of the positioning of the gold market development

After replacing the previous collective-buying practice policy, our gold market has developed speedily; the coordinated development of the gold industry supply chain have started to form, with the contribution in the business developments of the Shanghai Gold Exchange and the commercial banks and the Shanghai Futures Exchange. The gold markets should be developed to serve wide-scope gold-related industries, with the goal of raising the competitiveness of our financial markets, letting the gold market play the important part of making our financial markets whole. We need to facilitate and encourage communications and coordination, and establish such mechanism especially between the SGE and SHFE. We also need to be more innovative developing RMB-denominated gold derivative products, increasing the diversity of product types, enabling the market function to perform better with depth, improve regulation and openness at the same time, building a multi-faceted, multi-level market system.

As soon as possible, the SGE needs to clarify and establish plans for the future market development and positioning of itself, improve and strengthen its service offering structure, bring its different policies and practices of different areas up to standard and make sure market regulation practices are well and smoothly in-force. Pay attention and seriously consider the opinion and suggestions of your members, do a good job to really service your members. We need to strengthen and improve areas of trading, gold-cash settlement, assaying and certifying of gold quality, the vaulting and shipment of gold. We need to study in depth the nature of the evolution of the gold-related industry and the gold market, so that the SGE can play its important role in promoting the healthy development of the gold market and related infrastructure building.

The SHFE should make full use of the future market price discovery and its function to manage risks to steadily and advance the healthy development of our gold risk-management market, adding to fundamental policies framework supporting the gold market. With the central aim of letting the market do its proper job, we need to make good and keep good the policies and regulations towards gold futures contracts and related businesses, making the gold futures market deep and with attention to details, thereby raising the level of service towards the broader private sector economic development. We need to keep raising our ability to control risk in the market, including managing and appropriately encouraging our members to look at themselves and do business with fit and proper conduct, effectively pre-empt and dissolve market risks. We also need to look at and make good the structure/composition of gold investors. Support gold enterprises so they can actively participate, using the futures market to protect values across time. Actively guide other financial institutions to use the gold futures market to manage risk.

Commercial banks should look towards the entire supply chain from gold mining to fabricating and value-added processing to final sales, practically innovate new financial products that are effective in helping each area in the chain with financial service. We need to cater to the needs of enterprises and market development at the same time, be innovative in developing business areas of physical gold sales, gold leasing, futures and options on futures too, enrich the product range, so as to satisfy the financing needs and risk-avoiding needs of enterprises. Encourage and guide commercial banks in developing RMB-denominated gold derivatives trading. Guide more financial institutions to make use of the gold market, broaden and deepen our gold market.

3. Strengthening gold market services system infrastructure

Build and strengthen  gold market system infrastructures. The SGE needs to further strengthen its trading infrastructure, be innovative, complete the gold market system. Introduce and enrich different models/modes of trading, introduce market maker system, raise the liquidity of the gold market. Speed up work on disaster-recovery systems, bring back-up systems up-to-speed. Further improve cash capital management systems, secure and protect customer funds.

Bring our gold assaying system up to standard. With respect to our gold industry capabilities and practical development needs of the market, learning from the experience of international gold markets, refine and improve our systems on gold ingot eligibility applications, assaying, appraising and inspection / checking, raise the standard-setting standing and reputation of our system, help move the establishment of our gold market standard assaying system. Consider the resources of our country as a whole, noting special features of the gold industry, do our reasonable best to make sure that the gold bars and ingots vaulted by our industry are up-to-standard.

Make a good vaulting-transportation system. Consider all the factors relating to the gold production and actual consumption of our country, set up a good system of settlement vaults. Collect and consider the business costs of our commercial banks and members, set reasonable (standard) fees for moving gold in and out of vaults, and storage fees. Set up good transport system network, prepare low-cost, high-speed efficient service of transportation to the market.

Perfect our settlement service systems. According to the needs of the market, practically improve the system infrastructure of gold account services, offer more convenient and fast physical gold settlement and gold accounts to the market. Learn from the experience of the international market, investigate and propose multi- and different types of gold account services. Improve the gold market’s capital settlement services.

4. Bring about satisfactory gold market laws, regulations and related policy supporting system

Speed up gold market laws and legal framework building. Help move forward the Ordinance of gold market management/regulation. Formulate plans to manage gold and gold-made products imports and exports. Step up management of financial institutions on gold products, guide and motivate framework for steady development of financial institutions’ gold-related businesses.

Make up gold market related taxation policy ready for implementation. Continue to execute existing set of taxation plans from SGE and SHFE. Research into good taxation policy on investment gold and commercial banks gold business.

Look into broadening supply channels for physical gold for the gold market. With respect to actual market needs and how our gold markets are, increase the number of commercial banks qualified to do import-export business, help the market to become innovative, raise the level of liquidity in the market. Develop the gold leasing market based on free market principles.

Work on and improve the gold market financing services. According to applicable credit policies and principles, commercial banks needs to increase the access to amount of credit for qualified large enterprises that fit the gold supply chain plans for development of our country. Give special support to large-scale gold enterprise groups’ development to aid them to achieve the strategy to “go outside” into the international arena, and help them with related gold financing service business that they have. Support these groups when they issue bonds, short- and intermediate-term notes for lowering financing costs. When suitably qualified enterprises engage in mergers or acquisitions, help them with loans to aid industry restructuring, to simplify the business and achieve better scale effects. Regarding value-added processes and retailing, take note of each of their business characteristics including cyclical features, help form a financial services system that takes care of their needs from liquidity all the way to final sales. Think about new financial products that will help them in their businesses, making use of collateral values in receivables and inventories as necessary. Encourage financial institutions in developing financial services with gold as collateral. Banks should study and understand problems in credit issues of value-added processing and retail businesses, and propose practical solutions.

Forex management policies: help make a good current gold market foreign currencies management policies/strategy. In order to help guide commercial banks to develop RMB-quoted gold derivatives trading, working with SGE’s price quoting system infrastructure, work to allow commercial banks that are developing RMB-denominated gold derivatives to be able to hedge on-shore gold trading margin with off-shore position without actual gold import-export business operations. Research into the possibility of allowing banks that are planning to develop such business to allow them to use other FX open positions margin to compensate in the overall margin required in total on-shore positions.

Move the gold market towards external openness. Steadily increase the number of foreign members of the SGE. Look into allowing off-shore qualified ingot suppliers to supply to the SGE. Look into allowing off-shore institutions to participate in SGE transactions.

5. Pre-empting gold market risks.

Step up regulation of the gold market. Each department should fulfil regulatory responsibilities seriously. With good communication and collaboration, work together for the integrity and benefit of the market as a whole.

Commercial banks should step up risk management and control. Plan well for related services, make sure businesses opening satisfy requirements. Make sure system infrastructure investments are sufficient to protect security and integrity of transactions. Policies should be suitable towards particular characteristics and risks of each business to pre-empty risks.

Intermediaries need to step up on self-discipline. The SGE and SHFE need to make sure transactions, delivery, settlement and gold account and other services are well supported by system infrastructure including for on-line products, and make sure that all the services offered are safe. Make sure members behave, markets are orderly. When market conditions change, take timely action to pre-empty risks.

6. Protect the investors.

Use a multi-form approach, work to have better educated and mature investor groups for the gold market. Step up training for gold market industry staff, raise the degree of professionalism. Step up education on gold market risks, let the players be well cognizant of risks. Market players should well understand the importance of protecting investors interest and the healthy development of the gold market, so that when they encounter issues, they raise them with authorities appropriately. Let market participants know what behaviour is expected, that underground speculative activities are strictly forbidden. Any violating departments will face strict punishment and posted to records.

Source

Chinese Gold Rush Heating Up

In the trading week from January 20 – 24 physical gold withdrawn from the SGE vaults accounted for 57 tons, this is the third week in a row SGE withdrawals have been more than weekly global mine production. In the first 24 days of 2014 withdrawals from the SGE accounted for 216 tons. With one trading week left this month it’s very likely January 2014 will break the all time record of monthly withdrawals, surpassing the 236 tons from April 2013. Is this the height of the Chinese gold rush?

SGE withdrawals 2014 week 4

SGE vs COMEX ™ Jan YTD 2014  

Demand for gold has been strong due to the celebration of the Chinese lunar year, the year of the horse, starting January 31. Across the nation people buy golden gifts for each other, especially by these low prices. It’s quite clear now that the Chinese people will only buy more  physical gold as the price remains low, or will further drop. They are not scared of a loss in value, as it has been in their culture for thousands of years to save in gold as a core asset. The young people, this is taught by the elder. After many years of economic suppression they regained their freedom to do so, being spurred by newly acquired wealth.

Golden Chinese horse

Bloomberg reported on a shopping spree in retail:

“Older people believe gold brings good fortune and keeps its value,” said Jiang, who left in search of another store because the small horse charms she wanted for her nieces and nephews were sold out. “Gold gifts for children teach them about investment from a young age.”

“Lower gold prices give an extra boost to demand,” said Yang Chunyan, an analyst at Orient Securities Co. in Shanghai. “Sales of gold gifts typically accelerate in the two weeks leading up to the lunar new year and have really taken off.”

Meanwhile, in some parts of Asia there is a scramble for safe deposit boxes at banks to store physical gold. According to a source in the mainland, January 7:

HSBC, Bank of China. Dah Sing Bank, Bank of East Asia, Shanghai Commercial Bank, ANZ, Citibank, Hang Seng Bank, NONE have available Safe Deposit boxes – all occupied and there is a waiting list.

Soon after he travelled to Singapore, on January  28 he wrote me:

Same problem with Safe Deposit boxes in Singapore. I opened an account with Standard Chartered Priority Banking today, for boxes they have an 18 month waiting list. I also tried DBS, OCBC, HSBC, Maybank, ANZ and Citibank, no safe deposit boxes available.

Overview Shanghai Gold Exchange data 2014 week 4

– 57 metric tonnes withdrawn in week 4  (20-01-2014/24-01-2014)
– w/w  – 4.67 %, y/y + 39 %
– 216 metric tonnes withdrawn year to date

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

This is a screen dump from the 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 withdrawals week 4 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 gold 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 week 4 2014

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.

 

Chinese Commodity Financing Deals Explained

This post is part of the Chinese Gold Market essentials series. Click here to go to an overview of all Chinese Gold Market Essentials for a comprehensive understanding the largest physical gold market globally.

The main arguments presented by Western consultancy firms, such as GFMS and the World Gold Council (WGC), to explain the difference between SGE withdrawals and Chinese consumer gold demand relate to Chinese Commodity Financing Deals (CCFDs). However, this analysis is incorrect as I will demonstrate in this post. 

CCFDs are used by Chinese speculators to acquire cheap funds using commodities as collateral. When it comes to using gold as collateral for CCFDs there are two options: round tripping and gold leasing. First we’ll discuss round tripping.

Round Tripping

Goldman Sachs (GS) has properly described the round tripping process in a report dated March 2014. We’ll start by reading a few segments from GS about financing deals [brackets added by me]:

While commodity financing [round tripping] deals are very complicated, the general idea is that arbitrageurs borrow short-term FX loans from onshore banks in the form of LC (letter of credit) to import commodities and then re-export the warrants (a document issued by logistic companies which represent the ownership of the underlying asset) to bring in the low cost foreign capital (hot money) and then circulate the whole process several times per year. As a result, the total outstanding FX loans associated with these commodity financing deals is determined by:

  • – the volume of physical inventories that is involved
  • – commodity prices
  • – the number of circulations

Our understanding is that the commodities that are involved in the financing deals include gold, copper, iron ore, and to a lesser extent, nickel, zinc, aluminum, soybean, palm oil and rubber.

Chinese gold financing deals are processed in a different way compared with copper financing deals, though both are aimed at facilitating low cost foreign capital inflow to China. Specifically, gold financing deals involve the physical import of gold and export of gold semi-fabricated products to bring the FX into China; as a result, China’s trade data does reflect, at least partially, the scale of China gold financing deals. In contrast, Chinese copper financing deals do not need to physically move the physical copper in and out of China, so it is not shown in trade data published by China customs. In detail, Chinese gold financing deals includes four steps:

  1. Onshore gold manufacturers pay LCs to offshore subsidiaries and import gold from Hong Kong to mainland China – inflating import numbers
  2. offshore subsidiaries borrow USD from offshore banks via collaterizing LCs received
  3. onshore manufacturers get paid by USD from offshore subsidiaries and export the gold semi-fabricated products – inflating export numbers
  4. repeat step 1-3

Important to understand is that gold in round tripping needs to be physically imported into China and then exported, in contrast to copper. The reason for this, which GS fails to mention, is that the cross-border trade rules for gold in China are different than for all other commodities. Only through processing trade gold can be imported into China mainland by enterprises that do not carry a PBOC gold trade licenseRound tripping by speculators can only be done through processing trade, as it’s not possible through general trade to ship gold into China without a PBOC license. Consequently, round tripping flows are completely separated from the Chinese domestic gold market where the SGE operates. And hence round tripping cannot inflate SGE withdrawals. 

Only by bending the rules – set up a fake jewelry enterprise in a CSSA – speculators can import gold to round trip. By using processing trade in order to import gold into China speculators are required to subsequently export the exact same amount of gold, because these speculators pretend to be jewelry manufacturers importing gold for genuine production, which upon completion must be exported. This is why the gold is round tripped. The requirement for export in processing trade can be read in the official PRC Customs Supervision and Administration of Processing Trade Goods Procedures (2004):

“Processing trade” shall refer to the business activity of import of operating enterprises of all or some raw and auxiliary materials, components, parts, mechanical components and packing materials (Materials and Parts) and the re-export thereof as finished products after processing or assembling. 

Now we can understand why GS wrote [brackets added by me]:

Specifically, gold financing deals [round tripping] involve the physical import of gold and export of gold semi-fabricated products to bring the FX into China… 

The speculators export semi-fabricated gold products to keep up the appearance they are genuine gold fabricators, for which the gold imported must be processed and exported.

On a side note, the gold used in round tripping can be at most the amount of gold yearly exported from China (to Hong Kong). Though the total exported gold will also contain genuine processing trade, so round tripping will be less than this amount. Round tripping does not inflate net export from Hong Kong to China, only gross trade. The net amount of gold imported into China is shipped through general trade, via the SGE, into the Chinese domestic gold market and is prohibited from being exported.

Hong Kong - CN yearly gold trade January 2009 - March 2015

In the chart above we can see China exported 330 tonnes to Hong Kong in 2013. Let’s guess 200 tonnes of that was genuine processing trade (jewelry manufactured in a Chinese CSSA).

330 – 200 = 130 tonnes

Possibly, there was 130 tonnes imported into China for round tripping and subsequently exported back to Hong Kong. Or, 10 tonnes was imported into China for round tripping and subsequently exported to be round tripped an additional 12 cycles, making 13 rounds in total.

13 x 10 = 130 tonnes

In the latter scenario a lot less physical gold is involved (10 tonnes versus 130 tonnes). In reality it’s more likely a gold batch used in round tripping is making multiple rounds than one round.

The Chinese Gold Lease Market

The other gold financing deal that can be conducted by Chinese speculators is gold leasing (which is the same as gold lending). In general gold leasing is a normal market practice.

I have categorized all potential gold lessees (borrowers) in three groups for us to have a look at examples (with US dollars) of how gold leasing is done in financial markets:

  1. A gold miner needs funds to invest in new production goods. It can borrow dollars from a bank at a 7 % interest rate, or borrow gold at 2 % – the gold lease rate is usually lower than the dollar interest rate. The miner chooses to borrow 10,000 ounces and sells it spot at $1,500 an ounce. The proceeds are $15,000,000 that can be used to invest in new production goods. In a years time the miner has mined 10,200 ounces to repay the principal debt plus interest (the interest on gold loans can be settled in gold or dollars, depending on the contract). Through gold leasing the miner has acquired cheap funding compared to a dollar loan.
  2. A jeweler needs funds to buy gold stock for production. It can borrow dollars from a bank for 7 %, or borrow gold for 2 %. The jeweler borrows 10,000 ounces of gold, with which it can start fabricating jewelry. To hedge itself against price fluctuations the jeweler can sell spot, for example, 10 % of the 10,000 ounces it has borrowed (1,000 ounces at $1,500 makes $1,500,000) to buy gold futures contracts in order to lock in a future price. After a year the jeweler has sold the 9,000 ounces (as jewelry) for dollars and can take delivery of the long futures contracts to repay the gold loan.
  3. A speculator is looking for cheap funds. It can borrow dollars from a bank for 7 %, or borrow gold for 2 %. He borrows 10,000 ounces and sells it spot at $1,500 an ounce. The proceeds are $15,000,000 and subsequently these newly acquired funds can be used to invest in higher yielding products (> 2 %). If the trader chooses to hedge itself in the futures market is up to him. After a year the 10,000 ounces plus interest need to be repaid, either the trader can purchase gold with the profits made on the higher yielding investment or from delivery of futures contracts.

In China gold leases are settled and transferred through the SGE. The mechanics of the lease market in China was best described in an essay by the PBOC from 2011:

…the SGE provides a crucial role in gold leasing. The SGE’s block trading system is the trading platform used by gold leasing participants; the SGE also provides transfer and settlement services.

China’s gold leasing does not involve the central bank. Gold leasing takes place between commercial banks and enterprises as well as between commercial banks, the former being key.…

  1. An enterprise that intends to be a lessee approaches a branch office of a commercial bank with a rate request and application.
  2. The commercial bank carries out due diligence and then submits a review to their head office for approval.
  3. Upon approval the head office quotes a lease rate with the international gold lease rate as a benchmark plus additional basis points taking into account the potential lessee’s credit, physical gold management costs and other factors.
  4. If the potential lessee accepts the offer, a commercial bank branch manager will sign a lease contract with the customer including the terms and conditions clearly laid out.
  5. According to the “Shanghai Gold Exchange Lease Transfer Procedure”, after signing the lease, the head office of the commercial bank and lessee, or his agent, shall make a lease application through the exchange’s membership system. After verification, the SGE shall transfer the commercial bank’s gold from its SGE bullion account to the lessee’s SGE bullion account. The lessee can now trade the physical gold that it has leased or withdrawal the gold from the vaults.
  6. Upon expiration of the lease the lessee shall deposit or purchase physical gold through the SGE to repay the gold. Corresponding physical gold will be transferred from the lessee’s SGE bullion account to the commercial bank’s bullion account. Leasing fees involved will be settled in currency. At this point, the lease is completed.

First, I would like to insert a comment supplementing the PBOC’s description of gold leasing in the Chinese domestic gold market. In the paper it says:

“After verification, the SGE shall transfer the commercial bank’s gold from its SGE bullion account to the lessee’s SGE bullion account. The lessee can now trade the physical gold that it has leased or withdrawal the gold from vaults.”

My source at ICBC’s precious metals trading desk told me ICBC has little gold of itself for leasing, most of the gold lend out is sourced from third parties. These parties are either SGE members or overseas banks that supply gold through the Chinese OTC market. ICBC operates in the lease market as an intermediary by connecting supply and demand, it can lease from international banks or local gold owners with SGE Bullion Account and lend the gold to miners, jewelers or speculators. My suspicion is that the international gold lease rate is lower than the Chinese gold lease rate, which can attract gold from the international market into the Chinese domestic gold market.

The Chinese lease market in short: in China all gold leases are settled through the SGE (there can be an off-SGE lease market, but it would be highly illiquid). Both lessor (lender) and lessee are required to have an SGE Account. If a lease is agreed between two parties gold is transferred from one SGE Bullion Account to the other, when the lease comes due the gold is returned. At SGE level it’s as simple as that.

There is a big difference between jewelers that lease gold in contrast to miners and speculators. Jewelers lease gold because they need physical gold for fabrication; miners and speculators lease gold because they are seeking cheap funds, they will always sell spot the leased gold (without withdrawing the metal) at the SGE to use the proceeds. Why would a speculator withdrawal the metal?

Therefor, if SGE withdrawals capture leased gold this is for genuine jewelry fabrication that eventually ends up at retail level. When a jeweler needs to repay the lease it simply buys gold at the SGE to subsequently transfer it from its SGE Bullion Account to the lessor’s SGE Bullion Account. It’s not likely a jeweler would buy gold off-SGE to repay a lease, which then would need to be refined into newly cast bars by an SGE approved refiner to enter the SGE vaults. Gold leasing by jewelers can inflate SGE withdrawals but not so much supply to the SGE.

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

… No statistics are available on the outstanding amount of gold tied up in financial operations … but Precious Metals Insights [PMI] believes it is feasible that by the end of 2013 this could have reached a cumulative 1,000t…

This 1,000 tonnes figure is based on a misunderstanding regarding the Chinese gold lease market. PMI assumed there was 1,000 tonnes of gold tied up in financing deals based on the yearly lease volume in China, which was 1,070 tonnes in 2013. However, the yearly lease volume is not the gold that is leased out at any point in time, but reflects the aggregated volumes disclosed on all lease contracts that are executed over one year’s time in the Chinese domestic gold market. Meaning, if 100 mining companies lease 2 tonnes of gold for 1 month in 2016 and all leases are rolled over 4 additional months, the yearly lease volume would be 1,000 tonnes (100 x 2 x (1 + 4)), while on 31 December 2016 the total amount of gold leased out could be nil. (It’s impossible there was 1,000 tonnes used in round tripping as gross export from China has never been more than 330 tonnes)

In addition, the WGC used the words ‘tied up‘ for the gold used in financing operations, which sounds as if the market will be flooded when the gold is untied. The words ‘tied up’ can be misleading, let me explain: If a speculator borrows gold he will promptly sell it spot, this gold will not leave the SGE system. During such a lease period there is nothing tied up, there is just a debt to be repaid. When the lease comes due the lessee has to buy gold in the market (SGE) to settle the debt, which is the opposite of what the WGC insinuates what happens when gold is untied. In case a jewelry company leases gold the words tied up are more appropriate, in my view, as the borrowed gold bars are in transit from being processed to being sold as jewelry. Gold involved (tied up) in these leases can only be a share of the total amount of gold leased out in any point in time, because we all agree most leases in China are done for financing. There is only a small percentage of total gold loans tied up by jewelry companies.

Phillip Klapwijk, analyst with Precious Metals Insights (PMI) in Hong Kong, previous Executive Chairman of Thomson Reuters GFMS and consultant for the World Gold Council, has stated:

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

Needless to say I don’t agree for the reasons just mentioned regarding gold leasing and round tripping. Am I the only one? No. When Na Liu of CNC Asset Management Ltd, visited the SGE in May 2014 he spoke to the President of the SGE Transaction Department. From Na:

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

… Second, none of the 2,200 tonnes of gold was bought by the Chinese central bank. The President said: “The PBOC does not buy gold through the SGE.”

… Third, the financing deals do not exaggerate SGE’s assessment of China’s gold demand. This is because “the financing deals do not take place after the gold leaves the vaults.” 

The President of the SGE’s Transaction Department is clearly stating most leasing happens within the SGE system and this metal is not withdrawn. Therefor, gold leasing by speculators does not inflate SGE withdrawals and thus does not explain the difference between SGE withdrawals and Chinese consumer gold demand as disclosed by the World Gold Council. 

Remarkably, when I asked the WGC about the details in 2014 they replied [brackets adde by me]:

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

In their email the World Gold Council admits gold leases that are withdrawn from the SGE vaults are used for genuine gold business and being part of true gold demand. This is more confirmation gold leasing cannot explain the difference

In conclusion, round tripping gold flows are completely separated from the Chinese domestic gold market (SGE) and therefor cannot have caused the difference. In addition, gold leasing only inflates SGE withdrawals when used for genuine gold business and therefor cannot have caused the difference either.

More detailed information about the Chinese gold lease market can be found in my posts A Close Look At The Chinese Gold Lease Market, Gold Chat About The Chinese Gold Lease MarketZooming In On The Chinese Gold Lease MarketChinese Gold Leasing Not What It Seems and Reuters Spreads False Information Regarding The Chinese Gold Lease Market