Tag Archives: Citibank

Citibank Releases Anti-Gold Report Before Swiss Gold Referendum

Below a screen shot from a report by Citibank its global chief economist Willem Buiter, released on November 26, aimed at clarifying why gold has no value whatsoever.

Screen Shot 2014-11-27 at 10.52.56 AM

Although I can agree with his last point, I surely can’t with the rest. From my perspective these are some weird statements. A few more quotes:

…Gold is unlike any other commodity. The only things that come close to it are Bitcoin and similar digital peer-to-peer currencies. Gold is costly to extract from the earth and to refine to a reasonable degree of purity. There is an (unknown) upper limit to the total amount that is recoverable at any cost. It is costly to store. It has no significant remaining uses as a producer good – equivalent or superior alternatives exist for all its industrial uses.

…Like paper currency and Bitcoin, Gold is ‘irredeemable’.

…John Maynard Keynes once described the Gold Standard as a “barbarous relic”. From a social perspective, gold held by central banks as part of their foreign exchange reserves merits the same label, in our view.

…Because to a reasonable first approximation gold has no intrinsic value as a consumption good or a producer good, it is an example of what I call a fiat (physical) commodity. You will be familiar with fiat currency. Unlike what Wikipedia says on the subject, we argue that the essence of fiat money is not that it is money declared by a government to be legal tender. It need not derive its value from the government demanding it in payment of taxes or insisting it should be accepted within the national jurisdiction in settlement of debt. Instead the defining property of fiat money is that it has no intrinsic value; it derives any value it has only from the shared belief by a sufficient number of economic actors that it has that value.

…Gold has become a fiat commodity or a fiat commodity currency, just as the US dollar, the euro, the pound sterling and the yen (and a couple of hundred other currencies) are fiat paper currencies and as Bitcoin is a fiat virtual currency. The main differences between them are that gold, like Bitcoin, is very costly to produce, while the production of additional paper money has an extremely low marginal cost. If we count the deposits of commercial banks with the central banks, which together with currency in circulation make up the monetary base, as fiat money, then the incremental cost of fiat base money creation is zero.

…Remember, fiat money, including gold or Bitcoin, is intrinsically useless.

WOW, I’m speechless (and I’m going on vacation in 15 minutes). I’ll leave the comments up to you. Click here to read the full report.

Chinese Gold Demand 418 Tonnes YTD, West Confused

Another week (24-02-2014/28-02-2014), another 49 mt of Chinese gold demand in the form of withdrawals from the Shanghai Gold Exchange vaults. Withdrawals year to date account for 418 mt. This brings February Chinese gold demand to 172 mt, down 30 % from an all-time 246 mt record in January. Let’s not talk about the COMEX.

SGE vs COMEX ™ Feb 2014

In the West there is still confusion about Chinese gold demand. News outlets and banks are trying to figure out how in 2013 China net imported 1158 mt through Hong Kong, plus a few hundred metric tonnes through other ports, mined 428 mt domestically, while demand according to the World Gold Council was just 1066 tons. The Financial Times and the Telegraph couldn’t explain it. February 27 Citibank came out with a report named “Chinese Gold Demand: Unraveling the Case of the Missing Gold”.

Citi Chinese gold demand 2013

Slide Citibank

In my opinion this analysis is actually a step in the right direction; Citi acknowledges Chinese supply and demand was 2200. In 2013 SGE withdrawals accounted for 2197 mt, these numbers are clearly related. The formula for the Chinese gold market is: total supply = mine + import + scrap = SGE withdrawals = total (wholesale) demand. Simply because of the structure of the Chinese gold market. However, this is where Citi and I split up. I called Citi and I spoke directly with the analyst from the report. What surprised me was that this gentleman had never heard of SGE withdrawals! Hence our dispute.

First let’s get their numbers straight. They don’t disclose all the numbers on the supply side, but I zoomed in on the chart and calculated the amounts by measuring how many pixels each bar counted, compared it to the scale etc..


Citi Chinese gold supply and demand

The outcome on the supply side is roughly: scrap 240 mt, gross import 1480 mt, mine 420 mt.

The demand side: consumption 1176 mt, gross export 373 mt, residual 640 mt.

1) Export is not demand

In the chart above gross import is in fact net import. Very little of the gold exported from the mainland to Hong Kong 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 11 banks have general trade licenses from the PBOC, though for every shipment they need anew approval. It’s not likely the PBOC would approve gold export in general trade.

Processing trade is something else. In this trade form raw materials from overseas are imported, processed into products and then these products are exported again. This processing can only be done in Customs Specially Supervised Area’s, or CSSA’s. Processing trade doesn’t require a permit from the PBOC, as the gold that is imported will be exported after being processed. An example for a processing trade would be; gold is imported in Shenzhen, fabricated into jewelry and then exported to Hong Kong. The trade would show up in Hong Kong’s customs report.

Pocessing trade

Why am I telling you this? Because the gold that in 2013 was exported from the mainland to Hong Kong was all processing trade and did never go through the SGE. Concluding 1480 mt was net imported and that residual demand was much more than 640 tons in 2013. This chart I published on February 19 (the “Difference” is actual residual, WGC demand is more or less the same as CGA consumption demand):

SGE withdrawals vs WGC

2) Residual demand is not jewelry stockpiling

According to Citi this is what residual demand is:

…This includes stockpiling (by commercial banks,jewelers, etc.) as well as direct investment consumption…

I asked the analyst from Citi about residual demand, he said they don’t really know so they came up with this explanation. As we can see in the chart above residual has been 2000 mt in the last seven years. Was this mostly commercial banks and jewelers stockpiling? Of course not. I can understand some jewelers added some gold to their inventory when prices dropped significantly, for example in April 2013, but this stockpiling analyses is untenable. Citi continues:

In 2014… the result should be another large increase in Chinese imports and another large “gap” in supply and demand data.

Another large gap in supply and demand? Really? When I called the SGE in November 2013 they told me this gap (some call it residual, some net investment) is just individual account holders at the SGE withdrawing physical gold from the vaults. So residual demand is just direct investment and we shouldn’t treat it as a demand category that is insignificant.


Overview Shanghai Gold Exchange data 2014 week 9

– 49 metric tonnes withdrawn in week 9  (24-02-2014/28-02-2014)

– w/w + 0.62 %

– 418 metric tonnes withdrawn year to date

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

SGE withdrawals 2014 week 9

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

SGE withdrawals week 9 2014

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

SGE premiums

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

Schermafbeelding 2014-03-07 om 23.22.55

In Gold We Trust