Tag Archives: GLD

China’s Rising Gold ETF Market: A Hybrid

In 2013 we’ve witnessed the inception of the Chinese gold ETF market. At first demand for the gold ETFs was neglectable, as investors mostly preferred to buy the physical gold directly at the Shanghai Gold Exchange (SGE) or buy jewelry or investment bars through retail channels. This year, however, there has been a major shift in gold ETF demand in China.

The physical holdings of Chinese gold ETFs have surged five-fold from 7 tonnes at the end of January, to 35 tonnes at end of August. The Huaán Yifu Gold ETF, which was holding 23 tonnes in August, entered the global top 15 list.    

Exhibit 1. All physical holdings of Chinese gold ETFs are stored within SGE designated vaults.

The interest in China’s nascent gold ETF market was even mentioned by the World Gold Council in a recent Gold Demand Trends report. In this post, we’ll add some texture to China’s gold ETF market; how are the gold ETFs constructed and how can they be compared to the largest Western gold ETF, the SPDR Gold Trust. At this moment the market share of Chinese gold ETFs is still small – within China as well as globally, but knowledge about the workings of these ETFs will be valuable when they acquire significant market share in the future.

Kindly note, all mechanics and examples presented in this post are simplified.

What Is A Gold ETF?

ETF is short for Exchange Traded Fund. ETFs trade like stocks and its price usually tracks an underlying asset or index. Like stocks, ETFs have a primary market and a secondary market. The secondary market is the stock exchange where most ETF investors trade. What makes ETFs special is the primary market where ETF shares are created and redeemed. Let us use the SPDR Gold Trust (symbol: GLD) to illustrate how the primary market works. Mainly through the creation and redemption process of shares, the GLD share price tracks the gold price.

Primary GLD market participants include (from the prospectus):

  • The Sponsor (World Gold Trust Services, LLC, which oversees the performance of the Trustee and the Custodian)
  • The Trustee (BNY Mellon Asset Servicing, which is responsible for the day-to-day administration of GLD)
  • The Custodian (HSBC Bank plc, which holds the gold bars in custody, there can be sub custodians)
  • The Authorised Participants (the institutions which are authorised to create and redeem GLD shares, at this moment the Authorised Participants are Barclays Capital, Inc., Credit Suisse Securities (USA) LLC, Goldman Sachs & Co., Goldman Sachs Execution & Clearing, L.P., HSBC Securities (USA) Inc., P. Morgan Securities Inc., Merrill Lynch Professional Clearing Corp., Morgan Stanley & Co. LLC, RBC Capital Markets, LLC, Scotia Capital (USA) Inc., UBS Securities LLC and Virtu Financial BD LLC).

GLD is traded on the New York Stock Exchange Arca (NYSE Arca)

Exhibit 2. The (simplified) process of creation and redemption of GLD shares by an Authorised Participant through the Trustee.

If an Authorised Participant (AP) wants to create GLD shares, it needs to deposit gold into the account of the Trust and subsequently the Trustee will provide the AP with GLD shares. The creation application must be made in multiples of 100,000 shares (a block of 100,000 shares is called a basket). Since every GLD share represents approximately 0.1 ounce of gold, in order to create 100,000 GLD shares the AP needs to deposit 10,000 ounces of gold into the account of the Trust. (In reality, 1 GLD share actually represents a little less than 0.1 ounce of gold, the reason for this will be explained later on in this post.)

The redemption process works the other way round. If an AP wants to redeem GLD shares, it deposits 100,000 GLD shares at the Trust and subsequently the AP receives 10,000 ounces of gold.

The purpose of APs creating and redeeming GLD shares is usually arbitrage. As previously mentioned the gold equivalent of 1 GLD share is roughly 0.1 ounce, nevertheless GLD shares and actual gold are traded in two different markets. As a consequence, the price of 1 GLD share can differ from the price of 0.1 ounce of gold. If the price of GLD and the price of gold diverge, this is where arbitrage comes into play for the APs. Accordingly, the arbitrage by APs through creation and redemption of shares contributes to GLD’s price tracking the gold price.

Suppose (simplified), the price of 1 GLD share is $110 – caused by supply and demand for GLD shares at the NYSE Arca – while the price of 0.1 ounce of gold is $100 in the gold market. An AP can grasp this opportunity by buying (or first leasing) 10,000 ounces of gold to deposit in the GLD Trust account after which the Trustee will create 100,000 GLD shares for the AP. The new shares created are then sold by the AP on the stock market, which will cause the price of GLD to go down. The arbitrage opportunity will be used by APs until it’s closed.

If the price of GLD shares is lower than the price of gold, the arbitrage opportunity works the other way around, APs can buy shares, redeem them for gold at the Trustee and sell the gold.

In the aforementioned example trade when the AP (via the Trustee) created 100,000 GLD shares his investment was $10,000,000 (10,000 ounces at $100 per 0.1 ounce). The AP’s revenue was $11,000,000 (100,000 GLD shares worth $110 a piece). The AP’s profit in this exercise was $1,000,000.

($110-$100)*100,000 = $1,000,000

As readers can see from the example, the holdings of GLD were increased by 10,000 ounces of gold. Almost every day the holdings of GLD vary and the change is often caused by arbitrage of APs.

One theory is, when demand for GLD shares is strong (usually by Western investors) and the share price is trending higher than the price of the gold equivalent, the APs jump the arbitrage, create shares and GLD inventory swells. Then, if growth in GLD inventory correlates to a surging gold price (which can be observed in exhibit 3 below) we can speculate the gold bull market in part has been caused by Western investment demand in GLD.

Exhibit 3.

Now we have established the workings of the largest Western gold ETF, we will have a look at how the Chinese gold ETFs are constructed, and compare them to GLD.

China’s Gold ETF Market

Below are the 4 Chinese gold ETFs currently in existence that we’ll discuss.

  1. - Bosera Gold Exchange Open-Ended Securities Investment Fund
  2. - Guotai Gold Exchange Open-Ended Securities Investment Fund
  3. - Huaán Yifu Gold Exchange Open-Ended Securities Investment Fund
  4. - Efund Gold Exchange Open-Ended Securities Investment Fund

In China every gold ETF share represents approximately 0.01 gram of gold. By creating or redeeming gold ETF shares (Chinese) APs receive or deliver a basket of 300,000 shares, which equals to 3Kg of gold. This threshold is much lower than that of GLD, of which a basket equals to 310Kg of gold. The gold acceptable for Chinese ETFs are the spot (physical and spot deferred) gold contracts listed on theSGE – for example Au99.99. Therefore, all the physical holdings of China’s gold ETFs are stored within SGE designated vaults.

Moreover, there is a range of features that make China’s gold ETFs quite different from GLD.

1. Chinese Gold ETF Shares Can Also Be Created Or Redeemed Through Cash

Unlike GLD, which only allows the use of gold to create shares, and only allows the use of shares to redeem gold, China’s gold ETFs also allow shares to be created and redeemed through cash in the primary market. An AP can present cash to the Fund Manager who handles the creation and redemption process for a Chinese gold ETF. The Fund Manager is comparable to the Trustee of GLD. Thereby, through an AP individual investors can create or redeem gold ETF shares with cash as well.

Suppose, a Chinese investor wants to arbitrage the difference between the price of a gold ETF and the price of gold. In this example the price of the gold ETF is higher than the price of gold, so the investor want use cash to create shares to sell on the stock market. The investor can present cash to an AP who in turn will create shares via the Fund Manager. The amount of cash used in this transaction to create shares is equal to the cash value of the spot gold contracts that are needed to create the shares without the use of cash.

Vice versa, in case an investor wants to arbitrage the price of a gold ETF when it’s lower than the price of gold, the investor can present shares to an AP to redeem for cash.

Exhibit 4. Creation and redemption process of Chinese gold ETF shares through cash.

In China the APs can be securities firms and commercial banks. The securities firms are often not SGE members. Therefor, the number of APs that support gold ETF shares creation and redemption through cash is often larger than the number of those that support shares creation and redemption through spot gold contracts. For example, in the case of Efund Gold ETF, the fund has authorised 13 securities firms (APs) to process creation and redemption through cash, but only 2 banks (APs) to process creation and redemption through spot gold contracts (Industrial and Commercial Bank of China and Bank of Communications).

2. The Flexibility Of The Fund Manager

The Trustee of GLD doesn’t have much flexibility in managing the assets. Its duty is mainly processing the creation and redemption orders of GLD shares. Therefore, the gold holdings of GLD are mainly allocated gold and according to the prospectus [brackets added by me]:

Gold held in the Trust [GLD]’s allocated account is the property of the Trust and is not traded, leased or loaned under any circumstances.

In China, the Fund Managers of the gold ETFs have more flexibility. The gold contracts that China’s gold ETFs hold include not only spot physical contracts like Au99.99 and Au99.95, but can also be spot deferred contracts like Au (T+D), and notable all these “spot contracts” may be leased (sometimes swapped) within the SGE system. Additionally, every Chinese gold ETF can invest 10% of its fund assets (5 % of net fund assets in case of Efund Gold ETF) in “other financial instruments” allowed by the China Securities Regulatory Commission (CSRC).

For example, the excerpt below is from the Efund Gold ETF’s prospectus [brackets added by me]:

The investment scope of the Fund [Efund Gold ETF] is liquid financial instruments, including gold physical contracts (including spot physical contracts, spot deferred contracts, etc), bonds, asset-backed securities, bond repos, bank deposits, money market instruments, and other financial instruments which laws, regulations or the CSRC allow the Fund to invest in the future (but these have to satisfy the relevant rules of the CSRC).

If laws, regulations or regulatory institutions allow the Fund to invest in other instruments (including but not restricted to gold derivatives like forwards, futures, options and swaps), after necessary procedures, the Fund Manager will include them into the investment scope.

The portfolio percentage: The fund asset invested in gold spot contracts is not lower than 95% of the net asset value of the Fund.

All the 4 gold ETFs in China can participate in gold leasing. Some can participate in gold swaps and some can pledge the gold to borrow money.

The excerpt below is from the Huaán Yifu Gold ETF Prospectus:

The Fund can do gold lease and pledge gold to borrow money.

Effectively the Fund Manager of the Huaán Yifu Gold ETF can make money by, for example, leasing the fund’s assets.

The excerpt below is From the Guotai Gold ETF Prospectus:

The Fund can do gold lease, gold swap and invest in gold spot deferred contracts, etc, in order to lower the operating expenses and lower tracking error. The Fund does margin trade only for the purpose of risk management and enhancement of the efficiency of the asset allocation.

As a result, the Fund Managers of Chinese gold ETFs have significant flexibility in handling the fund assets. Please remember that all gold leasing, swapping, etc. has to be done within the SGE system and the gold cannot leave the SGE designated vaults.

From the CSRC’s website [brackets added by me]:

Article 4. Gold ETFs may not deposit physical gold into the [SGE] vault or withdraw physical gold from the [SGE] vault. Margin trade is only for the purpose of risk management and enhancement of the efficiency of the asset allocation. 

Exhibit 5. The bottom row shows the minimum percentages the Gold ETFs must invest in “spot contracts”, though some of this gold can be involved in leasing.

3. NAV Per Share Recalculation

Since the inception of GLD in 2004 its share gold equivalent is steadily declining lower than 0.1 ounce of gold. That’s because the Sponsor, Trustee and Custodian don’t provide services for free. They need to earn money and their earnings must come from the Net Asset Value (NAV) of the ETF. In other words, the gold in the Trust is gradually sold to pay for operational expenses. From the GLD prospectus:

The amount of gold represented by the Shares will continue to be reduced during the life of the Trust due to the sales of gold necessary to pay the Trust’s expenses irrespective of whether the trading price of the Shares rises or falls in response to changes in the price of gold.

Each outstanding Share represents a fractional, undivided interest in the gold held by the Trust. The Trust does not generate any income and regularly sells gold to pay for its ongoing expenses. Therefore, the amount of gold represented by each Share has gradually declined over time. This is also true with respect to Shares that are issued in exchange for additional deposits of gold into the Trust, as the amount of gold required to create Shares proportionately reflects the amount of gold represented by the Shares outstanding at the time of creation. Assuming a constant gold price, the trading price of the Shares is expected to gradually decline relative to the price of gold as the amount of gold represented by the Shares gradually declines.

On November 18, 2004, 1 GLD share exactly equaled 0.1 ounces of gold, but by now (September 2016) 1 GLD share equals 0.09542 ounces of gold, a decline of almost 5 % over the course of 12 years. This explains why currently the amount of ounces needed by an AP to create a basket of shares has become less than 10,000 ounces, and continues to decline.

In China’s gold ETF market, although the gold represented by the ETF instruments also decline as with GLD, the share values are periodically re-adjusted to ensure the NAV per share remains (roughly) 0.01 gram of gold.

For example, from the Bosera Gold ETF prospectus:

Fund share re-calculation means the fund manager based on the necessity of the operation of the fund, under the premise that the total NAV is unchanged, adjusts the total fund shares outstanding and NAV per share. 

There is nothing complicated about the re-calculation. There are simply periodic adjustments when the Fund Manager sets the value of the shares (in yuan) higher because the gold content equivalent is elevated, from below 0.01 gram to 0.01 gram, whereby the Fund Manger “adjusts the total fund shares outstanding” downward.

4. Linked Funds

In China, every gold ETF is accompanied by a Linked Fund. The Linked Fund mainly invests in the Target Gold ETF as can be seen in the list below. The Linked Fund is usually a common open-ended mutual fund. While 90 % of the assets under management of the Linked Fund must be invested in its Target Gold ETF, the Fund Manager still has some room for managing the remaining 10%.

Exhibit 6.

For example, from the Bosera Gold ETF-linked Fund’s prospectus:

The Fund mainly invests in Bosera Gold Exchange Open-Ended Securities Investment Fund, gold contracts listed on the Shanghai Gold Exchange, gold futures contracts listed on the Shanghai Futures Exchange, bonds and other financial instruments which the CSRC allows the fund to invest, like securities lending and borrowing, gold lease, etc.

For more clarity I’ve drawn a graph to illustrate the ratios of investment allocation by the Guotai Gold ETF and the Guotai Gold ETF-linked Fund.

Exhibit 7.

Although, at this stage it’s not completely clear to me what would be the benefit for investors to invest in the Linked Fund, as opposed to the Target Gold ETF.

 5. Voting Rights

GLD holders only have limited voting rights. The excerpt below is from the GLD prospectus,

Under the Trust Indenture, Shareholders have no voting rights, except in the following limited circumstances: (i) shareholders holding at least 66.66% of the Shares outstanding may vote to remove the Trustee; (ii) the Trustee may terminate the Trust upon the agreement of Shareholders owning at least 66.66% of the outstanding Shares; and (iii) certain amendments to the Trust Indenture require 51% or unanimous consent of the Shareholders.

In China’s gold ETFs shareholders have more voting rights and can vote to decide on a lot of important issues. The excerpt below is from the prospectus of Bosera Gold ETF:

In one of the following circumstances, based on the consent of the fund manager, the fund custodian or the fund shareholders who hold 10% (including 10%) of the fund shares outstanding, it is mandatory to hold fund shareholders’ meeting:

1. Termination of the fund contract;

2. Change of the operation of the fund;

3. Increase of the remuneration of the fund manager or the fund custodian, but excluding the circumstances in which the increase of the remuneration is mandatory by the requirements of laws or regulations;

4. Replacement of the fund manager or fund custodian;

5. Amendment of the fund category;

6. Amendment of the fund investment target, scope or strategy (excluding the circumstances in which laws, regulations or the CSRC have other relevant requirements);

7. Amendment of fund share holders’ meeting proceedings, voting methods and voting procedures;

8. Termination of listing but excluding circumstances in which the fund no longer satisfies listing requirements and the listing is terminated by the Shenzhen Stock Exchange;

9. Merger of the fund with other fund(s);

10. Other items that have material influence on the rights and responsibilities of the parties to the fund contract and necessitate the fund share holders’ meeting to amend the fund contract;

11. Other items that are required by laws, regulations, the fund contract or the requirements of the CSRC to hold the fund share holders’ meeting.

Even the Linked Fund shareholders of China’s Gold ETFs can participate in voting:

The fund shareholders of the linked fund of this fund can attend or send representatives to attend the fund shareholders’ meeting and participate in voting, based on the share holding of the linked fund. The equivalent number of fund shares with voting rights and correspondent votes are: the product of the total shares of this fund held by the linked fund multiplied by the linked fund shares held by the respective link fund share holder as a percentage of the total linked fund shares outstanding. The result of the calculation is rounded to the nearest whole number.

Ironically, to me there seems to be more democracy and openness in China’s gold ETFs than in GLD. On the other hand, Chinese gold ETFs have a fundamentally different foundation, a hybrid design I would say.

China’s gold ETF market was erected in 2013 and is still evolving. In the future, there may be more complex gold ETF related financial structures that have a big impact on China’s overall gold market. I shall follow it closely.


In exhibit 5 we can see which Chinese commercial bank is the custodians of which Chinese gold ETF. Without a doubt the physical holdings in each Chinese gold ETF (exhibit 1), stored within SGE designated vaults, will appear on the bank balance sheet of the custodian bank. This (important) information will be added to my previous post What Are These Huge Tonnages In “Precious Metals” On Chinese Commercial Bank Balance Sheets? as a new chapter.

The main sources used for this article are the prospectuses from the Bosera Gold ETF, Guotai Gold ETF, Huaán Yifu Gold ETF and Efund Gold ETF, and the prospectuses of the Linked Funds of these Gold ETFs, Bosera Gold ETF-linked fund, Guotai Gold ETF-linked fund, Huaán Yifu Gold ETF-linked fund and Efund Gold ETF-linked fund)

The Bank Of England Lost 755 Tonnes Of Gold In 2013

The Bank Of England (BoE) just came out with their annual report 2014. In the report it’s stated the BoE is the custodian of 5485 metric tonnes of gold (£140 billion pounds measured February 28, 2014). From the BoE annual report 2014:

The Bank provides custodial services for a range of customers. As at 28 February 2014, total assets held by the Bank as custodian were £594bn, of which £140bn were holdings of gold.

In the BoE’s annual report 2013 it was stated they held 6240 tonnes of gold (£210 billion pounds measured February 28, 2013). From the BoE annual report 2013:

As part of this strategy the Bank also provides custodial services for a range of customers. As of 28 February 2013, total assets held by the Bank as custodian were £699 billion, of which £210 billion were holdings of gold.

(To calculate the tonnage I used a gold price of £1046.719 for February 2013 and £793.931 for February 2014)

According to the BoE they had 755 tonnes less gold in their vaults in February 2014 relative to February 2103 (in contrast to reports the BoE lost 1300 tonnes in 2013). The BoE is a custodian for central banks and the LBMA, the removed gold from the vaults was most likely from LBMA customers. GLD’s gold inventory is vaulted in London, but I’m not positive how much, if any, of their gold is stored at the BoE. GLD’s stock lost 451 tonnes over this period. If everything GLD lost came from their own HSBC vault, and nothing from their sub-custodian the BoE, the gold removed from both GLD and the BoE in total is 1206 tonnes.

However, when we look at UK’s net gold trade over this period (March 2013 – February 2014), we can see 1593 tonnes were exported.

UK Gold Trade 2009 - march 2014

This leaves a gap of 392 tonnes (1593 minus 1201), which had to be supplied by additional LBMA or private vaults in London.

West to East Gold Exodus In Full Swing

Chinese gold demand remains extraordinary robust in 2014. Last week (17-03-2014/21-03-2014) wholesale demand, aka SGE withdrawals, was 36 metric tonnes, year to date demand is 523 tonnes.

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 12 2014


Of course the big question is; where on earth is this gold coming from? Let’s have a look at global trade numbers published so far this year to shine some light on this mystery. As I have written about in 2013, the main gold vein that supplied China ran from the UK, through Switzerland, through Hong Kong eventually reaching the mainland. As we all know China mainland doesn’t disclose its gold trade numbers, but the other countries do (to a certain extent, monetary gold is usually not disclosed).

The Physical Gold Distribution From West To East

The UK net exported 1425 metric tonnes in total in 2013. The peak was in May, 338 tonnes were net exported to meet demand in the east after the drop in the price of gold in April, whereafter UK gold export somewhat slowed. Chinese demand came down from unprecedented highs in April, but remained robust throughout 2013. UK gold export and Chinese demand were correlated during last year.

Around new year and the Chinese Lunar year demand for gold in the mainland picked up again as we can see in the chart below (and as I have reported herehere and here).

SGE withdrawals 2014 week 12

Now the global trade numbers from that period are released we again see matching trends in global gold trade and Chinese demand (/SGE withdrawals). In January 2014 there was a steep increase in UK’s net gold export; 143 tonnes in total, 118 tonnes were net exported to Switzerland and 33 tonnes net to Hong Kong.

UK Gold Trade 2008-2014 01-14

What a surprise, there is still gold left in the London vaults. Most analyst thought these vaults were practically empty at the end of 2013. Like Kenneth Hoffman, who stated in December 2013 on Bloomberg TV that the London gold vaults were virtually empty. All gold was exported to Switzerland, remelted into kilobars and sent to China. He also stated: The most interesting thing is, as we look into 2014, if there ever is interest in gold again, that gold is just not there anymore. Well guess what, there is interest in gold again, coming from China. And doesn’t seem to stop at these prices.

Another reason why analysts thought the UK wouldn’t be coughing up more physical gold was because GLD inventory stopped falling since the beginning of January. After being drained for 552 tonnes in 2013, year to date GLD is up 22 tonnes.

GLD gold inventory

A Gift From Switzerland 

Since January the Swiss Customs Department decided to change the way they disclose their gold trade numbers. Previously they only disclosed total gold and silver trade numbers, now they break it down per country. This gives us gold analysts very valuable insights. A pleasant side-effect is that the Swiss publish their data much sooner than all others.

Switzerland gold trade January February 2014

In total Switzerland gross imported 477 metric tonnes of gold in first two months of 2014. The biggest supplier was the UK, smaller ones were Brazil, Burkina Faso, Chile, Peru, Russia, South Africa and the US. Total Swiss gross gold export over this period accounted for 400 metric tonnes.

A we can see from the chart not only did the UK net exported 118 tonnes to Switzerland in January, in February another 114 tonnes were shipped to the Alps. In two months the Brits net exported 232 metric tonnes to Switzerland, while GLD inventory was up! What Keynesian is still selling in the UK? Or more important, how much is there left to sell? There are probably a few thousand tonnes left in the vaults of the Bank of England, but that’s all owned by foreign nations.

As we heard from the biggest Swiss refinery in December 2013, they were having a very hard time throughout 2013 sourcing the gold for demand from China. An event that never happened in the last 37 years, according to the managing director of this refinery. Yet, in February the Brits shipped 114 tonnes to Switzerland. Anybody who knows the seller please comment below.

Also worth noting; in January Switzerland net exported 12 tonnes to China and 85 tonnes to Hong Kong. In February net export to China accounted for 37 tonnes and to Hong Kong 98 tonnes. Coming months will point out if this change, direct exporting to China bypassing Hong Kong, will become a trend.

Reaching Asia

In January Hong Kong net imported more gold than they net exported to the mainland. The Special Administrative Region net imported a staggering 114 metric tonnes (some of this gold is smuggled into the mainland in jewelry form by mainland tourist, please read at the end of this post), while they only net exported 89 tonnes to the mainland.

Hong Kong gold trade 1-2014

Hong Kong - China gold trade 1-2014

Hong Kong - China gold trade monthly 1-2014

If we gather all the data we have from January we must conclude that although the main gold vein is still in full swing, it’s not enough to supply the Shanghai Gold Exchange. SGE withdrawals in January accounted for 246 tonnes.


This is a screen shot from the monthly Chinese SGE trade report; the second number from the left (blue – 月交割量 ) is monthly gold withdrawn from the SGE vaults in Kg.

SGE withdrawals january 2014

In January China net imported 89 tonnes from Hong Kong, 12 tonnes from Switzerland, domestic mine supply was 36 tonnes, domestic scrap supply couldn’t haven’t been more than 25 tonnes, which leaves 83 tonnes that had to be imported from other countries. I still don’t have any estimates on how much gold China imports from its own overseas mines, however I doubt its 83 tonnes a month. Concluding not only in the UK, also in other countries around the world large stock piles of gold are still being sold to China.

West To East Gold Distribution Update

The great distribution of wealth and power, facilitated by gold, from west to east is still going strong. From looking at available global trade numbers we know the main gold vein runs from the UK through Switzerland, through Hong Kong, eventually reaching Shanghai. Let’s take a look at the latest data.

Starting Point: The London Gold Vaults

It started in January when the UK, home of the London Gold Market, net exported 74 tons of gold to Switzerland. As we can see in the chart below this is not unusual, we saw similar events in the beginning and in the end of 2011. But this year export accelerated to a spike May, in which 237 tons were net exported to the Swiss. A staggering amount of gold, nearly as much as the official gold reserves of the Bank Of England. Through the summer these exports remained elevated, year to date the UK has net exported 1235 tons of gold in total, of which 1109 tons to Switzerland.

UK gold export

In September the UK net exported 117 tons of gold, down from 119 tons in august, – 1.7 % m/m. Net export to Switzerland was 107 tons in September, up from 98 tons in August, + 9.1 % m/m. This implies we have not seen the end of the gold exodus from the UK.

GLD Redemptions

A significant portion of UK gold exports are being supplied by ETF stocks. GLD, which is the biggest gold ETF in the world and whose vaults are in London, was drained for 444 tons in the first three quarters of this year. At this moment GLD’s inventory stands at 866 tons, more stock suited for it’s authorized participants to be redeemed and shipped to the east.
note “Unallocated Accounts”


Remelting The Gold Bars In Switzerland

Although the Swiss, discreet as they are, do not publish country specific with whom they trade gold, nevertheless, their total trade numbers are very clear. Being one of the biggest trading, refining and storage centers in the world, vast amounts of gold cross their borders. In 2012 they have imported 2267 tons of gold and exported 1550 tons. On average import has transcended export by 25 % in recent years, which emphasizes Switzerland’s storage function over this period. This has changed as the Swiss have imported 2420 tons and exported 2184 tons in the first three quarters of this year. Meaning not only trade is surging, but also that the gap between import and export is tightening. As was confirmed by Switzerland’s biggest refinery, all gold coming in from London is being remelted into kilobars and sent forward to China.
If we annualize gold export for 2013 the outcome is 2912 tons, 1362 tons more than in 2012. Gold that partially is shipped to Hong Kong, partially directly to Shanghai.

Transit Port Hong Kong

Most (but certainly not all!) gold that is imported by China mainland comes in through Hong Kong. Year to date Switzerland has net exported 697 tons of gold to Hong Kong. A surge of 445 % if we measure just the first three quarters relative to 2012 totals.


Net export from Hong Kong to the mainland is 826 tons of gold year to date.


Just the official route has brought 826 tons of gold to China year to date, annualized 1100 tons. If we add 400 tons Chinese mining supply the total is 1500 tons othat will meet demand.
Whilst the World Gold Council estimates Chinese consumer demand will be over 1000 tons, my estimate is it will be over 2000 tons. In my humble opinion just the official route raises a few eyebrows to the WGC demand numbers. If we then take into account gold is also shipped into China through other ports than Hong Kong, more eyebrows are raised.
In a future post I will describe in detail how I calculated my estimate.
In Gold We Trust