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The Great Physical Gold Supply & Demand Illusion

Gold supply and demand data published by all primary consultancy firms is incomplete and misleading. The data falsely presents gold to be more of a commodity than a currency, having caused deep misconceptions with respect to the metal’s trading characteristics and price formation.

Numerous consultancy firms around the world, for example Thomson Reuters GFMS, Metals Focus, the World Gold Council and CPM Group, provide physical gold supply and demand statistics, accompanied by an analysis of these statistics in relation to the price of gold. As part of their analysis the firms present supply and demand balances that show how much gold is sold and bought globally, subdivided in several categories. It’s widely assumed these balances cover total physical supply and demand, which is incorrect as the most important category is excluded. The firms though, prefer not to share the subtle truth or their business models would be severely damaged.

The supply and demand balances by the firms portray gold to be more of a commodity than a currency, as the gist of the balances reflect how much metal is produced versus consumed – put differently, the firms mainly focus on how much gold is mined versus how much is sold in newly fabricated products. However, in reality gold is everlasting and cannot be consumed (used up), all that has ever been mined is still above ground carefully preserved in the form of bars, coins, jewelry, artifacts and industrial products. Partly because of this property the free market has chosen gold to be money thousands of years ago, and as money the majority of gold trade is conducted in above ground reserves. Indisputably, total gold supply and demand is far in excess of mine production and retail demand.

As most individual investors, fund managers, journalists, academics and precious metals analysts consider the balances by the firms to be complete, the global misconception regarding gold supply and demand is one of epic proportions. Physical gold is a profound anchor in our global financial system and thus it’s of utmost importance we understand the fine details of its trading characteristics. 

Supply & Demand Metrics By The Firms

The firms can argue that the difference between what they present as supply and demand (S&D), as opposed to what I deem to be a more unadulterated approach of S&D is due to contrasting metrics. Accordingly, we’ll discuss their metrics to reveal their infirmity. In a nutshell, the firms only count the physical gold S&D flows that are easy to measure, while leaving out the most important part: institutional supply and demand. 

Although the firms all have slightly different methodologies to measure S&D, from comparisons the numbers appear to be quite similar. For our further investigation we’ll spotlight the metrics and models by GFMS. The reason being, GFMS has been the only firm that was willing to share a full description of their methodology for publication – to be viewed here. Metals Focus (MF) provided a partial methodology, the World Gold Council and CPM Group declined to comment.

Let’s have a look at GFMS its S&D categories. On the supply side is included:

  • Mine supply (newly mined gold)
  • Scrap supply (gold sourced from old fabricated products)

On the demand side is include:

  • Jewelry demand (gold content used in newly manufactured jewelry products bought locally at retail level, adjusted by jewelry exported and imported).
  • Industrial demand (the volume of gold used in industrial applications, for example bonding wire, products used in semiconductors/electronics and dental alloys).
  • Retail bar investment (the net volume of bars that are purchased by individual investors through retail channels).
  • Coin investment (a combination of published data from mints and also a proprietary survey conducted by GFMS detailing where coins are sold).

The above four demand categories summed up are often referred to as “consumer demand” by the firms.

Furthermore GFMS includes:

  • Net hedging (change in physical market impact of mining companies’ gold loans, forwards, and options positions)
  • Net official sector (total central bank selling or buying)
  • ETF inventory build (change in ETF inventory)
  • Exchange inventory build (change in exchange inventory)

The last four categories can be either supply or demand. In example, when central banks (the official sector) in total are net sellers this will be listed as a negative demand figure, as is shown in the S&D balance by GFMS below from 2006 until 2009, when central banks in total are net buyers this will be listed as a positive demand figure, as is shown in the balance from 2010 until 2015. For a clear overview of the GFMS S&D balance please have a look at all line items below.

Exhibit 1. Courtesy GFMS. Global gold S&D balance as disclosed in the Gold Survey 2016.

According to GFMS Supply consists of Mine production, Scrap and Net Hedging. In turn, Demand consists of Jewelry, Industrial Fabrication, Retail Investment, and Net Official Sector. After balancing Supply and Demand this results in a Physical Surplus/Deficit. Then, ETF Inventory Build and Exchange Inventory Build are added/subtracted from the Physical Surplus/Deficit to come to a Net Balance.

GFMS likes to pretend their balance is complete and occasionally articulates any surplus or deficit arising from it is positively correlated to the price of gold, which is anything but true, as I will demonstrate step by step.  

The Firms Exclude Majority Gold Supply & Demand

Most important what’s excluded from the balance is what we’ll refer to as institutional supply and demand, which can be defined as trade in bullion among high net worth individuals and institutions. Usually the bullion in question comes in 400-ounce (12.5 Kg) London Good Delivery (GD) bars having a fineness of no less than 995, or smaller 1 Kg bars having a fineness of no less than 9999. In addition, bullion bars can weigh 100-ounce or 3 Kg, among other less popular sizes, generally having a fineness of no less than 995. Bullion can be traded without changing in weight or fineness, but it can be refined and/or recast for transactions as well, in example from GD bars into 1 Kg bars. In some cases institutional supply and demand involves cross-border trade, when bullion is sold in country A to a buyer in country B, in other cases the bullion changes ownership without moving across borders.

Provided are two exemplifications of institutional S&D:

  • An (institutional) investor orders 400 Kg of gold in its allocated account at a bullion bank in Switzerland – which would be purchased in the Swiss wholesale market most likely in GD bars. This type of S&D will not be recorded by GFMS.
  • A Chinese (institutional) investor buys 100 Kg of gold directly at the Shanghai Gold Exchange (SGE), the Chinese wholesale market, in 1 Kg 9999 bars and withdraws the metal from the vaults. Neither this transaction will be registered by GFMS – or any other firm.

These examples show the S&D balances by GFMS are incomplete.

For illustrational purposes, below is a chart based on all S&D numbers by GFMS from 2013, supplemented by my conservative estimate of institutional S&D. Including institutional transactions total S&D in 2013 must have reached well over 6,600 tonnes.

Exhibit 2. Global gold S&D 2013 by GFMS, including conservative estimate institutional S&D.

GFMS Covers The Tracks With Help From The LBMA

Although GFMS intermittently admits their number are incomplete (they have to), at the same time they’ve been battling for years to eclipse apparent institutional S&D for its audience. Dauntless tactics were needed when in 2013 institutional demand in China reached roughly 1,000 tonnes and over 500 tonnes in Hong Kong. Institutional demand in the East was predominantly sourced through GD bars from the London Bullion Market, which were refined into 1 Kg 9999 bars that are more popular in Asia. For the cover up GFMS went to great lengths to refute the volumes of gold withdrawn from SGE vaults, and accordingly have the London Bullion Market Association (LBMA) adjust statistics on total refined gold by its member refineries. Remarkably, the LBMA cooperated. Allow me to share my analysis in detail.

In 2013 something unusual happened in the global gold market as Chinese institutional demand exploded for the first time in history. Hundreds of tonnes of institutional supply from London in the form of GD bars were mainly shipped to Switzerland to be refined in 1 Kg 9999 bars, subsequently to be exported via Hong Kong to meet institutional demand in China. From customs data by the UK, Switzerland and Hong Kong the institutional S&D trail was clearly visible. From 2013 until 2015 there was even a strong correlation between the UK’s net gold export and SGE withdrawals. Demonstrated in the chart below.

Exhibit 3. Correlation between UK net gold export and SGE withdrawals.

Because of the mechanics of the gold market in China, Chinese institutional demand roughly equals the difference between the amount of gold withdrawn from SGE designated vaults (exhibit 4, red bars) and Chinese consumer demand (exhibit 4, purple bars). In the exhibit 4 below you can see this difference that brought GFMS in a quandary, especially since 2013. For more information on the workings of the Chinese gold market and the size of Chinese institutional demand please refer to my post Spectacular Chinese Gold Demand Fully Denied By GFMS And Mainstream Media.

Exhibit 4. Chinese wholesale demand (SGE withdrawals), versus GFMS consumer demand versus apparent supply.

Stunningly, since 2013 GFMS has tried to convince its readers through numerous arguments why SGE withdrawals crossed 2,000 tonnes for three years in a row, while Chinese consumer demand reached roughly half of this. Yet the arguments have failed miserably to explain the difference – they rationalize only a fraction, read this post for more information.

And GFMS did more to eclipse apparent institutional S&D. They colluded with the LBMA.

To be clear, I cannot exactly measure global institutional S&D. However, let me make an estimate of apparent institutional demand for 2013. Notable, in 2013 a flood of gold crossed the globe from West to East. Chinese institutional demand accounted for 914 tonnes and Hong Kong net imported 579 tonnes – the latter we’ll use as a proxy for additional Asian institutional demand, as Hong Kong is the predominant gold trading hub in the region. 

In total apparent institutional demand in 2013 accounted for (914 + 579) 1,493 tonnes. If we add all other demand categories by GFMS shown in exhibit 1, total demand in 2013 was at least 6,619 tonnes. Be aware, this excludes non-apparent institutional demand.

Exhibit 5. Global gold demand 2013 by GFMS, including apparent institutional demand.

Because nearly all wholesale gold demand in Hong Kong and China is for 1 Kg 9999 bars, the global refining industry was working overtime in 2013, mainly to refine institutional and ETF supply in GD bars coming from London. In December 2013 I interviewed Alex Stanczyk of the Physical Gold Fund who just before had spoken to the head of a Swiss refinery. At the time Stanczyk told me [brackets added by me]:

They put on three shifts, they’re working 24 hours a day and originally he [the head of the refinery] thought that would wind down at some point. Well, they’ve been doing it all year [2013]. Every time he thinks it’s going to slow down, he gets more orders, more orders, more orders. They have expanded the plant to where it almost doubles their capacity. 70 % of their kilobar fabrication is going to China, at apace of 10 tonnes a week. That’s from one refinery, now remember there are 4 of these big ones [refineries] in Switzerland.

As a consequence, statistics on “total refined gold production” in 2013 by “LBMA accredited gold refiners who are on the Good Delivery List”, which the four large refineries in Switzerland are part off, capture the immense flows of institutional S&D – next to annual mine output and scrap refining. On May 1, 2015, the LBMA disclosed total refined gold production by its members at 6,601 tonnes for 2013 in a document titled A guide to The London Bullion Market Association. It’s no coincidence this number is very close to my estimate on total demand (6,619 tonnes), as apparent institutional demand in Asia was all refined from GD into 1 Kg bars.

Here’s exhibit 2 from another angle.

Exhibit 6. Global gold S&D by GFMS, including apparent institutional S&D, versus total refined gold production 2013.

In the table below we can see the LBMA refining statistics for 2013 at 6,601 tonnes.

Exhibit 7. Courtesy LBMA. Screenshot from A guide to The London Bullion Market Association captured by Ronan Manly in May 2015.

After this publication GFMS was trapped; these refining statistics revealed a significant share of the institutional S&D flows they had been trying to conceal. What happened next – I assume – was that GFMS kindly asked the LBMA to adjust downward their refining statistics. First and painstakingly exposed by my colleague Ronan Manly in multiple in-depth posts, the LBMA kneeled and altered its refining statistics to keep the charade in the gold market going.

On August 5, 2015, the LBMA had edited the aforementioned document, now showing 4,600 tonnes in total refined gold production. (Click here to view the original LBMA document from the BullionStar server, and here to view the altered version from the BullionStar server.) Have a look.

Exhibit 8. Courtesy LBMA. Altered document on refining statistics by the LBMA August 2015.

In the altered version it says:

Total refined gold production by the refiners on the List was estimated to be 4,600 tonnes in 2013, owing to recycling of scrap material, above world mine production of 3,061 tonnes (source Thomson Reuters GFMS).

A few important notes:

  • In the altered version the LBMA mentions “an estimate” for “total refined gold production”, while it doesn’t need to make an estimate as all LBMA accredited gold refiners who are on the Good Delivery List are required to provide exact data to its parent body. The exact data was disclosed in the first version of A guide to The London Bullion Market Association, and it stated, “total refined gold production by the refiners on the List was 6,601 tonnes”.
  • In the altered version the LBMA states the refining statistics were sourced from Thomson Reuters GFMS, but the LBMA doesn’t need GFMS for these statistics. The fact they mention GFMS, though, suggests a coordinated cover up of institutional S&D. Not only the firms, also the LBMA publishes incomplete and misleading data.
  • The altered version stated refining production totaled 4,600 tonnes, which is a round number and obviously quickly made up. A few weeks after the numbers were adjusted, the LBMA adjusted the numbers again, this time into 4,579 tonnes (click here to view from the BullionStar server). Clearly, on several occasions there has been consultation with the LBMA to get the statistics in line with GFMS.
  • In the original document the LBMA states, “Total refined gold production by the refiners on the List was 6,601 tonnes in 2013, more than double world mine production of 3,061 tonnes”, while in the altered version they state, “Total refined gold production by the refiners on the List was estimated to be 4,600 tonnes in 2013, owing to recycling of scrap material, above world mine production of 3,061 tonnes”. Notable, GFMS prefers to have total supply focused around mine and scrap production, instead of including institutional supply.
  • The original refining statistics (6,601 tonnes) are still disclosed in the LBMA magazine The Alchemist (#78 on page 24), to be viewed from the LBMA server here.
  • The fine details about how often and when the LBMA changed its refining statistics can be read in Ronan Manly’s outstanding post Moving the goalposts….The LBMA’s shifting stance on gold refinery production statistics.

And so nothing is spared in trying to uphold the illusion of the GFMS S&D balance to be complete. In another example GFMS excluded gold purchases by the central bank of China from its S&D balance. In June 2015 the People’s Bank Of China (PBOC) increased its official gold reserves by 604 tonnes, from 1,054 tonnes to 1,658 tonnes. During that quarter (Q2 2015) all other central banks worldwide were net buyers at 45 tonnes. Thus, in total the Official Sector was a net buyer at 649 tonnes. Now, let’s have a look at GFMS’ S&D balance for Q2 2015:

Exhibit 9. Courtesy GFMS. Global gold S&D balance as disclosed in the Gold Survey 2015 Q2. 

Net Official Sector purchases are disclosed ay 45 tonnes. GFMS decided not to include the 604 tonnes increment by the PBOC simply because it didn’t fit their balance model. A 604 tonnes increment in would have set the “net balance” at -480 tonnes. Readers would have questioned the balance from this outlier, and so GFMS decided not to include the tonnage.

According to my sources PBOC purchases were sourced from institutional supply (from abroad and not through the SGE), which is a supply category not disclosed by GFMS and therefore the tonnage was a problem. (Note, GFMS disclosed the PBOC increment in text, but not in their balance.) For more information read my post PBOC Gold Purchases: Separating Facts from Speculation.

Gold Is More A Currency Than A Commodity

The biggest flaw of the balance model by GFMS is that it depicts gold to be more of a commodity than a currency. It’s focused on mine output and gold recovered from old fabricated products on the supply side, versus retail sales of newly fabricated products on the demand side. In parlance of the firms, how much is produced (supply) versus consumed (demand). Official sector, ETF and exchange inventory changes are then added to the balance. This commodity S&D balance approach by GFMS has caused deeply rooted misconceptions about the essence of gold and its price formation.

The price of a perishable commodity is mainly determined by how much is annually produced versus how much is consumed (used up). However, gold is everlasting, it cannot be used up and its exchange value is mainly based on its monetary applications, from being a currency, or money if you will. Logically the best part of its trading is conducted in above ground reserves. From my perspective the impact of global mine supply, which increases above ground stocks by roughly 1.5 % annually, and retail sales have less to do with gold’s price formation than is widely assumed.

Back to GFMS. Have a look at the picture below that shows their S&D flows for 2015. 

Exhibit 10. Courtesy GFMS. The global S&D flows for 2015.

GFMS pretends total supply is mine production plus some scrap, which is then met by jewelry demand in addition to retail investment, industrial fabrication and official sector purchases. The way they present it is misleading. These S&D flows are incomplete; they suggest gold is traded like any other commodity. But what about institutional S&D in above ground bullion? Trades that define gold as an international currency.

Let’s do another comparison; this time between what GFMS calls Identifiable Investment demand, consisting of…

  • Retail bar & coin
  • ETF demand

…versus my what I deem to be a more unadulterated approach of investment demand, consisting of…

  • Retail bar & coin
  • ETF demand
  • Institutional demand

According to my estimates, in 2015 apparent Chinese institutional demand accounted for roughly 1,400 tonnes (exhibit 4). In the Gold Survey 2016 GFMS states on page 15 [brackets added by me]:

Total [global] Identifiable Investment, … posted a modest 5 % increase in 2015, to reach 990 tonnes.

That’s quite a tonnage between global Identifiable Investment by GFMS at 990 tonnes and apparent Chinese institutional demand at 1,400 tonnes. We should also take into account non-apparent institutional demand, gold that changes hands in trading hubs like Switzerland. Unfortunately we can’t always measure institutional S&D, but that doesn’t justify denying its subsistence.

Have a look at the chart below that shows the large discrepancy. In the next chapter we’ll specifically discuss the significance of investment demand in relation to the price of gold.

Exhibit 11. Global Gold Investment Demand 2015.

My point being: what many gold market participants and observers think is total supply and demand is just the tip of the iceberg. This truly is a staggering misconception created by the firms.

The global gold market. H/t Dan Popescu.

When observing the GFMS balance in exhibit 1 its incompleteness is self-evident. At the bottom we can see the line item “net balance”, which reflects the difference between total supply and total demand. According to GFMS, if the “net balance” is a positive figure there was a surplus in the global gold market, and if “net balance” is a negative figure the market has been in deficit. In the real world this figure is irrelevant. Gold supply and demand are by definition always equal. One cannot sell gold without a buyer, and one cannot buy gold without a seller. Furthermore the gold market is deep and liquid. So how come there is a difference between total supply and total demand in the GFMS balance? As I’ve demonstrated before, because GFMS doesn’t include institutional S&D that in reality makes up for the difference and far beyond. In all its simplicity the “net balance” item reveals their data is incomplete.

Let’s have another stab at this. How can “net balance” exist in the real world, for example in 2009? According to GFMS the gold market had a 394 tonnes surplus in 2009. But how? Were miners left with 394 tonnes they couldn’t sell? Or some supranational entity decided to soak up the surplus to balance the market? Naturally, this is not what happens. Total supply and total demand are always equal, but GFMS doesn’t record all trades.

Moreover, in my opinion the words “surplus” and “deficit” do not apply to gold. There can be no deficit in gold; there will always be supply. At the right price that is. Sometimes Keynesian economists claim there is not enough gold in the world for it to serve as the global reserve currency. Austrian economists then respond by saying that there will always be enough gold at the right price. I agree with the Austrians and their argument also validates why there can be no deficit in gold.  

There is more proof the “net balance” item presented by GFMS is meaningless. Although according to GFMS the market had a 394 tonnes “surplus” in 2009 the price went up by 25 % during that year. This makes no economic sense. A surplus suggests a declining price, not the other way around. Tellingly, S&D forces presented in GFMS balances are often negatively correlated to the gold price, as was the case in 2005, 2006, 2009, 2010 and 2014 (exhibit 1). In conclusion, GFMS S&D balances are not only incomplete, the resulting “net balance” items are misleading with respect to the price. Below are a few charts that demonstrate this conclusion.

If we plot “net balance” versus the end of year price of gold we can see the correlation is often negative. Have a look below. Green “net balance” chart bars show a positive correlation to the gold price, red chart bars show a negative correlation (note, the left axis is inverted for a more clear overview between any “deficit/surplus” and the price of gold). As you can see nearly half of the “net balance” chart bars are negatively correlated to the price of gold.

Exhibit 12. GFMS’ gold market “net balance” versus the gold price. We can quarrel if the “net balance” in 2014 was positively or negatively correlated to the price. I say the correlation was negative as the gold price in 2014 remained flat in US dollars but was up in all other major currencies, in contrast to the “surplus” presented by GFMS.

Mind you, although the “net balance” item is often negatively correlated to the gold price, in the Gold Survey 2016 GFMS states on page 9:

In terms of the Net Balance, 2015 marked the third year in which the gold market remained in surplus, and therefore it is not surprising that the bear market continued.     

And on page 14:

The forecast reduction in global mine output and a gradual recovery in demand will see the physical surplus narrow in 2016, providing support to the gold price and laying the foundation for better prospects.  

GFMS likes to pretend any “surplus” or “deficit” arising from their balance is correlated to the price, but the facts reveal this is not true.

Let us plot the “physical surplus/deficit” line item by GFMS (exhibit 1) versus the gold price. This results in even more negative correlations.

Exhibit 13. GFMS gold market “physical surplus/deficit” versus gold price.

This exercise reveals that a positive correlation between either a “surplus” or “deficit” arising from a GFMS balance and the price of gold is just a coincidence. No surprise when one is aware their S&D data is incomplete.

Remarkably, the last chart was also published in the Gold Survey 2016, but GFMS chose not to invert the left axis and doesn’t disclose what we see is a surplus or deficit. As a result the largest surpluses (2006, 2007, 2009, 2010) seem to correlate with a rising price, though in reality they did the opposite. Compare the chart below with the one above.

Exhibit 14. Courtesy GFMS.

GFMS also publishes S&D balances for silver (a monetary metal that is comparable to gold). For silver the presented correlations by GFMS between a “surplus” or “deficit” in relation to the price are even weaker.

Exhibit 15. GFMS silver market “net balance” versus silver price, as disclosed in the Silver Survey 2016.
Exhibit 16. GFMS silver market “physical surplus/deficit” versus silver price, as disclosed in the Silver Survey 2016.

According to GFMS the silver market is always in deficit, but the price goes up and down. Obviously GFMS neglects to measure institutional S&D for silver. 


In my opinion, when Gold Fields Mineral Services (GFMS) was erected many decades ago they made a mistake to adopt a commodity S&D balance approach. Surely with the best intentions they gather intelligence and retrieve data from the market. But we must be aware this is not the full picture. The most significant data is not disclosed by GFMS.

When it comes to what drives the price of gold GFMS and I agree it’s determined by gold’s role as a currency in the global economy. When reading the chapter PRICE AND MARKET OUTLOOK in the Gold Survey 2016, GFMS shares its insights with respect to the gold price. Factors mentioned are:

  • Turmoil in global stock markets
  • A Chinese hard landing
  • Geopolitical tensions in the Middle-East
  • Central bank stimulus (QE)
  • Global economic weakness
  • Interest rates policy by central banks
  • Low risk asset / safe haven demand

So if these factors drive the gold price, in what S&D category would this materialize? Would (large) investors buy and sell jewelry? Or bullion bars? I think the latter. According to my analysis the price of gold is largely determined by institutional demand, and to a lesser extent ETF and retail bar & coin demand.

Let’s do an exercise to see what physical gold S&D trends correlate to the price. The majority of supply on the GFMS balance consists of mine output and the majority of demand on the GFMS balance consists of jewelry consumption. But if we plot these volumes versus the price of gold in a chart, there is no push and pull correlation. For example, when the gold price surged from 2002 until 2011 jewelry consumption was not rising. Neither was it outpacing mine supply. The opposite happened, to be seen in the graph below. This is because jewelry demand is price sensitive – when the price goes up jewelry demand goes down, and vice versa. Jewelry demand is not driving the price of gold.

Exhibit 17. GFMS retail demand, versus mine and scrap supply versus the gold price.

I also added retail bar & coin demand. Interesting to see is that retail bar & coin demand is on one hand a price driver, moving up and down in sync with the gold price, on the other hand it can be price sensitive having brief spikes when the price of gold declines.

The best correlation between physical S&D in relation to the gold price can be seen in institutional and ETF S&D. One of the largest gold trading hubs in the West is the UK, home of the London Bullion Market that also vaults the largest ETF named GLD. The UK has no domestic mine production, no refineries and national gold demand is neglectable in the greater scheme of things. Therefore, by measuring the net flow of the UK (import minus export) we can get a sense of Western institutional and ETF demand and supply. For example, if the UK is a net importer – import demand being greater than export supply – that signals a net pull on above ground stocks. Approximately one third of the UK’s net flow corresponds to ETF inventory changes, the other two thirds reflect pure institutional S&D.

Exhibit 18. UK net flow versus the gold price.
Exhibit 19. UK net flow, GLD inventory change, gross import and gross export versus the gold price.

In the charts above we can observe a remarkable solid correlation between the UK’s net flow and the gold price. The UK is a net importer on a rising price and net exporters on declining price. The shown correlation can’t be a coincidence, though there’s no guarantee it will prevail in the future.

The two charts above show the gold price is mostly determined by institutional supply and demand in above ground reserves. Effectively, GFMS is hiding the most important part of global physical gold flows.

When I asked an analyst at one of the leading firms why his company doesn’t measure institutional S&D he told me candidly, “because it’s extremely difficult to accurately estimate it”. And it is. As I wrote previously, I can’t exactly measure global institutional S&D either. However, very often publicly available information gives us a valuable peek at it, and it shows to be more relevant to the gold price than what the firms keep staring at. Not knowing exactly what institutional S&D accounts for doesn’t mean GFMS shouldn’t pay attention to it.

But the firms keep trying to uphold the illusion the data they’ve been selling for decades is complete. For if they would plainly confess it was incomplete, future business could be severely damaged.

What I blame these firms is that they’ve created a meme that the gold market is as large as annual mine supply. This has caused all sorts of misconceptions. Often I read analyses based on a comparison between quantitative demand and mine output. Such analyses are likely to jump erroneous conclusions.

H/t Ronan Manly, Bron Suchecki, Nick Laird from Goldchartsrus.com


Simplified overview gold flows 2015:


GOFO And The Gold Wholesale Market

An essay on the relationship between GOFO, gold forwards, the gold lease rate and the US dollar interest rate.

In order to continue to reveal essential information about the physical and paper gold markets around the world, first I would like to expand on the inner workings of the gold wholesale market. In this post we’ll use the Gold Forward Offered Rates, in short GOFO, as an excuse to illuminate the most vital gears that drive the gold market engine. For, if we truly understand GOFO we also understand gold leasing, forwards and swaps, which are the building blocks of the gold wholesale market. Therefor, the goal of this post is to achieve a thorough understanding of  GOFO.

GOFO officially “represents rates at which the market making members will lend gold on swap against US dollars”, but GOFO also resembles the gold forward rate and the difference between the US dollar interest rate and the gold lease rate. The purpose of this post is to explain all this in a simplified way.

Let us start discussing gold forward contracts and work our way through this. Please be aware this post requires some studying and is not an easy read.

Gold Forward Contracts

In the gold market there are several possibilities to enter into contracts for buying or selling gold at a future date. These contracts can be used by gold market participants to lock in a future gold price or for speculation. The most common contracts are forwards and futures. On exchanges (organized markets) such as the COMEX gold futures contracts are traded, in the over the counter (OTC) market gold forwards are traded. For this post we’ll mainly focus on forwards.

Below is a chart in which I’ve plotted an exemplar gold forward curve based on mid market rates. In addition, I’ve added a table in the chart with the the bid and ask quotes (that set the mid market rates). The bid quotes represent the prices at which market making members are willing to buy gold at a pre-determined date in the future. These are the same prices at which we the market takers are willing to sell gold at a corresponding date in the future. The ask, or offer, quotes represent the prices at which market making members are willing to sell gold at a pre-determined date in the future (market takers buy at these prices). The mid market rate is the mid-point between the bid and ask price. Have a look at the chart and the table.

Forward curve gold price
Chart 1. Gold forward curve. The slippage is $0.15.

Please note, forward prices reflect what the market expects now about the future based on present circumstances. Forward prices do not determine what the actual spot price in the future will be.

We can see the bid-ask spread in this example is a constant $0.3 for every gold forward contract. In reality these spreads can vary and are determined by the liquidity of the forward contract. For liquid contracts, which are traded in high volumes, the spread is thin (meaning the spread between the bid and ask quotes is small). For illiquid contracts the spread is wide.

Furthermore, the difference between the mid market rate and the bid (or ask) is called the slippage.

Let’s have a look at a simplified example how a gold forward contract can be used. Say, a gold mining company anticipates the gold price will decline in the future. The miner has a steady output of 1,000,000 fine ounces a year and his annual expenses are 1.3 billion dollars, all to be paid at the end of the year. His business is viable starting at a gold price of $1,300 dollars an ounce. To ascertain to stay in business over one year’s time the miner can choose to enter into a 12 months forward contract in order to sell gold for $1,310.74.

The seller of a forward contract is said to be short, the buyer of the contract is said to be long. The total amount of shorts and the total amount of longs are always equal with respect to forward and futures contracts. The total amount of outstanding contracts is what is referred to as the open interest.

The long, in example, is a jewelry company that in turn seeks to lock in a future price for the well being of his enterprise. Perhaps it makes economic sense for the jeweler to borrow gold for the fabrication of gold ornaments, in the now, a loan he’s required to repay in one year’s time. Not to be exposed to future swings in the gold price he can choose to buy 12 months gold forward, assuring him to be able to repay the gold loan when it comes due.

Let us move on to the workings of the gold lending (/lease) market.

The Gold Lease Market

In a free market any currency can be lent out. Whether it’s the US dollar, euro, Norwegian krone or gold. Interest is paid from the borrower to the lender to stimulate supply, compensate for the risk of defaulting on the loan and postponement of using the currency. It’s true precious metals safely stored in a vault do not yield, however, when metal is lent out it will accrue interest. Gold lending in the gold wholesale market is referred to as gold leasing, and the acronym for the gold lease rate is GLR.

The interest on a gold loan can be settled in gold or dollars, although most often the latter is agreed. From the London Bullion Market Association we can read:

Market convention is for the interest payable on loans of precious metals to be calculated in terms of ounces of metal. These ounces are then generally converted to US dollars, based upon a US dollar price for the metal agreed at the inception of the lease transaction.


In the past decades the most prominent gold lenders have been central banks. During perceived economic stability it was thought to be safe for central banks to lend large portions of their official gold reserves. Though, in recent years these leases have been unwound to a great extent.

A borrower in the gold market can be, in example, the jewelry company mentioned in the previous chapter. In need of funds for production goods the jeweler can borrow dollars at ie 6 % from a bank, or he could directly borrow gold at ie 2 %. Historically, the normal state of the gold market offered a lower GLR than US dollar interest rate.

Below is a chart with an exemplar gold lease curve – showing the mid market GLR for several tenors. The gold lease bid is the interest rate market making members are willing to pay for borrowing gold (and the rate market takers are willing to receive for lending gold), the gold lease ask is the interest rate market making members want for lending gold (and we the market takers are willing to pay for borrowing gold).

Gold lease rate curve
Chart 2. Gold lease rate curve. 

Usually interest rates in financial markets are calculated on a 360 days a year basis.

Let us move on to combine currency lending, spot and forward markets, and come to grips with how these are interrelated and how the wholesale market in general functions.

Interest Rate Parity

Free markets that cater liquid venues for lending currencies, spot exchange and trading in forward contracts give rise to a concept called interest rate parity. This concept can be tough to get your head around, therefor I will describe it first and then show the math to clarify it.

Let us start at the base: the interest rate of any currency affects the forward value of this currency, because loans based on the interest rate grow into more supply of the currency over time. In example, a $5,000 US dollar loan at a 6 % US dollar interest rate grows into $5,300 in 1 year.

The theory of interest rate parity suggests that the interest rates of two currencies determine the forward relationship between the values of these two currencies (/the forward price of either currency denominated in the other). As, both interest rates generate a return in the future, the volumes of which determine the forward price. With respect to gold, interest rate parity suggests the forward gold price is firmly correlated to the gold lease rate and US dollars interest rate.

We should get familiar with the math that clarifies interest rate parity. We’ll work with the following exemplar market: the spot gold price is $1,200, the US dollar interest rate is 6 % and the GLR is 2 % – we’ll ignore bid-ask spreads for now. From here it can get complicated. Suppose, a trader borrows $1,200 for 6 months (180 days) at the annual US dollar interest rate of 6 %. When the loan comes due the trader is obliged to repay the principal plus interest to the US dollar lender. In the following formula we can see the principal (1,200), the interest rate (0.06) and the tenor (180/360) going in:

$1,200(1+0.06(180/360)) = $1,200(1.03) = $1,236

With the dollars borrowed the trader can buy 1 ounce of gold on spot and lend it for 6 months. When the gold loan matures the trader will get back the principal plus interest. In the next formula we can see the principal (1 oz), the interest rate (0.02) and the tenor (180/360) going in:

1(1+0.02(180/360)) = 1(1.01) = 1.01 oz

Remarkably, as we know the spot gold price and the volumes the loans grow into, we can compute the 6 months forward gold price: the gold lend by the trader will grow into 1.01 ounces over a 6 months time horizon and his dollar loan will grow into $1,236 over the same period, so consequently the 6 months forward gold price is $1,223.76.

$1,200/1       = $1,200         = spot gold price

$1,236/1.01 = $1,223.76   = forward gold price

As mentioned above, “both interest rates generate a return in the future, the volumes of which determine the forward price”.

In one formula it will show the 6 months forward gold price is:

$1,200(1+0.06(180/360)) / (1+0.02(180/360)) = $1,223.76

We can see the forward gold price is higher than the spot gold price because the GLR is lower than the US dollar interest rate.

Interest rate parity

The market will set the 6 months forward gold price at $1,223.76, because any undervalued or overvalued forward gold price (bellow or above $1,223.76) would immediately be arbitraged (interest rate parity is said to be “a no-arbitrage condition”).

Let’s have a look at an arbitrage trade in case the forward gold price would diverge from the forward price suggested by the theory of interest rate parity. Suppose, interest rates and the spot gold price are the same as above, but now the quoted forward gold price is too low at $1,220. To arbitrage this opportunity you want to buy (long) this cheap forward gold. Spot–forward arbitrage requires the opposite trade in the spot market – or one would just enter into a forward contract – in this case sell spot gold. If you don’t have spot gold you can borrow it. We can identify two legs in our arbitrage trade:

sell spot gold = buy spot dollars

buy forward gold = sell forward dollars

The chronological order to arbitrage undervalued forward gold would be:


  • borrow 1 ounce of gold for 6 months at 1 % (an annual GLR of 2 % divided by 2. In this example the gold interest will be settled in gold)
  • sell 1 ounce of gold on spot for $1,200
  • lend the $1,200 for 6 months at 3 % (an annual 6 % US dollar interest rate divided by 2)
  • buy long a 6 months gold forward contract for 1.01 ounce at the quoted forward gold price of $1,220 per ounce to repay the gold loan plus interest. The 6 months forward contract will have a notional value of:

1.01*$1,220 = $1,232.2

Then, in 6 months time,

  • receive $1,200 plus interest for the dollar loan:

$1,200*1.03 = $1,236

  • settle the gold forward contract by paying $1,232.2 for 1.01 oz
  • repay the gold loan with 1.01 oz

The total revenue of the arbitrage trade is $1,236 dollars. Having to settle the forward with $1,232.2, leaves a profit of $3.8:

$1,236−$1,232.2 = $3.8

The arbitrage opportunity will be taken advantage of until it’s closed, at that point in time the 6 months forward gold price is $1,223.76. For more clarity I should add that the closing of the arbitrage opportunity happens in the now, not in 6 months time. In addition, when the arbitragers step in the forward gold price could be pushed up from $1,220 to $1,223.76, as we’ve seen in the example trade, though in reality the other variables, such as the spot gold price or the GLR, can give way as well until interest rate parity has manifested. Interest rate parity suggests the spot, lending and forward markets are strongly linked. If one market is moving the others will move accordingly.

In reality everything is more complicated than in our exemplar market because of additional costs involved such as collateral/margin requirements and transaction/shipping/insurance costs (and because interest rate parity is just a theory, which does not always hold).

James Orlin Grabbe, the author who inspired me to pen this post, wrote in the late nineties: 

The forward price of gold – the price agreed now for gold to be purchased or sold at some time in the future – is a function of the gold spot price, and the interest rates representing alternative uses of resources over the forward time period.

James orlin grabbe 2
James Orlin Grabbe.

Introducing GOFO

So, we can compute the forward gold price from the spot gold price, US dollar interest rate and GLR. The formula can be written as:

F(T) = S(1+r(T/360)) / (1+r*(T/360))

F(T) = the forward gold price over a time horizon T days (up to 360 days)

S = the spot gold price

r = US dollar interest rate

r* = GLR

From this equation there is more to reveal. In our exemplar market the spot gold price is $1,200 and the 6 months forward gold price is $1,223.76. Ergo, the 6 months gold forward premium in percentages (/the forward rate) is:

($1,223.76/$1,200)−1 = 0.0198 = 1.98 %

The 6 months forward rate is by approximation 2 % and consequently the annualized forward rate is by approximation 4 %. The difference between the US dollar interest rate (6 %) and the GLR (2 %) is also 4 %. Meaning, the forward rate equals the difference between the US dollar interest rate and GLR. Why? Math. If we play with the formula above we get a nominal forward premium of:

F(T)−S = $1,223.76−$1,200 = $23.76

And by using (r−r*) as difference between the US dollar interest rate and GLR, we get:

S(r−r*)−S = $1,200(0.03−0.01) −$1,200 = $24

The forward rate equals the difference between the US dollar interest rate and the GLR. At this point I would like to bring up GOFO. Grabbe wrote:

Gold forward rates are sometimes referred to as “GOFO” rates, because GOFO was the Reuters page that showed gold forward rates.

Although this is not the official definition of GOFO, it is true that GOFO resembles the forward rate. I say ‘resembles’ and not ‘equals’, because there is a tiny difference we will discuss in the final chapter about GOFO.

Finally, we have explained two descriptions of GOFO mentioned in the introduction of this post. Namely, GOFO resembles the gold forward rate and the difference between the US dollar interest rate and the gold lease rate. The official and exact definition of GOFO we’ll save for last.

GOFO ≈ US dollar interest rate − GLR

GLR ≈ US dollar interest rate − GOFO

US dollar interest rate ≈ GOFO + GLR

GOFO, GLR and US$ interest rate
Chart 3. A positive gold forward rate is called contango.

When the forward rate is negative this is called backwardation. A negative forward rate implies gold for immediate delivery is trading at a premium to gold for future delivery. This can be caused by tightness in supply now or by market expectations the price will fall in he future. Backwardation is the opposite of contango, a positive forward rate. Historically contango has been the normal state of the gold market whereby the GLR is lower than the US dollar interest rate.

Because GOFO resembles the gold forward rate, negative GOFO implies backwardation in the gold forward price. Unfortunately, GOFO is not being published anymore after it was negative for long periods in 2013 and 2014. The LBMA writes on its website:

GOFO … was discontinued with effect from 30 January, 2015, following discussions between the LBMA and the contributors to the dataset, the LBMA Forward Market Makers.

So much for transparency.

In the chart below we can see GOFO went negative repeatedly in 2013 and 2014. The cause was presumably tightness in spot gold supply, as every time GOFO went sub-zero the spot gold price was pushed up.

GOFO 2013 and 2014
Chart 4. The 1, 2, 3, 6 and 12 months GOFO rates from July 2013 until April 2014.

In the interest rate parity chapter we examined an arbitrage trade that surfaced when the forward gold price was too low in relation to the prevailing US dollar interest rate and GLR in our exemplar market. Naturally, a comparable arbitrage opportunity arises when the forward gold price is too high in relation to the prevailing US dollar interest rate and GLR. Say, the 6 months forward gold price in our exemplar market is not $1,223.76, but higher at $1,300. This time we want to sell overvalued forward gold and buy spot gold to strike a profit:

buy spot gold = sell spot dollars

sell forward gold = buy forward dollars


  • borrow 1,200 dollars for 6 months at 3 % (an annual US dollar interest rate of 6% divided by 2)
  • buy 1 ounce spot gold for 1,200 dollars
  • store the gold for a storage fee of $5 for 6 months
  • sell short a 6 months gold forward contract at $1,300 for 1 ounce. The forward contract will have a notional value of:

1*$1,300 = $1,300

In 6 months time,

  • settle the forward: deliver 1 ounce of gold and receive $1,300
  • pay storage costs $5
  • repay the initial dollar loan:

$1,200*1.03 = $1,236

The proceeds of the gold forward are $1,300. Total expenses of the dollar loan ($1,236) and storage costs ($5) are $1,241, which leaves a profit of $59.

$1,300−$1,236−$5 = $59

The trade can also be executed by buying spot gold end lend the metal for 6 months instead of storing it. In that case the profit would be higher as the storage costs would be replaced by interest accrued on the gold loan. A 6 months gold loan of 1 ounce would grow into 1.01 ounce. When this gold loan is settled in dollars, the return would be the interest in ounces converted to dollars based on the spot gold price:

0.01*$1200 = $12 (dollar return on 6 months gold loan)

Using a dollar return on the gold loan would give a profit in our previous arbitrage trade of:

$1,300−$1,236+$12 = $76

The difference in profit ($76 – $59 = $17) is of course equal to the storage costs plus the dollar return on the gold loan ($5 + $12 = $17).

More on the pricing of commodity forward/futures contracts and the interaction between the theory of interest rate parity and the theory of storage will be discussed in a forthcoming post.

Gold Forward Swaps & GOFO

We’ve arrived at the official definition of GOFO, the swap. From the website of the London Bullion Market Association we can read the following official definition of GOFO:

GOFO represents rates at which the market making members will lend gold on swap against US dollars.

In parlance of the precious metals markets the word swap usually refers to a forward swap, whereby gold is sold spot and bought forward, or bought spot and sold forward. Essentially this is what GOFO is all about, a forward swap. The swap always has two legs, namely a spot and a forward leg. Consequently, the swap rate equals the forward rate.

gold swap rate = gold forward rate = US dollar interest rate − GLR

When market makers are willing to “lend gold on swap against US dollars” in the official definition of GOFO, they’re willing to execute a forward swap by selling gold spot and buying gold forward. The word “lend” in the official definition can be slightly deceiving, as strictly speaking there is no lending, the swap simulates lending: a gold loan to the market taker collateralized with dollars.

When a swap is executed and the market maker (dealer) sells spot gold to the market taker (client) and simultaneously signs a forward contract to buy it back in due time, the client buys that spot gold with dollars (collateral) and is obligated to return the metal through the forward contract at a fixed price. From the client’s perspective the process can be viewed as borrowing gold (collateralized with dollars), from the dealer’s perspective the process can be viewed as lending gold (on swap against dollars).

In the official definition of GOFO the dealer is the lender of gold but naturally he offers the reverse swap as well, whereby the dealer is the borrower. Let’s have a look at an example trade in which the dealer borrows gold: a central bank owns gold that it wants to put up as collateral for a 1 year dollar loan. The central bank and its dealer agree on a swap transaction. Based on the data from our exemplar environment the central bank will sell gold on spot to the dealer at $1,200 an ounce and then buy back the metal in 1 year’s time at $1,248 an ounce.

$1,200*(1+(0.04(360/360))) = $1,248

Essentially, the central bank has borrowed dollars for 1 year at 4 % instead of 6 % because it has collateralized the loan with gold (/lend its gold simultaneously at 2 %). Again, the swap rate is the difference between the US dollar interest rate and the GLR.

Let’s take it one step further and add bid-ask spreads to learn what GOFO is exactly. In more academic literature (The Non-Investment Products Code, NIPS code) we can read:

GOFO is the Gold Forward Offered Rate and is the rate at which dealers will lend gold on the swap against US dollars. As such it provides an international benchmark and is the basis for the pricing of gold swaps, forwards and leases. …

From GOFO rates, indicative mid-market gold lease rates can be determined as:

Mid-market lease rate = (US dollar LIBOR less 0.0625%) minus (GOFO plus 0.125%)

To explain the equation mentioned in the NIPS code, we should compare it to the one I penned in the previous chapter:

GLR ≈ US dollar interest rate – GOFO

The formulas are to a great extent similar. Though, the NIPS code uses LIBOR as the US dollar interest rate, which it corrects downwards by 0.0625 % because LIBOR is an offer rate – LIBID is its related bid. To compute the mid market US dollar interest rate the slippage, in this case 0.0625 %, is subtracted from LIBOR. In turn, GOFO is increased by 0.125 % because a “lend gold on swap against dollars” deal from a market maker’s perspective is based on the mid market spot leg, while the forward leg is the bid (in the official definition of GOFO the market maker buys forward, so the forward leg is the bid). To calculate the mid market forward leg GOFO must be increased by the slippage, which according to the NIPS code is 0.125 %. In the Nips code formula LIBOR is adjusted to come to the mid-market US dollar interest rate and GOFO is adjusted to come to the mid-market swap rate, in order to compute the mid-market GLR.

In the end both formulas are:

Mid-market gold lease rate = mid market US dollar interest rate – mid market gold swap rate

Hopefully by now you can see how understanding GOFO helps understanding the essential workings of the gold wholesale market – which is very valuable for understanding gold in general.

London Was Bleeding 184t Of Gold In December While China Imported At Least 217t

When there is no more gold left in London to export the gold price is likely to go higher on strong global demand induced by economic headwind. At the time of writing the spot gold price is $1,251.80 per ounce, up 18 % year to date, while the S&P 500 is down 9 % year to date. 

In a year that saw strong gold demand from China, in total withdrawals from the vaults of Shanghai Gold Exchange accounted for 2,596 tonnes in 2015, we turn our eyes to the most obvious place for sourcing such quantities of physical gold: London, the heart of gold wholesale market. Since the gold price came down sharply in April 2013 there has been a spectacular drain from the vaults in the London Bullion Market. In 2013 the UK net exported no less than 1,424 tonnes. Whilst net gold export from the UK in 2014 decreased to 452 tonnes, in 2015 the gold exodus from London has accelerated to 573 tonnes.

In December 2015 the UK has net exported 184 tonnes of gold, which is the third highest amount on record, according to data released by Eurostat. Net gold export in December was up 218 % from November and up 3,730 % from December last year. In December 2015 the UK gross exported 213 tonnes of gold – the second highest number on record, which is up 127 % from November and up 315 % from December 2014. The UK’s gross import accounted for 29 tonnes in December 2015, down 20 % from November and down 38 % from December 2014.

UK Gold Trade 2012 - december 2015

In the chart above we can see a clear correlation between the UK’s net gold export (“Total net flow”, the black line) and China’s wholesale gold demand (measured by “SGE withdrawals”, the turquoise line), implying gold import by China is supplied, directly or indirectly, by London. In the chart below we can see the same data as in the chart above, but now I’ve inverted “SGE withdrawals” and moved its scale on the right hand side so the correlation is even more clear.

UK Gold Trade vs SGE Withdrawals

Of total export from the UK in December 29 tonnes were net exported directly to China and a “surprising” 155 tonnes were net exported to Switzerland – from where 59 tonnes were net exported to China. From what we know China net imported at least 217 tonnes in December 2015, which is the highest amount ever (computed from data by countries that export gold to China, 29 tonnes from the UK, 59 tonnes from Switzerland and 129 tonnes from Hong Kong).

SGE withdrawlas vs China gold import monthly
Strong gold import by China in Dec is partially explained by restocking of the Shanghai Gold Exchange vaults that suffered large outflows in July, August and September due to the crashing Chinese stock market and devaluation of the renminbi.

So how come the gold price has been going down from April 2013 until December 2015 while Chinese demand has been so strong? First of all, because the West has been a strong supplier of physical gold. In my view physical supply by the West and the gold price are linked. For instance, if we compare the average monthly gold price to net gold trade by the UK this interconnection becomes apparent.

UK net gold flow vs gold price

We can see that whenever the UK is exporting gold the price is declining – and vice versa. Effectively, China has been able to purchase huge amounts of gold by the grace of London selling the metal. But what if London is running out and global demand picks up on the back of failing QE and negative interest rate policy (NIRP)? In that scenario likely the gold price would climb higher, which, coincidentally, is what we’re seeing at the time of writing. Year to date the gold price measured in US dollars has increased 18 % from $1,061 at 1 January to $1,251.80 at 11 February.

Screen Shot 2016-02-11 at 7.48.41 pm
This graph is conceived with BullionStar Charts.

How much gold is left in London? We can make a rough estimate, although we don’t know how much of this residual is in weak or strong hands. Research by Ronan Manly from BullionStar and Nick Laird from Sharelynx pointed out there were roughly 6,256 tonnes of gold in London in June 2015. However, of this total at least 3,779 tonnes is monetary gold owned by central banks around the world stored at the Bank Of England (BOE), which is not for sale. The remaining 2,477 tonnes in non-monetary gold was potentially for sale (note, this number included 1,116 tonnes that was allocated as ETF gold in London at the time). In any case, we know now that from June until December the UK net exported 390 tonnes of non-monetary gold, which leaves approximately 2,087 tonnes in non-monetary gold in the UK as of 31 December 2015. Assuming the People’s Bank Of China hasn’t purchased some of this gold and covertly exported it to Beijing in the past months.

As long as London is selling gold and China is buying the price can go down. However, if London stops selling (or becomes a buyer) the price can make a reversal.

China Rapidly Changing International Gold Market  

Since 2007 China has the largest domestic gold mining output, since 2011 the Shanghai Gold Exchange has been the largest physical gold exchange and in 2013 and 2014 China was the largest importer. Now the Chinese seek to escalate pricing power.

From the beginning of the liberalization of China’s gold market in 2002, the governor of the People’s Bank Of China has been strikingly honest – compared to his Western colleagues – regarding his view on gold. At the LBMA conference in 2004 governor Zhou Xiaochuan stated gold is a currency, an indispensable investment tool and the gold market – together with the securities and foreign exchange market – constitute the main part of the financial market.

As of today, China has fully developed its domestic gold market and is aiming to further integrate with the international gold market – inter alia to support the internationalization of the renminbi – as was planned more than a decade ago. From Zhou in 2004:

China’s gold market must integrate into the global market. Therefore China will further open up the market and quicken its steps toward integrating into the international market.

China’s aim is … to establish a safe and effective system for gold trading and to give full play to the gold market’s function of investment and risk warding, thus promoting the development of China’s gold market. We will strive for this aim with members from the international financial industry, and in particular, the global gold fraternity.

The Chinese gold market has come a long way since the launch of the Shanghai Gold Exchange (SGE) in 2002 to the launch of the Shanghai International Gold Exchange (SGEI) in 2014. From no gold market whatsoever before 2002 to an international gold market has been a meaningful accomplishment. When Zhou attended the opening ceremony of the SGEI in 2014 he said:

This event [the launch of the SGEI] is a major milestone in China’s opening of its financial market to foreign investors. The Shanghai International Gold Exchange will bolster China’s gold market toward greater trading volume and further highlight the price discovery function of the gold market.

In order to move the center of gravity of the international gold market towards Shanghai, the Chinese are pursuing to increase (paper) trading volume in renminbi – through the Shanghai International Gold Exchange (SGEI), attract global supply to be sold through the Shanghai Free Trade Zone, have a renminbi denominated gold fix and improve the connection between the Chinese gold market with the international gold market.

Recurrently, China likes to play multiple hands at the same time: on June 16, 2015, the Bank Of China became the first Chinese bank to participate in the LBMA Gold Price auction process, formerly know as the London Gold Fix. Industrial & Commercial Bank Of China (ICBC) is considering to join the fix as well. By joining the LBMA Gold Price auction the Chinese aim to influence the Western side of the international gold market to a larger extent, most notably the London Bullion Market  which has much weight in setting the international gold price. Concurrently, China is said to be launching its own gold fix in renminbi this year; the PBOC is expected to give approval for a renminbi denominated gold fix anytime now. The multiple hands strategy can also be detected as China is pushing to increase power within Western dominated multilateral institutions such as the International Monetary Fund, while at the same time establishing new multilateral institutions such as the the Asian Infrastructure Investment Bank.

Along the lines of spreading engrossment the SGE has disclosed on June 25, 2015, at the LBMA forum in Shanghai to be in discussions with CME Group (COMEX) about listing each other’s contracts. Allegedly, an agreement will be signed this August and trading may start in the first quarter of 2016. Shen Gang, Vice President of the SGE, has stated her exchange will open a trade link with the Chinese Gold & Silver Exchange Society in Hong Kong and the Dubai Gold & Commodities Exchange as well.

Trading volume on the SGE for the first half of 2015 reached a record of 8,778 tonnes, up 200 % year on year, up 55 % from the second half of 2014 (including OTC trading that was settled through the SGE).

SGE weekly gold volumes

Perhaps the most intriguing recent development is the new Silk Road Gold Fund, a 100 billion yuan fund to be led by the SGE – including a Gold ETF Fund, Gold Resource Merger and Acquisition Fund and Gold Investment Fund, which will facilitate gold purchases for the central banks of Silk Road member states to “serve the strategy of the Silk Road and lead the new development of gold”. Official information on the Gold Fund is hard to come by, the best intelligence I could find was an English piece on Xinhua and a Chinese report of the Gold Fund launch event on iFeng (exclusively translated by BullionStar). IFeng wrote:

Representatives from gold and financial institutions talked freely about bringing gold’s superiority into full play, seizing the historic and strategic opportunity of the One Belt And One Road [Silk Road], strengthening the bank-enterprise cooperation and financial-industrial combination, and leading the transformation and upgrading of the gold industry under the economic background of the new normal.

The holding of the conference enhanced the communication and cooperation between the western gold industry and countries along the line of the One Belt And One Road, clarified the development direction of the gold industry under the economic background of the new normal … and unlocked a new chapter of the gold industry development.

This can be a paradigm shift as one of the institutions that are identified with the Silk Road initiative is the Asian Infrastructure Investment Bank, that has been allied by 57 nations (of which many are Western but with the United States and Japan absent). The Gold Fund is likely to drive gold business through the Shanghai International Gold Exchange.

AIIB silk road

Gold business developments not yet directly related to the Gold Fund, but at this stage said to be part of the Silk Road initiative, are mining collaborations in the Asian region. On May 11, 2015, Chinese gold miner, China National Gold Group Corporation, has announced it has signed an agreement with Russian gold miner Polyus Gold to deepen ties in gold exploration. The cooperation will include mineral resource exploration, technical exchanges and materials supply.

In addition, Chinese mining companies are on a buying spread acquiring other companies: Zijin Mining Group has bought a 50 % stake in Barrick Gold Corp’s Porgera mine in Papua New Guinea for $298 million on May 26, 2015. In Australia, the world’s second largest mining country, Zijin Mining Group already owns Norton Gold Fields and has recently launched a bid for Phoenix Gold next door. Zijin has announced to issue shares worth 10 billion yuan ($1.61 billion) for future acquisitions. From George Fang, Zijin Mining Group Executive Director and Vice President:

Gold is our game. The company is open to opportunities around the world.

Furthermore, on July 1, 2015, the LBMA and the SGE mutually recognized the specifications of 9999 kilobars, the preferred gold bar in China, which will enhance connectivity between the Shanghai gold market and the rest of the world. I wouldn’t be surprised if eventually 9999 kilobars become London Good Delivery. Specifications for Good Delivery have been changed before; in 1954 coin bars (either 899 – 901 or 915.5 – 917 fine) were removed from the Good Delivery list. Currently, only 995+ fine bars weighing 350 – 430 ounces can be subjected to Good Delivery status, but there is no reason why this can’t change.

Bank Of England Custodian Gold Drops 351t

The Bank Of England (BOE) has recently released its annual report in which it’s disclosed the gold held in custody for a range of customers was 5,134 metric tonnes on February 28, 2015, down 351 tonnes (6 %) form the previous year. 

The data on gold in custody at the BOE is disclosed in billions of Great British Pounds. The annual report states the BOE’s custodian gold was worth £130 billion on February 28, 2015. Because the data is disclosed in round numbers the derived tonnage is an estimate.

BOE custodian gold
Exhibit 1.

The BOE isn’t a member of the LBMA, but members of the LBMA hold gold in custody accounts with the BOE – next to foreign central banks and international financial institutions.

Let’s throw in some more numbers that are publicly available to get a bette handle on gold stored in London and to see if we can figure out how much gold is left in London:

Since January 2015 the LBMA website claims the total gold stored in London is 7,500 tonnes of which three quarters is stored at the BOE vaults. We’ll use 5,625 tonnes as an estimate for gold held in custody at the BOE on February 28, 2015.

From the Internet Archive it can be seen the same website claimed in April 2014 there was 9,000 tonnes in London of which two thirds was stored at the BOE. We’ll use 6,000 tonnes as an estimate for gold held in custody at the BOE in custody on February 28, 2014.

Gold from the GLD ETF is also stored in the LBMA system, at an HSBC vault located within the M25 London Orbital Ringway (typically LBMA vaults are within M25 to limit transportation and security costs), but this is all outside the BOE vaults.

The BOE could be a subcustodian for HSBC, as can be read in the GLD prospectus:

Gold bars may be held by one or more subcustodians appointed by the Custodian [HSBC], or employed by the subcustodians appointed by the Custodian, until it is transported to the Custodian’s London vault premises [the HSBC vault].

However, it’s likely in February there was nil GLD gold held by a subcustodian. From the prospectus:

As at March 31, 2015, the Custodian [HSBC] held 23,702,920 ounces of gold on behalf of the Trust [GLD] in its vault, 100% of which is allocated gold in the form of London Good Delivery gold bars with a market value of $28,135,365,641 (cost — $29,341,051,196) based on the LBMA Gold Price PM on March 31, 2015. Subcustodians held nil ounces of gold in their vaults on behalf of the Trust. 

GLD was holding 771 tonnes on February 28, 2015, and 804 tonnes on February, 28, 2014.

Next is an overview of the estimates we just talked about:

LBMA system estimates Feb 2015
Exhibit 2.
  • ‘tonnes at BOE’ is the data from the BOE annual reports
  • ‘LBMA’ is the data from the LBMA website
  • ‘LBMA gold at BOE’ is derived from the data from the LBMA website
  • ‘LBMA gold outside BOE’ is ‘LBMA’ minus ‘LBMA gold at BOE’
  • ‘LBMA gold outside BOE minus GLD’ is exactly what is says it is

What can be seen is that ‘tonnes at the BOE’ and ‘LBMA gold at BOE’ roughly corresponds. It can be that, ‘LBMA gold at the BOE’ includes foreign central bank gold, or put differently; foreign central bank gold at the BOE is maybe counted as gold in the LBMA system. I will further investigate this possibility.

It’s hard to say how much gold foreign central banks store at the BOE, but according to my estimates it is at least 2,000 tonnes – based on data from the central bank of the Netherlands (123t), Austria (230t), Germany (441t), Australia (80t), Switzerland (208t), Sweden (61t), Finland (25t), Belgium (±200t) and India (±250t) in addition to the IMF (±450t).

Let us assume foreign central banks store 3,000 tonnes at the BOE. This means the floating supply of London Good Delivery bars at the BOE is:

5,134 (annual report) – 3,000 (foreign central banks) = 2,134 tonnes

‘LBMA gold outside BOE minus GLD’ (exhibit 2) = 1,104 tonnes

Summed up, there is an estimated 3,238 tonnes of floating supply in London. This excludes GLD and gold stored by foreign central banks at the BOE.

LBMA estimates Feb 2015
Exhibit 3.

This post will be continued.

Bank Of China Joins LBMA Gold Price (London Gold Fix)

Originally published by the LBMA.

Tuesday 16th June 2015. LBMA Gold Price – Bank of China joins as new participant.

The LBMA today is pleased to announce that the Bank of China has been approved by ICE Benchmark Administration (IBA) to participate in the LBMA Gold Price auction process, administered by IBA.

On 20 March, 2015, IBA successfully transitioned the LBMA Gold Price to an independently administered, transparent and electronic auction process, replacing the former London Gold Fix, which was established in 1919.

The addition of the Bank of China takes the total number of direct participants, who currently participate in the auction process, to eight: Barclays Bank, Bank of China, Goldman Sachs International, HSBC Bank USA NA, JP Morgan, Societe Generale, The Bank of Nova Scotia – ScotiaMocatta and UBS.

Ruth Crowell commented “I am delighted to see the growth in the number of direct participants to the LBMA Gold Price auction process. In particular, I welcome the addition of Bank of China. As one of the LBMA’s founding members, it is appropriate that they should be the first Chinese participant”.

“We are proud to become the first Chinese and Asian bank to participate in the gold auction which is used to determine the LBMA Gold Price.” said Yu SUN, General Manager, Bank of China London Branch & CEO, Bank of China (UK) Limited. “Bank of China joined the LBMA as an initial member in 1987, and has been actively participating in the gold trading business in London for over forty years. Although being the world’s largest gold producer and consumer, China has never played a major role in the global gold fixing. Bank of China’s direct participation in the gold auction would reinforce the connection between the Chinese domestic market and overseas markets, make the international gold price better reflect the supply and demand in China, and help to promote the internationalization of the Chinese gold market.”

IBA operates twice daily, physically settled, electronic and tradable spot gold auctions at 10.30am and 3.00pm UK time. The price formation is in US Dollars (USD), with indicative settlement prices in Euro (EUR) and Pound Sterling (GBP). At the end of the auction IBA publishes the benchmark in USD, EUR and GBP. Since April 1, 2015, the LBMA Gold Price is a regulated benchmark under the supervision of the UK’s Financial Conduct Authority (FCA). The LBMA holds the Intellectual Property (IP) rights for the price.

Thoughts On The Price Of Gold

Withdrawals from the Shanghai Gold exchange (SGE), which equal Chinese wholesale gold demand, in week 12 (March 23 – 27) accounted for 46 tonnes, down 14.5 % w/w. Year to date total withdrawals have reached 607 tonnes, up 9 % from 2014, up 33 % from 2013.

Screen Shot 2015-04-03 at 11.23.15 AM
Blue (本周交割量) is weekly gold withdrawn from the vaults in Kg, green (累计交割量) is the total YTD.

Shanghai Gold Exchange SGE withdrawals delivery only 2014 - 2015 week 12 x

Shanghai Gold Exchange SGE withdrawals delivery 2015 week 12 dips x

Ever wondered why Chinese demand doesn’t move the price of gold substantially higher? A much perceived analysis in the gold space is that (central) banks suppress the price of gold. While it certainly is in their interest to control the price of gold and there are many clues they do intervene, in this post I would like to approach this subject from scratch, from what I believe is basic economics, hopefully sparking debate.

Thoughts On The Price Of Gold

In any market where goods are traded there is supply and demand. For this post we’ll look at the gold market to examine the relationship between both; there can be people offering gold for sale (supply), meeting people who are willing to buy gold (demand). If a transaction is agreed at a certain price the amount of gold sold (supply) is always equal to the amount of gold bought (demand), it’s impossible supply and demand are not equal by any measure – or one would use different metrics to measure either one.

When demand increases relative to supply (economic agents are willing to buy more gold at prevailing prices), the strength of demand will transcend the strength of supply. As a result the price of gold will rise until a new market equilibrium is found. The volume of gold bought in itself does not indicate the price will rise, for if an immense flood of supply would be unleashed that is being met by equally strong demand the price of gold will not change. No matter how much gold is sold, it won’t tell us anything about the strength of demand relative to supply, only the price can tell. The price unveils the forces of supply relative to demand.

In the graph below we can see how an increment in demand relative to supply can move the price.

Supply Demand curves

  • P – price
  • Q – quantity of good
  • S – supply
  • D – demand

In this example demand increases from Q1 to Q2, while supply remains constant; the price moves up from P1 to P2 for a new market equilibrium.

Technically, if India buys (or imports) 4,000 tonnes a year this doesn’t necessarily mean demand is strong, nor does it mean the price will go up or would have gone up in the process. If supply to India was stronger than demand from India, the price can go down while thousands of tonnes cross the globe (given India has no domestic mine production).

The gold market is quite unique and cannot be compared to other markets, like the potato market. The primary difference lays in the fact that gold can’t be consumed, as it doesn’t corrode all gold is immortal and can be recycled indefinitely. We humans can lose gold, but it can’t vanish. Therefor, all gold mined is added to the total above ground stock. In contrast, potatoes have a limited life span of itself and when eaten are digested. Yearly supply and demand of potatoes is determined by what is produced versus human trends that set our need for consumption.

Gold supply, on the other hand, is less determined by mining output, as this is effectively only a small percentage of the total above ground stock. It’s estimated yearly mining output is 1.6 % of the total above ground stock. In theory the total above ground stock is potential supply at the right price. The willingness to sell largely depends in which category the owner of the metal can be classified. Yearly mining output is likely to be sold no matter what the price is; above ground bullion can be sensitive to price movements; ancient gold artifacts are likely never to be sold; jewelry can have emotional value for owners, etc. Furthermore, no one is ever forced to sell – aside from government confiscation that have occurred in history. In short, the volume of yearly supply is elastic, but for sure it’s more than mining output.

Additionally, many other aspects determine the volume of supply and demand (the price). To name a few: technical analysis, trust in central banks, financial stability, real interest rates, stock market performance, inflation (expectations), the yield curve, disposable income, the strength of alternate currencies, industrial applications and supply and demand data (for example, if China buys 2,000 tonnes of gold per annum, but analysts worldwide state – for whatever reason – the Chinese buy 1,000 tonnes, this leads to distortion of sentiment as the market will react on false assumptions).

Next to physical supply and demand, the price is affected by gold derivatives – futures, options, forwards and unallocated gold – and the London Gold Fix. Derivatives are leveraged a multitude of physical supply and demand volumes and therefor have an equally greater impact on the price and sentiment, especially in the near term. In derivative markets the price of gold can be easily moved up or down to the likes of big traders in the short to medium term.

Terry Smeeton of the Bank Of England stated at the Australian Gold Conference in March of 1994 (from Frank Veneroso’s Gold Book 1998):

…at least 20 central banks are engaged in swaps, options and futures. This is double the number of banks who were regular players a few years ago.  

CME Group, the world’s biggest derivatives marketplace located in the US, launched a program in July 2013 to incentivize central banks outside the US to trade in a number of products, a few of which are Metals Futures Contracts traded on CME Globex, by offering them a special discount (click here to read the details from CME Group). I would be surprised if central banks don’t trade gold futures at this moment.

The London Gold Fix is set twice a day in the London gold market through an electronic, auction-based platform, at which currently seven bullion banks participate. The auction has been under scrutiny as its opaque nature is vulnerable for manipulation.

Gold Fix Chart

It should be noted that the volume of gold traded in the London OTC gold market is unknown, but estimated to be a few times the size of the futures market in New York (the COMEX).

Derivatives can be used by hedge funds, speculators, bullion banks and central banks to influence the price, subsequently influencing technical analysis and sentiment on which the rest of the market reacts. People can be scared to sell, however, when the price in the paper markets (derivatives) moves up or down, no physical gold owner is forced to sell at the paper prices except for miners. If the paper price goes down and physical demand increases this has to be met by equal physical supply, that is, if the price for physical gold follows the paper price. If the physical price disconnects from the paper price, premiums will appear at one location.

Reality Check

In 2013 the price of gold made a spectacular nosedive, which was followed by an even more impressive flight of physical gold from Western vaults to China. The UK net exported 1,424 tonnes of bullion, China net imported 1,507 tonnes.

Screen Shot 2015-04-02 at 9.56.46 PM
BulionStar charts

According to my logic and textbooks the fall in the gold price and the physical moving east was a stronger force of supply than demand. We could quantify Chinese demand as “strong”, but apparently supply was stronger.

In the Gold Demand Trends Q2 2014, by the World Gold Council we can read:

The rapid 25% drop in the gold price during the April-June period of 2013 sparked a leap in gold demand that we have heard described as a ‘once in a generation’ event.

My point being, if central banks suppress the price of gold, this can only be done if physical gold is supplied to the market. So the question is, who is currently selling gold to China? (Or in the free market since the London Gold Pool collapsed in 1968.)

China is the largest miner of gold at 450 tonnes a year, though to satisfy domestic demand additional gold is imported; in 2013 Chinese net import exploded to 1,507 tonnes, my estimate for 2014 is at least 1,250 tonnes and year to date China has imported well over 400 tonnes. Is this sold by institutional investors in London (the LBMA system) or by central banks? Eventually time will tell. In the meantime I will continue to research how much gold is flowing to Asia and if there is any gold left in Fort Knox (read this and this post for my Fort Knox research).

LBMA Forum Singapore: SGE Chairman Confirms Chinese Gold Demand In 2013 Hit 2000 MT

I just received a very interesting email from Torgny Persson, chief executive officer of BullionStar.com, who is attending the LBMA forum in Singapore today.

Dear Koos,

Following up on our brief discussion before, I’ve continued to follow your excellent blog and have some breaking news for you. I’m writing to you from the lunch break at the LBMA forum in Singapore today.

Among the speakers were Xu Luode, Chairman of the Shanghai Gold Exchange, and Zhou Ming, General Manager of the precious metals department for ICBC.

Mr. Xu started his speech by referring to the official figure of demand for the Chinese gold market 1189 tons, as published by WGC, but mentioned twice that the figure for consumption is likely higher. Later in the speech Mr. Xu mentioned and I quote the official translation in the headphones “..as the Chinese consumption demand of gold hit 2000 tons in 2013”. There you have it. The chairman himself said it out straight.

Other key takeaways from the Chairman’s speech:

– The government and the government agencies are strongly supporting the gold market development in China generally and the Shanghai free trade zone specifically.
– There’s a London fix for gold, there should also be a fix in China.
– The free trade zone will open up the Chinese gold market internationally. Settlement will be in RMB but with the possibility to freely exchange to other currencies.

The chairman focused especially on the strategic opening up of the Chinese market internationally and China influencing the international gold market.

Mr. Zhou’s speech was equally interesting.

According to Mr. Zhou, the commercial bank retail volume including sale and repurchasing in China was 500 tons in 2013, up 165 % compared to 2012. Of this ICBC stands for 200 tons. The four largest banks have 80% of the market.

Mr. Zhou also mentioned that the transaction increase for paper gold was up 27 % in 2013 i.e. much less than the physical demand. The volume of the OTC gold derivates market in China in 2013 was 550 tons according to Mr. Zhou and the market for interbank borrowing and leasing was 1300 tons in 2013 up 160% compared to 2012.

ICBC has over the last years restructured their precious metals department with a speciality branch in Shanghai. ICBC has more than 300 dedicated warehouses for gold in 36 provinces and more than 20 million gold clients!

The customers buy for ‘personal use’. It’s rare that anyone sells back.

Mr Zhou also interestingly mentioned that ICBC “can not meet the demand of the market” and that we will see “the price of derivatives delinking from the (physical) spot price”. He said that fluctuations will affect the pricing system in gold but that the market will retreat to the fundamental analysis of gold supply and demand to rebuild the current market structure (my comment: obviously hinting that the physical Chinese market will take over the current derivative markets flawed price setting mechanism). He was talking about the shift of trading distribution and price transmission mechanism in the light of this.

To summarize, I was stunned about the frank and straightforward remarks by both of the above gentlemen and just wanted to share with you as I know many in the industry including big media is reading your blog.

See attached pictures of Mr. Xu and Mr. Zhou from the LBMA forum one hour ago.

Kind Regards


LBMA Singapore 2014 Xu Luode
LBMA Singapore 2014 Xu Luode
LBMA Singapore 2014 Zhou Ming
LBMA Singapore 2014 Zhou Ming

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.

GOFO Turned Negative AGAIN: The Consequences

Today (April 3, 2014) the one month Gold Forward Offered Rate (GOFO) turned negative again. This is the seventh time since July 8, 2013 this has happened. I would like to share a few thoughts on this.

A few weeks ago when I wanted to see and download GOFO rates these were easily accessible on the LBMA website. This site, however, recently suffered a makeover. A few days ago I couldn’t find the GOFO rates at all, then when I did find them I noted they weren’t allowed to copy! I directly emailed the LBMA about it, this was their response:

The LBMA do not own the gold and silver prices, we publish the prices on our website under an agreement with the London Gold and Silver Fixing companies, who own the data and who are responsible for setting the gold and silver prices on a daily basis. When we launched the new website, this was on condition that we prevented the data from being downloaded or scraped from the site. If you would like to be able to download the data you will require a licence from the Gold and Silver Fixing Companies.

Nice one, no more GOFO data for the average Joe to analyse. I immediately requested a license at the London Gold and Silver Fixing companies to be able to download the GOFO rates. In the meantime I spent a couple of hours manually writing the rates one by one in my excel sheet from the new LBMA website.

Gofo Rates On LBMA site

The LBMA also changed the order of the rates; the last date is now at the top. Just to make things a little easier.

What Is GOFO?

I will just skim the surface here, I will write about GOFO in detail in coming posts. First lets have a look at some equations and what factors determine GOFO to help us understand what GOFO is.

LIBOR (USD loan) – GLR (Gold Lease Rate, XAU loan) = GOFO


LIBOR is the average interest rate estimated by leading banks in London that they would be charged if borrowing from other banks. It’s a benchmark for fiat money interest rates all over the world. Many consumer interest rates like mortgages and credit card loans are derived from LIBOR.

The gold lease rate (GLR) is the interest rate on gold. If a central bank chooses to lend (lease) some of its gold reserves, it agrees on an interest rate with the borrower. For example, the US Treasury, which is the owner of the gold on the Fed’s balance sheet, decides to lend 3 metric tonnes for 1 year to a jeweller against a 2 % interest rate. A year later the jeweller has to repay the US Treasury 3,06 metric tonnes. In this transaction paper gold would be created out of thin air, as at the start of the lease the gold would be physically transported to the jeweller but would remain on the Treasury’s balance sheet as gold receivable (assuming the Treasury would disclose the distinction between gold and gold receivables). Double counting the same gold creates gold. When the gold loan is payed back by the jeweller the created gold vanishes. Just as in fractional reserve banking at commercial banks.

Gold loans exist in various forms, they can also be done through a book entry at a bullion bank without physically moving gold. The GLR is determined by supply (gold lenders) and demand (gold borrowers) in the gold market.

The Consequences Of Negative GOFO

From looking at the equations we can conclude GOFO is the difference in interest rate between US dollars (USD) and gold (XAU). When the three months GOFO is negative, it means the interest rate to borrow XAU for three months is higher than the interest rate to borrow USD for three months; there is more demand for XAU than USD. This suggests the value of gold expressed in dollars will rise.

Bear in mind we live in a ZIRP bubble bath, there is such USD supply (out of thin air) that LIBOR is exorbitant low.

Nevertheless in the following chart we can see that when GOFO is trending down the price of gold (XAUUSD) is pushed up.

GOFO goldprice

In the above chart I made the negative GOFO periods grey. The gold price (right axis) tends to go up in these periods. If GOFO persists to trend lower it’s very likely the price of gold will rise. When we look back a couple of years, we can see that every time GOFO dipped in negative territory a strong bull market in gold followed. I expect to see the same in coming years.

GOFO history


Deutsche bank that recently announced to stop participating in the London gold fix (and is one of the banks under investigation of manipulating the London gold fix) wrote this on GOFO, from their Quarterly Commodities Report April 2013:

Historically, GOFO rates have only been negative twice since 1999, but have frequently moved into negative territory over the past year. We believe this is a result of on going large shift of gold from the west to the east. More recently, with GOFO turning positive, it suggests that physical tightness has eased at least in the near term.

Well guess what, GOFO is back negative again and the west to east gold exodus is long from over.

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.