Tag Archives: PBOC

Estimated Chinese Gold Reserves Surpass 20,000t

My best estimate as of June 2017 with respect to total above ground gold reserves within the Chinese domestic market is 20,193 tonnes. The majority of these reserves are held by the citizenry, an estimated 16,193 tonnes; the residual 4,000 tonnes, which is a speculative yet conservative estimate, is held by the Chinese central bank the People’s Bank of China.

I’m aware I’ve been absent from writing about the Chinese gold market for a long time, so for some of you it can be burdensome to pick up where we left a few months ago. It is not feasible for me to explain the entire structure of the Chinese gold market again; my suggestion would be to follow the links provided in the text for more background info. Most knowledge is covered in previous BullionStar posts, Mechanics Of The Chinese Domestic Gold MarketChinese Cross-Border Gold Trade RulesWorkings Of The Shanghai International Gold Exchange

To substantiate my estimates on above ground gold reserves in China mainland, we’ll first discuss private gold accumulation in China through the Shanghai Gold Exchange (SGE), after which we’ll address official purchases by the People’s Bank of China (PBOC) and its proxies that operate in the international over-the-counter market.

Chinese Private Gold Accumulation

A few days ago, you could read on the BullionStar Gold Market Charts page that withdrawals from the vaults of SGE in June accounted for 156 tonnes. Year to date SGE withdrawals have reached 984 tonnes, which is 16 % shy of the record year 2015 when 1178 tonnes were withdrawn by this time. Since 2013 gold demand in China has remained extremely elevated – don’t let the World Gold Council tell you anything different – which exposes spectacular years of physical gold accumulation by the Chinese.

Monthly Gold Withdrawn From Shanghai Gold Exchange Vaults vs Gold Price In Renminbi
Exhibit 1.

The amount of SGE withdrawals provides a fairly good proxy for Chinese wholesale gold demand, although not all gold passing through the SGE adds to above ground reserves. In China, most scrap supply and disinvestment flows through the Shanghai bourse as well, next to mine output and imports. Needless to say, recycling gold within China doesn’t change the volume of above ground reserves. So, simply using SGE withdrawals won’t fly for calculating above ground reserves. What we’re interested in are net imports and mine production in the Chinese domestic gold market.

Although gold exports from the Chinese domestic market are prohibited, exports from the Shanghai Free Trade Zone (SFTZ) where the Shanghai International Gold Exchange (SGEI) is located, are permitted. Before calculating Chinese net imports, let’s have a brief look at exports from the SFTZ – which reflects to what extent the SGEI is developing as a physical gold hub in Asia. As far as I can see, China’s gold bullion export from the SFTZ is still negligible. From the United Nations’ international merchandise trade statistics service COMTRADE, it shows the only countries that have imported tiny amounts from China in 2017 are the UK and India. But the amounts are so small, they carry little importance for our analysis.

There is one region that is importing significant amounts of gold from China, which is Hong Kong, though, this likely isn’t exported from the SFTZ but from the Shenzhen Free Trade Zone. The vast majority of China’s jewellery manufacturers are in Shenzhen, and for quite some years gold jewellery, ornaments, industrial and semi-manufactured parts are being exported from this Chinese fabrication base to Hong Kong. These events haven’t got anything to do with the SGEI in my opinion. Thereby, Hong Kong exports far more gold to China than vice versa.

For computing net gold export from Hong Kong to China we’ll subtract “imports into Hong Kong from China” from “exports and re-exports from Hong Kong to China” (as you know China doesn’t disclose gold trade statistics itself). Imports into Hong Kong accounted for 23 tonnes, while exports and re-exports to China accounted for 333 tonnes. Accordingly, China net imported 311 tonnes from Hong Kong in the first five months of 2017.

Hong Kong - China gold trade monthly ccc
Exhibit 2. In 2016 rumours circulated Hong Kong’s elevated gold exports relative to gold re-exports possibly hinted at fallacious trade data. This year the numbers show no sign of such activities.

If we apply the same math to Switzerland’s customs data, it shows China net imported 172 tonnes from the Swiss in the first six months of this year.

Most definitely Australia has exported gold bullion directly to China in 2017 as well, but the Australian Bureau of Statistics (ABS) has changed its methodology regarding this data somewhere in 2016 and is reluctant to share the details with me. Using my old way to compute Australia’s export directly to China results in 23 tonnes (this number is provisional and will be amended).

The UK, a large gold exporter directly to China in 2014 and 2015, hasn’t shipped any gold directly to China year to date, according to Eurostat.

Largest Gold Exporters to China
Exhibit 3. Annualised Chinese gold import for 2017 stands at 1,159 tonnes.

What’s remarkable is that Chinese true gold demand is far greater than what the World Gold Council (WGC) and GFMS are reporting as “Chinese consumer gold demand”. This is due to incomplete metrics applied by the WGC and GFMS. The immense tonnages imported by China have been waived in previous years, by the aforementioned Western consultancy firms, with dishonest arguments. (If you like to study the details regarding gold demand metrics read this.) In reality, thousands of tonnes are being imported into China and this metal is not coming back in the foreseeable future; causing a bull run on steroids if institutional interest for gold rebounds in the West. Ascending above ground reserves within China imply declining above ground reserves in the rest of the world. And the more scarce the metal in the West, the higher price when demand revives. I’ve described this phenomenon in my previous post How The West Has Been Selling Gold Into A Black Hole. In a forthcoming posts I will add more texture to my analysis.


Domestic mine production in China is not allowed to be exported, effectively all output can be added to above ground reserves. The China Gold Association (CGA) wrote on April 28, 2017, that Chinese domestic mine output in the first quarter accounted for 101 tonnes. Lacking the data for the second quarter, makes me estimate mine production from January until June by doubling 101, which is 202 tonnes. By the way, the CGA added:

Gold is a special product with the dual attribute of general commodity and currency. It is the cornerstone of important global strategic assets and the national financial reserve system. It plays an irreplaceable role in safeguarding national financial stability and economic security.

Based on data publicly available, in the first six months of 2017 China net imported at least 506 tonnes into the domestic market and mined 202 tonnes. An addition of 707 tonnes to Chinese private gold reserves.

Chinese Official Gold Purchases

I can be short on PBOC gold purchases: the Chinese central bank does not buy any gold through the SGE – its increments must be treated in addition to all visible flows – and it buys in secret not to disturb the global market. I’ve shared my analysis regarding the PBOC buying gold through proxies in the international over-the-counter (OTC) market for several years on these pages. Although, my reasoning has been confirmed countless times, it’s worth noting it was affirmed once more not long ago.

Early 2017 world renowned gold analyst Jim Rickards was in a meeting with the three heads of the precious metals trading desks of largest Chinese bullion banks. These gold dealers told Rickards that indeed the PBOC does not buy any gold through the SGE. Rickards stated in the Gold Chronicles podcast published January 17, 2017 (at 25:00) [brackets added by Koos Jansen]:

What I [J. Rickards] don’t know is about the Shanghai Gold Exchange sales, they’re pretty transparent, how much of that is private and how much of that is the government [PBOC]. And I was sort of guessing 50/50, 70/30, whatever. What they told me, and these guys are the dealers [the three heads of the precious metals trading desks], it’s 100 % private. Meaning, the government operates through completely separate channels. The government does not operate through the Shanghai Gold Exchange. … None of what’s going on on the Shanghai Gold Exchange is going to the People’s Bank Of China.

In fact, the PBOC uses Chinese banks as proxies to buy gold in countries like the UK, Switzerland and South-Africa after which the metal is transhipped to Beijing. Note, monetary gold shipments do not show up in customs reports of any country.

I haven’t come across any clues in the past months that have changed my estimate on the PBOC’s true official gold reserves. My best substantiated guess still is 4,000 tonnes (in contrast, the PBOC publicly discloses it holds about 1,840 tonnes). For more information on how and when the PBOC stacked up to 4,000 tonnes, continue reading at the BullionStar Gold University by clicking here.

Estimated Total Gold Reserves China 20,000 Tonnes

Let us put the pieces of the puzzle together. We know the PBOC doesn’t buy gold though the SGE, but prior to 2007 the Chinese gold market wasn’t fully liberalized and back then the PBOC was primary dealer in the domestic market. Any PBOC purchases prior to 2007 could have been from Chinese gold mines. What else do we know? China is said to be a gold importer since the 1990s, suggesting domestically mined gold was not exported after, say, 1994. In the next screen shot from the China Gold Market Report 2010 we can read “China has been a gold importer since the 1990s”.

Screen Shot 2015-05-17 at 11.48.53 PM
Exhibit 4. Courtesy China Gold Market Report 2010

For the sake of simplicity, we’ll calculate from 1994 onwards. Precious Metals Insights (PMI) has estimated that 2,500 tonnes of gold jewellery were held by the Chinese population in 1994. Furthermore, I have data on Chinese non-monetary gold import starting in 2001 – which started slowly but ramped up in 2010 (exhibit 2).

In 1994 PBOC official reserves accounted for 394 tonnes and Chinese domestic mine output accounted for 90 tonnes. So, our starting point in 1994 is:

2,500 (jewellery base) + 394 (official reserves) + 90 (mining) = 2,984 tonnes

From here, we can aggregate domestic mine output and net imports for every succeeding year. As stated above, my assumption is that the PBOC sourced its official gold from domestic mines prior to 2007, but shifted these acquisitions to the international market after 2007. The official gold increments in 2001 (105 tonnes) and 2003 (100 tonnes) I’ve subtracted from “aggregate domestic mine output”, the increments in 2009 (454 tonnes) and onwards I did not subtract from “aggregate domestic mine output”.

The previous calculation has resulted in the following chart:

Estimated Total Chinese Gold Reserves June 2017
Exhibit 5. Aggregate net import reflects non-monetary gold.

In the chart the green, blue and grey bars represent private gold reserves, and summed up account for an estimated 16,193 tonnes at the time of writing. The red bars reflect the PBOC’s official gold reserves – I would like to stress this number is speculative – and currently account for 4,000 tonnes. My best estimate as of June 2017 for total above ground gold reserves within the Chinese domestic market is 20,193 tonnes.

Debunking GFMS’ Gold Demand Statistics

What came to light as on odd discrepancy between GFMS’ Chinese gold demand and “apparent supply” has proven to be a tenacious cover-up by the oldest consultancy firm in the gold market. And not only does GFMS publish incomplete and misleading data on Chinese gold demand, all its supply and demand data is incomplete and misleading. As a result, the vast majority of investors across the globe has been brainwashed to believe total gold supply and demand mainly consists of global mine output and jewelry demand. In reality, the supply and demand data GFMS publishes is just the tip of the iceberg. But the firm is reluctant to admit this publicly, lest their business model would be severely damaged.

GFMS has denied all allegations about their incomplete Chinese gold demand statistics by continuously making up false arguments. Therefore, BullionStar will debunk, once more, such arguments spread by GFMS – which are supposed to explain how from January 2007 until September 2016 the difference between GFMS’ Chinese gold demand and apparent supply reached over 4,500 tonnes – in order to expose true Chinese gold demand.

Exhibit 1. Chinese gold supply and demand data. Apparent supply is reflected by the center columns (mine output + import + scrap supply). Withdrawals from the vaults of the Shanghai Gold Exchange serve as a proxy for Chinese wholesale gold demand. True Chinese gold demand is somewhere in between SGE withdrawals and apparent supply.

Since 2013 I’ve witnessed GFMS shamelessly present nine arguments in their Gold Survey reports, but along the way abandoned the arguments that I had debunked on these pages. Indeed, few of all these arguments have ever proven to be valid, illustrated by the fact that GFMS perpetually keeps making up new ones. What’s left is to disparage are the final three arguments from GFMS’ most recent annual report: the Gold Survey 2016 (GS2016). Because GFMS chooses their arguments to be ever more complicated, I’ll have to be precise in my wordings not to allow any margin for interpretation errors. For detailed information regarding the mechanics of the Chinese gold market and supply & demand metrics readers can click the links provided.

Debunking Final GFMS Arguments

In the Chinese domestic gold market nearly all supply (import, mine output, scrap supply) is sold through the Shanghai Gold Exchange (SGE), and so Chinese wholesale gold demand can be measured by the amount of gold withdrawn from the SGE vaults; data published on a monthly basis. As I’ve been reporting on withdrawals from the Chinese core exchange since 2013, the debate between me and Western consultancy firms like GFMS with respect to true Chinese gold demand has centered around these infamous SGE withdrawals (exhibit 1). Per mentioned above, GFMS has put out nine arguments in recent years explaining their reader base why SGE withdrawals do not reflect gold demand. Firstly, let us have a look at the five arguments now abandoned by GFMS:

  1. Wholesale stock inventory growth (Augustus 2013) (Gold Survey 2014, page 88)
  2. Arbitrage refining (Gold Survey 2014, page 88) (Reuters Global Gold Forum 2015)
  3. Round tripping (Gold Survey 2014, page 88) (Gold Survey 2015, page 78, 82)
  4. Chinese commercial bank assets to back investment products. “The higher levels of imports, and withdrawals, are boosted by a number of factors, but notably by gold’s use as an asset class and the requirement for commercial banks to hold physical gold to support investment products.” (Gold Survey 2015, page 78).
  5. Defaulting gold enterprises send inventory directly to refiners and SGE (Gold Survey 2015 Q2, page 7)

No need to discuss these anymore, as GFMS dedicated a full chapter in the GS2016 report titled, “A Review And Explanation Of How China’s SGE’s Withdraw Numbers Are Impacted By Other Trading Activities”, in which the arguments above are not listed, implying GFMS ceased to recognize them as relevant. However, there are three new arguments listed, and one old one, that will be discussed in this post:

  1. Tax avoidance (Gold Survey 2016, page 56).
  2. Financial statement window dressing (Gold Survey 2016, page 58).
  3. Retailers selling unsold inventories directly to refiners (Gold Survey 2016, page 58)
  4. Gold leasing activities and arbitrage opportunities (in China gold is money at lower cost) (Gold Survey 2016, page 57, Gold Survey 2015, page 78)

Because gold leasing is an old argument it will only briefly be addressed here.

1. Tax Avoidance

This argument entails an illegal Value-added tax (VAT) invoice scheme. Although this scheme exists, it can not have the impact on SGE withdrawals like GFMS wants you to think.

GFMS introduces its special investigation chapter by stating:


The first and foremost factor behind why we believe the SGE’s withdrawal number differs from the country’s total gold demand is related to China’s current tax system, with some people exploiting this grey area.

… the number of industry participants mushroomed in 2014 and 2015 as other traders became aware of the potential loophole.

The GFMS team uses the terms “tax avoidance” and “loophole”. For the ones that don’t know, tax avoidance and tax evasion are two opposing practices. Tax avoidance is the legal usage of a tax regime to one’s advantage in order to reduce the amount of tax payable by means that are within the law (Wikipedia). Tax evasion is the illegal evasion of tax payable (Wikipedia). In other words, tax avoidance is legal while tax evasion is illegal. In the introduction the GFMS team pretends the tax scheme is legal, while this is anything but true. In China one can risk life imprisonment or the death penalty when caught for tax evasion:

Whoever forges or sells forged special invoices for value-added tax shall, if the number involved is especially huge, and the circumstances are especially serious so that economic order is seriously disrupted, be sentenced to life imprisonment or death and also to confiscation of property.

Then, to add to the confusion, further down the GFMS team writes, “of course, all of the activities are considered illegal by the Chinese government.” Maybe GFMS doesn’t understand the difference between tax avoidance and tax evasion, two diametrically different practices, which makes their professionalism highly questionable.

GFMS writes, “the first and foremost factor behind why we believe the SGE’s withdrawal number differs from the country’s total gold demand is related to China’s current tax system”. So we’re supposed to believe that after all these years – GFMS is operational for decades – and all that has been written on the Chinese gold market, now GFMS has finally found the “first and foremost reason” why SGE withdrawals do not reflect demand? Or did it recently stumble upon this scheme to use in its defence? I think the latter.

The understand the details of this illegal VAT invoice scheme please read my post The Value-added Tax System In China’s Domestic Gold Market, written to substantiate this blog post.

Regarding using VAT invoices for tax evasion, the GFMS team must have read this news article by the Shenzhen Municipal Office. In the news, a company called Longhaitong used SGE VAT invoices for tax evasion. How does it work? For example: the prevailing spot gold price on the SGE is 234 CNY/gramme. Company X tells a mom-and-pop jewelry fabricator that they can supply good quality cheap gold, say the SGE spot price minus 2 CNY/gramme, but without a VAT invoice. The mom-and-pop fabricator wants to buy 1 Kg so it gives 232,000 CNY to company X (the mom-and-pop shop will fabricate jewelry from the gold to be sold covertly without VAT to consumers). Company X buys 1 Kg of gold on the SGE at the spot price of 234 CNY/gramme, paying 234,000 CNY. Then company X gives the gold to the mom-and-pop fabricator but keeps the VAT invoice. Up till now, company X has incurred a loss of 2,000 CNY (bear in mind, because of China’s VAT system buyers pay the spot price at SGE which doesn’t include any VAT, but when companies withdraw the metal they receive a VAT invoice from the tax authority that describes 17 % of the all-in price is VAT, because the gold leaves a VAT exempt environment). However, company X can then sell the VAT invoice for 4,000 CNY to, in example, a brick trader. Company X effectively makes 2,000 CNY. If the brick trader alters the subject header on the invoice from “gold” into “bricks” he can tax deduct 34,000 CNY (234,000 / (1+17%) * 17%) from his VAT payable. In this scenario, the brick trader effectively makes 30,000 CNY (34,000 CNY minus the 4,000 it paid to company X). Naturally, all exemplar numbers can vary.

For sure this illegal VAT scheme exists and has been used. But, only to a limited extent – in my conclusion I will tell you the upper bound. Mind you, in the scenario I just described the gold does meet demand, albeit through an illegal scheme!

In addition, the discrepancy between the GFMS Chinese demand figures and SGE withdrawal numbers first appeared in 2008, and have exploded since 2013.

Exhibit 2. Chinese gold supply and demand data.

In the GS2016 GFMS writes:

We initially became aware of the scheme in 2013 when it first emerged, but based on information gathered from our contacts, the number of industry participants mushroomed in 2014 and 2015 as other traders became aware of the potential loophole.

The GFMS team wants readers to believe that it was the tax scheme that caused the discrepancy between GFMS Chinese demand and SGE withdrawals since 2013, but the VAT regulation regarding gold has remained unchanged since 2002. Is it believable that criminals found the possibility of these illegal practices 11 years later, exactly when Chinese demand exploded? No. If you click this link, you will see a similar incident that happened in 2010 and was reported at the end of 2011. The VAT scheme has existed for many years and crime incidents happen, but not like GFMS wants you to think.

If the GFMS team was indeed aware of the illegal practices as late as 2013 and thought that was the year when these practices first emerged, then GFMS is not properly informed in the Chinese gold market.

More from GS2016:

One of our contacts with some understanding of this activity estimated that just from Shenzhen alone, such trading activities could have possibly impacted the SGE’s withdrawal volumes by a few tonnes per day. Approximately half of the gold being sold in the black market at discounts would eventually flow back to the SGE.

In my opinion this is speculation. According to the news available, buyers in the black market are those who want the gold to fabricate jewelry that eventually is being met by true demand. In contrast, GFMS wants readers to believe half of the gold involved in the scheme flows back to the SGE. But bars withdrawn from the SGE vaults are not allowed to re-enter, only if they’re recast into new bars by SGE approved refineries (the gatekeepers of the Chinese chain of integrity). For gold involved in VAT invoice schemes to flow back to the SGE, technically SGE approved refineries would be complicit. Though the SGE conducts a campaign to crack down on such illegal tax activities.

As stated above, the VAT scheme is real, though it can not involve as much gold as GFMS wants you to believe. Unfortunately we can’t compute the exact amount recycled through the SGE through this practice, we can only identify the upper bound, which we’ll do in the conclusion.

As background information: when gold is withdrawn from SGE vaults and promptly flows back to the SGE, this overstates withdrawal numbers as it creates equal demand and supply that has no net effect on the price. Therefore, such recycle flows should not be counted in supply and demand statistics. Readers can click this post for more information.

Financial Statement Window Dressing

The GFMS team writes:

Some companies attempted to build up their revenues by merely trading and withdrawing physical gold from the SGE vault so it would appear they have a high level of business activity, while in reality there is no real genuine demand behind this.

Trading can build up revenues but why do these companies withdraw gold? That doesn’t make economic sense. If a company buys gold on the SGE and leaves the gold in the SGE vault, the gold will be recorded as “inventory” on the company’s balance sheet. If the company then withdraws the gold, the gold is still regarded as “inventory”, so what’s point of withdrawing gold? Changing the location of the gold doesn’t change the accounting nature of the gold.

It is technically possible to buy gold on the SGE, withdraw, refine it into new bars, redeposit the bars into SGE vaults and sell the bars. However, this will incur expenses. When the point is “window dressing”, why incur unnecessary expenses? More logic would be to leave the gold in the SGE system. This argument is false.

Retailers Selling Unsold Inventories Directly to Refiners

In this section, the GFMS team writes:

Retailers often prefer to sell a portion of their working stock at a discount directly to refiners in order to maintain inventories at a desirable level.

Why waste the fabrication costs of jewelry when retailers can sell the products at a discount to customers?

GFMS writes:

By selling to refiners, even if such a transaction may result in a financial loss, it still counts as revenue; but doing the latter only increases the expense category and provides no benefits to the company’s revenues or asset value.

Let’s assume an unsold jewelry stock is worth of 1,000 CNY. The retailer sells it to a refiner at 800 CNY, which results in a loss of 200 CNY. The inventory item on the retailer’s balance sheet is reduced by 1,000 CNY and the cash item increases by 800 CNY. The net result is that the total asset value of the retailer decreases by 200 CNY, then how can this practice provide benefits to the asset value?

GFMS writes:

As an example, during a field research trip earlier this year, a local refiner indicated that one jewellery retailer has sold approximately 40 tonnes of unsold jewellery pieces to them in a single two month period.

But this quote doesn’t mention what the unsold jewelry pieces become in the end. Possibly, these pieces become gold wires, which might be used by jewelry fabricators instead of becoming gold bars that flow back to the SGE. GFMS pretend the majority of gold in China is continuously recycled through the SGE, which is not true. Many refineries are note even approved by the SGE to supply gold bars.

Gold Leasing Activities And Arbitrage Opportunities

This argument is one of the oldest and most persistent. But we can be short about this; in the Chinese gold lease market nearly all trades are conducted within the SGE system. Any speculator borrowing gold for cheap funding will not withdraw his metal loan, as his incentive is to sell spot for the proceeds. GFMS fools readers by mentioning high leasing activity, but it neglects to mention leases aren’t withdrawn from the vaults. Only a jewelry fabricator would withdraw borrowed gold because he wants to fabricate products to meet demand. For more information you can read this post on the Chinese gold lease market.

Even the World Gold Council has recently stated little borrowed gold leaves the SGE system [brackets added by me]:

Over recent years we have observed a rising number of commercial banks participating in the gold leasing market. … It’s estimated that around 10% of the leased gold leaves the SGE’s vaults. The majority is for financing purposes and is sold at the SGE [and stays within the SGE vaults] for cash settlement.

This argument is false.

Furthermore, it’s noteworthy that GFMS writes:

From the perspective of the bank, lending physical gold is an off-balance sheet item,…

But as I’ve demonstrated in this and this post the majority of the “precious metals” on the Chinese bank balance sheets reflects back-to-back leasing. Meaning banks borrow gold in the SGE system to subsequently lend out at a higher lease rate. So neither do the Chinese bank balance sheets influence SGE withdrawals. What withdrawals largely reflect are direct purchases by individual and institutional investors at the SGE. True demand.


There is a very limited extent to which the VAT scheme can explain the difference between GFMS’ demand and SGE Withdrawals. I wrote previously that indeed there is certain amount of gold being withdrawn from SGE vaults, which, for various reasons, finds its way back to the SGE in newly cast bars – overstating SGE withdrawals as a proxy for wholesale demand. Unfortunately nobody knows exactly the volume flowing through the SGE that distorts withdraw data. But, we do know the upper and lower bound. The upper bound is the difference between SGE Withdrawals and apparent supply, the lower bound is zero.

Exhibit 3. Chinese gold supply and demand data. As supply and demand are always equal, to estimate demand we can measure supply.

GFMS only measures consumer demand (jewelry, retail bar and coin, and industrial demand) and not institutional demand (direct purchases at the SGE). This is not speculation this is a fact, and in China everyone can buy gold directly at the SGE so this explains the immense withdrawals. GFMS is fully aware of this but refuses to acknowledge it – because that would ruin their business model. Instead GFMS pretends that the difference between consumer demand and SGE withdrawals is all caused by gold being recycled through the central Chinese exchange. But how is this possible? If the Chinese gold market would simply be a merry-go-round fest, how come the Chinese import thousands of tonnes of gold that are not allowed to be exported? What GFMS suggests is not possible. The fact China keeps importing reveals demand. Another chart:

Exhibit 4. Chinese gold supply and demand data. Apparent supply is reflected by the center columns (mine output + import + scrap supply).

Theoretically the upper bound for the VAT scheme to have recycled gold through the SGE equals the difference between SGE withdrawals and apparent supply (the difference in exhibit 4 between the red and center columns). That’s the sole leeway we can debate about. As supply equals demand, demand cannot be lower than apparent supply. I should add, not unimportant, we know GFMS’ scrap supply data does not include disinvestment (institutional selling directly to refineries). So disinvestment must be included in the difference between SGE withdrawals and apparent supply as well. Have another look at exhibit 3. But, because we don’t know the amount of disinvestment, neither do we know the amount of distortion (VAT scheme and other recycling flows).

That’s why in exhibit 1 I’ve disclosed the aggregated difference between apparent supply and GFMS demand. There can be no mistake about this volume, it reflects true demand and it has mushroomed into +4,500 tonnes since 2007. GFSM can present many more arguments in future reports, but it won’t change the fact that true demand is at least equal to apparent supply.

To be exact, from January 2007 until September 2016 apparent supply accounted for 11,541 tonnes, and GFMS’ Chinese gold demand accounted for  6,903 tonnes. The difference, which GFMS has pursued to conceal, has aggregated to 4,638 tonnes. And according to my analysis this was not bought by the Chinese central bank.

As over the aforementioned period SGE withdrawals accounted for 12,825 tonnes, we get…

True Chinese gold demand ballpark = 11,541 – 12,825 tonnes

GFMS’ Chinese consumer gold demand = 6,903 tonnes

Let’s see how much longer GFMS can deny reality.

Exhibit 5. Chinese gold supply and demand data. Apparent supply is reflected by the center columns (mine output + import + scrap supply).

For more detailed information with respect to GFMS’ incomplete global gold supply and demand metrics view this post.

Q1 – Q3 2016 China Net Gold Import Hits 905 Tonnes

Withdrawals from the vaults of the Shanghai Gold Exchange, which can be used as a proxy for Chinese wholesale gold demand, reached 1,406 tonnes in the first three quarters of 2016. Supply that went through the central bourse consisted of at least 905 tonnes imported gold, roughly 335 tonnes of domestic mine output, and 166 tonnes in scrap supply and other flows recycled through the exchange.

Core Supply & Demand Data Chinese Gold Market Q1-Q3 2016

Chinese gold demand is still going strong this year, albeit less than in 2015. The most likely reason for somewhat lower demand has been the strength in the price of gold in the first three quarters of this year, to which the Chinese reacted by subduing purchases. From 1 January until 30 September 2016, the gold price went up 24 % in US dollars per troy ounce, from $1,061.5 to $1,318.1; measured in renminbi the price went up 28 % over the same period.

Now I have proven the gold on Chinese commercial bank balance sheets has little to do with physical gold ownership of these banks, but mainly reflects back-to back leases and swaps, we can be positive that data on withdrawals from the vaults of the Shanghai Gold Exchange (SGE) roughly equals Chinese wholesale demand. For now that is, as future developments can always alter our metrics.

Below is a chart showing withdrawals from the vaults of the SGE and the price of gold in yuan per gram. The most significant trends of recent years are still in effect; in the short term, when the gold price is falling Chinese demand increases (2013 and 2015), when the gold price is rising Chinese demand declines (2016). This trend is supported by SGE premiums that have an inverse correlation with the price of gold, when the price of gold declines, SGE premiums escalate and vice versa – I will show charts below. Furthermore, in the long term we can observe consistent growth in Chinese gold demand due to the opening up and development of the domestic market.

Exhibit 1. SGE withdrawals versus the gold price in yuan per gram.

SGE withdrawals in the first three quarters of 2016 accounted for 1,406 tonnes – still impressive – down 29 % from 1,986 tonnes in 2015, which was a record year. Annualized SGE withdrawals are set to hit 1,877 tonnes in 2016.

Notable, “known net import” by China is relatively strong compared to SGE withdrawals in 2016. Total net import in the first three quarters of this year has aggregated to 905 tonnes – annualized 1,206 tonnes – or 64 % of SGE withdrawals, versus an import/withdrawals ratio of 53 % in 2015. As mine supply to the SGE is fairly constant, recycled gold through the SGE must be lower this year than last year. As a rule of thumb, we use the equation:

SGE withdrawals = domestic mine output + import + recycled

For Q1-Q3 2016 that gives:

1,406 tonnes = 335 tonnes + 905 tonnes + 166 tonnes

The largest net exporter to China is still Hong Kong, having transhipped 608 tonnes to the mainland from January until September 2016, up 5 % compared to 2015. The volume Hong Kong exports to the mainland has been quite constant since 2014, while in 2013 China’s special administrative region was a substantial larger supplier.

(There have been rumors that Hong Kong ’s export to China is overstated in the official data by the Hong Kong Census & Statistics Department, caused by fake exports. In the chart below you can see that the share of exports relative to re-exports from Hong Kong to China this year has increased from previous years. Potentially this signals fake exports, as it’s easier to over invoice an export than re-export, though I haven’t found hard evidence for this scheme. When I do I will report accordingly.)

Exhibit 2. Hong Kong cross-border gold trade with China mainland. Any potential “export scheme” can have nothing to do with “round-tripping” as Hong Kong’s gross import from China is very low.
Exhibit 3. Monthly Hong Kong cross-border gold trade with China mainland. The exports/re-exports ratio has fallen since July. 

The second largest exporter to China is Switzerland, having supplied a net 229 tonnes so far this year, which is 22 % more than last year. Clearly, direct shipments from Switzerland to China have replaced shipments via Hong Kong.

Direct net exports by the UK to China mainland have collapsed by 92 % this year compared to 2015, from 210 tonnes to a mere 18 tonnes. The reason being, the UK has been the largest net importer globally this year, which is related to the strength in the gold price early this year. UK net gold trade is a proxy for Western institutional supply and demand.

Exhibit 4. Monthly UK net gold flow and GLD inventory change versus the gold price in US dollars per troy ounce. Note, the strong correlation between the price and UK net flows.

Australia’s direct export to China is down this year as well (in the first eight months, data for September has not yet been released). I’ve computed the data as described in my post Australia Customs Department Confirms BullionStar’s Analysis On Gold Export To China. Following this method, the land of down under has sent 50 tonnes of gold directly to China during the first eight months of this year, down 23 % from 65 tonnes in 2015.

Despite press releases suggesting Russian gold enterprises are strengthening ties with the SGE, I have identified only one shipment of 30 Kg by the Russian Federation directly to China in 2016. In 2013 the Russians directly net exported 50 Kg to China.

Exhibit 5. Gold export Russia to China.

Data on gold export from South Africa to China is not publicly available.  

Exhibit 6. Chinese monthly gold supply and demand data.
Exhibit 7. Chinese gold supply and demand data for Q1-Q3 2013, 2014, 2015 and 2016.

In exhibit 7 we can see that, although the level of SGE withdrawals in 2016 is lower than in 2013, 2014 and 2015, net imports are higher than in 2014. It’s very difficult to know the exact explanation for relative high imports this year. Though, in my opinion, it’s connected to increased Chinese ETF demand, which grew by 34 tonnes and is all required to be stored in SGE vaultsand less gold being recycled through the SGE.

Since 2014, when the Shanghai International Gold Exchange (SGEI) was erected, there is a possibility “SGE withdrawals” are inflated by withdrawals from vaults in the Shanghai Free Trade Zone; gold that is allowed to be exported abroad – the free trade zone is not part of the domestic market. But as far as I know any activity on the SGEI lacks foreign enterprises that buy gold to withdraw and export. A couple of months ago a source at a large Chinese bank told me the SGEI is mainly used by Chinese banks to import gold into Chinese domestic market. In addition, I haven’t bumped into any large importers from China. Occasionally India imports a few hundred Kg, but that’s it.

The emblematic difference between “Chinese gold demand as disclosed by GFMS” and SGE withdrawals – displayed in exhibit 7 – is due to GFMS’ incomplete metrics. For decades this consultancy firm has been denying the existence of institutional supply and demand in above ground gold, which is far more important to price formation than retail sales and mine supply, the predominant flows published by GFMS. The essence of this swindle can be read in my blog post The Great Physical Gold Supply & Demand Illusion. I also have a few more blog posts in the pipeline that discuss GFMS’ most recent gold supply and demand data.

All supply and demand data presented above excludes purchases by the People’s Bank of China, which sources physical gold in the international OTC market. 

SGE Premiums November Highest Since 2013

I expect November to be a very strong month for SGE withdrawals. Mentioned in the introduction segment of this post, there is a trend in Chinese wholesale gold demand in relation to the gold price. Whenever, the gold price is climbing, Chinese demand is subdued, accompanied by low SGE premiums; when the gold price is decreasing, SGE withdrawals and premiums in China shoot up. The relationship between the gold price and SGE withdrawals can be viewed in exhibit 1. Below in exhibit 8 & 9, readers can see the relationship between “SGE end of day prices and premiums”.

Exhibit 8. SGE end of day prices and premiums.
Exhibit 9. SGE end of day prices and premiums, including moving averages which make the inverse correlation more visible.

Note, the gold price on the SGE and the premium have an inverse correlation.

I already mentioned that SGE withdrawals in the first nine months of 2016 have been subdued due to a rally in the gold price. However, high premiums at the SGE in November forecast elevated withdrawals for the month. Since Trump got elected on November 9, and price of gold started tumbling, SGE premiums have broken a three-year record. This signals strong demand.

In the next chart from Goldchartsrus.com we can see the premium on the SGE’s most traded physical contract Au99.99 has risen since November 9 and reached 3 % by 24 November. Levels not seen since 2013 (exhibit 8).

Exhibit 10. Intraday SGE premium (Au99.99 versus XAUUSD)

Although the relationship between the gold price and SGE premiums has been in place for years, Reuters reports the high premiums in November are caused by worries on import restrictions. From Reuters:

Gold premiums in top consumer China jumped to the highest in nearly three years this week on worries over a supply shortage that traders said were due to Beijing’s efforts to restrict import licenses.

“While we don’t have the exact numbers, we hear that they (Chinese government) have limited the number of importers,” said Dick Poon, general manager at Heraeus Precious Metals in Hong Kong.

To me this statement doesn’t make sense. At this moment that are 15 banks approved by the PBOC to import gold. Limiting the number of importers would cause less importers to import more gold in order to balance the domestic market (supply gold from abroad when necessary). In the Measures for the Import and Export of Gold and Gold Products drafted by the PBOC in March 2015 it states:

… An applicant for the import … of gold … shall have corporate status, … it is a financial institution member or a market maker on a gold exchange [SGE] approved by the State Council.

… The main market players with the qualifications for the import … of gold shall assume the liability of balancing the supply and demand of material objects on the domestic gold market. Gold to be imported … shall be registered at a spot gold exchange [SGE] approved by the State Council where the first trade shall be completed.

The Chinese government could lower imports by distributing less “import licences” to approved banks. As, every approved bank still needs to submit for a license for every gold import batch. Logically, lowering imports would be done by the PBOC through handing out less licences.

From the PBOC:

There shall be one Import … License of the People’s Bank of China for … Gold Products for each batch … and the License shall be used within 40 work days since the issuing date.

If the PBOC wanted to lower imports, it would simply hand out less licences. No need to “limit the number of importers”.

Either way, I expect SGE withdrawals to be strong for November.

The Gold Price And Global Flows. The UK Net Imported 152 tonnes In June.

On a firmly rising gold price the UK is one of the largest net importers of gold in 2016. The gold price went up 25 % from $1,061.5 dollars per troy ounce on January 1 to $1,325.8 on June 31. Over this period the UK net imported 583 tonnes and GLD inventory mushroomed by 308 tonnes.

In the month of June the UK gross imported 154.2 tonnes, up 22 % from May, and gross export was 1.9 tonnes, down 37 % from the previous month. Net import into the UK resulted in a robust 152.3 tonnes, up 23 % month on month.

Gross import by the UK from Switzerland remained resilient at 68.5 tonnes, up 11 % from May, while gross export to Switzerland was nix.

The most noteworthy gold exporters to the UK in June 2016 were:

UK gross gold import table June 2016

Notable, the UK net imported a record amount from China mainland at 3.2 tonnes. This is very exceptional and has never happened in recent history, as far as I know.

UK Gold Trade China 2012 - June 2016
In general gold export from the Chinese domestic gold market is prohibited – unless the Peoples Bank Of China would make an exception. Therefor, the export of gold from China to the UK was possibly sourced from the Shanghai International Gold Exchange (SGEI) in the Shanghai Free Trade Zone (SFTZ) that technically/physically is separated from the Chinese domestic gold market.

Although the tonnage isn’t staggering, the transfer becomes newsworthy when viewed in perspective. The Chinese have an interest in becoming a dominant player in the international gold market. To strengthen their economy they wish not only for more physical (private and official) gold reserves, another objective is a broad development of gold market infrastructure and integration with the international market. Read what PBOC governor Zhou Xiaochuan had to say in 2004 at the London Bullion Market Association (LBMA) conference :

The establishment and development of China’s gold market marks the basic completion of the construction of a market for major financial products in China, which will provide better micro grounds for China’s macro economic adjustment. For further development, China’s gold market should gradually realize three transformations: from commodity trade to financial product trade, from spot transactions to futures transactions, and from a domestic market to integration with the international market.

…. gold still has a strong financial nature and remains an indispensable investment tool. In major financial centers in the world, the gold market – together with the money, securities and FX market – constitutes the main part of the financial market.

China’s gold market must integrate into the global market. …. China should actively create conditions for its gold market to become an important part of the international gold market.

… gold still bears the marked nature of money under the modern financial system.

In September 2014 the Shanghai International Gold Exchange (SGEI) was erected in the SFTZ, followed by the launch of the Shanghai Gold Fix in April 2016, but up until now both events did not elevate China’s share in the international gold market as the Chinese had hoped for. But the Chinese always set out multiple strategies at once to reach their objectives.

Meanwhile, in the past 14 months four Chinese banks have penetrated the LBMA Gold Price auction. Namely, Bank of China, Bank Of Communications, China Construction Bank and Industrial and Commercial Bank of China (ICBC). In addition, ICBC Standard Bank has become an LBMA market maker for spot trading and a clearing member of “the not-for-profit company London Precious Metal Clearing Limited (LPMCL)” for which it has bought the 2,000 tonnes gold vault from Barclays in May. The vault is located in London.

ICBC Standard Bank on the latest developments:

This enables us to better execute on our strategy to become one of the largest Chinese banks in the precious metals market.

Is it a coincidence that China is suddenly exporting gold to the UK while ICBC Standard Bank was recently accepted as clearing member of the LPMCL and utilizes a gold vault in London? Likely the gold export to the UK is connected to the new clearing and vaulting activities by ICBC Standard Bank. Next to China’s strategy to develop the SGEI for gold trading in renminbi along the Silk Road, they’re actively increasing presence in the London Bullion Market.

However, I don’t think the majority of gold imports into the UK this year – aside from the import from China – are connected to ICBC Standard Bank, the imports mainly reflect Western institutional demand. Net gold flows through London have been correlated to the price of gold long before the Chinese entered the international precious metals construction.

So, although the 3.2 tonnes exported from China to the UK are exceptional, the UK manifesting itself as a net importer while the price is rising is quite normal.

The Gold Price And Global Flows

Here’s a theory hopefully sparking fruitful debate: the gold price is set by physical supply and demand in the West.

Since 2013 when the price of gold declined significantly in all major currencies, we’ve witnessed a massive exodus of physical gold from West to East. In 2013 the UK, housing the London Bullion market, net exported 1,424 tonnes, the highest amount since 1997 when 2,473 tonnes were net exported (source James Turk).

In the 2014 and 2015 the UK continued to be a net exporter. Large wholesale 400-ounce London Good Delivery bars were mainly transported to Switzerland, where being recast into 1 Kg 9999 fine bars for the Asian market. From international merchandise trade statistics we could clearly track the gold flowing from the UK, to Switzerland, to Hong Kong, finally reaching China mainland. We could even see a correlation between UK net export and SGE withdrawals from early 2013 up until December 2015.

UK Gold Trade 2012 - June 2016 SGE withdrawals

Currently China is still buying gold, albeit less than in recent years, but the West has turned into a net buyer as well, pressuring supply and forcefully driving up the price.

Some commentators in the gold space deemed it impossible China was importing 1,400 tonnes on average in the past three years while the price was going down. The price was set purely in the paper markets, so they concluded. According to my analysis China was able to buy the tonnages they did by the willingness of the West to supply the metal – exactly who in the West was so eager to supply is another story.

The falling gold price from 2013 until 2015 and the exceptional tonnages China was importing were caused by strong physical supply from the West. Simplified, if 1,400 tonnes are imported into China, one can observe strong demand, but the corresponding supply had to be at least equally strong (or stronger) on a declining price. The nominal volumes of supply and demand are always equal, the difference in strength between both is what sets the price. In my logic, that is. What happened in the past years was that the Chinese were merely buying the physical supply coming from the West, buying as much as they could. A once in a lifetime opportunity.

As stated in a previous post I think the price of gold can be, and is, easily manipulated through derivatives in the short term. Through leveraged futures contracts or derivatives in the highly opaque OTC market the price of gold can be efficiently managed for short periods. But in the long term the price can only be decided by physical supply and demand. If any entity for example desires to suppress the gold price in the long term then physical metal has to be supplied into the open market or an undeniably vivacious spread will appear between the paper and physical price.

What I’m seeing is that physical gold flows across the globe are highly correlated with the gold price. Have a look at the chart below showing the gold price versus the net flow through the UK (and GLD inventory change). There’s a clear correlation.

UK Net Gold Trade GLD Jan 2012 - June 2016
GLD inventory change makes up about one third of the total UK net flow.

The same correlation can be seen in net gold flows through Switzerland – which can be considered as a proxy for Western demand just like net flows through the UK.

Swiss net gold flow vs gold price 1971 - 2016 june

In general, every time the West starts hoarding in the UK and Switzerland the price goes up, and when they sell the price declines. I think these charts show that there is more correlation between the gold price and physical supply and demand than is widely assumed in the gold space.

UK Swiss Gold Trade 2005 - 2016 June

Take this last chart for example. The UK net importing huge amounts of physical gold coincides with the price going up, and exactly when they turn to net exporting the price goes down. So then how can the price have nothing to do physical supply and demand?

On a small side note. I find it remarkable that research (by Ronan Manly, BullionStar, and Nick Laird, Goldchartsrus.com) pointed out that the physical float in London was nearly running out in late 2015 and shortly after the UK starts net importing and the price goes up. When in December 2015 the UK net exported 184 tonnes of gold, which was the third highest amount on record, I wrote In February 2016 [brackets added by me]:

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.

How much gold is left in London? We can make a rough estimate, ….Research by Ronan Manly … and Nick Laird … pointed out there were roughly 6,256 tonnes of gold in London in June 2015. However, of this total at least 3,779 tonnes was monetary gold owned by central banks around the world stored at the Bank Of England (BOE), which is [presumably] not for sale. The remaining 2,477 tonnes in non-monetary gold were potentially for sale. [Note, this number included 1,116 tonnes in ETF gold outside BOE vaults and 1,355 tonnes stored within BOE vaults, leaving 6 tonnes in the LBMA system outside the BOE] 

Courtesy Jesse’s Café Américain.

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.

The Chinese Gold Market Essentials Guide

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

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

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

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

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

Understanding The Chinese Gold Market Step By Step

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

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

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

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

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

Interview Koos Jansen By Lars Schall, November 2015

I was interviewed by Lars Schall on behalf of Matterhorn Asset Management, 4 November 2015. Please listen to the podcast below, or you can read the transcript provided with links for further reference. Wa talked about PBOC gold purchases, the London Bullion Market, The Shanghai Gold Exchange, the Silk Road Economic Project and much more!

China is playing the gold game very carefully

Lars:  My first question would be, during this year, the Chinese Central Bank announced its new gold position.  How much does China possess now and do you think those numbers are accurate?

KJ:  Well, they state they have about 1,700 tons right now.  I do not think those numbers are accurate.  I think the numbers they disclose now every month since June, they are increasing their reserves a little bit, just like Russia does, and I think this is a strategy maybe communicated between Russia and China even to slowly push for a new monetary system, international monetary system.  So, if they would’ve disclosed they have 3,000 tons or 4,000, whatever they have or see fit to disclose, they would really rock the boat in the international sphere.  So, they are very careful in playing this game and they also want to be included into the SDR to internationalize the Renminbi.  That is of great importance for them, so they are finding ways to internationalize and the Renminbi being included into the SDR is one of them, to be a reserve currency, and so they don’t want to make too many enemies.  So, they’re playing it really careful.  They stated in, I believe it was June or July, they increased official gold reserves by 600 tons from 1,054 to about 1,700 and they’re increasing reserves now by, you know, 15 tons a month more or less.  I think it’s a strategy to slowly push for a new international monetary system in which the Renminbi will have a much greater role.  So, I don’t believe the 1,700 number.  I think they have a little bit more, between 2,000 or 4,000 tons.  I did a study once about this but it’s kind of difficult because it’s really one of the best kept secrets on earth, but my study indicated that they do buy about 500 tons a year.  There was a small segment in the paper from Deutsche Bank that said the PBOC is buying 500 tons a year.  I stumbled upon a study from a guy from the China Gold Association who had written a report in 2011 and he advised the People’s Bank of China to increase its official gold reserves by 500 tons a year, so that would be about 3,500, 4,000 tons right now.  Of course, this gentleman from the China Gold Association is not a policymaker but I collected a lot of hints from various places that the People’s Bank of China is buying about 500 tons a year.  Now, we can’t prove it but it sure suggests they have more than 1,700 tons and then indirectly it suggests that the 1,700 tons they state they have is just strategy.

Lars:  Yeah, but the Chinese can buy gold covertly?  I mean, your company, for example, has done a study that a huge amount of gold went off the radar in London.  How can that be?

KJ:  Yes, that’s correct.  That started with an investigation from Ronan Manly from BullionStar and Nick Laird from Sharelynx, and Bron Sucheki and I also helped a little bit.  In the first instance, it was a study about the London bullion market and how much gold was left in London.  Now, they found that in 2011, there were 9,000 tons in London in the LBMA system, let’s say, within the London Ring way so that includes LBMA vaults, it includes the vault of the Bank of England, foreign central bank it’s called, and then in 2015, that number dropped from 9,000 to 6,250.  So, it means that 2,750 tons were removed or had left London since 2011.  Now, official foreign trade statistics indicate that the UK over this period only net exported about 1,000 tons, so that means that 1,750 tons is missing from London, let’s say.  So, that can be possible because what we see in international merchandise trade statistics, I should say that’s the official name for goods and services crossing the border, only non-monetary gold is disclosed.  So, what I do and a few colleagues of mine is we track all merchandise trade statistics from the UK, Switzerland, Hong Kong, all the gold trading hubs, also some mining nations such as Russia or nations in Africa.  But all of those numbers only include non-monetary gold because the rules are that non-monetary gold must be disclosed in these reports but monetary gold is exempt from being disclosed in foreign trade statistics.  So, in this way, for example, the People’s Bank of China can buy gold in London, non-monetary gold from whatever seller and they can monetize it in London and then covertly ship it home without it having to be declared at the customs department.  They can do this all around the world.  They can do it in Africa, they can do it in Switzerland, and they can do it in Hong Kong.  Just to illustrate, Hong Kong net imported 600 tons of gold in 2013.  That’s a lot of gold but I think it’s possible that the People’s Bank of China bought a part of that gold in Hong Kong once it was imported as non-monetary gold in Hong Kong.  Probably a part of it was monetized in Hong Kong and then shipped to the mainland for the official gold reserves of the People’s Bank of China.

Lars:  Yes, but when it comes to gold buying as a covert operation, so to say, does the PBOC buy gold directly or is this buying through proxies?

KJ:  I think they buy through proxies because what they buy is kind of a good kept secret, and they are very secretive about it.  So, to avoid any risk of leaking, I think they buy through proxies.  In any case, they buy through SAFE and maybe through CIC which are sovereign wealth funds, but even maybe through Chinese commercial banks, I don’t know, but I assume they buy through other proxies.

Lars:  And does this buying take place via the Shanghai Gold Exchange?

KJ:  No.  This is the whole thing.  This is what I like to talk about because a lot of analysts look at China and they count how much China is mining every year and they count how much non-monetary gold imports into China is every year.  China doesn’t disclose how much they import in non-monetary gold but from looking at other nations, for example, Hong Kong and Switzerland and the UK, we know how much they export to China so we can more or less figure out what they import.  But that is all non-monetary gold and all the non-monetary gold which is imported into China is required to be sold through the Shanghai Gold Exchange.  So, the question then is, does the People’s Bank of China buy gold through the Shanghai Gold Exchange.  Now, I don’t think they do.  There are a number of reasons.  One reason, for example, is that I think the People’s Bank of China likes to buy London Good Delivery Bars, which are 400 ounce or 12.5kg in the metric system, because the gold in those bars is cheaper.  If you buy a ton of gold in coins, it’s more expensive than in London Good Delivery Bars.  So, I think they buy London Good Delivery Bars but these bars are not being sold through the Shanghai Gold Exchange.  They can be sold but if I look at all the trade data from the Shanghai Gold Exchange, only I think, if I recall correctly, three tons have been sold in London Good Delivery Bars in 12.5kg bars through the Shanghai Gold Exchange in recent years.  So, that will mean that either the People’s Bank of China is not buying London Good Delivery Bars or they are not buying through the Shanghai Gold Exchange.  For example, all gold on the Shanghai Gold Exchange is denominated in Renminbi and I think the People’s Bank of China wants to diversify its foreign exchange reserves, which are predominantly in US dollars for gold.  So, they want to sell their US dollars and buy gold.  That is not done through the Shanghai Gold Exchange.  So, I made a whole list, I wrote an article about this once, about all the reasons why the People’s Bank of China may or may not buy gold through the Shanghai Gold Exchange and it’s kind of obvious they would not buy gold through the Shanghai Gold Exchange, also because it would be done in clear sight.  If they buy a few tons every week in the Shanghai Gold Exchange, everybody would see it, you know, and again, they would then buy all these 1kg bars.  So, I think given the fact they are so secretive about it and all the reasons I think they will never buy gold through the Shanghai Gold Exchange.  I do think they are able to intervene in the Chinese domestic gold market but as a main hypothesis, I’d say the People’s Bank of China would not buy gold through the Shanghai Gold Exchange and from there, I try to analyze.

Lars:  Okay, but where do the Chinese try to sell their dollars and get gold in return?

KJ:  Well, London is an example.  Most gold across the world is paid for in US dollars so they can buy it anywhere.  Also, Singapore, Hong Kong, Australia, maybe they have some deals with mining companies in Africa or Australia that they covertly ship some to China mainland but it’s not difficult of course to sell your dollars and buy gold in the international market.

Lars:  Yeah, and talking about gold mining projects, well the ‘One road, One belt’ project in Eurasia driven by the Chinese is connected already to gold.  Can you talk a little bit about how this is connected to gold?

KJ:  On the Eurasian continent, there are a lot of clubs cooperating at the moment and that is kind of interesting.  Maybe the biggest club is the ‘Silk Road Economic Project’ also called the ‘One Belt, One Road’ project initiated by the Chinese President – I believe it was in 2012 but in the last year, it gathered steam.  There are about 60 countries along this Silk Road and his intention is to have more cooperation on the political and economic fields now.  The Silk Road is a big project and there’s also a Silk Road fund but underneath this Silk Road project, we have the Asian Infrastructure Investment Bank which has 57 founding members among which a lot of western countries, a lot of European countries.  There is also the Eurasian Economic Union which consists of Russia, Belarus, and Kazakhstan.  That is not officially a part of the Silk Road project yet but these are clubs that are all gaining ground on the Eurasian continent.  You then have the Shanghai Cooperation Organisation and all these clubs are also starting to cooperate a little bit.  There’s also President Putin who said already that his Eurasian Economic Union will cooperate with the Silk Road Economic Project so that is one.  And now this year, the Chinese have disclosed that there also will be a Silk Road Gold Fund which is led by the SGE and is meant for more cooperation on the Eurasian continent obviously in mining exploration, gold trading, and things like that.  So, that is a really significant development and the SGE also said that it will facilitate gold buying for foreign central banks.  So, I can imagine countries like Kazakhstan, for example, buying gold through the Shanghai Gold Exchange, Shanghai International Gold Exchange, I should say, in the future.  So, this is the intention of the Silk Road Gold Fund.  We also saw some little signs of cooperation earlier this year.  Russia’s biggest mining company, Polyus Group, started a cooperation with China’s biggest mining company, China National Gold Group.  I just wrote an article about this, Polyus sells most of its gold so it outputs through VTB Bank which is a Russian bank and VTB Bank also became a member of the Shanghai Gold Exchange last week.  So, likely more gold from Polyus will be sold through VTB Bank on the Shanghai Gold Exchange.  The volume of the Shanghai International Gold Exchange is still very low and the Shanghai International Gold Exchange is really meant for the world to sell its gold in Renminbi to other countries.  The volume is very low at the moment so we can say it has failed up until now but who knows what the future will hold.

Lars:  Isn’t it interesting, you’ve mentioned the Shanghai Cooperation Organisation which was launched in the summer of 2001 that many of the members are buying gold actively, that many of the countries that are intended to be members of the SCO one day that they are also buying gold, for example, Turkey, and that many of those countries, they have the majority of all the gold that is in the ground, in the soil still to produce?

KJ:  Well, first I’d like to say that Turkey is not buying gold.  Turkey has a special system in which commercial banks offer Turkish citizens to deposit their gold.  The Indian system, which has been launched now is kind of based on the Turkish system.  So, in Turkey, people can go to a bank and they can deposit their gold and get an interest on their gold.  Of course, they risk losing their gold, but this gold is being collected by commercial banks can be used by commercial banks as reserve requirements at the central bank.  So, they use this gold from the citizens as a reserve requirement at the central bank.  The central bank counts this gold as their official gold reserves, so the Turkish Central Bank is not buying any gold.  They just double count the gold from the citizens.

Lars:  Thank you for underlining this.

KJ:  Yes, I should write a new article about this because I think the system is exactly the same now or being launched now in India.  The Indian Central Bank also has said that the Indian commercial banks can use the gold in deposit from the citizens as a reserve requirement.  So, I don’t know if they’re going to count that gold also as official gold reserves but it’s very worth watching.  So, the next question was about the Shanghai Cooperation Organisation, yeah.  Of course, those nations are buying gold and I see a lot of gold in the wider Silk Road region.  If we look at Asia and Europe, for example, a lot of countries in Asia are buying gold and then we have, for example, in India, the people are buying a lot of gold, about 900-1,000 tons a year.  In other Asian countries, the central banks are buying gold which is very significant because that is like, you know, we are diversifying away from the US dollar.  I don’t need to tell our listeners this; a lot of buying is happening on the Asian continent.  On the European continent, these central banks already have a lot of gold but what they’re doing is they’re repatriating their gold from the UK, from the Bank of England, and from the Federal Reserve Bank of New York in the US.  So, I think both continents, Europe and Asia are focused on gold and slowly moving away from the US dollar, albeit that the Europeans are not yet buying.  They’re repatriating because they have already significant amounts of gold.  The Asians are buying.

Lars:  Recently, Peter Mooslechner, an official of the Central Bank of Austria said that the Asians are more active in the gold market now and that they use their gold to influence the price or actually he said to intervene in the market.  Do you have something to say on those statements that he made?

KJ:  Yeah.  Well, actually I found his interview very interesting.  I don’t really know what he meant by intervening because he also said that, you know, we gold analysts immediately think about gold price manipulation.  I don’t know if all those countries he mentioned are manipulating gold price because he also mentioned the euro system and the ECB are intervening into the gold markets, just like the Asian countries.  I’m not sure what he meant by that.

Lars:  Yes, but you know that I’ve asked him some specific questions.

KJ:  Yes, I know.

Lars:  It’s their policy not to provide answers to any questions that relate to their strategy with gold or other central banks strategy with gold.

KJ:  Yes, of course, if you ask a central banker about gold, he will never answer you.  I’ve found that all across the world which is a signal in itself we can think, but I didn’t really focus on the comments of Mooslechner on the intervening parts which he said.  I found more interesting what he said about repatriating gold and about Europe maybe even buying gold if the Chinese economy is going down.  The world is entering a recession again. I found that very interesting and also because at one point he said that European countries, more and more European countries are repatriating because of economic nationalism which is a contradiction to what he said a minute before and that was that the Austrian Central Bank was repatriating because of a concentration risk at the Bank of England.  So, clearly this contradiction indicates that he is not repatriating because of a concentration risk at the Bank of England but because of other reasons.  Now, also this year, the General Court of Auditors in Austria, they released a report in which they disclosed that the Austrian auditors were not allowed to audit their gold in England in the past years in between 2009 and 2013.  That is of course one of the real reasons why Austria is repatriating is because the gold is not safe at the Bank of England or, you know, for other countries like the Netherlands.  The gold is not safe in New York.  That’s why they are repatriating and so that was my takeaway from the interview with Mooslechner.

Lars:  Yes, and is it your perception related to the German case that the Bundesbank is following a policy of economic nationalism.  Don’t you think that it is very reluctant and that it does what it does only because there was public pressure?

KJ:  That’s a good question.  Of course, it also has to do with public pressure but I don’t think the Bundesbank is only repatriating because of public pressure.  I think they do it because of their own interests, bearing in mind, I believe it was in 2001, the Bundesbank repatriated about 1,000 tons from the Bank of England in secret.  Nobody knew about it so there was no public pressure at the time and they repatriated the gold even still from the Bank of England.  The same goes for the Netherlands.  They repatriated.  The Dutch Central Bank repatriated not really because of public pressure.  I mean, there was some, you know, I submitted a freedom of information act (FOIA) request once and there were some talks in politics.  Of course, that happened after the economic crisis, you know, chatter about gold was started but I don’t think it was public pressure in the Netherlands or in Germany that led them to repatriate the gold.  I think it’s their own interest.  The second question of course is, so why do they take so long and why don’t they repatriate all the gold.  Now, just like I said previously about Asia, I think they do this so slowly because it’s such a sensitive subject.  Maybe the gold indeed is not all there anymore so that’s why they have to do it very gently.  We can also imagine that if, for example, the Netherlands, Austria and Germany were to repatriate all their gold all at once then it would of course lead to instant shock in financial systems.  So, I think it’s on purpose that they do it slowly but it’s speculation.

Lars:  However, the Germans intend to leave roughly half of their gold position in New York and London, and they are saying, this is now the official position of the Bundesbank that they want to leave it there so they are able to react to a currency crisis if it appears or a curse.  Do you have to have the gold in London and in New York for such a purpose?

KJ:  I would say no.  I mean, if there would be a currency crisis, people would rush to gold and your gold would become more valuable and you would like to have it at home, not in England or New York.  Only if there was a crisis and you want to sell gold, you would like to have gold in London, but how I look at it, I think it’s better with economic turmoil up ahead to have your gold at home than in England.

Lars:  Yes, and the IMF says that gold, monetary gold, physical bullion gold is the only financial asset with no counterpart risk.

KJ:  Yes, with no counterparty risk.  This was stated in the balance payments manual number six.  Yeah, yeah.  I think those things are really significant and, you know.

Lars:  Yes, but in order to be such a financial asset, you really have it in your own possession, on your own soil, right?

KJ:  Right, right.  Oh, sorry, you were referring to the previous question. – You’re absolutely right.  If you talk about gold and gold is the only asset with no counterparty risk, you’d need it at home and of course it does have a counterparty risk if it’s in London or in New York.  It’s as simple as that.  Yeah, you’re right.

Lars:  Now, another question would be that China is a big producer of gold but the production doesn’t leave the country.  Where does it go to?

KJ:  I think to the private sector in China.  Before 2002 when the Shanghai Gold Exchange was launched, the People’s Bank of China had the monopoly in the Chinese domestic gold market.  So, all the domestic mining output was sold to the People’s Bank of China and then it was distributed to a few designated jewelry shops or to maybe the coffers of the PBOC.  So, before 2002, all the gold that was mined in China flowed through the People’s Bank of China but since the Shanghai Gold Exchange was launched in 2002, most of the gold, I would say 99% of the gold mined in China is being sold through the Shanghai Gold Exchange, and then what I just spoke about in one of my previous answers is that I think the private sector are the buyers on the Shanghai Gold Exchange in China.  So, it does not really go to the People’s Bank of China, maybe still a little bit is going to the People’s Bank of China because maybe they still have some covert mines operating in China but actually most of the conventional output is being sold through the Shanghai Gold Exchange.

Lars:  Koos, thank you very much for this interesting conversation.

KJ:  Okay, thank you very much, Lars.

The PBOC Was Buying Gold in London In The Nineties

I couldn’t resist translating this must read from 1993 in Dutch newspaper NRC Handelsblad (h/t @frankknopers) about the gold sales by the Dutch central Bank (DNB). Presumably, “a part” of the 400 tonnes sold at the time through the Bank For International Settlements went to the Chinese central bank. Although we don’t know for sure what the Chinese central bank did with the gold – at the time the People’s Bank Of China was the primary dealer in the Chinese domestic gold market and in theory could have sold the gold to Chinese jewelry fabricators – we may assume it was kept for its official reserves.

The other week I published an article about the Chinese Gold Army that was established in 1979 to develop domestic gold mining and exploration. This signifies the People’s Bank Of China (PBOC) was laying the foundation for the Chinese gold market in the seventies. Later on, in 2002 the PBOC started to liberalize the gold market by launching the Shanghai Gold Exchange that took over gold allocation and the pricing mechanism from the central bank. Many of us thought that the PBOC only became active in the international OTC gold market to diversify its lopsided US dollar reserves after, say, 2009. But we were wrong, the PBOC was buying gold in London as early as 1992. No, we don’t know exactly how much or what they did with the gold, though for sure the PBOC has been designing its gold strategy decades ago along side its opening up policy.  

Remarkably, the article from NRC noted that the Dutch central bank sold gold “to equalize its holdings relative to other important gold holding nations” and “it’s known China is working to increase its gold reserves to bring it more in line relative to its GDP”. One of the theories about our current international monetary system – that was detached from gold in 1971 – is that it can only shift to a new gold anchored system when the power blocks have equalized the chips (Jim Rickards). In other words, if the US, Europe, Russia and China all have an equal ratio of official gold reserves to their GDP, the international monetary system could make a transition towards gold.

Global gold vs GDP

Within the aforementioned theory China should have about 6,000 tonnes to come to the gold/GDP ratio the EU and Russia have (the US has a little less gold proportionally). Although it’s impossible to know how much the PBOC really holds, it’s certainly more than what they disclose at the moment, which is 1,743 tonnes. In a forthcoming post we will discuss the most recent ins and outs regarding PBOC official gold reserves. For now, enjoy the full article.

Note, at the time the article was published DNB held 1,090 tonnes of gold.

DNB gold

Operation Gold

(NRC Handelsblad, 27 March 1993).

Last summer the President of the Dutch Central Bank, W. Duisenberg, persuaded the Minister Of Finance, W. Kok, of the need to sell a quarter of the Dutch gold reserves: “The time is right”. Part of the Dutch gold was probably sold at the end of last year to the People’s Republic Of China. The multi billion operation that has taking place in utmost secret is producing the state an annual 400 million guilders in extra benefits since 1994. “Part of the sale was handled outside the market.”

van Ewijk and L.J.R. Scholten: The profitability of De Nederlandsche Bank, in: ESB 1-7-1992. In ESB 19-8-1992 there was a sequel and in ESB 20-1-1993 both authors went on about the gold sales.

March 27, 1993

No. The gold of De Nederlandsche Bank [DNB] was not secretly loaded into a Chinese cargo plane at Schiphol and flown to Beijing. The gold of the Dutch Central Bank remained where it was, in the vaults of the Bank of England where it has been for years. Only the signs with the name of the owner of the gold bars were changed. A new name: for traders in the international gold market there is no doubt that the People’s Bank Of China (PBOC) has bought a part of the 400 tonnes of gold, a quarter of the Dutch gold reserves, which DNB has sold late last year in utmost secrecy.

“With 99 percent certainty we know that the People’s Bank of China has been one of the buyers of the Dutch gold”, said Philip Klapwijk from Goldfields Mining Services, an institute in London affiliated with the South African gold mines that specializes in research into the gold market. Also other London bullion dealers have a strong suspicion that China was involved in the gold sales of DNB. “We have noted that the Chinese central bank has bought gold in recent months”, said John Coley of the London bullion dealer Sharp Pixley and spokesman of the London Bullion Market Association.

At the Ministry of Finance in The Hague and at DNB in Amsterdam they know the story of the Chinese connection, but they remain tight lipped. “Everything is sold locally in London”, said the spokesman of DNB, JH du Marchie Sarvaas. The central bank is silent on the question of who was engaged in the sale and who the buyers were. “It is not in our interest to make announcements about it”, he said. Servaas will only tell us that the transactions have been set up in different ways and that DNB has not entered the market directly itself.

The spokesman of the Ministry of Finance, Dr. RP Florisson, stated not to know where the gold that was sold has gone. Some things, he added, you would rather not know. Members Of The House have neither any idea in what way the gold was sold. With the letter from 12 January by Kok that notified the Members Of the House about the gold sale came an attachment, though in it the ‘technical details’ from the original correspondence between Duisenberg and Kok were omitted. This was a crucial passage, which disclosed the name of the mediator in the gold sales, the Bank for International Settlements, the central bank of central banks.

Courtesy BIS.

The Seller

Perhaps the phrase “silence is golden” finds its origin in the world of central banks. Like is the case in Operation Gold. In April 1992 DNB developed the intention to sell part of its gold stock and add the proceeds to its foreign exchange reserves. The Board Of Governors of the central bank, consisting of President Dr. WF Duisenberg and three other Directors, approved the plan. Only a few other employees were notified. In June Duisenberg shared his plan with Kok during one of their weekly lunch meetings. Kok hesitated at first because he feared he would be remembered as The Seller of the national gold.

Duisenberg explained that it was the sound fiscal policies from Kok and the strong position of the guilder that made the gold sales possible. Kok was persuaded. At the Ministry Of Finance the Deputy Comptroller General and the Director were informed. On 29 September Duisenberg sent a letter to Kok in which he explained that the sale was intended ”to equalize our gold holdings relative to other important gold holding nations”. The sale should not lead to loss of confidence in the guilder, not serve to fill the state coffers and not lead to disruption of the gold market. “Therefore, a high degree of secrecy is warranted”, Duisenberg wrote. If unexpected complications would arise DNB would waive the operation.

Wim Kok China Construction Bank
Courtesy CCB. Coincidentally, the Minister Of Finance of the Netherlands, Wim Kok, in 1993 that approved the gold sale that ended up in China is now employed by China Construction Bank Corporation – the second largest bank in China after ICBC.

Kok agreed on 2 October and in the fall several sales transaction followed in the London forwards market. In addition, the Bank has for International Settlements (BIS) was involved as an intermediary. The BIS, which is based in Basel and was established in 1930 to administer the German reparations, is as closed as the Swiss banking secrecy. Who calls the BIS can enjoy the long version of Eine kleine Nachtmusik as on-hold music, to finally be told the BIS never releases any information.

Duisenberg expanded on the gold sales at a meeting of the BIS on 12 January 1993. The sale had already taken place, only the gold had yet to be delivered. Not all members of the BIS welcomed the Dutch move, nor were they consulted for its decision. That same day DNB published the news. A team from a TV news network was – under the pledge of secrecy –flown to Basel for an interview with Duisenberg. “The time is right” for the sale of part of the Dutch gold reserves, the President said.

The news dropped like a bomb. Rumors were circulating in the gold market late last year about possible Dutch gold sales, based on these rumors a reporter from news agency Reuters asked DNB for a response in November. It replied no announcements were ever made on market transactions. Gold traders were particularly surprised by the volume of sales: “It was very well done. I never knew that the market could absorb such an amount in such a short time without drastic price distortions”, said one gold dealer.

It was a huge deal. Four hundred tonnes is nearly a quarter of the total annual gold mine production. It is the equivalent to 32,000 gold bars of 12.5 Kg [400-ounce] and 26 centimeters in length, which placed end to end form of line of 8.32 kilometers. That is almost as long as the symbol of our national pride, the Oosterscheldedam.

With the sale DNB earned 7.5 billion guilders in US dollars, D-marks and Japanese yen that have been added to the foreign exchange reserves of the central bank. As these foreign exchange earn interest – unlike gold – the profit starting from 1994 is an annual 400 million guilders which will flow to the state coffers. Recent pleas from Members Of The House to invest this money in infrastructure have been rejected by Kok, who agreed with DNB that this amount, like other profits of the central bank, flow to the Treasury.

Economics Journal

Seldom a critical note is written about the policy of DNB. Coincidentally, last year, while Duisenberg was preparing the gold sales in secret, a remarkable article in the journal for economists, ESB, was published. Casper van Ewijk and Bert Scholten, both working at the economics department of the University of Amsterdam, questioned the profitability of DNB. They concluded that the central bank, with its relatively large reserves of gold and foreign exchange, yields an extremely poor result on its investments. With that, the annual profit payment to the Treasury is a lot lower than possible.

In a second article – after the gold sale – the two economists claimed that DNB had sold too little gold and had waited too long with the sale. Now the gold was sold for an average of 18,800 guilders per kilo, while ten years before it could have been twice that amount. In those ten years, the gold yielded not one cent and its value only declined. The addition of the gold to the foreign exchange reserves was in their opinion, “unnecessary and therefore undesirable”, as the Netherlands has more than enough foreign exchange reserves. And the revenue of the sale, according to Van Ewijk and Scholten, could be better used to reduce the national debt. That gives the government more financial benefit than an annual interest income.

The defense of DNB – as expressed in replies from the Minister Of Finance to questions by the parliament – is that a central bank is not a hedge fund. The gold and foreign exchange reserves are not intended to maximize returns but to conduct a proper exchange rate policy and to ensure confidence in the guilder. As a result, it is also necessary to hold currency that offers a low rate of return. The gold is not held for speculation, but is a cornerstone of the monetary policy of the Netherlands as a major gold holding nation. When deciding on the time at which it sold some of the gold, the gold price did not play any role whatsoever.

The suggestion to use the principal proceeds to flow to the treasury could no find grace: the change in the composition of reserves (gold was converted into US dollars, D-marks and yen) is not a reason to pour assets of the central bank into the hole of the national deficit. If DNB would give in to this temptation that would be a monetary sin: financing the government deficit by the central bank. That happens in South America, or in Italy, but not in countries that appreciate a hard currency.


Gold plays a vital role in finance since trade emerged. Late last century all European countries and the United States went on the classical gold standard. The direct link between the amount of money in circulation to gold reserves at central banks broke the economies of the industrialized countries in the economic depression of the thirties. The Netherlands held on to gold until 1936 as one of the last countries together with Switzerland and France.

After the Second World War the US dollar ruled. Under the Bretton Woods system, which was set up in 1944 under US-British leadership, all currencies were pegged to the US dollar. This provided stability and dynamics because the Americans constantly pumped new dollars into the world economy. The Bretton Woods system created unprecedented economic growth for a quarter of a century. The gold did not disappear completely. To increase the credibility of the system, the United States declared their readiness to ensure the conversion of dollars into gold at a fixed price of 35 dollars per troy ounce (31.1 grams). The Americans could easily make that offer, because in 1944 they were in possession of three quarters of all the gold reserves in the world.

The Dutch government in exile had largely spent its gold reserves during the war. During the reconstruction foreign exchange reserves piled up in the fifties and sixties and DNB happily took advantage of the opportunity to convert dollars that were earned through exports, for gold in the US. Together with France The Netherlands was in those years the largest gold accumulator. French President General Charles de Gaulle said, in a famous news conference on 4 February 1965, about the US dollar hegemony and gold, “Ah! Gold its nature never changes, not in any form, bars or coins. It has no nationality, it is held eternal and universal as the unchangeable and trustworthy value par excellence”. Also in The Netherlands gold was held as an article of faith.

During the sixties the US gold reserves in Fort Knox severely declined. Eventually, President Nixon decided in 1971 to temporarily suspend the convertibility of dollars into gold. The ‘gold window’ was closed; the world had spent well over twenty five years to tap into the US gold reserves.

Since 1971 the gold reserves of DNB hardly changed. The spectacular rise in gold price to $850 dollars per troy ounce in early 1980 led to a great gain in the books but that was all. However, politicians in the seventies had their greedy eyes on the gold stocks to use these for employment projects and other fun things for the people to finance. President of DNB at the time, Dr. Jelle Zijlstra, abhorred such ideas. Not a single gram of gold was sold from the vaults of DNB.

Zijlstra and his successor Duisenberg feared gold sales would affect the position of the guilder. Moreover, the government deficit was so huge in the eighties that sales would be interpreted by financial markets as weakness. Gold supported confidence in the guilder and provided an aura of invulnerability.


During 1991 the gold inventories were casually mentioned in a conversation between senior officials of the Ministry Of Finance and DNB during the preparations for the Economic and Monetary Union (EMU) – the plan for a European central bank and a common currency, which was clinched in the Maastricht Treaty. It was clear that the size of the Dutch gold stock was well above average in the EC. This would be disadvantageous if in a few years DNB must transfer part of its reserves to the European Central Bank (ECB).

As a rich gold country the Netherlands is at a disadvantage, because it participates for a relatively small amount in the ECB. The Netherlands threatens to get stuck in the monetary union with a huge amount of gold – that doesn’t yield – because according to ECB rules participating central banks may only purchase or sell gold and foreign exchange reserves with approval by the ECB. After ratification of the Maastricht Treaty, the freedom of DNB would be very limited. “The Netherlands has no interest in a large amount of gold”, said a source familiar with the matter.

The Netherlands receives a 4.7 percent share in the ECB based on the size of the Dutch population and the national economy. That’s less than the Dutch share of 7.3 percent in total international reserves (gold and foreign exchange) of all central banks in the EC and much less than the share of 11.7 percent in gold reserves. Even after the sale of 400 tonnes the Netherlands retains a stake in the EC gold reserves of 9.4 percent. DNB is expected to sell another 685 tonnes of gold to bring their gold share in line with that of the ECB. To reassure the gold market DNB states it will not sell any more gold, though financial experts expect that the gold reserves by EC central banks, including DNB, will be further adapted within the framework of the monetary union. “Last year the Belgian and Dutch central banks sold gold. That made gold sales by central banks respectable. Additional sales threaten the market”, said a London bullion dealer.

In the beginning of 1992, still in the fuddle of Maastricht and nine years after the traumatic devaluation of the guilder in 1983, the position of the guilder was very strong and the Dutch budget deficit was considerably reduced. In The Hague no one advocated to do any more fun things with the Dutch gold stocks. The time was right to proceed to sale.

Small World

It was not possible that DNB would enter the gold market itself, because that would be known immediately in the closed world of gold trading. The few remaining Dutch players in the gold market are tiny. In London, there are four major gold traders, Sharps Pixley, Samuel Montague, Mase Westpac and Rothschild. According to John Coley, spokesman of the London Bullion Market Association, it was obvious that DNB would use the BIS as an intermediary. Duisenberg is very well known in Basel because he was President Of The Board of the BIS from 1988 to 1990.

W Duisenberg

The advantage of the BIS is, as “central bank of central banks”, that it guarantees anonymity and direct access to the central banks of the member countries in Eastern and Western Europe as well as Australia, Canada, Japan and South Africa. A London trader suggested that DNB used the central bank of another member state of the BIS to bring the gold to the market. That could have been the central bank of South Africa, whose gold offers would not surprise any traders. South Africa is always very active in the London bullion market. The BIS could have acted as an intermediary between DNB and the South African central bank.

“Part of the sale was handled outside the market”, says Philip Klapwijk of Goldfield Mining Services. He says he came to this conclusion because the price of gold last year, although down slightly, it should have shown much greater fluctuations if 400 tonnes would have been sold – even if the supply would be split into small tranches.

The BIS probably made contact with the People’s Bank of China as the buyer. Why precisely the People’s Republic of China? Chinese love gold, says an expert, and he refers to the huge Taiwanese gold purchases in 1987. Second, China has large dollar surpluses as a result of the spectacular economic growth. And third, China announced that it is working to build up its reserves in order to bring it more in line with the size of the Chinese GDP.

The weekly table of DNB, which is published every Wednesday in the newspaper, we can see since February a decline in Dutch gold reserves. Presumably, the increase in the gold reserves of China will never be visible. The statistics produced by the International Monetary Fund for China record the same amount of gold for a decade, coincidentally about 400 tonnes. China experts, however, know that the People’s Bank has second secret gold reserves, which are held outside the statistics in “non-monetary gold”. If part of the gold reserves of DNB have been added to these, as many suspect, no one will ever officially know.

China’s Gold Army

As part of the wide analysis of the Chinese domestic gold market I would like to share that since the seventies there is a special army in China dedicated to gold. It’s called The Gold Armed Police – if you can read Chinese have a look at this Wikipedia page.

It’s no coincidence this army came into existence in 1979, eight year after the US left the gold standard and when China started opening up under the guidance of Deng Xiaoping. As, this was the moment the Chinese slowly started to reform their economy and made the first preparations in their gold market. They knew, among others, the global dollar standard wouldn’t last forever.

On 29 October 1976 representatives of the Chinese central bank and the Federal Reserve (US, Arthur Burns) met in China and discussed international economics. From Wikileaks:


In the quote from Wikileaks we can clearly read the Chinese were interested in gold. However, the Chinese economy was completely centrally planned at the time and they were not a member of the World Trade Organization or the giant exporter of goods they are now. Therefor, I suspect China had little resources to acquire gold – in the seventies China’s foreign exchange reserves were very small – while they urgently needed to increase their reserves.

Initially the Gold Armed Police was established to develop China’s domestic mining industry. China’s domestic mining output grew by an incredible 2,964 % from 1976 until 2014, according to data from the China Gold Association, and this was partially due to gold exploration by the Gold Armed Police.

Chinese mining 1949-2014 x

Remember that before 2002 the PBOC had the monopoly on all gold trade in China. Mining output (and potential import) was transferred to the PBOC that set the domestic gold price and distributed the gold to a limited amount of designated jewelry shops or kept the metal for its official reserves. The Gold Armed Police and the PBOC must be closely associated.

Next to exploration the Gold Armed Police was also assigned to guard the mines and to do other tasks. And here is where it becomes interesting. Gold market insider James Rickards has written in The Death Of Money (2014):

A senior manager of G4S, one of the world’s leading secure logistics firms, recently revealed to a gold industry executive that he had personally transported gold into China by land through central Asian mountain passes at the head of a column of People’s Liberation Army tanks and armored transport vehicles. This gold was in the form of the 400- ounce “good delivery” bars favored by central banks rather than the smaller one- kilo bars imported through regular channels and favored by retail investors.

Although Rickards notes the convoy was lead by the People’s Liberation Army I think it’s very likely the Gold Armed Police was involved in this transport that contained monetary gold directed to PBOC vaults. We can speculate the Gold Armed Police is active in distributing the PBOC’s monetary gold into the mainland.

The Gold Armed Police in April 2011, about 100 soldiers from the 7th detachment in Xinjiang.

The other day I spoke to a gold market insider, that likes to remain anonymous, who told me “some central banks send their own airplanes to London to pick up monetary gold” when we were discussing purchases from China’s central bank in the UK. I’m quite sure the PBOC has bought a substantial amount of gold in London in recent years and I suspect the Gold Armed Police is distributing the monetary metal.

So how does the PBOC buy gold in London? Through which proxy do they do they purchase the metal? Well, that’s hard to say. But, if I may freely speculate the Bank Of China is part of this. If we read the Chinese Wikipedia page about the Foreign Exchange Reserves of the People’s Republic of China (not the English page) it states:


The FX reserves of the Chinese mainland are State-owned assets and managed by SAFE and the PBOC, the actual business operations are carried out by the Bank of China.

SAFE (State Administration Of Foreign Exchange) is the largest Chinese sovereign wealth fund that manages the PBOC’s foreign exchange reserves.

The Bank Of China is a commercial state-owned bank and LBMA member that can be one of the proxies for the PBOC’s monetary gold purchases around the globe. So, possibly the Bank Of China buys gold in the London OTC market, which is then transported by the Gold Armed Police to PBOC vaults in Beijing.

Below is an article I found on The China Times about the Gold Armed Police:

Source The China Times, Global Edition

China has a military unit dedicated to gold exploration, this unit is the only one of its kind in the world.

The gold exploration unit was established in the beginning of China’s reform and opening up, when the country urgently needed to increase its gold reserves. The unit has found more than 1800 tons of gold so far, helping China become the world’s largest gold-producing country.

China’s annual gold production was merely 4 tons when PRC was founded. After the gold exploration unit of the Chinese People’s Liberation Army was established in 1979, 12 detachments were sent to all over China. The picture shows soldiers from the 7th detachment of the gold exploration unit singing songs on their way in March 2006.

Gold reserves are usually located in remote and inaccessible areas. The picture shows soldiers from the 8th detachment of the gold exploration unit fighting sandstorm in Lop Nur in August 2002.

In 1995, China’s gold production for the first time exceeded one hundred tons, taking the 8th place in the world. More than half of the gold reserves were found by the gold exploration unit. Eight years later, China’s annual gold production exceeded 200 tons. The picture shows a soldiers from the 8th detachment of the gold exploration unit carrying out explosion works in August 2002.

July 2000, soldiers from the 8th detachment panning alluvial gold in Xinjiang. In 30 years, the gold exploration unit has found many large-scale gold deposits, in total found more than 1800 tons of proven gold reserves.

Lop Nur, August 2002, soldiers from the 8th detachment cooking meals in tent, two days later, the tent was swept away by flood.

Lop Nur, August 2002, soldiers from the 8th detachment having lunch together.

April 2011, about 100 soldiers from the 7th detachment carrying out geology and resources survey tasks in Xinjiang.

May 2011, soldiers from the 6th detachment taking a break after long-hours hard work in Qilian Mountain, Qinghai.

Natural gold nugget found by the gold exploration unit in 1983, it contains 1114 grams of pure gold.

Renminbi Internationalization And China’s Gold Strategy

Here we go!

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

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

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

That’s why, in order for gold to fulfill its destined mission, we must raise our gold holdings a great deal, and do so with a solid plan. Step one should take us to the 4,000 tonnes mark, more than Germany and become number two in the world, next, we should increase step by step towards 8,500 tonnes, more than the US.

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

Currently, there are more and more people recognizing that the ‘gold is useless’ story contains too many lies. Gold now suffers from a ‘smokescreen’ designed by the US, which stores 74% of global official gold reserves, to put down other currencies and maintain the US Dollar hegemony. Effectively, the rise of the US dollar … and later the euro currency, from a single country currency to a global or regional currency was supported by their huge gold reserves.  

Individual investment demand is an important component of China’s gold reserve system, we should encourage individual investment demand for gold. Practice shows that gold possession by citizens is an effective supplement to national reserves and is very important to national financial security.

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

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

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


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

Renminbi Internationalization and China’s Gold Strategy Seminar

Date: September 22, 2015. Source 

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

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

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

Wang Jia Qiong
Wang Jiaqiong

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

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

Song Xin rmb au
Song Xin

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

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

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

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

What Happened To The Shanghai International Gold Exchange?

Withdrawals from the vaults of the largest physical gold bourse globally, the Shanghai Gold Exchange (SGE), accounted for 54 tonnes (in week 45 / 16 until 20 November), up 10 % from last week. Year to date SGE withdrawals have reached 2,313 tonnes, which is an all time record.

Shanghai Gold Exchange SGE withdrawals delivery 2015 week 45

Please make sure you’ve read The Mechanics Of The Chinese Domestic Gold MarketChinese Gold Trade Rules And Financing Deals Explained, Workings Of The Shanghai International Gold Exchange, and SGE Withdrawals In Perspective.

Given elevated SGE withdrawals and continued weakness in the gold price it looks like the Chinese population is buying the dips. The Chinese central bank (PBOC) is likely doing the same, but not through the SGE. The PBOC does its monetary gold purchases in the international OTC gold market – for example, in London or Hong Kong.

According to Reuters China has imported 72 tonnes of (non-monetary) gold from Hong Kong in October – this gold is required to be sold first through the SGE, it’s not directed to the PBOC. Data from the Hong Kong Census & Statistics Department has not been released, but Reuters has a contract with the Department in order to obtain data a few days before the public release.

Known gold exports to China year to date: From January until October Hong Kong has exported 653 tonnes to China mainland, which is 784 tonnes annualized. Switzerland has exported 217 tonnes to China from January until October, annualized 260 tonnes. The UK shipped 210 tonnes to China in the first nine months of this year, annualized 280 tonnes. Australia net exported 49 tonnes in seven months, which is 84 tonnes annualized. So, without counting shipments from exporters such as South Africa and Singapore, China has imported 1,129 tonnes of gold year to date and is on track to import 1,408 tonnes of (non-monetary) gold in total this year. In addition, Chinese domestic mining output is set to reach 476 tonnes. Chinese apparent gold supply – without counting scrap – in 2015 will be 1,884 tonnes.


Using SGE withdrawals as a measure for Chinese gold demand can be slightly deceiving for a number of reasons. For example, Chinese citizens can buy gold on the SGE but prefer not to withdraw this metal from the vault, or chose to withdraw next month/year. This way, wholesale demand would actually be higher than the amount of gold being withdrawn. On the other hand, since the inception of the Shanghai International Gold Exchange (SGEI) gold can be withdrawn from SGEI (IB) Certified Vaults in the Shanghai Free Trade Zone (SFTZ) and exported abroad. According to the accounting rules from the SGE, any SGEI withdrawal is included in SGE withdrawals. An export from the SFTZ would be included in SGE withdrawals. I’m always occupied with the details regarding SGE withdrawals, why we can use it as a measure for Chinese wholesale gold demand and why not. I think SGEI withdrawals can have been a cause for inflated SGE withdrawals this year. 

Late 2014 and early 2015 I’ve written SGE withdrawals could have been distorted by withdrawals from the SGEI. For a while I corrected SGE withdrawals by SGEI trading volume to be conservative about Chinese wholesale gold demand. We simply didn’t know what happened to the SGEI gold that was traded – was it withdrawn from the vaults or not withdrawn. Then, in February 2015 SGE chairman Xu Luode published some figures in an article for Bullion Bulletin that pointed out most of the SGEI trades that were withdrawn from the vault was imported into the Chinese domestic mainland. Meaning, SGEI trading volume could only have slightly distorted our measure of Chinese wholesale gold demand (SGE withdrawals).

After a run up in SGEI trading volume this year, from January until March, it appeared trading of iAu9999 (the most commonly traded SGEI contract – 1 Kg 9999) severely declined in recent months and I stopped subtracting SGEI trading volume from SGE withdrawals to measure Chinese wholesale gold demand. But, the other day I studied the Chinese SGE weekly reports. What I failed to see in recent months was that iAu9999 has been trading in the Chinese OTC market. Mea culpa. In the Chinese OTC market SGE contracts can be negotiated off-SGE, while settlement is done on-SGE.

In the Chinese weekly SGE reports we can see OTC trades on the first page. Below is a screen shot of the report, the OTC settlements are framed in red. Framed in blue is ‘this weeks’ trading, which was in week 45 (framed in green).

Screen Shot 2015-11-29 at 1.46.15 pm
Courtesy SGE.

Some analysts, including myself, thought the SGEI was dead. But it isn’t.

SGEI contracts bullionstar
In June OTC iAu9999 volume transcended a whopping 170 tonnes a week.

First of all, the iAu9999 contract is traded increasingly in the OTC market. In the chart above the black line resembles OTC iAu9999 trading volume. In the OTC market volume has declined from a peak in May, but I wouldn’t say trading has ceased.

It certainly is possible the gold of these OTC iAu9999 trades can have been withdrawn from the vaults in the SFTZ and exported abroad and thus inflated SGE withdrawals. When a contract (iAu9999) at the SGEI is exchanged, four things can happen (in the context of this investigation):

  1. The gold stays in the vault.
  2. The gold is withdrawn and stored elsewhere in the SFTZ.
  3. The gold is withdrawn and imported into the Chinese domestic gold market.
  4. The gold is withdrawn and exported to, for example, India.

Option 2 and 4 would increase SGE withdrawals without increasing Chinese wholesale gold demand.

When looking at the numbers from the OTC iAu9999 trading we can see an interesting pattern.

iAu9999 OTC

Have a look at the data labels in the chart above. We can see that all weekly OTC iAu9999 volumes end on two zeros (blue bars) or three zeros (red bars). These volumes are the sum of all trades executed during the week. It’s safe to conclude these volumes are exchanged by large traders, as iAu9999 is changing hands in batches of one hundred (blue bars) or in some weeks one thousand (red bars) 1 Kg 9999 bars. For example, in the week that ended 3 July 2015 exactly 73,000 Kg’s were traded. In theory, 20,855 Kg’s were traded on Monday and 52,145 Kg’s on Thursday, aggregating at 73,000 Kg’s in total for the week. Though, this coincidence cannot have occurred each and every week. More likely the OTC iAu9999 traders buy and sell per 100 or 1000 Kg’s. No other SGE or SGEI contracts show this bulky trading pattern.

Did any foreign nations buy gold through the SGEI OTC market and export it from the SFTZ? Hard to say. The most obvious gold trading partner for China is India. Early this year the SGE chairman wrote about the SGEI [brackets added by me]:

… Using the International Board [SGEI] as a launch pad, China’s gold market will embrace greater openness and foster stronger ties with its neighbours and, together, elevate the trading and pricing influence of Asia in the world’s gold market.

As a perennial major consumer of gold and a close neighbor of China, India will undoubtedly become one of SGE’s most important partners in the coming years. SGE looks forward to forming close partnerships with the Indian market.

Imaginably, the iAu9999 purchases were withdrawn from the SGEI vaults in the SFTZ and exported to India. Though, India’s trade statistics can be tracked very precisely and only a small amount of gold has been exported from China to India since the SGEI was erected in September 2014.

Screen Shot 2015-11-30 at 12.22.52 am
Courtesy Zauba.

In the table above we can see India imported 1.205 tonnes from China Since September last year. These imports into India can be processing trade from any Free Trade Zone in China (no SGEI involvement required), but can also be from purchases at the SGEI in the Shanghai Free Trade Zone. In the latter scenario these exports would have been captured in SGE withdrawals (the metal is bought at the SGEI, withdrawn from the IB Certified Vault and exported).

In any case India imported very little gold from China in the past year. The only other gold importer from China I could find was Thailand at 1.488 tonnes, which makes me think foreigners have not yet been very active on the SGEI. More likely, at this stage, is that SGEI withdrawals are imported into the Chinese domestic gold market. Another option, given the large round number volumes, is that OTC iAu9999 is trading in China’s foreign exchange market.

I should add, the customs departments from Switzerland and Hong Kong confirmed that when gold is exported from local soil to the Shanghai Free Trade Zone it’s disclosed in their data as an ‘export to China’. It is irrelevant if that gold is ever imported into the Chinese domestic gold market. No matter what happens to the gold in the SFTZ  it is initially disclosed as an export to China.

In short, trading at the SGEI can have blurred SGE withdrawals this year. More research should point to what extent. 

The Official Chinese Gold Trade Rules By The PBOC

Readers can download the original Chinese Measures for the Import and Export of Gold and Gold Products from the People’s Bank Of China (PBOC) here. Be advised the Measures for the Import and Export of Gold and Gold Products can be confusing if not connected to Chinese trade rules in general.

In the translation below reference is being made to:

  1. Annex 1, Import and Export License of the People’s Bank of China for Gold and Gold Products, of which is a translation can be viewed here.
  2. Annex 2, Application Form for Import and Export of Gold and Gold Product, of which a translation can be viewed here.
  3. Catalogue for the Regulation of the Import and Export of Gold and Gold Products, of which a translation can be viewed here.
PBOC gold 3
Courtesy PBOC

Measures for the Import and Export of Gold and Gold Products

Order of General Administration of Customs and People’s Bank of China

Order No. 12015

Measures for the Import and Export of Gold and Gold Products is prepared by People’s Bank of China and General Administration of Customs based on Law of the People’s Republic of China on the People’s Bank of China, Customs Law of the People’s Republic of China and Decision of the State Council on Establishing Administrative License for the Administrative Examination and Approval Items Really Necessary to be Retained.

The Measured is issued hereby and shall take effect since April 1, 2015.

Measures for the Import and Export of Gold and Gold Products

Article 1 The Measure is prepared to regulate the imports and exports of gold and gold product and to enhance the import and export management of gold and gold product based on laws like Law of the People’s Republic of China on the People’s Bank of China, Customs Law of the People’s Republic of China and Decision of the State Council on Establishing Administrative License for the Administrative Examination and Approval Items Really Necessary to be Retained etc.

Article 2 For the purpose of these Measures, gold means gold unwrought and gold products mean semi-finished gold and finished products of gold.

Article 3 The People’s Bank of China, as the authority in charge of the import and export of gold and gold products, implements a permit system for the import and export of gold and gold products.

The People’s Bank of China, based on the needs of national macroeconomic regulation and control, may conduct restrictive approval for the import and export volume of gold and gold products.

For the import and export customs clearance of gold and gold products as included in the Catalogue for the Regulation of the Import and Export of Gold and Gold Products, the Import and Export License of the People’s Bank of China for Gold and Gold Products (Annex 1) issued by the People’s Bank of China or a People’s Bank of China branch shall be submitted to the Customs.

The People’s Bank of China shall, in conjunction with the General Administration of Customs, formulate, adjust, and issue the Catalogue for the Regulation of the Import and Export of Gold and Gold Products.

Article 4 A legal person or another organization importing and exporting gold and gold products by the following trade modes shall obtain an Import and Export License of the People’s Bank of China for Gold and Gold Products in accordance with these Measures:

(I) General trade;

(II) Processing trade for the domestic market and gold products exported under processing trade with gold raw materials purchased within the territory of China; and

(III) Import and export between areas under special customs supervision or supervised bonded places and overseas areas.

An individual, a legal person or any other organization donating imported gold and gold products for public interest undertakings shall obtain an Import and Export License of the People’s Bank of China for Gold and Gold Products in accordance with these Measures.

The provisions on the administration of individuals entering and leaving China with gold and gold products shall be formulated by the People’s Bank of China in conjunction with the General Administration of Customs.

Article 5 The import and export of the state gold reserves shall be handled by the People’s Bank of China.

The import and export of gold coins (including gold precious metal commemorative coins) shall be handled by institutions designated by the People’s Bank of China.

Article 6 The main market players with the qualifications for the import and export of gold shall assume the liability of balancing the supply and demand of material objects on the domestic gold market. Gold to be imported and exported shall be registered at a spot gold exchange approved by the State Council where the first trade shall be completed.

Article 7 Applications for the import and export of gold and the import of gold products donated for public interest undertakings shall be accepted and approved by the People’s Bank of China.

Applications for the import and export of gold products shall be accepted by the branches of the People’s Bank of China at or above the prefecture level and approved by the Shanghai Head Office of the People’s Bank of China, the branches and business management departments of the People’s Bank of China, or the central sub-branches of the People’s Bank of China in the capital cities of the provinces (autonomous regions), and the central sub-branch of the People’s Bank of China in Shenzhen.

Article 8 An applicant for the import and export of gold (except the import of gold for donation to public interest undertakings) shall have corporate status, have no record of violating laws and regulations within the recent two years, and satisfy one of the following conditions:

(I) It is a financial institution member or a market maker on a gold exchange approved by the State Council, with professionals of the gold business, a perfect gold business risk control system, and stable gold import and export channels, whose business carried out on the gold market complies with relevant policies or regulatory provisions, and whose spot trading of gold is active and the volume of transactions for its own account is among the highest in the two years before the application is filed;

(II) It is a comprehensive member of a gold exchange approved by the State Council, and a mining enterprise with annual gold production of 10 tons or more, pollutant emissions during the production process satisfying the environmental protection standards of the state, overseas gold mineral products investment scale exceeding USD 50 million, which has obtained mining rights of overseas gold mines or paragenetic and associated gold mines, which has formed mineral gold production capacity, whose business carried out complies with relevant policies or administration provisions, and whose spot trading of gold is active and volume of transactions for its own account is among the highest in the two years before the application is filed;

(III) It is a mining enterprise, with three consecutive years of domestic taxation records no less than RMB 200 million yuan and investment in overseas nonferrous metals exceeding USD 100 million, which has obtained mining rights of an overseas gold mine or paragenetic and associated gold mine and is ready to produce gold, and whose business carried out complies with the relevant policies or regulatory provisions;

(IV) It is a manufacturing enterprise that assumes the task of producing precious metal commemorative coins for the state;

(V) It is a gold importing and exporting refining enterprise which has become a certified brand on the international gold market.

Article 9 An applicant for the import and export of gold products (except the import of gold products for donation for public interest undertakings) shall have corporate status or the status of other organization, have no violation of laws and regulations within the recent two years, and satisfy one of the following conditions:

(I) For enterprise which produces, processes or uses relevant gold products, it shall possesses necessary production sites, equipment and facilities, discharge pollutant made in the production process based on national environment protection standards and keep a tax payment record that no less than RMB 1 million yuan has been paid each year for a successive 3 years;

(II) For foreign trade operation enterprise which applies to customs certification on enterprise management, it shall keep a tax payment record that no less than RMB 3 million yuan has been paid each year for a successive 3 years;

(III) Educational organizations, science study organizations and so on which need to use gold product for national research project and key subjects.

Article 10 Those which apply for import and export of gold shall submit the following materials to People’s Bank of China:

(I) Descriptions on business conditions including name, address (office place), enterprise profile, using of the imported and exported gold and planned amount etc. shall be noted on the written application;

(II) Application Form for Import and Export of Gold and Gold Product (Annex 2);

(III) Copies of officially sealed business certification of the enterprise legal person;

(IV) Gold import and export contracts and their copies;

(V) Officially sealed copies of Organization Code Certificate of the People’s Republic of China;

(VI) Explanatory materials on whether the applicant has illegal conducts in the past 2 years;

(VII) Financial organization of banking industry shall also offer relevant materials on internal gold business control system; those which apply for gold export shall submit real gold inventory amount certification of gold and commodities exchange approved by State Council;

(VIII) Gold mining enterprises shall also submit pollutant discharge permit certification and copies of annual qualification inspection report issued by provincial environment protection department, copies of relevant foreign investment approval document by the business department, copies of bank out-remittance certification, relevant certifications on exploiting gold in foreign countries or regions and tax payment record of the enterprise in the past 3 years; those which apply for exporting gold shall submit gold production capacity issued by the industry command department or self-discipline organization and registration certification of gold and commodities exchange approved by State Council.

Those which apply for gold import and export again and of which no materials of the aforesaid terms are changed shall only need to submit materials in Item II and Item IV; or shall apply and handle as the first application in case the other materials in the aforesaid terms are changed.

Article 11 Those which apply for import and export of gold product shall submit the following materials to the branch of People’s Bank of China above municipal level where the applicant lives:

(I) Descriptions on business conditions including name, address (office place), enterprise profile, using of the imported and exported gold and planned amount etc. of the applicant shall be noted on the written application;

(II) Application Form for Import and Export of Gold and Gold Product;

(III) Copies of officially sealed legal registration certificate including business certification of the enterprise legal person and legal certificate of public institutions;

(IV) Gold import and export contracts and their copies;

(V) Registration Form for the Archival Filing and Registration of Foreign Trade Operator or Certificate of Approval for Establishment of Enterprises with Foreign Investment in PRC which is sealed with archive filing seal.

(VI) Description materials on whether the applicant has illegal conducts in the past 2 years;

(VII) Enterprises which produce, process or use gold product shall also submit the enterprise tax payment record of the past 3 years, pollutant discharge permit certificate issued by municipal environment protection department and annual qualification inspection report as well as their copies;

(VIII) Enterprise of foreign trade operation shall also submit relevant enterprise management proving materials apply to customs certification and enterprise tax payment record of the past 3 years;

(IX) Education organizations and science research institutes shall also submit proving materials on conducting national research projects or key subjects;

(X) Enterprises which export gold products shall also submit proving materials including added-value tax invoice of gold raw materials obtained within China.

Those which apply for gold import and export again and of which no materials of the aforesaid terms are changed shall only need to submit materials in Item II and Item IV; besides, education organizations and science research institutes shall also submit materials in Item IX and enterprise which export gold products shall also submit relevant materials specified in Item X; or shall apply and handle as the first application in case the other materials in the aforesaid terms are changed.

Article 12 The application conditions specified in Item I, Article 9 of the Measure applies to gold product from processing trade for the domestic market, imported materials of products for domestic market within products listed in Catalogue for the Regulation of the Import and Export of Gold and Gold Products and gold products exported under processing trade with gold raw materials purchased within the territory of China.

For processing trade for the domestic market, the application materials shall be submitted and delivered in accordance with provisions in Article XI of the Measure; besides, materials explaining fair reasons for turning to domestic market, copies of processing trade business approval certificate and processing trade contracts and their copies etc.

For gold products exported under processing trade with gold raw materials purchased within the territory of China, the enterprise shall report the conditions of gold purchase within the territory of China when the processing trade manual is established (changed) and submit Import and Export License of the People’s Bank of China for Gold and Gold Products.

Article 13 As for imported gold and gold product donation made by individual, legal person or other organization for public welfare establishments, the following materials shall be submitted by the Donee to People’s Bank of China:

(I) Donation agreement that conforms to provision of Law of the People’s Republic of China on Donations for Public Welfare;

(II) Legal registration certificate and their copies including public institute legal person certificate or social group legal person registration certificate;

(III) Application Form for Import and Export of Gold and Gold Product

Article 14 People’s Bank of China shall make the administration permit decision within 20 work days since accepting the application for import and export of gold and gold products.

Article 15 Municipal branches of People’s Bank of China shall directly report the primary review opinions and all the application materials to the upper organization within 20 work days since accepting the application for import and export of gold and gold products. And the upper organization shall make the administration permit decision within 20 work days since receiving the primary review opinions and all the application materials.

Shanghai head office, all branches, business management department, central branches of provincial capitals (metropolis) and Shenzhen central branch of People’s Bank of China which directly handle application for import and export of gold products shall make the administration permit decision within 20 work days since acceptance.

Article 16 People’s Bank of China or its branches may review the applicant in case it is necessary to verify the real content of the application materials; the review shall be conducted by more than 2 working staff.

Article 17 The approved applicant shall handle relevant procedures at the customs by Import and Export License of the People’s Bank of China for Gold and Gold Products when handling cargo import and export of gold and gold products.

There shall be one Import and Export License of the People’s Bank of China for Gold and Gold Products for each batch of product and the License shall be used within 40 work days since the issuing date. The licensed party which need a postpone for reasonable reasons may apply for handling a delay procedure to the issuing organization with the original license 5 work days after the expiring of the license.

Article 18 People’s Bank of China and its branches are entitled to supervise and inspect the activities of administration permit items conducted by the Licensee shall be cooperative.

Article 19 The Licensee shall promptly report the implementation conditions of import and export of gold and gold products and provide relevant materials based on the provision of People’s Bank of China and its branches.

Article 20 Despite of the provisions in Article 4 of the Measure, gold and gold products imported and exported by the following means shall exempted from handling Import and Export License of the People’s Bank of China for Gold and Gold Products and shall be supervised by the customs instead:

(I) Imported or exported by processing trade;

(II) Imported or exported between customs special supervision region, tax-free supervision area and foreign territories;

(III) Imported or exported between customs special supervision region and tax-free supervision area;

(IV) Imported or exported by maintenance, shipment return and temporary in-and-out methods.

Article 21 Except for provisions in Article 4, 5 and 20 of the Measure, any individual, legal person or other organization shall not import and export gold and gold products by any other means. Except otherwise specified by the state.

Article 22 Individual, legal person or other organization shall abide by relevant national regulations on anti-money laundering and anti-terrorist financing when importing and exporting gold and gold products.

Article 23 Foreign exchange receipts and payments incurred when importing and exporting gold and gold products shall be handled in accordance to foreign exchange management rules.

Article 24 The Licensee shall not make the following conducts:

(I) Transfer or lend the import and export license for gold and gold products;

(II) Use fake or intentionally made import and export license for gold and gold products;

(III) Acquire the import and export license for gold and gold products by lying or other dishonest conducts;

(IV) Exceed the class, specification and amount scale permitted by the import and export administration;

(V) Make fake donations on imported and exported gold and gold products;

(VI) Fail to register and exchange the imported and exported gold at the gold and commodities exchange based on the provisions;

(VII) Maliciously manipulate gold exchange price by means like hoarding and profiteering, or other conducts which violate the rights and interests of the other investors like cheating;

(VIII) Violate relevant policies or management provision on gold market and gold derivatives exchange;

(IX) Refuse the supervision and inspection by People’s Bank of China and its branches or hide relevant conditions and provide fake materials during the supervision and inspection process.

In case the Licensee makes any of the conducts listed in former terms, People’s Bank of China and its branches is entitled to suspend the handling of its import and export application; those with vital situations shall be punished in accordance to Article 46 of Law of the People’s Republic of China on the People’s Bank of China.

Article 25 People’s Bank of China and its branches is entitled to withdraw the import and export license for gold and gold products of the Licensee by law.

Article 26 Illegal conducts including smuggling or violating customs supervision provisions resulting from importing and exporting gold and gold products by violating the Measure shall be disposed in accordance to laws and regulations including Customs Law of the People’s Republic of China and Regulation of the People’s Republic of China on the Implementation of Customs Administrative Punishment by the customs; or shall be investigated for its criminal liabilities by being transferred by the justice organization in case of crime.

Article 27 People’s Bank of China and General Administration of Customs are responsible for explaining the Measure.

Article 28 The Measure shall be implemented since April 1, 2015.


1. Import and Export License of the People’s Bank of China for Gold and Gold Products

2. Application Form for Import and Export of Gold and Gold Products

The Chinese Gold market: Lost In Translation

There are a few analyses making rounds on the internet about gold owned by the People’s Bank Of China (PBOC). I’m always interested in these analyses, as I like to be aware of all knowledge available on this subject, but I rarely agree with them.

The big questions that remain in the gold space are, (i) how much gold does the PBOC truly have, (ii) how and where is this gold stored, (iii) how much of the imported (non-monetary) gold ended up at the PBOC or at the private sector.

In previous posts I’ve shared my analyses: I think the PBOC buys most of its gold abroad where they monetize the metal after which it can be imported into China mainland without having to be disclosed in publicly available customs reports (these monetary gold flows would be invisible to us, therefor I don’t know how much gold the PBOC has). All the gold that is disclosed in publicly available customs reports as export to China is directed through the Shanghai Gold Exchange (SGE) where it’s bought by private investors and institutions, not the PBOC. That’s my main thesis, although I don’t rule out the PBOC is able to interfere in the domestic Chinese gold market and the SGE.

The problem we encounter is that there has been a lot more gold sold through the SGE than all consultancy firms (WGC/GFMS/CPM) disclose as Chinese gold demand. The difference, which is at least 2,000 tonnes, is thought to be PBOC gold accumulation. In addition, there are a lot of precious metals on the balance sheets of Chinese commercial banks, although it’s unknown what these precious metals truly represent. Is it gold, silver or platinum and who is the owner? Many analysts think the PBOC buys gold on the SGE through commercial banks and leave this on balance sheets of these banks before it can be flipped to the PBOC’s balance sheet.

The website Smaulgld published an article on 2 October 2015 that hints at the mechanism described in the previous paragraph. From Smaulgld:

Chinese President Xi Jinping recently confirmed the practice of moving the People’s Bank of China’s reserve assets to other entities in China [quote from Xi]: “some assets in foreign exchanges were transferred from the central bank to domestic banks, enterprises and individuals” This might explain where some of China’s gold hoard, that many suspect they posses but have not reported as reserves, may be located.

And in another Smaulgld post:

If indeed China holds gold with … any of the Chinese state owned banks, the PBOC could roll up that gold on to its own balance sheet in order to show more gold reserves quickly and easily in one month with a single entry.

In this post I would like to focus on the quote from Xi. It was copied from a written interview with the Wall Street Journal that was republished on iCross China. The original Chinese text was published on China network. In Chinese Xi said:


Translated by a friend of mine in the mainland:

First, the ownership of part of the foreign exchange reserves was transferred from the central bank to institutions like domestic banks, enterprises and individuals. For example, the balance of the foreign exchange deposits of all kinds at domestic banks increased 56.9 billion USD, with a 27-billion increase in August alone.

I think this is what happened: in the original Chinese text it said 外汇存款, which means foreign exchange deposits, but the translator working for iCross China translated it into foreign exchanges, which was interpreted by Smaulgld as being foreign exchange reserves. The essential difference is that foreign exchange deposits are owned by the private sector (at domestic banks) and foreign exchange reserves are owned by the central bank.

What Xi meant was that the Chinese private sector (banks, enterprises and individuals) was exchanging yuan for US dollars at the Chinese central bank. In turn the PBOC used its foreign exchange reserves to supply US dollars to the private sector in exchange for yuan. Subsequently, foreign exchange deposits at domestic banks grew by $56.8 billion, reflected in a matching decline of $56.8 billion in the PBOC’s foreign exchange reserves. In short, yuan went from the private sector to the PBOC, US dollars went from the PBOC to the private sector.

Currently there is downward pressure on the renminbi and the PBOC is defending the value by selling its foreign exchange reserves and buying yuan. When the Chinese private sector wants to exchange yuan for US dollars, which eventually is done through the Chinese central bank, the PBOC would not buy US dollars in the international foreign exchange market for this purpose, as this would lead to a declining value of the renminbi. Instead, the PBOC exchanges its own foreign exchange reserves for yuan, which are then transferred to the private sector and deposited as foreign exchange deposits at domestic banks. Needless to say, the US dollars transferred from the PBOC’s foreign exchange reserves to domestic banks, as foreign exchange deposits, are no longer the PBOC’s foreign exchange reserves.

Concluding, there are no foreign exchange reserves transferred from commercial bank balance sheets to the PBOC’s balance sheet or vice versa, nor has any gold been transferred this way.

funny hilarious chinese translation fails

Another quote that popped up at several blogs, after it was published on Reuters, was the one from Fu Xuejun, strategist at Huarong Securities Co. When the Chinese stock market was collapsing in the beginning of July this year, Fu Xuejun said/wrote:

The government must rescue the market, not with empty words, but with real silver and gold…

In my opinion this was wrongly translated. Fu Xuejun probably wrote 真金白银, which is a phrase that means “real money” not “real silver and gold”. This is a common pitfall as in many languages the word for gold or silver is the same as for money. For example, money in French is argent, but silver in French is also argent. 

I’ve been told Fu Xuejun is known in China purely as a stock trader with very little knowledge of gold and silver. Therefor, most likely, Fu Xuejun meant to say that the government needed to use money out of its own pockets to rescue the stock market instead of empty words. Fu Xuejun replied to my email:

Dear Jansen,

I mean “real money”, not with physical gold and silver. “真金白银”is a idiom meaning a lot of real money.

I should add, gold on the balance sheets of Chines banks could be copied to the PBOC balance sheet IF the Chinese adopt the Turkish system, wherein gold savings by citizens deposited at commercial banks also show up on the balance sheet of the Turkish central bank, albeit double counted, as commercial banks in Turkey can use gold as part of their Reserve Requirement Ratio at their central bank.

Analyzing PBOC Official Gold Reserves Increment

As always, please make sure you’ve read The Mechanics Of The Chinese Domestic Gold Market before continuing.

Finally last Friday the People’s Bank Of China (PBOC) updated its official gold reserves, from 1,054 tonnes, a figure reported since 2009, to 1,658 tonnes. Most gold analysts expected a number substantially higher than what was just disclosed. In this post we’ll analyze the 1,658 tonnes figure.

Before diving into the analysis, I like to share that I think it’s possible the PBOC hasn’t been completely honest by stating their gold reserves have grown by only 604 tonnes since 2009. I think in reality they have more than 1,658 tonnes, but let’s discuss that later on. In my analysis, I always try to start with official data and work my way from there, instead of start with speculative data and work backwards. It’s very easy in the gold space to rebut all official data, mainly because there is so much speculation. Therefor, I would like to start with the figure just disclosed, then I’ll try to answer, why 1,658 tonnes?

PBOC Gold Reserves Increment Was Covertly Imported

With regard to the update in gold reserves, the PBOC has stated on its website (in Chinese):

Based on our assessment of the asset value of gold and analysis of price movements, on the condition of not impacting or influencing the market, through various domestic and international channels, we gradually accumulated this part of gold reserves. The major channels of accumulation include: purifying domestic gold scraps and gold of various grades [杂金 in Chinese usually means non-standard gold including scraps so I have to paraphrase it], direct purchase of production, transaction in domestic and foreign markets, etc.   

The official narrative is that the PBOC has bought 604 tonnes of gold in the domestic and international market. From my perspective, however, I think the PBOC has mainly been buying gold in the international market, as that’s where superfluous US dollars can be exchanged for gold. In the Chinese domestic gold market, physical gold is settled in renminbi. Gold the PBOC potentially has obtained in the mainland would be from state owned mines that not sell their gold through the Shanghai Gold Exchange, but have the gold directly transported to central bank vaults.

Not so long ago I wrote a lengthy post on PBOC gold reserves, it was titled PBOC Gold Purchases: Separating Facts from SpeculationThe article contained a few concepts I still believe in:

  • The PBOC does not buy gold through the Shanghai Gold Exchange (SGE).
  • PBOC purchases/shipments are not disclosed in global customs reports.
  • As a consequence, everything we can see going into China (exports from other countries to China which are required to be sold through the SGE) and domestic mine supply (which is mainly sold through the SGE) are being added to private gold reserves and does not end up at PBOC vaults.

According to the China Gold Association (and global trade data), mainland net gold imports from 2010 until 2014 accounted for 3,967 tonnes and domestic mining output over this period totaled 1,979 tonnes; a combined 5,964 tonnes.

To summarize we know that:

(1) Laws and tax incentives direct Chinese gold import and gold mine supply to be sold through the Shanghai Gold Exchange

(2) Chinese private gold demand is all supplied through the SGE

(3) Physical gold at the SGE can only be settled in renminbi

4) The PBOC is likely to buy gold abroad with US dollars (not renminbi) to diversify their lopsided FX reserves and

(5) In 2014 an SGE official confirmed that the PBOC did not buy gold through the Shanghai gold bourse

With this knowledge, it’s easy to understand the PBOC did not buy the 5,964 tonnes of gold that was supplied to China 2010-2014 through import and mining. The 5,964 tonnes was consumed by private gold buyers at the Shanghai Gold Exchange. To repeat myself, PBOC gold purchases cannot be traced from global trade data or SGE withdrawals, as these occur in the realm of the private Chinese gold market.

One more reason why the gold exports to China we can see – for example in Hong Kong customs reports – are not addressed by the PBOC is that it can be observed  that gold bullion is being declared as either non-monetary or monetary gold when studying customs data from any country. If the PBOC can choose how to declare their bullion, they’ll choose monetary. These are typically the options available when making a gold customs reporting:

  • Gold, for non-monetary purposes (HS code 71081100)
  • Gold, unwrought, for non-monetary purposes (HS code 71081200)
  • Gold, in semi-manufactured forms, for non-monetary purposes (HS code 71081300)
  • Monetary gold (HS code 71082000)

The essential difference between these four categories is that “monetary gold” is always blank; this category is never disclosed publicly! As we know, the PBOC prefers to buy gold in secret, so their gold transport surely is hidden in the eclipsed category “monetary gold”. It’s thus pointless to try to measure PBOC gold reserves from available customs data on gold, as this data doesn’t show gold monetary shipments. From trade data we can only see what’s entering China for private gold demand sold through the SGE.

From this perspective all official gold data presented above makes sense; all these thousands of tonnes of gold we could see entering China fell into the hands of private hoarders.

My supposition can be further strengthened if we re-read translations from Chinese gold industry officials I’ve published over the years. From Sun Zhaoxue, President of the China Gold Association in 2012:

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

From an internal memo (only published in Chinese) from the PBOC on how to develop the gold market, 2012:

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

There have been many clues the PBOC was buying gold as well, next to Chinese private demand, but for now we’re confirmed the gold we could see going into China over the years has been from the private sector.

Let’s make a new chart:

Estimated Total Chinese Gold Reserves (July, 2015)

I’ve accumulated all domestic gold mining output and known gold imports isolated from “Official reserves” since 2009. The “Official reserves” increments in 2001 and 2003 are subtracted from “Cumulative domestic mining”, the “Official reserves” increments in 2009 and 2015 are not subtracted from “Cumulative domestic mining” or “Cumulative total import”, as my theory is that this was covertly imported. A detailed description of how I compiled this chart can be found in my previous post on this subject.

If I’m right in my analysis that the PBOC has mainly been buying gold abroad since 2009, there are currently 13,781 tonnes of gold in China, of which 1,658 tonnes are (confirmed) official gold reserves and 12,123 tonnes are private reserves. Needless to say, everything the PBOC potentially holds in addition to 1,658 tonnes official reserves must added to these estimates. (I do not rule out the PBOC is able to buy gold in the domestic market.)

PBOC Gold Reserve Increment Is A Strategic Move

The PBOC’s decision to disclose their official gold reserves at 1,658 tonnes cannot be viewed in isolation from global monetary affairs. Since the financial crisis in 2008, Europe and Asia have been very clear in their preference to gradually decrease the emphasis of the US dollar as reserve currency in the international monetary system. China’s strategy is to play multiple hands at the same time of which one is the SDR.

For the development of their economy, China aims to internationalize the renminbi. The composition of the SDR will be reviewed later this year. A requirement for a currency to be included in the SDR is that it’s freely usable. China will thus be required to disclose its reserves at least once yearly by groups of currencies. If we read the official statement on the gold reserves by the PBOC in Chinese, this is apparent from the part containing info about IMF’s Special Data Dissemination Standard (reserves disclosure).

With the US having the power to obstruct renminbi inclusion into the SDR, the Chinese have to play it safe. They are required to be transparent about their true gold reserves, but may not want to upset the US by disclosing an official gold reserve figure at 3,500 tonnes. The 1,658 tonnes figure, which is too little to rock the global financial order, though a sign that China assesses gold to be “an important element of international reserve diversification” may thus be an appropriate figure. It’s not in China’s interest to rush into a new international monetary system as they continue to diversify away from the US Dollar.

China UST holdings

From the above chart, we can see China is not net selling US treasuries, but that they have stopped increasing their accumulated holdings since 2010. The Chinese aren’t ready for a major shift in the international monetary system yet. They are still working on further internationalization of the renminbi, the SDR inclusion, developing their financial markets and opening up their capital account. Only then will they unwind the US dollar. Until then, China will continue to adopt a slow step by step approach.

Why SGE Withdrawals Equal Chinese Gold Demand And Why Not – The Argument List

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

The difference between SGE withdrawals and Chinese consumer gold demand as disclosed by the World Gold Council has aggregated to 3,193 tonnes from 2007 until 2014 (the period this article will focus on). Naturally, we’re here to get the finest understanding of Chinese gold demand. To explain how the difference is caused Western consultancy firms have presented several arguments in publications and lectures at conferences, though none of them can explain the difference in full. This post is an overview of all such arguments (supplemented by my own arguments).

Below we’ll examine to what degree the arguments can or cannot have caused the difference. Subsequently, we’ll discuss the details of all metrics that can be applied, to eventually be able to calculate our best estimates of genuine Chinese gold demand 2007 – 2014 within every metric.

This is the argument list so far in chronological order:

  1. industrial demand
  2. stock movement change
  3. round tripping
  4. leasing
  5. official purchases
  6. recycled gold
  7. export
  8. the Shanghai International Gold Exchange
  9. smuggling
  10. ETF demand

In 2014 the World Gold Council (WGC) came out with two special reports about the Chinese gold market that should have shine a light on the difference (China’s Gold Market: Progress And Prospects form April 2015 and Understanding China’s Gold Market from August 2014). However, these reports contain many false statements and the segments on the difference fail miserably, as I’ve pointed out in several posts (one, two, three, four, five, six, seven, eight). Surprisingly, after the reports were published Western consultancy firms came up with new arguments that should explain the difference. I would like to direct your attention on this shift in arguments; when the old ones failed, the firms impudently moved on and came up with new ones. The fact this list of arguments is constantly changing confirms the weakness of all arguments it holds, and the apparent ‘ignorance’ of Western consultancy firms regarding the Chinese gold market.

First let’s go through all the arguments to investigate which ones make any sense, at the end of the post we’ll do some number crunching.

1) INDUSTRIAL DEMAND. The first argument ever presented to me was from the WGC. In August 2013 I’ve asked the Council what their explanation was for the difference between their Chinese gold demand and demand disclosed in the CGA Gold Yearbooks (co-written by the PBOC), which exactly equaled SGE withdrawals. They replied to me by email:

The data that we publish in Gold Demand Trends are collected for us by Thomson Reuters GFMS. Our data represent jewelry and bar & coin demand and do not incorporate any industrial demand or fabrication, which is included in the PBoC figures. As I am sure you will appreciate, data collection of this sort relies on a number of proprietary sources and these will not necessarily be the same for both GFMS and PBOC. It is, therefore, perhaps not surprising that the estimates of demand differ somewhat.

Not very credible the WGC identifies a gap of 3,193 tonnes of gold with industrial demand, but, although being small, industrial demand isn’t captured in WGC Chinese gold demand, for whatever reason, and thus partially explains the difference from a metrics point of view.

The reason I tend to compare SGE withdrawals to Chinese gold demand as disclosed by the WGC, and not by GFMS, Metals Focus or CPM Group, is because the WGC is globally the easily (free) accessible data source for investors. Usually investors and news agencies worldwide consult the WGC for supply and demand statistics, which make these the most important to test for their accuracy. Why the WGC doesn’t include industrial demand in their data is beyond me, but for our own investigation we’ll simply take notice.

Industrial demand is a legitimate argument and its volume will be taken into account for our own calculation of genuine Chinese gold demand at the end of this post.

2) STOCK MOVEMENT CHANGE. When I asked GFMS in August 2013 about net investment – which is how the difference was titled in the CGA Gold Yearbooks – they wrote me by email:

We have checked with our Data Specialist and confirmed that we use a different methodology. Total Chinese demand used by Thomson Reuters GFMS only includes jewelry, physical bullion bars/coins and all industrial demand. Any stock movement change (which is essentially the item 6 net investment) will not be included as underlying demand.


So according to you category six is “stock movement change”? This would be gold added to the stocks from jewelers, the mint, industrial companies, etc? (this is a few hundred tons each year!)


That’s correct based on the resolution provided by our data specialist.

Because SGE withdrawals capture wholesale demand the difference is partially what jewelry companies, refineries, industrial companies and the mint have purchased at the SGE, but not yet sold in retail. And so, stock movement change is a legitimate argument, though the amount of gold in stock can never explain the full difference of 3,354 tonnes.

According to an estimate by the WGC as much as 125 tonnes of gold can have been absorbed as inventory in the Chinese domestic gold market from 2009 until 2013:

… It is, however, indicative that as jewelers expanded, so too did their inventory levels and it is our judgment that across the industry between 75t to 125t may have been absorbed in the supply chain since 2009.

As the period we are investigating with respect to the difference spans wider, from 2007 until 2014, we’ll use an estimate of 200 tonnes for stock movement change.

Stock movement change is a legitimate argument and its volume will be taken into account for our calculation of genuine Chinese gold demand at the end of this post.

3) ROUND TRIPPING. In April 2014 the WGC published a report on China titled China’s Gold Market: Progress and Prospects. It certainly was not the first WGC report on China, in 2010 China Gold Report was released, but it was the first time the Council elaborated on the structure of the Chinese gold market, the Shanghai Gold Exchange and the ‘supply surplus’ in the Chinese gold market. Logically, the Council had some explaining to do, as it was clear China imported substantially more gold than what they disclosed as demand.

For the first time Chinese Commodity Financing Deals (CCFD) were introduced to the Council’s wide reader base. This type of financing is pursued to acquire cheap funds, it can be done trough round tripping or gold leasing. The Council wrote:

These operations fall into two broad categories, although there is some overlap between the two. Firstly, there is the use of gold via loans and through letters of credit (LCs) as a form of financing. Secondly, there is the use of gold for financial arbitrage operations that will also be based upon gold loans or LCs. In most cases the gold is quickly re-exported to Hong Kong, often as very crude jewellery or ornaments to get round tight controls on bullion exports. (This is the practise commonly referred to as ‘round-tripping’. Moreover, because nearly all gold flowing into China goes through the SGE, round-tripping can inflate the SGE delivery figures.) In other cases the metal is stockpiled in vaults in China or Hong Kong.  

In particular the part in bold is not true, as we could read in my previous posts. Basically, round tripping gold flows are completely separated from the Chinese domestic gold market and the SGE system, therefor they can not inflate SGE delivery or withdrawals.

So, round tripping is not a legitimate argument. To my understanding the WGC has abandoned this argument all together, though GFMS still thinks round tripping inflates SGE withdrawals. In their Gold Survey 2015 it’s written (page 78):

…the round tripping flows between Hong Kong and the Chinese mainland, which also inflates the SGE turnover and withdrawal figures…

4) GOLD LEASING. The other CCFD is leasing. In the WGC report from April 2014 it’s stated:

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

PMI insinuated 1,000 tonnes is tied up in CCFDs, but as I’ve clearly demonstrated in previous posts, this is not true. There is no need to go over this again – if you wish please read my previous posts for a detailed analysis.

5) OFFICIAL PURCHASES. Often it’s being thought in the gold space SGE withdrawals end up in the vaults from the People’s Bank Of China (PBOC). Early 2013 the WGC speculated the difference could be explained by official purchases, later that year the Council changed its mind. From the July 2014 WGC report on China, Understanding China’s Gold Market, we can read:

China’s authorities have a range of options when purchasing gold. They may acquire some of the gold which flows into China; there has been no shortage of that. But there are reasons why they may prefer to buy gold on international markets: gold sold on the SGE is priced in yuan and prospective buyers – for example, the PBoC with large multi-currency reserves – may rather use US dollars than purchasing domestically-priced gold. The international market would have a lot more liquidity too.

In my post PBOC Gold Purchases: Separating Facts from Speculation I’ve analyzed why it doesn’t make sense for the PBOC to purchase gold through the SGE. The firms will agree the PBOC is not likely to buy gold through the SGE and thus official purchases cannot make up the difference we’re after.

6) RECYCLED GOLD. The most obvious argument to explain elevated SGE withdrawals, one would think, is recycled gold through the bourse counted over and over as withdrawn. Though, SGE rules command bars withdrawn are not permitted to re-enter the vaults before being remelted and assayed by an SGE approved refinery. Which is not say it doesn’t happen.

Arguments presented by the firms regarding recycled gold must be divided in subcategories. In Understanding China’s Gold Market the WGC was correct in pointing out there are two sorts of scrap flows going through the SGE; gold-for-cash and gold-for-gold.

Gold can be sold for cash, thereby increasing supply, while gold can also be sold for gold, increasing both supply and demand. Gold-for-gold supply does not affect the supply-demand balance, hence it’s not counted as supply in WGC metrics – nor is the matching demand side. I would say gold-for-gold cycles through the SGE are a legitimate argument that explain SGE withdrawals to inflate and therefor will be taken into account for our calculation of genuine Chinese gold demand at the end of this post.

Let’s have a look at examples of gold-for-gold:

6.1) Process scrap. This argument was first presented by CPM Group. In short, CPM states industrial companies produce 50 – 70 % scrap supply of the gold used in manufacturing. The scrap spillover flows back to the SGE. Process scrap thus inflates SGE supply and demand, because the gold was bought at the SGE (demand), but flows back for a significant part (supply). Although, it’s unknown how much of this gold actually flows back to the SGE or is brought to a refinery for toll refining (a refinery producing bars or wire from the process scrap for the industrial company in return for a fee).

Process scrap, described in detail by Jeffrey Christian at the very end of this post, is a form of gold-for-gold scrap supply.

6.2) Arbitrage refining. This argument was brought forward by GFMS on 17 February 2015 at the Reuters Global Gold Forum when Jan Harvey interviewed Samson Li (GFMS).

Jan Harvey:

Some people see withdrawals on the Shanghai Gold Exchange as a proxy for Chinese demand. Do you think this is valid?

Samson Li:

It depends on the methodology used. For example there are refiners that would, at times, withdraw 9995 gold bars from the SGE, refine it into 9999 bars whenever there is profitable opportunity, and then deposit it back into SGE vault……

Presumably there can be an arbitrage opportunity at the SGE if Au99.95 gold is an X percentage cheaper than Au99.99 gold. Such a spread would be a classic example of one of the contracts being under or overvalued relative to the other.

I’m not a trader, but I can imagine a way to close the arbitrage through gold leasing. This is my theory: if a spread occurs Au99.95 is bought, concurrently Au99.99 (LAu99.99) is borrowed and immediately sold. Then the Au99.95 is withdrawn, refined into Au99.99 and returned to the lender.

If the arbitrage described above can be closed inter alia depends on the speed to which a lease contract can be settled. If a spread occurs and the refiner has to wait 2 days before it can take delivery of Au9999, the arbitrage won’t fly. I’ve asked the ICBC gold lease desk what would be the fastest possibility to sign a lease contract. They told me usually it takes several days or weeks as the lessee’s credit rating must be determined. Though, for regular customers the lease ca be executed in one hour.

It’s hard for me to say if arbitrage refining is really possible according to the aforementioned theory, because it depends on many variables and the established relationship between lessor and lessee. In addition, why would anybody sell Au99.95 if it was undervalued? In my opinion the argument that arbitrage refining inflates SGE withdrawals can be doubted.

6.3) VAT schemes. This argument is legitimate. though it’s unknown to what extent it has been used. Read more here.

On the South China Morning Post there was an article published wherein an illegal VAT scheme is described which can inflate SGE withdrawals.

So how much is gold-for-gold in total (all aggregated process scrap and potential arbitrage refining and VAT schemes)? We can estimate total gold-for-gold supply and I will tell you how. The advantage of calculating total gold-for-gold supply is that it doesn’t require us to know exactly how much all separate gold-for-gold volumes are.

Every year the Chinese publish the composition of total supply in the Chinese wholesale gold market in the CGA Gold Yearbooks. Have a look at the next chart (I’ve added GFMS scrap, which is gold-for-cash supply):

WGC demand vs SGE withdrawals 2
The gap between the green bars (total supply) and the red bars (SGE withdrawals) are caused by additional scrap flows (gold-for-gold) through the SGE.   

By knowing, (i) SGE withdrawals, (ii) Import, (iii), Mine output and (iiii) Gold-for-cash (labeled as GFMS scrap in the chart) we can calculate gold-for-gold scrap, because of the structure of the Chinese gold market:

Gold-for-gold scrap = SGE Withdrawals – Import – Mine production – gold-for-cash

It may be difficult to track process scrap and potential arbitrage refining directly, indirectly the Chinese disclose the volume of both flows as gold-for-gold. By knowing import and we can fill in the equation.

To come to a thorough understanding of Chinese gold supply/demand metrics gold-for-gold scrap flows are very much worth measuring. Especially, because since 2013 this supply category has grown.

7) EXPORT. This argument was brought forward by PMI. On a conference in London Phillip Klapwijk, Managing Director of Precious Metals Insights Limited (PMI), stated China exports about 1,000 tonnes a year (from the domestic gold market). However, at this stage the rules prohibit gold export from the Chinese domestic gold market. I’ve written an extensive analysis on Klapwijk’s presentation (click to read), no need to go over this again here. The export argument is not legitimate.

8) THE SHANGHAI INTERNATIONAL GOLD EXCHANGE. This argument is from myself. As we could have read in The Workings Of The Shanghai International Gold Exchange and SGE Withdrawals In Perspectivethe gold withdrawn from the vaults through the SGEI in the Shanghai Free Trade Zone can be exported abroad and thereby distorting Chinese wholesale gold demand when measured by SGE withdrawals. However, up until now (16 December 2015) it seems SGEI withdrawals are rarely exported abroad, according to several sources. The SGEI argument is not (yet) legitimate.

9) SMUGGLING. Naturally, smuggling can cause SGE withdrawals to be inflated. Although, we have no numbers on smuggling so I can’t take it into account for our calculation of genuine Chinese gold demand.

10) ETF demand read this.

How much is genuine Chinese gold demand?

The difference between SGE withdrawals and WGC Chinese consumer gold demand from 2007 until 2014 accounts for 3,193 tonnes. By subtracting the volume of gold involved in legitimate arguments from the total difference we can calculate genuine Chinese gold demand. Let’s put to work the numbers and see what happens.

1) INDUSTRIAL DEMAND. Data on Chinese industrial demand wildly varies. Thereby, both the CGA and GFMS publish industrial demand including the use of scrap. Because the scrap produced by fabricators flows back to the SGE and must be subtracted from SGE withdrawals as gold-for-gold to compute genuine Chinese gold demand, we need to measure industrial demand excluding the use of scrap. We’ll use an estimate of 200 tonnes for Chinese industrial gold demand (excluding the use of scraps) from 2007 until 2014:

3,193 tonnes minus 200 tonnes = 2,993 tonnes

2) STOCK MOVEMENT CHANGE: For growth in wholesale inventory from 2007 until 2014 we’ll also use an estimate of 200 tonnes:

2,993 tonnes minus 200 tonnes = 2,793 tonnes

6) GOLD-FOR-GOLD. This type of recycled gold supply from 2007 until 2014 accounted for 903 tonnes:

2,793 tonnes minus 903 tonnes = 1,893 tonnes

When we subtract the tonnage from all legitimate arguments from total SGE withdrawals we’re still left with a difference of 1,893 tonnes of gold. Contrasting metrics can only explain the difference for 1,300 tonnes (3,193 – 1,893).

While, the 1,893 tonnes cannot be labeled as anything else than genuine gold demand (and many Chinese gold industry executives have publicly disclosed to wholeheartedly agree with me). To repeat myself, the residual difference can only be caused by direct purchases from individual and institutional customers at the SGE that withdraw their metal from the vaults. 

China SGE gold demand data
Gold-for-gold can be calculated by subtracting ‘GFMS scrap’ from ‘recycled’.

In the chart above you can see the data I’ve used to write this post. Total SGE withdrawals from 2007 until 2014 accounted for 8,822 tonnes, while WGC demand accounted for 5,629 tonnes over this period. We can only correct the difference of 3,193 tonnes by 1,300 tonnes when taken into account contrasting metrics, leaving a difference of 1,893 tonnes.

5,629 tonnes (WGC demand) + 1,893 tonnes = 7,522 tonnes, which is genuine (estimated) Chinese gold demand for 2007 until 2014.

Rectification Chinese Gold Trading Rules

I’ve found more detailed rules on the workings of the Chinese gold market regarding, (i) the use of onshore renminbi for contracts traded on the Shanghai International Gold Exchange (SGEI), (ii) gold sales of Chinese domestic gold mines. Previously I’ve written posts on these subjects that contained inaccurate information that I would like to correct. (My previous posts are already corrected.)

First, let’s have a quick look at the latest Shanghai Gold Exchange (SGE) withdrawal numbers. In week 22 (June 1 – 5) withdrawals came down 12 % from the week before at 32 metric tonnes. Year to date 1,015 tonnes have been withdrawn. The current downtrend is completely normal as seasonally the summer months are quiet in the Chinese gold market, as opposed to the months around new year.

Shanghai Gold Exchange SGE withdrawals delivery 2015 week 22

SGE Customers Can Use Onshore Renminbi For SGEI Contracts

Chinese citizens in the mainland that have an SGE account are allowed to use onshore renminbi to buy physical gold contracts on the Shanghai International Gold Exchange (also referred to as the International Board or SGEI). On May 30, 2015, I published a post on the current status of trading rules at the SGEI regarding the use of onshore renminbi by domestic traders. From a source at the SGE I was told domestic SGE members (banks, refineries, etc) can trade SGEI contracts using onshore renminbi, but domestic SGE customers (citizens, corporations) cannot. Afterwards I came in contact with an employee of the SGEI who told me this is incorrect, in reality both SGE members and SGE customers can use onshore renminbi to trade International Board contracts. I checked with a source at ICBC and he confirmed SGE customers can use onshore renminbi to trade SGEI contracts.

Related posts on this complicated subject are the ‘Chinese gold market essentials’ posts, The Mechanics Of The Chinese Domestic Gold Market, Chinese Gold Trade Rules And Financing Deals Explained and Workings Of The Shanghai International Gold Exchange | Part One.

Important to understand is that if SGE customers buy SGEI contracts they own gold stored in the Shanghai Free Trade Zone (offshore), but they’re not allowed to withdraw this gold and/or transport. Likewise if SGEI members purchase SGE contracts (in the mainland) they’re not allowed to withdrawal and/or transport.

This is the corrected segment from my post May 30, 2015:

Since September 2014 international traders can use offshore renminbi to trade all contracts on the International Board and most contracts on the Main Board (they can only withdraw gold from International Board contracts stored in the Shanghai FTZ). Domestic traders can trade all Main Board contracts and International Board contracts. Although, only a few Chinese banks – to my knowledge ICBC and China Industrial Bank – offer domestic clients SGEI brokerage to use onshore renminbi to trade International Board contracts.

Have a look at the next table for an overview. Kindly note, delivery is not the same as withdrawals (/load-out).

Screen Shot 2015-04-11 at 7.31.56 PM

In my previous post I quoted Wang Lixing (also known as Roland Wang, Managing Director China for the World Gold Council) saying:

China’s domestic investors still cannot conveniently participate in trading on the International Board. Key reason is control on foreign exchange, which the International Board requires the use of the offshore renminbi.

Now I know SGE customers can also use onshore renminbi on the International Board I disagree with Wang even more.

Chinese symbols for acknowledge a mistake, admit a fault, offer an apology, make an apology.

Not All Chinese Domestic Mining Ouput Is Required To Be Sold Through The SGE

A few years ago I’ve written, “all output from Chinese mines is required to be sold though the SGE”, based on the rule:

All PRC [People’s Republic of China] gold producers are … required to sell their standard gold bullion through the Shanghai Gold Exchange…

Later I found out what standard gold bullion encompasses in the Chinese gold market; gold bars of 50g, 100g, 1Kg, 3Kg or 12.5Kg, with a purity of Au9999, Au9995, Au999 or Au995. Meaning, not all output from Chinese mines is required to be sold through the SGE, only when doré/ore is refined into standard gold bullion it’s required to be sold through the SGE.

In my opinion this rectification is not a game changer. Because the SGE has the best liquidity in the Chinese domestic gold market miners want to sell through the SGE, so they mostly cast standard gold bars to sell.

Mining output and scrap supply can be refined into standard gold bullion or non-standard god bullion, if standard gold is traded over the SGE or SHFE it’s exempt from VAT. Standard gold traded off-SGE is not exempt from VAT. Non-standard gold (for example jewelry) traded off-SGE is exempt from VAT (if there is value added, the value added would enjoy VAT), but many buyers and sellers like to trade standard gold bullion over the SGE for the liquidity and because this gold is granted of the highest quality.

Imported gold can be standard gold bullion or non-standard gold bullion (like doré). Imported standard gold is required to be sold though the SGE. I’m not sure at this stage what the rules are for imported doré/ore, though I know much of it is refined into standard gold and sold through the SGE. (It’s likely the rules for imported gold are the same for domestically mined gold.)

In short, there are many incentives that drive supply in the Chinese domestic gold market to be sold through the SGE. Hence, SGE withdrawals (the demand side) is such significant data.

The author of this post would like to have lunch some time with the architect of the Chinese domestic gold market, but doesn’t yet know who this person(s) is.