Tag Archives: Reuters

The Mainstream Media Versus Gold

One of these weird things happened on Monday November 3, 2014, in the gold space. I published an article in which I reported gold demand in China, measured by withdrawals from the vaults of the Shanghai Gold Exchange (SGE), was exceptionally strong in recent weeks. In week 43 SGE withdrawals accounted for 60 metric tonnes of gold (SGE withdrawals have proven to be the best indicator for Chinese wholesale demand, confirmed by SGE officials). Additionally, I hinted at the fact the Chinese continue to buy more gold whenever the price drops, and the price has been dropping for the past two weeks.

SGE withdrawals 2014 week 43, dips
Exhibit 1. Chinese gold demand rises if the price falls.

The same day Reuters and the Wall Street Journal reported Chinese gold demand was weakening, regardless of the low prices. Let’s go through their analysis. From the WSJ:

Gold prices in Shanghai normally carry a premium to global prices, but that reversed to a rare discount Monday. The premium, which is attributable to capital controls, was $2 to $3 an ounce to London prices about a week ago.

…“You would not have expected Shanghai gold to be at a discount,” said a leading Hong Kong-based executive with an international bank, who didn’t want to be identified. “The physical buying in gold has dried up.

From Reuters:

Unusually, prices on the Shanghai Gold Exchange, the world’s biggest platform for physical trade, are at a discount of around $1 an ounce to the global benchmark, slipping from premiums of $1-$2 an ounce last week.

Both these mainstream media are stating SGE gold was trading at a rare discount on November 3, 2014. First of all, an SGE discount isn’t rare at all, it happens all the time. This is incorrect information from the mainstream media.

Shanghai Gold Exchange SGE gold premium 2008 2014
Exhibit 2. SGE premiums are usually the inverse from the price of gold.

Second, SGE gold wasn’t trading at a discount on November 3, 2014.

I have two data feeds for charting SGE gold premiums. One is from the SGE itself, published in their weekly Chinese reports, the other one I use is from Sharelynx.com, which has setup an automated Excel sheet for me that daily updates many quotes I track. The next chart is based on the numbers from Sharelynx, updated until November 4, 2014:

Shanghai Gold Exchange SGE gold premium 2014
Exhibit 3. According to my data there was no discount on the SGE November 3.

As you can see on November 3 the SGE physical contract Au9999 was trading at a premium to London spot (I also double checked the premium manually). The discount reported by the mainstream media is incorrect information.

In the next chart we can see SGE premiums are correlated to SGE withdrawals. Which makes sense as the Chinese buy more gold when the price drops (exhibit 1) and SGE premiums go up when the gold price drops (exhibit 2).

Shanghai Gold Exchange withdrawals 2014
Exhibit 4. Correlation between SGE withdrawals and SGE premiums.

More from Reuters November 3, 2014:

Since all physical gold trade in China goes through the exchange [SGE], it is seen as a reliable barometer of Chinese demand.

SGE officials, and the China Gold Association, have clearly confirmed withdrawals are the best indicator for Chinese wholesale gold demand. From Scotiabank, September 29, 2014:

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

Though Reuters acknowledges all physical gold trade in China goes through the SGE, they refuse to publish the numbers on how much is going through (SGE withdrawals). I think it’s weird mainstream media never report on SGE withdrawals, or the significance of these numbers. If Reuters would have reported on SGE withdrawals on November 3, it would be impossible to commingle with a story of weak Chinese gold demand.

When I first found out about SGE withdrawals in May 2013 I’ve written emails to many mainstream media (Bloomberg, the Financial Times, the Guardian, Reuters, etc.). Hereafter, both Reuters and Bloomberg reported about SGE withdrawals once (that I know of).  Bloomberg, 15 July 2013:

The Shanghai Gold Exchange supplied 1,098 metric tons in the six months through June, compared with 1,139 tons for the whole of last year, according to data from the bourse today. 

Reuters on 18 October 2013:

Physical deliveries from the Shanghai Gold Exchange totaled 1,709.056 tonnes as of Friday, data on the exchange’s website showed. 

After these publications Bloomberg and Reuters stopped reporting on SGE withdrawals. (please comments below if I’ve missed any mainstream media publications on SGE withdrawals).

Reuters reporting on weak Chinese gold demand while SGE withdrawals have been sky high in recent weeks, reminded me of an older article from Reuters. From September 12, 2014:

India’s love affair with gold may be over, as prices slide

Kiran Laxman Salunkhe used to buy jewellery during religious festivals, but sliding gold prices have led the young farmer to break with his family’s traditional investment.

This year Salunkhe has deposited his hard-earned savings at the bank for the first time in a decade…

…”Nowadays it is risky to keep jewellery. Burglaries are rising,” he said. “With a fixed deposit there is no risk.”

That’s right, Reuters’ headline literally stated “India’s love affair with gold may be over”, because Kiran Laxman Salunkhe, a young farmer, stopped buying gold. India’s population is over 1.2 billion people and I’m not so sure if they all stopped buying gold in September to open up a bank account.

India Gold Import September 2014

Recently India’s custom department came out with the gold import numbers from September (when Kiran Laxman Salunkhe stopped buying gold). India officially imported, excluding smuggling, 94 tonnes of gold, which was the strongest month since June 2013. The indians imported this much gold despite the 10 % import duty.

Of course India’s love for gold is part of their culture and is engraved into the DNA of the Indian population. Reuters’ headline and article in itself were ridiculous. The fact that India actually imported more gold in September than they had over a year makes the article completely incorrect.  

Can it be Chinese gold demand is currently very strong, despite the WSJ quotes a leading Hong Kong-based executive with an international bank, who didn’t want to be identified, stating: The physical buying in gold has dried up”? Yes it can.


I always wonder why the mainstream media notes gold premiums denominated in dollars, according to my logic it’s better to note this in percentages. Imagine, for example, the price of gold falls to $200 dollar an ounce in three months, or rises to $4,000 an ounce. What then does a $2 dollar premium in Shanghai tells you when reading back the WSJ article of November 3? Percentages would work much better IMVHO. 

It probably has got something to do with the USD hegemony; the more the USD is used as the ultimate measure of value, the longer everyone will believe it is. In my world all goods, services, assets and currencies constantly fluctuate in value relative to each other. Over the long term, though, gold has proven to have to most stable exchange rate against goods. 

Mainstream Media Exaggerated Chinese Commodity Financing Deals

In the beginning of May I wrote an extensive post on why round tripping, also referred to as a Chinese Commodity Financing Deal, does not influence the amount of gold withdrawn from the vaults of the Shanghai Gold Exchange, which equals Chinese wholesale demand. Round tripping merely inflates the import and export of gold between a Customs Specially Supervised Area in the mainland, usually Shenzhen, and foreign countries, usually Hong Kong.

What I didn’t cover in that post was the amount of physical gold tied up in round tripping. Though this does not have anything to do with domestic Chinese gold demand, it can be important because when these financing deals are unwound the gold is released as physical supply. So how much gold is there tied up in round tripping? In the latest report on the Chinese gold market from the World Gold Council, China’s Gold Market: Progress and Prospectswe can read:

Imported commodities are used in China for financing purposes – most notably copper but also, increasingly, gold. Restrictions on finance and lending have boosted this market.

…No statistics are available on the outstanding amount of gold tied up in financial operations linked to shadow banking, but Precious Metals Insights believes it is feasible that by the end of 2013 this could have reached a cumulative 1,000 tonnes, equal to a nominal value of nearly $40 billion.

In this context the WGC used the term financial operations with regard to round tripping and not another type of commodity financing deal. But did they mean 1000 tonnes of physical gold is tied up in round tripping, or a much smaller amount that cumulative inflated trade numbers by 1000 tonnes – over a few years? I’ve sent an email to the World Gold Council (WGC) and got a very clear answer.

In their reply they stated the amount of physical gold tied up in round tripping is far less than 1000 tonnes and that in theory it can’t be more than gross export from China mainland to Hong Kong. This was 337 tonnes in 2013. However, these exports definitely contain jewelry fabricated in Shenzhen to be sold in Hong Kong or other nations; genuine processing trade. Also, the gold tied up in round tripping is likely to make more than one round. If so, every round would make the Hong Kong Census and Statistics Department count the same gold as additional import. For example, if 50 tonnes is round tripped three times, that would show up as 150 tonnes of gross export from the mainland to Hong kong. Though I don’t know either how much gold is tied up in round tripping, I think the amount is far less significant than what mainstream media have presented. Just guessing 20 – 100 tonnes.

To my surprise the WGC added in their email that the amount of gold tied up in round tripping should not be conflated with Chinese demand, as it merely inflates trade statistics. Although I agree, this is contradictory with what they wrote in their report:

…This is the practice 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. 

As I’ve explained in my prior post, SGE deliveries (or withdrawals they should say) can only be supplied by gold that is imported by one of the twelve commercial banks that have a PBOC import license for general trade. These banks are not engaged in round tripping, which only occurs in processing trade for which no PBOC license is required. SGE withdrawals, that supply the Chinese domestic gold market, are therefor not influenced by round tripping, and neither is Chinese demand.

Chinese gold trade laws

When I was doing research for this post I was quite shocked when I read the articles from Reuters and the Financial Times regarding round tripping again. Reuters stated Chinese firms could have locked up as much as 1,000 tonnes of gold in financing deals“, Izabella Kaminski from the Financial Times seemed happy to go with this number:

China Gold Collateral Financing Shock

This Reuters story about China having up to 1,000 tonnes of gold tied up in financing deals is doing the rounds, courtesy of information out of the WGC.

But it’s hardly a revelation.

We’ve known that China has been using gold (and almost everything else under the sun) for financing purposes for ages.

 Goldman even blessed us with a more recent update about the shenanigans in March…

…A key consequence of such an unwinding could be a commodity shock.

…this is why we’ve always been sceptical of those using rampant Chinese consumption of gold as an indication of an imminent rebound in the gold price.

Many people have been mislead about this subject as the WGC has published incomplete and contradictory information and the major news outlets have misinterpreted the WGC.

Mainstream Media Reports On SGE Physical Delivery

Although I can’t track all media on Shanghai Gold Exchange coverage – maybe they report more on it than I know – but as far as I know the big guys wrote about SGE physical delivery twice now. 

Bloomberg, 15 July 2013:

The Shanghai Gold Exchange supplied 1,098 metric tons in the six months through June, compared with 1,139 tons for the whole of last year, according to data from the bourse today. 

Reuters on 18 October 2013:

Physical deliveries from the Shanghai Gold Exchange totaled 1,709.056 tonnes as of Friday, data on the exchange’s website showed. 

What is important to understand is that the majority of these deliveries are supplied by imports from the west, and they give us very detailed information of Chinese gold demand. The gold exodus from west to east is accompanied by the power shift from the US to China, and underlines the end of the US dollar hegemony. 

Slowly this information is reaching the masses. Slowly, but surely, it will have an enormous impact on power relations between nations. 

In Gold We Trust