Tag Archives: SGE. shanghai gold exchange

The Official Chinese Gold Trade Rules By The PBOC

Because inaccurate information regarding the Chinese gold market keeps circulating in the international gold community BullionStar has decided to translate the Measures for the Import and Export of Gold and Gold Products drafted in March 2015 by the People’s Bank Of China (PBOC). The translation, which can be read below, will serve as a foundation to further expand on CCFDs and investigate the discrepancy between SGE withdrawals and Chinese consumer gold demand. In a forthcoming post I will expand in detail on the Measures for the Import and Export of Gold and Gold Products combined with additional Chinese trade laws, to elucidate how these rules relate to the physical gold flows involved in round tripping. A second succeeding post will be dedicated to the physical gold flows inside the Chinese domestic gold market – through the SGE – and how these relate to gold leasing.

You can download the original Chinese Measures for the Import and Export of Gold and Gold Products from the 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.

Annexes:

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:

一是部分外汇资产由央行转向境内银行、企业等机构及个人持有,如今年前8个月境内银行各项外汇存款余额增加569亿美元,其中8月份增加270亿美元。

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.

Guest Post: Thoughts Behind PBOC Gold Purchase Policy

Written by one of my sources in the mainland, LK:

In the early parts of 2009 without being anticipated, China came forward and announced that its official gold reserve had leaped from 600 tons to 1054 tons. They haven’t announced any changes since then. This lack of communication is usually said due to the wish not to disturb the market (so they can buy gold more cheaply), but I found an article by Chinese gold analyst and columnist Xiao Lei last month suggesting much more thoughts are given by the Chinese authorities to this strategy. We have not seen this view being discussed in the English speaking world.

Xiao Lei
Xiao Lei

A few more words about 2009

That the PBOC should be, and has been, buying gold as a strategic reserve asset is no secret. Officially, the 454 tons increase in 2009 was done over the years since 2003, but Xiao Lei believes that it might have been amassed quickly from 2008 Q4 through to 2009 Q1 during the markets sell off (when gold fell from $1000 to $700 an ounce).

The 2009 announcement was interesting. In Xiao Lei’s words:

This high-profile announcement served the purpose of demonstrating China and the world that the PBOC has the capability to both stabilize and protect its financial markets (that depends on trust). It has indeed been increasing its gold reserve steadily, thus accumulating that one asset which the financial systems can ultimately depend on should all else fail.

The action not only showed a good quick return (at $900, even before the full price recovery), but also won much accolade and public encouragement within the country for the central bank to continue its gold-buying program. And for those who took note this was an endorsement, all said and done without disturbing the price.

This is the type of cues and support we should be watching for from China!

2009 to 2011

This bull phase saw the gold price double. Xiao Lei thinks that during this period, the PBOC has gone to the market at least 3-5 times. Other developing nations were also buying and declaring their increases, all in all leading to higher acquisition prices. If China were to announce a higher holding level now at about $1250, Xiao says that the central bank would face some pressure from public commentators it would rather do without.

During this time, different members of the PBOC senior management have repeatedly mentioned that gold purchases should only be done at opportune times without disturbing the market. YI Gang, the Director of the State Administration of Foreign Exchange and Deputy Governor of the PBOC, even said that China is a big gold country already and if the PBOC buys too much, it would lead to higher prices for China’s gold-consuming citizens, whether for wedding dowry or new year tradition, and this would not be good. All these suggest that the PBOC has now become mindful of its shadow in the market unlike before. It also paints a central bank that is sensitive to public opinions – something we are not used to seeing anywhere.

 

2013 The Stars Lined Up

The bear market from 2011 is almost a god send to the mandarins tasked with amassing the gold hoard. The market came to them without the aforementioned shackles:

1. Calls for foreign exchange reserve diversification were gaining momentum

This referred to the internal opinion within the country. Holding on to US Treasuries came under increasing pressure in media discussions, sometimes even turning accusatory. With the official gold reserve percentage so low, it is hard not to do anything but.

2. Shanghai Free Trade Zone (FTZ) received approval in 2013. RMB internationalization would be much more rapidly achieved with gold trading.

Gold is an international standardised commodity with plenty of liquidity. With gold, China does not have to open up its internal securities and debt markets for trading (which are not ready), and still has plenty RMB to use as unit of account and currency for trade. There is already a 2000 tons vault in the FTZ open for business (and the USD-denominated gold board has NOT received approval).

3. Liquidity and lower cost of gold purchases

As gold is a long term strategic asset, the price of gold is not an absolute concern on the books. As long as the acquisition does not cause a serious price reaction, the acquisition is a success. This is how it is viewed.

4. Cover from the “Dama” Aunties!

Because of media scenes of the wet market aunties flocking to and queueing up at the gold stores buying up everything, attention was well diverted away from the true needs of the PBOC to buy gold. Xiao actually wrote that PBOC’s buying did not raise concerns with the international monetary bodies and the markets just took the buying as regular consumer behavior, barely noticing the official sector, with the exception of a few specialized analysts (that’s you and us!). Moreover, there is no way of telling how much of the gold supplied to China will be ending up at the PBOC.

5. Trend of the time in history

Germany is being given the cold shoulder. The big direction is certainly to get your own gold and back on your own ground. So buying in size is in fact along the path of least resistance, the trendy thing to do.

Conclusion

As few realize that gold is a strategic asset in national security, few must realize that the announcement of gold reserves of a major country is also an important strategic decision that will only come from the highest of ranks. The deep implications this has on prices, perceptions and what it may provoke from the other players makes this an important card that will only be used casually by incompetent fools.

Through this article, we have learnt something about China’s internal interactions on this matter and what issues the PBOC is having to find itself sensitive to. The author Xiao Lei further remarked that not only will the timing and situation of the next announcement be carefully chosen, the actual level that will be announced will be decided with reasons too – meaning that the full holding will unlikely to be all plainly divulged.

2013 was in many ways a total bonanza, and one would be very naive to think that the PBOC would pass up on this golden window given their good understanding of the subject as seen in various speeches and writing within the nation!

LK

The Need For China To Buy Gold

The other day Zero Hedge posted an image from a quarterly financial report from the Chinese central bank, the PBOC. When I first looked at it I thought for a minute the PBOC had announced a raise in their official gold holdings. Then I woke up and realized their gold holdings are disclosed in the second row from below, still stuck at 33.89 million ounces. I asked my friend in the mainland to translate the headers to get a better view on this summary. He was so kind to do so.

China Gold

Translated:

China Gold translated

We can see Chinese FX reserves expressed in US dollars (which is still the most commonly used reserve currency and unit of account worldwide) having a total value of $3,821,315,000,000 (or $3.8 trillion) at the end of December. At least 34 % of these assets are denominated in US dollars in the form of US treasuries ($1.3 trillion). Only 1 % is held in physical gold according to the PBOC; 33.89 million ounces (1054 tons) was worth  $41,5 billion in December. Let’s compare these numbers with the a few other countries. From The World Gold Council:

World official gold holdings, January 2014

The Need For China To Buy Gold

China is in the top ten in terms of gold holdings, but only holds a fraction of gold relative to its total FX reserves.

The bulk of China’s FX reserves are extremely vulnerable for a devaluation of the US dollar. At the same time a devaluation of the US dollar is imminent, as Yu Yongding, a prominent Chinese economist and former member of the monetary policy committee of the People’s Bank of China, has expressed in numerous presentations. This is why China has a strong incentive to hedge against the USD by increasing their official gold holdings. From Yu Yongding at the LBMA conference 2012:

..Before taking over the Presidency of the Fed, Bernanke was very open in talking about the possibility of using inflation to solve the debt problem. He gained the very apt nickname ‘Helicopter Ben’, and I think he will rule out this option, but of course he will not say so openly.

..To push down the value of the dollar is another very important objective of QE, even though Bernanke refused to admit that this is the policy, I think Greenspan is more honest, because he is no longer the governor.

Essentially, the policy of QE is to shift the debt burden away from borrowers at the expense of creditors and I think this is basically the situation that China is facing.

Yu Yongding on QE

A big problem for China has been buying large quantities of physical gold without increasing the price. For this reason China’s strategy has always been to be as secretive as possible about its gold purchases. They don’t disclose their gold import numbers, nor any interim changes in official gold holdings. They hide their dire hunger for the yellow metal to simply bargain a better price. But sometimes their craving to buy gold (without affecting the market) slips through the media: 

Yu Yonding:

Yu Yongding on gold QE RMB

Li Yining:

China should increase its gold reserves appropriately, and China must take every chance to buy, especially when gold prices fall.

 

Want China Times:

China should now rapidly increase its gold reserves, without pushing up prices of the precious metal excessively.

 

Sun Zhaoxue:

It’s especially true that as global gold prices make new highs, increasing gold reserves also become more difficult.

So China’s main objective is to buy as much gold for as little dollars. The main objective of the US is to devalue the dollar.

A Summary Of Potentially Coherent Facts

  • The US debt problem has created the necessity to devalue the dollar in order to shrink their debt (and boost export).
  • China holds at least $1.3 trillion in FX exchange which will be wiped out by a US dollar devaluation.
  • The US and China have a strong trade relationship; Both benefit from China exporting cheap goods to the US.
  • The US and China share a mutual interest in holding the value of the dollar in check for trading.

Can it be these two mighty countries agreed in early 2013 to support the value of the dollar for the time being, while heavily suppressing the price of gold in the paper markets to allow China to accumulate as much of the yellow metal as needed? This would surely provide the best outcome for both after what inevitably will happen: a devaluation of the US dollar and a revaluation of gold.

Chinese Gold Rush Heating Up

In the trading week from January 20 – 24 physical gold withdrawn from the SGE vaults accounted for 57 tons, this is the third week in a row SGE withdrawals have been more than weekly global mine production. In the first 24 days of 2014 withdrawals from the SGE accounted for 216 tons. With one trading week left this month it’s very likely January 2014 will break the all time record of monthly withdrawals, surpassing the 236 tons from April 2013. Is this the height of the Chinese gold rush?

SGE withdrawals 2014 week 4

SGE vs COMEX ™ Jan YTD 2014  

Demand for gold has been strong due to the celebration of the Chinese lunar year, the year of the horse, starting January 31. Across the nation people buy golden gifts for each other, especially by these low prices. It’s quite clear now that the Chinese people will only buy more  physical gold as the price remains low, or will further drop. They are not scared of a loss in value, as it has been in their culture for thousands of years to save in gold as a core asset. The young people, this is taught by the elder. After many years of economic suppression they regained their freedom to do so, being spurred by newly acquired wealth.

Golden Chinese horse

Bloomberg reported on a shopping spree in retail:

“Older people believe gold brings good fortune and keeps its value,” said Jiang, who left in search of another store because the small horse charms she wanted for her nieces and nephews were sold out. “Gold gifts for children teach them about investment from a young age.”

“Lower gold prices give an extra boost to demand,” said Yang Chunyan, an analyst at Orient Securities Co. in Shanghai. “Sales of gold gifts typically accelerate in the two weeks leading up to the lunar new year and have really taken off.”

Meanwhile, in some parts of Asia there is a scramble for safe deposit boxes at banks to store physical gold. According to a source in the mainland, January 7:

HSBC, Bank of China. Dah Sing Bank, Bank of East Asia, Shanghai Commercial Bank, ANZ, Citibank, Hang Seng Bank, NONE have available Safe Deposit boxes – all occupied and there is a waiting list.

Soon after he travelled to Singapore, on January  28 he wrote me:

Same problem with Safe Deposit boxes in Singapore. I opened an account with Standard Chartered Priority Banking today, for boxes they have an 18 month waiting list. I also tried DBS, OCBC, HSBC, Maybank, ANZ and Citibank, no safe deposit boxes available.

Overview Shanghai Gold Exchange data 2014 week 4

– 57 metric tonnes withdrawn in week 4  (20-01-2014/24-01-2014)
– w/w  – 4.67 %, y/y + 39 %
– 216 metric tonnes withdrawn year to date

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

This is a screen dump from the Chinese SGE trade report; the second number from the left (本周交割量) is weekly gold withdrawn from the vault, the second number from the right (累计交割量) is the total YTD.

SGE withdrawals week 4 2014

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

SGE gold premiums

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

Sge premiums week 4 2014

Week 3, 2014 Withdrawals From SGE Vaults 60 Tons, YTD 159 Tons

Again an astounding trading week on the SGE; from January 13 – 17, 2014 physical withdrawals from the SGE vaults accounted for 60 tons of gold, year to date 159 tons. Although withdrawals are down 25 % from the previous week, the amount is still well above weekly global mine production.

This strong demand could be related to the Chinese Lunar year, which is celebrated on January 31, 2014. SGE withdrawals in the first three weeks were up 60 % compared to the same period in 2013.

A friend of mine who is traveling through Asia at the moment sent me a text message yesterday, it stated:

On three separate occasions I met with Chinese men who told me with a big smile China is buying A LOT of physical gold with printed dollars, they don’t understand why the rest of the world is just watching this happening. These people are positive the price of gold is going to rise substantially.

Overview SGE data 2014 week 3

– 60 metric tonnes withdrawn in week 3, 13-01-2014/17-01-2014
– w/w  – 25 %, y/y + 98 %
– 159 metric tonnes withdrawn year to date

Sources: SGE, USGS

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

Shanghai Gold Exchange withdrawals 2014 week 3

This is a screen dump from Chinese SGE trade report; the second number from the left (本周交割量) is weekly gold withdrawn from the vault, the second number from the right (累计交割量) is the total YTD.

Shanghai Gold Exchange gold withdrawals week 3 2014

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

Shanghai Gold Exchnage gold premiums

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

Shanghai Gold Exchange premiums week 2 & 3 2014

 

SGE foreign exchange gold system

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