Tag Archives: SGE withdrawals

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.

shanghai-gold-exchange-sge-withdrawals-september-2016
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.)

hong-kong-china-gold-trade-yearly-september-2016
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.
hong-kong-china-gold-trade-monthly-september-2016
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.

uk-net-gold-flow-gld-change-vs-gold-price-september-2016
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.

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Exhibit 5. Gold export Russia to China.

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

chinese-monthly-gold-supply-demand-data-september-2016
Exhibit 6. Chinese monthly gold supply and demand data.
chinese-gold-supply-demand-data-q1-q3-2013-2014-2015-2016
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”.

shanghai-gold-exchange-sge-gold-premium-2009-novemner-2016
Exhibit 8. SGE end of day prices and premiums.
shanghai-gold-exchange-sge-gold-premium-2009-november-2016-ma
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).

sgepremiums-november-2016
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 Great Physical Gold Supply & Demand Illusion

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

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

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

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

Supply & Demand Metrics By The Firms

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

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

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

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

On the demand side is include:

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

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

Furthermore GFMS includes:

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

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

screen-shot-2016-10-02-at-10-22-17-pm
Exhibit 1. Courtesy GFMS. Global gold S&D balance as disclosed in the Gold Survey 2016.

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

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

The Firms Exclude Majority Gold Supply & Demand

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

Provided are two exemplifications of institutional S&D:

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

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

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

global-gold-supply-demand-2013-including-conservative-institutional-supply-demand-1
Exhibit 2. Global gold S&D 2013 by GFMS, including conservative estimate institutional S&D.

GFMS Covers The Tracks With Help From The LBMA

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

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

uk-gold-trade-vs-sge-withdrawals
Exhibit 3. Correlation between UK net gold export and SGE withdrawals.

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

chinese-domestic-gold-market-sd-2015
Exhibit 4. Chinese wholesale demand (SGE withdrawals), versus GFMS consumer demand versus apparent supply.

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

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

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

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

global-gold-demand-2013-by-gfms-including-apparant-institutional-demand-1-png
Exhibit 5. Global gold demand 2013 by GFMS, including apparent institutional demand.

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

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

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

Here’s exhibit 2 from another angle.

global-gold-supply-demand-2013-by-gfms-including-apparent-institutional-supply-demand-vs-total-lbma-refining
Exhibit 6. Global gold S&D by GFMS, including apparent institutional S&D, versus total refined gold production 2013.

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

1-6601-gold-tonnes-1
Exhibit 7. Courtesy LBMA. Screenshot from A guide to The London Bullion Market Association captured by Ronan Manly in May 2015.

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

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

2-4600-gold-tonnes-2
Exhibit 8. Courtesy LBMA. Altered document on refining statistics by the LBMA August 2015.

In the altered version it says:

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

A few important notes:

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

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

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

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

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

Gold Is More A Currency Than A Commodity

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

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

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

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

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

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

  • Retail bar & coin
  • ETF demand

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

  • Retail bar & coin
  • ETF demand
  • Institutional demand

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

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

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

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

global-investment-gold-demand-2015-1
Exhibit 11. Global Gold Investment Demand 2015.

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

tip-of-the-iceberg
The global gold market. H/t Dan Popescu.

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

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

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

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

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

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

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

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

And on page 14:

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

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

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

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

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

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

screen-shot-2016-10-17-at-9-14-53-pm
Exhibit 14. Courtesy GFMS.

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

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

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

Conclusion

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Appendix

Simplified overview gold flows 2015:

global-physical-gold-flows-gfms

SGE Gold Trading Volume 2015 Up 84 % Y/Y Due To International Board

In two parts I will present an overview of the Chinese gold market for calendar year 2015. In this part we’ll focus on Shanghai Gold Exchange trading volumes. In the next post we’ll focus on physical supply and demand flows in Chinese gold market in 2015.

First, let us quickly assess the core volume data of the largest precious metals exchanges in China and the US. Physical and derivative gold trading at the Shanghai Gold Exchange (SGE) in 2015 reached 17,033 tonnes, up by 84 % from 9,243 tonnes in 2014. Gold futures trading at the Shanghai Futures Exchange (SHFE) in 2015 accounted for 25,421 tonnes, up 7 % from 23,750 tonnes in 2014. Consequently, total wholesale trading volume in China (SGE + SHFE) was 42,454 in 2015, up 29 % year on year. In New York at the COMEX total gold futures volume reached 128,844 tonnes for the year 2015, up 3 % from a year earlier. COMEX trading volume was three times as large as the total volume in China.

COMEX vs SGE & SHFE gold volume 2015 pie chart

It’s unknown how much gold is traded in the Over-The-Counter London Bullion Market. However, a survey conducted by the LBMA in 2011 pointed out approximately 680,783 tonnes of gold per year change hands through the London based market.

All tonnages mentioned in this post are counted single-sided.

The Shanghai Gold Exchange

There are a few more interesting data points to be found in SGE trading for 2015 when examining the developments of the specific contracts.

At the SGE two types of gold products (/contracts) can be traded: physical products and deferred products. The physical contracts traded on the Main Board (SGE / domestic market) are:

  • Au50g (50 gram gold bar, 9999 fine)
  • Au100g (100 gram gold bar, 9999 fine)
  • Au99.99 (1 Kg gold ingot, 9999 fine)
  • Au99.95 (3 Kg gold ingot, 9995 fine)
  • Au99.5 (12.5 Kg gold ingot, 995 fine)

The physical contracts traded on the International Board (SGEI / international market) are:

  • iAu100g (100 gram gold bar, 9999 fine)
  • iAu99.99 (1 Kg gold ingot, 9999 fine)
  • iAu99.5 (12.5 Kg gold ingot, 995 fine)

The contracts above cannot be traded on margin and are settled (/delivered inside SGE(I) designated vaults) immediately (T+0), therefor they embody pure physical trading.

The deferred contracts (only traded on the Main Board) are:

  • Au(T+D) (1 Kg per lot, delivery in 3 Kg or 1 Kg ingots)
  • Au(T+N1) (100 gram per lot, delivery in 1 Kg ingots)
  • Au(T+N2) (100 gram per lot, delivery in 1 Kg ingots)
  • mAu(T+D) (100 gram per lot, delivery in 1 Kg ingots)

Because the deferred contracts are traded on margin and there is no fixed delivery date, these derivative products embody paper trading.

All SGE contracts can be traded competitively over the Exchange, but the physical contracts can also be negotiated bilaterally in the Over-The-Counter (OTC) market and then settled through the SGE system. The SGE publishes the volume of these OTC trades.

The most traded contract on the Exchange in 2015 was the deferred product Au(T+D). In total Au(T+D) volume accounted for 5,648 tonnes, up 30 % from the previous year. The second most traded contract was the physical product Au99.99, of which 3,465 tonnes changed hands, up 65 % from 2014 - although, if we include OTC trading total Au99.99 volume for 2015 reached 6,998 tonnes, which would make it the number one contract.

Shanghai Gold Exchange Trading Volume 2015
The contracts Au99.5 and iA99.5 are not included in the chart, as the products have not been traded. This underlines the PBOC, that would prefer to buy 12.5 Kg bars, is not buying gold through the SGE.

Shanghai Gold Exchange Yearly Trading Volume 2002 - 2015

Physical trading (including OTC activity) at the SGE in 2015 accounted for 9,745 tonnes (57%), versus 7,288 tonnes in paper trading (43 %).

The growth in total gold trading at the SGE in 2015 was the strongest since the financial crisis erupted in 2008. According to my analysis one reason for this has been the opening of the Shanghai International Gold Exchange (SGEI) in September 2014.

The SGE system services gold trading for the domestic Chinese gold market. This gold traded over the SGE system is prohibited from being exported. The SGEI is a subsidiary of the SGE located in the Shanghai Free Trade Zone, where international members of the Exchange can import, trade and export gold. In terms of physical gold flows the SGE and SGEI are separated venues. For more information please read my previous post, “Workings Of The Shanghai International Gold Exchange”.

On the surface it looks as if the SGEI has been a failure. The most traded contract at the International Board is iAu99.99. At the start of 2015 iAu99.99 trading was weak and after a short peak in April, volume came down to practically nil throughout the middle and the end of the year. Hence, most analysts stated the SGEI was dead. There are two important points that undermine this statement.

The first point is that iAu99.99 can be traded in the OTC market. When it appeared that trading of iAu99.99 was dying out at the Exchange, in the OTC market activity continued. There is no constant trading in iAu99.99 in the OTC market, but the volumes are significantly higher than iAu99.99 trading over the Exchange (see the chart below).

iAu99.99 SGEI volume

Tellingly, the iAu99.99 trades in the OTC market are all performed in giant batches of 100 or 1000 Kg. Have a look at the data labels in the chart below. We can see that all weekly OTC iAu99.99 volumes are in sizes one hundred (blue bars) or one thousand (red bars) 1 Kg bars. For example, look at the week that ended 3 July 2015, when 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 to 73,000 Kg’s in total for the week. Though, this coincidence cannot have occurred each and every week. More likely the iAu99.99 traders in the OTC market always buy and sell per 100 or 1000 Kg’s. No other SGE or SGEI contract shows this bulky trading pattern.

Weekly iAu9999 OTC Trading Volume

The second point is that international members of the Exchange are not only allowed to trade the contracts on the International Board, they’re also allowed to trade the domestic contracts, they’re just not allowed to withdraw the metal from domestic vaults. The international members that focus on arbitraging any price differentials between the US and China will prefer the most liquid contracts on the Exchange. So, for this purpose the international members would trade Au99.99 and Au(T+D). Sources at the SGE confirmed to me that indeed international members are trading Main Board contracts.

If we look at the next chart, we can see that since the inception of the SGEI in September 2014 total SGE volume (including domestic, international, physical and deferred contracts) increased significantly. My conclusion is that the gateway of the SGEI has increased liquidity at the Exchange in Shanghai and enhanced the connection between the Chinese and Western gold markets.

Total Weekly SGE Trading Volume

I realize the system of the SGE and SGEI, how trading and physical gold flows are divided, is not easy to understand. The best I can do to clarify this is to present the diagram furnished by the SGE showing how trading in all contracts by all customers is organized (see below). In the next post we’ll examine the physical gold flows going through China and the Shanghai Free Trade Zone.

Screen Shot 2016-03-18 at 5.31.17 pm
Courtesy SGE.

Note, domestic members/customers are allowed to use onshore renminbi to trade all products on the Main Board, but are also allowed to use onshore renminbi to trade all products on the International Board (although load-in and load-out metal from the vaults is prohibited). In turn, international members are allowed to use offshore renminbi to trade all contracts on the International Board, but are also allowed to use offshore renminbi to trade most contracts on the Main Board (although load-in and load-out metal from the vaults is prohibited).

SGE Confirms To Continue Publish Withdraw Data!

I’ve received written confirmation by the Shanghai Gold Exchange (SGE) delivery department that the Chinese Market Data Monthly Reports disclose the volume of physical gold withdrawn from SGE designated vaults. I’m thrilled to resume reporting these numbers and everything related to the Chinese gold market! 

It’s advised to have read The Chinese Gold Market Essentials Guide before you continue.

Because of the structure of the Chinese gold market the volume of physical gold withdrawn from the vaults of the SGE provides us a unique measure of Chinese wholesale gold demand – which in recent years has been more than twice as much as Chinese consumer gold demand reported by the World Gold Council. However, it appeared the SGE ceased publishing SGE withdraw numbers after a press release from 11 January 2016 that stated the bourse “adjusted some terms in the Delivery Reports”. After the announcement SGE withdrawals were not disclosed in the Chinese Market Data Weekly Reports and over the phone I was informed withdraw numbers would not be disclosed any longer by the SGE.

Perhaps I spoke to the wrong people at the SGE or perhaps the SGE has changed its mind. In any case, in the first Chinese Market Data Monthly Report of this year (January) the format was different from the Chinese Market Data Weekly Reports. In the Chinese monthly report it showed a number that looked to be the volume of gold withdrawn from the vaults. Though we couldn’t be too sure as the SGE changed its nomenclature since the press release from 11 January.

Once again I contacted the SGE and finally came in touch with an employee at the delivery department. The person in question told me over the phone that indeed the January monthly report disclosed withdraw data, but because confirmations over the phone can be easily violated, I also asked for written confirmation. Then, a few days later the SGE delivery department confirmed over email that the Market Data Monthly Reports include the volume of gold withdrawn from SGE designated vaults!

So, here we go again. The SGE monthly report from February shows withdrawals from the vaults of the SGE accounted for a modest 107.6 tonnes, down 52 % from January and down 31 % from February 2015.

Shanghai Gold Exchange SGE withdrawals February 2016

Year to date SGE withdrawals have reached 333 tonnes, down 19 % year on year.

Subdued SGE withdrawals – indicating suppressed Chinese physical gold demand – in February is very remarkable as in this month the price of gold (in US dollars) increased by over 10 %.

Screen Shot 2016-03-08 at 1.58.45 pm
Graph conceived with BullionStar charts.

This suggests that the Chinese do not buy physical gold when the price goes up but mainly buy when the price goes down. In addition, because there has been strong buying from Western parties in February, for example GLD inventory in London increased by 15 % over this period, we can conclude the West is the price setter and China up until now has predominantly been a “price taker”. Put differently, China is merely taken advantage of bargain prices.

CdBc0LTWAAAym5-
Courtesy Bloomberg.

The same correlation between the price of gold and Western physical buying behaviour can be observed when we compare the gold price to cross-border gold trade from the UK, where many Western investors store their gold.

UK net gold flow vs gold price

So for this comparison we use UK cross-border gold trade as a proxy for Western physical gold buying. Although this is not exact science, in the chart above we can see whenever the West is buying physical gold (UK net import increases, see 2012) the price goes up and whenever the West is selling physical gold (UK becomes net exporter, see 2013) the price goes down.

Given the fact the price of gold has increased significantly year to date we may expect the UK was not a net exporter in January and February, more likely the UK was a net importer over this time horizon.

Addendum

Because there has been so much confusion about the terms used in the new Chinese Market Data Monthly Reports and the Market Data Weekly Reports I included screenshots of both reports below provided with translations as suggested by the SGE press release from 11 January 2016. In the Market Data Weekly Report for week 7 (22 – 26 February) 2016 we can see the following Delivery Report.

Screen Shot 2016-03-08 at 10.24.27 am

  1. Delivery amount this week, the sum of the trading volumes in physical products and the contract delivery volumes of deferred products for the reported week, counted bilaterally in Kg.
  1. Trading volume this week, the sum of all trading volumes in physical and deferred products for the reported week, counted bilaterally in Kg.
  1. Delivery ratio this week, the proportion of the delivery amount to the total trading volume of both physical and deferred products for the reported week (1 divided by 2).
  1. Cumulative delivery amount, the sum of all weekly delivery amounts from the beginning of the year to the statistical time point, counted bilaterally in Kg.
  1. Cumulative trading volume, the sum of all trading volumes in physical and deferred products from the beginning of the year to the statistical time point, counted bilaterally in Kg.
  1. Cumulative delivery ratio, the proportion of the cumulative delivery amount to the cumulative trading volume of both physical and deferred products from the beginning of the year to the statistical time point (4 divided by 5).

In the Market Data Monthly Report for February 2016 we can see this Delivery Report:

Screen Shot 2016-03-08 at 10.01.56 am

  1. Delivery amount this month, the sum of the trading volumes in physical products and the contract delivery volumes of deferred products for the reported month, counted bilaterally in Kg.
  1. Trading volume this month, the sum of all trading volumes in physical and deferred products for the reported month, counted bilaterally in Kg.
  1. Delivery ratio this month, the proportion of the delivery amount to the total trading volume of both physical and deferred products for the reported month (1 divided by 2).
  1. Cumulative delivery amount, the sum of all monthly delivery amounts from the beginning of the year to the statistical time point, counted bilaterally in Kg.
  1. Cumulative trading volume, the sum of all trading volumes in physical and deferred products from the beginning of the year to the statistical time point, counted bilaterally in Kg.
  1. Cumulative delivery ratio, the proportion of the cumulative delivery amount to the cumulative trading volume of both physical and deferred products from the beginning of the year to the statistical time point (4 divided by 5).
  1. Load-out volume this month, the amount of gold withdrawn from the vaults, counted unilaterally in Kg.
  1. Cumulative load-out volume, the amount of gold withdrawn from the vaults from the beginning of the year to the statistical time point, counted unilaterally in Kg.

Final notes: “delivery” is not the same as “load out volume” or “withdrawals”. “Delivery” refers to the amount of gold that changes ownership inside the vaults, “load out volume” and “withdrawals” both refer to the amount of gold that leaves the vaults.

The load-out volume for silver does not reflect Chinese wholesale silver demand, as the structure of the Chinese silver market is different from the Chinese gold market.

According to my manual cross calculations the “delivery amount” in the weekly report for week 7 does not match “the sum of the trading volumes in physical products and the contract delivery volumes of deferred products for the reported week”. I’ve send out an inquiry to the SGE to verify the data.

UPDATE 10 March 2016: The SGE replied how they calculated “delivery amount”, it was based on the delivery of Au(T+N1) and Au(T+N2) in 100 gram per lot. It appeared I had an SGE sheet with false specifications of Au(T+N1) and Au(T+N2) – 1 Kg per lot. My manual cross calculations and the SGE numbers match now. 

SGE Continues To Publish Withdrawals Figures?

It seems the Shanghai Gold Exchange (SGE) is continuing to publish the amount of gold withdrawn from the vaults on a monthly basis. For the month of January “SGE withdrawals” accounted for 225 tonnes, down 1 % from December. After the first weekly SGE reports in 2016 did not disclose SGE withdrawal data and phone calls to the bourse in Shanghai answered these numbers would not be published anymore we can wonder why the Chinese have changed their stance.

It’s advised to have read The Chinese Gold Market Essentials Guide before you continue.

The SGE releases reports with trading data in several intervals in either English or Chinese. Until the last week of 2015 SGE withdrawals, a measure for Chinese wholesale gold demand, were published in the Chinese weekly and monthly reports. Then, an announcement published on the English website of the SGE on 11 January 2016 stated the “the Exchange has adjusted some terms in the Delivery Reports”.

This is where the confusion started because the SGE announced in English to adjust its nomenclature in the Chinese “Market Data Weekly Reports and Market Data Monthly Reports” – I cannot find the same announcement in Chinese. Their intensions were positive though, as there often has been disorientation regarding terms the SGE used inconsistently in the past. In example, the term “delivery”.

The announcement stated the SGE would adjust “distributing market data … effective as of Jan. 1st 2016 and are clarified as follows”:

1.The term “delivery amount” refers to the sum of the trading volume of physical products and the contract delivery volume of deferred products. The term “delivery ratio” refers to the proportion of delivery amount to the total trading volume of both physical and deferred contracts.

2.The term “load-out volume” refers to the total volume of standard physical bullions withdrawn from SGE-certified vaults by members and customers.

3.The terms “accumulative delivery amount”, “accumulative trading volume” and “accumulative load-out volume” respectively refer to the sum of delivery amount, trading volume and load-out volume from the beginning of the year to the statistical time point. The term “accumulative delivery ratio” refers to the proportion of accumulative delivery amount to the accumulative trading volume.

4.Delivery-related data of silver products are added into the reports.

What I found early January was that the first Market Data Weekly Report did not honor the new guidelines from the announcement. In the first weekly report the delivery amount did not match its description, and there was no “load-out volume” (/withdraw volume) to be found. After several phone calls to the SGE to ask if the “load-out volume” data would ever be published we were told no. In the second weekly report the delivery amount did match its description, but there was still no “load-out volume” to be found.

However, this morning Nick Laird from Sharelynx pointed out to me the first Market Data Monthly Report has been released and this report has a different format than the Market Data Weekly Reports. In the Monthly report we can read at the very bottom:

本月出库量  225,081.30

累计出库量  225,081.30

I will spare you my analysis of Chinese characters, but according to a friend in Singapore and Google Translate the top line means “current month volume out of the warehouse” and the bottom line means “cumulative volume out of the warehouse”. I did not reach out to a professional translator, however, I called the SGE again and finally ended up talking to someone at the “delivery department”. This person confirmed to me (over the phone in English) that indeed the “load-out volume” was disclosed at the bottom of the monthly report.

I like to be very cautious in stating the SGE will henceforth publish withdrawal data in the monthly reports. Having seen changes in the first two weekly reports and inconsistent formats in the weekly and monthly reports makes me wonder if we can rest assured the SGE will publish the “load-out volume” in the future.

Hopefully, the SGE decides to continue publishing withdrawal data and the writers of the new weekly and monthly reports were just finding their way to adjust to the new guidelines. Why they would publish withdrawal data only in the monthly reports and not in the weekly reports beats me. Let us be patient and see what the coming reports have to offer. I’ve also send an email to the person I spoke to at the SGE delivery department to ask for written confirmation regarding the “load-out volume” disclosed in the monthly report, which perhaps will be replied with an elucidating statement.

SGE withdrawals at 225 tonnes in January 2016 are 12 % down from January 2015 and 1 % down from the previous month.

Shanghai Gold Exchange SGE withdrawals 2009 - 2016 January

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.

CGA

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.

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

How Much Gold Is China Importing And Does It Still Correlates to SGE Withdrawals?

We have some catching up to do in terms of discussing Chinese gold import in H1 2015 and how this relates to withdrawals from Shanghai Gold Exchange (SGE) vaults. For this post it’s advised you’ve read The Mechanics Of The Chinese Domestic Gold Market to have a basic understanding of the physical gold supply and demand flows through the Shanghai Gold Exchange within the Chinese domestic gold market.

SGE withdrawals in 2015 are stronger than ever. Although, SGE withdrawals are (seemingly) less correlated to Chinese gold import this year, nonetheless Chinese gold import in the first six months of 2015 was higher relative to the same periods in the years before. 

Chinese Gold Market Recap

I started reporting on SGE withdrawals in 2013 because I noticed these numbers exactly equaled Chinese gold demand as disclosed in the China Gold Association (CGA) Yearbooks 2007 until 2011. In addition, the structure of the Chinese gold market appeared to be designed to direct all Chinese gold supply through the SGE. Therefor, what comes out of the SGE (withdrawals) must equal total supply, which must equal total (wholesale) demand.

SGE withdrawals equal domestic mine output plus recycled gold supply plus import. Therefor, by using withdrawal data from the SGE, Chinese domestic mine output figures from the CGA and estimate the amount of recycled gold supply, we could calculate import.

Mine + recycled gold + import = SGE withdrawals

And:

Import = SGE withdrawalsminerecycled gold

SGE withdrawals proved to be a very effective tool to estimate import figures and measure Chinese wholesale gold demand. That is, until the Chinese gold market changed. In 2014 the Shanghai International Gold Exchange (SGEI) opened its doors, potentially inflating SGE withdrawals from the Shanghai Free Trade Zone without this gold ending up in the Chinese domestic gold market, and recycled gold supply increased significantly relative to 2013. From late 2014 I started writing SGE withdrawals were more difficult to analyze because of these changes in the Chinese gold market. After a period of abstinence from my side in reporting on SGE withdrawals, in this article we will resume to analyze the physical supply and demand flows in the Chinese domestic gold market.

The challenge is that China does not disclose gold import data in its regular customs reports. To find out how much China is importing we must use the foreign trade data statistics from all countries that export to China. A few years ago the bulk of Chinese gold import came in through Hong Kong and so gold export data from the Hong Kong Census and Statistics Department roughly elucidated how much China was towing in. Currently, China is importing gold directly from many other countries. To grasp how much gold China is importing I’ve started to chase the foreign trade statistics from all the major gold hubs (UK, US, Switzerland, Singapore, Hong Kong, Turkey, Dubai) and the big miners (Russia, South Africa, Ghana, Australia, Brazil, Canada, Mexico, Peru, Uzbekistan). Unfortunately this study is taking far longer than I was hoping for – in some countries the customs representatives, when finally contacted, are very sluggish in replying to my emails. I will share the data I have collected so far.

How Much Gold Has China Imported In H1 2015?

On 4 September I published an introduction to this research. The article was about the gold exports from the UK directly to China, which has been 112.5 tonnes in the first half of 2015.

H1 2015 UK net export to China: 122.5 tonnes. 

UK - CN Gold Trade 2012 - June 2015

According to Swiss customs they shipped 137.5 tonnes of gold to China in the first six months of this year.

H1 2015 Swiss net export to China: 137.5 tonnes.

Switzerland China gold trade H1 2015

Direct gold exports from the US to China is very small, according to official data, it was about 1.6 tonnes in H1.

H1 2015 US net export to China: 1.6 tonnes.

US - China gold trade

According to the local Census and Statistics Department Hong Kong net exported 370.3 tonnes of gold to China in H1.

H1 2015 Hong Kong net export to China: 370.3 tonnes.

Hong Kong - CN monthly gold trade January 2009 - June 2015

Australia’s gold export to China is tricky to analyze. Strangely, Australia reports gold shipments as “being exported to China” even though it’s transferred via Hong Kong. Have a look at the chart below.

Australia COMTRADE vs HK census june 2015

Australia also reports gold shipments as “being exported to Hong Kong”, but this is close to zero. Now, if we compare the “Australia gold export to China” from COMTRADE (red bars in the chart above) with “Hong Kong gold import from Australia” (blue bars in the chart above), these have been nearly equal until January 2015. Clearly, what Australia reported as “gold export to China” was first shipped to Hong Kong from where it was re-exported to China. Hong Kong has reported these imports from Australia also as an export to China, as we know that the gold Australia exported to Hong Kong was destined for China mainland. If, in order to compute China’s total gold import, we would add “Australia gold export to China” to “Hong Kong gold export to China”, this would result in double counting equal the volume of “Australia gold export to China”.

In the chart above we can see that since January 2015 “Australia gold export to China” starts transcending “Hong Kong gold import from Australia”. The red bars move up from the blue bars. From that point in time Australia started shipping bullion directly to the mainland, in addition to the Hong Kong route. By subtracting “Hong Kong gold import from Australia” from “Australia gold export to China”, what remains is what Australia directly exported to China, which is the figure we’re looking for.

H1 2015 “Hong Kong gold import from Australia”           = 41 tonnes

H1 2015 “Australia’s gold export to China”                      = 76 tonnes

76 – 41 = 35 tonnes

H1 2015 Australia net export to China: 35 tonnes.

The remaining countries that transparently report gold trade with the mainland are Japan, having net exported 2.9 tonnes to China in H1 2015, and Canada, that exported 2.5 tonnes.

Let’s add up all proven net gold exports to China:

122.5 (UK) +

137.5 (Switzerland) +

1.6 (US) +

370.3 (Hong Kong) +

35 (Australia) +

2.5 (Canada) +

2.9 (Japan)

= 672.3 tonnes

H1 2015 proven Chinese net gold import: 672.3 tonnes.

The Federal Customs Service of Russia states it has exported 93 kilograms of gold to China in 2012 and 2013, nothing more since then. Although I suspect this is not true, I can’t prove it yet. 

Screen Shot 2015-10-09 at 11.30.09 pm

Gold export numbers from South Africa, Singapore, Dubai, Ghana, Brazil, Mexico, Peru and Uzbekistan I have not yet obtained – or in some cases I have my reasons to doubt the accuracy of the data.

Connecting The Dots Between Chinese Gold Import, Chinese Domestic Gold Mining Output And SGE Withdrawals

Aside from the discussion on the metrics of Chinese gold demand, I will focus on the size of wholesale demand as measured by SGE withdrawals and how this relates to Chinese new gold supply. Out of interest how much physical gold China is accumulating, I like to track new gold supply consisting of net gold import plus domestic mining output – the gold added to China’s total reserves.

As the China Gold Association (CGA) has not yet updated Chinese domestic gold mining output up until June 2015, I have used an estimate of 239 tonnes for Chinese mining in H1 2015 (calculated as: half of China’s mining output 2014 increased by 5.6 %, which is by how much Chinese mining expanded in 2014 relative to 2013).

All together, in H1 2015 China has net imported 672.3 tonnes of gold and mined 239 tonnes, totaling 911.3 tonnes.

Let’s have a look at a chart to compare H1 2015 physical gold flows to previous years.

SGE withdrawlas vs gold import China and WGC demand
Exhibit 1. The center column represents estimated Chinese new gold supply (domestic mine output + import). For the sake of simplicity I have left out trade statistics from the US, Japan and Canada – a few tonnes of trade would distort our view of the bigger picture.

This year SGE withdrawals have been stronger than ever, having reached an astonishing 1,178 tonnes in H1 2015. However, the first thing we notice when eyeballing the chart above is the gap between estimated Chinese new gold supply (the center column in the chart) and SGE withdrawals. It is highly probable that recycled gold, whether that is gold-for-cash or gold-for-gold, supplying the SGE has increased this year (depending on how much China has imported from ie Singapore, South Africa and Russia). The gap previously cited accounts for 267 tonnes; this must have been supplied either by unknown imports or recycled gold. The ratio between both is impossible to reveal at this stage.

In the chart above we can see the gap was smaller in H1 2013 than in H1 2015. Though the gap can be deceiving. We know for a fact China has not only imported gold from Hong Kong and Switzerland in 2013. Net export from Hong Kong to China in 2013 plus net export from Switzerland to China in 2013, adds up to 1,403 tonnes. Whilst, the CGA has reported Chinese total net gold import in 2013 accounted for 1,506.5 tonnes. Therefor, China must have imported 103.5 tonnes of gold in 2013 from countries whose trade statistics I haven’t included in this post. The usual suspects are Singapore, South Africa and Russia, perhaps also Ghana. We can safely conclude that because China has imported gold from the usual suspects in 2013, it can also have imported gold from these countries in 2015.

CGA Gold Yearbook 2013 supply
CGA Gold Yearbook 2013: framed in black is total supply 2013 in tonnes. Purple = domestic and overseas mine output, green = recycled gold, blue = bullion import.

Important to note, Chinese new gold supply in H1 2015 (domestic mine output plus import from Hong Kong, Switzerland, the UK and Australia: 911.3 tonnes) was higher than new gold supply in H1 2014 (domestic mine output plus import from Hong Kong, Switzerland and the UK: 795 tonnes) and higher than new gold supply in H1 2013 (domestic mine output plus import from Hong Kong and Switzerland: 861 tonnes).

My conclusion is, although SGE withdrawals are (seemingly) less correlated to Chinese gold import in 2015, caused by more recycled gold supply flowing through the SGE, estimated Chinese gold import in the first six months of 2015 was higher relative to the same periods in the years before. Annualized Chinese gold import 2015 is 1,345 tonnes.

Demand figures from the World Gold Council on China’s gold hunger are still dwarfed by the amounts of physical gold that are very clearly supplied to China mainland.

That’s all I have for now.

WGC Notes 2014 Chinese Gold Demand Could Reach 1,700t

On December 9, 2014,  Albert Cheng, Managing Director Far East of the World Gold Council, was interviewed by the China Gold Network. The interview was published in Chinese only.

The Gold Demand Trends published each quarter by the World Gold Council (WGC), show aggregated Chinese consumer demand Q1 – Q3 2014 was 638.4 tonnes. But, in the interview Cheng notes that the chairman of the Shanghai Gold Exchange (SGE), Xu Luode, has stated the SGE was supplied by 1,100 tonnes of gold import in the first eleven months of 2014 and this number may reach 1,250 tonnes by year end. Supplemented by 450 tonnes of domestic mine production this year “total demand should reach about 1700 tonnes”, said Cheng.

I have been long disputing Chinese gold demand numbers from the WGC, as total supply (Chinese net import, domestic mining and scrap) persistently has been transcending the WGC numbers. The WGC has never been able to elucidate the difference between massive supply and their demand numbers. The aggregated difference from 2007 until present is about 3,000 tonnes.

The total supply can be tracked on a weekly basis by SGE withdrawals, which have proven to be the best proxy. Though the import (and scrap) composition of SGE withdrawals can only be estimated until confirmed by the SGE or China Gold Association.

World Gold Council

And so I was surprised Cheng openly (in Chinese) elaborated on the SGE model and instead of solely talking about how much gold was sold at retail level, also expanded on how much gold is actually added to Chinese (non-government) gold reserves, measuring import and domestic mine production, that are prohibited from being exported from the mainland.

The next quote is translated by LK, gold investor from Hong Kong (who we all should be very thankful for his work!):

The China Gold Network: The recently published Q3 Gold Demand Trends report says that China’s gold demand is down year-on-year. How do you interpret this?

Albert Cheng: This year, the Q3 gold demand figure that we publish is down because last year’s gold demand was a special case. Given that last year compared to 2012 same time was up 40%, there really is nothing strange. However, if we compare this year’s Q3 figure to the average of the last 5 years at this time, we still find positive growth, and still up slightly compared to 2012.

Screen Shot 2014-12-12 at 1.48.22 PM

Using the numbers supplied by Xu Luode, they in fact show that China imported about 1100 tonnes of gold in the first 11 months this year through the SGE, and may reach 1200 to 1300 tonnes by year end. Adding together domestic production, total demand should reach about 1700 tonnes. So, the energy of the China gold market hasn’t diminished; compared to last year, the development is still healthy.

For clarity: the translator is a native Chinese speaker and a financial expert. The translation has been confirmed by a second native Chinese speaker and financial expert, which severely limits the probability of the Chinese text being misinterpreted.

As my regular readers know I often make estimates of Chinese net import using SGE withdrawals as a proxy. Last week I estimated China in the first 11 months of 2014 imported 1,200 tonnes, we now know now I probably overestimated gold import by 9 % (1,200 tonnes vs 1,100 tonnes).

In hindsight it’s always more easy to analyze. I think what happened is that in mid 2014 (March and June) a part of the SGE withdrawals supply composition shifted from import to scrap. If scrap went up, import went down, as:

SGE withdrawals = import + mine + scarp (neglecting stock-carry over)

Shanghai Gold Exchange withdrawals and premiums 2014

In the chart above we can see premiums going negative in March and June while withdrawals staying relatively strong. This means domestic supply (scrap) was increasing relative to import, hence the gold in China became cheaper than in London. The reason the discount isn’t immediately arbitraged is because gold in China is prohibited from being exported.

The dip in Chinese gold import was also reflected in export from Hong Kong to China mainland.

Hong Kong - China gold trade monthly January 2009 - September 2014

Because scrap apparently was more than I calculated in my model, I can now adjust the model. If from January until November import was 1,100 tonnes and mining was 413 tonnes, than scrap had to be 328 tonnes, as withdrawals were at least 1,841 tonnes in the mainland.

Additionally, elevated scrap means quite some Chinese have been selling physical gold that found its way to the SGE. Perhaps some were expecting the price to rise sooner. I don’t think elevated scrap signals leases were unwound; if a lease expires the lessee is most likely to buy gold on the SGE, it would not make sense for him to buy gold in the domestic market to bring to the SGE in order the repay the loan.

SGE withdrawals in week 49 have dropped by a whopping 28 % w/w, to 38 tonnes. Year to date withdrawals stand at 1,905 tonnes.

Screen Shot 2014-12-11 at 9.15.40 PM

However, when corrected by SGEI trading volume withdrawals in week 49 could have been as low as 27 tonnes, which was not expected for the seasonally strong December month. Year to date withdrawals corrected for SGEI volume is 1867 tonnes.

Shanghai Gold Exchange SGE withdrawals 2014 week 49, dips

 

Let’s wait what next week will bring to see if China will reach the 1,700 tonnes.

January Chinese Gold Demand All-Time Record, 247 Tons

Sorry for the delay in my weekly reporting on SGE withdrawals. Due to the Chinese Lunar new year the SGE was closed from 31-01-2014 til 06-02-2014 (dd-mm-yyyy) so I had to wait a bit longer for the publication of the numbers. What they eventually released were the trade numbers from 5 trading days, January 27 – 30, and February 7.

Lets skim through the news first. Bloomberg just reported that Chinese gold usage, according to the China Gold Association, in 2013 was 1176 tons. First of all I don’t understand this new term usage, nor have I ever understood the term consumption regarding gold. If you have some knowledge of gold you know it’s never consumed, gold is immortal and will be recycled till the end of times. Its immortal property is one of the reasons why it’s the most marketable commodity, hence we started using it as money thousands of years ago. The other reasons are it has the right scarcity, its divisible and subsequently small units can be merged/melted into a large unit (a proces which can be repeated to infinity without any loss of material).

Having said that; How can gold demand (I assume that’s what they mean by usage) be 1176 tons, when China mainland net imported 1123 tons just from Hong Kong, domestically mined 428 tons, and additionally net imported gold through other ports? Regular readers of this blog know the number 1176 tons of demand is false, it was in fact 2197 tons as my research has exposed.

Other mainstream news outlets (like the Financial Times and the Telegraph) are slowly starting to scratch their heads about the Chinese gold market. It won’t take years before the Chinese will fail to hide their true insatiable demand for physical gold. Since 2008, after Lehman fell, the China Gold Association (CGA) has changed the way they measure gold demand. In 2007 they reported in the CGA Gold Yearbook:

In 2007 the amount of gold withdrawn from the warehouses of the Shanghai Gold Exchange, total gold demand of that year, was 363.194 tons of gold, an increase of 48 % compared to 2006…

In other words, SGE withdrawals equal total Chinese demand (in 2013 SGE withdrawals accounted for 2197 tons), as I have been writing about for months! Starting in 2008 the CGA switched measuring gold demand from wholesale level (SGE withdrawals) to retail level in order to suppress demand figures. This way they were able to hide investment demand. (for my full analysis read this)

It’s remarkable the CGA publishes these suppressed demand numbers, which are being copied by western media without any second thoughts, while at the same time the CGA has written reports, which are being ignored by western media, that state Chinese demand surpassed 1000 tons (it was 1043 tons to be precise) in 2011. From The China Gold Market Report 2011, page 28:

Deregulation of the gold control to open the gold market to the public in 2002 led to the constant rise in China’s gold demand, which unprecedentedly exceeded 1,000 tons in 2011…

The China Gold Market Reports 2007 – 2011 all state Chinese demand equals SGE withdrawals (due to the structure of the Chinese gold market designed in 2002). Since 2011 the CGA ceased publishing the China Gold Market. Chinese demand was such that it became uncomfortable for the Chinese authorities to lay their cards on the table.

To continue to report on suppressed demand numbers the CGA has recently signed a partnership with CPM group. Together they hope to gain more credibility in spreading incomplete data – for as long as it holds.

CGA CPM group partneship

For the CGA this is all strategics. I wonder if CPM Group knows what CGA president, Sun Zhaoxue, writes about the gold market in the Chinese media. Allow me to quote a few snippets from exclusive translations I published here and here:

…the United States intends to suppress gold to ensure the Dollar’s dominance, the fall in the price of gold was premeditated, and a part of the currency war.

…The hottest topic at the moment is oil and gold. The ground war we are seeing around the world is I think war for oil whereas gold is the currency war.

…The US owes Germany so much gold but instead of repaying immediately, it sets a 2020 deadline to return the gold. From this example and process as well as some typical factors, this is a downright currency war to maintain the US Dollar hegemony by defeating all other currencies.

…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. Going to the source, the rise of the US dollar and British pound, and later the euro currency, from a single country currency to a global or regional currency was supported by their huge gold reserves. 

…In the global financial crisis, countries in the world political and economic game, we once again clearly see that gold reserves have an important function for financial stability and are an ‘anchor’ for national economic security.

…We need to establish a more clear national gold strategy, continue to grow gold reserves and progressively become a ‘gold-reserve’ nation that is commensurate with the country’s economic strength.

 …To fundamentally solve these problems, the state will need to elevate gold to an equal strategic resource as oil and energy.

In addition, because 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.

In short, Sun knows the world is in a currency war and in war time China will keep it cards close to its chest. I hope the SGE doesn’t stop publishing withdrawal numbers, it’s the best benchmark we have at this moment.

Shanghai Gold Exchange Withdrawal Numbers January 2014

Withdrawals from the Shanghai Gold Exchange vaults in January 2014 accounted for 247 tons, which is an increase of 43 % compared to January 2013. It’s also more than monthly global mining production and an all-time record! China mainland mines about 35 tons per month which is required to be sold first through the SGE. The other 212 tons (247 – 35) had to supplied by import or recycled gold. My estimate is that scrap couldn’t have been more than 25 tons, so import in January was a staggering 187 tons. China is still draining the vaults in the west BIG TIME!

SGE vs COMEX ™ Jan 2014

Because the last SGE weekly report covers four days in January and one in February, I multiplied the weekly amount by o.2 and subtracted the outcome from the year to date number to get to the January total. This number may be revised when the SGE publishes the January monthly report, but I don’t expect a significant change.

[Update 14-02-2014, January SGE withdrawals were 246, I was one ton of, still a record.] 

Overview Shanghai Gold Exchange data 2014 week 5 and 6

– 40 metric tons withdrawn in 5 trading days of week 5 and 6   (27-01-2014/07-02-2014)

– w/w  – 29.9 %

– 256 metric tons withdrawn year to date

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

SGE withdrawals 2014 week 5,6

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

SGE withdrawals January 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 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

In Gold We Trust

The Chinese Government’s Gold Policy, From The Horse’s Mouth

Notes from the translator, LK:

“This is a detailed policy memo from the country’s highest government to let the various ministries and department know of the direction, intentions, progress and steps of development of the many facets and components of the gold market that serves both the gold industry and other areas of finance.

So they sure are in it for the long haul and mean it well for everybody. I’d say this is pretty convincing of our possible future landscape!

I consider this one big piece of the jigsaw, as so far as there has been little of what China thinks or is doing, other than buy buy buy.”

Here we go..

  State Council logo

A Communication On How We Should Help Develop The Gold Market.

The Opinions From:

People’s Bank of China (PBOC)

National Development and Reform Commission (NDRC)

Ministry of Industry and Info Technology of the PRC (MITT)

Ministry of Finance (MOF)

State Administration of Taxation of the PRC (SAT)

China Securities Regulatory Commission (CSRC)

To various bodies including and not limited to:

To: PBOC Shanghai HQ, branches, provincial capital city center branches, sub-provincial city center branches, provincial development and reform committees, CSRC, national inland revenue, SGE, SHFE, State owned banks, share-ownership commercial banks etc.

2012-03-07

1. The importance of understanding a healthy development of the gold market

The gold market is an important component in the make up of financial markets. Gold has both financial and commodity attachments. Good efforts to develop the gold market will enable it to play a unique function not found in other financial assets, complementing and helping the other markets in finance, completing our financial system helping in both breadth and depth, raising our market’s competitiveness and readiness to respond to crises, contributing to stability and security of our finances.

Developing our gold-related industries will not only help raise the competitiveness of these industries, but also help other mining and resource industries. Since the reform started, our gold industries have developed steadily along the supply chain which includes exploration, mining, refining, trading, investment, value-added and retail sectors. A well-functioning gold market can help these sectors in financing needs, risk management, cost-lowering, supplying market information to these enterprises, helping them make production and operation plans, thus help restructure and raise the standard of these industries.

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 jewellery, 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.

2. Next-step clarification of the positioning of the gold market development

After replacing the previous collective-buying practice policy, our gold market has developed speedily; the coordinated development of the gold industry supply chain have started to form, with the contribution in the business developments of the Shanghai Gold Exchange and the commercial banks and the Shanghai Futures Exchange. The gold markets should be developed to serve wide-scope gold-related industries, with the goal of raising the competitiveness of our financial markets, letting the gold market play the important part of making our financial markets whole. We need to facilitate and encourage communications and coordination, and establish such mechanism especially between the SGE and SHFE. We also need to be more innovative developing RMB-denominated gold derivative products, increasing the diversity of product types, enabling the market function to perform better with depth, improve regulation and openness at the same time, building a multi-faceted, multi-level market system.

As soon as possible, the SGE needs to clarify and establish plans for the future market development and positioning of itself, improve and strengthen its service offering structure, bring its different policies and practices of different areas up to standard and make sure market regulation practices are well and smoothly in-force. Pay attention and seriously consider the opinion and suggestions of your members, do a good job to really service your members. We need to strengthen and improve areas of trading, gold-cash settlement, assaying and certifying of gold quality, the vaulting and shipment of gold. We need to study in depth the nature of the evolution of the gold-related industry and the gold market, so that the SGE can play its important role in promoting the healthy development of the gold market and related infrastructure building.

The SHFE should make full use of the future market price discovery and its function to manage risks to steadily and advance the healthy development of our gold risk-management market, adding to fundamental policies framework supporting the gold market. With the central aim of letting the market do its proper job, we need to make good and keep good the policies and regulations towards gold futures contracts and related businesses, making the gold futures market deep and with attention to details, thereby raising the level of service towards the broader private sector economic development. We need to keep raising our ability to control risk in the market, including managing and appropriately encouraging our members to look at themselves and do business with fit and proper conduct, effectively pre-empt and dissolve market risks. We also need to look at and make good the structure/composition of gold investors. Support gold enterprises so they can actively participate, using the futures market to protect values across time. Actively guide other financial institutions to use the gold futures market to manage risk.

Commercial banks should look towards the entire supply chain from gold mining to fabricating and value-added processing to final sales, practically innovate new financial products that are effective in helping each area in the chain with financial service. We need to cater to the needs of enterprises and market development at the same time, be innovative in developing business areas of physical gold sales, gold leasing, futures and options on futures too, enrich the product range, so as to satisfy the financing needs and risk-avoiding needs of enterprises. Encourage and guide commercial banks in developing RMB-denominated gold derivatives trading. Guide more financial institutions to make use of the gold market, broaden and deepen our gold market.

3. Strengthening gold market services system infrastructure

Build and strengthen  gold market system infrastructures. The SGE needs to further strengthen its trading infrastructure, be innovative, complete the gold market system. Introduce and enrich different models/modes of trading, introduce market maker system, raise the liquidity of the gold market. Speed up work on disaster-recovery systems, bring back-up systems up-to-speed. Further improve cash capital management systems, secure and protect customer funds.

Bring our gold assaying system up to standard. With respect to our gold industry capabilities and practical development needs of the market, learning from the experience of international gold markets, refine and improve our systems on gold ingot eligibility applications, assaying, appraising and inspection / checking, raise the standard-setting standing and reputation of our system, help move the establishment of our gold market standard assaying system. Consider the resources of our country as a whole, noting special features of the gold industry, do our reasonable best to make sure that the gold bars and ingots vaulted by our industry are up-to-standard.

Make a good vaulting-transportation system. Consider all the factors relating to the gold production and actual consumption of our country, set up a good system of settlement vaults. Collect and consider the business costs of our commercial banks and members, set reasonable (standard) fees for moving gold in and out of vaults, and storage fees. Set up good transport system network, prepare low-cost, high-speed efficient service of transportation to the market.

Perfect our settlement service systems. According to the needs of the market, practically improve the system infrastructure of gold account services, offer more convenient and fast physical gold settlement and gold accounts to the market. Learn from the experience of the international market, investigate and propose multi- and different types of gold account services. Improve the gold market’s capital settlement services.

4. Bring about satisfactory gold market laws, regulations and related policy supporting system

Speed up gold market laws and legal framework building. Help move forward the Ordinance of gold market management/regulation. Formulate plans to manage gold and gold-made products imports and exports. Step up management of financial institutions on gold products, guide and motivate framework for steady development of financial institutions’ gold-related businesses.

Make up gold market related taxation policy ready for implementation. Continue to execute existing set of taxation plans from SGE and SHFE. Research into good taxation policy on investment gold and commercial banks gold business.

Look into broadening supply channels for physical gold for the gold market. With respect to actual market needs and how our gold markets are, increase the number of commercial banks qualified to do import-export business, help the market to become innovative, raise the level of liquidity in the market. Develop the gold leasing market based on free market principles.

Work on and improve the gold market financing services. According to applicable credit policies and principles, commercial banks needs to increase the access to amount of credit for qualified large enterprises that fit the gold supply chain plans for development of our country. Give special support to large-scale gold enterprise groups’ development to aid them to achieve the strategy to “go outside” into the international arena, and help them with related gold financing service business that they have. Support these groups when they issue bonds, short- and intermediate-term notes for lowering financing costs. When suitably qualified enterprises engage in mergers or acquisitions, help them with loans to aid industry restructuring, to simplify the business and achieve better scale effects. Regarding value-added processes and retailing, take note of each of their business characteristics including cyclical features, help form a financial services system that takes care of their needs from liquidity all the way to final sales. Think about new financial products that will help them in their businesses, making use of collateral values in receivables and inventories as necessary. Encourage financial institutions in developing financial services with gold as collateral. Banks should study and understand problems in credit issues of value-added processing and retail businesses, and propose practical solutions.

Forex management policies: help make a good current gold market foreign currencies management policies/strategy. In order to help guide commercial banks to develop RMB-quoted gold derivatives trading, working with SGE’s price quoting system infrastructure, work to allow commercial banks that are developing RMB-denominated gold derivatives to be able to hedge on-shore gold trading margin with off-shore position without actual gold import-export business operations. Research into the possibility of allowing banks that are planning to develop such business to allow them to use other FX open positions margin to compensate in the overall margin required in total on-shore positions.

Move the gold market towards external openness. Steadily increase the number of foreign members of the SGE. Look into allowing off-shore qualified ingot suppliers to supply to the SGE. Look into allowing off-shore institutions to participate in SGE transactions.

5. Pre-empting gold market risks.

Step up regulation of the gold market. Each department should fulfil regulatory responsibilities seriously. With good communication and collaboration, work together for the integrity and benefit of the market as a whole.

Commercial banks should step up risk management and control. Plan well for related services, make sure businesses opening satisfy requirements. Make sure system infrastructure investments are sufficient to protect security and integrity of transactions. Policies should be suitable towards particular characteristics and risks of each business to pre-empty risks.

Intermediaries need to step up on self-discipline. The SGE and SHFE need to make sure transactions, delivery, settlement and gold account and other services are well supported by system infrastructure including for on-line products, and make sure that all the services offered are safe. Make sure members behave, markets are orderly. When market conditions change, take timely action to pre-empty risks.

6. Protect the investors.

Use a multi-form approach, work to have better educated and mature investor groups for the gold market. Step up training for gold market industry staff, raise the degree of professionalism. Step up education on gold market risks, let the players be well cognizant of risks. Market players should well understand the importance of protecting investors interest and the healthy development of the gold market, so that when they encounter issues, they raise them with authorities appropriately. Let market participants know what behaviour is expected, that underground speculative activities are strictly forbidden. Any violating departments will face strict punishment and posted to records.

Source

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

Chinese Cross-Border Gold Trade Rules

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.

Let us get more familiar with how gold can be imported into and exported from China. There are two types of cross-border trade in China: general trade and processing trade

Only through general trade gold can be imported into the Chinese domestic gold market where it’s required to be sold first through the Shanghai Gold Exchange (SGE). Gold imported through processing trade must be used for manufacturing or assembling purposes after which the finished goods are required to be exported.  

Processing trade is meant for China’s manufacturing industry to efficiently connect with the rest of the world. The Chinese and foreign companies engaging in processing trade are exempt from, in example, import duties and value added tax.

Usually processing trade is conducted through Customs Specially Supervised Areas (CSSAs) – also called Customs Specially Regulated AreasSpecial Customs Supervision Areas or Customs Special Supervision Regionsthese are all the same. When processing trade is performed outside CSSAs (the rest of the mainland, non-CSSA) the materials will be strictly monitored by Chinese customs. Through processing trade gold cannot enter the Chinese domestic gold market where the  SGE operates.

Customs Specially Supervised Areas

CSSA is a collective noun for free trade zones, export processing zones, bonded logistics parks, bonded ports, comprehensive bonded zones, etc. Without going into detail what the differences are between various types of CSSAs, all such areas must be seen as regions in China mainland where rules for taxes, customs and foreign exchange administration can diverge from the rest of the mainland.

Screen Shot 2015-11-05 at 9.39.57 am
Courtesy the EU SME Centre.

Through CSSAs cross-border trade between China mainland and foreign countries can be established without China having to fully open up its borders. By slowly increasing the number of CSSAs and easing cross-border trade rules between these areas and the rest of the world, the State Council gradually allows China to open up. Hong Kong is not a CSSA, but a Special Administrative Region of the People’s Republic of China. In terms of trade Hong Kong must be treated as a separate country from China mainland, having its own customs department and currency.

Some CSSAs are physically open to the rest of the mainland, people are free to go in and out without being asked to show documentation by Chinese customs, others are restricted, surrounded by a fence and goods moved in or out can be subject to checks.

shanghai pilot free trade zone ftz
The Shanghai Pilot Free Trade Zone.
Shanghai WaiGaoqiao Free Trade Zone.

Processing Trade vs General Trade

To study processing trade we’ll use the official PRC Customs Supervision and Administration of Processing Trade Goods Procedures (2004) and Managing Trade & Customs in China (2011, KPMG) as our guides. To avoid misunderstandings, henceforth we’ll work with the nomenclature provided in these documents. According to the PRC Customs Supervision and Administration of Processing Trade Goods Procedures the definition of processing trade is:

“Processing trade” shall refer to the business activity of import of operating enterprises of all or some raw and auxiliary materials, components, parts, mechanical components and packing materials (Materials and Parts) and the re-export thereof as finished products after processing or assembling. It includes processing of supplied materials and processing of purchased materials.

Let’s examine the two types of processing trade to get a better understanding of the wider concept. There is the Processing Of Purchased Materials Model (or Contract Manufacturing model) and the Processing Of Supplied Materials Model (or Toll Manufacturing model).

The Processing Of Purchased Materials Model involves a Chinese manufacturer to import raw materials and parts from abroad into China (a CSSA) to assemble or process into finished goods. Upon completion the finished goods will be exported and sold in an overseas market by the Chinese manufacturer.

Screen Shot 2015-10-27 at 5.33.09 pm
Courtesy KMPG.

The Processing Of Supplied Materials Model involves a foreign company to export raw materials and parts to China (a CSSA) to be processed by a Chinese manufacturer into finished goods. Upon completion the finished goods are exported to an overseas market to be sold at the discretion of the foreign company. This foreign company will pay the Chinese manufacturer a processing fee for its services provided.

Screen Shot 2015-10-27 at 5.33.20 pm
Courtesy KMPG.

Example given of a processing trade with gold: Bullion from Hong Kong is exported to the CSSA in Shenzhen where 4,000 Chinese gold manufacturers are located. Subsequently, the gold is fabricated into jewelry and upon completion imported back into Hong Kong to be sold in jewelry shops. This trade can be either conducted through the Processing Of Purchased Materials Model or the Processing Of Supplied Materials Model.

Essential to understand is that the flow of goods in processing trade is completely separated from the Chinese domestic market, though these goods crossing the Chinese border are included in customs statistics. From the PRC Customs Supervision and Administration of Processing Trade Goods Procedures we can read:

Article 21. Goods imported and exported by operating enterprises in the form of processing trade shall be included in customs statistics.

Though the gold crossing the Chinese border is only included in customs statistics from China’s trading partners, as China has eclipsed its gold trade in its customs data.

Processing trade – and the rules just mentioned – explains how gold can be imported into China from Hong Kong and exported back from China to Hong Kong without entering the Chinese domestic gold market and flowing through the Shanghai Gold Exchange (SGE). Since 2004 traders do not need a license to import/export gold through processing trade into/from China, as was communicated in the People’s Bank of China, General Administration of Customs Announcement No. 19 of 2003 (on the change of gold and its products processing trade regulatory conditions).

Hong Kong - CN monthly gold trade January 2009 - June 2015

As you can see in the chart above there is a difference between gross gold trade and net gold trade, which is caused by processing trade.

Now we understand processing trade, let us move on to study trade between the Chinese domestic market and foreign countries.

If goods are imported into/ exported from the Chinese domestic market this is referred to as general trade. The agency that controls all forms of gold in general trade is China’s central bank, the People’s Bank Of China (PBOC). Only financial institutions and gold enterprises that carry the Import and Export License of the People’s Bank of China for Gold and Gold Products (The License hereafter) can get gold to pass customs into the Chinese domestic gold market. I’ve published the translation of the official Measures for the Import and Export of Gold and Gold Products (The Measures hereafter) drafted by the PBOC in March 2015 – exclusively translated by BullionStar. For the first time these rules are now publicly available in English. From The Measures we can read:

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 Catalogue for the Regulation of the Import and Export of Gold and Gold Products describes all forms of gold (powder, coins, bullion, unwrought, scraps, jewelry) that can cross the Chinese border. For gold to be imported into the Chinese domestic gold market the material is required to be accompanied by The License.

Currently there are fifteen commercial banks that can apply for The License to import standard gold, which in China is bullion weighing 50g, 100g, 1Kg, 3Kg or 12.5Kg, having a fineness of 9999, 9995, 999 or 995. The fifteen commercial banks are:

  1. Shenzhen Development Bank / Ping An Bank
  2. Industrial and Commercial Bank of China
  3. Shanghai Pudong Development Bank
  4. Agricultural Bank of China
  5. China Construction Bank
  6. Bank of Communications
  7. China Merchants Bank
  8. China Minsheng Bank
  9. Standard Chartered
  10. Bank of Shanghai
  11. Industrial Bank
  12. Bank of China
  13. Everbright
  14. HSBC
  15. ANZ

All standard gold imported through general trade into the Chinese domestic gold market is required to be sold first through the SGE (the core of the Chinese domestic gold market). From The Measures we can read [brackets added by me]: 

… An applicant for the import and export 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 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 … shall be registered at a spot gold exchange [SGE] approved by the State Council where the first trade shall be completed.

Next to standard gold there is non-standard gold, for example bullion bars weighing 1,040 gram, jewelry, coins, ore and doré. Non-standard gold is not required (and not allowed) to be sold through the SGE when imported into the Chinese domestic gold market. Only a very limited number of gold enterprises can apply for The License to import non-standard gold under general trade. Although, The Measures released in March 2015 by the PBOC loosened the requirements for enterprises.

Example given of a gold enterprise that can import non-standard gold into the Chinese domestic gold market: On 26 May 2015 Zijin Mining Group bought a 50 % stake in Barrick Gold Corp’s Porgera mine in Papua New Guinea for $298 million. On 9 October 2015 China Gold Network wrote that Zijin Mining was one of the first mining companies to be granted the qualification by the PBOC to import gold under general trade, allowing Zijin to import doré from Papua New Guinea into the Chinese domestic gold market. Note, if the doré is imported and refined into standard gold, the bars are required to be sold through the SGE.

From China Gold Network:

9月25日,紫金矿业获得中国人民银行批复允许从事黄金进口业务,打破了国内只有金融机构从事该业务的惯例,开创了国内大型黄金企业从事黄金进口业务的先河。

Translated [brackets added by me]:

On Sept 25, Zijin Mining was granted by the People’s Bank of China the permission to do gold import business [under general trade], which broke the common practice that in China only financial institutions do this business, and became the first case that a big domestic gold miner does gold import business [under general trade].

By loosening the rules for enterprises to import non-standard gold into the Chinese domestic gold market the PBOC has helped Chinese mining companies to strive for more overseas acquisitions.

Import and Export License of the People's Bank of China for Gold and Gold Products
Import and Export License of the People’s Bank of China for Gold and Gold Products. Click here (page 13) for the original form in Chinese, click here for the translated PDF version in English provided by BullionStar.

Above we can see The License form that commercial banks have to submit for every gold import. Being able to apply for The License does not grant unlimited permission to import gold into the Chinese domestic gold market – from abroad or CSSAs – as for every shipment a stamp from the PBOC is needed. From the Measures we can read:

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.

Gold export from the Chinese domestic market is prohibited by the PBOC (except for golden Panda coins). The reason The Measures mention export is because if the PBOC would ever change its policy in allowing standard gold export from the Chinese domestic market it doesn’t need to rewrite the laws. Currently, if one of the fifteen banks (or Zijin Mining) will submit a request at the PBOC for an export license it will be rejected.

Has anybody ever seen an SGE bar outside China mainland? Likely not. This is because the SGE system operates in the Chinese domestic gold market and thus bars withdrawn from the SGE vaults are prohibited form being exported.

SGE bar small hi-res
SGE standard gold bar 100 gram

1.上海黄金交易所标准金条 SGE Standard Gold Bar.
2. 上海黄金交易所 SGE Logo.
3. 品牌 Brand Logo.
4. 金条品牌 Bar Brand (泰山 is Mount Tai, which is produced by Shandong Gold).
5. 成色 Fineness.
6. 重量 Weight.
7. 金条 Bar Number.

However, there is one possibility to export an SGE bar from the Chinese domestic gold market. Individuals can bring 50 grams of gold when traveling abroad. Though this rule is not very stringent on the import side, on the export side one individual would be allowed to bring a 50g SGE bar across the border, two individuals would be allowed to bring a 100g SGE bar, etc.

More important, through processing trade enterprises not carrying The License can import gold into/ export gold from China. From The Measures we can read:

…, 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;

There it is, enterprises can import gold into/ export from China through processing trade without The License from the PBOC – because CSSAs are separated from the Chinese domestic gold market. These enterprises are indeed required to be engaged in gold business, for example, as jewelers or refiners.

Gold trade between a CSSA and the Chinese domestic market is considered as general trade. Meaning, for gold to be imported from the Shanghai Free Trade Zone into the Chinese domestic gold market The License must be provided.

CSSA Shenzhen Hong Kong Mainland