Tag Archives: Shanghai International Gold Exchange

China’s Gold Market Opens Up To Boost RMB Internationalization

Last week the Shanghai Gold Exchange (SGE) launched a new English website to offer international customers more information and tools on trading gold in renminbi through its subsidiary in the Shanghai Free Trade Zone the Shanghai International Gold Exchange (SGEI). BullionStar took the opportunity to translate a speech by a Teng Wei, Deputy General Manager of the SGEI, named “How China’s Gold Market Can Help The RMB Achieve International Status” that was held at the Renminbi World summit in Beijing on the 29th and 30th of November 2016. In the speech Teng Wei outlined his vision for the SGEI going forward regarding renmibi (RMB) internationalization, connecting the onshore and offshore renminbi market and increasing gold market share.

My comment before you read the translation:

1) In the financial blogosphere the general perception is that the SGEI has been a failure since it was launched in September 2014. This analysis is based on the assumption that the trading volume of the most popular SGEI contract (1 Kg 9999 – iAu99.99) has been tepid for two years now. But this analysis neglects two important elements.

First, iA99.99 can be traded competitively “on Exchange”, but also in the OTC market. The OTC possibility is hardly known by commentators in the English world, though the related volumes are significant. Have a look at the next chart in which I’ve plotted iAu99.99’s weekly trading volume “on Exchange” and in the OTC market. Clearly iAu99.999 is traded mainly in the OTC market.


Second, international customers of the SGEI can not only trade the SGEI gold contracts, but they can also trade SGE (domestic) gold contracts. Logically, as at present liquidity on the SGE is much higher than on the SGEI, many international customer that seek to trade gold in renminbi, and don’t need to export the metal, will choose to trade SGE gold contracts.

When observing total trading of all SGE(I) gold contracts, there is a clear rise in volume since the SGEI was launched.


Up till now international customers are mainly trading SGE contracts. The significant rise in trading volume of all SGE(I) contracts since September 2014 is due to the inception of the International Board (SGEI). In the second week of November 806 tonnes was traded on the SGE(I), the highest amount ever.

So the launch of the SGEI has not been a failure in my opinion – it has elevated gold trading in (offshore) renminbi.

For more information please read my post The Workings Of The Shanghai International Gold Exchange or have a look at the graph below.

International customers can trade domestic contracts but are not allowed to withdraw the metal from the vaults (and export).

2) Teng Wei mentions that in 2015 gold demand in China and India was 985 and 849 tonnes respectively. In the case of China this refers only to consumer demand, not institutional demand. Chinese consumer and institutional demand in 2015 combined was well north of 2,000 tonnes.

For more information please read my post Spectacular Chinese Gold Demand 2015 Fully Denied By GFMS And Mainstream Media.

3) A gold exchange doesn’t flourish overnight. The SGE was launched in 2002; in that year its total trading volume was 22 tonnes and withdrawals accounted for 16 tonnes. Ten years later total trading volume was 3,175 tonnes and withdrawals accounted for 1,138 tonnes. In 2015 total trading volume was 17,033 tonnes and withdrawals accounted for 2,582 tonnes. The development of the SGE, becoming the largest physical gold exchange globally, took time and it can be no different for the SGEI.

Document Translation [brackets added]:

Teng Wei: China’s Gold Market Opens Up To Boost RMB Internationalization

29-11-2016 Sina Finance

The 2016 RMB summit was held in Beijing on the 29th and 30th of November. Deputy General Manager of the Shanghai International Gold Exchange Center Teng Wei participated in the forum and discussion on “How China’s Gold Market Can Help the RMB Achieve International Status”. He expressed that using Shanghai’s free trade zone status, investors can open trading accounts denominated in RMB and participate in trading directly through the Exchange’s international board [SGEI] that allows access to most of the precious metal products that are traded in China. The international board has developed relatively well since establishment with active participation from international members and steadily increasing trading volume.

Gold on the international board is quoted and settled in RMB, which effectively connects the RMB onshore market and offshore market. This will extend the scope of RMB usage across borders and provide a new channel for inward capital flows. It is a move that is beneficial to expand the RMB usage to steadily promote internationalization of the RMB.

The actual speech:

Ladies and gentlemen, good afternoon, I am Teng Wei from the Shanghai International Gold Exchange. I am delighted to participate in this forum organized by the Asian Bankers Association to have a chance to speak and interact with everyone about opening China’s gold market to the world and how that can help the internationalization of the RMB.

This afternoon, I would like to touch upon on three topics. The first topic is the new pattern of the internationalization of the RMB and the global gold market. China’s gold market was established in 2002 with the launch of the Shanghai Gold Exchange. If anyone is familiar with the history of China’s gold market, you will know that before the year 2002 the Chinese gold market was entirely ran by the People’s Bank of China, including the process of purchasing, allocating and storing of gold. There wasn’t a single unified market where all participants could trade at the same time. Since the year 2002, with approval of the State Council, the People’s Bank Of China developed gold spot trading on the Shanghai Gold Exchange, as well as gold futures trading and over-the-counter trading via commercial banks, etc, which formed the basis for a multi-level diversified gold market system.

While the Chinese gold market was developing rapidly, the pattern of the global gold market was also having a dramatic change. As time passed, the international gold spot market was heavily concentrated in London and the international gold futures market has been concentrated in New York. However, in recent years, with the rise of gold demand in China, India and other Eastern nations, and with the exit of European and American banks from the precious metals market, it’s clear that Western gold is moving to the East. In 2015 gold demand in China and India was at 985 tons and 849 tons respectively. These figures alone account for 45% of global [consumer] gold demand. With gold demand from other markets dipping to various levels, China is not only the world’s largest gold producer and importer of gold, but has also become the world’s largest gold consumer.

Just now, I mentioned that the two main centers for gold trading are London and New York, and the current situation is Western gold flowing to the East. Everyone, have a look at some statistics that I have here, showing that just China and India alone make up over 45% of global gold demand. This was last year’s data.

Since the year 2005, when the RMB exchange rate was reformed, international investors’ willingness to trade in RMB denominated assets has also increased. This has objectively enhanced the Chinese gold market’s international status and garnered attention. In recent years, the RMB exchange rate is expected to have some changes.

The Shanghai Gold Exchange provides the important infrastructure for China’s gold market. ECB officials have mentioned that an important part of promoting the internationalization of the RMB is having a good financial market infrastructure. The exchange is also an important “all-in-one” foundation for gold transactions, clearing, delivery and storage. It serves with the commitment to provide gold investors with efficient and convenient market services. It has been 14 years since establishment of the exchange in the year 2002 and development has been rapid with annual trading volumes increasing 40% on average.

At the end of 2015 there were over 8.6 million individual accounts, over 10,000 institutional accounts and the total gold trading volume for the year reached 17,000 tonnes. The exchange was ranked as one of the largest and we firmly grasped an important opportunity for the internationalization of the RMB with the profound changes happening in the gold market. At the same time, we want to build a harmonious ecological gold market that sets a new path for the global gold market and achieve the status of being a global gold power from a large gold holding nation.

For the second point, I would like to explain how opening up China’s gold market externally to the world can help the internationalization of the RMB. To further promote and innovate China’s gold market, on 18th September 2014, the Shanghai Gold Exchange set up an international board [SGEI], open directly to foreign investors. This move has effectively connected China’s domestic gold market and the international gold market. Using Shanghai’s free trade zone, investors can open trading accounts denominated in RMB and participate in trading directly through the exchange’s international board that allows access to most of the precious metal products that are traded in China. The international board has developed relatively well since establishment with active participation from international members and steadily increasing trading volume.

As of now, the exchange has 67 international members, including most of the world-renowned gold suppliers and traders like Mr Thomas McMahon, who is also our Exchange’s member. At the end of the third quarter of 2016, the international board had recorded a total of 7,837 tonnes of gold traded, with a turnover valued at nearly 200 billion RMB. The Shanghai International Gold Exchange is the test pilot and pioneer for opening up China’s gold market to the world. It is significantly important for further increasing the capacity, expansion and international influence of China’s gold market. In addition, the international board uses RMB for settlements, producing an effective convergence of the RMB offshore and onshore markets, expanding the cross-border use of the RMB and providing a new channel for return of funds. All these points steadily promote the internationalization of the RMB and serve as a useful exploration.

For RMB denominated gold products to gain popularity outside of China, we think the prerequisite is to provide a fair offering for global gold market transactions, with reliable gold benchmark pricing in RMB, using the Shanghai Gold Exchange benchmark pricing mechanism [Shanghai Fix] for our trading platforms. The weight of the gold traded is 1 kilogram, with a fineness of no less than 99.99%. Using a price inquiry method and market volume, a balance is reached to form the benchmark price of gold measured in RMB. The price announcements will be released externally each trading day at 10:15 and 14:15.

At present, the Shanghai gold benchmark price is being used by domestic gold producers and suppliers for hedging and settlements. More and more commercial banks are also using the Shanghai gold benchmark price for gold leasing and financing as the standard. More and more products linked to the Shanghai gold benchmark will be made available.

Other than domestic usage, the Shanghai gold benchmark price is also being actively studied more and more by external markets regarding its application. In October, the exchange signed an agreement with Dubai for the right to use the Shanghai gold benchmark price and authorization was given for the Dubai gold exchange to use the Shanghai gold benchmark price as the standard for offshore RMB denominated futures. The signing of this agreement marks the use of the Shanghai gold benchmark price in international financial markets for the first time. This greatly helps to elevate the international influence of the exchange in global markets and improves the image and reputation of the RMB abroad.

For the third point, I would like to share with everyone how the Shanghai Gold Exchange acts as an important infrastructure for internationalization in three steps. As the forerunner for opening domestic markets and innovation, the Shanghai Gold Exchange cannot forget its historical mission. We are determined to take the international and market-oriented strategy.

Overall, for the internationalization process, we have three steps to take. The first step is to be open and inclusive, actively inviting foreign investors to come in. Just now, we have introduced our international board after the establishment of the Exchange and we will continue to increase publicity efforts. In accordance to high standards and multifaceted principles, we will continue to increase and expand international membership of the Exchange. Accordingly, we have carried out a variety of promotional activities in major financial hubs and countries and regions along the new Silk Road to allow more international market participants to hear the sound coming from the Chinese gold market. The exchange also takes the opportunity to actively learn from the experience of advanced international markets in the optimization of various trading systems and innovation of all kinds of trading products.

For the second step, since we have invited guests inwards, we also have to step outwards. Through cooperation and win-win situations, the gold Exchange can be promoted and step out of China. The Shanghai gold benchmark price has now taken a first step with the Dubai Gold Exchange agreement. This can be considered an ice-breaking move and serve as a cooperation model for other overseas markets and improve the recognition, branding and acceptance of the Shanghai gold benchmark price. Taking this as an opportunity, the Shanghai Exchange, together with the Chicago Mercantile Exchange (CME, COMEX), the Hong Kong Stock Exchange, the Malaysian Stock Exchange and a number of foreign exchange markets explored on long-term cooperation mechanisms that will allow foreign investors to directly participate in our gold market, in RMB denominated gold trading, standard gold settlement, and many other aspects and modes of cooperation that will increase the Shanghai Gold Exchange’s international market influence.

The third step is to realize RMB internationalization and increase global transaction on the exchange through integration and upgrades. As the international financial markets continue to merge and develop, market boundaries are increasingly blurred and we believe that market fragmentation will be removed gradually. In recent years, we can all notice that there are more and more mergers and acquisitions among major exchanges in the world. We hope to learn from the experiences of such joint stock mergers and acquisitions between global exchanges and explore the different modes of industry integration with overseas exchanges. By offering a wide range of local and overseas products through an open platform [SGEI], we hope to create a world class exchange group. The journey of the internationalization of the Shanghai Gold Exchange will epitomize the opening of China’s financial markets to the outside world and play an important part in the internationalization of the RMB. With Shanghai becoming the third most important market in the world after London and New York, the Chinese gold market will make a great contribution to the internationalization of the RMB. Thank you everyone.

Q1 – Q3 2016 China Net Gold Import Hits 905 Tonnes

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

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

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

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

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

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

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

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

SGE withdrawals = domestic mine output + import + recycled

For Q1-Q3 2016 that gives:

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

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

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

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

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

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

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

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

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

Exhibit 5. Gold export Russia to China.

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

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

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

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

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

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

SGE Premiums November Highest Since 2013

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

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

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

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

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

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

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

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

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

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

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

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

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

From the PBOC:

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

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

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

Synthetic Gold Leasing: More Details Regarding The “Precious Metals” On Chinese Commercial Bank Balance Sheets.

More proof the “precious metals assets” on Chinese commercial bank balance sheets have little to do with the “surplus” gold in China’s domestic market.

The “surplus” in the Chinese gold market is the difference between withdrawals from the Shanghai Gold Exchange vaults and gold demand as measured by consultancy firms like the World Gold Council and Thomson Reuters GFMS. The “surplus” accounts for over 4,000 tonnes. In reality the “surplus” is true gold demand by Chinese individuals and institutional investors directly at the SGE. Some analysts think the huge tonnages in “precious metals assets” on the balance sheets of Chinese commercial banks have anything to do with the “surplus”, but this is not true. And I prefer to explain in detail. 


One of the topics about the Chinese gold market that has not been fully illuminated is the “gold” on the 16 Chinese commercial banks’ balance sheets. At the end of 2015 the aggregated “precious metals assets” on the bank balance sheets accounted for 598 billion yuan (RMB), which translates into approximately 2,682 tonnes of gold – if all the precious metals were gold related, which is very likely.

In my previous post on this subject we learned from examining the banks’ annual reports from 2015, that there are at least five gold assets that can appear in the “precious metals” line item on the balance sheets. Namely:

  1. Gold savings that belong to the banks’ customers (Gold Accumulation Plans, GAP)
  2. Gold inventory for the banks’ retail gold bar business
  3. Gold leasing business
  4. Gold held for hedging purposes
  5. Gold held outside China

In this post we’ll examine more thoroughly the (Chinese and English) annual reports from 2007 until 2014 of the 16 banks, to learn more on what these huge tonnages represent. The most significant new finding is that Chinese banks conduct synthetic leases – in other words: swapsBy performing synthetic leases,  Chinese banks can show “precious metals assets” but no “precious metals liabilities” on their balance sheets. Then, at the very surface it seems these banks own gold, in reality they own zero gold. 

Exhibit 0. Precious Metals Assets Chinese Banks.

Also note, swaps can be executed with foreign banks, through which gold is subsequently imported into the domestic market. And because the Chinese banks have been importing thousands of tonnes in recent years, it should come as no surprise these trades have influenced the “precious metals” line item on their balance sheets.

More findings that will be addressed in this post are:    

  1. Chinese reported lease volume reflects yearly turnover.
  2. Gold stored in Shanghai Gold Exchange (SGE) designated vaults owned by commercial banks does not to appear on the custodial bank’s balance sheet.
  3. More confirmation some gold on the balance sheets is stored outside China.

My conclusion is that the “precious metals” on the Chinese commercial bank balance sheets do not account for the “surplus” gold in the Chinese domestic market Western consultancy firms pretend to be ignorant about. The Chinese banks do not own much gold of themselves, as some analysts have speculated, nor are these banks preparing for a new gold standard designed by the PBOC, according to my sources and analysis.

This post is divided in three segments. The first segment is about accounting, which supports the second segment about swaps and other gold related line items on the Chinese bank balance sheets. The first segment can be skipped if you already posses thorough knowledge on accounting. The third segment displays all the “precious metals” related data of the 16 bank balance sheets from 2007 until 2015.

I Accounting Background

Before we can discuss the details of the “precious metals” mentioned in the financial statements of the annual reports of the 16 banks, we need to do some studying on accounting structures (study the definitions of a financial statement, balance sheet, an income statement, assets/liabilities, financial assets/liabilities and derivative financial assets/liabilities). This study will prove valuable for future posts as well. The bank balance sheets are an important topic in the Chinese gold market; understanding accounting helps us to illuminate the Chinese gold market.

Financial Statement

Financial statements of banks are divided in three main segments: a balance sheetan income statement and a cash flow statement.

Balance Sheet

On Investopedia we can read the definition of a balance sheet:

Balance Sheet

A balance sheet is a financial statement that summarizes a company’s assets, liabilities and shareholders’ equity at a specific point in time. These three balance sheet segments give investors an idea as to what the company owns and owes, as well as the amount invested by shareholders.

The balance sheet adheres to the following formula:

Assets = Liabilities + Shareholders’ Equity

A number of ratios can be derived from the balance sheet, helping investors get a sense of how healthy a company is. These include the debt-to-equity ratio and the acid-test ratio, along with many others. The income statement and statement of cash flows also provide valuable context for assessing a company’s finances, as do any notes or addenda in an earnings report that might refer back to the balance sheet.

An example would be, ICBC holding 1 tonne of gold in small ICBC brand bars as inventory for retail sales. This gold is an asset of ICBC.

Income Statement

Next to a balance sheet, banks disclose an income statement in their annual reports. From Investopedia we read:

Income Statement

An income statement is a financial statement that reports a company’s financial performance over a specific accounting period. Financial performance is assessed by giving a summary of how the business incurs its revenues and expenses …. It also shows the net profit or loss incurred over a specific accounting period.

Unlike the balance sheet, which covers one moment in time, the income statement provides performance information about a time period.

In example, ICBC buys gold at the SGE worth 1,000,000 RMB and has the metal recast in small 200 gram ICBC brand bars. If ICBC subsequently sells the newly casted bars for in total 1,100,000 RMB, then 100,000 RMB is profit and will be included in the income statement.

Cash Flow Statement

Next are the cash flows, from Investopedia:

Cash flow is the net amount of cash … moving into and out of a business.

Total aggregated cash flows are measured over the course of a period, for example one year, as with the income statement. But unlike the income statement, it records all things related to cash flows. For example, if ICBC buys a new building worth 10,000,000 RMB, this will affect the balance sheet (cash decrease, asset increase) and the cash flow statement, but not the income statement.

An Asset

From China’s Accounting Standard for Business Enterprises: Basic Standard we can read how an asset is defined:

Article 20 An asset is a resource that is owned or controlled by an enterprise as a result of past transactions or events and is expected to generate economic benefits to the enterprise.

“Past transactions or events” mentioned in preceding paragraph include acquisition, production, construction or other transactions or events. Transactions or events expected to occur in the future do not give rise to assets.

“Owned or controlled by an enterprise” is the right to enjoy the ownership of a particular resource or, although the enterprise may not have the ownership of a particular resource, it can control the resource.

“Expected to generate economic benefits to the enterprise” is the potential to bring inflows of cash and cash equivalents, directly or indirectly, to the enterprise.

Article 21 A resource that satisfies the definition of an asset set out in Article 20 in this standard shall be recognized as an asset when both of the following conditions are met:

(a) it is probable that the economic benefits associated with that resource will flow to the enterprise;


(b) the cost or value of that resource can be measured reliably.

Article 22 An item that satisfies the definition and recognition criteria of an asset shall be included in the balance sheet. An item that satisfies the definition of an asset but fails to meet the recognition criteria shall not be included in the balance sheet.

Financial assets/liabilities

Financial assets/liabilities can be subdivided in several categories, such as financial assets/liabilities designated at fair value through profit and loss, financial assets/liabilities held for trading and derivative financial assets/liabilities. Financial assets/liabilities are included on the balance sheet and the change in fair value of most financial asset/liabilities will appear in the income statement. Not all banks subdivide financial assets/liabilities in the same manner. For example, ICBC lists “financial assets/liabilities held for trading” parallel to “financial assets/liabilities designated at fair value through profit and loss”. Other banks only disclose “financial assets/liabilities designated at fair value through profit and loss” as a total. The details on accounting are beyond the scope of this post.

Let’s have a look at an example of a financial liability. We’ll use plain gold leasing. Suppose ICBC borrows 1 Kg of gold for 1 year and instantly sells the gold at 280 RMB/gram. ICBC will then record a cash asset of 280,000 RMB and a financial liability held for trading of 280,000 RMB on its balance sheet. Say, after one month the gold price surges to 380 RMB/gram. For ICBC the cash asset remains at 280,000 RMB, but the bank will increase the carrying amount of the financial liability held for trading to 380,000 RMB. The 100,000 RMB, which is a loss, will go into the income statement. In the income statement there is a separate line for this called net profit or loss on financial assets or liabilities designated at fair value through profit and loss.

Below is part of the income statement from ICBC’s 2015 annual report.

Exhibit 1. Courtesy ICBC. “Consolidated Statement of Profit or Loss” is the income statement. In accounting amounts in between brackets are negative.

Derivative financial assets/liabilities

Derivative financial assets/liabilities on balance sheets must not be commingled with derivative instruments such as futures or forwards, of which the notional values are recorded off-balance sheet. Let me show how derivative financial assets/liabilities are acquired.

We’ll use futures as an example. Suppose ICBC buys long a SHFE gold futures (1,000 grams) contract at 280 RMB/gram on 1 November 2016 that is to expire in June 2017. The futures contract itself (derivative instrument) is recorded off-balance sheet, but the profit or loss arising from it creates a “derivative financial asset/liability” recorded on the balance sheet and the income statement. At 1 November 2016 the fair value of the futures contract is 0 because the future price has not moved yet so there is no profit or loss. The notional value of the futures contract is 280,000 RMB (1,000*280). On 1 November 2016 ICBC’s financial statement would be:

  • ICBC’s derivative financial asset/liability held for trading on the balance sheet = 0
  • Fair value ICBC’s derivative financial asset/liability held for trading recorded in the income statement’s “net profit or loss on financial assets or liabilities designated at fair value through profit and loss” = 0 RMB
  • Notional value of ICBC’s derivative financial instrument recorded off-balance sheet = 280,000 RMB

Suppose one month later, on 1 December 2016, the gold price has surged to 380 RMB/gram. ICBC is long gold so it will have a mark-to-market profit of 100,000 RMB. This profit will go into the income statement in “net profit or loss on financial assets or liabilities designated at fair value through profit and loss”. At the same time ICBC has created a derivative financial asset held for trading worth 100,000 RMB. (If gold would sink below 280 RMB/gram, ICBC would record a derivative financial liability held for trading.) On 1 December 2016 ICBC’s financial statement would be:

  • Derivative financial asset held for trading on the balance sheet = 100,000 RMB
  • Fair value ICBC’s derivative financial assets held for trading recorded in the income statement’s “net profit or loss on financial assets or liabilities designated at fair value through profit and loss” = 100,000 RMB
  • Notional value of ICBC’s derivative financial instrument recorded off-balance sheet = 380,000 RMB

Below you can view a balance sheet and an off-balance sheet account from ICBC’s 2015 annual report.

Exhibit 2. Courtesy ICBC. Balance sheet from ICBC’s 2015 annual report.
Exhibit 3. Courtesy ICBC. Off-balance sheet account from ICBC’s 2015 annual report. 

Having said this, the practice of categorizing precious metals assets and liabilities varies from bank to bank in China. Nevertheless, there are excellent observations to make from the financial statements of the banks. This will be quite complex, if I didn’t explain it properly, please refer to the introduction of this post that serves as a simplified summary.

II Findings

Banks Do Synthetic Back-To-Back Gold Leasing Through Swaps

From the previous post, we know that gold leasing – mainly back-to-back borrowing and lending – overstates the precious metals assets and liabilities of Chinese banks. However, what was not mentioned in the previous post was that banks do synthetic back-to-back leasing through swaps. This way, it’s possible that banks that are active in the gold lending market, will show precious metals assets on their balance sheet – without precious metals liabilities, while not owning a single gram of metal themselves. The bank will synthetically borrow gold through a swap, and lend it out for a few extra basis points. The result is synthetic back-to-back leasing.    

From a Chinese bank’s perspective a synthetic gold lease is conducted by borrowing RMB to buy spot gold, lend that metal to a customer, and at the same time sell short a forward contract. When the gold loan to the customer comes due the metal is returned to the bank, which then will be sold through the forward contract to repay the bank’s RMB loan. That’s the definition of a swap: buy spot and sell forward (sell spot and buy forward for the counterparty).

If gold is in contango, and the forward price is higher than spot, the Chinese bank will make a profit on the swap. However, in contango, the costs for the RMB loan transcend the swap profit. The difference between both is the cost equal to the gold lease rate (GLR). In my previous post Understanding GOFO And The Gold Wholesale Market we could read about these relationships (and the exact workings of swaps).

Fiat interest rate – swap rate = GLR

Effectively, by borrowing RMB for a swap the bank pays GLR to synthetically borrow gold.

As the international gold lease rate is likely lower than the gold lease rate in China, Chinese banks can make a profit by (synthetically) borrowing gold abroad, import the metal and lend it through the SGE system at a higher GLR. (Whenever a gold loan is to be repaid from the Chinese domestic gold market to an international lender, not the physical metal is exported, but funds cross the Chinese border, as physical gold export is prohibited from the Chinese domestic gold market.)

For example, Minsheng Bank can synthetically borrow gold for 3 months from HSBC at GLR in the interbank market. When Minsheng lends the gold for 3 months to a jeweler at GLR + 30 BPs, then Minsheng earns 30 BPs in this trade.

Exhibit 4. All precious metals related data from Minsheng Bank’s financial statements 2007 – 2015. We can observe a significant surge in precious metals assets, lease volume and precious metals derivatives in 2014.

In the real world, this is exactly what banks have been doing. Let’s still use Minsheng Bank as an example. Please view the table above. We can see Minsheng’s gold lease volume jumped from 13 tonnes in 2013 to 101 tonnes in 2014, and the precious metals assets surged from 2,913 million RMB in 2013 (~12 tonnes) to 25,639 million RMB in 2014 (~107 tonnes). The surge in precious metals assets was fully caused by the increment in the gold lease business, as can be seen in the excerpt below from Minsheng Bank’s 2014 annual report. All the numbers are in millions of RMB.

Exhibit 5. Courtesy Minsheng Bank. 

It’s disclosed the precious metals assets jumped from 2,913 million RMB in 2013 to 25,639 million RMB in 2014, due to a 22,726 million “increase in precious metals lease business”. 

But note we can only see an increase in “precious metals assets” on Minsheng’s balance sheet (exhibit 4), there are no “precious metals liabilities”. This is because the gold lend by Minsheng was sourced through swaps. Minsheng didn’t literally borrow gold (precious metals liability), it swapped gold for RMB collateral.

This is how it works in Minsheng’s case. When it enters a swap transaction these are the spot and the forward legs to be recorded in the financial statement. Minsheng borrows RMB and buys spot gold to lend out to a customer at GLR plus a few basis points. At that moment a precious metals asset (the gold loan) is recorded on the balance sheet, but not a precious metals liability (the related RMB liability is not disclosed in exhibit 4). Simultaneously, Minsheng sells short a forward contract that is recorded off-balance sheet. In due time the gold loan is repaid, the forward settled, etc.

The off-balance activities are shown in exhibit 4, additionally they’re disclosed in Minsheng’s financial statement to be viewed below. Again all numbers are in millions of RMB.

Exhibit 6. Courtesy Minsheng Bank.

We can see that the large increase in precious metals derivatives trading from 2013 to 2014 was mainly caused by “3 months to 1 year” “forwards and swaps”, of which most have been swaps used for synthetic back-to-back leasing.

Also note:

  • Exhibit 5 shows there was a 22,726 million RMB (~ 94 tonnes) increase in leases from 2013 to 2014. Exhibit 6 shows ~ 24 billion RMB (~ 100 tonnes) in “3 months to 1 year” swaps have been executed in 2014, over zero in 2013. Likely, the majority of the swaps have been in tenors close to 1 year, as by 31 December 2014 roughly 107 tonnes in precious metals assets were on the balance sheet.
  • In 2014 the “3 months to 1 year” “cash inflow” (Minsheng’s sell forward leg) transcended the “cash outflow” (buy spot leg) because gold was in contango that year in China. (Exhibit 6)
  • Perhaps you have noticed that Minsheng Bank counts only 1 leg of the gold swap off-balance sheet. Yes, if we compare the total “precious metals forwards and swaps” “cash outflow” 32,865 million RMB with the total notional amount in precious metals derivatives off-balance sheet, 32,844 million RMB, the two numbers are roughly equal.

All in all, at the surface it seems Minsheng Bank holds approximately 100 tonnes in precious metals assets, in reality this is merely reflecting synthetic back-to-back leasing through swaps. More proof there can be little “surplus” gold on the commercial banks balance sheets. 

As long as Chinese annual lease volume grows, the commercial bank balance sheets can mushroom as a consequence.

Estimated Chinese Gold Leasing Turnover
Exhibit 7. 

Chinese Lease Volume Reflects Yearly Turnover. 

In the past there has been some doubt whether the reported Chinese gold lease volume reflected the total turnover over a certain period, or the gold that has been leased out at a certain point in time. Already in May 2015 I wrote China’s reported gold lease volume reflects turnover – because traders at Chinese banks told me – and now there is more confirmation to be presented. From Minsheng Bank’s financial statements we can understand that the gold lease volume means the lease turnover per annum. Have another look at exhibit 4.

Minsheng bank leased out 116 tonnes of gold in 2015, which was an increase from 2014. But at the end of 2015, the “precious metals assets” wherein gold leasing is recorded, decreased to 83 tonnes. This can only be possible if the lease volume is annual turnover. Apparently, in 2015 Minsheng’s leasing business grew, but it conducted more deals in tenors shorter than 1 year, causing the annual turnover to increase (to 116 tonnes) but the outstanding leases at year-end on the balance sheet to decline from the previous year.  

The World Gold Council (WGC) seems the have come to the same conclusion recently. In the Gold Demand Trends Q2 2016 report, it stated (page 15) the gold lease volume “captures the total amount of gold leased in the reporting period, for example, if Commercial Bank A lends 1t to Jeweller B for three months and Jeweller B returns it back for the Commercial Bank A to lend again to Bank C, a total of 2t of leasing volume will be recorded for the period”. This confession by the WGC is remarkable, because from April 2014 until early 2016 the WGC was spreading a myth about the gold involved in the Chinese lease market. From the WGC’s China’s Gold Market Progress And Prospects, April 2014:

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

For several years the WGC pretended any lend/borrowed gold was “tied up in illegal leasing schemes”, and if the leases would be unwound this event would flush the physical market dragging down the price. Although this was nonsense, copy-paste media outlets like Reuters and the Financial Times simply reproduced what the WGC was writing, adding to the confusion in the gold community. (By the way, the consfusion simply appeared to be a pack of lies invented by Western consultancy firms that were trying to uphold the illusion the supply and demand data they had been selling for decades was complete.)

While at it, the WGC admitted most of the leased gold doesn’t leave the SGE vaults:

It’s estimated that around 10 % of the leased gold leaves the SGE’s vaults. The majority is for financing purposes and is sold at the SGE for cash settlement.    

This is what I’ve written since February 2015: gold leasing has little impact on SGE withdrawals, as the vast majority of leases are for financing purposes and are thus settled within the SGE system.

Gold In SGE Vaults Is Not On The Custodian’s Balance Sheets

In China, most of the SGE vaults are actually owned by commercial banks but approved by the SGE as “designated vaults”. In addition there are other types of enterprises that own “SGE designated vaults” – probably jewelry companies in Shenzhen, the heart of China’s jewelry manufacturing industry. In my previous post I shared the possibility that SGE vaulted gold appears on the balance sheets of custodian commercial banks. But further research has pointed out that is not the case. SGE vaulted gold does not appear on the balance sheet of the custodians, only on the balance sheet of the owner.

As has been written at the beginning of this post, in order for a custodian, in this example ICBC, to recognise the gold owned by another entity, in this example BOC, in its SGE-designated vault as an asset, the gold has to be “owned or controlled” by ICBC. In reality ICBC wouldn’t have any ownership of this gold. ICBC would have, to a certain extent, some control over BOC’s gold, but in order for ICBC to recognise the gold as an asset on its balance sheet, it should be “probable that the economic benefits associated with that resource will flow to the enterprise”. In other words, ICBC should be able to sell or lease out BOC’s gold in its vaults to record the metal as asset. Though, an SGE custodian would never go there or its business would collapse promptly.

Exhibit 8. Balance sheet of Ping’ An Bank.

There is more confirmation. On the balance sheet of Ping’ An Bank, the volume of precious metals holdings for 2011 and 2010 were both nil. At the same time, according to Ping’ An’s annual report of 2010, its total gold withdrawals ranked No. 8 among all SGE designated vaults. 


Gold vaulting service keeps increasing and the withdrawal number is listed the eighth among SGE designated vaults.

And in 2011 Ping’ An’s gold deposit and withdrawal total accounted for 10% of all SGE warehouse activity. It is hard to believe that Ping’ An had no gold in its SGE-designated vaults at the end of 2010 and 2011, while Ping’ An’s vaults were such an important part of the SGE system. Concluding, Ping’ An didn’t recognize other SGE clients’ or members’ gold in its vaults as its assets. Hence we have for 0 for Ping’ An’s precious assets in 2010 and 2011.

Some readers may point out the following paragraph in ICBC’s 2015 annual report:

The Group records the precious metals received as an asset. A liability to return the amount of precious metals deposited is also recognised.

However, if readers check ICBC’s 2015 annual report in Chinese, they will find the original paragraph was written like this:


The group recognises an asset when the group receives the precious metals deposited by the customer for accumulation, and at the same time recognises the related liability.

Therefore, ICBC was actually referring to the gold in its Gold Accumulation Plan (GAP) and the key information was lost in translation.

Gold in Chinese ETFs is neither recognized by its custodian as an asset. 

Some Of Chinese Banks’ Gold Is Indeed Outside China

I mentioned in the previous post that some of Chinese banks’ precious metals holdings could be outside China. ICBC acquired Standard Bank in 2015 and Standard Bank’s precious metals are outside China. However, even some medium-sized Chinese banks hold precious metals outside China. The following table is from Ping’ An’s 2014 annual report (page 196, numbers are in millions of RMB).

Exhibit 8. Screen shot of Ping’ An Bank’s annual report 2014.

What we see is that Ping’ An held gold assets in US dollars worth 2,420 million RMB. The disclosed “foreign exchange equivalent” for Ping’ An’s precious metals would only be mentioned like this if the precious metals are held outside China. If the precious metals would have been located inside China, Ping’ An never would have listed the value of the assets as “USD (in CNY equivalent)”.

III Data

We will not extensively analyze every Chinese bank’s financial statement like we’ve done with Minsheng Bank and Ping’ An Bank above, though I do like to share all the data I’ve collected. The practice of categorizing precious metals assets and liabilities varies from bank to bank so readers should pay attention to the notes below the tables and are recommended to read the original annual reports for more information. The derivative instruments are listed according to the notional amount (off balance sheet) instead of the fair value. The notional amount is not comparable between banks because for swaps, some banks only consider one leg while others add both the spot and forward legs, for example Bank of Ningbo, together.

Assuming all precious metals mentioned are gold related.

1. Industrial and Commercial Bank of China (ICBC)


We can observe ICBC precious metals assets started to transcend its financial liabilities related to gold in 2014. The possible causes are increases in ICBC brand gold bar sales (more inventory), customers purchased more options (ICBC would need to buy more gold to hedge), and more synthetic gold leasing.

2. Bank of China (BOC)


“Commodity derivatives and others” were called “precious metals derivatives and other derivatives” before 2010. BOC doesn’t have any significant numbers related to precious metals in financial liabilities designated at fair value through profit and loss.

Noteworthy, at the end of 2007 BOC had 7,982 million RMB (~ 41 tonnes of gold) in precious metals pledged as collateral, and late 2009 this figure had grown into 27,271 million RMB (~ 114 tonnes of gold). The precious metals were used as collateral in swap transactions for financing, according BOC’s accounting practice.

From BOC’s 2009 Annual Report:

贵金属互换交易,根据其交易实质,按照在抵押协议下出售的贵金属交易处理。抵押的贵金属不予终止确认,相关负债在“拆入资金” 中反映。

Precious metals swap transactions, based on the transaction nature, are treated as precious metals sales under collateral agreement. The precious metals pledged as collateral are not ceased to be recognized and the related liability is reflected in “borrowings through interbank lending”

3. Bank of Communications


Bank of Communications lists precious metals assets in two separate categories. I’m not sure what is identified with “precious metals contracts”.

Bank of Communications reported in its 2013 annual report that it conducted overseas gold swap business:


[Bank of Communications] successfully conducted overseas gold swap transactions.

In 2013, Bank of Communications conducted gold interbank lending with HSBC and HSBC became the most important source of physical gold for the Bank of Communications:


The two parties [Bank of Communications and HSBC] not only conducted “first deal” cooperation in gold consignment and gold borrowing, but also realized surging cooperation volume. HSBC has become an important import source of physical gold for the bank.

4. China Construction Bank

4-china-construction-bank-2007-2015Not everything in the “other derivatives” category are precious metals.

China Construction Bank (CCB) wrote in its annual reports that the market share of physical sales to the public was No. 1 in 2010, and in the same year the market share of gold leasing was 40 %. From CCB’s 2010 annual report:


The Bank [China Construction Bank] has maintained the rank of No 1 in branded physical gold to individuals. The market share of gold leasing was 40.30 %. The market share of account gold was 37.41 %.

CCB offered physical withdrawal on precious metals accounts since 2013 and its own gold accumulation plan since 2015.

5. Agricultural Bank of China


Before 2014 “precious metals contracts” were called “precious metals lease contracts”. Not sure what “precious metals contracts” can be next to “precious metals lease contracts” – perhaps SGE physical contracts like Au99.99.

Before 2011, precious metals derivatives were reported separately as forwards and swaps. The precious metals lease business was reported to be launched in 2010.

6. Shanghai Pudong Development Bank


The change in “Financial liabilities at fair value through profit and loss” was caused by precious metals shorts (?) according to Shanghai Pudong Development Bank’s annual reports.

7. China Merchants Bank


The increase in “precious metals assets” was caused by the increase in proprietary trading and gold lease according to the annual reports. From China Merchants Bank’s 2014 annual report:


In 2013, China Merchants Bank reported to have conducted precious metals leasing of 60 tonnes, a 203 % increase from 2012. 

8. China Minsheng Bank

8-china-minsheng-bank-2007-2015The fine data was discussed in the previous chapter.

9. Industrial Bank


The 644 million RMB precious metals related liabilities were caused by “gold pledge business” according to Industrial Bank’s 2008 annual report.

“Precious metals shorts and leased precious metals” are a subcategory under “financial liabilities held for trading”.

10. China CITIC Bank

10-china-citic-bank-2007-2015According to the annual reports, the surge in the precious metals and precious metals contracts in 2014 was caused by the increase of precious metals lease and proprietary business.

According to CITIC bank’s 2014 annual report:


In the reporting period, the gold lease business and precious metals proprietary trading business all achieved rapid growth.

11. Ping’ An Bank (former Shenzhen Development Bank)


Before 2014 precious metals derivatives were called gold derivatives. Before 2009, Ping’ An only gave a lump sum of all the derivatives. Just in case there were any gold derivatives in this category, I’ve included the lump-sum numbers.

The increase in the “financial liabilities designated at fair value through profit and loss” in 2013 was caused by the increase in “financial liabilities held for trading” related to “gold business”, according to the annual report. Therefore all the numbers in “Financial liabilities designated at fair value through profit and loss” are listed here, although this category may include some liabilities not related to precious metals. From Ping’ An’s 2013 annual report:

ping-an-bank-pic-212. Huaxia Bank


The precious metals assets in 2007 and 2008 were a result from physical gold sales according to the annual reports.

13. Everbright Bank


According to the annual reports, Everbright Bank started to conduct gold consignment sales and gold leasing in 2013. Therefore, the increase in precious metals holding in 2013 was probably caused by these activities. From to Everbright Bank’s 2013 annual report:


[Everbright Bank] acquired the gold import qualification, started to conduct gold consignment and gold lease business.

14. Bank of Beijing


Clearly the Bank of Beijing participates in back-to-back leasing, as precious metals leased out are exactly equal to precious metals leased in.

15. Bank of Nanjing

The Bank of Nanjing only disclosed 6 million RMB in precious metals assets in 2014 and 7 million RMB in 2015.

16. Bank of Ningbo


Spectacular Chinese Gold Demand 2015 Fully Denied By GFMS And Mainstream Media

Debunking the Thomson Reuters GFMS Gold Survey 2016 report. New information provides a more detailed perspective on the Chinese domestic gold market. 

In the Gold Survey 2016 report by GFMS that covers the global gold market for calendar year 2015 Chinese gold consumption was assessed at 867 tonnes. As Chinese wholesale demand, measured by withdrawals from Shanghai Gold Exchange designated vaults, accounted for 2,596 tonnes in 2015 the difference reached an extraordinary peak for the year. In an attempt to explain the 1,729 tonne gap GFMS presents three brand new (misleading) arguments in the Gold Survey 2016 and reused one old argument, while it abandoned five arguments previously put forward in Gold Survey reports and by GFMS employees at forums. Very few of all these arguments have ever proven to be valid, illustrated by the fact that GFMS perpetually keeps making up new ones, and thus gold investors around the world continue to be fooled about Chinese gold demand. For some reason GFMS is restrained in disclosing that any individual or institution in China can directly buy and withdraw gold at the Shanghai Gold Exchange, which is the most significant reason for the discrepancy in question.

According to my estimates true Chinese gold demand in 2015 must have been north of 2,250 tonnes.

The reason I keep writing about this subject (the discrepancy in question) is that it eventually will enable me to show that global physical gold supply and demand as presented by GFMS is just the tip of the iceberg. And, as stated in my previous post true physical supply and demand is far more relevant to the gold price than the numbers by GFMS.

New Information has enabled me to shine a fresh light on the Chinese domestic gold market, so we’ll zoom in once again to get the best assessment of the mechanics of this market. This post is part two of an overview of the Chinese gold market for 2015. In the first part we focused on the (paper) volumes traded on the Shanghai Gold Exchange (SGE) and Shanghai International Gold Exchange (SGEI). In this post we’ll focus on the size and mechanics of the Chinese physical gold market, while at the same time addressing the fallacious information in the Gold Survey 2016 (GS2016).

The Gold Surplus In China According to GFMS

First, let’s have a look at an overview of the key supply and demand data points for 2013, 2014 and 2015, as disclosed in Gold Survey reports by GFMS.

GFMS SD 2013-14-15
Exhibit 1.

Without GFMS mentioning the volume of SGE withdrawals for 2015 (2,596 tonnes) in the GS2016 they disclose apparent supply in the Chinese domestic gold market at 2,293 tonnes. Mine output accounted for 458 tonnes (page 22), scrap supply for 225 tonnes (page 36) and net import was 1,610 tonnes (page 54). The latter is incorrect because GFMS has double counted 63 tonnes Australia exported to China, as demonstrated in my post Australia Customs Department Confirms BullionStar’s Analysis On Gold Export To China, but the let’s not nitpick.

On other pages in the GS2016 we read total (consumer) demand for 2015 was 867 tonnes (page 52), consisting of retail bar demand at 199 tonnes (page 52) and gold fabrication at 668 tonnes (page 41). According to their own data there was a surplus of 1,426 tonnes (2,293 – 867) in the Chinese gold market. Whilst, in 2013 the surplus accounted for 826 tonnes and in 2014 for 917 tonnes, according to data disclosed in previous Gold Survey reports. Meaning, in the past three years GFMS has observed 3,169 tonnes (826 + 917 + 1,426) that were supplied to China not to meet demand, but for reasons that are constantly changing - wait till we get to the plea.

Remarkably, in the GS2016 report GFMS writes:

Hong Kong remained the primary conduit of Chinese gold imports, though its share has been contracting since 2013 … Gold import from this conduit was traditionally regarded as a simple proxy to estimate Chinese consumption … The declining dominance of Hong Kong and the increasing proportion directly routed into Beijing and Shanghai therefore points to the necessity of changes on methodology to calculate Chinese gold demand.

Exhibit 2.

GFMS states that when all Chinese imports came in through Hong Kong this inflow was “regarded as a simple proxy to estimate Chinese consumption”, but now gold is also being imported directly from countries like Australia, the UK and Switzerland, such inflow “points to the necessity of changes on methodology to calculate Chinese gold demand”. How can it be that a couple of years ago Chinese gold import from Hong Kong reflected demand, but a few years later direct massive additional import from the UK and Australia does not reflect demand?

As you probably know (otherwise you can read it here) most of the gold supply in China flows through the SGE. Consequently wholesale demand can be measured by the amount of gold withdrawn from SGE designated vaults. Comparable to the difference between apparent supply and consumer demand shown in exhibit 1, is the difference between SGE withdrawals and consumer demand – the latter being even wider.

Chinese domestic gold market S&D 2015
Exhibit 3.

In the GS2016 GFMS has written a chapter fully dedicated to the humongous difference between SGE withdrawals and their assessment of demand. The chapter is titled “A Review And Explanation Of How China’s SGE’s Withdraw Numbers Are Impacted By Other Trading Activities”. In this post we’ll only briefly discuss whether the arguments are valid, as one of them has to do with China’s highly complex VAT system and I like to expand on this subject in detail in a separated post. However, we’ll expose more of the mechanics of the Chinese domestic gold market in this post, which conveniently demonstrates why nearly all the arguments by GFMS that will be discussed later on are bogus.

This might surprise you, but I actually had fruitful correspondence in the past months with a Senior Precious Metals Analyst at GFMS and a Senior Analyst at Metals Focus (MF). Both gentlemen have been very helpful in sharing their methodology for computing (Chinese) physical supply and demand data. I have to say both of them have answered all my questions. This service is seldom provided by the the World Gold Council, the Bank Of England or the London Bullion Market Association. Based on the information shared by GFMS and MF I’ve refined my view on our on-going disagreement with respect to the Chinese gold demand.

The Mechanics Of The Chinese Domestic Gold Market And Estimating True Chinese gold demand.

Let us refresh our memory regarding the structure of this market. In the Chinese domestic gold market nearly all physical gold supply and demand flows through the SGE because all bullion import1 into the domestic market is required to be sold first through the SGE and there are rules and tax incentives that funnel nearly all domestic mine output and scrap supply through the central bourse. As gold in the Chinese domestic market is not allowed to be exported1, the amount of gold withdrawn from SGE designated vaults therefore serves as a decent indicator for wholesale demand.

However, there are a few possibilities through which SGE withdrawals can be distorted for measuring demand.

  • If metal is in some manner recycled2 through the central bourse. When gold is bought and withdrawn from the SGE vaults and promptly sold and deposited into SGE vaults (for example though process scrap), these flows would inflate SGE withdrawals while not having a net effect on the price of gold, hence the related supply and demand volumes would be deceiving. Although article 23 from the Detailed Rules for Physical Delivery Of the Shanghai Gold Exchange states that bars withdrawn from SGE designated vaults are not allowed to re-enter these vaults, this rule does not fully prevent gold from being recycled through the exchange. If bars withdrawn are re-melted and assayed by an SGE approved refinery they are allowed back into the vaults. And thus, some recycled gold can inflate SGE withdrawals as a measure for true demand.
  • Another example that could distort SGE withdrawals is when international members would withdraw gold from vaults of the SGEI in the Shanghai Free Trade Zone2 (SFTZ), these withdrawals are included in the total SGE withdrawal figure, to store elsewhere in the SFTZ or export abroad1.

For ease of reference we’ll label the amount of gold recycled through the SGE that has no net effect on the price, and gold withdrawn from SGEI vaults that is not imported into the Chinese domestic market as distortion2.

Therefor, in order for us to make the best estimate of true Chinese gold demand we should subtract the amount of distortion from SGE withdrawals. The crux of true Chinese gold demand is establishing the amount of distortion, that’s it.

Previously I assumed the scrap numbers by GFMS mainly reflected gold that was making it’s way back to the SGE and these flows included disinvestment. Both assumptions appeared to be false.

  1. Scrap numbers from GFMS and MF, although they’re certainly not equal, are collected from refiners that are not all SGE members. Implying not all refineries scrap is making its way to the SGE, but is sold through other channels.
  2. Scrap numbers from GFMS and MF include jewelry and industrial products sold back from consumers, they do not include disinvestment that flows directly through refineries to the SGE. GFMS does measure disinvestment at retail level, for example, when people sell bars back to banks these will get netted out to compute net retail bar demand. But if an affluent investor or institution wants to sell (disinvest) 500 Kg they’re likely to approach a refinery directly.

In my nomenclature “distortion2” is the part that inflates SGE withdrawals as a measure for demand, “scrap” is supply from sold fabricated products like old jewelry, and “disinvestment” is supply coming from investment bars sold directly to refineries making its way to the SGE.

As a consequence, these new insights regarding scrap and disinvestment supply have changed my perspective on the Chinese supply and demand balance.

To reach a more clear understanding of what was just described, I’ve conceived an exemplar graph to visually interpret the Chinese physical gold supply and demand balance. Have a look.

Example Chinese domestic gold market S&D
Exhibit 4.

As you can see in the graph above total supply and total demand are exactly equal, this is because one cannot sell gold without a buyer or buy gold without a seller. Consequently we can gauge demand by measuring supply. Please note, in the supply and demand balance shown above, and in our further investigation, two elements are left out. On the supply side I left out stock carry over in SGE vaults from previous years, as this information is not publicly available. On the demand side I left out gold bought at the SGE that was not withdrawn from the vaults, as this information is also unknown.

In all its simplicity the example chart shows that the difference between consumer demand and true Chinese gold demand is caused by direct purchases from individual and institutional clients at the SGE. While GFMS merely counts demand at retail level, by jewelry and bar sales at shops and banks, the real action is at wholesale level, at the SGE.

GFMS fully neglects direct purchases at the SGE (demand) and any corresponding disinvestment to the SGE (supply). Hence our disagreement.

Estimate of SGE withdrawals distribution
Exhibit 5. According to my analysis the PBOC does not buy its gold through the SGE. For more information read my post PBOC Gold Purchases: Separating Facts from Speculation.

At the moment the SGE has almost 10,000 institutional and over 8.3 million individual clients that are able to buy gold directly at the SGE. There is even an SGE smartphone application called “Yijintong” that allows anyone with an internet connection to open an SGE account and trade directly on the SGE wholesale platform enjoying the lowest spreads in China. Furthermore, the SGE counts 183 domestic members and 63 international members.

Exhibit 6. Screenshot Yijintong.

From the SGE (December 2015):

Yijintong is the first professional mobile terminal of state-level gold market jointly researched and developed by the Gold Exchange and all its members …

Yijintong has comprehensive functions and advanced systems, which are compatible with various Android and iOS operating systems. Right now, it possesses market, transaction, search and information functions, so investors can conduct transactions via mobile phones … In early 2016, Yijintong will support mobile phone online account opening. After that, new users will be able to establish Shanghai Gold Exchange’s “Gold Account” business on their mobile phones directly, and avoid the step of visiting stores. It has brought convenience for personal investors to participate in gold and silver transactions.

Investors can log into Yijintong through mobile phones to conduct daily and nightly market transactions and search, utilizing all-day mobile phone services for gold and silver transactions, allowing Yijintong to become a mobile phone gold and silver investment edge tool that integrates functions and practicability, which also helps investors to do well in both work and financial management.

Exhibit 7.

SGE app qr code

Exhibit 8. Download methods: iOS and Android mobile phone users can scan the QR code and open it in the browser to download and install directly.

The China Gold Association (CGA) makes yearly estimates of direct purchases at the SGE. In their Gold Yearbook 2013 direct purchases (net investment) were assessed at 1,022 tonnes, computed as SGE withdrawals minus consumer demand. The CGA neglects any distortion flowing through the SGE hence I stopped using their methodology. Have a look at the screenshot below.

CGA Gold Yearbook 2013 demand
Exhibit 9. CGA Yearbook 2013: framed in black is total demand 2013 in tonnes (Red = jewelry manufacturing, blue = small bar production (sold at ie banks) , purple = industrial material, turquoise = coin manufacturing, yellow = other, green = net investment)

Unfortunately me personally can’t exactly compute true Chinese gold demand, as I don’t have business relationships with all Chinese refineries to gauge disinvestment supply flowing to the SGE. In any case, these are the formulas:

True Chinese demand = net import into the Chinese domestic market1 + scrap + disinvestment + domestic mine output

Although a tad complex, the exact formula including SGE withdrawals is:

SGE withdrawals = net import into the Chinese domestic market1 + (domestic mine output – domestic mine output that not flows to the SGE) + (scrap – scrap that not flows to the SGE) + disinvestment + distortion + (an amount equal to “domestic mine output that not flows to the SGE + scrap that not flows to the SGE” being disinvestment or distortion)

Although not all scrap as disclosed by GFMS ends up at the SGE, it’s definitely all genuine supply and therefore useful in the first formula above. Same goes for domestic mine output.

The part of scrap and domestic mine output that doesn’t travel to the SGE (although being genuine supply) must be replaced by either disinvestment or distortion at the SGE (exhibit 4). Note, in the knowledge direct purchases from the SGE are immense in China (exhibit 9) we can safely assume that disinvestment flows to the SGE are sizable as well.

My new insights unfortunately do not imply that we can make a more precise estimate of true Chinese gold demand. However, I think the best approach is to set the lower bound of true Chinese gold demand at net import1 + mine output + scrap. While I think true demand is likely higher because disinvestment to the SGE can be significant.

Sadly because disinvestment is unknown, distortion is also unknown (exhibit 4)

Let’s return to our discussion with GFMS. The big question is of course, how can total Chinese gold demand by GFMS be 867 tonnes, in a market where mining output accounted for 450 tonnes (source), net imports by my calculations accounted for 1,575 tonnes1, and there is also scrap and disinvestment supply, but export is prohibited and the premium on gold in China was positive throughout the whole year?! This cannot be.

Shanghai Gold Exchange SGE gold premium 2015
Exhibit 10.

I would like to show a real life example to illustrate what’s going on the Chinese gold market: In 2015 the Chinese stock market (the Shanghai Composite Index) declined by 40 % from June till August. Seeking for a safe haven the Chinese bought physical gold en masse directly at the SGE; some weekly withdrawals in July, August and September transcended 70 tonnes. The gold was of course sourced by imports (look at the premium in exhibit 10), yet GFMS doesn’t consider this to be demand.

SCI vs SGE withdrawals
Exhibit 11. 

The Arguments

Although true Chinese demand cannot be less than SGE withdrawals minus distortion, GFMS pretends their arguments can explain the gigantic gap between SGE withdrawals and consumer demand. Illustrated in the chart below.

Chinese domestic gold market S&D 2013 - 2015
Exhibit 12.

All arguments presented can only explain the size of distortion (exhibit 4), not the difference between SGE withdrawals and consumer demand! Actually, I should stop writing here, but I won’t. Let’s briefly go through these arguments to see if they make any sense.

The chapter in question, “A Review And Explanation Of How China’s SGE’s Withdraw Numbers Are Impacted By Other Trading Activities” (Gold Survey 2016), surprisingly lists three new arguments…

  • Tax avoidance (page 56).
  • Financial statement window dressing (page 58).
  • Retailers selling unsold inventories directly to refiners (page 58)

…and one old argument:

  • Gold leasing activities and arbitrage opportunities (in China gold is money at lower cost) (Gold Survey 2016, page 57, Gold Survey 2015, page 78)

Given the fact GFMS has gone all out in this chapter one would assume it to be complete. But strangely, arguments presented in prior Gold Survey reports and at forums have been abandoned. The following arguments were presented by GFMS in recent years:

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

What happened to arbitrage refining as described by GFMS Senior Precious Metals Analyst Samson Li at the Reuters Gold Forum in 2015? Has this arbitrage opportunity ever existed or did the market change and now the opportunity is closed? I never thought this argument was very compelling. Maybe GFMS changed its mind on arbitrage refining.

What happened to the round tripping of gold between Hong Kong and Shenzhen, put forward in the Gold Survey 2014 and 2015 as a reason that inflated SGE withdrawals? Did criminals stop using this scheme, or did GFMS find out it never inflated withdrawals because gold flows through Free Trade Zones are separated from the Chinese domestic gold market and the SGE system1? In several posts I’ve extensively shown round tripping does not inflate SGE withdrawals, for more information click here.

What happened to the argument Chinese commercial banks buy and withdraw gold at the SGE to back investment products they offer to customers, a practice which boosts import and withdrawals but was not considered demand by GFMS? Or is it demand now, as GFMS dropped this argument from the list? Ok, gotcha.

Now briefly about the new arguments listed by GFMS in the GS2016:

  • Tax avoidance.

The definition of tax avoidance is that it’s a legal way to pay as little tax as possible. However, the scheme GFMS describes in the GS2016 report is tax evasion, which is highly illegal, and worst case the perpetrator can suffer life imprisonment. This is not some legal loophole as GFMS purports (page 56).

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

By writing the scheme is a way of tax avoidance and a loophole GFSM is misleading their readers. In addition, this illegal scheme did not emerge in 2013. The tax rules are now the same as when the SGE was erected in 2002. In fact, if you click here, you can read an article about the same crimes in 2009. But as mentioned before, we’ll save the details for a forthcoming post, when we’ll also address “financial statement window dressing” and “retailers selling unsold inventories directly to refiners”.

About gold leasing that would inflate SGE withdrawals, I’ve written numerous blog posts about this in the past. Best you can read my post Chinese Commodity Financing Deals Explained. In all the posts I’ve written over the years on the subject I’ve stated that the gold leased is not likely to leave the SGE vaults except when the gold will be used for jewelry manufacturing (which is genuine demand). Effectively, all the gold leasing by enterprises, investors and speculators to acquire cheap funding happens within the SGE system and do not inflate withdrawals. Ironically, in the latest World Gold Council (WGC) report it’s written [brackets added by me]:

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

So, I hope to have clarified why according to my estimates true Chinese gold demand in 2015 must have been north of 2,250 tonnes (import 1,575 tonnes, mine output 450 tonnes, scrap supply 225 tonnes). More details in the next post when we will discuss the tax scheme.


1. Estimating China’s net gold import is difficult. For one, because China’s customs department doesn’t publicly disclose its cross-border trade statistics for gold so we depend on bullion export data (HS code 7108) from the rest of the world. Data from Hong Kong, the UK, Switzerland, the US, Canada and Australia is publicly available, but for example data from South Africa is not. Therefor provisional data on China’s net import is not always fully accurate. Only when the CGA publishes the import amount in their Gold Yearbook can we know for sure. My estimate is 1,575 tonnes for 2015.

Net bullion exports to China in 2015: Hong Kong 861 tonnes, Switzerland 292 tonnes, the UK 285 tonnes, the US 6 tonnes, Japan 5 tonnes, Australia 124 tonnes, Canada 3 tonnes.

In China gold is not allowed to be exported from the domestic market (SGE Main Board). However, gold is allowed to be imported into / exported from China through processing trade, usually done in Free Trade Zones. This is the only way gold can be exported from China. Note, processing trade flows are completely separated from the Chinese domestic gold market. For detailed information read my post Chinese Cross-Border Gold Trade Rules.

In order to track how much gold China is net importing, it’s necessary to net out bullion export to China by foreign countries, with import from China by foreign countries (HS code 7108). Although, it’s also possible that bullion is imported into China through processing trade and exported as jewelry (China has a vast jewelry manufacturing industry), which falls under a separated trade category (HS code 7113). Suppose, a jewelry manufacturer in Shenzhen import 2 tonnes of gold from Hong Kong under HS code 7108 through processing trade, processes the gold into jewelry to subsequently export the finished products back to Hong Kong under HS code 7113. This would blur our view on net bullion import by China, however I neglect this phenomenon in my calculations.

The fine gold content in jewelry exported from China (HS code 7113) is very difficult to measure as the total value of the products shipped also contain other precious metals, gems and includes the fabrication costs. Hence, the value and weight of jewelry exported from China does not reveal the fine gold content. The reason why I do not adjust net bullion inflows into China by jewelry outflow is because the gold content in jewelry exported from China is roughly offset by imports of gold doré or gold as a by product in ores and concentrates.

For example, the most recent CGA Yearbook in my possession, covering calendar year 2014 (exhibit 13), states “Chinese domestic and overseas gold mining output” was 512.775 tonnes. In the same report it’s mentioned “domestic mining output” accounted for 451.799 tonnes, implying overseas mine supply accounted for 60.976 tonnes. And thus, I net out overseas mining imported into China (60.976 tonnes) against jewelry exported from China. If I find more information on Chinese cross-border gold trade flows I will adjust my methodology accordingly.

Exhibit 13. Screenshot taken from my hard copy of the CGA Yearbook 2014. We can see framed in blue is “domestic and overseas mine supply”, framed in red is “gold import” and framed in green is “total supply”. Total supply, as disclosed by the CGA, equals SGE withdrawals for 2014, likewise it did for the years 2007, 2008, 2009, 2010, 2011, 2012 and 2013. 

Last but not least, gold can be imported through processing trade into the Shanghai Free Trade Zone (SFTZ) where the Shanghai International God Exchange (SGEI) vaults are located. Potentially, this gold in SGEI vaults, once sold to foreigners is withdrawn and exported abroad (inflating SGE withdrawals). However, a source at ICBC has indicated to me that regarding physical flows the SGEI is mainly used by Chinese domestic banks to import gold into the Chinese domestic market, at least this was the case until December 2015. So I don’t see a possibility there were exorbitant large volumes of gold in SGEI vaults in 2015, or have been withdrawn and exported.

The only noteworthy imports from China (the SGEI) I have observed are by India, which has taken in 370 Kg during 2015 (source Zauba), and by Thailand that presumably bought 7 tonnes (source COMTRADE).

Screen Shot 2016-08-13 at 11.20.26 am Screen Shot 2016-08-13 at 11.21.56 am Screen Shot 2016-08-13 at 11.22.20 am Screen Shot 2016-08-13 at 12.11.32 pmExhibit 14.

iAu9999 & iAu9999 OTC SGE
Exhibit 15. Weekly trading volume of the most popular SGEI contract iAu99.99, traded on-exchange and in the OTC market.

For more information on the SGEI read my posts, Workings Of The Shanghai International Gold Exchange and What Happened To The Shanghai International Gold Exchange?

2. For the sake of simplicity I have categorized under “distortion” everything that is not true demand, namely: process scrap, stock inventory change, arbitrage refining (if it exists), the VAT scheme, smuggling and SGEI withdrawals.

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).

Kazakhstan & China Join Forces In Gold Market

Silk Road Gold Trading Kicks Off

The other day I bumped into a small but potentially important news item on the website of the Shanghai Gold Exchange. The article was published in Mandarin, of course, as the Chinese (authorities) hardly ever publish valuable information in English – most articles published in English have been intentionally written to communicate what the State Council wants the West to hear. In the article it’s described a financial delegation from Kazakhstan visited the Shanghai Gold Exchange (SGE) to discuss cooperation in gold trading along One Belt One Road (OBOR), also referred to as the new Silk Road, that reaches over the whole Eurasian continent. From the SGE (exclusively translated by BullionStar):

A group led by Kairat Kelimbetov, the Chairman of the Board of Directors of the Kazakhstan International Financial Center, visited the Exchange

At noon on 26 February 2016 a group led by Kairat Kelimbetov, President of the Astana International Financial Center and former President of the National Bank of Kazakhstan, visited the Shanghai Gold Exchange and held talks with President Jiao Jinpu. Both parties reached consensus on strengthening cooperation and seeking development in the gold market under the “One Belt One Road” project. Zuo Qihan, Kazakhstan consulate general in Shanghai, Shen Gang, Vice General Manager of the Exchange and Zhuang Xiao, CTO, attended the meeting.

Although the article lacks any detail, we can discover its potential impact if we study the financial and political backdrop.

Kelimbetov has an impressive track record. Previously he served as the Minister of the National Economy, Deputy Prime Minister and Governor of the National Bank of Kazakhstan. Currently, he’s the head of the brand new Astana International Financial Center (AIFC) that was officially launched in January 2016, aimed to become one of the top 10 financial centers in Asia and one of the top 30 financial centers in the world by 2020. The government of Kazakhstan contributes full support to the AIFC .

Kairat Kelimbetov and Jiao Jinpu at the SGE
26 February 2016, on the left SGE President Jiao Jinpu, in the middle AIFC President Kairat Kelimbetov. Courtesy SGE.

The main language spoken at the AIFC is English and the center includes an independent court for financial and investment disputes using English law. Kenneth Rogoff, Professor at Harvard University and former chief economist at the IMF, has said with English law at the basis the AIFC will be a game changer.

The AIFC decree signed in May 2015 at the Astana Economic Forum (AEF) by the President of Kazakhstan, Nursultan Nazarbayev, commands the National Bank of Kazakhstan and the Kazakhstan Stock Exchange to relocate from the city of Almaty to Astana. The AIFC will be installed on the premises of the EXPO 2017 starting from 1 January 2018.

At the AEF Nazarbayev stated the financial crisis that broke out in 2008 is systemic and will only end when the key cause is eliminated: the profound accumulated imbalances in the currency markets. He added that these hidden, latent roots of the crisis have spawned currency wars and economic wars in the form of sanctions hurting many countries. Nazarbayev said, “This is what generates an increase in confrontation between East and West, the U.S. and NATO against Russia and China, … deep reforms are needed for sustained economic growth.”

Nazarbayev may 2015 AEF
Nazarbayev speaking at the AEF 22 May 2015.

Nazarbayev has always been a vocal critic of US supremacy and an advocate of gold. Under his guidance, in 2011 the National Bank of Kazakhstan has taken the pre-emptive right to buy all domestic gold mine output to strengthen its international reserves and develop the local gold industry. In 2012 a (third) large gold refinery, Tau-Ken Altyn, was erected as one of the key projects of the Astana Industrial Park, to ensure all domestic mine output can be refined in Kazakhstan.

President Nazarbayev paid a visit to the Tau-Ken Altyn refinery in December 2013, as can be seen in the video below starting at 1:13. Tau-Ken Altyn can produce 12.5 Kg investment bars for the central bank, as well as 100 gram and 1 Kg bars for personal investment.

Although official documentation is lacking, from the news item at the SGE website I assume the AIFC has included the Shanghai International Gold Exchange (SGEI) for servicing gold trading in renminbi – supporting the internationalization of the renminbi.

It’s unclear if the AIFC has exclusively attracted the SGEI platform for gold trading. On 11 March 2016 Kelimbetov visited London where he held a meeting with the heads of UK government institutions, large investment banks (Goldman Sachs, Morgan Stanley, UBS) and international financial organizations to discuss the AIFC’s progress. Though, Kazakhstan is likely to prefer cooperating with its Chinese partner in gold business, as both nations share a common interests of making a fist against US dollar domination.

The central banks of Kazakhstan and China are among the most aggressive gold buyers in the world. Since 2010 the official gold reserves of Kazakhstan have grown from 67 metric to 222 tonnes. In turn, over the same time horizon China has increased its official gold reserves from 1,054 tonnes to 1,762 tonnes, according to official statistics – it’s thought China’s central bank has significantly more gold than it publicly discloses.

Kazakhstan & China Gold Reserves 2011 2015

The central banks of numerous other countries in (central) Asia are buying gold as well, in example Russia, Belarus, Tajikistan, and Kyrgyzstan, sharing an objective to diversify foreign exchange reserves and unwind the US dollar hegemony.

But increasing their official gold reserves is not all these countries do, it’s part of something bigger. In recent years a vast movement of economic collaborations between countries in Eurasia has unfolded. One of these collaborations is the Silk Road economic project (/OBOR) that was launched in 2013. Partially funded by China’s foreign exchange reserves the project focuses on connectivity and cooperation among countries in Asia, Europe and Africa. Aside from its independent activities OBOR also provides the structure to connect other collaborations, of which the most relevant ones are:

  • The Shanghai Corporation Organization (SCO). The SCO is a political, economic and military alliance, comprising the member states Russia, China, Kazakhstan, Tajikistan, Uzbekistan and Kyrgyzstan, that was launched in 1996.
  • The Eurasian Economic Union (EEU). Launched in 2014 the EEU members Russia, Belarus, Kazakhstan, Armenia and Kyrgyzstan now form a space that is modeled on the European Economic Community.
  • The Asian Infrastructure Investment Bank (AIIB). The AIIB is an international financial institution, erected to support the building of infrastructure in the Asia-Pacific region, launched in 2015 counting 57 prospective founding members. Most Asian (except Japan) and European countries participate in the AIIB.

If we look closely we can observe that China is slowly pushing for more integration of the clubs mentioned above with OBOR. For example, in May 2015 Xi Jinping and Vladimir Putin signed a decree on cooperation in tying the development of the EEU with OBOR and in December 2015 the first discussions were held to integrate the SCO with OBOR. (Chinese state press agency Xinhua has a dedicated Silk Road web page that covers developments regarding OBOR and the SCO, EEU and AIIB.)

Kazakhstan recently opened a logistics terminal in Lianyungang, China, and completed the construction of its Zhezkazgan-Beineu railway to create a better connection for China through Kazakhstan to the Caspian seaports. “All these projects are aimed at increasing the transit potential of both our country and the whole of the Eurasian Economic Union,” said Nazarbayev at the AEF on 22 May 2015. “This is the new Silk Road. Forty countries have showed an interest in free trade with the Eurasian Economic Union. But we must not stop there. I propose to create a new … Eurasian transcontinental corridor.”

Screen Shot 2016-03-15 at 11.23.11 pm
Kazakhstan has a strategic position in Eurasia.

Coincidentally, also on 22 May 2015 the Silk Road Gold Fund was launched at a conference in Xi’an, China, with the subject of “Serve the New Strategy of the Silk Road, Lead the New Development of Gold”. From iFeng we can read (exclusively translated by BullionStar):

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

Time will tell to what extent the cooperation between the SGEI and the AIFC will execute what this quote describes. Namely, increasing gold business in the economies along the Silk Road.

A few days later in May 2015 China unveiled the Silk Road Gold Fund to the English-speaking world. From Xinhua:

The fund, led by Shanghai Gold Exchange, is expected to raise an estimated 100 billion yuan in three phases.

…Among the 65 countries along the routes of the Silk Road economic belt … there are numerous Asian countries identified as important reserve bases and consumers of gold.

…About 60 countries have invested in the fund, which will in turn facilitate gold purchase for the central banks of member states to increase their holdings of the precious metal, …

I’m not sure if the National Bank of Kazakhstan will buy its gold through the SGEI anytime soon, more likely some of Kazakhstan’s gold production will be sold through the Chinese exchange.

From all information presented above the intensions of China and numerous Asian countries with respect to gold and the Silk Road are clear. Through OBOR China will not only use its foreign exchange reserves for infrastructure in Eurasia to boost growth and strengthen economic ties and in the region, additionally, gold business is developed and gold is promoted as a key reserve currency.

The Chinese Gold Market Essentials Guide

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

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

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

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

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

Understanding The Chinese Gold Market Step By Step

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

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

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

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

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

China’s Gold Army

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

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

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


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

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

Chinese mining 1949-2014 x

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

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

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

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

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

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

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


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

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

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

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

Source The China Times, Global Edition

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

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

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

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

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

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

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

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

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

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

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

Renminbi Internationalization And China’s Gold Strategy

Here we go!

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

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

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

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

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

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

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

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

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

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


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

Renminbi Internationalization and China’s Gold Strategy Seminar

Date: September 22, 2015. Source 

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

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

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

Wang Jia Qiong
Wang Jiaqiong

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

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

Song Xin rmb au
Song Xin

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

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

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

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

What Happened To The Shanghai International Gold Exchange?

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

Shanghai Gold Exchange SGE withdrawals delivery 2015 week 45

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

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

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

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


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

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

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

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

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

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

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

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

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

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

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

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

iAu9999 OTC

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

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

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

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

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

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

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

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

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

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

Russia’s VTB Bank Joins As SGE Member. Chinese Direct Gold Imports Increase

Another strong week for gold demand at the Shanghai Gold Exchange – China’s main physical gold bourse. From 19 until 23 October 57 tonnes have been withdrawn from the vaults of the Shanghai Gold Exchange (SGE), according to data released on Friday by the SGE. Year to date 2,119 tonnes have been withdrawn. With a little over two months left in 2015 SGE withdrawals, which capture the amount of Chinese wholesale gold demand, are set to reach more than 2,500 tonnes in 2015, breaking the record of 2013 at 2,197 tonnes.

SGE withdrawals have made a spectacular run up this year since the Chinese stock market came crumbling down in June. In between June and October SGE withdrawals have been 1,138 tonnes, up 37 % year on year.

The People’s Republic of China does not publish the amount of gold imported, however, from foreign trade statistics provided by other nations and physical turnover at the SGE we can estimate China will net import at least 1,300 tonnes of gold in 2015 – transcending net import in 2014, which was an estimated 1,250 tonnes. 

Whilst the SGE releases withdrawal data every week, foreign trade statistics are released on a monthly basis. Wholesale gold demand in China mainland was elevated in recent months, but it always remains to be seen exactly how much gold was net imported in order to supply the SGE.

Shanghai Gold Exchange SGE withdrawals delivery 2015 week 41

Let’s have a look at what gold trade data has already been released for the past months: Switzerland has net exported 21.69 tonnes of gold to China in September – up 28 % month on month – according to the most recent data from the Swiss Customs department. This is the largest amount of gold export to China from Switzerland in six months.

Switzerland China gold trade 2012 - sep 2015

Trade data from the Hong Kong Census And Statistics Department has not yet officially been released, but Reuters gave us a sneak preview. Net export from Hong Kong to China mainland in September was 97 tonnes, up 63 % month on month and the largest amount of gold export to China in ten months.

Foreign Trade statistics from the UK and other major gold trading hubs has not yet been published. Although not all gold trade data can be collected, we can see in the chart below, that displays currently known Chinese physical gold supply, gold import into China is steadily rising along side strong SGE withdrawals.

SGE withdrawals vs gold import China monthly september 2015
In this chart foreign trade statistics from Australia are not included for July, August and September, and foreign trade statistics from the UK are not included for September.  

As usual, apparent physical gold supply in China is much more than what the mainstream media would like you to believe. Most notably, since 2013 gold supply in China has been thousands of tonnes more than what consultancy firms like the World Gold Council and GFMS disclose as Chinese gold demand. On the LBMA conference in Vienna (18 – 20 October) it was discussed, again, that Chinese Commodity Financing Deals are the sole reason for the missing gold in China.

This is not true. Chinese Commodity Financing Deals (CCFDs) with respect to gold can be either conducted through round tripping or gold leasing. Round tripping has got nothing to do with the Chinese domestic gold market and gold leasing can never have ‘swallowed’ a few thousand tonnes of gold from reaching genuine demand. Because the myths about CCFDs keep being repeated I will write a new extensive post on CCFDs.

VTB Bank Has Been Granted SGE Member Status

On the website of VTB Bank it was announced it has been granted SGE member status, with the right to participate in trading on the Shanghai International Gold Exchange (SGEI). VTB is the first Russian bank to enjoy member status of the Chinese exchange.

Russia has hardly been exporting non-monetary gold directly to China in recent years. Now VTB is an SGE member this will change, as Russian banks are often the exporters of mined gold of Russian mining companies. I will closely watch the foreign trade statistics provided by Russia’s customs department.

“Access to trading on China’s domestic precious metals market will give VTB Bank, which also trades on Western exchanges, more opportunities to sign gold deals in Shanghai. As an important element of our Chinese strategy, we continue working to develop the bank’s business and that of our clients in the Shanghai Free Trade Zone.…” said Herbert Moos, Chairman of VTB Bank’s Management Board.

The biggest part of Russia’s mining output is sold to VTB and Sberbank, who sell it to the Russian central bank and foreign buyers – according to newswire EM Goldex

Russia’s largest gold mining company Polyus Group, that mined 53 tonnes in 2014, announced in early May it would start cooperating with China’s largest mining company China National Gold Group Corporation in resource exploration, technical exchanges and materials supply. Shortly after, we learned this cooperation is part of the Silk Road economic project that was initiated by China.

Polyus sells the lion share of its mine output through Russian banks. If we look at the 2014 Polyus Annual Report we can see it sold most if its gold (38 %) through VTB Bank.

Screen Shot 2015-10-30 at 3.18.22 pm
Courtesy Polyus Group.

In 2014 Polyus sold gold valued at 841 million US dollars through VTB Bank. In the past this gold has probably not been sold directly to China or through the SGEI. This is about to change since VTB is now SGE member.

VTB Bank’s SGE membership is significant, as it can be seen as more cooperation in the gold industry on the Eurasian continent along the Silk Road between Russia and China. 

Will The Shanghai International Gold Exchange Facilitate Gold Inclusion Into The SDR?

The Shanghai International Gold Exchange (SGEI) was launched in September 2014, to internationalize the Chinese gold market and the renminbi. The timing of the launch is quite remarkable though, in the context of changes in the international monetary system (IMS).

2015 is likely to force a major shift in the IMS. Two developments are worth watching, the SDR basket will be reviewed, the renminbi will probably be adopted later this year, and the rise of the Asian Infrastructure Investment Bank (AIIB), an international financial institution proposed by China with many Western members; currently France, Germany, Italy, Luxembourg, Switzerland, New Zealand and the UK. Both developments are severe blows to the US dollar hegemony.

Last week I reported on, (i) the IMF terms for the renminbi to be adopted into the SDR, (ii) if these terms can be met this year, and (iii) what the role of gold will be in the process (read China, Gold, SDRs And The Future Of The International Monetary System). Since then there has been more confirmation of renminbi adoption in the media.

From Reuters:

China’s yuan at some point would be incorporated in the International Monetary Fund’s Special Drawing Right (SDR) currency basket, IMF Managing Director Christine Lagarde said, …”It’s not a question of if, it’s a question of when,”

From Xinhua:

China and Germany conducted their first high-level financial dialogue here on Tuesday and agreed to strengthen macro-economic policy coordination

…confronted with a complex and fragile global economic situation, China and Germany as important economies should strengthen policy coordination, coordinate strategic cooperation, deepen financial and fiscal cooperation…

Representing Germany at the dialogue, German Finance Minister Wolfgang Schaeuble and Deutsche Bundesbank President Jens Weidmann said that Germany and China have been working together very well both bilaterally and multilaterally in financial and fiscal areas…

According to a joint statement after the dialogue, the German side will actively support … China’s goal to add the RMB to the special drawing rights (SDR) currency basket based on existing criteria.

…During the dialogue, both sides reached consensus on issues such as investment cooperation between China and Europe, China and Germany and in third countries.

Kindly note, Germany officially has the second largest gold reserves in the world and are currently repatriating gold from the US. Thereby expressing their affinity with gold and their lack of trust in the US as their custodian. This Germany would like the renminbi to be included into the SDR.

The most important condition for the adoption of the renminbi is that it must be freely usable. From Criteria for Broadening the SDR Currency Basket, an IMF paper published in 2011, “that discusses a number of reform options for the eligibility criteria for the SDR currency basket”:

The freely usable concept and its two key elements—currencies should be “widely used” and “widely traded” —are set out in the Articles and serve important operational purposes.

The renminbi is currently “widely used” and “widely traded”.

Will Gold Be Included In The SDR Basket? 

China gold x

The reason the current IMS is up for revision is because the global fiat experiment has failed miserably. Having exclusively fiat currencies circulating within countries, without any anchor to a non-fiat reserve currency, is simply not sustainable. In shaping a new IMS the designers would be mistaken to create a system based on a basket of solely fiat currencies, which have just proven to be ineffectual. Gold could provide credibility and strength to the SDR.

In addition, we could read some clues (in my prior post) that the Chinese would like gold in the SDR along side the national fiat currencies. This would explain China’s aggressive gold purchases in recent years.

On March 9, 2015, Albert Cheng, managing director of the World Gold Council Far East, was interviewed by ShanghaiDaily.com:

Q: The council has signed an understanding agreement with the Shanghai Gold Exchange to work more closely via the International Board set up in the city’s pilot Free Trade Zone last September. Could you tell us how that will work?

A: The memorandum of understanding involves objectives to improve operation of the Shanghai Gold Exchange, such as attracting more international players. Gold is a hard currency, so if it is freely traded in China, it will have an impact on the yuan. The design of the International Board, allowing international and domestic investors to participate in the onshore gold market, has a symbolic meaning of some kind of convertibility. By signing the memorandum, we can help the Board marketing this concept to the international trading community.

In general the renminbi is not yet fully convertible, but in terms of gold it is; through the Shanghai International Gold Exchange. Logically all currencies in the SDR basket must be freely usable, and allowed to be freely exchanged for one another. If the renminbi and gold were to be added to the SDR basket it would help if there is an exchange for both, which is currently operating in the Shanghai Free Trade Zone.

Will the Shanghai International Gold Exchange facilitate gold inclusion into the SDR?

Total SGE Withdrawals 255t In January, Up 4 % y/y

In the last trading week of January another huge quantity of gold left the vaults of the Shanghai Gold Exchange (SGE). According to the latest SGE data nearly 54 tonnes were withdrawn in week 4 (January 26 – 30), down 24 % w/w. Year to date a staggering 255 tonnes has been withdrawn, up 4 % from the strongest January ever in 2014.

Screen Shot 2015-02-06 at 11.44.19 AM
Blue (本周交割量) is weekly gold withdrawn from the vaults in Kg, green (累计交割量) is the total YTD.

Corrected by the volume traded on the Shanghai International Gold Exchange (SGEI), withdrawals in week 4 were at least 42 tonnes (read this post for a comprehensive explanation of the relationship between SGEI trading volume and withdrawals). Year to date withdrawals corrected by SGEI volume were at least 230 tonnes.

Shanghai Gold Exchange SGE withdrawals delivery 2015 week 4, dips

Shanghai Gold Exchange SGE withdrawals delivery only 2014 - 2015 week 4, dips

A quick calculation suggests China has imported somewhere in between 175 and 200 tonnes of gold in January. Happy New Year!

In a recent blog post Thomson Reuters noted banks that enjoy a PBOC gold trade license are obliged to import a minimum amount of gold each year. Supposedly this is why Chinese gold import (and SGE withdrawals?) ramped up in the fourth quarter of 2014.

Licensed importers need to import a minimum amount of gold bullion per year to demonstrate to government authorities that they have put their import license to good use. Therefore, after a series of relatively weak import numbers in the second and third quarters, importers had some catching-up to do by the fourth quarter.

So China imports gold, which is being sold through the SGE and withdrawn from the vaults, though this is not related to any demand? If there would be no demand for the imported gold in China, (i) there would be significant discounts on the SGE relative to London, (ii) Importing/consignment banks would suffer enormous losses. Doesn’t make sense to me.

On January 26 the SGE announced to allow its international members and customers to trade the deferred silver contract Ag(T+D), a domestic precious metals contract, starting February 2. Though, foreign traders will only be able to open long or short positions, receive/pay the deferred compensation fee and close long or short positions. Delivery let alone withdrawals will not be allowed. Herein we can clearly see the closed characteristics of the Chinese precious metals market; not only gold is prohibited from being exported, through VAT rules the State Council effectively blocks silver from being exported as well (in general trade). The possibility for foreigners to open Ag(T+D) positions are pure paper trades. From the SGE:

All members,

For the purpose of diversifying trading products for international members and customers, the Shanghai Gold Exchange (“The Exchange”) is going to open the trading access of Ag(T+D) contracts to international members and customers. From February 2nd, 2015, all international members and customers are allowed to participate in the Ag(T+D) trading, including opening long or short positions and closing out long or short positions; and yet delivery tendering, delivery equalizer tendering, or load-in and load-out of physical silver bullions are not allowed.

The trading margins and transaction fees for international members are consistent with domestic members and customers. The position limits of Ag (T+D) for international members and customers are also in line with domestic members and customers. International members and customers may apply to SGEI for adjustment of position limits as per their business needs.

Likely not many foreign traders have jumped in as of yet, total weekly silver volume in week 5 (January 2 – 6) was 9,704 tonnes, down 11 % w/w.

Shanghai Gold Exchange SGE weekly silver volume

Hard to say what will happen down the line, the internationalization of the SGE since September 2014 hasn’t been successful up until now. This would presumably change if China liberalizes its precious metals export policy, but does it want to? Not in the near future if you’re asking me.

Let’s see what happens next in the global realm of precious metals when Chinese banks will participate in the new London gold fix scheduled in March.

SGE Withdrawals A Whopping 61t In Week 51, YTD 2016t

Withdrawals from the Shanghai Gold Exchange (SGE) came in very strong in week 51 at 61 tonnes, year to date the counter has reached 2016 tonnes.

Screen Shot 2014-12-27 at 12.18.55 PM
Blue (本周交割量) is weekly gold withdrawn from the vaults in Kg, green (累计交割量) is the total YTD.

Some SGE data lags one week, some not; in this post all data is up to week 51 (December 19).

Withdrawals from the vaults of the SGE captures Chinese wholesale demand, however, to get a more precise view on demand we have to add SGEI volume to the equation (read this post for a comprehensive explanation on the relationship between SGE withdrawals and volume on the Shanghai International Gold Exchange – SGEI). If we subtract SGEI volume from SGE withdrawals, at least 51 tonnes was withdrawn in week 51, at most 61 tonnes; year to date, at least 1,963 tonnes was withdrawn, at most 2,016 tonnes.

I could speculate on why Chinese wholesale gold demand is likely to be more in the area of the upper limit or bottom limit, fact is I have little evidence to back it up; all I know at this stage is that it’s somewhere in between.

Shanghai Gold Exchange SGE withdrawals delivery 2014 week 51, dips

Last week I wrote I expected withdrawals to be strong in the coming weeks, as December and January are seasonally the strongest months, but the Chinese are often aiming to buy their physical on the dips. In week 49 and 50 withdrawals were a bit held back because of the rising price of gold in renminbi. In week 51 the price was declining, so withdrawals were up.

Shanghai Gold Exchange SGE withdrawals delivery only 2014 week 51, dips

Year to date SGE withdrawals – 1963 tonnes, the bottom limit – were supplied by (my best estimates):

  • 442 tonnes mine production
  • 1,172 tonnes import
  • 349 tonnes recycled gold

If we use the upper limit – 2016 tonnes, import and/or recycled gold had to be more.

SGE premiums have been hovering in between 0.51 and 0.76 % above London spot throughout week 51.

Total SGE (gold) trading volume was down 14 % from the previous week at 410 tonnes. The uptrend is still intact as we can clearly see from the next chart.

Shanghai Gold Exchange SGE weekly gold volume

On the Shanghai Futures Exchange (SHFE) volume traded in Au futures accounted for 786 tonnes in week 51 (1,196 tonnes SGE + SHFE volume), on the COMEX 2,527 tonnes changed hands.

COMEX vs SGE + SHFE gold volume

Insatiable Chinese Gold Demand Continues Unabated

Friday the latest update was published on withdrawals of the Shanghai Gold Exchange (SGE) and Shanghai International Gold Exchange (SGEI). As I’ve written last week this number does not exactly equal Chinese gold demand anymore, but for the time being it’s a very accurate benchmark.

SGE withdrawals 2014 week 42
Blue (本周交割量) is weekly gold withdrawn from the vaults in Kg, green (累计交割量) is the total YTD.

Total withdrawals in week 43 (October 20 – 24) accounted for 60 tonnes and year to date the counter has reached 1607 tonnes. How is this gold supplied? The SGE is supplied by imported gold, domestically mined gold and recycled (or scrap) gold. The amount withdrawn from the vaults equals total demand equals total supply equals import + mine + scrap, because once bars leave SGE vaults they are not allowed to return before being remelted and re-assayed again and counted as recycled.

SGE withdrawals = import + mine + scrap = total demand 

Import = SGE withdrawals – mine – scrap

Let’s fill in the blanks. SGE withdrawals are weekly disclosed by the SGE and domestic mining will be 451 tonnes in total this year. How much is recycled gold? In the China Gold Yearbook 2014 (that covers the financial year 2013), it was disclosed recycled gold was 247 tonnes in 2013, and 232 tonnes in 2012.

Supply Chinese gold market 2013, China Gold Yearbook 2014
Blue is recycled gold in tonnes, green is total supply. (1506.50 is tonnes imported ex gold from Chinese overseas mines)

Based on these numbers let’s estimate scrap will be 239 tonnes in 2014. Now we can calculate import.

Chinese supply content 2014 week 43

As we can see in the table, China has net imported 46.7 tonnes in week 43 and 1036 tonnes year to date (until October 24). Note, these are estimates, but have proven to be very precise.

I’ve been reporting on these numbers for a while now and sometimes I don’t realize anymore how much gold we’re actually talking about. While 99 % of the financial industry has no idea how much gold is being soaked up by China – because they rely on numbers from the World Gold Council – we (me and regular readers) are almost habituated to these immense numbers. 46.7 tonnes of gold are 3,736 London Good Delivery bars, more than 46 thousand 1 Kg bars and about the same amount as the official reserves of Finland, imported in one week! Additionally, this excludes PBOC purchases, which is not being bought through the SGE, according to an SGE official. Though a CGA official confirmed the PBOC is buying continuously.

12.5 Kg London Good delivery bar.
12.5 Kg London Good delivery bar.
1 Kg gold bar
1 Kg gold bar

Taking a step back and rethink what’s currently going on in the Chinese gold market will be quite an intriguing chapter in history books. “China bought all that gold at those prices while the whole world was watching?”, readers will wonder, “and this wasn’t noticed by any journalists? While clearly the fiat international monetary system came to an end?”, as I imagine.

The pattern is as clear as can be; the lower the price of gold the more the Chinese buy. As of October 31 (week 44) the price of gold fell to $1,172 an ounce. Did the Chinese bought some more?

SGE withdrawals 2014 week 43, dips, Chinese gold demand

I expect they did. Notice that demand in December and January is always elevated in China, there will be strong demand in the coming months.

In 2013 and in H1 of 2014, the gold sold through the SGE could be clearly traced back to its source by official customs data. Most of the gold came from London (home of the London Bullion Market and GLD), which was shipped to Switzerland to be refined in 1 Kg bars and then sent on to China via Hong Kong. The numbers made perfect sense, in 2013 China net imported 1,500 tonnes from the West, they mined about 450 tonnes and recycled gold was 250 tonnes, hence SGE withdrawals accounted for 2,200 tonnes.

In recent months the trade numbers make less sense with regard to the amount of gold sold through the SGE, which leaves the question; who is selling these huge amounts of physical gold – under the radar – for bottom prices to China? I will spent a future post speculating on this question.

SGE withdrawals vs COMEX delivery monthly, Chinese gold demand
Latest monthly SGE withdrawal numbers. Note, “withdrawals” and “delivery” are something different.

I noticed the gold premium on the SGEI jumped from the SGE on Thursday, meaning gold in the Shanghai Free Trade Zone (SGEI) is more expensive than in the mainland (SGE).

Shanghai Gold Exchange gold premium

Foreigners trading on the SGE can not export the gold from the mainland, this is prohibited by the PBOC. Chinese banks (the ones blessed with a PBOC import license) that trade on the SGEI can import gold into the mainland. Effectively the arbitrage opportunity can only be closed one way; if SGEI gold in the FTZ is cheaper than SGE gold in the mainland, the Chinese banks can buy and import gold from the FTZ until the difference is nullified. Of course when SGEI gold is more expensive than SGE gold, the Chinese banks in the mainland have no interest to import SGEI gold.

The fact that trading volume on the SGEI dropped 1.7 tonnes from 4 tonnes in week 43 to 2.3 tonnes in week 44 hints at much of the volume traded on the SGEI is done by domestic banks. Hence SGEI volume drops if it’s price rises relative to SGE prices.

Click here to read a comprehensive analysis of the workings of the SGEI. 


The discount of silver in China compared to London is still hovering below 4 % (measured until October 31).

Shanghai Gold Exchange silver premium 2013

The decline in the discount of silver can be explained by high demand in the mainland, but it can also been caused by high demand from abroad. As we learned last week (click for a detailed analysis) Chinese traders found a way to export silver circumventing a 17 % VAT on silver bullion export – I don’t know the amount of silver involved in the scheme.

Some of the silver that was depleted from the SHFE inventories can have been used for this export scheme. Even more silver can have been exported as the SHFE inventories are not the only stocks in the mainland.

SHFE silver inventory, October 31, 2014

Silver on the Shanghai Futures Exchange (SHFE) is trading in backwardation, since August 6. This also could have been caused by the export scheme. I will try to figure out how much silver was exported through the scheme, as this will provide us more information on the implications it has caused in the Chinese silver market.

SHFE silver backwardation October 31, 2014

One thing is for sure, the declining silver discount in the mainland and concurrent backwardation were caused by high demand, wether from abroad or the mainland.