Tag Archives: SHFE

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).

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!

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. 

Rectification Chinese Gold Trading Rules

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

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 Year to date 1,015 tonnes have been withdrawn.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

Shanghai Gold Exchange SGE withdrawals delivery 2015 week 22

SGE Customers Can Use Onshore Renminbi For SGEI Contracts

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

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

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

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

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

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

Screen Shot 2015-04-11 at 7.31.56 PM

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

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

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

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

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

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

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

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

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

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

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

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

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

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?

SGE Withdrawals 45t Week 9, YTD 456t

Chinese wholesale gold demand, that equals withdrawals from the vaults of the Shanghai Gold Exchange (SGE), accounted for 45 metric tonnes in week 9 of 2015 (March 2 – 6). Year to date 456 tonnes have been withdrawn from the SGE vaults. An estimate suggests 340 tonnes has been net imported into the Chinese domestic gold market over this period (calculating with a yearly SGE scrap rate of 250 tonnes).

Screen Shot 2015-03-14 at 8.47.03 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.

Since the inception of the Shanghai International Gold Exchange (SGEI) there was a possibility the significance of SGE withdrawals, as published in the Chinese weekly reports, became distorted by activity on the SGEI – in the Free Trade Zone. That’s why I corrected SGE withdrawals by trading volume from the SGEI, just to be on the safe side of measuring Chinese wholesale demand.

However, we just learned that what was traded and withdrawn on the SGEI in 2014 was primarily imported into the Chinese domestic gold market. So, for the time being we can assume SGE withdrawals are still an accurate proxy for Chinese wholesale demand – a metric described in this post.

Shanghai Gold Exchange SGE withdrawals delivery 2015 week 9 dips

Shanghai Gold Exchange SGE withdrawals delivery only 2014 - 2015 week 9

I like to note SGEI trading volume has jumped recently, reaching a record in week 9 at 34 tonnes (counted unilaterally). Perhaps this is exchange is slowly coming to life.

Shanghai International Gold Exchange SGEI weekly gold trade volume

Only the 1kg physical contract iAu99.99 is traded on the International Board (SGEI), there seems to be nil interest in the 100 gram physical contract iAu100 and in the 12.5kg (London Good Delivery bars) contract iAu995.

Overall SGE volume is somewhat dropping as the spot deferred contracts Au(T+N1) and Au(T+N2) are falling back after a resurrection that started late November 2014.

SGE weekly gold volumes

On the Shanghai Futures Exchange (SHFE) we can see the same trend; slightly dropping volumes. Nothing “worth mentioning”.

COMEX vs SHFE gold volume and open interest

GFMS Reports Chinese Gold Trade Volume Incorrect By 100%

Thomson Reuters GFMS, one of the leading consultancy firms regarding precious metals supply and demand data has recently released the GFMS Gold Survey 2014 – Update 2. From the report:

Thomson Reuters’ supply and demand data are collected and collated by our team of research analysts based in Australia, China, Europe, India and the USA within an extensive field research programme which involves interviewing stakeholders across the supply chain in every market and utilizing the unique data sets available to us after researching the market continuously since 1967.

… [etc]

All this information, including mine cost profiles, analysts “view of the field”, disaggregated supply and demand data back to 2000, as well as base case and two alternative scenarios underpin price forecast for one, three, and ten year periods and are now available on Thomson Reuters Eikon.

For the ones that don’t know, Thomson Reuters Eikon is a data terminal that costs you something in between $800 and $1,800 a month, depending on how many bells and whistles you prefer.

In a previous post I noted I didn’t agree with GFMS on Chinese gold demand 2014, disclosed by them at 866 tonnes while supply in China was 1,833 tonnes (import 1,200 + mine 451 + scrap 182), resulting in a gap of 967 tonnes. But I would like to save the demand discussion for another post to expand upon.

The section in the GFMS report that shows gold trading volume on the largest exchanges of the planet looks like this:

Screen Shot 2015-01-31 at 9.51.43 PM

The table is obviously meant so readers can compare the gold volumes traded on the major exchanges; all data is computed into metric tonnes. The COMEX data is correct, the CME publishes gold futures volume as number of contracts, when I multiply all contracts traded in 2014 by 100 ounce, which is the size of one contract, and divide the total amount of ounces by 32151, the total tonnage is 126,007. (Just about the same as GFMS reports.)

Then, the Shanghai Futures Exchange (SHFE), the primary gold futures exchange in China. One gold contract/lot on the SHFE equals 1 Kg. The SHFE publishes gold futures volume as number of contracts, when I add all contracts traded in 2014 and divide the total amount by 1,000, the total tonnage is 47,500 tonnes. Seemingly the same as GFMS reported. However, volume on the SHFE is counted double-sided, or bilaterally. From the SHFE:

  1. The unit for trading volume, open interest and the change of open interest is lot, herein are double-side counted; trading value herein is double-side counted.

There for the total tonnage has to be divided by 2 if compared to COMEX volumes. The actual total tonnage traded on the SHFE in 2014 was 23,750 – counted unilaterally. GFMS has effectively double counted SHFE gold trading volume. This way GFMS has also disclosed all data from the SGE incorrect – Au(T+D) and the spot contract. From the SGE

The Volume [Kg] and Amount are calculated bilaterally.

The open interest and turnover on the SHFE and SGE are counted bilaterally as well. Additionally, take note I’ve written on August 27, 2014, GFMS was making exactly the same mistake on their silver numbers, in the World Silver Survey 2014:


Imagine you pay $1,800 a month for an Eikon terminal that feeds you inaccurate Chinese volume and open interest data. Previously I noticed an error in the Bloomberg terminal that discloses the Chinese price of silver including 17 % VAT, and thus feeding false data.

Of course it’s anyone’s choice to decide what data to use or how to interpreted data, this post is merely meant to share my view on Chinese precious metals trade data in a effort to help investors to get a better perspective on global markets.

Yearly Shanghai Silver Volume Transcends COMEX Again, SGE Withdrawals Nearly 2,100t

Happy New Year from the BullionStar team!

In 2014 silver futures traded on the Shanghai Futures Exchange (SHFE) accounted for 2,908,168 tonnes. On the COMEX 2,123,387 tonnes were traded, 37 % less than in Shanghai. 

First let’s have a look at the latest SGE trade report of week 52 (December 22 -26). Total SGE gold withdrawals was a staggering 58 tonnes in week 52, year to date (until December 26) SGE withdrawals have reached 2,073 tonnes. With three trading days left (December 29 – 31) total withdrawals are 124 tonnes shy of the 2013 record (2197 tonnes). The possibility 2014 withdrawals will transcend 2013 is small, though 2014 has once again been an incredible strong year for Chinese gold demand.

Regular readers of this blog are used to the tonnage being withdrawn from the SGE vaults every week, often more than 40 tonnes (in one week). The fact the mainstream media, or the World Gold Council, CPM Group or Thomson Reuters GFMS, still don’t report these numbers is getting weirder by the day.

Because gold bullion export is prohibited in china, we know by tracking SGE withdrawals, fairly accurate, how much gold is being added to Chinese non-government gold reserves. This year that amount will be about 1,700 tonnes.

Screen Shot 2014-12-31 at 4.43.44 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 gold data is up to week 52 (December 26).

Corrected by trading volume on the Shanghai International Gold Exchange (SGEI) – read this post for a comprehensive explanation of the relationship between SGEI trading volume and withdrawals – SGE withdrawals in the mainland, that equal Chinese wholesale demand, were at least 44 tonnes, at most 58 tonnes. Year to date SGE withdrawals in the mainland were at least 2,006 tonnes, at most 2,073 tonnes.

Shanghai Gold Exchange SGE withdrawals delivery 2014 week 52, dips

Shanghai Gold Exchange SGE withdrawals delivery only 2014 week 52, dips

My best estimates for the supply side of SGE withdrawals (2,006 tonnes):

  • Domestic mining 450 tonnes.
  • Import 1,206 tonnes.
  • Recycled gold through the SGE 350 tonnes.

East – West Precious Metals Markets Comparison

Let us have a look at size of the precious metals (paper) markets in China relative to the COMEX.

SGE gold trading volume saw a remarkable lift-off this year, most likely because 8 SGE contracts were allowed to be traded by foreign investors.

Trading Privileges of the Shanghai Gold Exchange

Total volume traded in 2013 on the SGE was 5,807 tonnes (counted unilaterally). In 2014 volume has already surpassed 8,982 tonnes; an amplification of at least 55 % y/y.

Total volume traded in week 52 was 371 tonnes, down 10 % w/w.

Shanghai Gold Exchange SGE weekly gold volume

Volume on the two largest gold futures exchanges on earth (COMEX and the SHFE) have been low in week 52. On the Shanghai Futures Exchange (SHFE) volume in week 52 dropped 56 % w/w, to 344 tonnes. On the COMEX weekly volume dropped 54 % w/w, to 1,152 tonnes (the COMEX trading week counted only four days).

COMEX vs SGE + SHFE gold volume

The Open Interest (OI) on the SHFE closed December 26 at 101 tonnes, on the COMEX at 1,158 tonnes. The total OI on the SGE of all gold deferred contracts combined – Au(T+D), mAu(T+D), Au(T+N1) and Au(T+N2) – stood at 109 tonnes on December 26.

COMEX vs SHFE gold volume and open interest

Let’s have a look in the silver pit. For silver we have all the data of all exchanges (SGE, SHFE, COMEX) for 2014 complete.

SGE silver volume in 2014 shows less growth relative to gold, probably because silver contracts aren’t allowed to be traded by foreigner investors. Total silver volume traded on the SGE in 2013 accounted for 215,250 tonnes, in 2014 it was 252,306, so it’s up 17 % y/y.

In week 52 SGE silver volume was down 49 % w/w, at 8,602 tonnes.

Shanghai Gold Exchange SGE weekly silver volume

Total silver volume on the COMEX has dropped 2.5 % in 2014 relative to 2013. Total volume on the SHFE has increased 14 % compared to 2013.

Total volume traded on the COMEX in 2013 was 2,176,519 tonnes; the SHFE traded 2,557,430 tonnes in silver futures, 18 % more.

In 2014 the COMEX has traded 2,123,387 tonnes of silver futures, the SHFE 2,908,168 tonnes, 37 % more. 

COMEX vs SHFE silver volume yearly

COMEX vs SGE + SHFE silver volume

The OI on the COMEX closed at December 31, 2014, at 23,264 tonnes, up 27 % y/y. The OI on the SHFE closed at 3,052 tonnes, down 39 % from a year earlier.

COMEX vs SHFE silver volume and open interest

The OI of the deferred SGE contract Ag(T+D) closed on December 31 at 2,471 tonnes, up 25 % y/y.

Silver inventory at the SGE dropped 8 % y/y, to 103 tonnes. Silver inventory on the SHFE dropped 71 % y/y, to 123 tonnes. Note, there are many other (spot) silver exchanges in China, these inventories don’t mean that much. SHFE inventory has been emptied because the cash and carry trade closed (read this post for a simplified explanation) when the silver futures curve on the SHFE went from contango to backwardation.

SHFE & SGE silver inventory, December 26, 2014

Currently the futures curve on the SHFE is in contango,

SHFE silver futures curve contango December 31, 2014

…which caused the discount of silver in the mainland to increase relative to London spot.

Shanghai Gold Exchange SGE silver premium

Silver export from China enjoys 17 % VAT, hence the discount is not arbitraged. (for more information on the structure of the Chinese silver market read this post).

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

Notes from the translator, LK:

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

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

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

Here we go..

  State Council logo

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

The Opinions From:

People’s Bank of China (PBOC)

National Development and Reform Commission (NDRC)

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

Ministry of Finance (MOF)

State Administration of Taxation of the PRC (SAT)

China Securities Regulatory Commission (CSRC)

To various bodies including and not limited to:

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


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

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

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

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

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

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

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

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

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

3. Strengthening gold market services system infrastructure

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

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

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

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

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

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

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

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

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

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

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

5. Pre-empting gold market risks.

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

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

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

6. Protect the investors.

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


Building A Strong Economic And Financial Security Barrier For China

Presenting another translation of an article from one of the leaders in the Chinese gold industry. The original version appeared on 1 August 2012 in Qiushi magazine, the main academic journal of the Chinese Communist Party’s Central Committee. Sun Zhaoxue is the president of China National Gold Corporation, China’s biggest mining company. He is also president of the China Gold Association, that acts as a bridge between the Chinese government and gold producers in protecting business interests and providing information, consultancy, co-ordination and intermediary services for them. In the article he explains that China needs to hoard gold in order to safeguard the country’s economic stability and to strengthen its defense against external risks.

In 2011 Sun received the award economic person of the year on state television channel CCTV, as you can see in this video (opens in new window). Watch how the show, broadcasted on prime time with orchestral music, moving camera’s and women in cocktail dresses, emphasizes the importance of gold and glorifies the guy digging it up. In his acceptance speech Sun said the price of gold will rise and China should seize the opportunity to act accordingly.

On the Lujiazui financial reform and opening up Forum in 2009 he said China should not only boost it’s official reserves, civil hoarding is just as important for economic stablilty, he recommends to invest 20 % of savings in gold.

Although other sites (ie the Financial Times) have quoted from Sun’s oncoming article, none of them published the whole thing. This MUST READ is translated for us by Soh Tiong Hum (click for his very interesting +Google page).

the state will need to elevate gold to an equal strategic resource as oil

Building a strong economic and financial security barrier for China

- Actively build and implement national gold strategies

Published 1 August 2012, Author: SUN Zhaoxue

Because Gold possesses stable intrinsic value, it is both the cornerstone of a countries’ currency and credit as well as a global strategic reserve. Without exception, world economic powers established and implement gold strategies at the national level. China is the world’s second largest economy, in order to enhance core competitiveness in a shorter period of time, an important aspect is an integrated policy of gold exploration, production, trade, consumption and investment so as to strengthen China’s control of this strategic resource, thereby effectively safeguard the country’s economic and financial security in the process of globalization and strengthen defense against external risks.

First, rediscover the status and role of gold reserves from a strategic height

After the disintegration of the Bretton Woods system in the 1970s, the gold standard which was in use for a century collapsed. Under the influence of the US Dollar hegemony the stabilizing effect of gold was widely questioned, the ‘gold is useless’ discussion began to spread around the globe. Many people thought that gold is no longer the monetary base, that storing gold will only increase the cost of reserves. Therefore, some central banks began to sell gold reserves and gold prices continued to slump. Affected by this point of view, the growth of gold reserves for China, the world’s largest gold producer, began to slow.

Indeed, since mankind’s discovery of gold, gold because of its stability and rarity became mankind’s important method of exchanging labor and wealth. Along with the deepening of economic globalization gold stabilized societies and economies, prevented inflation, increased national credit-worthiness and stabilized exchange rates. It possesses a status that is irreplaceable by other capital assets. Especially since the outbreak of the international financial crisis, gold’s safe-haven against inflation is increasingly prominent, its strategic position in the reserves of wealth regained world attention and central banks became net buyers of gold.

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

Especially noteworthy is that in the course of this international financial crisis, the US shows a huge financial deficit but it did not sell any of its gold reserves to reduce debt. Instead it turned on the printer, massively increasing the US Dollar supply, making the wealth of those countries and regions with foreign reserves mainly denominated in US Dollar quickly diminish, in effect automatically reducing their own debt. In stark contrast with the sharp depreciation of the US Dollar, international gold price continue to rise breaking $1900 US Dollars per ounce in 2011, gold’s asset-preservation contrasts vividly with the devaluation of credit-based assets. Naturally the more devalued the US Dollar, the more the gold price rises, the more evident the function of US gold reserves as a hedge. Although the international financial crisis was established in the US, the crisis failed to shake the dollar’s status as an international currency. US net wealth did not appear to diminish with the same degree of the dollar’s decline, an important reason why the US’ 8,133 tons of gold reserves play a role. In the global financial crisis, countries in the world political and economic game, we once again clearly see that gold reserves have an important function for financial stability and are an ‘anchor’ for national economic security.

After 30 years of reform and development, China has become a highly open country, not only moving in tandem with the world economy, but is playing an increasingly important role in the way the setup of the world economy changes. Therefore to win over new changes and challenges in the international post-crisis era, China must not only advance the internationalization of the Chinese RMB supported by a massive economy, but also view gold reserves as an important parameter and achieve a logical ratio between gold reserves and economic output. This requires us to make a forward looking judgment on the scale of gold reserves, build and implement quickly a national gold strategy that is suitable to China’s economic development.

Second, effort to increase domestic resource integration is our main channel to increase gold reserves

Because gold is a natural currency, from assuring national economic development and
security, to hastening the advancement of RMB internationalization, increasing gold reserves should become a central pillar in our country’s development strategy. International experience shows that a country requires 10% of foreign reserves in gold to ensure financial stability while achieving high economic growth concurrently. At the moment, the US, France, Italy and other countries’ gold accounts for 70% of forex reserves. Entering the new century, China increased its gold reserves twice in 2001 from 394 tons to 500 tons, and in 2003 to 600 tons. After the international financial crisis erupted, gold reserves were increased to 1054 tons but gold reserves account for less than 1.6% of forex reserves – a wide gap compared to developed countries.


Due to China’s huge forex reserves, it’s difficult in the short term to make gold a main channel to accumulate forex reserves like the US and European countries. It’s especially true that as global gold prices make new highs, increasing gold reserves also become more difficult [Author includes an idiom ’风物长宜放眼量’ from Mao Zedong here; idiom says that there are many setbacks and frustrations in life but one should adopt a long-term horizon to analyze a problem in order to find solutions]. We need to establish a more clear national gold strategy, look at benefits over a long term as a starting point, amply make use of two markets, two resources, continue to grow gold reserves and progressively become a ‘gold-reserve’ nation that is commensurate with the country’s economic strength. Based on current conditions, apart from accumulating gold from international markets at opportune moments, the main channel to implement a national gold strategy is to increases domestic gold integration through increasing gold production, this in order to strengthen the all-round development of China’s economy and financial ‘breakwater’.


In the new century, under the guidance of systematic development, China’s gold industry ushered in a period of accelerated development and in one fell swoop got rid of the ‘poor gold country’ hat. From 2007 to 2011, China’s gold production took global pole position and established a complete industrial system of gold, effectively supporting the national gold strategy. There are still many shortcomings in our current gold industry, particularly prominent problems include: generally small scale mining, low proven reserves, unconsolidated mining concessions, recovery of mining by-products, development order, environment protection and other aspects of uneven development. Statistics show that there were more than 500 Chinese regions that mine gold in 2011, making up more than 700 gold mines, yielding an average of 0.5 tons per mine. The world’s largest gold producer Barrick Gold Corporation of Canada produced 239.5 tons however.

To address this situation, China is also increasing gold resource integration efforts in recent years. However, due to long-standing lack of development of gold resources on strategic planning, and in recent years an illusion of wealth brought by the gold bull market, a variety of aspects of social capital have been involved in mining. To fundamentally solve these problems, the state will need to elevate gold to an equal strategic resource as oil and energy, from the whole industry chain to develop industry planning and resource strategies. First, we must restrict access, from a technical, financial, security and environmental protection perspective, to improve the access threshold for exploration of gold. To raise the barrier of entry will gain the efficiency of mining. Second, to further improve mining management we must increase resource integration efforts, further develop and expand main gold exploration and development companies into leading enterprises, so as to achieve projects of scale. Third we should encourage key enterprises that are competitive to penetrate globally so as to avoid loss of bargaining power, because domestic enterprises consist of small players.

In addition, because individual investment demand is an important component of China’s gold reserve system, we should encourage individual investment demand for gold. Practice shows that gold possession by citizens is an effective supplement to national reserves and is very important to national financial security. World Gold Council statistics show that Chinese individuals possess less than 5 grams of gold per capita, a significant difference to the global average of more than 20 grams. This shows that there big potential for private ownership.

Third, committed to the promising and rigorous implementation of the national gold strategy

Formed in early 2003, China Gold Group Corporation is both China’s largest gold production and sales enterprises, but also the gold industry’s only state owned enterprise. Under the direction of scientific development [this term appears several times – it can mean using a systematic approach or can also refer to a government directive] over the past 10 years, China Gold Group Corporation always adhered to building an excellent business, preventing financial risks and servicing the national situation as a top priority China Gold is committed to promote the coordinated development of gold industry’s exploration, mining, processing, consumption and investment in the industrial chain for a healthy development of China’s gold market, in order to contribute to the effective implementation of the national gold strategy. In 2012, China Gold Group Corporation’s total assets will exceed more than ¥60 billion yuan, sales revenue will exceed ¥100 billion yuan. Currently, the Group has a daily processing capacity of 150,000 tons of ore, business scope covers the entire value chain and has grown into China’s gold industry leader. The group has to play a leadership role as state-own enterprise, to turn the gold industry into an important pillar of stable national economic growth under the national gold strategy.


In the “Twelve Five” period [abbreviation for central policy 5-year plan; 12-5 is the plan for period 2011-2015we will target the gold industry with cutting-edge technology and continue to increase investment in science and technology for the implementation of a technology driven strategy to promote the optimization and upgrading of the gold industry. At present China Gold Group Corporation has three R&D projects incorporated into the “Twelve Five” National Science and Technology Support Program, appointed by the Ministry of Science to be a green gold mining technology feasibility study project.

The company plays a major role in promoting large-scale research projects. Through independent innovation and integrated innovation we address the constraints of gold exploration, mining, smelting and other areas of industry challenges, and continuously improve the comprehensive development and utilization of mineral resources capability. Meanwhile, we should focus on projects as an opportunity to revitalize the national equipment manufacturing industry as its mission, find ‘win-win’ models of cooperation for mining companies and equipment manufacturers, actively support localization of major equipment to promote the continuous innovation of major mining equipment producers.

To bear national responsibility and increase national gold reserves in the “Twelve Five” period, China Gold Group Corporation must firmly grasp the lifeline of resources with methods such as exploration to increasing proven reserves, merger and acquisition, base construction and opening up offshore gold resources to accelerate increase of national gold reserves. On the one hand, we should make full use of own research and manpower, increase number of talents, funds and equipment to carry out prospecting, achieve the highest gold reserves in the shortest time; on the other hand actively secure local government support to increase regional integration, breakthroughs, scientific development, achieving higher efficiency, to solve the gold industry’s problem of being resource-inefficient and environmentally destructive because of mining small, scattered, isolated, far’. In the near term, China Gold Group Corporation will, on the 20 national regions identified for gold production, speed up consolidation of small mines into a batch of technologically-advanced, environmentally friendly, ‘role-model’ enterprises that can produce 3-8 tons annually. Concurrently, actively implement a globalization strategy that will exploit overseas resources and increase channels to grow China’s gold reserves.

We should advocate to ‘store gold among the people’ and guide a healthy positive development in this segment. In recent years, the domestic gold industry’s rapid growth provided good conditions for various uses of gold, as well as create space for this business to grow faster. China Gold Group Corporation has to catch the opportunity, while increasing its supply capacity, to push ‘store gold among people’ strategy, actively extend the business value chain, increase gold investment types, encourage and promote individuals’ gold investment and consumption. Foremost, maximize the utilization of nearly 1600 China Gold retailers, increase sales channels, optimize sales network, strengthen branding and achieve to ‘store gold among the people’ and thus ‘store wealth among the people’. This is the objective under our gold strategy.

World economies are shaken and insecure, causes of instability are coming together and uncertainty is growing. The world economy faces new changes, new challenges and new opportunities, therefore we must relook the status and function of gold from a strategic height and create and implement a national gold strategy, to strengthen our country’s ability to counter complex situations. This is the only way for China’s gold industry to adopt a scientific evolution, to push China from across the milestone from a ‘large gold country’ to a ‘strong gold country’.

(Author : China Gold Group Corporation General Manager, President of China Gold Association)