In 2013 we’ve experienced what kind of extreme buying power China is able to unleash on the physical gold market; Chinese wholesale demand in 2013 was 2197 tons, this excluded PBOC purchases. While the mainstream media is still absolutely clueless on what actually happened and how much gold was distributed across the globe, the facts aren’t that hard to summarize. Let’s have a look at the facts, supplemented with commentary by yours truly.
As most countries disclose their gold trade numbers, by analyzing these numbers we could see a clear gold vein running from the London Bullion Market to the vaults of the Shanghai Gold Exchange (SGE) in China mainland, from where the gold enters the Chinese market place. This main vein ran through Switzerland and Hong Kong.
The London Vaults
Most gold in the UK is located at the vaults of the BoE, where gold from the LBMA, the official reserves from the BoE and official reserves from many other central banks are stored. Additionally there are many gold vaults owned by Bullion Banks (GLD) and private parties in London. In response to the drop in the price of gold in April 2013 we have seen significant outflows from the UK; net export broke all records.
The UK net exported 1425 tons of gold in 2013, of which 152 tons net to the United Arab Emirates, 145 tons net to Hong Kong and 1329 tons net to Switzerland. In December total net export was 62 tons, up 68 % from November, while net export to Switzerland dropped to 52 tons. Net export (directly) to Hong Kong was 29 tons.
In 2013 GLD’s inventory dropped by 552 tons.
Through The Swiss Refineries
From refineries in Switzerland we know that all the gold that came from the UK in 400 ounce London Good Delivery (LGD) bars was being refined into 1 Kg bars 99.99 % purity, and sent to the East. Switzerland has never traded and refined as much gold as in 2013; gross import was 3082 tons and gross export 2786 tons.
Switzerland has a long history in gold refining and vaulting, both businesses had to adapt in 2013. Refining exploded as some plants almost doubled their capacity, working in three shifts 24 hours a day to supply the East. From Looking at the chart below we can see Swiss net import decreased to 295 tons in 2013 from an average of 572 tons in 2002 – 2012, which suggests their vaulting business grew less than in recent years.
The Chinese are not only buying unprecedented amounts of physical gold, additionally they strive to have more power in the pricing of the yellow metal. I have published numerous translations – a memo on gold policy from the Chinese government to various ministries, gold institutions, exchanges and the central bank, an interview with the head of the precious metals department of China’s biggest bank on it’s gold aspirations and an article on Chinese gold policy written by one of the most influential leaders of the Chinese gold market – in which this is all clearly exposed. In my opinion the Chinese will eventually take over the entire (paper) gold market.
Swiss refineries are also refining LGD bars for Gulf nations in the new standard 1 K four-nines bars (LGD bars are shipped from the Gulf to Switzerland, 1 K four-nines bars are shipped back). The president of the Peoples Republic of China Xi Jinping has called for better ties for China and Gulf Nations and for an acceleration in talks towards a free trade agreement.
China’s Foreign Minister Wang Yi met with Israeli Prime Minister Benjamin Netanyahu, the Saudi Arabian crown prince, the Iranian Foreign Minister, as well as a multitude of players from the Gulf and North Africa in the last couple of months to develop trade with West Asia. Yi’s goal was to reinforce the oil supply chain from the Middle East, and improve ways to export Chinese goods. Additionally China is investing in large infrastructure projects (railways, harbors, etc) in West Asia to breathe new life into the Silk Road.
At the same time four Gulf nations (Bahrain, Kuwait, Qatar and Saudi Arabia) are planning to setup a new common currency. All developments just mentioned are related as Asian nations seek allies to make a stand in a post US dollar system.
The Special Administrative Region Hong Kong
Hong Kong gold trade also broke all records. Net gold import jumped 1500 % from 37 tons in 2012 to 597 tons in 2013. Gross import in 2013 accounted for 2239 tons up 133 %, gross export 1642 tons up 78 %.
The biggest supplier by far was Switzerland, as Hong Kong net imported 913 tons from the Swiss in 2013, up 613 % from 128 tons in 2012 (look at the chart below and spot the record). The Swiss gross exported 1236 tons more in 2013 than in 2012, apparently the bulk of this extra refining output went to Hong Kong.
Hong Kong’s main gold export destination was China mainland. Net export was 1158 tons, up 108 % from 525 tons in 2012. Gross export was 211 tons, gross re-export (gold that passes through Hong Kong without being processed, i.e. 1 K bars) was 1284 tons.
Gross import from the mainland was 337 – this reflects a lot of jewelry fabricated in Shenzhen that is being exported to Hong Kong. Shenzhen is located just across the border from Hong Kong, accommodates the biggest SGE vault and is known for it’s jewelry production industry. The jewelry that is being shipped to Hong Kong is ‘smuggled’ back into the mainland to some extent.
In the mainland there is a 22 % tax on jewelry (17 % VAT, 5 % consumption tax), In Hong Kong there is 0 % tax on jewelry. It’s quite common for Chinese in the mainland to make trips to Hong Kong, buy cheap jewelry and other physical gold products and take this home without being bothered at the border. Customs are very stringent on gold exports from China mainland, on the import side Chinese can easily walk through wearing their new necklaces.
The Chinese jewelry company Chow Sang Sang estimates more than half their products sold in Hong Kong are purchased by mainland tourist. Additionally there are mainland tourists that purchase physical gold in Hong Kong and store it locally in safety deposit boxes at banks as well as vaults outside the banking system. This hidden mainland demand partially explains the unprecedented net gold imports by Hong Kong in 2013 (597 tons by 7 million inhabitants). The other explanation being Hong Kong vaults gold for investors from all over the world.
Please be aware that China mainland can import gold through many other ports than Hong Kong (as I have written bout here). According to my analysis the mainland has roughly imported 2000 tons of gold in 2013 including PBOC purchases.
In Gold We Trust