Tag Archives: UK

How The West Has Been Selling Gold Into A Black Hole

Kindly be advised to have read my posts The Mechanics Of The Chinese Domestic Gold Market and The Great Physical Gold Supply & Demand Illusion before continuing.

In December 2016 Chinese wholesale gold demand, measured by withdrawals from the vaults of the Shanghai Gold Exchange (SGE), accounted for 196 tonnes, down 9 % from November. December was still a strong month for SGE withdrawals due to the fact the gold price trended lower before briefly spiking at the end of the month, and the Chinese prefer to buy gold when the price declines (see exhibit 1).

In total Chinese wholesale gold demand reached an astonishing 1,970 tonnes in 2016. But will these huge tonnages bought by China ever have an impact on the gold price? I think it will.

Exhibit 1.
Exhibit 2.

As in previous years, SGE withdrawals were mostly supplied through imports, in 2016 at approximately 1,300 tonnes. And as in previous years, SGE withdrawals were roughly twice the size of Chinese consumer gold demand. The latter is published by all “leading” consultancy firms, such as the World Gold Council and Thomson Reuters GFMS. Because these firms have systematically underreported and eclipsed Chinese gold demand since 2007, a significant share of the financial industry is unaware China has imported 5,000 tonnes in the past years, which is not allowed to be exported. My hypothesis is that this 5,000 tonnes decline in above ground gold reserves outside of the Chinese domestic market will make gold rally stronger in a future bull market than it did in previous bull markets. To the extent many investors are uninformed about the shrinking volume of troy ounces available outside of China, their ignorance will boost any price rally coming.

In this post I would like to share my thoughts on how the gold price is correlated to trade in above ground reserves, and how China has slashed these reserves to the tune of 5,000 tonnes, which will significantly impact the next leg up in gold.

Correlated: The Gold Price And UK Gold Trade

Since many decades large investors in the West set the price of gold. Ever since, the heart of the Western gold wholesale market has been London in the United Kingdom. There is thus a correlation between the gold price and the volume of gold net imported or exported by the UK.

In Asia, on the other hand, gold market participants are more price sensitive, implying they buy low and sell high (the opposite of Western investors). I’ve described this trend frequently on these pages, but the same can be read in books by gold author Timothy Green. In The Prospect For Gold from 1987 Green states:

Exhibit 3. Thank you Nick Laird from Goldchartsrus.com for the book tip!

Before we discuss the connection between Western supply and demand trends to developments in the Chinese gold market of the past decade, let me first recapitulate that global physical gold supply and demand is far in excess of the statistics the World Gold Council and GFMS publish. Below is a chart that shows the quarterly averages of all physical supply and demand categories as disclosed by the World Gold Council from Q1 2002 until Q4 2015. These numbers are more or less the same as figures by GFMS.

Exhibit 4.

We can see that over the course of 13 years, the majority of supply consisted of mine output (73%) and the majority of demand consisted of jewelry consumption (64%).

(Note, the categories official sector, net producer hedging and ETFs can be either supply or demand and volumes can greatly vary per quarter. Though, only in 1 of 52 quarters examined has ETF demand been greater than jewelry consumption (Q1 2009). In all other quarters official sector, net producer hedging and ETFs supply or demand has not been greater than mine output or jewelry consumption.)

If the data by the World Gold Council regarding physical gold supply and demand would be exhaustive, mine output and jewelry consumption should have a positive correlation to each other and the price of gold. But they don’t. Have a look at the next chart.

Exhibit 5.1.

During the bull market from 2002 until 2011 jewelry consumption decreased and it hardly ever transcended mine output. In turn, mine output gradually ascended over this time horizon while the gold price increased six fold! Are the forces between jewelry demand and mine supply driving the medium/long term price of gold? No, clearly not. This shows the data by the World Gold Council is incomplete.

(I should add that mine output does have a correlation to the gold price in the very long term as it can take more than ten years to setup a gold mining project. See the next chart.)

Exhibit 5.2.

In contrast to the data by the World Gold Council, we can observe a strong correlation between the medium/long term gold price and institutional supply and demand flowing through London. View the chart below.

Exhibit 6.

Strangely, institutional supply and demand are categories not included in the World Gold Council’s data – or in any other precious metals consultancy firm’s data that I’m aware of.

Because in the UK there are no refineries, no gold mines and local consumption demand and scrap supply is immaterial, all gold that is visibly (non-monetary) imported and exported must either relate to ETF holdings stored in London, or Western institutional supply and demand. When we compute the ratio between both, ETF flows compound to roughly 35 % of the UK’s net flow (import minus export) and as a consequence approximately 65 % is Western institutional supply and demand. Effectively the majority of the UK’s net flow is Western institutional supply and demand.

Hereby, consider that all supply and demand categories disclosed by the World Gold Council more or less equal each other (exhibit 4), so for the sake of simplicity we‘ll state that total mine output + scrap supply versus jewelry consumption + bar and coin + industrial demand meets outside the UK and doesn’t set the medium/long term price of gold.

The UK’s net flow, on the other hand, is highly correlated to the medium/long term price of gold. Note how nearly every month the change in net flow corresponds with the direction of the gold price (exhibit 6). Less granular, from the moment my data starts in 2005 the UK has been a net importer until 2012 on a rising price of gold. From 2013 until 2015 the UK was a net exporter on a declining price of gold. And in the first quarter of 2016, when the gold price saw its strongest move up since 1986, the UK was a net importer. Coincidence? I think not.

We can conclude that Western institutional supply and demand in above ground gold reserves is driving the medium/long term price of gold. As it’s likely the price of gold could not have gone up from 2002 until 2011 if there had been no UK net imports, and it’s likely the price of gold could not have gone down from 2013 until 2015 if there had been no UK net exports. (Short term the gold price is pushed around in the paper markets.)

We can think of Western institutional supply and demand (the UK net flow) like this: the majority of the gold gross imported into the UK is demand from above ground reserves outside the UK, and the majority of the gold gross exported from the UK is supply to above ground reserves outside the UK. When the UK is a net importer that means there is a net pull on above ground reserves outside the UK, which corresponds to a rising gold price. When the UK is a net exporter the inverse is true.

Here it becomes apparent that the amount of above ground bullion is essential for future price developments.

The Chinese Black Hole

Let’s turn to China. In the introduction I stated China is importing a lot more gold than is known in the financial industry because most investors base their knowledge on data by the World Gold Council. More precise, China has imported 5,000 tonnes from 2007 until 2016 in addition to what the World Gold Council has portrayed through their demand statistics.

Let’s get our minds around this through some charts. As an example, I’ve drawn a chart showing Chinese gold supply and demand for 2015 (last year I have complete data of).

Exhibit 7.

We don’t know every exact data point for China, but we do know GFMS demand (purple) and apparent supply, consisting of domestic mine output (green), scrap supply (yellow) and net import (blue). From here on we’ll use GFMS data, as GFMS publishes scrap supply numbers for China and the World Gold Council doesn’t.

According to GFMS Chinese consumer gold demand in 2015 was 867 tonnes. To meet demand GFMS presents 450 tonnes was domestically mined and scrap supply accounted for 225 tonnes. Indirectly GFMS states China net imported 192 tonnes to complete the supply and demand balance in the Chinese domestic market (exhibit 7). For the additional 1,383 tonnes imported GFMS has floated all sorts of excuses, which I‘ve debunked here and here.

The bottom line is, in addition to the 192 tonnes GFMS reports as imported in 2015 to meet consumer demand, China imported 1,383 tonnes to meet institutional demand and all this metal is not allowed to be exported.

If we repeat the same exercise for every years since 2007, the aggregated net imports by China that have not been included in the statistics by GFMS account for 5,000 tonnes. See the next chart.

Exhibit 8.


You can see now, China has enormously diminished above ground reserves outside of the Chinese domestic market without all investors around the world being fully aware. In my humble opinion this will make the price of gold go up turbo charged next time the West shows interest in the metal.

In The Prospect For Gold Green states:

Exhibit 9.

“Selling gold is not a one way street”, wrote Green in 1987. But guess what. Since a few years – from the moment China became an elephant player in the physical market – selling gold is a one way street! Western sell-offs are transhipped to China but do not return. The global gold game has changed.

Exhibit 10.

The consequence is that there are less above ground reserves outside of China for Western investors to buy in a forthcoming bull market, which will elevate the dollar bid per unit gold – in other words the gold price measured in US dollars per troy ounce.

Courtesy BBC.

Keep in mind, this phenomenon (China importing vast quantities in addition to Chinese consumer gold demand as disclosed by GFMS) has greatly materialized in 2013, when gold entered a bear market after an 11-year run up. In the previous bull market (2002-2012) above ground reserves outside of China had not been slashed yet. So the ramifications of this phenomenon will only be felt during the next leg up.

Is there any proof to substantiate my hypothesis? I think so. Early 2016 there was some renewed interest in yellow metal from large Western investors. When the price of gold started to climb it went practically vertical ending the first quarter of 2016 up 16.7 %, the strongest quarter since 1986. Coincidence? I think not. It went up strong as it did because there were fewer ounces in above ground reserves available.


A study on how much above ground reserves there are outside China will be saved for a future blog post.

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.

The Great Physical Gold Supply & Demand Illusion

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

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

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

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

Supply & Demand Metrics By The Firms

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

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

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

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

On the demand side is include:

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

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

Furthermore GFMS includes:

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

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

Exhibit 1. Courtesy GFMS. Global gold S&D balance as disclosed in the Gold Survey 2016.

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

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

The Firms Exclude Majority Gold Supply & Demand

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

Provided are two exemplifications of institutional S&D:

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

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

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

Exhibit 2. Global gold S&D 2013 by GFMS, including conservative estimate institutional S&D.

GFMS Covers The Tracks With Help From The LBMA

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

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

Exhibit 3. Correlation between UK net gold export and SGE withdrawals.

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

Exhibit 4. Chinese wholesale demand (SGE withdrawals), versus GFMS consumer demand versus apparent supply.

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

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

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

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

Exhibit 5. Global gold demand 2013 by GFMS, including apparent institutional demand.

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

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

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

Here’s exhibit 2 from another angle.

Exhibit 6. Global gold S&D by GFMS, including apparent institutional S&D, versus total refined gold production 2013.

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

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

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

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

Exhibit 8. Courtesy LBMA. Altered document on refining statistics by the LBMA August 2015.

In the altered version it says:

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

A few important notes:

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

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

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

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

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

Gold Is More A Currency Than A Commodity

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

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

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

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

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

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

  • Retail bar & coin
  • ETF demand

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

  • Retail bar & coin
  • ETF demand
  • Institutional demand

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

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

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

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

Exhibit 11. Global Gold Investment Demand 2015.

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

The global gold market. H/t Dan Popescu.

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

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

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

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

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

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

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

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

And on page 14:

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

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

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

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

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

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

Exhibit 14. Courtesy GFMS.

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

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

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


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


Simplified overview gold flows 2015:


Record Monthly Gold Export UK to China

The UK net exported a record 32.4 tonnes of gold directly to China mainland in June 2015.

In 2014 the conventional conduits of bullion flows to China, from all around the world first to Hong Kong and then to the mainland, have been replaced by direct exports. For example, the UK is exporting bullion directly to China since April 2014 – as I reported at the time. The result of the rearrangement in these gold flows is that Hong Kong’s export to the mainland has lost its accuracy as an indicator for China’s gold hunger. In a few posts we’ll have a look at trade data from several gold exporting nations and trading hubs to grasp how much gold China is importing this year.

Starting April last year, UK shipments of gold directly to China have been going up. In June 2015 the UK net exported a record 32.4 tonnes of gold to China, up 6.5 % m/m, up 116 % y/y.

UK - China Gold Trade 2012 - June 2015
Exhibit 1.

Let’s see if we can learn some more from the UK’s trade data. Remarkably, the UK became a net importer of gold in June with 2 tonnes net imported. Falling total gold exports and rising total gold imports caused this. Concluding, although China imported a record monthly tonnage from the UK in June, the Brits did not suffer a net outflow because of concurrent strong imports into London. UK total gold import in June was 49.3 tonnes, compared to a gold net export to China at 32.4 tonnes. Have a look at the below chart for some clarity.

UK Gold Trade 2012 - June 2015
Exhibit 2.

In the above chart, we can see the UK’s total net export has been going down in the past few months (black line), although we know that net export to China has increased (exhibit 1). Who was exporting gold to the UK to be sent forward to China? In June it was the US at 19.5 tonnes, which was the highest amount since February 2012, and Canada at 18.4 tonnes.

Chinese gold wholesale demand measured by SGE withdrawals was high in June at 196 tonnes (exhibit 2). We shall see what the supply composition (mine/import/scrap) was of SGE withdrawals when gold export data from more countries is released.

India Silver Import 2014 At 7,063 Tonnes, Up 15 %

India’s customs department, the Directorate General of Commercial Intelligence & Statistics (DGCIS), just released the QUICK ESTIMATES FOR SELECTED MAJOR COMMODITIES for December 2014. According to DGCIS the figures for December are provisional and subject to change, however, I’ve been tracking these quick estimates for months and they are reasonably accurate – compared to the official numbers that lag a few months.

In December India imported $182.31 million in silver; divided by an average price of $16.3 an ounce this accounts for 11,188,095 ounces, or 348 tonnes, down 72 % from 1,254 tonnes in November. The total gross amount of silver imported in 2014 accounted for a whopping 7,063 tonnes, up 15 % from the shocking 6,125 tonnes in 2013. As far as my data goes back (2009) net silver import 2014, 7,055 tonnes, is a record.

Bullion Bulletin released a report in 2014, called An Empirical Study Of Silver Markets In India. In the intro it states:

Why has the silver import into India increased in 2013? We started talking to the industry. We could identify two causes – investment demand and jewelry demand. Investment demand was largely due to demand switch from gold and relative attractiveness of silver to gold.

Screen Shot 2015-01-26 at 10.30.32 AM
Courtesy of Bullion Bulletin

The quick estimates do not disclose any silver export; the official numbers do, but these are negligible as we can see in the next chart.

India Silver Import December 2014

India Yearly Net Silver Import 2009 - 2014

Note, the previous charts are build from numbers on silver as disclosed by the DGCIS, I do not know how much silver is exported in the form of jewelry or silverware. There are numbers available about the value of silver jewelry exports from India, published by the Gem & Jewelry Export Promotion Council (GJEPC), however these values can capture fabrication costs, gems and other precious metals. There for I don’t feel comfortable deriving exported silver tonnage from GJEPC data.

According to Bullion Bulletin total silver demand in India has been strong in recent years, 3,381 tonnes in 2010, 5,519 tonnes in 2011, 3,890 tonnes in 2012 and 5,822 in 2013. This demonstrates little silver import, as disclosed by DGCIS, is exported in the form of jewelry, silverware or industrial products.

Large inflows of silver into India are often supplied by the UK; we can see a clear pattern if we compare India gross import with UK net export to India.

India vs UK Monthly Silver Trade 2009 - 2014
Eurostat has not yet released any data from December 2014

Meaning the UK, the London Bullion Market, is drained from silver by the East just like it’s drained from gold by the East. I don’t see any silver shortages in the near term in the UK, but I’ll keep an eye on it.

China Continues To Drain Global Gold Inventory

Withdrawals from the Shanghai Gold Exchange (SGE), the best indicator for Chinese wholesale demand, have been strong in 2014. In total 2,102 tonnes was loaded out from the SGE vaults. Mid 2014 withdrawals were relatively low, then they ramped up in September.

In this post we’ll examine where this gold was sourced from.

Shanghai Gold Exchange SGE withdrawals delivery monthly 2009 - 2014

At this moment we don’t know exactly what the composition was of the supply side of SGE withdrawals in 2014 – scrap, mine or import, though SGE chairman Xu Luode gave us a hint at the ninth China Gold & Precious Metals Summit that took place in early December:

As regards the concerns over the Chinese gold demand, chairman of the Shanghai Gold Exchange Xu Luode told the conference that the gold market in 2014 is still a CHINA YEAR. …China has imported over 1,100 tonnes of gold by November this year and the whole year’s bullion import is estimated to reach 1,200 – 1,300 tonnes, a number only next to the year of 2013.

As I have demonstrated before the main feeder for China’s gold hunger is the London Bullion Market (the UK), though in 2013 this was more so than in 2014. Let’s go through the most recent customs data published by the largest suppliers to China mainland: the UK, Switzerland, Hong Kong, Australia and the US.

The UK

The great gold exodus from West to East started early 2013; 12.5 Kg London Good Delivery bars (995 purity) from the UK are shipped to Switzerland, where it’s refined into 1 Kg (9999 purity) bars and send forward to the East. The big change since 2014 is that more gold is being send directly to China instead of going via Switzerland and Hong Kong, partially because China has increased its refining capacity.

In total the UK net exported 173 tonnes in November, up 282 % m/m; the biggest outflow since July 2013. Net export to Switzerland also saw a huge spike in November, 118 tonnes, up 179 % m/m, the largest tonnage in 9 months.

In the next chart I have added SGE withdrawals to UK gold trade – since January 2013 we can see a correlation between net export from London and withdrawals in China.

UK Gold Trade 2012 - November 2014

January – November total UK net gold export stands at 447 tonnes, net gold export over this period to Switzerland was for 579 tonnes.

In November UK gold export to China was 30 tonnes, up 186 % m/m, an all time record. Aggregated net gold export (January – November) heading for the mainland was 105 tonnes.

UK - China Gold Trade 2012 - November 2014

For all UK trade data I have used the tonnage disclosed by Eurostat.


The Swiss imported 1,597 fine tonnes in the first eleven months of 2014; export was 1,616 tonnes over this period.

Switzerland gold trade 2011 2014 November

I would like to emphasize fine tonnes in the chart above. Thanks to a commenter on this blog (named sb) I have calculated the fine content of Swiss gold trade. One of Switzerland’s core businesses is refining gold; this means the import tonnage disclosed by Swiss customs is of a significant lower purity than the exported tonnage. A good example is 2014:

Switzerland gold trade November 2014

First the data: in November import was 219 tonnes, up 137 % m/m, a record for 2014; export was 232 tonnes, up 20 % m/m, a record for 2014 as well. Net outflow was 12.5 tonnes.

We can see the more Switzerland is importing the higher the purity of the imported gold. Here is why; there is a certain amount global mines can produce as doré every month (low purity), when demand exceeds this amount the Swiss need to import bullion bars, which makes the overall purity of import rise. The last chart clearly illustrates that the more gold is passing through, the more is drained from global bullion bar inventory.

The top destinations of Swiss gold are India, Hong Kong, Singapore and China mainland.

Switzerland gold trade largest traders Jan Nov 2014

Export to China matches, again, the trend of SGE withdrawals; relative weakness from May until August, strength from September till present.

Switzerland China gold trade November 2014

In November Swiss gold export to China was 35 tonnes, down 18 % m/m. Switzerland net gold export January – November heading for China was 187 tonnes.

Hong Kong

Hong Kong is Asia’s main trading hub. Gigantic amounts of gold are imported, most of which is destined for the mainland, though Hong Kong has also net imported hundreds of tonnes itself since 2013.

Hong Kong gold trade November 2014

I’ve been excepting most of Hong Kong’s stock will ultimately be drained by China. From Koos Jansen, June 21, 2014:

In 2013, the year Chinese demand for physical gold exploded, Hong Kong gross gold import was 2239 metric tonnes. The bulk of this was exported to China mainland (net 1158 tonnes), but a staggering 597 tonnes was left behind.

… It will be interesting when Hong Kong becomes a net exporter.

Not by staggering amounts, but Hong Kong is currently a net exporter for four months in a row.

Hong Kong monthly gold trade January 2013 - November 2014

Hong Kong started net exporting in August when demand in China was relatively weak; I expect these net exports to further increase, as Chinese demand accelerated in September through December.

In the first eleven months of 2014 Hong Kong net exported 742 tonnes to mainland China – down 30 % y/y.

Hong Kong - China gold trade 11-2014

In November net export to China was 99 tonnes, up 28 % m/m, a record since February. Note, again, the SGE withdrawal pattern in exports.

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


Australia is the second largest miner in the world, producing roughly 250 tonnes a year. Gold that is nearly all exported, as the ozzies themselves do not have an appetite for yellow metal comparable to Indians or Chinese.

Export data of the land of down under can be tracked through COMTRADE – that copies its data from the Australian Bureau Of Statistics. This data is deceiving though, as I’ve just found out. Australia discloses gold export to China, also when it’s shipped via Hong Kong. This results in double counting, as Hong Kong counts this gold as exported to China as well.

When I compared Australia’s export to China data from COMTRADE with Hong Kong’s import from Australia data from the Hong Kong Census And Statistics Department, I noticed they are nearly the same. This is an accounting inaccuracy by the Australian Bureau Of Statistics in my opinion.

Australia COMTRADE vs HK census

To make sure the COMTRADE numbers are reliable I double-checked them with numbers from GTIS – that copies its data from the Australian Bureau Of Statistics as well.

Australia Gold Trade Data Comparison png

These data sets are the same – the differences are negligible.

I asked Bron Suchecki, manager at the Perth Mint in Australia, if he knew whether his company sends gold destined for China always via Hong Kong or not. He replied (published with permission):

Generally, little of what gets shipped from the Perth Mint to Hong Kong would stay there – most would be in transit to China. There are many reasons for why Chinese bound metal would transit through Hong Kong, including logistics (more flights Perth to Hong Kong than Perth to China) and the breaking up of the usual one tonne plus sized deals we do with bullion banks into smaller shipments for their end customers.

In another email he explained the Perth Mint mostly sells to Bullion Banks, who are subsequently the legal exporters from Australia to China or Hong Kong. There for he doesn’t know how gold destined for China is shipped.

This comment Bron posted at his own blog, he stated about Perth Mint shipments to China in 2013… 

The Perth Mint probably accounted for 15% of that 1500t China import. 

The 15 % (225 tonnes) doesn’t reflect a precise tonnage, however I think it shows Australia exports more gold to China than is disclosed by COMTRADE/GTIS (180 tonnes).

Conclusion: the numbers I used in this post for gold export from Australia to China have been double counted (I’ll put a link in to this post for clarity). Although we know Australia exports huge quantities to China, we don’t know how much is shipped in addition to what travels via Hong Kong. I don’t feel comfortable, therefor, using any of Australia’s export numbers at this stage.

The US        

Right, so what’s the score? We are chasing 1,100 tonnes, thus far we’ve got 105 tonnes from the UK, 187 tonnes from Switzerland and 752 tonnes from Hong Kong, all added up makes 1,044 tonnes. Where could the remaining 56 tonnes could have come from? Not from the US, according to data from USGS.

The US exports substantial amounts of gold to Switzerland and Hong Kong, but very little to China itself. Worth mentioning, however, is that in September the US for the first time exported a few tonnes of bullion directly to China.

US - China gold trade
Is the US going to send larger amounts of bullion in the future directly to China?

Needless to say the 6 fine tonnes that were exported from the US do not fill the 56 tonnes gap. Were the remaining 50 tonnes came from I don’t know. It can be from mines in Africa or central Asia.

Are The London Gold Vaults Running Empty?

As I have extensively covered in the past months the majority of the unprecedented demand for gold from China, which started in January 2013, was being supplied by the UK, home of the London bullion market and many bullion bank (and private) gold vaults. Via Switzerland, where the gold was remelted into kilobars, it was shipped towards Hong Kong where most of it was re-exported to China mainland. Whilst in 2013 it was clear that the world’s largest gold-backed ETF, GLD, was the predominant supplier from the UK, since January 2014 GLD inventory has more or less stabilized.

GLD gold inventory

But UK gold export at the time remained elevated. In January 2014 the UK net exported 143 metric tonnes of gold (118 tonnes net to Switzerland), in February net export accounted for 107 tonnes (119 net to Switzerland). This gold must have been fully supplied from other vaults than GLD’s, which raises the question; how much floating supply is there left in London. I believe there is still a lot of physical gold in London (I will do a future post on some estimates), but I don’t know how much of this is floating supply.

Let’s head over to the east and see how much physical gold China has imported year to date, based on official trading statistics. If we look at the trade stats from Hong Kong we can see net export to the mainland in January was 89.7 tonnes, in February it was 112.3 tonnes and in March 85.1 tonnes. The amount that crossed the border in March was down 24 % from February, but still strong – 85.1 tonnes annualized is 1021.2 tonnes. The total in Q1 accounted for 287 tonnes, annualized 1148 tonnes (just to give you an idea).

Hong Kong - China gold trade monthly 3-2014

As we all know by now Hong Kong is not the only port through which China is importing gold. Though the Chinese are reluctant to disclose their gold trade numbers – guess why that is – from the trade statistics of other countries we can see a portion of how much gold officially vanishes in the black hole (China’s strong hands) not to return in the foreseeable future. Switzerland, where 70 % of the world’s gold refining capacity is located among four refineries, has been so kind to publish monthly reports on whom they trade gold with, and how much, since January 2014. The Swiss net exported 12 tonnes to China in January, 36.9 tonnes in February and 26 tonnes in March. If we add up Hong Kong and Switzerland net export to China in Q1 the outcome is 362 tonnes, annualized 1448 tonnes (just to give you an idea). Remember, this is only from two countries, it doesn’t include the kilobar shippings from the Perth Mint to China for example. Chinese gold import in Q1 has definitely been more than 362 tonnes – also because the official trade numbers I’ve used for this post do not include monetary gold, PBOC purchases will not show up in these stats.

It’s remarkable that Chinese net import in March, at least 111.1 tonnes (85.1 + 26), hasn’t been sourced from London, as it has been in the past year. UK total net gold export in March collapsed 85 % m/m from 107 tonnes in February to 16 tonnes in March, net export to Switzerland fell by 72 % from 119 in February to 34 tonnes inMarch. 

UK Gold Trade 2009 - march 2014

The main gold vein, as I’ve called it, that ran from the UK, through Switzerland, through Hong Kong finally reaching the mainland, is drying up. Switzerland net gold export to Hong Kong fell 76 % from 97.9 tonnes in February to 23.9 tonnes in March, according to Swiss customs.

Switzerland gold trade March 2014

In the coming months I’ll be watching very closely if any more gold will be squeezed out of London and how Swiss exports to Hong Kong and the mainland will evolve. I believe the largest floating supply is/was in London, it will be decisive for the gold market if these stocks are gone. Additionally I will search more customs databases to get hard numbers on gold export to China mainland.

The following video was broadcasted in December 2013. Kenneth Hoffman states that the London gold vaults were virtually empty at the time. Are the last bars being moved out at this very moment? The managing director of Switzerland’s biggest gold refinery stated this is exactly what is happening.

Because net export from Hong Kong to the mainland in March didn’t collapse, but Swiss export to Hong Kong did, two things could have happened. Or Hong Kong, which has net imported 924.6 tonnes of gold since 2010, shared a little of its yellow metal to supply the mainland, or other countries than Switzerland increased their export to Hong Kong. To find out I made a chart combining Hong Kong net import with Hong Kong’s main trading partners.

Hong Kong gold trade monthly, March 2014

From looking at the chart I think this is what happened; during Q1 Hong Kong net import dropped (Switzerland and UK imports down, Australia and the US quite stable in March), which means a bigger share of what they imported was sent forward to the mainland supplemented by inventory build up in Hong Kong over the past years.

From stats of the Shanghai Gold Exchange I know Chinese wholesale demand came down after Q1 without premiums going up. This suggest there hasn’t been a supply shortage in the mainland in April. However, even China’s non-government demand pace in April combined with demand from the PBOC, India, Russia and the rest of the world can transcend global mining and scrap supply, pressuring the floating supply. Let alone if Chinese demand will spring back, which is quite likely to happen at these prices and given the fact the Chinese government is officially stimulating its people to buy gold.

Additional charts: Hong Kong net import in Q1 accounted for 193 metric tonnes.

Hong Kong gold trade 3-2014

Chinese net import from Hong Kong in Q1 accounted for 287 metric tonnes.

Hong Kong - China gold trade 3-2014


West to East Gold Exodus In Full Swing

Chinese gold demand remains extraordinary robust in 2014. Last week (17-03-2014/21-03-2014) wholesale demand, aka SGE withdrawals, was 36 metric tonnes, year to date demand is 523 tonnes.

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

SGE withdrawals week 12 2014


Of course the big question is; where on earth is this gold coming from? Let’s have a look at global trade numbers published so far this year to shine some light on this mystery. As I have written about in 2013, the main gold vein that supplied China ran from the UK, through Switzerland, through Hong Kong eventually reaching the mainland. As we all know China mainland doesn’t disclose its gold trade numbers, but the other countries do (to a certain extent, monetary gold is usually not disclosed).

The Physical Gold Distribution From West To East

The UK net exported 1425 metric tonnes in total in 2013. The peak was in May, 338 tonnes were net exported to meet demand in the east after the drop in the price of gold in April, whereafter UK gold export somewhat slowed. Chinese demand came down from unprecedented highs in April, but remained robust throughout 2013. UK gold export and Chinese demand were correlated during last year.

Around new year and the Chinese Lunar year demand for gold in the mainland picked up again as we can see in the chart below (and as I have reported herehere and here).

SGE withdrawals 2014 week 12

Now the global trade numbers from that period are released we again see matching trends in global gold trade and Chinese demand (/SGE withdrawals). In January 2014 there was a steep increase in UK’s net gold export; 143 tonnes in total, 118 tonnes were net exported to Switzerland and 33 tonnes net to Hong Kong.

UK Gold Trade 2008-2014 01-14

What a surprise, there is still gold left in the London vaults. Most analyst thought these vaults were practically empty at the end of 2013. Like Kenneth Hoffman, who stated in December 2013 on Bloomberg TV that the London gold vaults were virtually empty. All gold was exported to Switzerland, remelted into kilobars and sent to China. He also stated: The most interesting thing is, as we look into 2014, if there ever is interest in gold again, that gold is just not there anymore. Well guess what, there is interest in gold again, coming from China. And doesn’t seem to stop at these prices.

Another reason why analysts thought the UK wouldn’t be coughing up more physical gold was because GLD inventory stopped falling since the beginning of January. After being drained for 552 tonnes in 2013, year to date GLD is up 22 tonnes.

GLD gold inventory

A Gift From Switzerland 

Since January the Swiss Customs Department decided to change the way they disclose their gold trade numbers. Previously they only disclosed total gold and silver trade numbers, now they break it down per country. This gives us gold analysts very valuable insights. A pleasant side-effect is that the Swiss publish their data much sooner than all others.

Switzerland gold trade January February 2014

In total Switzerland gross imported 477 metric tonnes of gold in first two months of 2014. The biggest supplier was the UK, smaller ones were Brazil, Burkina Faso, Chile, Peru, Russia, South Africa and the US. Total Swiss gross gold export over this period accounted for 400 metric tonnes.

A we can see from the chart not only did the UK net exported 118 tonnes to Switzerland in January, in February another 114 tonnes were shipped to the Alps. In two months the Brits net exported 232 metric tonnes to Switzerland, while GLD inventory was up! What Keynesian is still selling in the UK? Or more important, how much is there left to sell? There are probably a few thousand tonnes left in the vaults of the Bank of England, but that’s all owned by foreign nations.

As we heard from the biggest Swiss refinery in December 2013, they were having a very hard time throughout 2013 sourcing the gold for demand from China. An event that never happened in the last 37 years, according to the managing director of this refinery. Yet, in February the Brits shipped 114 tonnes to Switzerland. Anybody who knows the seller please comment below.

Also worth noting; in January Switzerland net exported 12 tonnes to China and 85 tonnes to Hong Kong. In February net export to China accounted for 37 tonnes and to Hong Kong 98 tonnes. Coming months will point out if this change, direct exporting to China bypassing Hong Kong, will become a trend.

Reaching Asia

In January Hong Kong net imported more gold than they net exported to the mainland. The Special Administrative Region net imported a staggering 114 metric tonnes (some of this gold is smuggled into the mainland in jewelry form by mainland tourist, please read at the end of this post), while they only net exported 89 tonnes to the mainland.

Hong Kong gold trade 1-2014

Hong Kong - China gold trade 1-2014

Hong Kong - China gold trade monthly 1-2014

If we gather all the data we have from January we must conclude that although the main gold vein is still in full swing, it’s not enough to supply the Shanghai Gold Exchange. SGE withdrawals in January accounted for 246 tonnes.


This is a screen shot from the monthly Chinese SGE trade report; the second number from the left (blue – 月交割量 ) is monthly gold withdrawn from the SGE vaults in Kg.

SGE withdrawals january 2014

In January China net imported 89 tonnes from Hong Kong, 12 tonnes from Switzerland, domestic mine supply was 36 tonnes, domestic scrap supply couldn’t haven’t been more than 25 tonnes, which leaves 83 tonnes that had to be imported from other countries. I still don’t have any estimates on how much gold China imports from its own overseas mines, however I doubt its 83 tonnes a month. Concluding not only in the UK, also in other countries around the world large stock piles of gold are still being sold to China.

West To East Gold Distribution Update

The great distribution of wealth and power, facilitated by gold, from west to east is still going strong. From looking at available global trade numbers we know the main gold vein runs from the UK through Switzerland, through Hong Kong, eventually reaching Shanghai. Let’s take a look at the latest data.

Starting Point: The London Gold Vaults

It started in January when the UK, home of the London Gold Market, net exported 74 tons of gold to Switzerland. As we can see in the chart below this is not unusual, we saw similar events in the beginning and in the end of 2011. But this year export accelerated to a spike May, in which 237 tons were net exported to the Swiss. A staggering amount of gold, nearly as much as the official gold reserves of the Bank Of England. Through the summer these exports remained elevated, year to date the UK has net exported 1235 tons of gold in total, of which 1109 tons to Switzerland.

UK gold export

In September the UK net exported 117 tons of gold, down from 119 tons in august, – 1.7 % m/m. Net export to Switzerland was 107 tons in September, up from 98 tons in August, + 9.1 % m/m. This implies we have not seen the end of the gold exodus from the UK.

GLD Redemptions

A significant portion of UK gold exports are being supplied by ETF stocks. GLD, which is the biggest gold ETF in the world and whose vaults are in London, was drained for 444 tons in the first three quarters of this year. At this moment GLD’s inventory stands at 866 tons, more stock suited for it’s authorized participants to be redeemed and shipped to the east.
note “Unallocated Accounts”


Remelting The Gold Bars In Switzerland

Although the Swiss, discreet as they are, do not publish country specific with whom they trade gold, nevertheless, their total trade numbers are very clear. Being one of the biggest trading, refining and storage centers in the world, vast amounts of gold cross their borders. In 2012 they have imported 2267 tons of gold and exported 1550 tons. On average import has transcended export by 25 % in recent years, which emphasizes Switzerland’s storage function over this period. This has changed as the Swiss have imported 2420 tons and exported 2184 tons in the first three quarters of this year. Meaning not only trade is surging, but also that the gap between import and export is tightening. As was confirmed by Switzerland’s biggest refinery, all gold coming in from London is being remelted into kilobars and sent forward to China.
If we annualize gold export for 2013 the outcome is 2912 tons, 1362 tons more than in 2012. Gold that partially is shipped to Hong Kong, partially directly to Shanghai.

Transit Port Hong Kong

Most (but certainly not all!) gold that is imported by China mainland comes in through Hong Kong. Year to date Switzerland has net exported 697 tons of gold to Hong Kong. A surge of 445 % if we measure just the first three quarters relative to 2012 totals.


Net export from Hong Kong to the mainland is 826 tons of gold year to date.


Just the official route has brought 826 tons of gold to China year to date, annualized 1100 tons. If we add 400 tons Chinese mining supply the total is 1500 tons othat will meet demand.
Whilst the World Gold Council estimates Chinese consumer demand will be over 1000 tons, my estimate is it will be over 2000 tons. In my humble opinion just the official route raises a few eyebrows to the WGC demand numbers. If we then take into account gold is also shipped into China through other ports than Hong Kong, more eyebrows are raised.
In a future post I will describe in detail how I calculated my estimate.
In Gold We Trust