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The Mechanics Of The Chinese Domestic Gold Market

This post is part of the Chinese Gold Market Essentials series. Click here to go to an overview of all Chinese Gold Market Essentials for a comprehensive understanding of the largest physical gold market globally. This post was updated until 2016.

The largest physical gold market globally is the Chinese domestic gold market. At the core of this market is the Shanghai Gold Exchange. This article is serves as an introduction to both.

The Shanghai Gold Exchange (SGE) is the largest physical gold exchange globally because China is both the largest gold importer and mine producer, and nearly all supply channels in the Chinese domestic market flow through the SGE. Since 2013 the yearly amount of physical gold withdrawn from the SGE vaults has exceeded 2,000 tonnes.

While Western consultancy firms like the World Gold Council (WGC) and Thomson Reuters GFMS (GFMS hereafter) report annual Chinese gold demand to be roughly 900 tonnes, the China Gold Association (CGA) states Chinese demand equals SGE withdrawals and thus is more than twice as much as is portrayed by the WGC and GFMS.

This article examines the basic mechanics of the Chinese domestic gold market and how nearly all physical gold in China flows through the SGE, in order to achieve the best understanding of the size of this market and true Chinese gold demand. In addition, the enormous difference between SGE withdrawals and Chinese gold demand as disclosed by GFMS is highlighted.

According to my analysis the structure of the Chinese domestic gold market with the SGE at its core has been designed by the People’s Bank Of China (PBOC), (i) to provide the Chinese citizenry direct access to the gold wholesale market, (ii) to grant all gold traded in the Chinese wholesale market to be of the highest quality, (iii) to be able for the PBOC to monitor the gold traded in the Chinese market, and (iiii) keep track of the amount of gold added to Chinese (non-government) reserves. Sprouted from the centrally minded Chinese authorities the SGE system was conceived in 2002 to facilitate the citizenry to buy physical gold, strengthen the Chinese economy, develop the Chinese gold market and to support renminbi  internationalization.

For our analysis of the Chinese domestic gold market I’ve relied on Chinese laws, annual reports drafted by the CGA, SGE, PBOC and Shanghai Futures Exchange (SHFE), next to sources in China at commercial banks and individual traders. The aforementioned reports are:

  • China Gold Association (CGA) Gold Yearbook 2006, 2007, 2008, 2013 (Chinese).
  • SGE Annual Report 2007, 2008, 2009, 2010, 2011 (English and Chinese).
  • SGE Monthly Report December 2013.
  • China Gold Market Report 2008, 2009, 2010, 2011 (English and Chinese).

Most of these reports have been written in conjunction by the CGA, SGE, PBOC and SHFE.

Screen Shot 2015-03-10 at 3.25.12 PM
Exhibit 1. Courtesy China Gold Market Report 2011.

All the English reports were available on the SGE website until 2014, after which they’ve been taken offline.


Prior to 2002 the Chinese gold market was practically non-existent. Back then the PBOC had the monopoly in trading gold in China and the people were only allowed to buy jewelry in designated shops. In 2002 the PBOC erected its subsidiary the SGE to allow the free market to take over the the pricing and allocation of gold. However, the Chinese domestic gold market didn’t change over night.

By approximation, the Chinese domestic gold market functioned as was planned starting in 2007, as in that year for the first time the amount of physical gold withdrawn from SGE vaults equaled Chinese wholesale gold demand that year. All supply and demand was matched at the SGE, without the interference of the PBOC in 2007. In the CGA Gold Yearbook 2007 it’s stated [brackets added]:

2007年,上海黄金交易所黄金出库量363.194 吨,即我国当年的黄金需求量,

In 2007, the amount of gold withdrawn from the warehouses of the Shanghai Gold Exchange, the total [wholesale] gold demand of that year, was 363.194 tonnes …

From 2002 until 2007 Chinese wholesale gold demand did not equal SGE withdrawals, to which we conclude the reform of the market wasn’t fully worked out in those years. From 2007 until 2011 SGE withdrawals exactly matched Chinese wholesale gold demand, from 2012 until present SGE withdrawals roughly matched Chinese wholesale gold demand, according to the metrics used by the CGA in its Gold Yearbooks published in Chinese print.

Until this date (2017) we deem SGE withdrawals to be a useful indicator for Chinese wholesale gold demand, though true Chinese gold demand is slightly lower.

There are a few basic rules in the Chinese domestic gold market that make SGE withdrawals equal Chinese wholesale gold demand, these rules compound to the mechanics of this market. In the following these rules are expanded upon. First with respect to the supply side, then the demand side.

Chinese Gold Import

Since 2011 the main conduit of supply into the Chinese domestic gold market has been bullion import. Gold bullion import into the domestic market can be done by banks that enjoy approval by the PBOC, though for every shipment a new License must be requested at the central bank. This policy is referred to as “one batch, one License”. Bullion export from the Chinese domestic gold market is prohibited as far as is publicly known.

Currently there are thirteen banks that have been approved by the PBOC to import bullion, presented in random order:

  1. HSBC Bank (China) Ltd
  2. Australian and New Zealand Bank (China) Company Ltd
  3. Standard Chartered Bank (China) Ltd
  4. United Overseas Bank (UOB)
  5. Industrial and Commercial Bank of China (ICBC)
  6. China Construction Bank (CCB)
  7. Bank of China
  8. Agricultural Bank of China (ABC)
  9. Bank of Shanghai
  10. China Minsheng Bank (CMB)
  11. Industrial Bank
  12. Shenzhen Development Bank (SDB) / Ping An Bank
  13. Everbright

All bullion imported into the Chinese domestic gold market by one of the thirteen banks must be standard gold and sold first through the SGE. Standard gold in China is bullion casted by an LBMA or SGE approved refinery in bars or ingots of 50g, 100g, 1Kg, 3Kg or 12.5Kg, with a fineness of 9999, 9995, 999 or 995. Solely standard gold is allowed into SGE certified vaults to be traded through the SGE system. The Chinese cross-border gold trade rules state [brackets added]:

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.

It’s possible non-bank gold enterprises, if approved by the PBOC, can import (and export) gold doré, ore and jewelry into / out of the domestic market if accompanied by a License, but this tonnage is insignificant in the greater scheme of things. Most gold imported is standard gold and very little gold is permitted to be exported. An exception, for example, is the Chinese Mint that can export golden Panda coins from the domestic market.

The Chinese domestic gold market with the SGE at its core is separated from Chinese Free Trade Zones (/Customs Specially Supervised Areas) where different cross-border trade rules are applicable.

Individuals can freely import and export 50 grams of gold when traveling abroad. However, the rule isn’t very stringent on the import side. Many mainland tourists visit Hong Kong to buy jewelry and bring as much jewelry as they like across the border when they return home. In Hong Kong jewelry doesn’t carry Value-Added Tax which makes these products less expensive than in China mainland.

The Value-Added Tax System

When standard gold is traded over the SGE or SHFE it’s exempt from Value-Added Tax (VAT). When standard gold is not traded over the SGE or SHFE it’s not exempt from VAT. In addition, when non-standard gold, for example 200 gram bars, is traded in the Chinese domestic gold market off-SGE it’s exempt from VAT.

The VAT rules in the domestic market incentivize wholesale gold supply to be traded in the form of standard gold through the SGE which is the most liquid exchange. (Also because gold within the SGE system is granted to be of the highest quality, which attracts most of demand in China. Any gold sold off-SGE can be of inferior quality.)

In the table below the different types of gold in China and the related VAT rates are listed.

Exhibit 2. Chinese domestic gold market VAT rates.

Domestic Gold Mining

The People’s Republic of China has the biggest gold mine production globally with an output of roughly 453.49 tonnes per annum (2016). The vast majority of this output is sold first through the SGE, as Chinese miners are required to sell standard gold over the SGE (another incentive to channel supply to the SGE).

Overseas gold mining output can be imported into the Chinese domestic gold market, subsequently to be refined into standard gold by an SGE approved refinery and traded over the SGE.

Because of the aforementioned rules the best trading liquidity in China is at the SGE and thus gold mining companies are incentivized to cast their output in standard gold bars to sell on the SGE. However, miners are also allowed to sell non-standard gold or gold products off-SGE. For example, China National Gold Group Corporation is a mining company that has its own physical stores to sell bars and ornaments.

Recycled Gold

All supply that is not domestically mined or imported into China we’ll label as recycled gold. Because of the liquidity on the SGE and the VAT rules regarding standard gold, recycled gold in the domestic market has an incentive to flow through the Chinese center bourse as well. Recycled gold is not required to be sold through the SGE, yet many refineries cast standard gold and thus most finds its way to the center bourse.

SGE bar small hi-res
Exhibit 3. Standard gold bar 100g

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

When it comes to measuring recycled gold supply it gets complicated as all sources available (CGA, GFMS, Metals Focus, CPM Group) for this data do not use the same methodology and nomenclature. In the remainder of this article the focus will be on the differences between GFMS and CGA metrics and nomenclature. The most significant difference with respect to recycled gold is that GFMS merely discloses scrap (old jewelry and industrial products that are sold by consumers) in their statistics, where the CGA discloses scrap, disinvestment, and “recycled distortion, lumped together as recycled gold.

The significance of differentiating between several recycled gold types is to separate the ones that have no net effect on the price from the ones that do. Recycled gold can be subdivided in three categories (the following is BullionStar nomenclature):

  1. Scrap: old gold products (jewelry or industrial) sold for cash by consumers at retail level, and therefore true supply having a net effect on the gold price. These scrap flows are included by both GFMS and the CGA in their statistics.
  2. Disinvestment: bullion wholesale supply. Fact is, in China any individual or institutional investors can buy (demand) gold directly at wholesale level (SGE). If down the road these investors decide to sell (supply) gold they can do so directly to a refinery. Such disinvestment can then make its way to the SGE. An investor wanting to sell 1500 Kg in gold bars is not likely to walk into a jewelry store to sell its materials, more likely he will approach a refinery. Because disinvestment surpasses retail stores (jewelry shops and banks) it’s not included by GFMS in their supply statistics. The CGA does include disinvestment in their supply statistics. Disinvestment has a net effect on the price. It can also be referred to as institutional supply.
  3. Recycled distortion: recycled distortion can be for example process scrap, which is metal spilled in manufacturing processes of jewelry or industrial products. Suppose, a jewelry manufacturer buys 1 tonne of gold at the SGE and starts fabricating jewelry. During production 800 Kg makes it into finished products while 200 Kg is scrap spill over. The spill over, called process scrap, is directly being sold back from the jewelry manufacturer to a refinery making its way to the SGE. Effectively the 200 Kg has been recycled through the SGE being both demand and supply, having no net effect on the price. Therefore, process scrap overstates the supply and demand balance. Next to process scrap there can be other forms of gold being recycled through the SGE (i.e. gold used in VAT schemes), which we’ll collectively label as recycled distortion. Recycled distortion is not included in GFMS data, but is included in CGA data.

Have a look at an overview on how recycled gold types are named by all consultancy firms, next to if they’re included in their statistics.

Exhibit 4. China recycled gold flows.

Because in terms of trading total supply and total demand are exactly equal – one cannot sell gold without a buyer or buy gold without a seller – consequently we can gauge demand by measuring supply. And, as GFMS publishes incomplete Chinese gold demand statistics, it’s essential to measure all types of supply to get the best estimate of true Chinese gold demand.

Just like the London Bullion Market Association (LBMA) the SGE respects a chain of integrity. Meaning, only SGE approved refineries can supply bars to the SGE system and once bars are withdrawn from SGE certified vaults they leave the chain of integrity. To prevent fraud, hereafter, the bars that are withdrawn are not allowed to re-enter the SGE vaults. The only way they can re-enter the SGE system (the Chinese wholesale market) is if the bars are melted down and recast into new bars by an SGE approved refinery. In the SGE’s Detailed Rules for Physical Delivery of the Shanghai Gold Exchange it’s stated:

Article 23

Any gold bullion withdrawn by a member or customer shall not be loaded into any Certified Vault in the future.

The same rule is disclosed on the websites of China’s largest banks that offer customers SGE trading accounts. On ICBC’s website it’s stated (point 2):

ICBC SGE rule gold bars
Exhibit 5. Courtesy ICBC.

This rule is important for comprehending the mechanics of the Chinese domestic gold market, because traders cannot easily recycle gold through the SGE.

SGE Withdrawals Equal Chinese Wholesale Gold Demand 

Above has been established that (in general) supply equals demand and in the Chinese domestic gold market nearly all supply flows through the SGE. Consequently, the volume of gold being withdrawn from SGE vaults is a proxy for Chinese wholesale gold demand. Additionally, we saw that that there is recycled distortion flowing through the SGE that is overstating the supply and demand balance. Simply put, when the volume of recycled distortion is subtracted from SGE withdrawals what is left is true Chinese gold demand. 

Presented below are a few equations for clarification:

SGE withdrawals = Chinese Wholesale Gold Demand

As import + mine + scrap + disinvestment + recycled distortion is total physical supply to the SGE and everything that is withdrawn is total demand:

SGE Withdrawals = Import + Mine + Scrap + Disinvestment + Recycled Distortion = Total Supply = Wholesale Demand 

But as was mentioned before recycled distortion blurs our view of demand, it has no net effect on the price, so it has to be subtracted from SGE withdrawals:

True Chinese Gold Demand = Import + Mine + Scrap + Disinvestment = SGE Withdrawals – Recycled Distortion

Chinese Wholesale Gold Demand = True Chinese gold demand + Recycled Distortion = SGE Withdrawals 

In a graph:

Exhibit 6. Example Chinese gold supply and demand balance.

Please note, in our Chinese gold supply and demand study two elements are left out. On the supply side we left out stock carry over in SGE vaults from previous years, as this information is not publicly available, on the demand side we left out gold bought at the SGE that was not withdrawn from the vaults (i.e. GAP and ETF holdings), as this information is not precisely known.

The formulas are supported by reports from the CGA and SGE from 2007 until 2013, as every year SGE withdrawals equaled wholesale gold demand in these documents. Presented are CGA demand figures and SGE withdrawals from 2007 until 2013:

2007: SGE Withdrawals 363.2 Tonnes

Screen Shot 2015-03-12 at 4.54.58 PM
Exhibit 7. SGE Annual Report 2007: framed in red are total SGE withdrawals 2007 in Kg’s (363.19365 Kg).
Screen Shot 2015-03-11 at 10.27.37 AM
Exhibit 8. CGA Gold Yearbook 2007: framed in red is total demand in Kg’s (363.194 Kg).

2008: SGE Withdrawals 543.2 Tonnes 

SGE Annual Report 2008, total SGE withdrawals in Kg's
Exhibit 9. SGE Annual Report 2008, total SGE withdrawals in Kg’s.
Screen Shot 2015-03-11 at 10.59.54 AM
Exhibit 10. CGA Gold Yearbook 2008: framed in red is total demand 2008 in tonnes

2010: SGE Withdrawals 837.2 Tonnes

SGE Annual Report 2010, total SGE withdrawals in Kg's
Exhibit 11. SGE Annual Report 2010, total SGE withdrawals in Kg’s
China Gold Market Report 2010, total demand in tonnes
Exhibit 12. China Gold Market Report 2010, total demand in tonnes

2013: SGE Withdrawals 2,197 Tonnes

Screen Shot 2015-03-12 at 9.25.07 AM
Exhibit 13. SGE Monthly Report December 2013, framed in red is total 2013 SGE withdrawals in Kg
CGA Gold Yearbook 2013 demand
Exhibit 14. CGA Gold Yearbook 2013: framed in black is total demand 2013 in tonnes (Red = jewelry manufacturing, blue = small bar production, purple = industrial material, turquoise = coin manufacturing, yellow = other, green = net investment)
CGA Gold Yearbook 2013 supply
Exhibit 15. CGA Gold Yearbook 2013: framed in black is total supply 2013 in tonnes. (Purple = domestic and overseas mine output, green = recycled gold, blue = bullion import)

In the last screen shots (from the CGA Gold Yearbook 2013) we can see total supply/demand in 2013 was 2,198.84 tonnes, which is 1.88 tonnes higher than SGE withdrawals. This can be explained by jewelry import that was counted as demand, but not sold through the SGE.

Chinese Gold Demand Metrics

After having examined the supply side of the Chinese domestic gold market let’s move on to the demand side. From the fact most supply flows to the SGE, logically most demand is directed to to the SGE as well.

Chinese wholesale gold demand as disclosed by the CGA, which equals SGE withdrawals, is the widest measure of demand. It consists of consumer demandinstitutional demand and recycled distortion (see exhibit 6 and 15)Consumer demand includes jewelry, bar and coin sales at retail level and gold used in industrial fabrication. Institutional demand comprises, in the case of China, individual and institutional investors buying bullion directly in the SGE wholesale market.

The predominant reason for the difference between SGE withdrawals and Chinese gold demand as disclosed by GFMS, is the fact that GFMS only discloses consumer demand in its reports, not institutional demand. (And they do so not only for China but for the rest of the world as well, which is an incomplete and misleading representation of gold supply and demand. Hereby GFMS makes gold look like a commodity instead of a currency, denying its most important trading characteristics in price formation.) Stunningly, the difference between SGE withdrawals and GFMS demand has aggregated to an astonishing 6,032 tonnes from January 2007 until December 2016. The next graph illustrates the difference

Chinese Gold Supply & Demand
Exhibit 16. The difference between Chinese consumer gold demand and SGE withdrawals.

As on the supply side, we can draft simple equations for the demand side:

SGE Withdrawals = Consumer Demand + Institutional Demand + Recycled Distortion = Chinese Wholesale Gold Demand

Consumer Demand + Institutional Demand = True Chinese Gold Demand 

Consumer Demand = Jewelry + Retail Bar & Coin + Industrial 

 Institutional Demand = Direct Purchases At The SGE 

Direct Purchases At The SGE (Institutional Demand) = SGE Withdrawals – Recycled Distortion – Consumer Demand

In the CGA demand table for 2013 (exhibit 14) it’s stated the difference between consumer demand and total demand was labeled as net investment, which is calculated by the CGA as a residual, ‘SGE withdrawals minus consumer demand’. Demonstrated in equations:

Net Investment = Institutional Demand + Recycled Distortion 

Net Investment = SGE Withdrawals – Consumer Demand

Institutional Demand = Net Investment  Recycled Distortion

However, because the exact volume of recycled distortion and disinvestment is unknown, institutional demand is unknown as well. Our best estimate of institutional demand is net investment. Again, all this is clearly illustrated in exhibit 6.

Everyone In China Can Buy Gold Directly At The SGE

So what’s causing the massive direct purchases at the SGE? “Demand for gold”, is the simple answer. But there’s more that can be told on direct purchases.

In China not only wholesale enterprises such as jewelry manufacturers and bullion banks can trade gold on the SGE, everyone can open an SGE account and start trading. The next graph illustrates how wholesale manufacturers are responsible for approximately half of SGE withdrawals (for exact ratios see exhibit 16). These wholesale enterprises will buy gold at the SGE and subsequently withdraw the metal to fabricate products (ie jewelry, ornaments and bank bars) to be sold at retail level. Individual and institutional SGE customers are responsible for the other half of SGE withdrawals. These customers will buy gold directly at the SGE and withdraw the metal to store in private vaults.

Exhibit 17. Example SGE Withdrawals Distribution.

According to my analysis the PBOC does not buy its monetary gold through the SGE, so effectively all gold flowing through the SGE ends up in the private sector.

Purchasing gold directly at the SGE is fairly simple in China. Every natural person, institution or wholesale enterprise can buy gold or trade derivatives at the SGE. For 50 RMB one can open an SGE account at his local commercial bank branch or via a smartphone application. Then, he or she receives a unique 10-digit trading number that gives access to the account consisting of a Bullion Account and Margin Account. The 10-digit trading number will stay with an individual forever, even if he or she switches banks. The procedure is illustrated in the picture below:

Screen Shot 2015-03-11 at 7.19.46 PM
Exhibit 18. Courtesy China Gold Market Report 2008.

When an SGE physical gold contract is exchanged the full amount of funds is promptly transferred from the buyer’s Margin Account to seller’s Margin Account. At the same time the related bullion is transferred from the seller’s Bullion Account to the buyer’s Bullion Account (settlement is T+0). Gold credited to a Bullion Account is allowed to be withdrawn from the vaults at any time.

Screen Shot 2015-03-12 at 6.01.39 PM
Exhibit 19. Courtesy China Gold Market Report 2011.

Early 2016 was the launch of the smartphone application Yijintong that allows anyone with an internet connection in China to open an SGE account and trade directly on the SGE wholesale platform appreciating the lowest spreads in China. The Yijintong smartphone app can be downloaded through the following QR-code:

SGE app qr code
Exhibit 20.

As fas as is publicly known, when Yijintong was launched the SGE already counted 8.3 million individual and 10,000 institutional customers, next to 246 members globally of which 183 domestic members and 63 international members. From the huge amount of individual and institutional customers we can easily understand the huge volumes of direct purchases at the SGE.

The only reason individual investors would buy gold in a jewelry shop or bank is because these bars are aesthetically superior and come in all sorts of shapes and sizes.

chow tai fook gold bar 2
Exhibit 21. Chow Tai Fook gold bar.

Though decorated bars come at a significant premium. Obviously, large investors would not buy retail bars but prefer relatively cheaper SGE bars. Which is the reason for the huge discrepancy between consumer demand and SGE withdrawals: many investors buy gold directly at the SGE.

Wang Zhe, Chairman & President of the SGE in 2010 wrote:

During the first four months of this year, the number of individual investors kept growing rapidly and now has exceeded two million. The Exchange has become the main channel of investment of physical precious metals, fulfilling the needs of domestic residents.

This quote describes that as early as in 2010 direct purchases at the SGE by individual clients exceeded retail bar purchases. And individual/institutional investors bypassing retail shops buying gold directly at the SGE has been a trend that has accelerated ever since (see exhibit 16).


By now a comprehensive framework has been provided of the basic mechanics of the Chinese domestic gold market. From all the equations and illustrations presented readers should be able to grasp the sheer size of this physical gold market.

Kindly note, to avoid confusion, in some publications the CGA discloses only consumption demand, similar to GFMS, excluding net investment. For example in 2014 [brackets added]:

Gold consumption in China grew to 1,176.40 tonnes [in 2013] … , with jewellery demand … 716.50 tonnes and [retail] bullion demand … 375.73 tonnes

The CGA states in the quote above consumer gold demand was 1,176.4 tonnes in 2013, while we read in other publications (exhibit 14) wholesale gold demand was over 2,000 tonnes.

Lastly, more examples are provided that confirm the more realistic size of Chinese gold demand. Na Liu, from CNC Asset Management Ltd, traveled to China in 2014 and spoke to The President of the SGE Transaction Department. Afterwards Na reported on Chinese gold demand in 2013 [brackets added]:

The President of SGE Transaction Department (The President) said: “This 2,200 tonnes of gold, after leaving our vaults, they entered thousands of Chinese households in the form of jewellery and investment purchases [consumer demand + direct purchases].”

…when we asked why the China Gold Association’s [consumer demand] number is so low, the President said: “They mainly cover the gold sales through the gold shops. This is their main source of information. And their number is quite useful in that way. However, our system [SGE withdrawals] has broader coverage.”

Clearly consumer demand is “gold sales through the gold shops” and SGE withdrawals have “broader coverage” (consumer demand + direct purchases at the SGE).

Needless to say, the people that run the SGE, CGA, PBOC and SHFE are all related. Depending on the occasion they choose to disclose consumer demand or wholesale gold demand. SGE Chairman, Xu Luode, said at the LBMA conference in 2014 [brackets added]:

Last year [2013], China imported 1,540 tonnes of gold. Such imports, together with the 430 tonnes of gold we produced ourselves, means that we have, in effect, supplied approximately 2,000 tonnes of gold last year.

The 2,000 tonnes of gold were consumed by consumers in China. Of course, we all know that the Chinese ‘dama’ [middle-aged women] accounts for a significant proportion in purchasing gold. So last year, our gold exchange’s inventory reduced by nearly 2,200 tonnes [SGE withdrawals], of which 200 tonnes was recycled gold.

Typically, Xu measures ‘import + mine production’ (∼2,000 tonnes in 2013) for Chinese gold demand, as this is the amount of gold added to Chinese private sector reserves (recycled gold doesn’t add anything to reserves). Indirectly Xu reveals his interest in the amount of private sector gold reserves within the domestic market.

All in all, there are several ways to measure Chinese gold demand. A next article is dedicated to the data and details of all metrics, for now, please have look at the next overview:

  • Gold sold at retail level (consumer demand) = GFMS demand
  • Import + mine = net gold added to Chinese private sector reserves
  • Import + mine + scrap + disinvestment = true Chinese gold demand
  • SGE withdrawals = wholesale gold demand

The definition of SGE withdrawals slightly changed late 2014 with the inception of the Shanghai International Gold Exchange. How it was changed can be read in the subsequent posts of the Chinese Gold Market Essentials (Workings Of The Shanghai International Gold ExchangeWhy SGE Withdrawals Equal Chinese Gold Demand And Why Not – The Argument List). 

How The World Is Being Fooled About Chinese Gold Demand

Kindly note the pattern

There is a story being told to the masses about Chinese gold demand that is grossly incorrect. The huge discrepancy between numbers from the World Gold Council (WGC) and actual gold demand is so wide yet cunningly hidden I must conclude there is essential information about physical gold demand deliberately kept privy.

Let’s go back to April 2013; the price of gold made a nosedive, which spawned an unprecedented physical buying spree across the globe, most notably in China. Withdrawals from the vaults of the Shanghai Gold Exchange (SGE), that equal Chinese wholesale demand, closed at 2,197 metric tonnes December 31, 2013, up 93 % y/y.

However, the WGC (the global authority on gold) initially stated Chinese consumer gold demand had reached 1,066 tonnes in 2013, an astonishing 1,131 tonnes less than wholesale demand. In the China Gold Association (CGA) Gold Yearbook 2013 it was disclosed China had net imported 1,524 tonnes and domestically mined 428 tonnes. Without counting scrap supply this adds up to 1,952 tonnes; adding scrap total supply has been well over 2,000 tonnes. It’s impossible consumer demand was only 1,066 tonnes.

Finally the WGC admitted their initial estimate of 1,066 tonnes of Chinese gold demand was grossly understated. By email they wrote me on February 12, 2015:

Dear Mr Jansen,

Thank you for emailing the World Gold Council, we apologize that your previous enquiry was missed.

Our figure for Chinese consumer demand in 2013 has since been revised upwards to 1,311.8 tonnes from the original figure of 1,066 tonnes published in the full year 2013 Gold Demand Trends report.  

That’s an increase of 23 % by the largest physical buyer on the planet. Although still far from actual demand, 23 % is quite a revision. Was there an official press release from the WGC to inform the world on this revision? No (I’ve asked the WGC, but I got no reply). Did the mainstream media properly cover the 23 % revision? Not that I’m aware of.

Actual Chinese gold demand 2013 has been knavishly hidden from the masses (99 % of the financial industry copies WGC numbers).

In 2014 the WGC again grossly understated Chinese gold demand. SGE withdrawals accounted for 2,102 tonnes, though the WGC stated Chinese consumer demand was only 814 tonnes. Again, a gap of more than 1,100 tonnes. All arguments the WGC has brought up to explain the surplus in the Chinese gold market can only make up about 15 % of the gap (gold-for-gold supply and stock movement change).

For 2014 grossly understating Chinese gold demand wasn’t enough for the Council to distract the world’s eye from China’s gold hunger; more was needed. By a few tonnes the WGC put India’s consumer gold demand ahead of China. In their Gold Demand Trends Full Year 2014 Indian demand is disclosed at 843 tonnes, transcending Chinese demand (814 tonnes) by 29 tonnes, just enough. Most media simply copied these numbers and are stating India is now the world’s largest gold consumer – no critical thoughts added. In my opinion this is the biggest fallacy in finance of our time.

WGC demand vs SGE withdrawals 2

In 2014 China imported at least 1,250 tonnes and domestically mined 452 tonnes. According to GFMS scrap supply was 182 tonnes, adding up to total supply at 1,884 tonnes. But, we’re supposed to believe India is the largest gold consumer on earth at 843 tonnes? Yes.

I’m open minded towards the possibility there is an agenda that is allowing China to buy as much gold for as little fiat as possible to make them accumulate whatever necessary before a monetary reset. I see no other explanation for the events unfolding in front of our eyes.

Can you imagine what would have happened to global gold sentiment if the WGC had disclosed 2013 Chinese demand at 2,100 tonnes and 2014 Chinese gold demand at 1,850 tonnes? Sentiment would have been influenced to say the least.

As I wrote in my first post on why SGE withdrawals equal Chines wholesale demand September 18, 2013:

If you think about it, the redistribution of gold is the only logical thing to happen given the state the world economy is in. … gold has to go to China in order to equalize the chips.

More Awareness About Chinese Gold Demand

Luckily my camp is growing. More and more analysts are using SGE withdrawals as a proxy for Chinese wholesale demand instead of inaccurate WGC data. CNC Asset Management wrote in a newsletter September 25, 2014:

To understand China’s real physical gold demand, investors should simply look at the weekly withdrawals from Shanghai Gold Exchange vaults. We visited the Shanghai Gold Exchange (SGE) in May and talked to the senior executives of the exchange. After reviewing the exchange’s trading mechanism, we are of the view that the weekly withdrawal figures provide a much more accurate data series that reflects China’s aggregate wholesale demand in a timely way.

More recently MarketWatch published SGE withdrawals and its significance, and Dr. Martin Murenbeeld, Chief Economist at Dundee Capital Markets, wrote in his newsletter on February 2015:

It follows from this opaque picture of Chinese supply and demand that some observers, including ourselves, have decided Shanghai Gold Exchange (SGE) deliveries data provides the best window on what might be happening on the demand side in China. (There are a number of observers who have noted the widely circulated estimates of gold demand are woefully inaccurate, precisely because these data are so significantly lower than SGE deliveries data.)

Latest data from the SGE shows withdrawals in the last five days around Lunar Year (February 16, 17 and 25, 26, 27) accounted for 38 tonnes. Total SGE withdrawals in the first two months of 2015 surpassed 410 tonnes. SGE withdrawals Q1 can reach 550 tonnes or more. However, don’t expect Chinese gold demand published by the WGC on Q1 to be anywhere near these figures.

SGE Withdrawals 59t in week 6, YTD 374t: Chinese Gold Soap Extended Another Season

The latest numbers from the Shanghai Gold Exchange (SGE) demonstrate a little over 59 tonnes have been withdrawn from the vaults in week 6 of 2015, down 0.35 % w/w. SGE withdrawals, which are often used as a proxy for Chinese wholesale gold demand, account for an amazing 374 tonnes year to date, up 17 % y/y.

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

Corrected by the volume traded on the Shanghai International Gold Exchange (SGEI), withdrawals in week 6 were at least 51 tonnes (read this post for a comprehensive explanation of the relationship between SGEI trading volume and withdrawals). Year to date withdrawals corrected by SGEI volume were at least 333 tonnes.

I can’t proof it at this stage, but I think domestic withdrawals are more likely to be 374 tonnes year to date than 333 tonnes. The Chinese import huge amounts of gold which obviously is not going through the SGEI. In addition, it seems unlikely every trade on the SGEI is withdrawn from the vaults in the Shanghai Free Trade Zone to be exported. The SGEI is not yet the place to buy gold.

Shanghai Gold Exchange SGE withdrawals delivery 2015 week 6

Shanghai Gold Exchange SGE withdrawals delivery only 2014 - 2015 week 6

According to my estimates China has imported 280 tonnes year to date (until February 13).

Here’s some more perspective; SGE withdrawals year to date are definitely not less than last year when we experienced how Chinese people can storm their local malls on a mission to buy as much gold as they can (perhaps that’s why this year lifeguards were on the scene to control the shoppers).

Lunar Year Withdrawals

Yes, demand has been huge in China, but not according to the price of gold. Technically speaking it doesn’t matter how much gold is bought to qualify demand, if supply is outstripping demand the price will go in one direction only, down. Officially, by tracking the price this should tell us everything about supply and demand of gold. A declining price means supply transcends demand, until a new price equilibrium is found, and vice versa.

If the price of gold is determined by physical supply and demand of gold we are supposed to believe that since April 2013 (see chart 1) there has been far more supply than demand as the price has come down substantially. Supposedly there has been so much supply, that Swiss refiners expanded their plants and worked in three shifts 24 hours a day to refine all this gold, which they fortunately could dump in China. The decline in the price was an enormous flood of supply and feeble demand!

Perhaps you can read my cynicism between the lines, as in my opinion there is more going on than the official story; for example, all leading Western consultancy firms have underreported 2013 and 2014 Chinese gold demand in both years by roughly 1,000 tonnes. As I have written a few hundred times on these pages: why the mainstream media isn’t covering this remains a mystery.

Most of the big potatoes in the gold realm sort of deny the amount of gold China is accumulating or present inaccurate arguments to defend their understated demand numbers.

On February 17, 2015, Mr Phillip Klapwijk, an analyst with Precious Metals Insights in Hong Kong, previous Executive Chairman of Thomson Reuters GFMS, was interviewed by Jan Harvey and Michael Wagner at the Reuters Global Gold Forum:

Harvey: The period in the run-up to the Lunar New Year is considered a peak season for gold demand in China. From what you have seen, how has buying been this year, compared to last year and the year before?

Klapwijk: In terms of the YoY, my sense is that 2015 is up moderately on 2014 but well below the exceptional demand seen in the same period in 2013.

Hmm, I beg to differ as we can see in chart 3.

Harvey: What sort of consumer trends have been noticeable this year – what sort of products are people favoring, and is gold buying overall as widespread as it has been in the past?

Klapwijk: This is partly a price and timing related phenomenon but also I think speaks to – by Chinese standards – a somewhat ‘soft’ environment for retails sales of jeweler this New Year.

I wrote a lengthy piece a couple of days ago stating retail sales do not make up the majority of gold sales in China.

Harvey: Do you consider withdrawals from the Shanghai Gold Exchange to be a useful measure of demand?

Klapwijk: The withdrawals show what the big picture is for physical “demand”. They are not per se an indication of the total demand for jeweler, investment products or industry.

This is because a good part of the withdrawals represent gold that is used purely for financing and other end-uses that are not equivalent to real consumption.

Wagner: Is financing with Gold a big deal in China?

Klapwijk: Therefore relying on SGE withdrawals to measure the size of and change in true demand is highly misleading. For example, withdrawals in 2013 came to 2,197t and in 2014 to 2,102t. This both overstates the true size of demand and, of course, completely understates the drop in jewelry and especially bar demand last year.

Yes, the difference is mainly the use of gold for financing. 

Harvey: How has that side of the market developed over the last few years? Is it still a growing area of business?

Klapwijk: The use of gold for financing… a kind of “gold carry trade”….has developed tremendously in recent years. Essentially borrowers in the shadow banking milieu are taking advantage of the availability of gold at comparatively very low rates of interest compared to straight forward RMB loans.

An indication of this is that at end 2013 the SGE reported gold loans by members totaled over 1,100 tonnes. My understanding is that number will have grown quite a bit in 2014.

There it is again, the amount of gold tied up in financing deals (CCFD’s) used as an argument to explain elevated SGE withdrawals. In my latest in-depth article on the Chinese gold market I expanded on why this can’t be the explanation as these deals only show up as SGE withdrawals if used for genuine gold business; jewelers leasing gold for production.

In a report the World Gold Council (WGC) released April 2014, China’s gold market: progress and prospects, it was stated:

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

Right, so we’re talking about the same gold, 1,000 tonnes has grown into 1,100 tonnes, but now the source of this number (Precious Metals Insights, Phillip Klapwijk, February 17, 2015) says this is simply the amount leased at the SGE (not disclosing what is withdrawn or not). When I emailed the WGC in 2014 to ask what kind of “financial operations” the 1,000 tonnes actually were, they replied:

Gold leasing: Banks have built up this business to support China’s burgeoning gold industry. Miners, refiners and fabricators all have a requirement to borrow gold from time to time. For example, fabricators borrow gold to transform into jewelry, sell and then repay the bank with the proceeds. It is an effective way for the fabricator to use the bank’s balance sheet to fund its business. Banks have strict policies in place for who they can lend to, and these have been tightened over recent years, but during PMIs field research it identified that, in some instances, organizations other than genuine gold business had used this method to obtain gold, which it would then sell to obtain funding [in this case the gold wouldn’t be withdrawn from the SGE vaults]. It would then hedge its position. According to PMI, this can generate a lower cost of funding than borrowing directly from the bank. Our colleagues in China think this would be a very small part of total gold leasing; the majority of it would be used to meet the demands of genuine gold businesses.

Here the WGC admits leased gold that is withdrawn from the SGE vaults is used for genuine gold businesses and only a small part of total leases is used in shadow banking! I rest my case. 

Koos Jansen vs WGC/GFMS/CPM Update

Recently Thomson Reuters GFMS released its global gold demand figures for 2014 in which they stated Chinese demand was 866 tonnes. I briefly expanded on why I didn’t agree with this number by a humongous margin in my post from January 30 – as Chinese supply was at least 1,834 tonnes. Followed by a post released January 31 on the fact that GFMS again had double counted Chinese gold volume traded on the Shanghai Gold Exchange and the Shanghai Futures Exchange. However, this quarrel does not exclude the World Gold Council and CPM Group.

In Gold Demand Trends Full Year 2014 the World Gold Council (WGC) discloses Chinese gold demand at 814 tonnes, far below the tonnage we see being supplied to China. My previous extensive post on my disagreement with WGC demand figures I wrote months ago, hence I feel a strong propensity to update the blogosphere with my latest insights regarding the Chinese market.

Recap; in China gold demand and thus import is greatly stimulated by the government; gold export is prohibited (in general trade), except for Panda coins; all imported and domestically mined gold is required to be sold first through the Shanghai Gold Exchange (SGE) before entering the Chinese marketplace; once gold is withdrawn from the vaults of the SGE it’s not allowed to re-enter these vaults before it’s re-cast into a new bars by an SGE approved refiner; tax incentives push scrap supply to be sold through the central bourse as well, if casted as new bars. Because of the structure of the Chinese gold market many analysts, including myself, use SGE withdrawals as a proxy for Chinese wholesale demand. Read these three posts (I)(II)(III) for more detailed information on the structure of this market. A simplified equation for the SGE is: 

SGE withdrawals = import + mine + scrap

When I started publishing SGE withdrawals and later connected them to Chinese wholesale demand (on September 18, 2013, December 12, 2013 and April 15, 2014) I was merely using numbers published in Chinese – from reports that are now all taken offline (CGA Gold Yearbook 2007-2009 & 2013, SGE Annual Report 2007-2011, China Gold Market Report 2007, 2008, 2010, 2011), the only two dots I connected was aggregated demand and SGE withdrawals, the rest became self-evident. In the next chart we can see total demand from 2004 to 2013 as disclosed by the China Gold Association (CGA) Gold Yearbook 2013, which is written in Chinese and only published in hard copies; the blue bars represent total demand in tonnes (LHS), the red line y/y growth in percentages (RHS).

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Exhibit 1. Chart total Chinese gold demand from the CGA Gold Yearbook 2013, scanned from page 50.

When I say Chinese wholesale demand in 2013 was nearly 2,200 tonnes I’m not making this up, these are metrics used by the CGA (SGE/PBOC).

Gold supply in China has been outstripping the WGC’s demand numbers by literally thousands of tonnes in the past years, to which the WGC is continuously seeking to find arguments that should explain the difference. In vain the Council has published two reports dedicated to the Chinese gold market that were permeated with incorrect statements. Jumping from one argument to the next hasn’t strengthened their case either. The oncoming chart gives you a rough approximation of the difference.

WGC demand vs SGE withdrawals
Exhibit 2. Chinese wholesale demand (SGE withdrawals) vs WGC demand

Kindly note the WGC has revised their Chinese demand numbers 2013 from 1,066 tonnes to 1,312 tonnes. The revision rebutted their initial data by 23 %.

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Exhibit 3.

For this post we’ll use data from 2013 as a model to examine the Chinese gold market.

Chinese Gold Supply And Demand Metrics

According to SGE chairman Xu Luode Chinese consumer demand in 2013 was 2,000 tonnes. In his speech at the LBMA forum in Singapore June 25, 2014, he noted:

Last year, China imported 1,540 tonnes of gold. Such imports, together with the 430 tonnes of gold we produced ourselves, means that we have, in effect, supplied approximately 2,000 tonnes of gold last year.

The 2,000 tonnes of gold were consumed by consumers in China. Of course, we all know that the Chinese ‘dama’ [middle-aged women] accounts for a significant proportion in purchasing gold. So last year, our gold exchange’s inventory was reduced by nearly 2,200 tonnes, of which 200 tonnes was recycled gold. 

The SGE chairman makes a distinction between SGE withdrawals (2,200 tonnes) and his measure of consumer demand (2,000 tonnes), which he calculates by subtracting recycled gold (200 tonnes) from SGE withdrawals. Xu’s consumer demand equates exactly to how much gold was added to Chinese non-government reserves; typically this is what Chinese leaders track, the amount of gold held among the population. Total demand (equals supply) minus scrap = import plus mined gold. Scrap supply doesn’t add to a country’s reserves, only import and mine supply increase reserves.

All players in this game use different metrics to produce supply and demand figures, partially this explains the difference. In this post we’ll examine these metrics and go through the arguments the authority on gold, as the WGC has crowned itself, has brought up to enlighten us in the past years.

To capture a nation’s gold demand the authority only publishes end-user demand data (consumer demand measured at retail level) in the Demand Trends Reports (page 26).

Consumer demand 

The sum of jewelry and total bar and coin purchases for a country i.e. the amount of gold acquired directly by individuals.

If you read the report you’ll notice the WGC measures end-user demand in the form of jewelry, bar and coin demand per country at retail level, next to “ETFs, OTC investment and stock flows” to compute global total investment. But, what if Chinese individuals buy physical gold at the SGE and have the gold withdrawn from the vaults to store the metal at their own discretion? Would this show up anywhere in demand numbers from the WGC? Fact is the SGE has over 5 million individual clients, according to the chairman of the SGE, next to 8,000 institutional clients!

The reason the WGC only discloses end-user demand is because that’s all that matters to the price of gold, if a jeweler has 2 tonnes of inventory this is hedged and therefor has no net effect on the price. But measuring Chinese gold demand at retail level is inaccurate as every single Chinese citizen can open an SGE account, buy gold and withdraw. Most SGE products are denominated is small lots, consumer sizes: 1 Kg, 100 grams, 50 grams, and 10 grams. There is one product to trade 12.5 Kg bars, though this contract has only been active on three days since its inception (total volume since its inception accounts for 3 tonnes, measured unilaterally). SGE customers (potentially every single Chinese citizen) can buy and withdraw bars as small as 50 grams at the SGE, granted of the highest quality.

Screen Shot 2015-02-15 at 12.23.33 PM
Exhibit 4.

This is one of the reasons there is such a huge discrepancy between retail demand (WGC) and SGE withdrawals. Not all Chinese citizens buy their bars at a jewelry shop, au contraire.

The CGA Gold Yearbook 2013 shows us how demand is composed.

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Exhibit 5. Overview Chinese gold demand 2013, from the CGA Gold Yearbook 2013.
  • Red = Jewelry manufacturing (716.5)
  • Blue = Small gold bar production (375.73)
  • Purple = Industrial material (48.74)
  • Turquoise = Gold coin manufacturing (25.03)
  • Yellow = Other (10.4)
  • Green = Net investment (1,022.44)
  • Black = Total (2,198.84)

I think Small gold bar production is the amount of non-SGE bars manufactured by jewelry companies, banks, etc.

If we add jewelry, bar, coin, industrial and other we get 1,176.4 tonnes. This is demand measured at retail level – which is close to what the WGC initially disclosed as demand. Than there is net investment of 1,022.44 tonnes. An SGE employee once told me this simply is a residual of SGE withdrawals minus what is measured at retail level, or, everything bought directly at the SGE that wasn’t sold at retail level. The huge difference between WGC demand and SGE withdrawals is mainly caused by net investment. The Council’s mission seems to be explaining why net investment is irrelevant, coming up with feeble arguments that should support this. Later on we’ll go through the argument list and what type of demand net investment can be.

Now, let’s have a look at the supply side.

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Exhibit 6. Overview Chinese gold supply 2013, from the CGA Gold Yearbook 2013.
  • Purple = Domestic and overseas mine output (445.417)
  • Green = Recycled gold (246.923)
  • Blue = Bullion import (1,506.50)
  • Black = Total (2,198.840)

From this article we know in 2013 China domestically mined 428.16 tonnes and 17.25 came from offshore activities, so actually 1,523.75 tonnes were imported. SGE withdrawals accounted for 2,196.96 tonnes in 2013, meaning 1.88 tonnes (2,198.4 – 2196.96) were imported in the form of ie jewelry that wasn’t required to be sold through the SGE.

In Understanding China’s Gold Market the WGC notes there are two types of recycled gold in China.

Recycling: There are two types of recycled gold: i) Gold-for-cash and ii) gold-for-gold. At a retail level consumers can sell gold for cash or, especially in the case of jewelry, exchange old pieces of gold for new pieces of gold. It may be that in tonnage terms, gold-for-gold recycling is similar in size to gold-for-cash recycling: we recently surveyed 1,000 consumers and found that 8% of gold owners had sold gold-for-cash, while 10% had exchanged gold-for-gold. At a wholesale level banks and jewelers may also sell or exchange gold stock with other suppliers.

I fully agree, again we see the difference in metrics; gold-for-cash is what GFMS measures (150 tonnes in 2013), gold-for-gold is measured by the CGA as a residual.

SGE withdrawals – import – mine – gold for cash supplied to the SGE = 96.923 tonnes

Hence total recycled gold in Exhibit 6 is disclosed at 246.923, this is gold-for-cash and gold-for-gold. More information on recycled gold in China according to CGA metrics we can read in the China Gold Market Report 2008 and 2009:

… At present, gold scrap in China mainly is in two major forms: repurchase of gold bars, only applicable to brand gold bars in reference to real-time gold price, and repurchase of gold jewelry through retailers.

… China’s actual gold recycling likely reached 100 tons in 2008. Physical gold withdrawals on the Shanghai Gold Exchange (SGE) topped 543.19 tons in the year, including gold imports of 81.44 tons by commercial banks, stock carry-over of 31.661 tons from 2007 and 282.007 tons of gold produced in the year. In theory, the gap of 148.082 tons was filled by recycled gold. Therefore the gold recycled in China in 2008 should have amounted to more than 100 tons in 2008.

A few years later (2014) from the WGC in Understanding China’s Gold Market:

Given the complexity of the market there could be many reasons, but the most likely explanation is that the SGE delivery figure includes the flow of recycled gold-for-gold as well as gold-for-cash. As explained previously, while recycled gold-for-gold will increase supply and demand, the net effect is market neutral. For this reason, demand and recycling estimates as reported in Gold Demand Trends and GFMS, Thomson Reuters’ Gold Surveys exclude recycled gold-for-gold. But because the structure of the Chinese gold market requires refined and recast recycled gold to be sold through the SGE [this is not mandatory, tax incentives stimulate refined gold to be sold through the SGE], it is likely the delivery figure captures this circulation of recycled gold-for-gold.

The next flow chart from the WGC is also quite helpful:

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Exhibit 7. Courtesy of the WGC. The red box is painted by me.

I hope it’s clear now what different metrics are used for both supply and demand. If we take another look at the Exhibit-2-chart, supplemented by import, mining and scrap data, it becomes more clear what the difference is.

WGC demand vs SGE withdrawals 2
Exhibit 8. The WGC mainly relies on data from GFMS for its Demand Trends Reports, though it doesn’t publish as detailed information on scrap supply as GFMS, hence I used GFMS’ scrap numbers.

Even if we take out gold-for-gold scrap supply (the green bars represent gold-for-cash scrap) total aggregated supply from 2007 to 2014 was 7,872 tonnes, while total aggregated WGC demand over this period was 5,469 tonnes. Leaving 2,403 tonnes to be explained by the Council in their argument list, which is focused on the ‘surplus’ in the Chinese gold market, but indirectly aimed at debunking the size of SGE withdrawals.

Chinese Commodity Financing Deals

Gold is used in two sorts of Chinese Commodity Financing Deals (CCFD) to raise cheap funds: round tripping and gold leasing (read this post on the details of round-tripping, this and this on gold leasing). CCFD’s are definitely on the WGC’s argument list.

As I’ve mentioned above the WGC has published two China specials to explicate where a few thousands tonnes of gold went missing somewhere on the Asian continent, next to all quarterly Gold Demand Trends.

1) China’s gold market: progress and prospects (April 2014)

2) Understanding China’s Gold Market (July 2014)

In the first report on page 56 it’s stated, “round-tripping can inflate the SGE delivery figures”. This is absolutely not true, as I have extensively written about in The Round Tripping Myth And Why It Doesn’t Hurt Chinese Gold Demand. No need to repeat myself.

Also on page 56:

The ‘surplus’ in the Chinese market mainly stems from either possible official purchases or the extensive use of gold for financial operations.

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

Although the mainstream media got completely carried away with the assumption 1,000t was tied up in CCFD’s, in reality it’s not so worrisome. Because it doesn’t involve round- tripping it can only be gold leasing. Somewhat simplified, only three parties engage in leasing gold to raise cheap funds: jewelers, miners and speculators. In China all gold leasing is settled through the SGE. If miners or speculators lease gold, they would instantaneously sell it spot at the SGE – they would not withdraw – and use the proceeds for investments. Only jewelers would withdrawal leased gold from the vaults to fabricate jewelry, subsequently sell the jewelry and use the proceeds to repay the gold loan. These withdrawals would eventually end up at retail sales. Additionally, it’s not likely a jeweler purchases gold off-SGE to have it refined and bring it to the SGE vaults to settle the lease, because the jeweler can simply buy directly at the SGE to settle the lease. This means gold leasing (CCFD’s in general) does not inflate SGE recycled gold supply.

In my opinion CCFD’s cannot substantially distort Chinese wholesale demand (SGE withdrawals). Occasionally I read numbers on the size of the Chinese gold lease market, though for me it is impossible to say what share is withdrawn or processed within the SGE system. I only know the part that is withdrawn is mostly genuine gold business.

In Gold Demand Trends Full Year 2014 the Council states:

The flow of gold into China has far exceeded the amount needed to meet domestic jewelry and investment demand in recent years [please tell us gold investors how much!]. The role of the commercial banks in using this gold for financing purposes has been well documented, including in our report Understanding China’s Gold Market and this activity expanded in 2014. To some extent, this helps explain why Shanghai Gold Exchange delivery figures are significantly higher than consumer demand.

If the only document they disclose on CCFD’s is Understanding China’s Gold Market, there is nothing new for us to learn. Yes, jewelers can lease gold, have it withdrawn and produce it into jewelry while it’s pending to be sold in retail. But this gold will not return to the SGE, so eventually it will be end-user demand. The part that is pending can partially explain the difference.

Commercial banks can have all sorts of gold (leases, pledges, ETF’s, gold savings accounts, etc) on their balance sheet, this doesn’t mean this gold has left the SGE vaults. In China gold ETF’s are backed by SGE contracts.

Official Purchases

We just read on page 56 from China’s gold market: progress and prospects, the difference might be explained by PBOC purchases. However, on page 9 from Understanding China’s Gold Market:

China’s authorities have a range of options when purchasing gold. They may acquire some of the gold which flows into China; there has been no shortage of that. But there are reasons why they may prefer to buy gold on international markets: gold sold on the SGE is priced in yuan and prospective buyers – for example, the PBOC with large multi-currency reserves – may rather use US dollars than purchasing domestically-priced gold. The international market would have a lot more liquidity too.

That’s what I wrote in this post (April 2014), it seems the WGC turned 1800 and agrees the PBOC doesn’t buy gold through the SGE.

PBOC purchases remain a very tough subject to analyze. I know they buy gold, but I have weak evidence of how much. The theory of China implementing the Turkish model to build official reserves is interesting, yet one of many problems with this theory is that the PBOC has a very strong incentive to diversify $4 trillion in FX reserves from US dollars into physical gold. So, until I bump into any evidence that would suggest otherwise, the PBOC does not buy any gold through the SGE.


There are incredible amounts of gold imported into China. The Council has often noted on the argument list exact data is hard to get by because round tripping and scrap flows may distort import figures. From page 14, Gold Demand Trends Q1 2014:

Trade flows: illustrated last year when gold flowed out of western ETFs, through refineries in Switzerland and to consumers in the East, official trade data can provide insights into global gold flows. Global Trade International Services provide access to a wide range of countries’ trade data and we also monitor individual countries’ trade data, particularly from the Hong Kong Census and Statistics Department. However, looking purely at trade data can be misleading. It can include scrap, doré and concentrates, which would be captured in supply rather than demand. Nuances such as ‘round-tripping’ can affect the data too. So, while trade data plays a valued role in informing a view on global gold flows, it is an imperfect measure of gold demand.

I’ve written an extensive post on why this is not true. In the CGA Gold Yearbook 2013, it’s precisely disclosed how much gold is imported. For other years data is available as well.

Stock Inventory

Next on the argument list is stock inventory. As demonstrated above, if a jeweler has 2 tonnes of inventory this is likely hedged, which makes it for the Council’s metrics not count as demand. From Understanding China’s Gold Market:

… It is, however, indicative that as jewelers expanded, so too did their inventory levels and it is our judgment that across the industry between 75t to 125t may have been absorbed in the supply chain since 2009.

Ok, let’s go along with this, 125 tonnes of gold (at max) is held by jewelers and alike as inventory.

The Shanghai International Gold Exchange

Something the WGC hasn’t listed on the argument list, which they should, is trading on the Shanghai International Gold Exchange (SGEI). Because SGE withdrawals at this stage also capture potential withdrawals from the SGEI in the Shanghai Free Trade Zone, this can distort withdrawal numbers in the domestic market. However, trading on the SGEI has been faint since its launch, so in my opinion it doesn’t play a substantial role now. Read this post for a detailed explanation.


The difference in metrics should be clear; SGE withdrawals are the widest measure to capture demand, whilst WGC demand is said to capture retail demand. Though, I think there is a lot of demand from individuals and institutions that buy directly at the SGE that is overlooked by the WGC.

If we stick to WGC metrics (not count gold-for-gold supply) the only legitimate argument that can explain the difference is stock inventory, either purchased at the SGE or leased at the SGE by wholesalers. According to the Council this accounts for 125 tonnes. Exhibit 8 showed us the gap between supply from 2007 to 2014 (7,872 tonnes) and WGC demand over this period (5,469 tonnes) is 2,403 tonnes. So, the difference is 2,403 tonnes and the only real WGC argument we can find to fill this void is 125 tonnes of stock inventory.

In my humble opinion stock inventory can be higher than 125 tonnes, say 300 tonnes, but this would still not fill the gap. Therefor the WGC massively understates Chinese gold demand. 2014 Chinese gold demand disclosed by the WGC is 814 tonnes, though supply was approximately 1,850 tonnes (excluding gold-for-gold), SGE withdrawals accounted for 2,102 tonnes.

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Exhibit 9. Boxed in red is the total amount of gold withdrawn from SGE vaults in 2014 (in Kg’s)

Gold-for-cash scrap (GFMS’ scrap numbers) supply is not required to be sold through the SGE, theoretically it could be refined into, for example,  goldwire and sold directly to jewelers. Aggregated mine and import supply from 2007 to 2014 is 6,934 tonnes. 

For anyone who is interested in analyzing the Chinese gold market, here are some numbers to begin with:

Chinese supply and demand numbers 2007 2014 SGE WGC GFMS
Exhibit 10.

One last point I want to make; if we look below at the weekly SGE withdrawal chart since 2010 we can see spikes around every New Year / Lunar Year (and from April – September 2013 due to the crash in the gold price) when traditionally the Chinese people buy presents for each other, often gold. Would this chart look the same if SGE withdrawals also contained CCFD’s or official purchases? Or would the chart than look more seasonally independent? In my opinion, IF the PBOC would acquire gold through the SGE the chart would look more seasonally independent.

Shanghai Gold Exchange SGE withdrawals delivery 2015 week 5, dips
Exhibit 11.

CPM Group

Somewhere in November 2014, Jeffrey Christian, Managing Partner of CPM Group, wrote an email to one of my colleagues, arguing SGE withdrawals are not what they seem. The post in which my colleague published the email and responded is taken offline (dead link), but here’s the email in full:


Someone sent me a piece you wrote on gold, in China but also elsewhere.

One comment: You use SGE gold deliveries seemingly as a surrogate of gold demand. A significant amount of the gold purchased by jewelry and electronics manufacturers and used in making products is re-refined and returned to dealers as new or process scrap. I presume you know that. The scrappage rate for most manufacturing of gold products is between 50% and 70%, depending on the processes used in manufacturing various jewelry, electronics, dental implants, catalysts, and other products. This means that the ‘end demand’ of gold that goes off into products to customers is substantially less than the amount delivered, via the SGE or any other supplier anywhere in the world.

For example, let us assume a manufacturer – it could be a jeweler or an electronics component maker – uses sputtering targets, as most of them do for the past many, many years. The new scrappage rate in the manufacturing process is 70%. In this example, let’s say that the manufacturer is using 10,000 ounces per month, buying 10,000 ounces per month through the SGE, having it made into sputtering targets, using the targets (or, in reality, selling them to clients who use them), and then collecting the process scrap, having it re-refined, and returning it to a dealer. In reality, there are various companies involved in this loop, but let’s keep it simple and say, the manufacturer. So, each month the manufacturer is buying 10,000 ounces of gold via the SGE, using 3,000 ounces in products, and recycling 7,000 ounces. At the end of the year, it will have taken delivery of 120,000 ounces of gold, but will have used 36,000 ounces of gold. The remaining 84,000 ounces of gold will have recirculated through the market repeatedly, each time being counted as an SGE delivery. So, if you are trying to guess how much gold is being used in jewelry, electronics, and other manufacturing processes in China by looking at SGE deliveries, you would be over-estimating actual demand or use by 233%.

I assume anyone writing about fabrication demand levels for gold knows this, but thought I would mention it to you in case it’s news to you. I know that when I mention it in presentations to mining executives, institutional investors, Eric Sprott, the WGC, and other gold market participants or observers, they often have no idea of this, and sometimes cannot even understand the processes I am describing.

I hope this helps. See you soon, next year, I hope.


Jeff Christian

The key takeaway of Mr Christian’s letter is that the scrap rate in China is much higher than we think and it’s all recycled through the SGE (note, in the process he describes the recycled gold is not required to go through the SGE). My reply is, if we look at Exhibit 6 we can see that by the widest measure SGE scrap supply is 247 tonnes. If we subtract all scrap (247) from SGE withdrawals (2,197), we get 1,950 tonnes. Mr Christian notes this over-estimates demand by 233 %. So actual demand was 585.6 tonnes in 2013??

SGE Withdrawals 59t in Week 5, YTD 315t. What is China Up To With All This Gold?

The day after the World Gold Council (WGC) released Gold Demand Trends Full Year 2014 in which they audaciously pretend Chinese gold demand last year was 814 tonnes, we can read from the Chinese SGE trade report of week 5 withdrawals from the vaults have been 59 tonnes. Year to date (– February 6) withdrawals from the vaults of the central bourse in China stand at 315 tonnes. In perspective, during the first five weeks of 2015 Chinese wholesale demand has been 39 % of what the WGC disclosed as total consumer demand in all of 2014.

Screen Shot 2015xxx-02-13 at 10.00.25 AM
Red (本周交割量) is weekly gold withdrawn from the vaults in Kg.

More perspective; corrected by the volume traded on the Shanghai International Gold Exchange (SGEI), withdrawals in week 5 were at least 42 tonnes (read this post for a comprehensive explanation of the relationship between SGEI trading volume and withdrawals). Year to date withdrawals corrected by SGEI volume were at least 289 tonnes.

Shanghai Gold Exchange SGE withdrawals delivery 2015 week 5, dips

Shanghai Gold Exchange SGE withdrawals delivery only 2014 - 2015 week 5, dips

Because of the importance of clarifying the mysterious gap between what the WGC discloses as Chinese gold demand in 2014 (814 tonnes) and the amount of gold we saw being supplied to China (at least 1,200 tonnes import, 452 tonnes mine output and 182 scrap supply = 1,834 tonnes), I would like expand on this subject in a separate post.

One quote I wish to share here; when I was researching Chinese market and reading through an old Alchemist copy (#75, page 11), my attention was drawn to a transcript from a keynote speech delivered by Jeremy East at the LBMA Bullion Market Forum in Singapore on 25 June, 2014. He made a remarkable comment we shouldn’t neglect when analyzing the Chinese gold market:

Why are the Chinese Buying?

So what is going on in China? Why are the Chinese buying? It only seems to have been happening over the last few years. What is going on?

China’s Gold Friendly Strategy

I was at the Shanghai Derivatives Forum at the end of May and one of the speakers was a representative of the [China] Gold Association. He gave us quite an interesting insight into the flavor of what is going on in China from a strategic perspective. Some of the things he talked about included that China planned to change the landscape of world gold markets. He talked about having a strong currency and about having that currency backed by gold, like the US dollar. He also talked about people holding more gold and encouraging more people to hold gold. That is not just individuals, but also the central bank. From that perspective, it is also getting gold into the country in terms of encouraging domestic gold production, but also investing in international mining companies and sourcing the product from them. China has got a very friendly gold strategy. 

There you have it, China is planning to change the landscape of world gold markets and strengthening the renminbi through supporting it by gold. Therefor it’s in the interest of the People’s Republic Of China not only Chinese individuals hoard gold, but the central bank as well. To achieve this mining and import is stimulated by the State Council.

Remember what Zhou Ming, General Manager of the Precious Metals Department at ICBC, said at the same conference?

…a new global currency setup is being conceived.

Mr East’s statement fits right into what we see the Chinese are doing; accumulating massive amounts of gold, developing their gold market, internationalizing their gold market and the renminbi. This little peak at the China Gold Association’s chessboard is more confirmation of where we’re going! Gold is making its way into the international monetary system.

Booming SGE Withdrawals In Week 2, 2015: 70 Tonnes

Withdrawals from the vaults of the Shanghai Gold Exchange (SGE) in week 2 of 2015 (12 – 16 January) accounted for an incredible 70 metric tonnes. Aggregated withdrawals in the first two weeks of this year stand at 131 tonnes.

Shanghai Gold Exchange SGE withdrawals delivery 2015 week 2, dips

Shanghai Gold Exchange SGE withdrawals delivery only 2014 - 2105 week 2, dips

Corrected by the volume traded on the Shanghai International Gold Exchange (SGEI), withdrawals in week 2 were at least 65 tonnes (read this post for a comprehensive explanation of the relationship between SGEI trading volume and withdrawals). Year to date withdrawals corrected by SGEI volume were at least 122 tonnes.

The numbers just mentioned are truly amazing, 70 tonnes withdrawn in one week is the third highest amount ever. Only in January 2014 when the Chinese were also buying gold for the Lunar year – but the gold price in renminbi was lower, and in April 2013 when the price of gold fell of a cliff, were withdrawals stronger than last week. This is important, as illustrated in the charts above the Chinese tend to buy gold when the price is declining, last week they bought like there was no tomorrow while the price was rising sharply. Now that’s strong demand! Perhaps some investors in the mainland read the recommendations from ICBC, world’s largest bank, regarding physical gold hoarding:

ICBC gold buy reccomendations

In perspective; 65 tonnes demand (the bottom limit) can only have been met by mine supply, scrap supply or import supply. Domestic mine production was 8.7 tonnes; gold was not trading at a discount, but at a premium to London last week, which means scrap couldn’t have been abundant; estimating scrap that supplied the SGE at 4 tonnes leaves import to have been at least 52.3 tonnes (in one week). Nothing unusual if this would occur sporadically, but since 2013 China has net imported 2,838 tonnes for just non-government demand, continuously draining global above ground gold inventory – as world mine production is not sufficient. How long can this go on? Deutsche Bank estimates the PBOC imports an additional 500 tonnes a year, according to a report released in November 2014:

…But there have been a number of examples of publicly flagged large-scale official gold transactions that have had a limited market impact. In the IMF example above, gold prices rose steadily despite the IMF being a reliable seller of almost 20 tonnes each month. In another example, the Chinese government’s open market purchases of roughly 500 tonnes per year have not prevented the gold price from plummeting in recent years.

The world Gold Council (WGC) estimates there is about 170,000 tonnes of above ground gold. In my opinion it’s impossible to know how much gold has been mined in the history of humanity, though I suspect it’s more than 170,000 tonnes, also because of what we are witnessing these years regarding amounts of gold moving from West to East – the WGC started counting from 10,000 tonnes since the Californian gold rush. 

The Shanghai International Gold Exchange

To my advantage for estimating Chinese wholesale demand (that equals SGE withdrawals), SGEI trading volume has been insignificant since the SGEI was launched in September 2014. SGE management of course was aiming for substantially more volume at their new subsidiary. In order to boost liquidity they took a bunch of measures. On December 29, 2014, the SGE announced free storage and no load-in and load-out fees from January 1 to June 30, 2015.

All international members and customers:       

With a view to encouraging international members and customers’ participation in trading and delivery activities on the International Board and meanwhile reducing their cost, the Shanghai Gold Exchange determines to further exempt international members and customers from fees including inventory fees, load-in and load-out fees, vault transfer fees and other service fees generated from trading contracts listed on the International Board. The exemption period shall be valid from January 1st to June 30th, 2015.  

Two days later they exempted traders from paying transaction fees on the SGEI physical gold contracts iAu99.99, iAu99.5 and iAu100g.

All Members,

With a view to promoting the liquidity and enhancing the investment function of Au(T+N) products, the Shanghai Gold Exchange (the “Exchange”) determines to reduce the transaction fees of Au(T+N1) and Au(T+N2) by 50%, from the current 2‰ to 1‰. In addition, the Exchange shall also exempt all its members from transaction fees of contracts listed on the International Board including iAu99.99, iAu99.5 and iAu100g, so as to boost the trading activities on the international board. 

The above-mentioned preferential policies shall be valid from January 1st to June 30th, 2015.

Then on January 15, they decided to collaborate with the WGC to promote SGEI trading:

Today, the Shanghai Gold Exchange and the World Gold Council, the market development organization for the gold industry, signed a ‘Memorandum of Understanding’ regarding a ‘Comprehensive Strategic Cooperation Agreement.’ The Shanghai Gold Exchange is the largest physical gold exchange worldwide and the World Gold Council is the global authority on the gold industry. Together, these two organizations are joining hands to support the development of both domestic and international gold trading in China by leveraging the opportunity provided by the internationalization of the Chinese gold market, through the Shanghai Free Trade Zone, to support market expansion. The agreement will support the development of gold investment products and solutions for the industry and investors both regionally and globally.

I’m holding my breath on the collaboration with the WGC. In my experience they could have started by making the SGEI more accessible. Since September I was trying to become a customer through a number of Chinese banks, but I didn’t succeed. Enrollment wasn’t particularly easy.

Gold Trading Volumes

Total SGE trading volume has been declining for a few weeks, in week 3 (January 19 – 23) volume accounted for 238 tonnes, down 19 % w/w.

Shanghai Gold Exchange SGE weekly gold volume

Volume on the Shanghai Futures Exchange is moving in the opposite direction, volume has been increasing since December 26. In week 3 volume was 778 tonnes, up 10 % w/w. The open interest closed at 124 tonnes at the end of the week.

On the COMEX 3,054 tonnes of gold in futures contracts changed hands, down 13 % w/w. The open interest closed at 1,403 tonnes.

COMEX vs SGE + SHFE gold volume

World Gold Council Rectifies 2013 Chinese Gold Demand

The WGC has revised its estimate of China’s 2013 consumer demand to 1,275 tonnes, up from their initial estimate of 1,066 tonnes.

My research on the Shanghai Gold Exchange and the structure of the Chinese gold market was, inter alia, confirmed in September this year by the work of Na Liu (CNC Asset Management Ltd.). As myself Na concluded Chinese wholesale gold demand equals withdrawals from the Shanghai Gold Exchange and this is far greater than demand reported by the World Gold Council.

The World Gold Council (WGC) has never openly responded to my publications. However, Na met with the WGC Market Intelligence team, the discussion that ensued led the WGC to rectify their 2013 Chinese demand numbers. From CNC Asset Management, November 27 2014:

We are pleased to report that we just had an in-depth discussion with the Market Intelligence team of the World Gold Council (WGC). Our discussion focuses on how to explain the significant gap between China’s consumer demand of gold, as defined and reported by the WGC to be just over 1,000 tonnes in 2013, and China’s wholesale demand, as defined and reported by us to be about 2,200 tonnes based on the Shanghai Gold Exchange (SGE) vault withdrawals during 2013. The following are our takeaways from the discussion:

First, the WGC has revised up its estimate of China’s 2013 consumer demand to 1,275 tonnes, up from their initial estimate of 1,066 tonnes.

Click here to read the full report.

The rest of the report from CNC Asset Management sums up, again, all the reasons given by the WGC that should explain the remaining difference between SGE withdrawals and WGC demand numbers. The WGC has published two reports on the Chinese gold market since April that both failed to clarify the difference. In fact, the reports led to even more speculation about why the WGC was withholding essential data about the Chinese gold market. In September I wrote:

…as time goes by and knowledge about the Chinese gold market is slowly spreading through the international gold space, the more pressure is building on WGC demand numbers regarding China.

According to the China Gold Association (CGA) demand in 2013 was 2,199 tonnes, which leaves a difference of 924 tonnes with the revised numbers from the WGC. The aggregated difference from 2007 until 2013 is 2,172 tonnes. The next chart is scanned from the China Gold Yearbook 2014, which is only published in hard copies written in Mandarin. It shows Chinese gold demand reported by the CGA.

Chinese gold demand by the China Gold Association 2004 - 2013
The blue bars represent demand in tonnes, the red line the yearly increase in percentages.

Chinese gold demand 2007 2013

Additionally, 2014 will at least add 900 tonnes to the aggregated difference. At year end the total aggregated difference will be well over 3,100 tonnes. 

In a forthcoming post I will once again share where I disagree with all the excuses the WGC presents in the CNC Asset Management report. A few more details I have to work out about the gold lease market, after which I can demonstrate the WGC is simply unwilling to accurately report on Chinese gold demand.

From the latest CNC Asset Management report:

…Both the WGC and we at CNC believe that more work needs to be done to understand China’s actual gold demand.

This is very hard to swallow, the WGC has been involved in the Chinese gold market since 1999 and they have two offices in China with numerous Chinese employees, yet they state “more work needs to be done to understand China’s actual gold demand”. 

Additionally, I will share my disagreement with Jeffrey Christian from CPM Group on SGE withdrawals. Mr Christian has recently send an email to Mineweb.com, stating Chinese demand is lower than SGE withdrawals because scrap is higher than most are capable of understanding (including the CGA apparently). A quote from Mr Christian’s email:

…I assume anyone writing about fabrication demand levels for gold knows this, but thought I would mention it to you in case it’s news to you. I know that when I mention it in presentations to mining executives, institutional investors, Eric Sprott, the WGC, and other gold market participants or observers, they often have no idea of this, and sometimes cannot even understand the processes I am describing.

His reasoning reminded me of what he wrote on my blog earlier this year:

Over the years the ‘over-age’ of SGE withdrawals to estimated demand has ranged from 14% to 41%. People may say that one equals the other, but they simply do not.

…I could bore you witless with examples of similarly cavalier use of language and statements from around the world’s precious metals market. I won’t. Many things simply are not as they seem to be, nor as they are said to be.

Meanwhile Chinese wholesale gold demand, measured by withdrawals from the Shanghai Gold Exchange (SGE), remains strong. In week 47 withdrawals accounted for 52 tonnes, year to date the counter has reached 1,813 tonnes.

Screen Shot 2014-12-04 at 11.53.13 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.

Corrected by trading volume on the Shanghai International Gold Exchange (SGEI), Chinese wholesale demand in week 47 was in between 49 and 52 tonnes, year to date in between 1,795 tonnes and 1,813 tonnes. For the next chart I have used the most conservative estimate.

Shanghai Gold Exchange withdrawals 2014 week 47, dips

Does The WGC Understand The Chinese Gold Market?

Or does it not want us to understand it?

2281As I’m mostly occupied researching the Chinese gold market I feel obliged, again, to respond to the latest World Gold Council (WGC) report on China; Understanding China’s Gold Market, published July 2014. For readers of China specials it may appear the WGC is exposing in-depth information on the Chinese gold market, while partially true, all publications contain inaccuracies and inconsistencies and do not disclose the most crucial data that indicates Chinese gold demand is significantly higher than widely assumed. The WGC consciously withholds this data from the mainstream audience – their motives are left for speculation.

Chinese wholesale gold demand in 2013 was 2197 tonnes, though the WGC states consumer demand was 1066 tonnes. Despite several attempts this enormous discrepancy has not been elucidated by the WGC until this day. However, as time goes by and knowledge about the Chinese gold market is slowly spreading through the international gold space, the more pressure is building on WGC demand numbers regarding China.

In this post we’ll analyze and compare the penultimate and last China special, China’s gold market: progress and prospects and Understanding China’s Gold Market, to truly get a better understanding of the Chinese gold market. We’ll begin discussing several quotes from Understanding China’s Gold Market.


Whilst China is the simplest gold market on the globe because of the center role of the Shanghai Gold Exchange (SGE), the WGC retains stating the opposite; it’s a very complex market:

In Gold Demand Trends – our quarterly overview of market fundamentals – we publish data for China’s bar and coin and jewelry demand, and in its annual Gold Survey, GFMS, Thomson Reuters publish data on technology demand. Beyond this, the market becomes a little more difficult to piece together. This note, which follows on from our report China’s gold market: progress and prospects, aims to shed light on China’s gold flows and explain how they relate to end-user demand. It is broken down into two sections: the first provides an overview of the supply chain and gold flows, highlighting the complexities surrounding imports, recycling and SGE delivery data. Section two builds on these insights to present a view on China’s aggregate demand.

SGE delivery, which should be titled SGE withdrawals but for the sake of simplicity we’ll stick to delivery in this post, is the single most important data point in the Chinese gold market; it’s the key to physical demand, as I‘ve written about frequently. In Understanding China’s Gold Market it seems if the WGC is actually expanding on SGE delivery.

(in the next screen shot from the WGC report the red box is added by me)


But are they really? Including the flow chart SGE delivery is mentioned twelve times in the report, but only one concrete number is disclosed: cumulative SGE delivery from 2009 to 2013 was 5811 tonnes. Instead of giving the exact numbers of SGE delivery for each year and the direct implication of these numbers (delivery equals wholesale demand), they’re only passingly hinting SGE turnover has been large in recent years. Though forced to expand on the structure of this market the WGC withholds a number that would to crush their credibility and is likely too sensitive for the international monetary system; the Chinese people bought 2197 tonnes of physical gold in 2013 (note, 229 tonnes of this was recycled gold, more on that later).

I’ve had email correspondence with the WGC in December 2013 in which they admitted to me not to know where all SGE deliveries end up, as “China will never disclose this information”. One phone call to the SGE explained a lot, “huge amounts of gold are withdrawn from the vaults by (personal) SGE account holders”, I was told. Below the surface recent WGC reports on the Chinese gold market are abject apologies for not adjusting previous demand numbers or ways to keep their members ignorant on how much Chinese physical gold demand in reality is. Subsequently the global authority on gold writes reports in the hopes to strengthen their paradigm.


Let’s continue examining more quotes regarding Chinese import:

Trade data: There are two issues which cloud the picture of gold flows into China. The first is that data are limited. Mainland China does not publish its own trade statistics so analysts rely on other sources, such as trade data from the Hong Kong Census and Statistics Department. … Trade data includes gold jewelry, semi-manufactured products, scrap, doré, and concentrates. … So while import data are very useful, they need careful interpretation and should not necessarily be taken at face value.

Chinese gold import is not so hard to grasp as the WGC wants us to believe. Jewelry, scrap and concentrates can be easily filtered out through customs data from Hong Kong and other countries. With some basic research anyone can come up with fair estimates of Chinese net gold import. My estimate, made in March 2014, was 1500 tonnes, measured through SGE deliveries.

CPM Group also makes reasonable estimates on net import; 1410 tonnes for 2013. They even have access to reports of commercial bank imports available from the Shanghai Gold Exchange, one would expect the WGC has the same privileges. From the CPM Gold Yearbook 2014, published in March 2014:

Because official gold customs figures are not being reported, gross imports and exports are deduced from figures reported by China’s trading partners to UN Comtrade and GTIS databases. Adjustments were made according to reports of commercial bank imports available from the Shanghai Gold Exchange.

And here comes the punch line: SGE chairman Xu Luode gave us the exact amount of gold import for 2013 at the Fourth Commercial Bank Gold Investment Forum May 15, 2014. He stated it was 1540 tonnes. Why doesn’t the WGC mention this extremely important number in a China special written a month later?

Prior to 2012, when Chinese gold demand hadn’t reached the level of sensitivity it currently is subjected to, the PBOC published SGE Annual Reports and China Gold Market Reports that disclosed gold import. From The China Gold Market Report 2008:

Physical gold withdrawal on Shanghai Gold Exchange (SGE) topped 543.19 tons in the year, including gold imports of 81.44 tons by commercial banks, stock carry-over of 31.661 tons from 2007 and 282.007 tons of gold produced in the year. In theory, the gap of 148.082 tons was filled by recycled gold.

From the SGE Annual Report 2009:

Gold import dropped 43 % to 46.42 tonnes, 35.02 tonnes lower than that of last year.

From the China Gold Market Report 2010:


We can see gold import (others) in 2010 was 240 tonnes, up 205.3 tonnes from the previous year.

In Understanding China’s Gold Market the WGC upholds a myth about unknown gold import in 2013. If they would disclose net import, 1540 tonnes, it would be severely in conflict to their consumer demand of 1066 tonnes, especially when adding 428 tonnes of domestic mining supply.

Moving on. From Understanding China’s Gold Market:

As reported in China’s gold market: progress and prospects and in GFMS, Thomson Reuters’ Gold Survey 2014, ‘round-tripping’ may flow through the SGE and could be captured in the Exchange’s delivery figures.

Round tripping does not inflate SGE deliveries! (click this link for a comprehensive analysis of round tripping and Chinese gold trade). Only fifteen banks, blessed with a PBOC general trade license, can import bullion into the domestic gold market which is required to be sold through the SGE. Commercial (state owned) banks are not involved in round tripping seeking cheap funds; banks already have access to the cheapest funds available. Additionally, bullion export from the mainland is prohibited as the WGC itself notes on page 4:

 In addition, bullion exports are prohibited.

Round tripping is done by merchants and jewelers that don’t have a PBOC general trade license, but are allowed to import gold into a Free Trade Zone for processing. This processing trade is exempt from a PBOC license because the gold is required to be exported after it’s processed. Gold trade through Free Trade Zones does not intertwine with the domestic gold market and the SGE. The lion share of gold exported from China is processing trade.

Another misconception on page 3:

Importantly, gold which has been withdrawn from the SGE cannot be sold directly back to the Exchange by private investors or non-SGE members – it first needs to be re-cast into a new bar.

SGE members are not allowed to sell gold directly back either, this rule applies for every trader on the exchange. Once bars are withdrawn from the vaults they are not allowed to re-enter.


From Understanding China’s Gold Market:

Given the complexity of the market there could be many reasons, but the most likely explanation is that the SGE delivery figure includes the flow of recycled gold-for-gold as well as gold-for-cash. As explained previously, while recycled gold-for gold will increase supply and demand, the net effect is market neutral. For this reason, demand and recycling estimates as reported in Gold Demand Trends and GFMS, Thomson Reuters’ Gold Surveys exclude recycled gold-for-gold. But because the structure of the Chinese gold market requires refined and recast recycled gold to be sold through the SGE, it is likely the delivery figure captures this circulation of recycled gold-for-gold.

First of all, refined and recast recycled gold is not required to be sold through the SGE! The reason a lot of gold is being recycled through the SGE is because gold on the SGE is exempt from VAT, which creates an incentive to sell it through the central bourse. This also explains why SGE delivery (wholesale demand) is so much higher than WGC consumer demand: Every Chinese citizen can open an SGE account through a commercial bank. On the SGE he or she can buy VAT free gold, while some (not all) gold products sold in retail include VAT or profit margins. SGE bars are the cheapest not the prettiest, but how many gold investors would care? While the WGC measures gold sales in retail, SGE delivery captures the true size of demand. Needless to say, all jewelers purchase their gold at the SGE, so SGE delivery includes retail sales.


Above, SGE 100 gram gold bar sold excluding VAT.

In China standard gold are bars of 50g, 100g, 1kg, 3kg and 12.5kg, with a purity of AU9999, AU9995, AU999 and AU995. This is VAT free if traded over the SGE or SHFE, if not traded over the SGE or SHFE standard gold is not VAT-free.

Second, yes, recycled gold-for gold flows through the SGE, we know this since 2008. From the China Gold Market Report 2008:

Gold scrap

At present, gold scrap in China mainly is in two major forms: repurchase of gold bars, only applicable to brand gold bars in reference to real-time gold price, and repurchase of gold jewelry through retailers.

I guess it took the WGC six years to figure this out.

Now scroll up and have another look at the last sentence from the first quote I presented from The China Gold Market Report 2008. “In theory, the gap of 148.082 tons was filled by recycled gold”.  Note, The China Gold Market Report 2008 also states withdrawals accounted for 543.19 tonnes, import was 81.44, stock-carry over was 31.661 and domestic mining was 282.007 tonnes. We can clearly read the essence of the structure of the Chinese physical gold market. In a simplified equation:

Import + mine + scrap = SGE delivery

China mined 428 tonnes in 2013, which was required to be sold through the SGE. Net import, also required to be sold through the SGE, was 1540 tonnes. SGE delivery was 2197 tonnes and thus gold recycled through the SGE was 229 tonnes (neglecting stock carry-over). SGE delivery minus recycled gold was 1968 tonnes, which is the amount that was net added to private reserves in 2013.

The Official Sector

In China’s gold market: progress and prospects the WGC stated the glut in gold supply (the discrepancy between SGE delivery and consumer demand) may have been absorbed by the PBOC:

            …the large and growing apparent ‘surplus’ in the local market, after taking into account supply, demand and net imports, has been suggested as pointing to unreported accumulation of gold by the state.

…in recent years supply of gold has risen even faster than demand because of a surge in bullion imports. This has fuelled talk of possible Chinese official gold purchases in the domestic market. Indeed, even taking into account very substantial amounts of financial arbitrage, gold exports, stock building and other phenomena, there still remains a large ‘residual surplus’ in the market, which some have interpreted as representing an implied build-up in official sector…

Back in April 2014 I have written it’s very unlikely the PBOC buys gold through the SGE as all gold on the SGE is quoted in renminbi and the PBOC would rather exchange US dollars for gold – likely buying gold overseas. I strengthened my theorem in a post from June 2014 when more pieces of the puzzle came out. In Understanding China’s Gold Market (July) the WGC writes:

China’s authorities have a range of options when purchasing gold. They may acquire some of the gold which flows into China; there has been no shortage of that. But there are reasons why they may prefer to buy gold on international markets: gold sold on the SGE is priced in yuan and prospective buyers – for example, the PBoC with large multi-currency reserves – may rather use US dollars than purchasing domestically-priced gold. The international market would have a lot more liquidity too.

This is exactly what I wrote in my post in April; the PBOC has a strong incentive to exchange some of their supererogatory dollars for gold abroad (not exchange renminbi for gold on the SGE).

There is another strong indication the PBOC does not buy gold through the SGE. The foreign exchange reserves of the PBOC exceed $4 trillion. This is one of the largest stacks on the planet and it’s estimated two-thirds is denominated in US dollars. Prominent Chinese economist Yu Yongding illustrated the situation in a power point presentation as follows:


China needs to diversify its US dollar holdings and buy precious metals (next to a very interesting list of additional steps of which most are currently being taken). However, given the size of their reserves just a tiny move would greatly affect the market. This is why the PBOC is forced to buy gold in utmost secret, which it is perfectly capable of doing. China’s central bank is not your local pawn shop around the corner, it can easily buy gold anywhere on the globe and ship it home without declaring anything to any customs, that’s why there is no gold analyst that knows the exact amount of Chinese official gold reserves. For this reason I believe everything we see (Hong Kong, UK, Swiss gold exports to the mainland, SGE delivery, etc) is not related to PBOC purchases. The PBOC would never leave a single trace and, therefore, SGE delivery solely relates to non-government demand.

PS in future posts I will expand on gold loans/leasing and the VAT structure for precious metals in China mainland.

The World Gold Council Clueless on Chinese Gold Demand?

February 18, 2014 the World Gold Council released the Gold Demand Trends for 2013. According to this report total 2013 Chinese consumer demand was 1,065.8 tons. In my opinion this number is highly disputable.

Chinese Gold Market Essentials

The Chinese gold market is completely structured top down. The main physical (spot and deferred) exchange in China is the Shanghai Gold Exchange (SGE), that serves as the entrance point for imported and mined gold to the Chinese marketplace. Additionally the SGE is supplied by recycled gold. The Shanghai Futures Exchange (SHFE) facilitates the trading of gold futures contracts (to compete with the pricing power of Western markets).

The reason the PBOC requires imported gold to be sold first through the SGE (mined and recycled gold are stimulated to be sold through the SGE by tax incentives) is to keep track of how much gold is added to non-government reserves (jewelry, bar hoarding, etc). The setup is quite simple; to channel import and mine supply through one exchange the PBOC can efficiently supervise the quality and quantity of the gold that enters the Chinese market place. The PBOC likes to knows how many grains of fine gold are being held among the people.

Before gold is allowed to enter the vaults of the SGE it’s assayed by the National Quality Supervision and Inspection Center for Bullion & Its Products that grants a minimum fineness of 99.95. Gold withdrawn from the SGE vaults can only re-enter as recycled gold. After being remelted, by one of the associated refineries (see the list on page 40), and an assaying process the gold can move back into the SGE vaults. Just to make sure on SGE level gold of the highest purity is traded.


The consequence/purpose of the structure of the Chinese gold market is that SGE withdrawals equal wholesale demand. Confirmed by the fact that total demand reported by the China Gold Market Reports 2007 – 2011 exactly equal SGE withdrawals for the corresponding years. For an extensive analysis read this.

The Great Disparity

In 2013 SGE withdrawals accounted for 2197 tons. The next screen dump is from the last SGE report of 2013, the second number from the right (red – 本年累计交割量) is the total amount of gold withdrawn from the SGE vaults in Kg.

SGE total withdrawals 2013

The World Gold Council (WGC) claims to report on ALL sorts of demand; consumer, investment, industrial and central bank demand. This is from their February 18, 2014 press release:

Global consumer demand for gold at unprecedented levels in 2013 China the world’s largest gold market in 2013 

Consumers around the world bought gold in record amounts in 2013, led by demand in China and India, with China becoming the world’s biggest gold market, according to the latest World Gold Council Gold Demand Trends report. …

In 2013 the gold market saw 21% growth in demand from consumers which contrasted with outflows of 881t from ETFs. The net result was that global gold demand in 2013 was 15% lower than in 2012, with a full year total of 3,756t. …

Central banks

Although down 32% on 2012 they continued to be strong buyers of gold, a trend which began in 2009. 2013 saw net purchases in all four quarters, totalling 369t, meaning 12 consecutive quarters of net inflows. …


Demand reached 405t in 2013, virtually unchanged from the figure of 407t in 2012.

We can see the WGC tracks consumer (jewelry, bar and coin), ETF (and thus investment funds), central bank and industrial demand. Logic, if one wants to thoroughly analyze the gold market all facets of supply and demand must be taken into account.

So how come there is such a big difference between Chinese demand reported by the WGC, 1066 tons, and wholesale demand, 2197 tons? Why is the WGC missing 1132 tons? One reason is because the Chinese are hiding it. Since 2008 the Chinese have great interest to hoard in the dark in order to diversify their US dollar reserves, strengthen their economy and protect it from external shocks. The China Gold Association (CGA) changed the way they measure demand and all other Chinese gold institutions ceased publishing reports on demand since 2011. The only valuable information they continue to publish are SGE withdrawals. Not often, but sometimes the facts seep through the Chinese press:

China’s explosion in demand for physical gold in 2013 left a deep impression on international investors. The Shanghai Gold Exchange withdrawals for the year up till 27 December 2013 exceeded 2180 tons. Considering the exchange’s position as a hub for domestic gold circulation, in conjunction with a system that forbids withdrawn gold from re-entering inventory, to a large extent the withdrawals number can be treated as the best benchmark for physical gold demand in the Chinese market.  Not to mention that the entire 2013 global mined gold production does not exceed 2700 tons. China’s massive demand has to a large extent remade the world’s gold circulation system. Newly mined and stocked gold is moving through trade links in London – Switzerland – Hong Kong – into China in a large scale orientation towards the East. The impact of China’s demand on international gold price will inevitably increase.

Why consumer demand as presented to the world has been understated since 2008 is because the China Gold Association is manipulating the demand category net investment to suppress other categories like jewelry and bar.  This is an overview from the China Gold Market Report 2010.

Chinese gold demand 2010

According to the China Gold Market Report 2007 net investment was 18 tons. Thomson Reuters GFMS (which is the sole data provider for the WGC), assumed this was gold added to the stocks of banks, jewelers and the mint, as it was withdrawn from the SGE vaults but wasn’t sold on retail level. In 2007 this was probably true. But when Lehman fell the world changed, the Chinese began to overstate net investment to hide true demand. Up until today GFMS states net investment is stock movement changeLet’s have a look at how much net investment was in recent years. Note, in the chart below the “Difference” is approximately net investment, calculated as SGE withdrawals minus WGC consumer demand minus industrial demand.

SGE withdrawals vs WGC

Actual net investment published by the China Gold Market Reports: 2007 – 18 tons, 2008 – 129 tons, 2009 – 147 tons, 2010 – 266 tons, 2011 – 285 tons.

From 2007 – 2013 net investment was roughly 2000 tons. This definitely can not have been stock movement change at banks, jewelers and the mint. According to my analysis this gold was bought at the SGE by investment funds, individual investors and jewelers pretending to be individual investors. In the mainland there is 17 % VAT on jewelry, plus an additional 5 % consumption tax – you do the math.

WGC gold

I contacted the WGC and got in touch with one of their experts based in China. When I asked him what net investment was we had a brief debate after which he had to admit he was clueless on where this gold was going. He told me the Chinese will never disclose this information. I asked him if he would like to collaborate with me to research net investment. I got no response. A week later I asked him if he would grant me permission to publish our email correspondence. He responded to not publish our correspondence as it was meant to be private.


In the meantime I was emailing a precious metals analyst from Thomson Reuters GFMS about the Turkish gold market. This gentleman was extremely kind and helpful and explained to me in detail how GFMS measures Turkish gold coin production. Very valuable information for me! When I asked him what his take was on Chinese net investment, I got no response.

CPM Group

Jeff Christian from CPM Group did respond after I wrote him an open letter regarding SGE withdrawals. You can read our debate in the comment section of this post. Not surprisingly we couldn’t agree. What was interesting about our conversation was that he said total Chinese net gold import in 2013 was 1411 tons.


Of course I’ve written a million emails to the CGA, in English and Chinese, no response whatsoever. I called them speaking English, no luck. My friend in the mainland has called them numerous times, they always say the gentleman who wrote the China Gold Market Reports is on holiday. The message is clear…

The mainland officially net imported 1158 tons of gold from Hong Kong in 2013. Total net import according to Jeffrey Christian was 1411 tons (according to me it was 2000 tons), let’s take his number for an example. How can China import 1411 tons and mine 428 tons (that’s 1839 tons) but only demand 1066 tons? Did they import gold without asking for it? Did someone secretly pushed it across the border and now the Chinese are stuck with it? Or is there a lot of demand the WGC doesn’t disclose?

Anyway, I think 1066 tons Chinese consumer demand as reported by the WGC is highly underestimated. To be continued…