Withdrawals from the vaults of the largest physical gold bourse globally, the Shanghai Gold Exchange (SGE), accounted for 54 tonnes (in week 45 / 16 until 20 November), up 10 % from last week. Year to date SGE withdrawals have reached 2,313 tonnes, which is an all time record.
Given elevated SGE withdrawals and continued weakness in the gold price it looks like the Chinese population is buying the dips. The Chinese central bank (PBOC) is likely doing the same, but not through the SGE. The PBOC does its monetary gold purchases in the international OTC gold market – for example, in London or Hong Kong.
According to Reuters China has imported 72 tonnes of (non-monetary) gold from Hong Kong in October – this gold is required to be sold first through the SGE, it’s not directed to the PBOC. Data from the Hong Kong Census & Statistics Department has not been released, but Reuters has a contract with the Department in order to obtain data a few days before the public release.
Known gold exports to China year to date: From January until October Hong Kong has exported 653 tonnes to China mainland, which is 784 tonnes annualized. Switzerland has exported 217 tonnes to China from January until October, annualized 260 tonnes. The UK shipped 210 tonnes to China in the first nine months of this year, annualized 280 tonnes. Australia net exported 49 tonnes in seven months, which is 84 tonnes annualized. So, without counting shipments from exporters such as South Africa and Singapore, China has imported 1,129 tonnes of gold year to date and is on track to import 1,408 tonnes of (non-monetary) gold in total this year. In addition, Chinese domestic mining output is set to reach 476 tonnes. Chinese apparent gold supply – without counting scrap – in 2015 will be 1,884 tonnes.
Using SGE withdrawals as a measure for Chinese gold demand canbe slightly deceiving for a number of reasons. For example, Chinese citizens can buy gold on the SGE but prefer not to withdraw this metal from the vault, or chose to withdraw next month/year. This way, wholesale demand would actually be higher than the amount of gold being withdrawn. On the other hand, since the inception of the Shanghai International Gold Exchange (SGEI) gold can be withdrawn from SGEI (IB) Certified Vaults in the Shanghai Free Trade Zone (SFTZ) and exported abroad. According to the accounting rules from the SGE, any SGEI withdrawal is included in SGE withdrawals. An export from the SFTZ would be included in SGE withdrawals. I’m always occupied with the details regarding SGE withdrawals, why we can use it as a measure for Chinese wholesale gold demand and why not. I think SGEI withdrawals can have been a cause for inflated SGE withdrawals this year.
Late 2014 and early 2015 I’ve written SGE withdrawals could have been distorted by withdrawals from the SGEI. For a while I corrected SGE withdrawals by SGEI trading volume to be conservative about Chinese wholesale gold demand. We simply didn’t know what happened to the SGEI gold that was traded – was it withdrawn from the vaults or not withdrawn. Then, in February 2015 SGE chairman Xu Luode published some figures in an article for Bullion Bulletin that pointed outmost of the SGEI trades that were withdrawn from the vault was imported into the Chinese domestic mainland. Meaning, SGEI trading volume could only have slightly distorted our measure of Chinese wholesale gold demand (SGE withdrawals).
After a run up in SGEI trading volume this year, from January until March, it appeared trading of iAu9999 (the most commonly traded SGEI contract – 1 Kg 9999) severely declined in recent months and I stopped subtracting SGEI trading volume from SGE withdrawals to measure Chinese wholesale gold demand. But, the other day I studied the Chinese SGE weekly reports. What I failed to see in recent months was that iAu9999 has been trading in the Chinese OTC market. Mea culpa. In the Chinese OTC market SGE contracts can be negotiated off-SGE, while settlement is done on-SGE.
In the Chinese weekly SGE reports we can see OTC trades on the first page. Below is a screen shot of the report, the OTC settlements are framed in red. Framed in blue is ‘this weeks’ trading, which was in week 45 (framed in green).
Some analysts, including myself, thought the SGEI was dead. But it isn’t.
First of all, the iAu9999 contract is traded increasingly in the OTC market. In the chart above the black line resembles OTC iAu9999 trading volume. In the OTC market volume has declined from a peak in May, but I wouldn’t say trading has ceased.
It certainly is possible the gold of these OTC iAu9999 trades can have been withdrawn from the vaults in the SFTZ and exported abroad and thus inflated SGE withdrawals. When acontract (iAu9999) at the SGEI is exchanged, four things can happen (in the context of this investigation):
The gold stays in the vault.
The gold is withdrawn and stored elsewhere in the SFTZ.
The gold is withdrawn and imported into the Chinese domestic gold market.
The gold is withdrawn and exported to, for example, India.
Option 2 and 4 would increase SGE withdrawals without increasing Chinese wholesale gold demand.
When looking at the numbers from the OTC iAu9999 trading we can see an interesting pattern.
Have a look at the data labels in the chart above. We can see that all weekly OTC iAu9999 volumes end on two zeros (blue bars) or three zeros (red bars). These volumes are the sum of all trades executed during the week. It’s safe to conclude these volumes are exchanged by large traders, as iAu9999 is changing hands in batches of one hundred (blue bars) or in some weeks one thousand (red bars) 1 Kg 9999 bars. For example, in the week that ended 3 July 2015 exactly 73,000 Kg’s were traded. In theory, 20,855 Kg’s were traded on Monday and 52,145 Kg’s on Thursday, aggregating at 73,000 Kg’s in total for the week. Though, this coincidence cannot have occurred each and every week. More likely the OTC iAu9999 traders buy and sell per 100 or 1000 Kg’s. No other SGE or SGEI contracts show this bulky trading pattern.
Did any foreign nations buy gold through the SGEI OTC market and export it from the SFTZ? Hard to say. The most obvious gold trading partner for China is India. Early this year the SGE chairman wrote about the SGEI [brackets added by me]:
… Using the International Board [SGEI] as a launch pad, China’s gold market will embrace greater openness and foster stronger ties with its neighbours and, together, elevate the trading and pricing influence of Asia in the world’s gold market.
As a perennial major consumer of gold and a close neighbor of China, India will undoubtedly become one of SGE’s most important partners in the coming years. SGE looks forward to forming close partnerships with the Indian market.
Imaginably, the iAu9999 purchases were withdrawn from the SGEI vaults in the SFTZ and exported to India. Though, India’s trade statistics can be tracked very precisely and only a small amount of gold has been exported from China to India since the SGEI was erected in September 2014.
In the table above we can see India imported 1.205 tonnes from China Since September last year. These imports into India can be processing trade from any Free Trade Zone in China (no SGEI involvement required), but can also be from purchases at the SGEI in the Shanghai Free Trade Zone. In the latter scenario these exports would have been captured in SGE withdrawals (the metal is bought at the SGEI, withdrawn from the IB Certified Vault and exported).
In any case India imported very little gold from China in the past year. The only other gold importer from China I could find was Thailand at 1.488 tonnes, which makes me think foreigners have not yet been very active on the SGEI. More likely, at this stage, is that SGEI withdrawals are imported into the Chinese domestic gold market. Another option, given the large round number volumes, is that OTC iAu9999 is trading in China’s foreign exchange market.
I should add, the customs departments from Switzerland and Hong Kong confirmed that when gold is exported from local soil to the Shanghai Free Trade Zone it’s disclosed in their data as an ‘export to China’. It is irrelevant if that gold is ever imported into the Chinese domestic gold market. No matter what happens to the gold in the SFTZ it is initially disclosed as an export to China.
In short, trading at the SGEI can have blurred SGE withdrawals this year. More research should point to what extent.
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 the largest physical gold market globally.
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 articles examine 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 our 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 market1, (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-government2) 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 and develop the Chinese gold market to support China’s internationalization.
For our analysis of the Chinese domestic gold market we’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).
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.
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]:
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.
Until this date (2016) 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 PBOC3, 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:
HSBC Bank (China) Ltd
Australian and New Zealand Bank (China) Company Ltd
Standard Chartered Bank (China) Ltd
United Overseas Bank (UOB)
Industrial and Commercial Bank of China (ICBC)
China Construction Bank (CCB)
Bank of China
Agricultural Bank of China (ABC)
Bank of Shanghai
China Minsheng Bank (CMB)
Shenzhen Development Bank (SDB) / Ping An Bank
All bullion imported into the Chinese domestic gold market by one of the fifteen banks must be standard gold4 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 state5 [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 Zones3 (/Customs Specially Supervised Areas) where different cross-border trade rules are applicable.
Individuals can freely import and export 50 grams of gold when traveling. However, this rules 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 Tax6 (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 most liquid exchange.
In the table below the different forms of gold in China and the related VAT rates are listed.
Domestic Gold Mining
The People’s Republic of China has the biggest gold mine production globally with an output of roughly 450 tonnes per annum7 (2015). The vast majority of this output is sold first through the SGE, as Chinese miners are required to sell standard gold over the SGE8.
Overseas gold mining output can be imported into the Chinese domestic gold market3, 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 Corporation9 is a mining company that has its own physical stores to sell bars and ornaments.
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. 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.
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 metrics 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 recycled gold comprising scrap,disinvestment, and recycled distortion.
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 (this following is BullionStar nomenclature):
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.
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 material, more likely he will approach a refinery. Because disinvestment surpasses retail stores (jewelry shops and banks) it’s not included by GFMS in their supplystatistics. 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 supply10.
Recycleddistortion: 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 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 any supply and demand balance. Next to process scrap there can be other forms of gold being recycled through the SGE, 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.
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. As GFMS publishes incomplete Chinese gold demand statistics10, 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 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 Exchange11 it’s stated:
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 stated12 (point 2):
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 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 equations to 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:
Chinese Wholesale Gold Demand = True Chinese gold demand + Recycled Distortion = SGE Withdrawals
In a graph:
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, as this information is also unknown.
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
2008: SGE Withdrawals 543.2 Tonnes
2010: SGE Withdrawals 837.2 Tonnes
2013: SGE Withdrawals 2,197 Tonnes
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 demand, institutional demandand 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 formation10.) Stunningly, the difference between SGE withdrawals and GFMS demand has aggregated to an astonishing 5,922 tonnes from January 2007 until September 201613. The next graph illustrates the difference.
As on the supply side, we can draft simple equations for the demand side:
Institutional Demand = Direct Purchases At The SGE
Direct Purchases At The SGE = 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.
According to our 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 sector14.
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 application1. Then, he or she receives a unique 10-digit trading number that gives access to theaccount 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:
When an SGEphysical gold contract15 is exchanged the full amount of corresponding 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.
Early 2016 was the launch of the smartphone application Yijintong1 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:
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 members1. 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.
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 wrote16:
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 201417[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
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 201318 [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).
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 201419 [brackets added]:
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 reduced by nearly 2,200 tonnes [SGE withdrawals], of which 200 tonnes was recycled gold.
Typically, Xu measure the supply side ‘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 shows 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 article13 is dedicated to the data and details of all metrics, for now, please have look at an overview below:
Gold sold at retail level (consumer demand) = GFMS demand
Import + mine = net gold added to Chinese private sector reserves
8)CHINA GOLD INTERNATIONAL RESOURCES CORP. LTD. https://www.bullionstar.com/blogs/koos-jansen/wp-content/uploads/2015/03/China-Gold-International-Resources-Corp.pdf
9) China Gold Sales page http://www.chinagoldgroup.com/eng/n284/n314/index.html
10) The Great Physical Gold Supply & Demand Illusion https://www.bullionstar.com/blogs/koos-jansen/the-great-physical-gold-supply-demand-illusion/
11) Detailed Rules for Physical Delivery of the Shanghai Gold Exchange https://www.bullionstar.com/blogs/koos-jansen/wp-content/uploads/2015/03/Detailed-Rules-for-Physical-Delivery-of-the-Shanghai-Gold-Exchange.pdf
12) ICBC Deferred Brokerage of Physical Precious Metals http://www.icbc.com.cn/icbc/e-banking/personalebankingservice/wealthmanagement/goldtrade/agencyphysicalgolddeferment/
13) Why SGE Withdrawals Equal Chinese Gold Demand And Why Not – The Argument List https://www.bullionstar.com/blogs/koos-jansen/why-sge-withdrawals-equal-chinese-gold-demand-and-why-not/
14) PBOC Gold Purchases: Separating Facts from Speculation https://www.bullionstar.com/blogs/koos-jansen/pboc-gold-purchases-separating-facts-from-speculation/
15) Workings Of The Shanghai International Gold Exchange https://www.bullionstar.com/blogs/koos-jansen/workings-shanghai-international-gold-exchange-part-one/
16) The Shanghai Gold Exchange and its future development http://www.lbma.org.uk/assets/blog/alchemist_articles/Alch63Zhe.pdf
17) China’s gold demand tops 1,000 tonnes for first time http://in.reuters.com/article/china-gold-idINDEEA1904M20140210
18) China Investment Strategies https://www.bullionstar.com/blogs/koos-jansen/wp-content/uploads/2015/11/Scotiabank-China_092914.pdf
19) The Development and Opening of China’s Gold Market https://www.bullionstar.com/blogs/koos-jansen/wp-content/uploads/2015/02/Alchemist-75-Xu-Luode-Singapore.pdf
The latest Indian Bullion Bulletin has just been released wherein the chairman of the Shanghai Gold Exchange (SGE) Xu Luode presents the SGE’s international ambitions – read below.
The Chinese government regards the gold market as an indispensable component of China’s financial market and attaches great importance to its growth and development.
The Shanghai International Gold Exchange
Xu provides an excellent all round update of the SGE, though he’s somewhat exaggerating the performances of the SGE International Board (SGEI) till thus far. I don’t blame him though, the SGEI has great potential.
One way to enhance SGEI trading would be to allow individual foreign investors to have easy access to the international exchange and its wide range of products, which is currently limited to SGEI members (banks, refineries, etc). Xu notes this will change soon.
I’ve gotten numerous questions by email from investors worldwide that would like to trade on the SGEI, but can’t get through. At this stage it’s simply not possible, but my contacts at ICBC will timely notify me when everybody can trade at the SGEI. I’ll keep you posted.
Xu Luode from the Bullion Bulletin:
Embrace Global Markets, Strengthen International Cooperation, Share China Opportunities, Advocate Mutual Benefits
Shanghai Gold Exchange, A Market-based and Global Exchange Center
Xu Luode, Chairman, Shanghai Gold Exchange
The Shanghai Gold Exchange (“Exchange” or “SGE”) was officially established on October 30, 2002 by the People’s Bank of China (“PBC”) under the approval of the State Council. In just little over a decade, the SGE has firmly placed itself as the most important domestic trading platform and central hub for spot and investment products in gold, silver and platinum. SGE’s success also extends to the international stage: it has been ranked as the world’s largest exchange for physical gold bullions for seven years in a row, and its trading volume in gold and silver reached 11.6 and 430.5 thousand metric tons respectively in 2013, which puts it as the fourth largest exchange in the world for gold and third largest in silver.
I. Background and Significance of the Launch of the International Board
The official launch of SGE’s International Board on September 18, 2014 has unveiled a new chapter in the reform and development of China’s gold market, and marked a solid step in the opening up of the China’s gold market to global investors. Its strategic launch underscores both SGE’s own development needs and its desire for greater integration with international markets. The background and significance of the International Board are:
1. China has an enormous market base for gold products and harbors great potential.
In recent years, we have witnessed the trend of “oriental gold” playing an increasingly important role in the global market attributable to the rapid development of the China’s gold market: in 2013 alone, the gold produced and imported by China exceeded 50 percent of the world’s gold production and 60 percent of the world’s gold consumption, respectively. As the world’s biggest gold producer, consumer, and importer, China is gradually integrating itself into the global gold market. Meanwhile, China is still a relatively young market as compared to its more established siblings in the world; similarly, SGE has been operating for less than 12 years and is still in its early development stage. But the future is bright: as the urbanization spreads to far corners of China and national income level surges, the development and growth potential of the China’s gold market has never been stronger.
2. Chinese government has been a major proponent for advancing China’s gold market and ushering in its era of internationalization.
Chinese government regards the gold market as an indispensable component of China’s financial market and attaches great importance to its growth and development. PBC has laid a solid foundation for transforming it from a domestic commodity market based on spot products to an international investment market based on derivatives. On another front, the Chinese government established the Shanghai Pilot Free Trade Zone (“Shanghai FTZ”) in September 2013, signaling its determination to introduce more innovations and reforms to the domestic financial system. As national efforts to internationalize RMB reach their crescendo, China’s domestic gold market is facing an auspicious window and timing for pursuing its internationalization and greater openness.
The significance of the launch of the International Board is manifest in the following three aspects:
(1) The International Board provides a vital link between the domestic and international gold markets.
By inviting foreign investors to trade in China’s domestic market, the International Board has greatly expanded the size of the market and increased market liquidity. Foreign investors can take advantage of the diverse range of trading, pricing, and hedging instruments as well as the arbitrage opportunities of “RMB-denominated gold price, RMB interest rates, and RMB exchange rates” provides, and share in the benefits and wealth brought about by China’s market reforms and development.
(2) The International Board provides a new investment channel for offshore RMB.
The International Board offers an attractive investment channel for foreigners holding offshore RMB and imbues offshore RMB with greater investment value and liquidity than ever before. At the same time, the International Board has spurred innovations in FX and interest rate products, improved the visibility and standing of RMB as an international money of account and settlement currency, and accelerated RMB’s march to becoming an international currency.
(3) The International Board lends greater weight to the importance of Asian gold market on the international stage.
China, India, Dubai and Singapore all enjoy vibrant trading scenes and comparative advantages; however, in the eyes of many investors, the influence wielded by the Asian markets is still very limited as a whole. Using the International Board as a launch pad, China’s gold market will embrace greater openness and foster stronger ties with its neighbors and, together, elevate the trading and pricing influence of Asia in the world’s gold market.
II. Key Features of the International Board
The launch of the International Board has attracted major spotlights from international markets due to its five prominent features:
1. Internationalization of market participants.
SGE’s first 40 highprofile international members include major global commercial banks, investment banks, gold refiners, and investment firms such as HSBC, Standard Chartered, Scotia Mocatta, Goldman Sachs, ANZ, Metalor, Heraeus and PAMP. International members are permitted to trade in all products listed on the Exchange through proprietary accounts and on behalf of international investors.
2. Internationalization of funds.
Offshore RMB and offshore convertible currencies can be used in the trading of RMB-quoted precious metals products offered by the Exchange via the PBC’s Free Trade Accounting Unit.
3. Internationalization of pricing.
All products listed on the Exchange are denominated in RMB. As more market participants gather to trade on the Exchange, and onshore investors and domestic funds become more intertwined with offshore investors and offshore funds, the sphere of influence of trading prices on the Exchange will gradually expand from nearby regions to the whole world and, at the same time, RMB-denominated gold benchmark price will emerge as another financial index of global significance.
4. Internationalization of products.
SGE integrates the Main Board with the International Board so that domestic and foreign investors can trade in the same arena. After being admitted to the Exchange, international investors are allowed to trade in a wide array of products, including the three spot gold products listed on the International Board as well as spot and deferred products on the Main Board. In addition, to better meet the needs of the market, the Exchange has further optimized the structure of products and recently introduced (T+N) deferred products as a new choice for the investors. SGE has also embedded bullion leasing service in its design of the International Board. SGE will concentrate on the launch of this service as its next step toward offering the full range of services that international investors demand.
5. Internationalization of delivery, storage and transportation services.
SGE provides delivery, storage, logistics and other supporting services for the importation and transit of gold through its fully modernized vault in the Shanghai FTZ that is capable of holding thousands of metric tons of gold. International investors may choose to conduct the delivery of physical gold at this vault at their own discretion. The physical gold so delivered may be imported into China by any qualified entity commissioned by the Exchange, or transited without restriction to any other country in the world.
III. Market Performance and Development Outlook of the International Board
As of November 2014, international members have traded more than 100 metric tons of gold in aggregate with a total turnover of around RMB 25 billion; imported gold tipped in at around 12 metric tons, and a total of 15 metric tons of gold have been deposited into the International Board Certified Vault. The market functions of the International Board are beginning to take root and contribute positively to the national economy. As is widely expected, the International Board has shown a promising start, but SGE’s internationalization initiative has just taken its first step, more efforts and time will be needed to realize the full market functions and economic impacts of the International Board.
1. Strengthen international cooperation and seek mutual benefits.
SGE and CME have recently signed a Memorandum of Understanding with regards to future cooperation efforts. As a perennial major consumer of gold and a close neighbor of China, India will undoubtedly become one of SGE’s most important partners in the coming years. SGE looks forward to forming close partnerships with the Indian market.
2. Attract more foreign entities and investors to participate.
At present, a large number of international organizations have expressed their strong desire to join in the SGE and the Exchange itself has started the admission process for a second group of international members. Looking ahead, SGE will continue to admit competitive foreign entities as its members in accordance with market needs, and will allow international members to conduct brokerage services when the time is ripe and accelerate the preparatory steps for the eventual admittance of foreign individual investors.
3. Further tap into market potentials and improve investor service.
In the future, the SGE will continue to optimize and enrich its range of bullion products, gradually open its silver, platinum, palladium and other precious metals products as well as price asking products and derivatives such as forwards and options to international investors. Furthermore, the SGE will focus on enhancing its transit and leasing businesses, gradually roll out foreign currency-based collateral services and FX swaps, accept offshore funds from more varied sources for International Board transactions, further improve the financial services offered to international members and customers in regards to account opening and cross-border funds transfers, provide customized and streamlined financial solutions to international members, and, by adopting a top-down design, offer exceptional and expedient services to international investors.
Mr. Xu Luode, Bachelor of Economics and senior accountant, is the Chairman of Shanghai Gold Exchange. He is also the Vice Chairman of China Gold Association, the Vice Chairman of China Payment and Settlement Association, the Executive Member of China Finance Society, and the Executive Member of China Numismatic Society.
Nope – that’s my answer. It’s my assumption the People’s Bank Of China (PBOC) does not buy any gold through the Shanghai Gold Exchange (SGE), for a number of reasons. In previous posts I’ve speculated about these reasons, here’s a recap; from Koos Jansen (April 15, 2014):
The main objectives for the PBOC to accumulate gold are:
Supporting the renminbi for its internationalization (adding trust and credibility)
Owning hard currency as the cornerstone of capitalism.
Owning reserves that protect the Chinese economy from external/internal shocks and inflation.
Owning reserves that are not controlled by a foreign nation (the US).
Diversifying its excessively large USD reserves prior to an irrevocable USD devaluation.
Hedge their exorbitant USD reserves.
In my opinion the PBOC (or its proxies SAFE and CIC) does not purchase gold from domestic mines or from the SGE. The PBOC’s incentive is to exchange USD’s for gold, preferably buying undervalued gold with overvalued dollars. Hence the PBOC buys in utmost secrecy, not to affect the market.
It wouldn’t make sense for the PBOC to buy gold from domestic mines because they would have to pay in RMB. This wouldn’t fit all their objectives mentioned above. Additionally Chinese law dictates all domestic gold mining output is required to be sold through the SGE (page 15). All physical gold on the SGE is quoted in RMB, so its not likely the PBOC buys gold through the SGE . On top of that I have several sources in the mainland, including a teacher in ‘economics and the gold market’ at the Henan University of Economics and Law in Zhengzhou City, that all tell me the PBOC would never buy gold on the SGE.
My assumptions have just been strengthened as new evidence came out showing the gold sold at the SGE does not end up at the PBOC. At the LBMA Forum in Singapore the chairman of the SGE, Xu Luode, stated Chinese consumer demand hit 2,000 tonnes in 2013, and at another speech he stated 1540 tonnes was net imported that year. This net import figure disclosed by Xu is highly unlikely to include PBOC purchases (PBOC’s gold demand is China’s best kept secret).
In the speech Mr. Xu mentioned and I quote the official translation in the headphones “..as the Chinese consumption demand of gold hit 2,000 tons in 2013.”
My interpretation is that consumption demand is non-government demand and excludes PBOC purchases. Xu came to this number, 2,000 tonnes, because he summed up Chinese net import (1540 tonnes) and domestic mining output (428 tonnes), as he stated in a speech at the Fourth Commercial Bank Gold Investment Forum. The China Gold Network reported:
Xu pointed out that the current gold market, especially the physical gold market is actually in the East, mainly in China. Last year China’s own gold-enterprises produced 428 tons; at the same time China imported 1,540 tons of gold, adding up to nearly 2,000 tons.
At the Shanghai Finance Forum Xu mentioned the same numbers, according to the website Xinmin News 365.
SGE withdrawals accounted for 2197 tonnes in 2013, but because 229 tonnes of this was supplied from recycled gold Xu only mentioned the amount of gold that was net added to non-government reserves; net import was 1540 tonnes, plus domestic mining 428 tonnes, is 1968 tonnes. Recycling gold through the SGE doesn’t affect non-government reserves. The Chinese gold market, with the SGE at its core, is designed by the State Council to track the quantity and quality of gold added to Chinese non-government reserves. Through the SGE 1968 tonnes of gold was added to non-government reserves, hence Xu stated “Chinese consumption demand of gold hit 2,000 tonnes in 2013″.
To confirm Xu’s statement at the LBMA Forum in Singapore I called the SGE on monday June 30, 2014. The gentleman I spoke to was Jesse Yang, who had witnessed Xu’s speech, as well as Torgny Persson. However, Yang didn’t listen to a interpreter on headphones, he could understand Xu’s speech in Chinese. This is a screen shot of the delegate list of the LBMA Forum in Singapore:
What Xu stated was that in 2013 more than 2,000 tonnes was delivered into consumers hands and that could be interpreted as demand.
Again, this relates to non-government demand and these numbers exactly fit the volumes traded at the Shanghai Gold Exchange in 2013. The statements by Xu and Yang reaffirm the PBOC does not purchase any gold through the SGE.
Robust demand at the Shanghai Gold Exchange in week 25 (June 16 – 20), physical gold withdrawn from the vaults accounted for 36.3 metric tonnes, according to the Chinese SGE weekly report published last friday.
In my opinion Chinese (wholesale) demand, that equals SGE withdrawals, is still trending upward (if we ignore the variant demand from April to November 2013 due to the drop in the price of gold). In the chart below there is a clear pattern in SGE withdrawals; around every new year and the Chinese lunar year there is a spike in withdrawals, this is due to Chinese tradition to buy gold as a gift in this period. In between these spikes withdrawals are relatively steady, with the exception of 2013. The trend to watch is the course of the spikes around new year and the interval periods. So yes, demand came down from extraordinary levels in 2013. Is Chinese demand in a downtrend? I wouldn’t say so.
The Chinese calendar differs from the Gregorian we use in the West. The lunar year always starts between January 21 and February 20. This year the lunar year was celebrated at January 31, the year of the horse.
Overview Shanghai Gold Exchange data 2014 week 25
– 36.3 metric tonnes withdrawn in week 25 (16-06-2014/20-6-2014)
– w/w + 9.81 %
– 920 metric tonnes withdrawn year to date.
My research indicates that SGE withdrawals equal Chinese wholesale gold demand. For more information read this. The SGE chairman, Xu Luode, confirmed this correlation last week at the LBMA forum in Singapore. Additionally I called the SGE this morning to have Xu’s statement confirmed. The SGE employee I spoke to said: “Xu noted more than 2000 tonnes was delivered into consumers hands and that could be interpreted as demand.”
This is a screen shot from the weekly Chinese SGE trade report; the second number from the left (blue – 本周交割量) is weekly gold withdrawn from the vaults in Kg, the second number from the right (green – 累计交割量) is the total YTD.
Below is the full translation of a Chinese article I’ve used in a previous post on the Shanghai Gold Exchange international board. The article is about a speech from SGE chairman Xu Luodo at the Fourth Commercial Bank Gold Investment Forum where he spoke about the SGE international board.
It’s a must read because Xu clearly states he is developing the SGE from a domestic to an international gold exchange for China to have a stronger voice in gold pricing – and stimulate the internationalization of the renminbi. Xu Luode has long been engaged in the practice of financial reform and development, he has a wealth of experience and deep theoretical knowledge. A short biography:
1983, Xu Luode graduated in economics at the Hunan University (the oldest institution in Chinese history, founded in 976 AD).
1983 to 1996, Xu worked at the China Banknote Printing and Minting Corporation, that carries out the minting of all renminbi coins and printing of renminbi banknotes for the People’s Republic of China.
1996 to 2003, Xu served as general director at the People’s Bank of China (PBOC).
2003 to 2007, Xu served at the People’s Bank of China Payment and Settlement Division.
Very important about this translation is the part where Xu points out that in 2013 Chinese mines produced 428 tonnes of gold and China net imported 1540 tonnes, adding up to nearly 2000 tonnes. This is exactly in line with the amount of total supply (/demand) at the SGE that year: 2197 tonnes.The 229 tonnes gap has been filled by scrap supply. With this statement Xu confirms that SGE withdrawals equal wholesale demand. (read this for a full analysis of the Chinese gold market)
Xu Luode: China Should Become First Class International Gold Market
Author: Lilin Xu | Source: China Gold Network
May 15 , Speaking at the “Fourth Commercial Bank Gold Investment Forum” in Hangzhou, Xu Luode, Chairman of the Shanghai Gold Exchange said the Chinese gold market is an important force, a positive energy in the international gold market but its influence does not correspond to its mass and scale. Therefore to accelerate the development of China’s gold market, he proposed building China’s “Shanghai Gold”.
Commenting on China’s voice in the international gold market, Xu Luode said that the right to price gold now lies in the West, namely New York and London. New York prices gold through bidding whereas gold price is fixed by five banks in London. However the London gold fixing price is now being questioned since these five banks are price-fixers while at the same time they are also the market’s most important participants.
Xu pointed out that the current gold market, especially the physical gold market is actually in the East, mainly in China. Last year China’s own gold-enterprises produced 428 tons; at the same time China imported 1,540 tons of gold, adding up to nearly 2,000 tons. China’s import volume is significant but China’s influence in the gold price is very small. Although influence was visible last year, real influence still lies in the West. Data such as Non-farm payroll, even a speech could impact the gold market in a big way. In this sense, the mass and scale of China’s gold market and its voice and influence in the international gold market do not match, so it should speed up the development of China’s gold market.
Xu pointed out that the development of China’s gold market should not be limited to an increase in scale, it also needs market development, product improvement, system development and risk prevention. Marketing, pricing mechanisms and international standards are all very important building blocks so every aspect of China’s gold market should join forces to speed up development.
Touching on the Shanghai Gold Exchange, Xu said the exchange has nearly 8,000 institutional investors and nearly 5 million individual investors.
As for Shanghai Gold Exchange’s future direction and potential, Xu said that there should be more and more investors to participate in the Shanghai Gold Exchange platform. Along with China’s economic development and growing personal wealth, the rising middle class wants to invest in capital markets, make financial investments, attend to wealth planning and also want to invest in the gold market. This is a judgment based on the general trend. Therefore the Shanghai Gold Exchange must grow to accommodate more domestic investors participating in the gold market, for example growing from the current 5 million investors to 6 million, 7 million, 8 million or even more. Key issues are marketing, sales, sufficient investor education and plentiful products.
Xu suggested that a platform such as the Shanghai Gold Exchange should be internationalized. Compared to international exchanges, the number of domestic exchanges is relatively few so the emergence of the Shanghai Gold Exchange was well received from all quarters; approved by the regulatory body, supported by the industry and acknowledged by society.
Xu said the Shanghai Gold Exchange is actively preparing for internationalization this year. Of course, the specific meaning of internationalization is to allow overseas investors to invest through the Shanghai Gold Exchange platform and to trade gold quoted in RMB.
Xu said that other currencies can be used as margin for transactions. Shanghai Gold Exchange will become an international platform with global investors. This will raise the standard of product assortment, ability to prevent risk, information technology and support market promotion and regulation.
Xu believes that China’s gold market should be the first class in the international gold market. China is fully qualified and may become the world gold market’s most important player.
When talking about the Shanghai Gold Exchange international board, Xu said that early interaction is very good with very good momentum. Many commercial banks, industrial enterprises and investment institutions all expressed interest in the international board.
As we can see power shifting from West to East on a daily basis at the current time of writing, in the fourth quarter of this year the Shanghai Gold Exchange (SGE) will launch an international board in the Shanghai Free Trade Zone (FTZ) for investors worldwide to trade gold spot contracts denominated in renminbi. The purpose being is becoming not only the world’s primary physical gold market but also increase pricing power and internationalize the renminbi.
Shortlist of recent developments regarding the rising powers in the East:
Russia’s central bank bought 28 metric tonnes of gold in April
Russia set up a Euarsian Economic union with Belarus and Kazakhstan
Russia closes an energy deal with China worth $400 billion (amongst 40 other business contracts)
Putin says Russia and China need to secure their gold and currency reserves
China openly calls for de-Americanization of the world
China, Russia, Iran and 21 other countries bolster cooperation to promote peace, security and stability in Asia
China is buying assets all over the globe and investing in infrastructure in Africa and West Asia
China is importing unprecedented amounts of physical gold
The SGE international board will be another blow to the US dollar hegemony, as more people around the world will hold renminbi, use the renminbi for trading gold and China wil have more power in pricing gold, though the international board’s pricing power can only be wholly exploited when the renminbi is fully convertible.
A Provisional Introduction To The Shanghai Gold Exchange International Board
Currently I don’t have any official documentation on the launch of the SGE international board, but by reading media (one, two) and from a source in the mainland, this is what I understand of it at this point: China’s central bank, the Peoples Bank Of China, has given approval to the SGE to set up a subsidiary company called the Shanghai International Gold Trading Center to operate the international board. The SGE is currently working on member recruiting, including commercial banks, gold producing companies and investment funds. Allegedly HSBC, ANZ, Standard Bank, Standard Chartered and Bank of Nova Scotia are to take part in the global trading platform.
Imported gold into the FTZ can be deposited in a brand new 1000 tonnes vault, after contracts are settled the gold can be delivered in this vault and withdrawn to be re-exported. Shanghai to become an international warehouse center. At first only spot contracts will be traded on the SGE international board, down the line derivatives will be launched. From Chinese state TV network CCTV:
A free trade zone (FTZ), also called foreign-trade zone, formerly free port is an area within which goods may be landed, handled, manufactured or reconfigured, and re-exported without the intervention of the customs authorities. Only when the goods are moved to consumers within the country in which the zone is located do they become subject to the prevailing customs duties.
SGE Chairman to Lead The Way
The chairman of the SGE is Xu Luode, who is former President of China Unionpay, a bankcard association established under the approval of the State Council and the People’s Bank of China. Xu already gained experience at Unionpay to lead a financial institution overseas. In 2010 Xu delivered a speech on how Chinese financial institutions can go global at the Lujiazui Forum, an important Chinese forum for policy makers on the rapid expansion of China’s financial market and China’s growing influence on the global economy. Now Xu will use his experience to open up the SGE to the world. From China Unionpay in 2010:
On June 26, Xu Luode, President of China Unionpay, was invited to attend the “Lujiazui Forum 2010,” …President Xu Luode delivered a speech on How Chinese Financial Institutions Can Go Global during the Post-crisis Era. New changes in the international economic pattern, especially the financial pattern, provided significant opportunities for Chinese financial institutions to go global, while the challenges were also formidable. Chinese institutions need strategy and holistic knowledge to promote globalization strategy prudently and steadily and successfully grow to be international corporations, expressed President Xu Luode in his speech.
President Xu Luode emphasized in his speech that the internationalization of an enterprise was not only the business behaviour of the enterprise itself, but should be also closely linked with national strategyand strategies of relevant enterprises. Since 2004, CUP’s internationalization has closely coordinated with the “reaching out” strategy of the country, and at the same time cooperates and interacts with the expanding of Chinese financial institutions and the internationalization of the Chinese Renminbi, thus achieving relatively rapid development.
Was Xu appointed as SGE chairman in October 2013 to launch the SGE international board? Who knows…
On may 15, 2014, Xu attended the fourth Commercial Bank Gold Investment Forum in Hangzhou. Based on three sources mentioned above (translated by Soh Tiong Hum) he made the following statements:
The Chinese gold market is an important force, a positive energy in the international gold market but its influence does not correspond to its mass and scale. Last year China’s domestic gold mines produced 428 tonnes; at the same time China imported 1540 tonnes of gold, adding up to nearly 2000 tonnes. China’s import volume is significant but China’s influence on the price of gold is very small. Real influence still lies in the West. Data such as Non-farm payroll, or even a speech could impact the gold market in a big way. In this sense, the mass and scale of China’s gold market and its influence in the international gold market does not match. Through the SGE international board Chinese pricing power will increase.
Foreign investors can directly use offshore yuan to trade gold on the SGE international board, which is promoting the internationalization of the renminbi. The international board will form a yuan-denominated gold price index system named “Shanghai Gold”. Shanghai Gold will change the current gold market “consumption in the East priced in the West” situation. When China will have a right to speak in the international gold market, pricing will get revealed. New York prices gold through bidding whereas the gold price is fixed by five banks in London. However the London gold fixing price is now being questioned since these five banks are price-fixers while at the same time they are also the market’s most important participants.
The development of China’s gold market is not limited to an increase in scale but a series of moves including market development, product improvement, system development and risk prevention. Marketing, pricing mechanisms and international standards are all very important building blocks so every aspect of China’s gold market should join forces to speed up development.
The Shanghai Gold Exchange has nearly 8,000 institutional investors and nearly 5 million individual investors.
The International board will be a platform with global investors. This will raise the standard of product assortment, ability to prevent risk, information technology and support, market promotion and regulation. China is fully qualified and may become the world gold market’s very important first class player.
Regional commercial banks should seize the trends and opportunities in the development of China’s gold market, and become actively involved in the market.
As you may remember Malca-Amit opened a 2000 tonnes gold vault, their biggest vault on the planet, in the Shanghai Free Trade Zone in November 2013. Of course they knew Shanghai was to become to center of the global gold market (why else build such a big vault?). I think Malca-Amit has a lot of market intelligence as many bullion banks and other market participants are their clients. If a part of the Malca-Amit vault in Shanghai is designated to the SGE I don’t know at this moment. The following video is from November 2013:
Though we’ll have to wait for the details on how the SGE international board will exactly operate in a few months, it’s influence on the global gold market will be significant and this will further deteriorate the status of the US dollar hegemony.
The amount of gold withdrawn from the Shanghai Gold Exchange vaults has been increasing in recent weeks. After an explosive week in April, when 117 tons of gold were withdrawn, weekly averages came down to a constant 40 tons throughout the year. At the end of October it seemed Chinese demand for physical gold was declining, but since November weekly physical delivery has been north of 40 tons. In between 9 and 13 December 50.4 tons of gold were withdrawn from the vaults. Year to date 2073 tons have been withdrawn, which equals to Chinese gold demand according to the PBOC.
Premiums in Shanghai have remained around 1 % over international spot in recent weeks.
USGS estimated total world mining production would be 2700 tons this years, but this estimate was made before the price collapsed in April. After the price drop numerous mines were shut down and thus total world mining production will be far lower than what was expected in January. It could very well be that SGE physical delivery in week 50, which was 50.4 tons, surpassed global mining production, which was estimated at 54.9 tons, but we can only be sure about this when we have the official mining data at year end.
Overview Shanghai Gold Exchange data week 50
– 50 metric tonnes delivered in week 50 (withdrawn from the SGE vaults), 09-12-2013/13-12-2013
– w/w + 13.8 %
– 2073 metric tonnes delivered year to date
– weekly average 41.46 tonnes YTD, 2013 estimate yearly total 2156 tonnes.
Screen dump from SGE trade report; the second number from the left (本周交割量) is weekly physical delivery, the second number from the right (累计交割量) is total delivery YTD.
Gold premiums on the SGE based on data from the weekly reports. Difference between SGE gold price in yuan and international gold price in yuan.
Below is a screen dump of the premium section of the SGE weekly report; the first column is the date, the third is the international gold price in yuan, the fourth is the SGE price in yuan, and the last is the difference.
Since October 2013 there is a new chairman at the Shanghai Gold Exchange. After Shen Xiangrong (2002) and Wang Zhe (2010), it’s now the turn to Xu Luode (2013):
Xu Luode was born in 1962 and has been a member of the Chinese Communist Party since June 1982. In 1983 he graduated as a Bachelor in Economics at the Hunan Institute voor Finance en Economics. From August 1983 to October 1996 he served as Deputy Director of the China Financial Banknote Printing and Minting Corporation. Then in 1996 Xu started working at the PBOC as general director, and in 2003 at the PBOC Payment and Settlement Division; since August 2007 he was appointed as party secretary of China UnionPay (CUP is one of the world leaders in payment services, reaching 3.5 billion people in over 30 countries with a yearly volume of $3.7 trillion). Xu has profound economic knowledge, has long been engaged in macroeconomic analysis and financial market research and management.
XU Luode delivered a keynote speech on how Chinese financial institutions can go global at the “Lujiazui Forum 2010”:
“Chinese institutions need strategy and holistic knowledge to prudently promote globalization strategyies and steadily and successfully grow to be international corporations”, expressed President Xu Luode in his speech.
President Xu Luode emphasized in his speech that the internationalization of an enterprise was not only the business behaviour of the enterprise itself, but should be also closely linked with national strategy and strategies of relevant enterprises. Since 2004, CUP’s internationalization has closely coordinated with the “reaching out” strategy of the country, and at the same time cooperates and interacts with the expanding of Chinese financial institutions and the internationalization of the Chinese Renminbi, thus achieving relatively rapid development.
Some more of what XU had to say on the 8th China Gold & Precious Metals Summit this year:
5 December Shanghai, “2013 China Gold & Precious Metals Summit”, the Shanghai Gold Exchange chairman Xu Luode said that although the market price of gold fell, the future of gold investment still has huge potential for the consumer market.
Xu Luode noted that the current gold market has two characteristics: First, the international price of gold fell, prices increased in amplitude, the domestic and international market spreads widened; Secondly, there was a substantial increase in the domestic market size and frequency of transactions…
Xu has already announced three developments for the SGE:
– From January 2014 there will be a new small contract launched at the Shanghai Gold Exchange – mAu (T+D) 99.99 % spot deferred for the “Chinese Mother” to usher a new breed of investment – that lowers the threshold of participating, adds more liquidity to the market and also helps to attract gold pricing eastwards.
– Xu plans to extend night trading hours to meet the needs of investors.
– There will be a SGE trading facility in the Shanghai pilot free trade zone to attract offshore yuan capital to invest in the Chinese mainland’s gold market. From China.org.cn:
The Shanghai Gold Exchange plans to launch an international board in the pilot free trade zone to attract offshore yuan capital to invest in the Chinese mainland’s gold market, a senior official said Thursday.
“We want to tap the opportunity from Shanghai’s pilot free trade zone and launch an international board to attract offshore yuan to invest in the mainland,” Xu Luode, chairman of the bourse, said at a precious metals forum in Shanghai yesterday.
The board will ensure that the onshore gold market correlates with the global market, said Xu, without disclosing a timetable for the launch.
Financial reforms in the free trade zone will allow free fund transfers between the zone and offshore markets for the first time, according to a directive issued by the People’s Bank of China on Monday.
The Shanghai exchange will establish a system that publishes daily rates at which selected market participants are willing to lend gold in the mainland interbank market, which is similar to the Gold Forward Offered Rates by the London Bullion Market Association, according to Xu.
The world’s biggest exchange for physical gold in Shanghai will also offer custody for the metal to retail investors.
The Shanghai Gold Exchange chairman Xu Luode said he considers the construction of an offshore gold exchange international gold market in Shanghai Free Trade Zone, for the cross-border use of RMB, it will be launched for the international offshore investors, the specific program is still in the research stage.The industry comments that it will be a tool to promote the internationalization of the RMB, the design may be quoted in RMB, analysts expect similar paper gold trading varieties.
The following picture was taken on 5 December 2013 at the SGE. On the right we can see XU Luode, probably pointing towards a new instant noodle machine at SGE headquarters. On the left we can see Dai Xianglong, governor of the PBOC from 1995 until 2002, the man who initiated the reform of the Chinese gold market during the tenth five year plan. The official reason for his visit at the SGE was “inspection”.
China is going to abolish its planned management system for the unified purchase and distribution of gold and to set up a gold market in its stead.
To reform the system aims to give full play to the basic role of the allocation and regulation of gold resources and promote the sound development of gold production, circulation and consumption.
The basic ideas in reforming the system are: to set up a gold market to replace the aforesaid planned management system. The main contents include: first, to cancel planned management of gold. set up a gold swap market in Shanghai in the form of a membership system. Second, to abolish the licensing management system for the business such as retail, wholesale, processing and management. Third, to relax control on gold imports in light of the process of foreign exchange system reform. Fourth, to establish and perfect new laws and regulations on gold circulation and management.
On this picture we can see the NSSF president Xie with the Mr Lawrence Fink, CEO of Blackrock, an investment fund, and LBMA associate, that offers a wide range of gold products for institutional investors.
Paulson & Co owns 10,000,000 shares of GLD, Blackrock owns 2,500,000 shares of GLD. Maybe the Chinese use these “agents” to redeem physical gold from the GLD inventory to sent to China.
Further research should point out how much the NSSF exactly has invested in gold related products..
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