Tag Archives: Xu Luode

What Happened To The Shanghai International Gold Exchange?

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.

Shanghai Gold Exchange SGE withdrawals delivery 2015 week 45

Please make sure you’ve read The Mechanics Of The Chinese Domestic Gold MarketChinese Gold Trade Rules And Financing Deals Explained, Workings Of The Shanghai International Gold Exchange, and SGE Withdrawals In Perspective.

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.

However…

Using SGE withdrawals as a measure for Chinese gold demand can be 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 out most 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).

Screen Shot 2015-11-29 at 1.46.15 pm
Courtesy SGE.

Some analysts, including myself, thought the SGEI was dead. But it isn’t.

SGEI contracts bullionstar
In June OTC iAu9999 volume transcended a whopping 170 tonnes a week.

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 a contract (iAu9999) at the SGEI is exchanged, four things can happen (in the context of this investigation):

  1. The gold stays in the vault.
  2. The gold is withdrawn and stored elsewhere in the SFTZ.
  3. The gold is withdrawn and imported into the Chinese domestic gold market.
  4. 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.

iAu9999 OTC

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.

Screen Shot 2015-11-30 at 12.22.52 am
Courtesy Zauba.

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. 

The Basic Mechanics Of The Chinese Domestic Gold Market

This post is part one 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 this gigantic physical gold market.

The largest physical gold market globally is presently the Chinese domestic gold market. At the core of this market is the Shanghai Gold Exchange.

China is the largest gold importer and mine producer globally, and because nearly all of these supply channels in the domestic market flow through the center bourse, as a consequence the infamous Shanghai Gold Exchange (SGE) is the largest physical gold exchange currently in existence. The yearly amount of physical gold withdrawn from the SGE vaults has exceeded 2,100 tonnes since 2013.

Whilst Western consultancy firms like the World Gold Council and Thomson Reuters GFMS report annual Chinese gold demand is roughly 900 tonnes, we can read in reports by inter alia the China Gold Association (CGA) that annual Chinese gold demand equals SGE withdrawals and is thus more that twice as much as is portrayed in the West. The difference (between GFMS demand and SGE withdrawals) can only in part can be explained by contrasting metrics.

In this post we’ll 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 the level of true Chinese gold demand.

Kindly note, the definition of SGE withdrawals changed late 2014. 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)

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 teh PBOC to monitor the gold traded in the Chinese market, and (iiii) keep track of the amount of physical gold added to Chinese (non-government) gold 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 in order to support China’s internationalization.

For this 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)
  • 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
Screenshot from the China Gold Market Report 2011.

All the English reports were available on the SGE website until 2014, but now have been taken offline. Nowadays most information is only published in Chinese print.

Introduction

Prior to 2002 the Chinese gold market was practically non-existent. Back then the PBOC had the monopoly in trading gold in China and Chinese 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 direct interference of the PBOC in 2007. In the CGA Gold Yearbook 2007 we can read:

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,比2006年增长了48.02%,低于供给增长率8.82个百分点。

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

From 2002 until 2007 Chinese 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 total Chinese gold demand, according to the metrics used by the CGA used in the Gold Yearbooks published in Chinese. From 2012 until present SGE withdrawals roughly match total Chinese gold demand.

SGE foreign exchange gold system
Shanghai Gold Exchange, China Foreign Exchange Trade System

There are a few basic rules with respect to the Chinese domestic gold market that determine why SGE withdrawals equal Chinese (wholesale) gold demand, these rules compound to the mechanics of this market. The first we’ll discuss are import rules.

Gold Imported Into China

Gold bullion import into the Chinese domestic gold market can be done by banks that enjoy approval by the PBOC, though for every shipment anew approval must be submitted at the Chinese central bank. Bullion export from the Chinese domestic gold market is prohibited as far as is publicly know. At this stage there are fifteen banks that have been approved by the PBOC (in random order):

  1. Shenzhen Development Bank / Ping An Bank
  2. Industrial and Commercial Bank of China
  3. Shanghai Pudong Development Bank
  4. Agricultural Bank of China
  5. China Construction Bank
  6. Bank of Communications
  7. China Merchants Bank
  8. China Minsheng Bank
  9. Standard Chartered
  10. Bank of Shanghai
  11. Industrial Bank
  12. Bank of China
  13. Everbright
  14. HSBC
  15. ANZ

All bullion imported into the Chinese domestic gold market by one of the fifteen banks is required to 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 of 50g, 100g, 1Kg, 3Kg or 12.5Kg, with a fineness of 9999, 9995, 999 or 995. Solely standard gold is allowed into SGE designated vaults to be traded through the SGE system. The Chinese gold trade rule book states [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.

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 apply. For import of doré, ore and jewelry into the domestic market different rules apply than for standard gold; in this form other entities than banks can import the metal, if approved by the PBOC, though export is prohibited.

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, like 200 gramme bars, is traded in the Chinese domestic gold market it is exempt from VAT. These VAT rules incentivize wholesale gold supply to be traded in the form of standard gold through the SGE system.

The Chinese Mint has an exception to export golden Panda coins from the Chinese domestic gold market and to my knowledge there are also a few  jewelry companies that are allowed to trade gold products in and out of the Chinese domestic market, but the tonnage is insignificant.

Chinese domestic gold market VAT rules.

Individuals can freely import and export 50 gram when traveling abroad. However, the rules aren’t very stringent on the import side. Many mainland tourists visit Hong Kong to buy jewelry and bring as much bracelets as they like across the border when they return home.

Chinese Gold Mining

China has the largest domestic gold mine production in the world with an output of roughly 450 tonnes in 2015. The vast majority of this output is sold first through the SGE. All Chinese gold miners are required to sell their standard gold over the SGE. The next quote is from China Gold International Resources Corp. Ltd. [page 15, brackets added]:

On October 30, 2002, the Shanghai Gold Exchange commenced operation under the supervision of the State Council. Thereafter, the PBOC ceased its gold allocation and gold purchase operations. All PRC [People’s Republic of China] gold producers are now required to sell their standard gold bullion through the Shanghai Gold Exchange, and prices of gold on the Shanghai Gold Exchange are determined by market demand and supply, which essentially converge with the price of gold in the international market.

In addition, 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 SGE has the best liquidity in China, and thus gold mining companies are extra incentivized to cast their output in standard gold bars and sell on the SGE. However, miners are allowed to sell non-standard gold or gold products off-SGE. For example China National Gold Group (China Gold) is a miner that also has its own physical stores to sell bars and ornaments.

China National Gold Group store
China Gold store

Scrap And Disinvestment Supply In China

When it comes to measuring scrap and disinvestment it gets a little more complicated, as our sources (GFMS, CGA) for this data  do not use the same nomenclature and metrics. GFMS usually uses term scrap for old jewelry and industrial products, but this excludes disinvestment. The CGA uses the terms recycled gold and scrap supply inconsistently for all other supply flows next to import and mine production.  Shortly, we’ll make a distinction between CGA, GFMS and BullionStar metrics.

First, all scrap and disinvestment and alike in the Chinese domestic gold market has a strong incentive to flow through the SGE because of the VAT rules regarding standard gold and liquidity. Scrap and disinvestment is not required to be sold through the SGE, yet many refineries cast standard gold that is exempt from VAT on the SGE, and thus most finds its way to the center bourse.

Below is a picture of a 100 gram standard gold bar:

SGE bar small hi-res
SGE standard gold bar 100 gram

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 Number. 

Now we will establish the significance of differentiating scrap and disinvestment and alike. Because in economics 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. With this knowledge we’ll have a more precise look at this topic

  1. The first is genuine scrap, as defined above, which is old gold products (jewelry or industrial) sold for cash and therefor true supply having an effect on the gold price. These scrap flows are included by both the CGA and GFMS in their “scrap” numbers.
  2. The second is disinvestment. Individual and institutional investors in China buy gold directly at the SGE. If later in time the bars are sold back they can be send directly through a refinery and then making their 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. Disinvestment (in my nomenclature) are included by the CGA in their “scrap” numbers, but not by GFMS.
  3. The third kind is recycled gold (again, this is my nomenclature). Recycled gold can be for example process scrap, which is metal spill over from jewelry or industrial fabrication. 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 back to the SGE. Effectively the 200 Kg have been recycled through the SGE, being both demand and supply, having no net effect on the price. Process scrap is not included in GFMS data. Next to process scrap there can be other forms of gold being recycled through the SGE, which we’ll all label as distortion (distortion is recycled gold).

In the (CGA) Chinese annual gold reports mentioned at the beginning of this post, scrap, disinvestment and distortion flows are all counted in one category, labelled by the CGA as “scrap supply”. In contrast, GFMS only measures scrap and not disinvestment  . This partially explains the difference in Chinese gold demand.

As supply and demand are always equal, when CGA metrics measure more supply, logically they measure more demand as well. When, later on, we’ll estimate true Chinese gold demand, we should subtract distortion from SGE withdrawals

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 the SGE vaults they leave the chain of integrity. To prevent fraud, hereafter, these bars are not allowed to re-enter the SGE vaults. The only way they re-enter the SGE is if they’re recast into new bars by an SGE approved refinery. From the SGE’s Detailed Rules for Physical Delivery of the Shanghai Gold Exchange we can read:

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. Read point 2 of a considerations segment from an ICBC gold product:

ICBC SGE rule gold bars

This rule is essential for comprehending the mechanics of the Chinese domestic gold market.

SGE Withdrawals Equal Chinese Wholesale Gold Demand 

Let us use some equations to clear our view of this market. If we put together the rules mentioned above we can understand the basic formula for the Chinese domestic gold market:

SGE withdrawals = Chinese Wholesale Gold Demand

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

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

But as mentioned before distortion blurs our view of demand (it has no net effect on the price). So distortion has to be subtracted from SGE withdrawals

And…

True Chinese gold demand = Import + Mine + Scrap + Disinvestment

Chinese Wholesale Gold Demand = True Chinese gold demand + Distortion

example-chinese-domestic-gold-market-sd-x
Chart 1.

Please note, in the supply and demand balance shown above, and in our further investigation, two elements are left out. On the supply side I left out stock carry over in SGE vaults from previous years, as this information is not publicly available. On the demand side I left out gold bought at the SGE that was not withdrawn from the vaults, as this information is also unknown.

The formula is supported by reports from the CGA and SGE since 2007, as every year SGE withdrawals equal total (wholesale) gold demand in these documents. Let’s have a look at CGA demand data and SGE withdrawals since 2007:

2007: SGE Withdrawals 363.2 Tonnes

Screen Shot 2015-03-12 at 4.54.58 PM
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
CGA Gold Yearbook 2007: framed in red is total demand in Kg’s (363.19365 Kg)

2008: SGE Withdrawals 543.2 Tonnes 

SGE Annual Report 2008, total SGE withdrawals in Kg's
SGE Annual Report 2008, total SGE withdrawals in Kg’s
Screen Shot 2015-03-11 at 10.59.54 AM
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
SGE Annual Report 2010, total SGE withdrawals in Kg’s
China Gold Market Report 2010, total demand in tonnes
China Gold Market Report 2010, total demand in tonnes

2013: SGE Withdrawals 2197 Tonnes

Screen Shot 2015-03-12 at 9.25.07 AM
SGE Monthly Report December 2013, framed in red is total 2013 SGE withdrawals in Kg
CGA Gold Yearbook 2013 demand
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
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

Chinese wholesale gold demand as disclosed in Chinese reports by the CGA is the widest measure of demand. Western consultancy firms like GFMS use different metrics, resulting in lower supply and demand figures. Though, contrasting metrics can not explain the full difference, which has aggregated to 5,030 tonnes from 2007 until 2015. In this post we’ll briefly discuss contrasting metrics, which explain the difference in part, a succeeding post is dedicated to an extensive study on these metrics and how we can measure genuine Chinese gold demand.

Shanghai Gold Exchange SGE withdrawals yearly vs GFMS demand 2007 - 2015
Chart 2: The difference in all its simplicity.

In the supply and demand tables above we could see the difference was labeled as net investment (in the CGA Gold Yearbook 2013 at 1,022.44 tonnes), which is calculated by the CGA as a residual between what is withdrawn from the SGE vaults and gold sold at retail level (jewelry shops and banks). GFMS does not include net investment on its demand balance, but merely includes the gold sold at retail level. Net investmentwhich roughly equals the difference, is caused by direct purchases from individual and institutional customers at the SGE that withdraw their metal (also see chart 3 below).

Wang Zhe Chairman & President of the wrote in 2010:

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.

The quote above clearly states that in 2010 direct purchases at the SGE by individual clients (266 tonnes) already exceeded retail bar investment (142 tonnes).

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

Screen Shot 2015-03-11 at 7.19.46 PM
Source: China Gold Market Report 2008

When a physical SGE gold contract is exchanged the full amount of funds is transferred from the buyer’s Margin Account to seller’s Margin Account, the gold 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
Source: China Gold Market Report 2011

The SGE has almost 10,000 institutional and over 8.3 million individual clients, next to 183 domestic members and 63 international members such as banks and refineries. Naturally, the metal withdrawn from the SGE vaults by individual and institutional clients is not sold at retail level (jewelry shops and banks).

Since early 2016 there is even an SGE smartphone application called “Yijintong” that allows anyone with an internet connection to open an SGE account and trade directly on the SGE wholesale platform enjoying the lowest spreads in China.

Any individual can buy bullion directly at the SGE, the only reason he or she would buy gold in a jewelry shop is because these bars are decorated and come in all sorts of shapes and sizes. Obviously, large investors would not buy retail gold but prefer relatively cheaper SGE bars.

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

I should mention, the CGA discloses Chinese gold demand for the English speaking world excluding net investment, to make it appear demand is far lower than it is in reality. From Reuters on Chinese gold demand 2013:

Gold consumption in China grew to 1,176.40 tonnes last year, with jewellery demand climbing 43 percent to 716.50 tonnes and bullion demand soaring 57 percent to 375.73 tonnes, the China Gold Association said on its website.

Jewelry and bar demand is exactly the same as in the screen shot from the CGA Gold Yearbook 2013 above, but net investment is excluded. Why the widest measure of the Chinese gold market is hidden from the English speaking world is left for speculation.

I shall give another example that confirms 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 by me]:

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.”

…when we asked why the China Gold Association’s number is so low [demand disclosed without net investment], 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.”

Needless to say, the people that run the SGE, CGA, PBOC and SHFE are all related. Depending on the occasion these people choose to disclose net investment, and thus the true size of the Chinese gold market.

Let us briefly have a look at the compositions of the difference. In the chart below we can see apparent Chinese gold supply (import + mine + GFMS scrap = center column) versus SGE withdrawals and GFMS demand. Obviously, what is being supplied in the Chinese gold market is far more than what the GFMS reports as demand.

Chinese domestic gold market S&D 2015
Chart 3.

The gap between the height of the centre columns (apparent supply) and the red columns (SGE withdrawals) is something that will be discussed in following post.    

A legitimate reason that explains part of the difference (SGE withdrawals – GFMS demand) is stock inventory change. There is always gold in transit from being withdrawn from SGE vaults by jewelry and industrial fabricators to being sold at retail level. This is wholesale stock inventory is not being counted by GFMS as demand as this is likely hedged in the futures market and thus has no net effect on the gold price. Stock inventory change can’t make up the full difference between SGE withdrawals and consumer gold demand, but is part of distortion

In 2013 GFMS wrote me net investment is solely stock inventory change. Of course this can’t be true. When confronting them with all the evidence I had collected they wrote me:

GFMS:

We have checked with our Data Specialist and confirmed that we use a different methodology. Total Chinese demand used by Thomson Reuters GFMS only include jewelry, physical bullion bars/coins and all industrial demand. Any stock movement change (which is essentially the item 6 net investment) will not be included as underlying demand.

Me:

So according to you net investment is “stock movement change”? This would be gold added to the stocks from jewelers, the mint, industrial companies, etc? (this is a few hundred tons each year!)

GFMS:

That’s correct based on the resolution provided by our data specialist.

The World Gold Council (WGC) has tried to explain the difference in two reports released in 2014 dedicated to the Chinese gold market, which both contained fallacious and self-contradictory statements. Up until now the WGC and GFMS have presented very weak arguments that should explain the difference.

For this post we’ll wrap it up. In short, there are several metrics to measure Chinese gold demand:

  • Gold sold at retail level = GFMS gold demand
  • Import + mine = net gold added to Chinese (non-government) reserves
  • Import + mine + scrap = the lowest measure of Chinese gold demand
  • Import + mine + scrap + disinvestment = true Chinese gold demand
  • SGE withdrawals = total wholesale gold demand

SGE chairman, Xu Luode, said at the LBMA conference in 2014 [brackets added by me]

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, of which 200 tonnes was recycled gold.

Typically, Xu likes to measure import + mine as Chinese gold demand as this is the amount of gold added to Chinese (non-government) reserves. I prefer to consider all metrics to have the best understanding of the Chinese domestic gold market and keep track by how much Chinese reserves are increasing.

SGE Chairman: India Will Become SGE’s Largest Partner

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.

28874_500x500
Governor of the central bank of China (PBOC) Zhou speaking at the opening of the Shanghai International Gold Exchange.

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:

Xu Luode 21. 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 Asia gold 2comparative 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.

Does The PBOC Purchase Gold Through The Shanghai Gold Exchange?

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).

Torgny Persson, chief executive officer of BullionStar.com who attended the LBMA Forum in Singapore, wrote me:

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:

Shanghai Gold Exchange and ICBC precious metals department delegates at LBMA Forum Singapore 2104.

Shanghai Gold Exchange and ICBC precious metals department delegates at LBMA Forum Singapore 2104.

Over the phone Mr Yang told me:

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.

SGE Withdrawals 36 MT in Week 25, YTD 920 MT

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.

Schermafbeelding 2014-06-29 om 16.09.44
Header: weekly quotes

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.

Schermafbeelding 2014-06-30 om 16.18.41

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.

Chinese calender versus Westren calender
Source: Wikipedia

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.”

Shanghai Gold Exchange withdrawals 2014 week 25

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 – 计交割量) is the total YTD.

Schermafbeelding 2014-06-29 om 16.10.47

SGE Chairman: China Should Become First Class International Gold Market

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.

2007 to 2013, Xu was president of China UnionPay, a bankcard association established under the approval of the State Council and the People’s Bank of China, where he gained experience to internationalize a Chinese financial institution. China UnionPay is one of the world leaders in payment services, reaching 3.5 billion people in over 30 countries.

October 2013, Xu was appointed as the chairman of the SGE and vice president of the China Gold Association. In December 2013 he announced the SGE international board.

According to this article Xu also currently holds a position at the China Society For Finance And Banking, China Numismatic Society and the Payment And Clearing Association of China.

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)

Dai op SGE
December 2013. Left: Dai Xianglong, PBOC governor from 1995 until 2002, the man who initiated the reform of the Chinese gold market during the tenth five year plan. Right: Xu Luode, SGE chairman.

Translated by Soh Tiong Hum:

Xu Luode: China Should Become First Class International Gold Market

2014/5/16

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.

Shanghai Gold Exchange International Board Another Blow To US Dollar

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 dumps record amounts of US treasuries

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:

The Shanghai FTZ can be considered as a Customs Specially Supervised Area, which I have written about extensively on these pages. Gold imported into the FTZ is not allowed to enter the Chinese marketplace without a PBOC permit. A Chinese trader in the mainland can not sell its physical gold to an international trader, for which it would be exported out of the mainland. To export gold out of the mainland there is a PBOC permit required. From what I’ve read, The structure of the Chinese domestic physical gold market will remain in tact after the launch of the SGE international board. Source

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 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.

Was Xu appointed as SGE chairman in October 2013 to launch the SGE international board? Who knows

Heraeus Precious Metals Sales Director Kevin Crisp visits SGE Chairman Xu Luode, 2014
One of the largest gold refineries Heraeus Precious Metals’ sales director Kevin Crisp visits SGE Chairman Xu Luode, February 18, 2014

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.

SGE foreign exchange gold system

SGE Physical Delivery 2073 Tons YTD, 50 Tons From 9-13 December

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.

Source: SGEUSGS

For more information on SGE delivery read thisthisthis and this.

Shanghai Gold Exchange gold withdrawn from vault week 50, 2013

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.


Shanghai Gold Exchange withdrawals from vault week 50

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.

SGE premiums week 50, 2013 

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.

SGE premiums week 50

In Gold We Trust

SGE foreign exchange gold system

New Chairman SGE: Huge Potential For Gold Investment

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

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:

Xu on 8th China gold summit 2013

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.

From  Caijing:

…the goal is to build Shanghai into an international gold exchange trading market with global influence.

More from Caijing:

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”.

Dai op SGE

Dai in 2001:

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.

SGE foreign exchange gold system

Dai is currently chairman of a pension fund in China, The National Council For Social Security Fund. Can it be Dai is investing in physical gold bars (1 K 4 nines) for his fund?

This picture was taken on November 28, 2012. On the left Alan Greenspan, currently chief advisor for John Paulson’s gold investments, on the right Dai Xianglong.

Dai Greenspan

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.

Xie Blackrock

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..