One of these weird things happened on Monday November 3, 2014, in the gold space. I published an article in which I reported gold demand in China, measured by withdrawals from the vaults of the Shanghai Gold Exchange (SGE), was exceptionally strong in recent weeks. In week 43 SGE withdrawals accounted for 60 metric tonnes of gold (SGE withdrawals have proven to be the best indicator for Chinese wholesale demand, confirmed by SGE officials). Additionally, I hinted at the fact the Chinese continue to buy more gold whenever the price drops, and the price has been dropping for the past two weeks.
Gold prices in Shanghai normally carry a premium to global prices, but that reversed to a rare discount Monday. The premium, which is attributable to capital controls, was $2 to $3 an ounce to London prices about a week ago.
…“You would not have expected Shanghai gold to be at a discount,” said a leading Hong Kong-based executive with an international bank, who didn’t want to be identified. “The physical buying in gold has dried up.”
Unusually, prices on the Shanghai Gold Exchange, the world’s biggest platform for physical trade, are at a discount of around $1 an ounce to the global benchmark, slipping from premiums of $1-$2 an ounce last week.
Both these mainstream media are stating SGE gold was trading at a rare discount on November 3, 2014. First of all, an SGE discount isn’t rare at all, it happens all the time. This is incorrect information from the mainstream media.
Second, SGE gold wasn’t trading at a discount on November 3, 2014.
I have two data feeds for charting SGE gold premiums. One is from the SGE itself, published in their weekly Chinese reports, the other one I use is from Sharelynx.com, which has setup an automated Excel sheet for me that daily updates many quotes I track. The next chart is based on the numbers from Sharelynx, updated until November 4, 2014:
As you can see on November 3 the SGE physical contract Au9999 was trading at a premium to London spot (I also double checked the premium manually). The discount reported by the mainstream media is incorrect information.
In the next chart we can see SGE premiums are correlated to SGE withdrawals. Which makes sense as the Chinese buy more gold when the price drops (exhibit 1) and SGE premiums go up when the gold price drops (exhibit 2).
More from Reuters November 3, 2014:
Since all physical gold trade in China goes through the exchange [SGE], it is seen as a reliable barometer of Chinese demand.
First, the withdrawal data reflects the actual gold wholesales in China. In 2013, the total gold withdrawal from the SGE vaults amounted to 2,196.96 tonnes. The President of the SGE Transaction Department said: “This 2,200 tonnes of gold, after leaving our vaults, they entered thousands of Chinese households in the form of jewelry and investment purchases.”
Though Reuters acknowledges all physical gold trade in China goes through the SGE, they refuse to publish the numbers on how much is going through (SGE withdrawals). I think it’s weird mainstream media never report on SGE withdrawals, or the significance of these numbers. If Reuters would have reported on SGE withdrawals on November 3, it would be impossible to commingle with a story of weak Chinese gold demand.
When I first found out about SGE withdrawals in May 2013 I’ve written emails to many mainstream media (Bloomberg, the Financial Times, the Guardian, Reuters, etc.). Hereafter, both Reuters and Bloomberg reported about SGE withdrawals once (that I know of). Bloomberg, 15 July 2013:
The Shanghai Gold Exchange supplied 1,098 metric tons in the six months through June, compared with 1,139 tons for the whole of last year, according to data from the bourse today.
Reuters on 18 October 2013:
Physical deliveries from the Shanghai Gold Exchange totaled 1,709.056 tonnes as of Friday, data on the exchange’s website showed.
After these publications Bloomberg and Reuters stopped reporting on SGE withdrawals. (please comments below if I’ve missed any mainstream media publications on SGE withdrawals).
Reuters reporting on weak Chinese gold demand while SGE withdrawals have been sky high in recent weeks, reminded me of an older article from Reuters. From September 12, 2014:
India’s love affair with gold may be over, as prices slide
Kiran Laxman Salunkhe used to buy jewellery during religious festivals, but sliding gold prices have led the young farmer to break with his family’s traditional investment.
This year Salunkhe has deposited his hard-earned savings at the bank for the first time in a decade…
…”Nowadays it is risky to keep jewellery. Burglaries are rising,” he said. “With a fixed deposit there is no risk.”
That’s right, Reuters’ headline literally stated “India’s love affair with gold may be over”, because Kiran Laxman Salunkhe, a young farmer, stopped buying gold. India’s population is over 1.2 billion people and I’m not so sure if they all stopped buying gold in September to open up a bank account.
Recently India’s custom department came out with the gold import numbers from September (when Kiran Laxman Salunkhe stopped buying gold). India officially imported, excluding smuggling, 94 tonnes of gold, which was the strongest month since June 2013. The indians imported this much gold despite the 10 % import duty.
Of course India’s love for gold is part of their culture and is engraved into the DNA of the Indian population. Reuters’ headline and article in itself were ridiculous. The fact that India actually imported more gold in September than they had over a year makes the article completely incorrect.
Can it be Chinese gold demand is currently very strong, despite the WSJ quotes a leading Hong Kong-based executive with an international bank, who didn’t want to be identified, stating: “The physical buying in gold has dried up”? Yes it can.
I always wonder why the mainstream media notes gold premiums denominated in dollars, according to my logic it’s better to note this in percentages. Imagine, for example, the price of gold falls to $200 dollar an ounce in three months, or rises to $4,000 an ounce. What then does a $2 dollar premium in Shanghai tells you when reading back the WSJ article of November 3? Percentages would work much better IMVHO.
It probably has got something to do with the USD hegemony; the more the USD is used as the ultimate measure of value, the longer everyone will believe it is. In my world all goods, services, assets and currencies constantly fluctuate in value relative to each other. Over the long term, though, gold has proven to have to most stable exchange rate against goods.