On this blog I’ve repeatedly questioned the Chinese gold demand figures from the World Gold Council, or “the global authority on gold” as they call themselves (which is weird when you think about it, how can any institution be the global authority on gold?). In 2013 Chinese wholesale gold demand was 2197 tonnes, though the World Gold Council claims demand was 1066 tonnes. All their arguments that should explain the difference appeared to have been untenable after researching them.
Most people on this planet who have an interest in gold simply copy the demand numbers from the WGC. The consequences of the world being misinformed on this subject is hard to comprehend.
It’s my belief the WGC continues to spread erroneous information, therefor I will continue to share where I disagree. Let’s begin with what happened in the first quarter of this year. In the WGC’s quarterly report covering Q1 2014 they state Chinese gold demand was 278.1 metric tonnes. However, in Q1 Hong Kong net exported 287.2 tonnes to the mainland and Switzerland 74.9 tonnes, on top of this Chinese domestic mining was 96.5 tonnes. This adds up to 458.6 tonnes. Domestic mining and net import from only two countries was 458.6 tonnes, yet demand as disclosed by the WGC was only 278.1 tonnes. Again there is a disparity (of at least 180.5 tonnes).
The way how I measure Chinese (wholesale) demand is by looking at Shanghai Gold Exchange (SGE) withdrawals. Because in China all imported and mined gold is required to be sold through the SGE first and the bars that leave the SGE vaults are not allowed to return to these vaults, SGE withdrawals equal Chinese wholesale demand (and thus; total supply equals SGE withdrawals equals total demand). In Q1 2014 withdrawals accounted for 564.2 tonnes, which means 105.6 tonnes (564.2 minus 458.6 ) was supplied by additional import and scrap. From this end the numbers always make sense.
Back to the WGC. In their Gold Demand Trends Q1 2014, they come up with several arguments that should validate their figures on Chinese gold demand. Confirming they have some explaining to do on the discrepancy between the huge amount of apparent supply and their demand figures, just like in their prior report China’s Gold Market: Progress and Prospects (published April 15, 2014). However, the more arguments they present the more contradiction, confusion and misinformation is being communicated. I’ll go through all the arguments the WGC presents in both reports and share my point of view, as concise as I can.
Gold Trade Flows
From page 14, Gold Demand Trends Q1 2014:
Trade flows: illustrated last year when gold flowed out of western ETFs, through refineries in Switzerland and to consumers in the East, official trade data can provide insights into global gold flows. Global Trade International Services provide access to a wide range of countries’ trade data and we also monitor individual countries’ trade data, particularly from the Hong Kong Census and Statistics Department. However, looking purely at trade data can be misleading. It can include scrap, doré and concentrates, which would be captured in supply rather than demand. Nuances such as ‘round-tripping’ can affect the data too. So, while trade data plays a valued role in informing a view on global gold flows, it is an imperfect measure of gold demand.
Sure, trade data can be misleading, but it helps if we look at right numbers. The Hong Kong Census and Statistics Department makes a clear distinction between scrap and gold in other forms. They categorize commodities according to SITC Rev. 4 (Standard International Trade Classification, Rev. 4). The 287.2 tonnes Hong Kong net exported to the mainland in Q1 2014 did not contain scrap.
Is it possible net gold export from Hong Kong to the mainland contains doré and concentrates? It’s possible, but it can’t explain the difference we’re after. The WGC stated in China’s Gold Market: Progress and Prospects, on page 49:
Only banks with PBOC-issued import licenses can import gold. They can only import LBMA good delivery bars and these must be traded through the SGE.
This statement is incorrect, it should be: “Only banks with PBOC-issued import licenses can import gold. They can import gold bars made by LBMA-approved refiners that meet SGE specifications and these bars must be traded first through the SGE”. Gold bar import into China is conducted by 12 commercial banks that hold a PBOC license, though anew approval has to be granted for every shipment. The general manager of Malca-Amit Precious Metals, a global gold vaulting and transportation company that has many bullion bank clients, said the following in November 2013 (1:40):
Currently gold being transported to China is imported only by local banks. A lot of the times the gold is being parked out of China, and only transported and shipped into China when needed.
Gold bullion is being parked into Hong Kong. After the banks get approval from the PBOC it’s imported into the mainland. Most of the 400 ounce London Good Delivery bars that since 2013 were exported from the UK to Switzerland, where it was remelted into 1 Kg 9999 bars, were at first shipped to and parked in Hong Kong before entering the mainland. Hong Kong serving as a depot. Hence my supposition Hong Kong primarily exports gold bars to the mainland. I can’t think of a reason why doré and concentrates, from Chinese owned overseas mines, would be imported into the mainland via Hong Kong.
The gold Switzerland net exported to the mainland in Q1 2014 is even less likely to be doré or concentrates. Switzerland is well known for its refining capacity, not for its gold mines. Everything that comes out of Switzerland is bullion. The Swiss categorize commodities according to HS 2007 (Harmonized System, click to compare HS to SITC), which is more specific than SITC. We can read from their trade reports the gold does not contain powder. In general gold bullion is traded under HS code 7108 globally.
The WGC also mentions round ripping as a cause that distorts trade numbers, which should explain the difference we’re after. This is false, I’ve written two extensive posts (#1, #2) on why round tripping has got nothing to do with the Chinese domestic gold market, Chinese gold demand or SGE withdrawals.
In China’s Gold Market: Progress and Prospects, page 56, the WGC wrote:
Moreover, because nearly all gold flowing into China goes through the SGE, round-tripping can inflate the SGE delivery figures.
This is simply not true, please read my previous posts on this subject. The WGC even admitted round tripping has got nothing to do with Chinese demand in email correspondence.
In the Gold Demand Trends report they stated on page 14:
At a country level, we monitor figures released by official institutions and trade bodies which can give an insight into local gold demand. For example, we examine the Shanghai Gold Exchange withdrawal figures and China Gold Association demand figures…
The WGC mentions SGE deliveries and withdrawals in two separate reports. (i) I hope they know the difference. (ii) If they watch SGE withdrawals why not publish these numbers and inform the world on the significance of these numbers. This is essential information regarding the Chinese gold market. Why is the WGC reluctant to cover these essentials?
Gold Stock Changes
From the WGC, Gold Demand Trends, page 14:
The number denoted as OTC investment and stock flows encompasses a number of elements, including: gold deposit accounts; stock changes that have yet to be identified; transactions in the relatively opaque OTC market; spot and forward products; as well as any statistical residual.
Chinese spot and froward products are traded in the Chinese domestic gold market. It doesn’t make the amount of supply any less. Stock increases could absorb some supply that doesn’t meet retail demand. However, the accumulative difference between wholesale and retail demand (2007 – 2013) was 2000 tonnes. Why would any jeweler or the mint add anymore stock in Q1 2014 when supposedly they already have this much in stock? And why doesn’t the WGC count gold purchased by an individual investor through a gold deposit account as demand. These are popular investment products in China. Just have a look on the website of China’s largest bank ICBC.
PBOC Gold Purchases
In China’s Gold Market: Progress and Prospects the WGC speculates apparent supply (net import, domestic mining) may have been purchased by the PBOC. According to my analysis “all net import we can see” is not being bought by the PBOC. The trade reports from the Hong Kong customs (and the UK and Switzerland) are very clear in describing the gold that is being exported as NON-MONETARY. The PBOC has a strong incentive hiding their purchases, that is not to affect the market. Why would the PBOC insist their purchases to be declared by any customs department around the world while they can easily import gold without anyone seeing it?
Chinese law dictates domestically mined gold is required to be sold first through the SGE, where all gold is quoted in renminbi. I don’t think the PBOC does gold purchases on the SGE while it can exchange their surplus US dollars overseas for gold, killing two birds with one stone; getting rid of some of their exorbitant US dollars reserves and purchase physical gold for all the obvious reasons.
The chairman of the SGE, Xu Luodo, said on May 15, 2014, at the Fourth Commercial Bank Gold Investment Forum, that China net imported 1540 tonnes in 2013 and his exchange has nearly 8000 institutional investors and 5 million individual investors. Institutional investors can include pension funds and alike, this explains very well where all the SGE withdrawals end up and the difference we’re after. I haven’t come across any Western mainstream media outlet that reported on these statements from Xu, though numerous Chinese media have covered it, to date you can only read it in English on this blog.