Chinese gold demand remains very strong throughout week 46 (November 10 – 14), withdrawals from the vaults of the Shanghai Gold Exchange (SGE) accounted for 52 tonnes. The year to date counter has reached 1,761 tonnes.
Below you can see a screen shot of the Chinese weekly SGE report disclosing total withdrawals.
Since we have confirmation from the SGE about the exact rules for Chinese domestic banks on importing gold through the Shanghai International Gold Exchange (SGEI), we know for sure trading volume on the SGEI can distort Chinese wholesale gold demand measured by SGE withdrawals (which also include SGEI withdrawals).
Given the fact total SGE withdrawals are very strong tells us the Chinese are buying massive amounts of gold, of which most is imported. In contrast SGEI trading volumes are quite low, which suggests domestic banks do not import through the SGEI (I read from one domestic bank having imported 500 Kg through the SGEI).
Consequently I think SGEI trading is primarily done by foreigners in the Shanghai Free Trade Zone. All this volume is concentrated in the iAu9999 physical gold contract. Because this is a physical contract (100 % margin), and because of the low volumes, SGEI trading is not likely to be speculation, but simple physical buying. If these foreigners that buy physical also withdrawal the gold to ship it home or leave it in the SGEI vaults we don’t know.
By not knowing what happens on the SGEI, I think the best way of approaching Chinese wholesale gold demand is this: If we look at week 46, SGE total withdrawals were 52,260.2 Kg, SGEI volume was 1,478 Kg, meaning Chinese wholesale gold demand was in between 52,260.2 Kg and 50,782.2 Kg. This way year to date demand is in between 1,761 tonnes and 1,746 tonnes. Let’s stay conservative and use the bottom limit, which would have required 1,143 tonnes to be imported year to date, annualized 1,293 tonnes.
Using 1,143 tonnes as net imports year to date and 399 tonnes of mine supply, we can make the following estimate of total (public and private) Chinese gold reserves; 15,496 Tonnes. (click here for a detailed explanation of how I conceived this estimate.)
More proof on PBOC purchases was disclosed by Deutsche Bank (DB) recently. In a report about the Swiss gold referendum they stated:
Of course, the passing of the referendum could act as a signal for speculators to ‘front-run’ SNB purchases. This additional demand could drive up prices. But there have been a number of examples of publically flagged large-scale official gold transactions that have had a limited market impact. In the IMF example above, gold prices rose steadily despite the IMF being a reliable seller of almost 20 tonnes each month. In another example, the Chinese government’s open market purchases of roughly 500 tonnes per year have not prevented the gold price from plummeting in recent years.
Let’s not discuss the price of gold for a second, but focus on what DB states on PBOC demand, which has been 500 tonnes for the last couple of years. This is not exact or official data, but it is more confirmation the PBOC is buying such amounts every year. We know the PBOC does not purchase gold through the SGE, so these purchases are in addition of Chinese wholesale gold demand and strengthen the composition of the previous chart.
Silver on the Shanghai Futures Exchange (SHFE) is trading in backwardation since August 6.
The discount on silver in China mainland relative to London is near 7 %.
That’s it for this week’s China update. (I found some interesting things ‘on the ground’ here in Amsterdam regarding the repatriation of Dutch gold from New York by DNB, I think it’s in everybody’s interets I continue writing on that story.)