Koos Jansen
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Koos Jansen
Posted on 12 Dec 2014 by

WGC Notes 2014 Chinese Gold Demand Could Reach 1,700t

On December 9, 2014,  Albert Cheng, Managing Director Far East of the World Gold Council, was interviewed by the China Gold Network. The interview was published in Chinese only.

The Gold Demand Trends published each quarter by the World Gold Council (WGC), show aggregated Chinese consumer demand Q1 – Q3 2014 was 638.4 tonnes. But, in the interview Cheng notes that the chairman of the Shanghai Gold Exchange (SGE), Xu Luode, has stated the SGE was supplied by 1,100 tonnes of gold import in the first eleven months of 2014 and this number may reach 1,250 tonnes by year end. Supplemented by 450 tonnes of domestic mine production this year “total demand should reach about 1700 tonnes”, said Cheng.

I have been long disputing Chinese gold demand numbers from the WGC, as total supply (Chinese net import, domestic mining and scrap) persistently has been transcending the WGC numbers. The WGC has never been able to elucidate the difference between massive supply and their demand numbers. The aggregated difference from 2007 until present is about 3,000 tonnes.

The total supply can be tracked on a weekly basis by SGE withdrawals, which have proven to be the best proxy. Though the import (and scrap) composition of SGE withdrawals can only be estimated until confirmed by the SGE or China Gold Association.

World Gold Council

And so I was surprised Cheng openly (in Chinese) elaborated on the SGE model and instead of solely talking about how much gold was sold at retail level, also expanded on how much gold is actually added to Chinese (non-government) gold reserves, measuring import and domestic mine production, that are prohibited from being exported from the mainland.

The next quote is translated by LK, gold investor from Hong Kong (who we all should be very thankful for his work!):

The China Gold Network: The recently published Q3 Gold Demand Trends report says that China’s gold demand is down year-on-year. How do you interpret this?

Albert Cheng: This year, the Q3 gold demand figure that we publish is down because last year’s gold demand was a special case. Given that last year compared to 2012 same time was up 40%, there really is nothing strange. However, if we compare this year’s Q3 figure to the average of the last 5 years at this time, we still find positive growth, and still up slightly compared to 2012.

Screen Shot 2014-12-12 at 1.48.22 PM

Using the numbers supplied by Xu Luode, they in fact show that China imported about 1100 tonnes of gold in the first 11 months this year through the SGE, and may reach 1200 to 1300 tonnes by year end. Adding together domestic production, total demand should reach about 1700 tonnes. So, the energy of the China gold market hasn’t diminished; compared to last year, the development is still healthy.

For clarity: the translator is a native Chinese speaker and a financial expert. The translation has been confirmed by a second native Chinese speaker and financial expert, which severely limits the probability of the Chinese text being misinterpreted.

As my regular readers know I often make estimates of Chinese net import using SGE withdrawals as a proxy. Last week I estimated China in the first 11 months of 2014 imported 1,200 tonnes, we now know now I probably overestimated gold import by 9 % (1,200 tonnes vs 1,100 tonnes).

In hindsight it’s always more easy to analyze. I think what happened is that in mid 2014 (March and June) a part of the SGE withdrawals supply composition shifted from import to scrap. If scrap went up, import went down, as:

SGE withdrawals = import + mine + scarp (neglecting stock-carry over)

Shanghai Gold Exchange withdrawals and premiums 2014

In the chart above we can see premiums going negative in March and June while withdrawals staying relatively strong. This means domestic supply (scrap) was increasing relative to import, hence the gold in China became cheaper than in London. The reason the discount isn’t immediately arbitraged is because gold in China is prohibited from being exported.

The dip in Chinese gold import was also reflected in export from Hong Kong to China mainland.

Hong Kong - China gold trade monthly January 2009 - September 2014

Because scrap apparently was more than I calculated in my model, I can now adjust the model. If from January until November import was 1,100 tonnes and mining was 413 tonnes, than scrap had to be 328 tonnes, as withdrawals were at least 1,841 tonnes in the mainland.

Additionally, elevated scrap means quite some Chinese have been selling physical gold that found its way to the SGE. Perhaps some were expecting the price to rise sooner. I don’t think elevated scrap signals leases were unwound; if a lease expires the lessee is most likely to buy gold on the SGE, it would not make sense for him to buy gold in the domestic market to bring to the SGE in order the repay the loan.

SGE withdrawals in week 49 have dropped by a whopping 28 % w/w, to 38 tonnes. Year to date withdrawals stand at 1,905 tonnes.

Screen Shot 2014-12-11 at 9.15.40 PM

However, when corrected by SGEI trading volume withdrawals in week 49 could have been as low as 27 tonnes, which was not expected for the seasonally strong December month. Year to date withdrawals corrected for SGEI volume is 1867 tonnes.

Shanghai Gold Exchange SGE withdrawals 2014 week 49, dips


Let’s wait what next week will bring to see if China will reach the 1,700 tonnes.

Koos Jansen
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  • philipat

    Thanks Koos, excellent new work. I still find it astounding that WGC will not accept what has now been acknowledged by official sources within PRC as being accurate data (SGE offtake) as an accurate record of wholesale demand. Not only that, but they will not produce a coherent statement as to WHY they do not accept these data. Underestimating demand constantly, in the face of official data to the contrary, seems to me like a very strange way for what is an Industry/Advocacy Organisation to operate.

  • doma

    I doubt the 450 tons domestic supply goes to domestic demand.This would mean
    all PBOC gold purchases are imported,nothing comes from domestic production.
    So either the PBOC are not buying gold or all the gold they do purchase comes
    from imports…..in which case where are the figures that support this?

    Bottom line imo,nobody is telling the truth here……with the WGC being the
    worst offender.

    • philipat

      It has already been confirmed by Koos, using reliable Chinese sources both on and off the record, that PBOC does NOT buy Gold for reserves on SGE. The reason is that PBOC wants to recycle and reduce USD/Treasury holdings into Gold. It can’t do that on SGE because it operates in RMB. PBOC buys Gold for reserves offshore.

      • doma

        You say the PBOC only buys imported gold from offshore reserves,
        care to say how many tons a year according to reliable chinese sources
        it buys?Where do these gold buys show up,WGC figures?
        Truth is nobody has a clue what the PBOC is doing or how much
        gold they have beyond the 1000 tons they have declared.
        Is anyone in officialdom reliable?:)

        • philipat

          No that is NOT what I said. What I said is that PBOC only buys Gold to add to its Official Gold reserves, not USING offshore reserves but using domestic USD/Treasury surpluses to buy Gold Offshore. That is very different.
          Also, you are confusing two entirely separate issues. As I noted in my original post, the WGC data for domestic wholesale consumption has no credibility in view of official Chinese data. But that is a matter of dispute regarding only domestic Chinese wholesale consumption.
          Either way, that data does NOT include PBOC purchases of Gold offshore (In USD) to add to official Gold reserves. You are correct to the extent that nobody really knows how much Gold PBOC is annually adding to Gold reserves. There are many different estimates but, taking everything into account, it would not surprise me if the figure was in the region of 500 Tonnes PA.
          And, again, this amount, whatever it is, is NOT included in the WGC data OR the Koos Jansen/China Gold Council figures which refer ONLY to domestic wholesale consumption.

          • doma

            If gold is a strategic goal of the PBOC why are they
            giving away 500 tons a year to their domestic market instead of keeping it for themselves.At 1000 tons in
            2009 & at your 500 tons per year guess,it would take
            until 2023-2024 to be on par with the US.
            Why not take the 500 tons of domestic supply & 500
            tons they supposedly source from the global supply per year & get to that 8,000 ton figure in 2016?
            Governments don’t operate that way,if all domestic
            supply is being made available to their people then
            the PBOC ALREADY has all the gold they want……..

          • philipat

            1. Gold mining Companies, even Chinese Gold mining Companies, need cash flow, especially with prices below the all-in sustainable cost of production.
            2. China has rather a lot of USD/Treasuries which it wants to convert into something more valuable.
            3. The fact is, that IS the way PBOC operates. If you don’t want to understand for whatever reason, that’s your call.

          • doma

            Fact is neither you nor i have any idea how the PBOC operates,how much Gold it is buying a year or if it
            already has all the gold it wants…….we are all just guessing:)

          • philipat

            So, is that your point? If so, it doesn’t really contribute much additional intellectual capacity to the debate, does it?

          • doma

            What is your point?That you can guess how much the
            PBOC is buying a year,that you can pretend to know how
            the PBOC operates in the gold market & that you can dress
            this up as intellectual debate?

  • Alb Einstein

    Very interesting as always. Presumably SGW withdrawals are down because some demand was brought forward due to the low prices in Nov? If so, the dip shouldn’t last too long; it will be interesting to watch the London GOFO rates once Chinese demand increases again.

    • doma

      The fact that GOFO rates are to be scrapped next month & the fact
      that the banks manipulate all rates & there is no consensus agreement
      on what negative GOFO actually means…..imo means GOFO
      rates are meaningless fwd.The bullion market is opaque because it’s mean’t
      to be opaque & will always be so even at €10,000 gold.

      • Alb Einstein

        Why scrap them if they are meaningless? :). The fact that they are, tells me that the recent negativity was real and there is a serious shortage in London during high demand periods. We may see this again IMHO, before they remove them later in Jan.

        • doma

          No…..removed because it removes another layer of
          transparency & adds another layer of opaqueness..:)

  • rowingboat

    Instead of needing to derive Chinese imports, we can read them directly from the customs data moving forward, currently available to September or October.
    Net imports from HK (636mt to Oct), from UK (65mt to Sept), Switzerland (153mt to Oct) and USA (4.5mt to Sept) = 858.5mt.
    When the full year data becomes available we’ll find these four sources are very close to Albert Cheng’s estimate of 1250mt, maybe accounting for >90% of imports in 2014.
    Koos, does Australia export directly to China as well or just via HK (129mt YTD)?

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