In an interesting development on Wednesday 12 September, the Shanghai Gold Exchange (SGE) launched trading of a new Chinese Gold Panda Coin contract on the SGE trading platform. With the addition of this listing, the SGE now offers physical trading of these famous Chinese gold bullion coins alongside its extensive range of physical gold bar and ingot trading contracts. As a reminder the Shanghai Gold Exchange is the largest physical gold exchange in the world, and nearly all gold in the Chinese gold market passes through the SGE.
Launched in 1982, the Chinese Gold Panda used to be produced in troy ounce weight denomination up until 2015 (such as 1 troy ounce and 0.5 troy ounce weights). Then from 2016 onwards, the Gold Panda switched to using metric weights, and is now produced in a 30 gram weights, 15 grams, 8 grams, 3 grams and down to a 1 gram weight. All Gold Panda coins have a gold purity of 99.9%. Chinese Gold Panda coins are produced by China Gold Coin Corporation which is fully-owned by China’s central bank, the People’s Bank of China. The actual fabrication of the Gold Panda coins takes place in Shenzhen Guobao Mint which is owned by China Gold Coin Corporation. China Gold Coin Corporation also coordinates marketing and distribution of gold panda coins on the international market.
Chinese Gold Panda coins are simultaneously legal tender in China as well as being known as commemorative coins. As the SGE said in its announcement announcing the new Gold Panda contract listing:
“The Chinese Panda Gold Coin is the legal currency of the People’s Republic of China issued by the People’s Bank of China (PBoC). It has the dual attributes of national authority and product investment.”
According to the SGE, trading of this new gold panda contract will expand the overall customer base of the Gold Panda, allow the Gold Panda coin to play a greater role in China’s investment gold market, and provide diversification benefits for investors, as well as centralise and improve price discovery for the coin. It will also crucially integrate the gold panda coin market into the wider Chinese gold market through the SGE.
Trading of the 30 gram Gold Panda Coin
Trading details of the new Chinese Gold Panda coin contract are as follows. The contract is a spot trading contract with a trading unit of 30 grams. The price is denominated in Yuan per gram. The minimum price movement is 0.01 yuan /gram. The lot size is 1 unit. The largest single bid quantity is 1000 lots. Delivery method is physical delivery, and delivery time is T+0, i.e. same day. Transactions are executed by matching the prices of buyers and sellers. Trading times for the Gold Panda contract are the same as SGE’s standard trading hours which as 9:00 – 11:30 (morning), 13:30 – 15:30 (afternoon), and a night trading session of 20:00 – 02:30 (i.e. 2.30 am the next morning).
Given that the new contract has a trading unit of 30 grams (which was the trading unit approved by the People’s Bank of China), this means that only the standard Gold Panda coins produced in either 2016, 2017 or 2018 would be eligible for trading, and only in the 30 gram weight. But for this contract listing, there are no different between release years, editions or imagery on the coins (2016, 2017 or 2018), and they are traded under the same contract.
Coins produced in 2015 or earlier, which were manufactured as 1 ounce Gold Pandas would not be eligible. Each year the Chinese Gold Panda bullion coins feature different imagery of pandas on the coin’s reverse of the coin, but with a consistent image of the obverse face of the coin, which is the Hall of Prayer for Abundant Harvests in the Temple of Heaven in Beijing. Examples of the 30 gram Chinese Gold Panda coin designs can be seen on the BullionStar website from 2018, from 2017 and from 2016.
Another factor which facilitated and eased an exchange listing, according to the SGE, is the fact that since 2012,Gold Pandas transactions have been exempt from VAT in China. For trading the new Gold Panda contract, this in practice means that those who are qualified for the Gold Panda’s tax exemption, including individual customers and institutional clients of the SGE can participate. Clients without such as tax exemption, can, according to the SGE, apply to China Gold Coin Corporation for tax exemption.
The first transaction in the new Panda Gold Coin 30g spot contract came in at 278.8 Yuan/gram when trading opened on 12 September. Trading data for the new contract, under the contract symbol ‘PGC30g‘ can be seen in the Daily Trading Report on the SGE website. An impressive 275 kgs of gold panda coins were traded on the first trading day 12 September, with a more modest 43 kgs of coins traded on the following day 13 September.
A Full Launch Ceremony – Chinese Style
On launch day, 12 September, the SGE and China Gold Coin Corporation held a full launch ceremony in Shanghai with speeches from senior PBoC, and SGE staff in front of 200 guests and assorted dignitaries from the Chinese government, Chinese commercial banks and representatives of the Shanghai Free Trade Zone. Short videos of 3 Chinese news reports covering the SGE’s launch ceremony for the Gold Panda contract can be seen on the SGE website’s media page, here and here.
Interestingly, one report on the launch ceremony, (translated from Chinese), concludes with the following paragraph:
“After the ceremony, the Shanghai Stock Exchange, the Shanghai Gold Exchange (SGE) and China Gold Coin Corporation signed a memorandum of cooperation on the development of the Panda General gold coin ETF. The Shanghai Stock Exchange and the Shanghai Gold Exchange signed a memorandum of understanding on Shanghai gold development cooperation.”
Does this mean a new Gold Panda backed Exchange Traded Fund (ETF) is in the works to be launched by the Shanghai Stock Exchange, Shanghai Gold Exchange (SGE) and China Gold Coin Corporation? It looks possible.
Two weeks prior to the launch on 29 August, the SGE also held a training seminar for the Gold Panda coin’s listing which was attended by 79 SGE member companies including commercial banks, securities dealers and bullion companies, which covered trading rules, delivery procedures for the coin (since it’s a physically delivered contract), and tax policy / tax exemption.
Lastly, a number of media reports about the new Gold Panda SGE contract claims that it’s the “only gold coin product in the world to be traded on an exchange market“. For example a report from China focused website GBTimes here states that. However, this is not true. In South Africa, the famous Krugerrand gold bullion coin is listed and trades on the Johannesburg Stock Exchange (JSE) for a long time now. As the JSE website states:
“The JSE offers trading in Krugerrands through a well-regulated secondary market and are traded in the same way as any listed Equity Market instrument, with prices being quoted on the various types (weights) of coin.”
Trading of Krugerands on the JSE is also documented in the South African gold market page of BullionStar’s Gold University gold market profiles.
So although the Gold Panda is not the first gold coin to be traded on an organised exchange, it is one of the few, and given the immensity of the Chinese Gold Market and the importance of the SGE, this development – of gold coin trading on the world’s largest physical gold exchange – is another evolution to watch in China’s constantly evolving physical gold market and should heighten the global profile of Gold Panda coins in other markets around the world.
With the first half of 2018 now behind us, it’s an opportune time to look at whats been happening in the Chinese Gold Market. As a reminder, China is the largest gold producer in the world, the largest gold importer in the world, and China’s Shanghai Gold Exchange is the largest physical gold exchange in the world.
For various reasons such as cross-border trade rules, VAT rules and deep liquidity, nearly all physical gold supply in China passes through the Shanghai Gold Exchange (SGE) vaulting network. These flows include imported gold, domestically mined gold, and recycled gold. Therefore, nearly all Chinese gold demand has to be met by physical gold withdrawals from the SGE, and SGE gold withdrawals are a suitable proxy for Chinese wholesale gold demand. Therefore, at a high level:
Physical Gold Supply to the SGE = SGE Withdrawals = Chinese Wholesale Gold Demand
Gold supply includes gold imports, mine supply, gold scrap / recycling and disinvestment. Disinvestment on the SGE is the reverse process of investment. Investment is when any institutional entity or individual purchases gold directly on the SGE. Disinvestment involves selling gold bullion which then goes to a refinery and re-enters the SGE vaulting network.
Wholesale gold demand includes consumer demand and institutional demand (direct gold purchases at the SGE). For a fuller explanation of this gold supply – demand equation as it applies to the Chinese gold market, see ‘Mechanics of the Chinese Domestic Gold Market’ on the BullionStar website.
SGE Gold Withdrawals in 2018
For the 6 months to the end of June 2018, physical gold withdrawals from the Shanghai Gold Exchange totalled 1038.4 tonnes. These flows represent gold which has actually been physically withdrawn from the network of SGE vaults across China. The monthly SGE gold withdrawal figures from January to June 2018 are as follows:
January 223.6 tonnes
February 118.4 tonnes
March 192.6 tonnes
April 212.6 tonnes
May 150.6 tonnes
June 140.6 tonnes
This withdrawal total, 1038 tonnes, is the third highest SGE withdrawal total on record for the first six months of any year of the SGE’s existence, only lower than the 1098 tonnes and 1178 tonnes recorded at the end of June 2013 and June 2015, respectively. The following chart highlights the cumulative Month 6 gold withdrawals from the SGE vaults, comparing all years from 2008 to 2018.
This year’s gold withdrawals to end of June, if annualised, would be 2076 tonnes, which would represent the fourth highest SGE gold withdrawals year on record after 2015, 2013 and 2014, in that order. All in all, SGE gold withdrawal figures year-to-date point to a very buoyant and healthy gold market in China and very strong wholesale gold demand, with volumes in line with the last 5 years.
Imports of Gold into China
Around the world, monetary gold (i.e. central bank gold) is exempt from customs and trade reporting when it moves across borders. Given this exemption, it is difficult to really know how much gold central banks (including the Chinese central bank, the PBoC) actually have at any given time.
Non-monetary gold is any gold that is not classified as monetary gold. Normally, non-monetary gold flows are estimable since there is no general exemption from customs and trade reporting. However, China is the exception, as it does not publish its gold import or export statistics. Therefore cross-border non-monetary gold trade flows involving China are more difficult to gauge than most. But it is still possible to gauge gold imports into China by looking at other countries’ gold exports to China.
During the year to date, Hong Kong and Switzerland, as expected, remained the two primary suppliers of non-monetary gold to China. Smaller direct suppliers of gold to China include the UK, Australia and the US. While Hong Kong remains the largest supplier of gold into China, China has been for a few years now, sourcing more gold directly from other countries and less gold via Hong Kong,
Looking first at Switzerland, for the first six months of 2018 from January to June, the Swiss supplied 274.7 tonnes of non-monetary gold into China. Specifically, 41.2 tonnes in January, a very large 67.2 tonnes in February, 39.6 tonnes in March, 26.6 tonnes in April, 38 tonnes in May and 62.1 tonnes in June. In fact, China topped the table as the largest single destination for Swiss non-monetary gold imports in every month from January to June 2018, ahead of India and Hong Kong.
If extrapolated on an annual basis, the 6 month flows would suggest Swiss gold exports to China of 274.7 tonnes from January to June would be roughly 550 tonnes for the full year. Comparing this to the full year 2017 when China imported 299.8 tonnes of non-monetary gold directly from Switzerland would suggest that a major change has occurred this year in the way the Chinese are sourcing their gold imports, with far more direct imports and less indirect imports from the interpot of Hong Kong.
According to Hong Kong’s Census and Statistics Department (HKCSD), Hong Kong net-exported 144.2 tonnes of gold to mainland China during the first 3 months of 2018. Extrapolating this on a 6 months basis would be about 290 tonnes, and 580 tonnes on an annualised basis. This would be a 7.5% drop compared to 2017 full year net gold exports from Hong Kong to China, but such a drop is to be expected as there is a trend of China is now engaged in more direct gold imports from destinations other than Hong Kong.
China sources gold directly from a number of other countries such as the UK, Australia, US and Canada. Together these other sources are still relatively insignificant as gold exporters to China compared to Hong Kong and Switzerland, but based on 2017 figures, together they may have sent about 30-40 tonnes of gold to mainland China during H1 2018.
Gold Production in China: 2018
Beyond gold imports, gold sourced from mining remains a critically important source of gold supply in China. According to the China Gold Association (CGA), China produced 98.22 tonnes of gold from mining in the first quarter of 2018, which was down 3 tonnes on Q1 2017. This comprised 80.8 tonnes from direct gold mining and 17.4 tonnes from extracting gold as a byproduct of other mining.
While the CGA has not yet published a gold mining output total for the second quarter of 2018 and its website has not yet been updated with such a news release, extrapolating the first quarter figure would suggest a Chinese domestic mining output figure of just less than 200 tonnes of gold for the first half of 2018 and about 400 tonnes for the full year.
Given that China produced 426.14 tonnes of gold during 2017, and the 2017 gold output total of 426.14 tonnes was itself 27.3 tonnes, or 6%, less than in 2016, it looks like 2018 will see another year of reduced gold production from the world’s number one gold producer. With continued buoyant demand from the Chinese gold market, these relative production shortfalls will have to be made up by larger gold imports or increased volumes of gold recycling.
Premiums of the Shanghai gold price to the international gold price have remained positive and steady throughout 2018, and generally low, except for a short period at the end of March. In price terms, SGE premiums during the year-to-date period have been recorded at between 1-2 Yuan per gram , or in percentage terms between 0.3% and 0.8%.
The positive premiums point to the attraction of sending gold from West to East, while the generally sedate levels of these premiums during 2018 indicate that there are currently no major supply constraints, such as tighter gold import rules, that could send the premiums higher into positive territory. Contrast this to late 2016, when the SGE gold price traded 2-3% higher than the international gold price, on the back of rumoured PBoC restrictions on gold import quotas and consignments that were said to be an attempt to control capital outflows.
With Chinese wholesale gold demand running at over 1000 tonnes for the first six months of 2018 as indicated by SGE gold withdrawals, China’s gold market has to principally meet this gold demand from the key supply sources of domestic mine production, gold imports and gold recycling and disinvestment.
For the year to date to end of June, we can assume that Chinese gold mining contributed about 200 tonnes to Chinese gold supply. Non-monetary gold imports, principally from Switzerland and Hong Kong, contributed another 560-580 tonnes. This would leave about 250 – 300 tonnes to be sourced from gold recycling and scrap through the SGE system and from disinvestment.
The London Bullion Market Association (LBMA) has just released a first update on the quantity of physical gold and silver holdings stored in the ‘LBMA’ London vaulting network. The LBMA press release explaining the move, dated 31 July, can be read here.
This vaulting network, administered by the LBMA, comprises a set of precious metals vaults situated in London that are operated by the Bank of England and 7 commercial vault operators. For simplicity, this set of vaults can be called the LBMA London vaults. The 7 commercial vault operators are HSBC, Brinks, ICBC Standard Bank, Malca Amit, JP Morgan, Loomis and G4S. ICBC Standard outsources its vault management to Brinks. It’s possible that to some extent HSBC also outsources some of its vault management to Brinks.
Strangely, the LBMA’s initial reporting strangely only runs up to 31 March 2017, which is 4-months prior to the first publication date of 31 July. This is despite the fact that new LBMA vault holdings data is supposed to be published on a 3-month lagged basis, which would imply a latest report coverage date of 30 April.
At the end of April 2017, the Bank of England separately began publication of gold vault holdings for the gold bars that the Bank stores in custody within its own vaults. The Bank of England reporting is also on a 3-month lagged basis (and the Bank actually adheres to this reporting lag). See BullionStar article “Bank of England releases new data on its gold vault holdings”, dated 28 April 2017, for details of the Bank of England vault reporting initiative.
Currently, the Bank of England is therefore 1 month ahead of the LBMA vault data, i.e. on 31 July 2017, the Bank of England’s gold page was updated with Bank of England gold custody vault holdings as of 30 April 2017.
Ignoring the LBMA 3-month lagged vs 4-month lagged anomaly, the LBMA’s first vault reporting update, for vault data as of 31 March 2017, states that the 8 sets of vaults in question (which includes the Bank of England gold vaults) held a combined 7449 tonnes of gold and a combined 32078 tonnes of silver.
Also included in the first batch of LBMA data are comparable London vault holdings figures for gold and silver for each month-end date from July 2016 to February 2016 inclusive. Therefore, as of the 31 July 2017, there is now an LBMA dataset of 9 months of data, which will be augmented by one month each month going forward. Whether the LBMA will play catch-up and publish April 2017 month-end and May 2017 month-end figures simultaneously at the next reporting date of 31 August 2017 remains to be seen.
The New Vault Data – Gold and Silver
For 31 March 2017, the LBMA is reporting 7449 tonnes of gold stored across the 8 sets of vault locations. For the same date, the Bank of England reported 5081 tonnes of gold held in the Bank of England vaults. Therefore, as of 31 March 2017, there were 2368 tonnes of gold ‘not in the Bank of England vaults’ (or at least 2368 tonnes of gold not counted by the Bank of England data).
Of the gold not in the Bank of England vaults, about 1510 tonnes of this gold in London was held by gold-backed Exchange Traded Funds (ETFs), mainly with the custodians HSBC and JP Morgan. These ETFs include the SPDR Gold Trust and various ETFs from ETF Securities, Source, iShares, and Deutsche Bank etc. This 1510 tonnes figure is taken from an estimate calculated at the end of April 2017 using data from the GoldChartsRUs website. See BullionStar article “Summer of 17: LBMA Confirms Upcoming Publication of London Gold Vault Holdings” dated 9 May 2017 for details of this ETF calculation.
Subtracting this 1510 tonnes of ETF gold from the 2368 tonnes of gold stored outside the Bank of England vaults means that as of 31 March 2017, there were only about 858 tonnes of gold stored in the LBMA vaults outside of the Bank of England vaults that was not held by gold-backed ETF holdings. See Table 1 below.
The lowest gold holdings number reported by the LBMA within its 9 months of vault data is actually the first month, i.e. July 2016. At month-end July 2016, the LBMA report shows total vaulted gold of 7283 tonnes. There was therefore a net addition of 166 tonnes of gold to the LBMA vaults between August 2016 and the end of March 2017, with net additions over the August to October 2016 period, followed by net declines over the November 2016 to February 2017 period.
Turning to silver, as of 31 March 2017, the LBMA is reporting total vaulted silver of 32,078 tonnes held in London vaults. The vaulted silver data also shows a notable increase over the period from the end of July 2016 to the end of March 2017, with a net 2485 tonnes of silver added to the vaults.
Since the Bank of England vaults only store gold in custody on behalf of customers and do not store silver, there are no silver holdings at the Bank of England and therefore there is no specific Bank of England silver reporting. The LBMA silver data therefore refers purely to silver vaulted with operators such as Brinks, JP Morgan, Malca Amit, HSBC, and Loomis.
There are currently at least 12,000 tonnes of silver stored in London on behalf of silver-backed ETFs such as the iShares Silver Trust (SLV), various ETF Securities products, a SOURCE ETF and some Deutsche Bank ETFs. Subtracting these ETF holdings from the full 32,078 tonne figure being reported by the LBMA would suggest that there are an additional ~ 20,000 tonnes of non-ETF silver held in the London vaults.
Previous Vault Estimates for Gold and Silver
Prior to the new LBMA and Bank of England vault holdings data reports, the only way to work out how much gold and silver were in the London vaulting network was through estimation. Between 2015 and 2017, a number of these estimates were calculated for gold and published on the BullionStar website and the GoldChartsRUs website.
The “Tracking the gold held in London” article, published on 5 October 2016, took a LBMA statement of 6500 tonnes of gold being in London, the earliest reference to which was from 8 February 2016 Internet Archive page cache, and also took a Bank of England statement that the Bank held 4725 tonnes as of the end of February 2016 period, and then it factored in that the UK net imported more than 800 tonnes of non-monetary gold up to August 2016, and also that ETFs had added about 399 tonnes over the same period. It also calculated, using GoldChartsRUS ETF data, that the London-based gold-backed ETFs held about 1679 tonnes of gold as of the end of September 2016.
Therefore, as of the end of September 2016, there could have been at least 7300 tonnes of gold held across the LBMA and Bank of England vaults, i.e. 6500 tonnes + 800 tonnes = 7300 tonnes. As it turns out, this estimate was quite close to the actual quantity of gold held in the LBMA and Bank of England vaults at the end of September 2016, which the LBMA’s new reporting now confirms to have been 7590 tonnes. The estimate is a lower number because it was unclear as to which initial date the LBMA’s 6500 tonnes reference referred to (in early 2016 or before).
Previous Vault Estimates Silver
At the beginning of July 2017, an article on the BullionStar website titled “How many Silver Bars are in the LBMA Vaults in London?” estimated that there were about 12,000 tonnes of Good Delivery silver bars held across 4 LBMA vault operators in London on behalf of 11 silver-backed Exchange Traded Funds. These ETFs and the distribution of their silver bars across the 4 vault operators of Brinks, Malca Amit, JP Morgan and HSBC can be seen in the following table.
The above article about the number of silver bars in the London vaults also drew on some data from precious metals consultancy Thomson Reuters GFMS, which each year publishes a table of identifiable above ground global silver supply in its World Silver Survey. One category of silver within the GFMS identifiable above ground silver inventories is called ‘Custodian Vaults’. This is distinct from silver holdings in ETFs and silver holdings in exchange inventories such as in COMEX approved vaults in New York. A simple way to view ‘Custodian Vaults’ silver holdings is as an opaque ‘unreported holdings’ category as opposed to the more the transparent ETF holdings and COMEX holdings categories.
For 2016, according to GFMS, this ‘Custodian Vaults’ silver amounted to 1571.2 million ounces (48,871 tonnes), of which 488.7 million ounces (15,200 tonnes), or 31% was represented by what GFMS calls the ‘Europe’ region. Unfortunately, GFMS do not break out the ‘Custodian Vaults’ numbers by individual country because they say that they receive the data on a confidential basis and cannot divulge the granularity. The early July article on BullionStar had speculated that:
“With 488.7 million ozs (15,201 tonnes) of silver held in Europe in ‘Custodian vaults’ that is not reported anywhere, at least some of this silver must be held in London, which is one of the world’s largest financial centers and the world’s highest trading volume silver market.”
“Apart from London, there would presumably also be significant physical silver holdings vaulted in Switzerland and to a lessor extent in countries such as Germany, the Netherlands and maybe Austria etc. So whats’s a suitable percentage for London? Given London’s extensive vaulting network and prominence as a hedge fund and institutional investment centre, a 40-50% share of the European ‘custodian vault’ silver holdings would not be unrealistic, with the other big percentage probably vaulted in Switzerland.
This would therefore put previously ‘Unreported’ silver holdings in the London vaults at between 6080 tonnes and 7600 tonnes (or an additional 182,000 to 230,000 Good Delivery Silver bars).
Adding this range of 6080 – 7600 tonnes to the 12,040 tonne figure that the 11 ETFs above hold, gives a total figure of 18,120 – 19,640 tonnes of silver stored in the LBMA vaults in London (545,000 – 585,000 Good Delivery silver bars).
But here’s the catch. With the LBMA now saying that as of the end of March 2017 there were 1.031 billion ounces of silver, or 32078 tonnes, stored in the LBMA vaulting network in London (and 31238 tonnes of silver in London as of end of December 2016), of which at least 12,000 tonnes is in silver-backed ETFs, then that still leaves about 20,000 tonnes of silver in the London vaults, which is higher than the silver total attributed to the entire ‘custodian vault’ category’ in Europe (as per the GFMS 2016 report).
Even the lowest quantity in the 9 months that the LBMA reports on, which is month-end July 2016, states that the LBMA vaults held 951,433,000 ounces (29,593 tonnes), which after excluding silver ETFs in London, is still higher than the total ‘Custodian Vault’ category that GFMS attributes to the European region in 2016.
These new LBMA vault figures are basically implying that all of the GFMS custodian vault figure for Europe (and some more) is all held in London and not anywhere else in Europe. But that could not be the case as there is also a lot of silver vaulted in Switzerland and other European countries such as Germany, to think of but a few.
This begs the question, does the GFMS Custodian vault number for Europe need to be updated to reflect the gap between the non-ETF holdings that LBMA claims are in the London vaults and what GFMS is reporting in a European ‘Custodian vaults’ category? If the LBMA reporting actually broke down the silver vaulting quantity number into Good Delivery silver bars and other categories, it might help solve this puzzle as it would give an indication of how much of this 32,000 tonnes of silver is in the form of bars that are accepted for settlement in the London Silver Market i.e. Good Delivery silver bars.
Could some of this 32,000 tonnes of silver be in the form of silver jewellery, and private holdings of silver antiques and even silver artifacts? On the surface the LBMA reporting appears to say not since it states that:
“jewellery and other private holdings held by retailers, individuals and smaller vaults not included in the London Clearing system are not included in the numbers”
But because this statement reads rather ambiguously, by implication another interpretation of the LBMA statement could be that:
“jewellery and other private holdings held by retailers and individuals in vaults that are part of the London Clearing system are included in the numbers”
The London Clearing system here refers to the vaults of the 7 commercial vault operators.
Until GFMS comes back with a possible clarification of its ‘Custodian Vault’ figure for Europe, then this contradiction between the LBMA data for silver and GFMS data for silver will persist.
Large Bars but also Small Bars and Gold Coins
According to the LBMA’s press release, while “the LBMA vault holding data …represent the volume of Loco London gold and silver held in the London vaults offering custodian services“, surprisingly the new LBMA data includes “all physical forms of metal inclusive of large wholesale bars, coin, kilo bars and small bars.”
The inclusion of gold coins, smaller gold bars and gold kilobars in the LBMA vault data is bizarre because only large wholesale bars are accepted as Good Delivery in the London gold and silver markets, not gold coin, not smaller bars, and not gold kilobars. Even the LBMA website states that “the term Loco London refers to gold and silver bullion that is physically held in London. Only LBMA Good Delivery bars are acceptable for trading in the London market.”
Furthermore, the entire physical London Gold Market and physical London Silver Market revolve around the LBMA Good Delivery lists. Spot, forward and options trades on the London OTC gold and silver market are only referenced to a unit of delivery of a Good Delivery bar, both for gold and for silver.
This is the London Good Delivery gold bar. It must have a minimum fineness of 995.0 and a gold content of between 350 and 430 fine ounces….. Bars are generally close to 400 ounces or 12.5 kilograms”
For silver, the same guide states that:
“Unit for Delivery of Loco London Silver
This is the London Good Delivery silver bar. It must have a minimum fineness of 999 and a weight range between 750 and 1,100 ounces, although it is recommended that ideally bars should be produced within the range of 900 to 1,050 ounces. Bars generally weigh around 1,000 ounces.”
Additionally, all the new London-based gold futures contracts launched by the LME, ICE and CME also reference, if only virtually, the unit for Delivery of loco London gold, i.e. the London Good Delivery gold bar. They do not reference smaller gold bars or gold coins.
In contrast to the LBMA , the COMEX exchange where the famous COMEX 100 ounce gold futures contract is traded only reports vault inventories of gold and silver where the bars satisfy that contract for delivery, i.e. the contract for delivery is one hundred (100) troy ounces of minimum fineness 995 gold of an approved brand in the form of either “one 100 troy ounce bar, or three 1 kilo bars”. COMEX do not report 400 oz gold bars or gold coins specifically because the contract has nothing to do with these products. Then why is the LBMA reporting on forms of gold that have nothing to do with the settlement norms of its OTC products in London?
Additionally, the LBMA website also states that “only bars produced by refiners on the [Good Delivery] Lists can be traded in the London market.“ All of this begs the question, why does the LBMA bother including smaller bars, kilogram bars and gold coins? These bars cannot be used in settlement or delivery for any standard London Gold Market transactions.
Perhaps these smaller gold bars and gold coins have been included in the statistics so as to boost the total reported figures or to make reverse engineering of the numbers more difficult? While the combined volumes of smaller bars and kilobars probably don’t add up to much in terms of tonnage, the combined gold coin holdings of central banks stored at the Bank of England could be material.
For example, the United Kingdom, through HM Treasury’s Exchange Equalisation Account (EEA), claims to hold 310.3 tonnes of gold in its reserves, all of which is held in custody at the Bank of England. The latest EEA accounts for 2016/2017, published 18 July 2017 state that “The gold bars and gold coin in the reserves were stored physically at the Bank’s premises.” See Page 43, Exchange Equalisation Accounts for details. Many more central banks, for historical reasons, also hold gold coins in their reserves. See Bullionstar article “Central Banks and Governments and their gold coin holdings” for some examples.
As another example, the Banque de France in Paris holds 2435 tonnes of gold of which 100 tonnes is in the form of gold coins, and 2,335 tonnes of gold bars. Even though these gold coins are held in Paris, this shows that central bank gold coin holdings could materially affect LBMA gold reporting that includes ‘gold coins‘ within the rolled up number. But such gold coins cannot be traded within the LBMA / LPMCL gold trading / gold clearing system and if present would overstate the number of Good delivery gold bars within the system.
The Bank of England gold page on its website also only refers to Good Delivery ‘gold bars’ and says nothing about gold coins, which underlines the special status to which the Bank of England assigns Good Delivery gold bars in the London Gold Market. Specifically, the BoE gold page states that:
“..we provide gold storage on an allocated basis, meaning that the customer retains the title to specific gold bars in our vaults”
“Values are given in thousands of fine troy ounces. Fine troy ounces denote only the pure gold content of a bar.
“We only accept bars which comply with London Bullion Market Association (LBMA) London Good Delivery (LGD) standards. LGD bars must meet a certain minimum fineness and weight. A typical gold bar weighs around 400 oz“
The Bank of England has now confirmed to me, however, that the gold holdings number that it reports on its website “is the total of all gold held at the Bank” and that this “includes coins that belong to the Exchange Equalisation Account (EEA) which are held by the Bank on behalf of Her Majesty’s Treasury (HMT)”
This means that the total gold number being reported by both the Bank of England and the LBMA needs to be adjusted downward by some percentage so as to reflect the amount of real Good Delivery gold bars in the London vaults. What this downward adjustment should be is unclear, as neither the Bank of England nor the LBMA break out their figures by category of gold bars versus gold coins.
LBMA numbers – Obscured Rolled-up numbers
Another shortcoming in the LBMA’s vault reporting is that it does not break down the gold and silver holdings per individual vault. The LBMA will be only releasing 2 highly rolled-up numbers per month, one for gold and one for silver, for example, 7449 tones for gold and 32078 tonnes for silver in the latest month.
Contrast this to New York based COMEX and ICE gold futures daily reporting, which both do break down the gold holdings per New York vault. Realistically, the LBMA was never going to report gold or silver holdings per vault, as this would be a bridge too far towards real transparency, and would show how much or how little gold and silver is stored by each London vault operator / at each London vault location.
This does not, however, stop the LBMA from claiming transparency and in its 31 July press release it states that:
“According to the Fair and Effective Markets Review (see here for further details) ‘…in markets where OTC trading remains the preferred model, authorities and market participants should continue to explore the scope for improving transparency, in ways that also enhance effectiveness.’“
Real transparency, as opposed to lip-service transparency, would be supported by providing an individual breakdown of the number of Good Delivery gold and silver bars stored in each of the 8 sets of vaults at each month end. If they want to include gold coins, smaller gold bars, and gold kilo bars as extra categories, then this could also be itemised on a proper report. It would also only take any decent software developer about 1 day to write and create such a report.
There is also the issue of independently auditing these LBMA numbers. The issue is essentially that there is no independent auditing of these LBMA numbers nor will there be. So there is no second opinion as to whether the data is accurate or not.
The Bank of England gold vault reporting is also short of transparency as it does not provide a breakdown of how much of the reported gold is held by central banks, how much gold is held by bullion banks, how much of the central bank gold is out on loan with the bullion banks, and how much gold, if any, is held on behalf of ETFs at the Bank of England as sub-custodian. Real transparency in this area would provide all of this information including how much gold the LPMCL bullion clearing banks HSBC, JP Morgan, UBS, Scotia Mocatta and ICBC Standard hold at the Bank of England vaults.
On the issue of ETF gold held at the Bank of England, it has been proven that at times the Bank of England has acted as a gold custodian for an ETF, for example, during the first quarter 2016, the SPDR Gold Trust held up to 29 tonnes of gold at the Bank of England, with the Bank of England acting in the capacity of sub-custodian to the SPDR Gold Trust. See BullionStar article “SPDR Gold Trust gold bars at the Bank of England vaults” for details.
The London Float
The most important question with this new LBMA vault reporting is how much of the 7449 tonnes of gold stored in London as of the end of March 2017 is owned or controlled by bullion banks.
Or more specifically, what is the total level of LBMA bullion bank unallocated gold liabilities in the London market compared to the amount of real physical gold bars that they own or control.
This ‘gold owned or controlled by the bullion banks’ metric can be referred to as the ‘London Float’. LBMA bullion banks can maintain their own holdings of gold bars which they buy in the market or import directly, and they can also borrow other people’s gold thereby controlling this gold also. Some of this gold can be in the LBMA commercial vaults. Some can also be in the Bank of England vaults.
In its press release, the LBMA states that:
“The physical holdings of precious metals held in the London vaults underpin the gross daily trading and net clearing in London.”
This is not exactly true. Only gold which is owned or controlled by the bullion banks can underpin gold trading in London. Allocated gold sitting in a vault that is owned by central banks, ETFs or investors and which does not have any other claim attached to it, does not underpin anything. It just sits there in a vault.
As regards gold bars stored in the LBMA vaults in London, these bars can either be owned by central banks at the Bank of England, owned by central banks at commercial vaults in London, owned by ETFs at the commercial vaults in London, owned or controlled by bullion banks, and owned by investors (either institutional investors, hedge funds, private individuals etc). On occasion, some ETF gold has at various times been at the Bank of England.
If central bank gold is held in allocated form and not lent out, then it is ‘off the market’ and can’t be ‘used’ by any other party such as a LBMA bullion bank. If central bank gold is lent out or swapped out to bullion banks, then it can be used or even sold by those bullion banks. The LBMA uses the euphemism ‘liquidity’ to refer to this gold lending. For example, from the LBMA’s recent press release on the new vault reporting it says:
“In addition, the Bank of England also offers gold custodial services to central banks and certain commercial firms, that facilitate central bank access to the liquidity of the London gold market.”
ETF gold when it is held within an ETF cannot legally be used by other entities since it is owned by the ETF and allocated to the ETF. Institutionally owned gold or private owned gold when it is allocated is owned by the holder. It could in theory be lent to bullion banks also.
Some of the LBMA bullion banks have gold accounts at the Bank of England. How many of these banks maintain gold holdings within the Bank of England vaults nobody will say, not the Bank of England nor the LBMA nor the bullion banks, but it at least extends to the 5 members of London Precious Metals Clearing Limited (LPMCL) which are HSBC, JP Morgan, Scotia Mocatta, ICBC Standard and UBS. Gold accounts for bullion banks undoubtedly also extend to additional bullion banks beyond the LPMCL members because many bullion banks have been involved in gold lending at the Bank of England for a long time, for example Standard Chartered, Barclays, Natixis, BNP Paribas, Deutsche Bank, and Goldman Sachs, and these banks would at some point have to take delivery of borrowed gold at the Bank of England.
Note, the gold brokers of the London Gold Market have for a long time, as least since the 1970s, been able to store some of their gold bars at the Bank of England vaults. These brokers were historically Samuel Montagu, Mocatta, the old Sharps Pixley, NM Rothschild and Johnson Matthey.
Since LBMA bullion banks can maintain gold accounts at the LBMA commercial vaults in London, and because some of these banks have gold accounts at the Bank of England also, then this London “gold float” can comprise gold bars at the commercial vaults and gold bars at the Bank of England vaults. It is however, quite difficult to say exactly what size this London bullion bank gold float is at any given time.
Whatever the actual number, its not very big in size because if you subtract central bank gold and ETF gold from the overall LBMA gold figure (of 7449 tonnes as of the end of March 2017) then whatever is left is not a very big quantity of gold bars, and at least some of this residual gold stored in the LBMA commercial vaults is owned by institutions, hedge funds, private individuals and platforms such as BullionVault.
In September 2015, a study of central bank gold held at the Bank of England calculated that about 3779 tonnes of Bank of England custody gold can be accounted for by central bank and monetary authority gold holdings. See “Central bank gold at the Bank of England” for details and GoldChartsRUs page “LBMA/BOE VAULTED GOLD, 2016 Update – The London Float”. Compared to the 4725 tonnes of gold held at the Bank of England at the end of February 2016, this would then mean that there were about 946 tonnes of gold at the Bank of England that was “unaccounted for by central banks”. This was about 20% of the total amount of gold held at the Bank of England at that time.
However, some of this 946 tonnes was probably central bank gold where the central bank owner had not publicly divulged that it held gold at the Bank of England. Many central banks around the world that were contacted as part of the research into the “central bank gold at the Bank of England calculation” either didn’t reply or replied that they could not confirm where their gold was stored. See BullionStar article “Central Banks’ secrecy and silence on gold storage arrangements” for more details.
After factoring in these unknown central bank gold holders at the Bank of England, the remaining residual would be bullion bank gold. It could therefore be assumed that a percentage of gold stored at Bank of England, somewhere less than 20% and probably also less than 10%, is owned by bullion banks. Since central bank gold holdings, on paper at least are relatively static, the monthly changes in gold holdings at the Bank of England therefore probably mainly reflect bullion bank gold movements rather than central bank gold movements.
If we look back now at the LBMA vault data for gold as of 31 March 2017, how much of this gold could be bullion banks (London float) gold.
LBMA total gold vaulted: 7449 tonnes
Bank of England gold vaulted: 5081 tonnes
Gold in commercial LBMA vaults: 2368 tonnes
Gold in ETFs: 1510 tonnes
Gold in commercial vaults not in ETFs: 858 tonnes
Gold in commercial vaults not in ETFs that is allocated to institutions & hedge funds = x
i.e. 7449 – 5081 = 2368 – 1510 = 858
Assume 10% of the gold at the Bank of England is bullion bank gold. Also assume bullion banks gold hold some gold in LBMA commercial vaults.
Therefore total bullion bank gold could be (0.1 * 5081) + (858 – x) = 508 + 858 – x = 1366 – x.
Since x has to be > 0, then the bullion bank London float is definitely less than 1300 tonnes and probably less than 1000 tonnes. The bullion banks might argue that they can borrow more gold from central banks, take gold out of the ETFs, and even import gold from refineries. All of these options are possible, but still, the London bullion bank float is not that large. And it is this number in tonnes of gold which should be compared to the enormous volumes of ‘paper gold’ trading that occur in the London Gold Market each and every trading day.
For example in June 2017, the LBMA clearing statistics state that 21 million ounces of gold was cleared each trading day in the London Gold Market. That’s 653 tonnes of gold cleared each day in London. With a 10 to 1 ratio of gold trading to gold clearing, that’s the equivalent of 6530 tonnes of gold traded each day in the London gold market, or 143,660 tonnes over the 22 trading days of June. Annualised, this is 1.632 million tonnes of gold traded per year (using 250 trading days per year).
And sitting at the bottom of this trading pyramid is probably less than 1000 tonnes of bullion bank gold underpinning the gigantic trading volumes and huge unallocated gold liabilities of the bullion banks. So you can see that the London gold trading system is a fractional-reserve system with tiny physical gold underpinnings.
In May 2011, during a presentation at the LBMA Bullion Market Forum in Shanghai China, on the topic of London gold vaults, former LBMA CEO Stewart Murray included a slide which stated that:
Investment – more than ETFs
Gold Holdings have increased by ~1,800 tonnes in past 5 years, almost all held in London vaults
Many thousands of tonnes of ETF silver are held in London
Central banks hold large amounts of allocated gold at the Bank of England
Various investors hold very substantial amounts unallocated gold and silver in the London vaults
The last bullet point of the above slide is particularly interesting as it references “very substantial amounts’ of unallocated gold and silver. Discounting the fact for a moment that unallocated gold and silver is not necessarily held in vaults or held anywhere else, given that it’s just a claim against a bullion bank, the statement really means that investors have ‘very substantial amounts‘ of claims against the bullion banks offering the unallocated gold and silver accounts i.e. very substantial liabilities in the form of unallocated gold and silver obligations to the gold and silver unallocated account holders.
If a small percentage of these claim holders / investors decided to convert their claims into allocated gold and silver, especially allocated gold, then where are the bullion banks going to get the physical gold to give to these converting claim holders? Neither do the claim holders of unallocated positions have any way of knowing how accurate the LBMA vault reporting is, because there is no independent auditing of the positions or of the report.
UBS and LBMA
The last line of the LBMA press release about the new vault reporting states the following:
This line includes an embedded link to the Teves report within the press release. This opens a 7 page report written by Teves about the new vault reporting. By definition, given that this report is linked to in the press release, it means that Joni Teves of UBS had the LBMA vault reporting data before it was publicly released, otherwise how could UBS have written its summary.
In her report, Teves states that a UBS database estimates that there are “1,485 tonnes of gold worth about $60bn and about 13,759 tonnes of silver worth about $7.85bn are likely to be held in London to back ETF shares“.
These UBS numbers are fairly similar to the ETF estimates for gold (1510 tonnes) and silver (12040 tonnes) that we came up with here at BullionStar, and so to some extent corroborate our previous ETF estimates. Teves also implies that some of the gold in the Bank of England figure is not central bank gold but is commercial bank gold as she says:
“let’s say for illustration’s sake that about 80% to 90% of BoE gold holdings are accounted for by the official sector.“
The statement on face value implies that 10% – 20% of Bank of England gold is not central bank gold. But why the grey area phrase of “let’s say for illustration’s sake”. Shouldn’t the legendary Swiss Bank UBS be more scientific than this?
Teves also says assume “negligible amount (in commercial vaults) comprises official sector holdings“, and she concludes that “this suggests that over the past year, an average of about 2,945 to 3,450 tonnes ($119-$139 bn) of investment-related gold was held in London.”
What she is doing here is taking the average of 9 months of gold holdings held in the LBMA commercial vaults (which is 2439 tonnes) and then adding 10% and 20% respectively of the 9 month average of gold held at the Bank of England (which is 506 and 1011 tonnes) to get the resulting range of between 2945 and 3451 tonnes.
Then she takes the ETF tonnes estimate (1485) away from her range to get a range of between 1460 and 1965 tonnes, as she states:
… “Taking these ETF-related holdings into account would then leave roughly around 1,460 to 1,965 tonnes or about $59bn to $79bn worth of gold in unallocated and allocated accounts as available pool of liquidity for OTC trading activities“
But what this assumption fails to take into account is that some of this 1,460 to 1,965 tonnes that is in allocated accounts is not available as a pool of liquidity, because it is held in allocated form by investors precisely so that the bullion banks cannot get their hands on it and trade with it. In other words, it is ring fenced. Either way, a model will always output what has been input into it. Change the 10% and 20% range assumptions about the amount of commercial bank gold in the Bank of England vaults and this materially alters the numbers that can be attributed to be an ‘available pool of liquidity for OTC trading activities’.
Additionally, the portion of this residual gold that is in ‘unallocated accounts’ is not owned by any investors, it is owned by the banks. The ‘unallocated accounts’ holders merely have claims on the bullion banks for metal that is backed by a fractional-reserve trading system.
In her commentary about the silver held in the London vaults, Teves does not comment at all about the huge gap between her ETF silver in London (which UBS states as 13,759 tonnes), and the full 32000 tonnes reported by the LBMA,and does not mention how this huge gap is larger than all the ‘Custodian Vault’ silver which Thomson Reuters GFMS attributes to the entire ‘Europe’ region.
The amount of gold in the London LBMA gold vaults (incl. Bank of England) that is not central bank gold, that is not ETF gold, and that is not institutional allocated gold is quite a low number. What this actual number is difficult to say because a) the LBMA will not produce a proper vault report that shows ownership of gold by category of holder, and b) neither will the Bank of England in its gold vault reporting provide a breakdown between the gold owned by central banks and the gold owned by bullion banks. So there is still no real transparency in this area. Just a faint chink of light into a dark cavern.
On the topic of London vaulted silver, there appears to be a lot more silver in the LBMA vaults than even GFMS thought there was. It will be interesting to see how GFMS and the LBMA will resolve their apparent contradiction on the amount of silver stored in the London LBMA vaults.
In 2016, withdrawals of gold from the Shanghai Gold Exchange totalled 1970 tonnes, the 4th highest annual total on record. This was 24% less than SGE gold withdrawals recorded in 2015, which reached a cumulative 2596 tonnes (See Koos Jansen’s 6 January 2017 blog at BullionStar “How The West Has Been Selling Gold Into A Black Hole” for more details of the 2016 withdrawals).
SGE gold withdrawals are an important metric in the physical gold market because SGE gold withdrawals are a suitable proxy for approximating Chinese wholesale gold demand. This proxy functions well because China’s domestic gold mining production, Chinese gold imports, and most Chinese gold scrap are all sold on the Shanghai Gold Exchange. As a reminder, gold withdrawals from the SGE means actual physical gold bars withdrawn from the SGE’s network of 62 approved precious metals vaults in 35 cities across China. (See “The Mechanics Of The Chinese Domestic Gold Market” for a discussion of why this proxy works).
2017 SGE Gold Withdrawals
Year-to-date, which now includes the first four months of 2017, SGE gold withdrawals have reached 727 tonnes, which annualized equals 2181 tonnes, and would make 2017 the 3rd highest SGE vault withdrawal year on record, and only slightly behind the 2197 tonnes of registered withdrawals from the Exchange’s vaults in 2013. And since SGE gold withdrawals are a suitable proxy for wholesale Chinese gold demand, it would point to 2017 shaping up to be one of the strongest years ever for physical gold demand in the Chinese gold market.
SGE Gold Withdrawals 2008 – 2017. The 2017 figure reflects January – April inclusive. Source:www.GoldChartsRUS.com
With two-thirds of the year still to play out, annualised estimates of year-to-date gold withdrawal figures will always be approximations and will change when each successive month’s figure is added.
For example, January 2017 gold withdrawals of 184.4 tonnes suggested an annualised withdrawal figure of 2213 tonnes. February’s withdrawals as per published SGE data came in at 179.2 tonnes, implying an annualised figure of 2182 tonnes. As monthly withdrawals increased in March to 192.2 tonnes, this edged the annual estimate up to 2224 tonnes. But coincidentally, April’s SGE gold withdrawal figure brought the annual estimate back to ~2182 tonnes. This was so because combined gold withdrawals for January and February exactly equaled combined withdrawals for March and April, in both cases 363 tonnes over the two consecutive two month periods.
January + February = 184+179 = 363 tonnes
March + April = 192+171 = 363 tonnes
There is also a data discrepancy worth pointing out with the Shanghai Gold Exchange’s gold withdrawal figures for 2017. This discrepancy relates to the fact that the monthly withdrawal numbers for the 4 month period from January to April do not add up to the cumulative gold withdrawal figure for 2017 as published elsewhere on the Exchange’s website.
SGE gold withdrawals for January to April inclusive summate to exactly 727.073 tonnes.
However, in the latest (April) edition of the SGE’s monthly “Data Highlights” report, which is published in English, it states that cumulative withdrawal volume inclusive of April totalled 771.973 tonnes, which is 44.9 tonnes higher than the figure implied by the summation of the 4 individual months’ figures.
This data discrepancy has been present in the ‘Data Highlights’ report each month since February. For example, at the end of February 2017, the combined monthly withdrawals of January (184.412 tonnes) and February (179.237 tonnes) were 363.649 tonnes, but the ‘Data Highlights’ report for February stated that the cumulative withdrawal total for those two months was 378.649 tonnes. This is exactly 15 tonnesmore than the two months combined would suggest. So, it seems that there is a data issue somewhere in SGE record keeping, especially given the rounded figure nature of the discrepancy number.
The SGE March report also had an error when the monthly totals for January – March pointed to gold withdrawals of 555.899 tonnes , while the March ‘Data Highlights’ listed cumulative gold withdrawals of 524.899 tonnes, in this case exactly 31 tonnesless than the summation of the 3 monthly figures would suggest. Again, the rounded figure nature of the discrepancy number suggests a data issue somewhere in the SGE reporting system.
Until the SGE clarifies the discrepancy, its best to go with the summation of the individual month’s withdrawal figures while awaiting feedback from the Exchange.
The above chart plots cumulative gold withdrawals for the 4 months to end of April compared to similar periods in previous years, and again shows that 2017 looks set to be one of the strongest years for Chinese gold demand on record. The cumulative gold withdrawals of 727 tonnes for the January to April timeframe are the 2nd highest ‘Month 1-4’ cumulative figure on record, with only 2015 higher, when the similar figure came in at 821 tonnes.
Beginning last November and persisting into December 2016, the SGE gold price and the International gold price (as expressed in Yuan) began to diverge with the SGE gold price trading significantly higher. This created a noticeable and rapidly rising premium in the SGE gold price, and at one point in mid December this premium was $40 per ounce higher than, or over 3% above the international gold price.
This phenomenon was at the time attributed to the introduction by the Chinese authorities of more stringent restrictions on gold imports in an effort to reduce currency outflows. For example, Reuters, citing trader sources, wrote on 9 December 2016 that China was “curbing gold imports in [a] bid to limit yuan outflow”.
There were also rumours in the gold market at that time that a number of banks that had been authorised to import gold into China had lost their import licences (or that their licenses had not been renewed), and that the People’s Bank of China was also becoming stricter on the quotas of gold that it would allow banks to import in a given consignment. However, when BullionStar asked the SGE about this in December, the SGE did not reply.
Only 13 banks are authorised to import gold into China, 10 of which are local Chinese banks, and the other 3 of which are the foreign banks HSBC, ANZ and Standard Chartered.
In theory, an expansion in the SGE price premium could have been caused by a combination of limited supply or higher demand, or both. The below chart for 2016 (lower panel) illustrates the emergence of this premium in early November, with the premium rising rapidly from less than 0.5% at that time to nearly 3.5% at one point in December, but still ending the year in the 2% range. The upper panel of the chart show that same phenomenon only in terms of the relative prices of the SGE and International gold prices.
In contrast, for the 10 months of 2016 that preceded November, the premium of the SGE price to the International price was persistently very low and static from January to October 2016.
Fast forwarding to 2017, the most interestingly observation of the SGE premium since the November-December timeframe is that although the premium dropped sharply in January from the 2% range down to the 0.4% range by January month-end, it resumed a uptrend in February before spiking up noticeably again during March to levels approaching those seen in November and December.
In the case of March, it appears that premiums rose again for the very same reason that was attributed to the sharp rise in late 2016, i.e. the re-emergence of supply constraints brought on by more stringent gold import restrictions. According to Reuters in an article on the subject dated 17 March in which it quoted a Hong Kong based trader saying that:
“imports are happening, but with some restrictions. The government has been doing this since November to control the capital outflows. Now, it is becoming a bit aggressive with stringent reviews”
“The quotas are reviewed regularly and extended on a case by case basis.”
Although premiums shrank after mid-March and returned to the 1% level, they oscillated in the 1% to 0.5% range until mid-April and since then have resumed a steady rise to the 1% level, which is a very different chart to the one that persisted for most of 2016.
It therefore seems that the impact of tighter import restrictions that appeared in November and December of last year and which the rising premiums reflected was not a transitory phenomenon but instead has become a persistent feature of the Chinese gold market.
And what does this say about the Chinese authorities’ plans to liberalise the Chinese gold market since more restrictive import quotas and rules appear to be doing the opposite by undermining some of the liberalisation steps that had already been underway?
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