Dec 092015

In July I did a post on How much gold does China really have? which looked at the rate China was accumulating gold reserves based on their occasional announcements of how much gold they had. Extrapolating out their average monthly rate of 8 tonnes gave the chart below, which projected to 2,186 tonnes by the end of 2020.


Since then China has begun to report its gold reserves every month and has accumulated 86 tonnes in five months – an average of 17.2 tonnes. That is a lot more than their previous rate and you can get a better idea of the acceleration if I update the chart above with the new reserves figures and then project that rate into the future.


If China keeps at this rate then it will have 2,792 tonnes by the end of 2020, which is 606 more tonnes than I initially estimated. In my previous post I noted that official reserve additions plus commercial bank additions seemed to average 45% of monthly flow of gold into the Chinese market (that is, imports and newly mined domestic gold). The chart below shows these two estimates in green and blue.


What is interesting is that the average of the green and blue over the May 2009 to June 2015 (the two dates where reserves were announced) comes out at 17.1 tonnes a month (the red dotted line) which is very close to the average Chinese accumulation rate of 17.2 tonnes (the purple dotted line) since July 2015. The average of the June 2011 to June 2015, a period where inflows into China increased significantly, is 20.5 tonnes, which is close to the two largest monthly additions to China’s reserves.

These figures would seem to imply that now that China is reporting its reserves it can accumulate officially at the rate it was doing so unofficially in the past. Of course that theory implies that Chinese commercial banks would no longer be adding to their gold inventories, which seems unlikely as long as the gold market in China is developing and expanding. On the other hand, as financing trades unwind possibly the commercial banks are reducing inventories and this is being absorbed into official reserves.

I would also note that the above analysis assumes China adds to its reserves by sourcing from the domestic market only. Koos Jansen is of the view that China is acquiring 400oz bars from overseas markets. I do not discount that this may occur but my view is that even if done via the Bank Of China as Koos speculates (and I think that is the most likely candidate) such buying would be obvious to the Western bullion banks. If PBOC via BOC gold buying was consistent and ongoing I think it would make them prey to traders and hence my view would be that any such activity would be sporadic and tactical, taking advantage of times when western gold market demand was weak. As we receive more data over the next year on China’s reserves, commercial bank stock, imports and mining we should be able to confirm which theory is correct.

Nov 052015

Last week I was in Sydney for the Precious Metals Investment Symposium. While the turnout was down on last year (surprising as the Australian gold price has been performing but I suppose people just look at the US price) the speaker turnout was excellent. For me the standouts were opening speaker John Butler, Keith Weiner and Jayant Bhandari. The presentations by Keith and Jayant were complimentary, with Keith covering his idea of yield purchasing power and how low interest rates were resulting in people eating their seed corn, and Jayant explaining why countries like India are so interested in gold (zero yield is better than negative yield), forecasting that the West is headed in the direction of negative yields/capital destruction.

On Monday night Mark from Gold Stackers roped me into helping him with the launch of the Back to the Future coins, which involved me putting on white coveralls and a wig to “act” as Doc Brown in a skit (emphasis on the double quotes around the word act). It was all good fun but thankfully I have not seen any pics of our attempt at acting circulating on the internet.

Tuesday night saw the Precious Metal Award Gala Dinner at which I was humbled to win the ‘Maggie’ Bullion Award, which is named in honour of an Australian coin dealer known for her exceptional focus on customers, who died unexpectedly last year.

Last night I recorded an interview with Dale Pinkert at FXStreet, covering a wide range of topics including:

  • bitcoin
  • personal vs third party storage
  • banning of gold in safety deposit boxes
  • manipulation
  • German repatriation
  • Chinese gold accumulation
  • price expectations for gold and silver

Towards the end I also discussed why gold has not responded to recent geopolitical and economic events, which is based on my view that everyone has a different level of trust in the politicians and central bankers to keep things under control.

China will save us

 Posted by at 10:02 pm  China, Narratives
Oct 162015

I have a lot of respect for Michael Kosares of bullion dealer USAGOLD but his recent commentary has a bit of the “China will save us” meme which has been around for many years and had its fullest expression in the Pan Asian Gold Exchange farce.

Michael notes the upcoming launch of a benchmark gold price by the Shanghai Gold Exchange and increasing involvement of Chinese banks in the setting of the London Price benchmark and says that “as a result, China’s influence in the gold market, already a key factor, should increase markedly and that “Chinese banks in London will be on the constant lookout for arbitrage opportunities that can be purchased and shipped to their home country”, concluding that “in this new gold market, China, perhaps inadvertently, will act as a proxy for gold coin and bullion owners all over the world” (my emphasis).

The tense of these comments – “increase markedly”, “will be”, “new” – implies that somehow China is not currently influencing the market to the fullest extent and involvement in benchmark pricing will help. This is just not the case. The Chinese government has approved all of its major banks to import gold and these banks have been very active in the kilobar market for many years now, something that the Perth Mint has experienced first hand.

As proof, consider this chart of the SGE premium. If there was any consistent restriction on China importing and impacting on the physical spot market this premium would not be near zero. Every week the Perth Mint offers 5 tonnes or so of physical gold to the market and we have rarely had a problem with banks, Chinese or otherwise, not being interested on bidding on it.


Yes, there have been periods where premium develops, often due to demand surges which clear out onshore inventories and then the banks scramble for new supply from refineries worldwide, but the chart shows that in the long run the premium reverts back to more modest levels. As Adrian Ash of BullionVault says “it’s the Shanghai premium which, thanks to the magic of profit-seeking capitalism, draws in metal from abroad” – arbitrage is doing its thing.

So it isn’t a case that “China will likely serve as a foil to the current paper-based pricing regime” as Michael says, China already is serving as a foil.

Jul 272015

On Friday I posted on the messaging China may have been sending with its central bank gold reserves announcement. Today I will update this analysis from 2012 to estimate how much gold the Chinese government unofficially holds and how much the population holds. I estimate that the total amount of gold in China is approximately 10,950 tonnes, with the population holding 6,490t, commercial banks holding 2,060t and the government, officially and unofficially, holding 2,400t.

How much gold is in China?

Koos Jansen estimates the total amount of gold within China at 13,781 tonnes. In large part the difference between Koos’ figure and mine is due to Koos assuming that the Chinese held about 2,500t of jewellery prior to 1994. In my 2012 post I quoted a source that notes that after the revolution all gold held by citizens, and gold mined, went to the government and was used to pay for imports. The analysis that follows does not rely on this total stock figure to work out official and other government gold holdings but it does affect the balance the population holds. If you agree with Koos then you can add the 2,500t to my 6,490t estimate of private stocks.

Where does China buy its gold?

It is my view that Chinese government acquires gold both domestically and from overseas, that all of it is held with China, and that any imports are reported in customs figures. Koos disagrees with this, arguing that as we see no figures in the customs category “monetary gold” from any country reporting gold exports to China, and since all SGE transactions are non-official, the government must be buying its reserves gold from overseas and importing it without having it declared.

I agree with Koos that “the PBOC buys gold in utmost secret or it would influence the market and geo-politics” and that they may make overseas purchases, but I find it hard to believe that China can dictate to the customs department of another country that their gold exports should not be reported at all (which would draw attention to the movement and negate secrecy). I also find it hard to believe that the PBOC would buy in its name from the overseas markets. It would be impossible to hide such activity from Western bullion banks and secure carriers and the information would leak out eventually, even if it could get the movements not reported in customs figures.

In my opinion, if the PBOC did not want to buy from domestic sources, it would request a Chinese commercial bank or a sovereign wealth fund to acquire gold in their name, import it as “for non-monetary purposes” and then get them to hold it until the PBOC wanted to officially acquire/report it. This method blends any PBOC purchases in with general gold importation flow, providing the secrecy it requires. As Huang Guobo, Chief Economist at SAFE, noted: “private demand for gold purchases is actually large but it is fragmented and intangible, and it is conducted through multiple channels and by multiple subjects that have less influence on the market, so this is more efficient in terms of the gold trade”, by which I take “more efficient” to mean “minimise price impact and maximise secrecy”.

Secondly, China does want its gold reserves to have some believability. If it was importing gold without any customs reporting, then Western analysts would have no basis on which to determine whether the reported reserves existed. By acquiring gold via reported imports (albeit in non-monetary form) and domestically, it allows the sort of analysis I will do below, which means that reported Chinese gold reserves can be assessed as to their reasonableness.

Koos also argues that the PBOC mostly buys gold from overseas. In Koos’ quote of the announcement, it says the purchases occurred “through various domestic and international channels … major channels of accumulation include: purifying domestic gold scraps and gold of various grades, direct purchase of production, transaction in domestic and foreign markets”.

I think the mention of “domestic” twice and the specific forms indicates that the purchasing was not solely from overseas sources. If it was mostly from overseas why mention all that detail? I note this Telegraph article where it says that a “division of the People’s Liberation Army mines gold and transfers the metal to the Chinese finance ministry, acting outside normal commercial channels. The government also buys gold directly from Chinese producers.”

Accordingly, I believe that the PBOC or its non-official arms could easily purchase from the domestic market without negatively affecting their policy of private gold accumulation. Indeed, during temporary slumps in the domestic market, non-official purchases could be a way of supporting the local mining industry and avoiding deep discounts within China to the London price.

How much is China buying?

In yesterday’s post I presented the chart below.


It makes a simple extrapolation between the dates of the official reported gold reserves figures (in red). The green area therefore represents an estimate of accumulation of gold by non-official Chinese organisations, which was then moved into official stocks at the date of reporting.

The chart below graphs this red/green accumulation from the chart above as a percentage of the monthly flow of gold into the Chinese market (that is, imports and newly mined domestic gold).


Notice that in the early years China was officially acquiring around 45% of all the flow of gold into the Chinese market. The percentage then declines from Jan 2003 (when China reported 600t of gold reserves) because the level of imports and mining increased greatly while we are assuming that the PBOC “gradually accumulated” during that period. While the accumulation was probably not in a straight consistent line, it nevertheless shows in general how little of China’s gold flow was being accumulated by the PBOC.

However, my green line is only an assumed official accumulation based on reported reserves. No doubt there has been other non-official accumulation but the question is how much of China’s gold flow is it reasonable of the Chinese government to have acquired without restricting its stated policy of encouraging private accumulation?

To answer that I turn to some estimates made by Matthew Turner, Senior Analyst at Macquarie Group (see this tweet) on how much gold Chinese commercial banks hold, based on their annual reports (see chart below).

If I add these figures (with some extrapolation back from 2007 to 2003) to our percentage flow chart, we get the following.


This I think is interesting, as it implies that as the Chinese commercial banks expanded their gold lending (mostly to domestic gold manufacturers to support the increasing jewellery and investor demand), naturally the government had to restrict its own acquisitions (in percentage terms, not in ounces) to ensure that a reasonable amount of gold was reaching the domestic market.

You will note that the purple line seems to run very much at the 45% rate that applies prior to 2003 (the red line). Does this constitute an official policy, namely that the Chinese government aims for the private citizens to accumulate 55% of gold flows? Pure speculation on my part and possibly reading too much into a pattern on a chart, but the best basis I think on which to make an estimate of unreported non-official gold accumulation.

If I then assume a policy of no more than 45% of gold flows into government (in the broadest sense) stocks, any time the purple line falls below 45% could be points at which other Chinese government organisations are accumulating gold. On this basis I produce the chart below.


The dark blue “Unreported Non-Official Accumulation”, which totals 745 tonnes by June 2015, is the calculated plug figure, if you will, to make government accumulation equal 45% of Chinese gold flow. Adding this to the official reserves gives a figure of 2,403t. If one wants to consider government controlled gold stocks in its broadest sense, then adding the commercial banks stocks gives you a figure of 4,460t.

It is possible that the PBOC leases some of its gold reserves to its commercial banks, in which case there is some double counting. However, if the 45% thesis is correct, then all that would do is increase the “Unreported Non-Official Accumulation” figure.

I would also note that this analysis does not include any gold purchased overseas and held overseas. This is a possibility but one that I give a low probability to because it means that China is taking on some exposure to Western banks to hold their gold for them and also because, again, it would be unlikely that such information would not leak out to Western governments, negating any strategic privacy that China may wish to have with respect to its gold activities.

One final chart, which takes the data in the chart above and expresses it as a percentage share of all gold within China.


This demonstrates the “sharing” of China’s gold stocks between the government and its people and that “the policy of ‘gold held by the people’ has been well achieved”.

Jul 242015

I don’t want to pick on Societe Generale analyst Robin Bhar, as this was representative of most of the commentary around China’s gold reserves announcement, but the statement that the 1,658 tonne figure “was not unexpected. If anything, it was slightly surprising that it wasn’t more, the market was looking at a figure north of 2,000 tonnes” makes the mistake of assuming that Central Bank announcements are about communicating facts.

As Ben Hunt says, Central Bankers “are all playing the Common Knowledge Game as hard as they can … if you don’t listen to what is being said in the context of game-playing, then you are placed at a disadvantage versus those who do. You will not understand the WHY that exists behind the public statements.”

So what is the WHY driving China’s gold reserves announcement? This note from Ben argues that “Chinese political stability under the unified coalition formed by Deng Xiaoping depends on robust and real domestic economic growth” and that “will depend on developed world export markets in the US and Europe”. That objective is not advanced by having a strengthening currency, making China’s exports more expensive, or as some goldbugs fantasise, “withdrawing from the system or blowing the system up” by reverting to a gold standard. But China cannot also dramatically weaken its currency lest it provoke Western governments into an overt currency war.

In terms of the why I think the timing, or WHEN, of the announcement was also significant.

It is also important to understand the audience the message is directed at, in other words the WHO. Ben notes that political linguistic game-playing often involves messages directed at multiple audiences, otherwise known as dog-whistling. In the case of the China gold reserves announcement, the choice of the figure revealed and how it was explained would have been a delicate, strategic balancing act considering the different perspectives of the players involved. Lets consider each of these audiences.

WHO – Foreign Governments and Central Bankers

Jim Rickards summarises the message China was sending to this audience in this simple tweet “China reveals enough gold to be respectable, but not enough to disrupt. Consistent with idea they want to join the SDR club, not destroy it”. Mark O’Byrne from GoldCore also makes the point that China “could be low balling their total gold holdings – official central bank reserves and non official holdings – in order to maintain confidence in their substantial US dollar holdings and to aid their bid to join the IMF.”

As news agency Xinhua noted, “China looks to advance its currency’s status as a key international reserve currency, which is now a prime candidate for the International Monetary Fund’s (IMF) special drawing rights (SDR)”. It is also interesting in terms of “join not destroy” that the article made the point that “countries have long abandoned the gold standard as the basis of monetary systems” before acknowledging that “gold reserve volume remains an important factor in market assessment of a country’s currency”.

I also find it interesting that the Xinhua included this quote from a researcher with the Shanghai Academy of Social Sciences: “China’s increasing gold reserves will strengthen yuan holders’ confidence, which will help stabilize the exchange rate and facilitate the internationalization of the yuan”. While directed at other central bankers, possibly it was also meant to encourage domestic investors to retain their yuan, rather than buying Australian or Canadian property, for example?

In terms of not disrupting, consider the chart below which shows the Chinese gold reserves additions as a monthly average rate of accumulation.


The recent 604 tonne addition is just a bit over 8 tonnes a month, which is similar to the rate of accumulation during 2001 and 2002. The message China is sending from this chart is that they are officially accumulating gold in a predictable and slow manner.

The steady as she goes message was reinforced by the People’s Bank of China saying, as reported by Reuters, that “on the premise of not creating disturbances in the market, we steadily accumulated gold reserves through a number of international and domestic channels” and would “remain flexible when deciding whether or not to adjust gold reserves in the future” with those channels being, according to Xinhua, “domestic scrap gold, production storage and trade in domestic and overseas markets.”

The consistency on China’s accumulation is better demonstrated by charting China’s reported reserves (in red) and filling in the gaps between the reporting points (in green) with assumed monthly additions, as I have done below.


The trajectory of the gold reserves growth is so bureaucratically predictable that I feel confident in extending the chart beyond today and saying that the next Chinese reserves announcement will fall on the my forecasted official reserves line depending on the date of the announcement.

Any figure greater than this predictable path would, as David Marsh of the monetary forum OMFIF said, “risk unsettling the world gold market” and “might be interpreted as an unfriendly move against the dollar at a ‘delicate time’.”

WHO – Domestic Stock Market Investors

Zero Hedge argued that “China had to wait until its stock market was crashing to present the ‘systemic stability’ bazooka: gold. Because in revealing a surge in its gold holdings, the PBOC is hoping to finally provide that final missing link that will boost investor sentiment, and get people buying stocks all over again.” Ross Norman from Sharps Pixley noted this argument but then said “but that makes no sense either, because they [gold reserves] aren’t!” sizeable.

Michael Kosares of USAGOLD provides a counter argument, noting that a “strong number would have propelled gold and the yuan higher – not what you might want having just thrown everything but the kitchen sink at the crashing Shanghai market. China in the end is an export economy, much like Japan. It’s stock market value relies on exports.”

I agree with Ross and Michael. Consider that the previous gold reserves announcement was in April 2009 when the amount increased from 600 tonnes to 1054 tonnes. The announcement prior to that was December 2002, which makes for a gap of 77 months. This increase being in June 2015 is a period of 75 months from the last, so one could consider this announcement should have been in August (assuming there is something special about the 77 month period). More relevant is the fact that the IMF meeting regarding the SDR will be in October, which means an August/September announcement would have sufficed.

So arguably the announcement in July about a gold reserves increase in June was early. I do not think it is coincidental that the announcement occurred shortly after China’s stock market fall. As the Chinese authorities would have been aware that market expectations were for a larger number, the reporting of a modest number sent a message to Chinese investors that while gold is important, it is not a major asset class and certainly not more important than the stock market. Reporting a large number would have sent the message that China was favouring gold and was the better asset to invest in.

Knowing that a lower than expectations figure would likely be negative for gold prices, China may well have considered it fortuitous that the gold price was weak at the same time they wanted to encourage people to invest in the stock market. As Jim Rickards tweeted “China is still buying gold and favors a lower price. So, timing the big ‘reveal’ for when gold prices are weak anyway makes perfect sense”, both for the State Administration of Foreign Exchange (SAFE) in terms of acquiring more gold and for discouraging domestic investors from shifting money from the stock market to gold.

WHO – Domestic Gold Consumers

For those without the wealth to invest in the stock market or property, gold represents a culturally familiar way to save. For this average consumer, the Chinese government would want to send a message that gold was still an acceptable investment, which the increasing of gold reserves achieves.

As mentioned above, the announcement also ensured that the gold price would not increase dramatically. The Chinese government would consider that essential, as a high gold price limits how much gold domestic consumers can accumulate, and could be seen by them as breaking the deal where the government can retain political power in exchange for individual economic improvement.

In this SAFE Q&A from 2010 they say that gold “has a very limited market capacity” and “if we buy gold on a large scale, the international price of gold will definitely be pushed up” which would “end up hurting the interests of our domestic consumers”.

This position was reiterated by Huang Guobo, Chief Economist at SAFE, in 2014 in this answer to a question about whether SAFE is “gold bargain-hunting”:

  1. “China now has a rational structure with both official gold reserves and active holding and purchase of gold among the people. Hence, the policy of ‘gold held by the people’ has been well achieved”
  2. “investment of foreign exchange reserves will have a significant influence on the gold market … if the price of gold is pushed up, then people will have to pay more for gold … which will be unfavorable in terms of our high consumption of gold”
  3. “when planning to invest foreign exchange reserves in the gold market, we must take into consideration its influence on the market and whether it will be beneficial for consumer groups in China that import a large quantity of gold”

Finally, consider what the PBOC itself said on Friday: “with an on-going policy of encouraging gold ownership by private individuals. It’s important to continue and consider the future of private investment demand as well as keeping international reserve asset allocation a flexible operation.” As Adrian Ash of Bullion Vault commented, “private gold demand … remains a key consideration for the People’s Bank when deciding its own gold-buying activity”, a case of “the state growing its own involvement, but letting private citizens take the lion’s share”.

With such a policy encouraging domestic gold accumulation, the gold reserves announcement helps to modestly reaffirm gold’s role and maintain a “favourable” gold price.

WHO – Foreign Gold Investors

As the Chinese government wants its population to accumulate gold (as well as itself), it would have been interested in coming under market consensus of how much gold it had. For the less game theory savvy Westerners who took the figure on face value, it would be read as bearish. For others, like

  • Joni Teves at UBS Group: “China hasn’t been very open about its strategy, so what matters now is whether the market believes they intend to continue buying … They do appear to leave the door open to further purchases, which should limit the downside for gold”
  • Georgette Boele at ABN Amro Bank: “Their motivation is reserve diversification, and they’ll probably keep buying”

the lower figures, while confirming that China will still be in the market, would not necessarily be bullish as these analyst and professional market players would have already incorporated that information into their calculations. The result is that there was little downside for China to report a lower figure given a higher figure may well have resulted in a large amount of retail Western investor buying.

WHERE – location and encumberance

The above discussion covers the Why and Who but I’d like to finish with some comments on the Where. Ronan Manly notes that there are two questions that no one has raised about the gold reserves announcement: “the storage locations of China’s official gold reserves and whether the gold is unencumbered”.

In respect of the encumbrance question, this is how gold is described in SAFE’s Template on International Reserves and Foreign Currency Liquidity (my emphasis):

Gold (including gold deposits and, if appropriate, gold swapped) – 623.97 [note this is in US$100 millions)
Volume in millions of fine troy ounces – 53.32

While no indication is given about the extent of Chinese deposits, lending or swapping, this wording does leave the door open to the possibility that China holds gold overseas, either as unallocated or allocated, or is involved in “actively managing” (as it is euphemistically referred to) its gold reserves.

As most analysts agree that China does hold more reserves than it announced last week, the question is where is this gold held? It does not mean that China was lying about its gold reserves, as costata001 tweets: “China could have bought that gold at any time in the past 30+ years. IMF rules only require reports when gold is classified as reserves i.e. monetary gold.” However, I do not think it is a case of the PBOC just changing the classification of gold it holds as monetary, given this definition by SAFE (my emphasis):

“4. Reserves assets refer to external assets that can be used at any time and are effectively controlled by the PBOC, consisting of monetary gold, special drawing rights (SDRs), the reserves position in the Fund, and foreign exchange.
4.1 Monetary gold refers to the gold held by the PBOC as reserve.”

So once gold becomes “effectively controlled” it becomes reserves. This means for the Chinese government to keep gold out of reserves it needs to keep it off the books of the PBOC. China is not unique in this regard. As Chris Powell notes, “Saudi Arabia pulled a similar trick in 2010. In June that year the World Gold Council reported that Saudi Arabia’s gold reserves had increased by 126 percent, from 143 to 323 tonnes, since 2008” but later revealed that it “had possessed that additional gold all along, holding it in what he called ‘other accounts’ but not reporting it”.

GoldCore have pointed out that in addition to the PBOC and SAFE, there are other Chinese government owned entities that may have also been buying gold, such as the China Investment Corporation or the “China National Gold Group Corporation or China Gold, China’s largest gold conglomerate with primary interests in mining and also refining”. Another location could also be the state owned banks active in the bullion market.

So when China decides that it wants to increase its gold reserves officially, it can acquire it from any of these entities. On Monday I will update this analysis from 2012 to estimate how much gold the Chinese government unofficially holds and how much the population holds, for what it is worth.

Jul 172015

In March 2015 the CME launched a gold kilobar futures contract. As with all futures contracts, vaulters apply to be a warehouse and as part of that they have to report registered and eligible stocks in their vaults. Currently there are three vaults reporting figures:

  • Brinks – 820,204 ounces
  • Malca-Amit – 36,909 ounces
  • Loomis International (ie Via Mat) – 17,779 ounces

The figures above are pretty representative of the average balances held by these three since the contract started trading. It is interesting that the Hong Kong warehouses have never reported any registered stock – it is all eligible. Compared to the CME’s US warehouses however, the 874,893 ounces of gold held within the Hong Kong warehouses is only 10% of the US stock of 8,751,688.

I hadn’t given the Hong Kong contract or its warehouses much thought until Ronan Manly, who writes for BullionStar, drew my attention to this submission by the CME to the CFTC “self-certifying the listing of a Gold Kilo Futures contract”.

As part of that submission the CME provides an analysis of deliverable supply so as to determine a conservative spot month position limit. To do that analysis “the Depositories that are intended to be approved by the Exchange … provided historical inventory levels of gold kilo bars stored in their respective vaults that meet the specifications of the Gold Kilo futures contract.” Those two depositories were Brinks and Malca-Amit.

The chart below shows the result of combining the data from the CME’s submission (monthly averages) with reported warehouse stocks for the HK contract supplied by Nick Laird at – note that the submission data only goes up to November 2014 and the contract starts trading in March, so we have a gap in our data.


You can see that someone(s) was accumulating kilobars all through 2013 and 2014, with the major surges being between Dec 2012 to Feb 2013 and Nov 2013 to Jan 2014. The interesting thing about that gap in our data is the massive drop of about 110 tonnes in the space of three and a half months. Where did it go?

The first theory may be that it went to the SGE to meet Chinese demand. However looking at exports from Hong Kong to China during that period shows no significant changes in volumes. There is also no indication that Chinese demand surged during that period, with SGE premiums (an indicator of demand) remaining subdued and SGE withdrawals at a high but relatively consistent rate.

The other possibility is that the owner(s) of that 110 tonnes realised that come March 2015 their previously unreported (at least until the CME submission) hoard of gold would suddenly become public, as CME futures warehouses, according to the CME rulebook, are (my emphasis) “required to report inventory to the Exchange .. Eligible metal shall mean all such metal that is acceptable for delivery against the applicable metal futures contract for which a warrant has not been issued.”

The purpose of that rule is to give the market visibility into potential stocks that may be traded on the contract, and also to avoid games where someone could take metal off warrant (no longer be registered) to give the impression there is little stock available to the market in the hope of giving the impression of a shortage.

The only way the owner(s) of that 110 tonnes could avoid be reported would be to move the metal into a non-CME warehouse, it being my assumption that the CME does not give exemptions to its warehouses on reporting the stocks of individual owners.

The chart below shows the combined Hong Kong and US warehouse data from Note the data gap marked (1), which shows how significant the 110 tonne reduction was in terms of overall CME warehouse stocks. It is interesting to note that the area marked (2) begs the interpretation that metal was moved from the US to Hong Kong, although my cursory analysis of US-Hong Kong imports and US warehouse withdrawals does not confirm this.


I noted previously that the rapid “decline in registered gold stocks and delivery rates occurred soon after gold’s dramatic crash through $1550 and into the 1300s” and it is interesting to note that the rebuild of overall stock (in Hong Kong rather than the US) appears to have begun after gold bottomed for the second time at $1200 in December 2013.

One final note on the CME submission. As mentioned, the CME used Brink’s and Malca-Amit’s data to determine a “conservative” position limit: “As the basis for assessment of deliverable supply, the average monthly combined gold kilo bar inventory … is 89,408 kilo bars. Staff proposes a conservative spot month position limit of 6,000 contracts which is 6.71% of deliverable supply.”

Given the massive drop in Malca-Amit’s warehouse stock, I think it could be argued that a review of those position limits is warranted. The average Hong Kong warehouse balances since the start of the contract’s trading has been 27,730 kilobars (with a minimum of 17,296 bars and a maximum of 40,587 bars), which at 6.71% of deliverable supply would be 1,860 contracts, which we can round up to  2,000 contracts – compared to the current 6,000 contracts.

Jul 142015

China continues to open up its gold market, with plans to launch a renminbi-denominated gold fix and talking with the CME to “list its products and prices on CME, whose members and clients will be allowed to trade the Chinese exchange’s products”. Such news reports are usually accompanied by references to China wanting to “increase its influence in global gold markets” in line with its size in the physical market.

Such developments are generally seen by goldbugs as positive, the narrative being that China is a physical gold market and they love gold and only buy it (never sell), which will mean that will we have a market “that is not distorted by the banks, their proprietary trading, or control of the gold distribution system globally”, according to Julian Phillips, for example.

No doubt Pierre Lassonde will be right when he said that “10 years down the road, the Shanghai Gold Exchange (SGE) is likely to determine the gold price, not the COMEX” but a closer look at the Chinese market reveals it may well be a case of “Meet the new boss, Same as the old boss”.

While the SGE’s most popular contract is the 9999 Gold, the deferred delivery contract (like a forward) also attracts a lot of volume. People also forget that there is a Shanghai Futures Exchange, which has a gold contract no different to Western gold futures.

Consider also the Bank of China International, who recruited a “former Goldman Sachs metals trading chief as an adviser to help it expand its commodities business”, someone who was on the management committee of the London Bullion Market Association and an executive committee member of the London Metals Exchange.

Or how about the Industrial and Commercial Bank of China, who is reported as launching “gold accumulation schemes, swaps, forward hedging, lease/financing, collateralized loans and other financial services” and who “is working with HSBC, JP Morgan Chase, Brink, Metalor and other professional logistics providers”.

Chinese have been involved in using “gold to engage in currency and interest rate arbitrage transactions”, collateral financing trades, or leasing and selling gold “from banks to solve their short-term funding problems in the hope of buying back the gold at lower levels to repay the lease” (see here), so much for Chinese only being buyers.

While the Chinese are indeed large consumers of physical, I think it is naïve to think that as their gold market matures their bullion banks will refrain from the same exchange/over the counter proprietary paper trading activities that Western bullion banks do, or that the same greed dynamic we have seen driving leveraged Chinese stock market investing (via official and hidden margin lending: link) will not occur in the gold market.

This dynamic is no doubt what was behind Pierre Lassonde’s forecast that “when we reach the peak in this gold cycle, the SGE will resemble a casino. The Chinese have a huge propensity for gambling, and this is what will likely propel the gold price to levels that we probably can’t even imagine.”

And then to a crash we probably can’t even imagine.

Jul 092015

In response to the Chinese stock market correction, the People’s Daily newspaper has been quoted as saying that “Confidence is more precious than gold. That’s what Chinese investors need at this moment; confidence, not panic.” No point quipping that they also need gold, as we know the Chinese have been accumulating plenty of the stuff. However it is valid to ask what impact China’s current woes may have on gold demand going forward.

[As an aside, the confidence quote seems to be on trotted out frequently, notably in 2008 about the global financial crisis when Chinese Premier Wen Jiabao said “At this moment, confidence is even more precious than gold or any currencies”, or here in 2014 regarding Zimbabwe.]

Louis James of Casey Research thinks it is negative, penning the dramatic headline “Why Millions of People Might Have to Sell Their Gold and Silver”. He says that Chinese equity investors “are suffering a major liquidity crunch. Many won’t have the cash to buy anything, not even gold” and that “huge numbers of investors are facing margin calls. That means that many who own gold will be selling because it’s the one thing they can get a bid on.”

CNN agrees with the “sell gold to pay back loans” narrative adding that stockpiles of metals may have been pledged as collateral (which firms may sell on behalf of investors). They also note that “the Chinese equities market is not just behaving badly because of mere speculative excess being worked off but indicating problems inside the economy”, which if true, could mean less gold demand going forward.

This does not sound good for gold, but UBS was reported as saying that “equities only account for 20 per cent of Chinese household wealth [and] this proportion drops further to about 12 per cent if property is included.” The Economist agrees noting that such a low share of wealth meant that “soaring shares did little to boost consumption and crashing prices will do little to hurt it” which should mean that retail Chinese gold demand should not be affected in any major way.

Nomura, quoted by FT Alphaville, also agrees that the “mechanism that channels the paper wealth of the equity market into real household consumption demand is limited in China”. Regarding the potential for margin calls and sales of collateral, Nomura note that the “leverage of margin financing done through brokerages and trust companies is generally under 3x, and the lender’s position is generally well protected as long as the equity market remains liquid enough”, the result being that we should not see significant sales of gold, assuming much has been pledged as collateral for margin loans.

There has been talk that the Chinese stockmarket correction may redirect investor money back into gold but at this time The Perth Mint is not seeing any evidence of that. Demand out of China for kilobars is low, which our Treasury believes is because bullion banks have tonnes of kilobars in stock (they usually accumulate kilobars when demand comes off and premiums are low with the intention of selling them back when premiums are good) so they are not interested in accumulating any more at the moment. The result is that kilobars premiums are way down. Our Treasury also notes that the gold arbitrage between China and London is low at around 50 cents, also indicative of a lack of interest.

Looking a bit further out, Peter Cooper at Arabian Money argues that the Chinese gold demand could get a boost given that the typical response by central banks to stock market crashes is to “lower interest rates and ease monetary conditions in liberal fashion and worry about the inflationary consequences later”. Where will the money go he asks: “likely the same place as last time: precious metals” when “gold went on a tear from under $800 to $1,923”.

Given that a significant factor behind the Chinese stock bubble was trading by retail investors, I note this article from Want China Times on the recent International Finance Expo in Guangzhou where “a total of 43 companies in the precious metals sector showcased their products created for the online age that involve apps for mobile devices or popular instant messaging service WeChat”. Just as The Perth Mint lowered its minimum investment to $50 via its new Depository Online service, the new Chinese products also “lowered the minimum investment requirement from a few thousand yuan to as low as 8 yuan (US$1.30), making investing in precious metals more accessible to investors new to the market.”

Talking of bubbles, maybe I was prescient in using the chart below in my presentation at Bursa Malaysia’s Gold Conference in June, which shows the previous Chinese stock bubble (for those not familiar with the red line bubble overlay, see Dr. Jean-Paul Rodrigue’s classic Stages in a Bubble).


The current Chinese stock market behaviour also seems to be following the same pattern.


So the Chinese have just as much form with bubble market behaviour as the West does. With 8 yuan minimum gold investments on the horizon, maybe it is fair to ask: goodbye Chinese stock bubble, hello Chinese gold bubble?