I’ve received written confirmation by the Shanghai Gold Exchange (SGE)
delivery department that the Chinese Market Data Monthly
Reports disclose the volume of physical gold withdrawn from SGE
designated vaults. I’m thrilled to resume reporting these numbers and
everything related to the Chinese gold market!
It’s advised to have read The
Chinese Gold Market Essentials Guide before you continue.
Because of the structure of the Chinese gold market the volume of physical
gold withdrawn from the vaults of the SGE provides us a unique measure of
Chinese wholesale gold demand – which in recent years has been more than
twice as much as Chinese consumer gold demand reported by the World Gold
Council. However, it appeared the SGE ceased publishing SGE withdraw numbers
after a press
release from 11 January 2016 that stated the bourse “adjusted some
terms in the Delivery Reports”. After the announcement SGE withdrawals were
not disclosed in the Chinese Market Data Weekly
Reports and over the phone I was informed withdraw numbers would
not be disclosed any longer by the SGE.
Perhaps I spoke to the wrong people at the SGE or perhaps the SGE has
changed its mind. In any case, in the first Chinese Market Data Monthly
Report of this year (January) the format was different from the Chinese Market
Data Weekly Reports. In the Chinese
monthly report it showed a number that looked to be the volume of gold
withdrawn from the vaults. Though we
couldn’t be too sure as the SGE changed its nomenclature since the press
release from 11 January.
Once again I contacted the SGE and finally came in touch with an employee
at the delivery department. The person in question told me over the phone
that indeed the January monthly report disclosed withdraw data, but
because confirmations over the phone can be easily violated, I also asked for
written confirmation. Then, a few days later the SGE delivery department
confirmed over email that the Market Data Monthly
Reports include the volume of gold withdrawn from SGE designated vaults!
So, here we go again. The SGE monthly report from February
shows withdrawals from the vaults of the SGE accounted for a modest
107.6 tonnes, down 52 % from January and down 31 % from February
2015.
Year to date SGE withdrawals have reached 333 tonnes, down 19
% year on year.
Subdued SGE withdrawals – indicating suppressed Chinese physical gold
demand – in February is very remarkable as in this month the price of gold
(in US dollars) increased by over 10 %.
This suggests that the Chinese do not buy physical gold when the price
goes up but mainly buy when the price goes down. In addition, because there
has been strong buying from Western parties in February, for example GLD inventory in London increased
by 15 % over this period, we can conclude the West is the price setter and
China up until now has predominantly been a “price taker”. Put differently,
China is merely taken advantage of bargain prices.
The same correlation between the price of gold and Western physical buying
behaviour can be observed when we compare the gold price to cross-border gold
trade from the UK, where many Western investors store their gold.
So for this comparison we use UK cross-border gold trade as a proxy for
Western physical gold buying. Although this is not exact science, in the
chart above we can see whenever the West is buying physical gold (UK net
import increases, see 2012) the price goes up and whenever the West is
selling physical gold (UK becomes net exporter, see 2013) the price goes
down.
Given the fact the price of gold has increased significantly year to date
we may expect the UK was not a net exporter in January and
February, more likely the UK was a net importer over this time horizon.
Addendum
Because there has been so much confusion about the terms used in the new
Chinese Market Data Monthly Reports and
the Market Data Weekly Reports I included screenshots of
both reports below provided with translations as suggested by the SGE
press release from 11 January 2016. In the Market Data Weekly
Report for week 7 (22 – 26 February) 2016 we can see the following
Delivery Report.
- Delivery
amount this week, the sum of the trading volumes in physical
products and the contract delivery volumes of deferred products for the
reported week, counted bilaterally in Kg.
- Trading volume this week, the sum of all trading volumes
in physical and deferred products for the reported week, counted
bilaterally in Kg.
- Delivery
ratio this week, the proportion of the delivery amount to the total
trading volume of both physical and deferred products for the reported
week (1 divided by 2).
- Cumulative
delivery amount, the sum of all weekly delivery amounts from the
beginning of the year to the statistical time point, counted bilaterally
in Kg.
- Cumulative
trading volume, the sum of all trading volumes in physical and
deferred products from the beginning of the year to the statistical time
point, counted bilaterally in Kg.
- Cumulative
delivery ratio, the proportion of the cumulative delivery amount to
the cumulative trading volume of both physical and deferred products
from the beginning of the year to the statistical time point (4 divided
by 5).
In the Market Data Monthly Report for
February 2016 we can see this Delivery Report:
- Delivery
amount this month, the sum of the trading volumes in physical
products and the contract delivery volumes of deferred products for the
reported month, counted bilaterally in Kg.
- Trading volume this month, the sum of all trading
volumes in physical and deferred products for the reported month,
counted bilaterally in Kg.
- Delivery
ratio this month, the proportion of the delivery amount to the total
trading volume of both physical and deferred products for the reported
month (1 divided by 2).
- Cumulative
delivery amount, the sum of all monthly delivery amounts from the
beginning of the year to the statistical time point, counted bilaterally
in Kg.
- Cumulative
trading volume, the sum of all trading volumes in physical and
deferred products from the beginning of the year to the statistical time
point, counted bilaterally in Kg.
- Cumulative
delivery ratio, the proportion of the cumulative delivery amount to
the cumulative trading volume of both physical and deferred products
from the beginning of the year to the statistical time point (4 divided
by 5).
- Load-out
volume this month, the amount of gold withdrawn from the vaults,
counted unilaterally in Kg.
- Cumulative
load-out volume, the amount of gold withdrawn from the vaults from
the beginning of the year to the statistical time point, counted
unilaterally in Kg.
Final notes: “delivery”
is not the same as “load out volume” or “withdrawals”. “Delivery” refers
to the amount of gold that changes ownership inside the vaults, “load out
volume” and “withdrawals” both refer to the amount of gold that leaves the
vaults.
The load-out volume for silver does not reflect Chinese wholesale silver
demand, as the structure of the Chinese silver market is different from the
Chinese gold market.
According to my manual cross calculations the “delivery amount” in the
weekly report for week 7 does not match “the sum of the trading volumes in
physical products and the contract delivery volumes of deferred products for
the reported week”. I’ve send out an inquiry to the SGE to verify
the data.
UPDATE 10 March 2016: The SGE replied how they calculated “delivery
amount”, it was based on the delivery of Au(T+N1) and Au(T+N2) in 100 gram
per lot. It appeared I had an SGE sheet with false specifications
of Au(T+N1) and Au(T+N2) – 1 Kg per lot. My manual cross calculations
and the SGE numbers match now.