In two parts I will present an overview of the Chinese gold market for
calendar year 2015. In this part we’ll focus on Shanghai Gold Exchange
trading volumes. In the next post we’ll focus on physical supply and demand
flows in Chinese gold market in 2015.
First, let us quickly assess the core volume data of the largest precious
metals exchanges in China and the US. Physical and derivative gold
trading at the Shanghai Gold Exchange (SGE) in 2015 reached 17,033 tonnes, up
by 84 % from 9,243 tonnes in 2014. Gold futures trading at the Shanghai
Futures Exchange (SHFE) in 2015 accounted for 25,421 tonnes, up 7 % from
23,750 tonnes in 2014. Consequently, total wholesale trading volume in China
(SGE + SHFE) was 42,454 in 2015, up 29 % year on year. In New York at the
COMEX total gold futures volume reached 128,844 tonnes for the year 2015, up
3 % from a year earlier. COMEX trading volume was three times as large as the
total volume in China.
It’s unknown how much gold is traded in the Over-The-Counter
London Bullion Market. However, a survey conducted
by the LBMA in 2011 pointed out approximately 680,783 tonnes of gold per
year change hands through the London based market.
All tonnages mentioned in this post are counted single-sided.
The Shanghai Gold Exchange
There are a few more interesting data points to be found in SGE trading
for 2015 when examining the developments of the specific contracts.
At the SGE two types of gold products (/contracts) can be traded: physical
products and deferred products. The physical contracts traded on the Main
Board (SGE / domestic market) are:
- Au50g (50 gram gold bar, 9999 fine)
- Au100g (100 gram gold bar, 9999 fine)
- Au99.99 (1 Kg gold ingot, 9999 fine)
- Au99.95 (3 Kg gold ingot, 9995 fine)
- Au99.5 (12.5 Kg gold ingot, 995 fine)
The physical contracts traded on the International Board (SGEI /
international market) are:
- iAu100g (100 gram gold bar, 9999 fine)
- iAu99.99 (1 Kg gold ingot, 9999 fine)
- iAu99.5 (12.5 Kg gold ingot, 995 fine)
The contracts above cannot be traded on margin and are settled (/delivered
inside SGE(I) designated vaults) immediately (T+0), therefor
they embody pure physical trading.
The deferred contracts (only traded on the Main Board) are:
- Au(T+D) (1 Kg per lot, delivery in 3 Kg or 1 Kg ingots)
- Au(T+N1) (100 gram per lot, delivery in 1 Kg ingots)
- Au(T+N2) (100 gram per lot, delivery in 1 Kg ingots)
- mAu(T+D) (100 gram per lot, delivery in 1 Kg ingots)
Because the deferred contracts are traded on margin and there is no
fixed delivery date, these derivative products embody paper trading.
All SGE contracts can be traded competitively over the Exchange, but the
physical contracts can also be negotiated bilaterally in the Over-The-Counter
(OTC) market and then settled through the SGE system. The SGE
publishes the volume of these OTC trades.
The most traded contract on the Exchange in 2015 was the deferred
product Au(T+D). In total Au(T+D) volume accounted for 5,648 tonnes, up 30 %
from the previous year. The second most traded contract was the physical
product Au99.99, of which 3,465 tonnes changed hands, up 65 % from 2014 -
although, if we include OTC trading total Au99.99 volume for 2015
reached 6,998 tonnes, which would make it the number one contract.
Physical trading (including OTC activity) at the SGE in 2015 accounted for
9,745 tonnes (57%), versus 7,288 tonnes in paper trading (43 %).
The growth in total gold trading at the SGE in 2015 was the
strongest since the financial crisis erupted in 2008. According to my
analysis one reason for this has been the opening of the Shanghai
International Gold Exchange (SGEI) in September 2014.
The SGE system services gold trading for the domestic Chinese gold market.
This gold traded over the SGE system is prohibited from being exported. The
SGEI is a subsidiary of the SGE located in the Shanghai Free Trade Zone,
where international members of the Exchange can import, trade and export
gold. In terms of physical gold flows the SGE and SGEI are separated venues.
For more information please read my previous post, “Workings
Of The Shanghai International Gold Exchange”.
On the surface it looks as if the SGEI has been a failure. The most traded
contract at the International Board is iAu99.99. At the start of 2015
iAu99.99 trading was weak and after a short peak in April, volume came down
to practically nil throughout the middle and the end of the year. Hence, most
analysts stated the SGEI was dead. There are two important points that
undermine this statement.
The first point is that iAu99.99 can be traded in the OTC market.
When it appeared that trading of iAu99.99 was dying out at the Exchange, in
the OTC market activity continued. There is no constant trading in iAu99.99
in the OTC market, but the volumes are significantly higher than
iAu99.99 trading over the Exchange (see the chart below).
Tellingly, the iAu99.99 trades in the OTC market are all performed in
giant batches of 100 or 1000 Kg. Have a look at the data labels in the chart
below. We can see that all weekly OTC iAu99.99 volumes are in sizes one
hundred (blue bars) or one thousand (red bars) 1 Kg bars. For example,
look at the week that ended 3 July 2015, when exactly 73,000 Kg’s were
traded. In theory 20,855 Kg’s were traded on Monday and 52,145 Kg’s on
Thursday, aggregating to 73,000 Kg’s in total for the week. Though,
this coincidence cannot have occurred each and every week. More
likely the iAu99.99 traders in the OTC market always buy and sell per 100 or
1000 Kg’s. No other SGE or SGEI contract shows this bulky trading
pattern.
The second point is that international members of the Exchange are
not only allowed to trade the contracts on the International Board, they’re
also allowed to trade the domestic contracts, they’re just not allowed to
withdraw the metal from domestic vaults. The international
members that focus on arbitraging any price differentials between the US and
China will prefer the most liquid contracts on the Exchange. So, for
this purpose the international members would trade Au99.99 and Au(T+D).
Sources at the SGE confirmed to me that indeed international members are
trading Main Board contracts.
If we look at the next chart, we can see that since the inception
of the SGEI in September 2014 total SGE volume (including domestic,
international, physical and deferred contracts) increased significantly. My
conclusion is that the gateway of the SGEI
has increased liquidity at the Exchange in Shanghai and enhanced
the connection between the Chinese and Western gold markets.
I realize the system of the SGE and SGEI, how trading and physical gold
flows are divided, is not easy to understand. The best I can do to clarify
this is to present the diagram furnished by the SGE showing how trading
in all contracts by all customers is organized (see below). In the next post
we’ll examine the physical gold flows going through China and the Shanghai
Free Trade Zone.
Note, domestic members/customers are allowed to use onshore renminbi
to trade all products on the Main Board, but
are also allowed to use onshore renminbi to trade all products on
the International Board (although load-in and load-out metal from
the vaults is prohibited). In turn, international members are allowed to
use offshore renminbi to trade all contracts on the International Board, but
are also allowed to use offshore renminbi to trade most contracts on the Main
Board (although load-in and load-out metal from the vaults is prohibited).