Wednesday, July 23, 2014

China Under-Reporting Physical Gold Demand


Some intriguing news concerning the physical demand for gold is the recent revelation that the World Gold Council has been under-reporting Chinese imports of gold. The issue arose when it was discovered that the World Gold Council only reports on the imports of gold that come through Hong Kong. It does not report on gold imported through Shanghai or Shenzen. Not only that, but China also recently opened up Beijing to gold imports.


The actual number of tonnes that China is importing could be significantly higher than what is currently being reported. According to the World Gold Council, 1,066 metric tonnes were imported in 2013, but a quick look at the Shanghai Gold Exchange reveals the amount of total gold withdrawn to be 2,197 tonnes. 

By law, all of the gold sold in China must be exchanged via the SGE and purchased with Chinese currency, the Renminbi. 

The Shanghai Gold Exchange represents the total gold traded for the country and the amount of withdrawals via the SGE is a much better indicator for physical demand of gold than the World Gold Council reports. 

It is strongly believed that gold mined within China is also sold via the SGE. With many undocumented mines in mainland China and the government's refusal in providing accurate reporting of exactly how much gold is being mined, we are left to analyze the amount traded via the SGE. We can assume that mined gold in China makes up a large portion of the difference between the 1,066 tonnes reported by the WGC and the 2,197 tonnes withdrawn on the SGE.

Other shadow sources of gold in China are believed to be coming via tunnels that link Hong Kong with mainland China as well as mainland Chinese tourists purchasing jewelry from Hong Kong and storing it privately. 

Something else to take notice of about this undocumented or "shadow" gold is that the People's Bank of China or PBOC (which does not report its gold purchases) is believed to never purchase via the SGE-- meaning that the World Gold Council and SGE aren't taking into account that gold purchased by the PBOC. What is even more alarming  is that the PBOC is only interested in buying foreign gold using U.S. Dollars. 

They are secretly dumping their dollars for gold. 

This has been coupled with a sharp increase in the amount of gold purchased via proxy banks. The UK has been increasing gold sales to Switzerland for years and Switzerland has been reselling that gold to proxy banks of the PBOC.  

China has geopolitical reasons for keeping their demand for gold a closely guarded secret. With the continued devaluation of the dollar and rampant U.S. inflation, China is desperately working to diversify and hedge its monetary reserves with gold as protection against a global economic crisis. By stockpiling gold within China, the country also helps to prop up the Renminbi, supporting its use as a currency internationally, all of which is good news for gold and bad news for the dollar. 

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