LAWRIE WILLIAMS: China’s SGE gold demand beating global new mined supply

As we have pointed out in previous articles, Chinese gold demand as represented by deliveries out of the Shanghai Gold Exchange (SGE) has been exceptionally strong over the summer months – a time when demand is usually weak.  But quite how strong has been remarkable by any standards.

All physical gold sold on the Chinese market has to be delivered through the SGE, so by Chinese calculations the amount of gold withdrawn from the SGE equates to national demand.  While this may be disputed by mainstream gold analysts like Metals Focus, GFMS and CPM Group, the principal differences between their calculations – which suggest Chinese demand is falling – and the SGE withdrawal figures, which suggest the complete opposite, appear to be down to the classification of what actually comprises consumption and the analysts do, for example, seem to ignore gold used in the financial sector in their calculations, and no doubt other categories which might reasonably be included in an overall real demand figure.  But what is worrying to those trying to understand the full picture is that currently there is an enormous discrepancy between the SGE gold deliveries and the analysts’ consumption calculations.  Whatever the truth of the matter, SGE delivery figures, which are announced every week, a week in arrears, have to be at the very least a terrific indicator of Chinese interest, and demand, for physical gold and the figures for July and August suggest that this is running at a huge level.

Here is a table showing weekly gold deliveries out of the SGE covering the months of July and August, and as can be seen the levels have been exceptional – and as pointed out above at a time of year when these physical gold withdrawal figures are usually among the weakest of the year.  Whether this has been stimulated by the low gold price, the recent dramatic falls in the Shanghai and Shenzhen stock exchange indexes, fear of inflation or some other stimulus we don’t know for sure – perhaps a combination of all of these.

*September 5^th figures are for a three day trading week with the Exchange closed for the Chinese Victory Day celebrations on the Thursday and Friday.

Figures courtesy of www.sharelynx.com

For the eight full weeks in July and August, SGE deliveries totalled  511.9 tonnes or a fraction under 64 tonnes a week.  If we assume even deliveries through the Exchange in the active days in the partial weeks we can add an additional 38.9 tonnes to the monthly totals bringing full month July and August SGE gold withdrawals to a total of 550.8 tonnes.  With global annual new mined gold production of approximately 3,250 tonnes it can be see that July and August SGE deliveries exceeded total new mined gold supply by almost 10 tonnes for the one nation on its own – again assuming even monthly distribution of global gold output.  So much for a fall-off in Chinese demand as most media reports are suggesting at the moment. 

And China (including Hong Kong)  only accounts for around one third of total global gold consumption according to The World Gold Council (WGC) in its latest Gold Demand Trends report, although this is calculated on Metals Focus derived consumption figures rather than the substantially higher SGE ones.  But regardless it is difficult to see where all this gold is coming from to supply the whole world’s demand if SGE figures are truly representative of the Chinese demand situation - and there's no reason to believe they are not.

We have been seeing a fall-off in COMEX gold inventories in the USA and net disposals out of the gold ETFs, but at nothing like the levels necessary to fill the level of global demand suggested by the recent Chinese figures.  Either the analysts’ estimates of global demand and supply are horrendously wrong, or the SGE ‘demand’ figures as suggested by the official statistics hugely overstate the true position.  The analysts will say there’s an element of round tripping and double counting in the SGE statistics which confuses the situation, although SGE rules are supposed to prevent this, but even if there is they would seem unlikely to make up the full difference in demand as suggested by SGE and WGC figures.

Whatever the true demand and supply scenario turns out to be, it is evident that physical gold is continuing to flow from the mostly quick return-fixated Western holders to the much more solid holders in Asia and in the Middle East – areas of the world which seemingly have a much stronger affinity for the yellow metal.  As Western physical supplies are drained at a rate which is not being exceeded by new mined and scrap supply (the latter having diminished sharply along with the gold price) it is hard to see how prices can continue to be held down based seemingly virtually entirely on futures markets rather than physical ones. One day supply/demand fundamentals based on physical metal will win the day. 

What the West forgets is that the enormous Chinese economy is still growing – albeit at a lower rate than before as the country tries to transform it into a consumer-driven one – suggesting ever-growing middle class buying power - and given the general public's affinity for gold, demand for the physical metal will just continue to grow while Western supplies will remain flat, or fall off as time progresses, unless there’s a huge gold price increase sufficient to stimulate big new mine project development and a massive pick-up in exploration.  But all this would still take years to implement in terms of significant new production generation.  The only conclusion here is that the gold price will increase sharply and the only apparent question is not if, but when.  This year, next year, sometime....?

14 Sep 2015 | Categories: Gold

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