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LAWRIE WILLIAMS - Latest SGE deliveries enormous: Physical gold may be nearing crunch point

What’s happening with the Shanghai Gold Exchange (SGE) and Chinese gold demand as expressed by the weekly physical gold withdrawals from the Exchange – a strong indicator at the very least of Chinese physical gold consumption taking all forms of demand into account?  August is usually a weak time of year for such gold movements, yet the latest week’s figures are for withdrawals of 73 tonnes – the fourth highest demand week ever!  And this follows on from deliveries during the month out of the Exchange of 65 tonnes the previous week and 56 tonnes for the first week of August, making a 3 week total of 194 tonnes of gold.  If this kind of demand level continues for the final week of the month – figures should be released next Friday – August will be a remarkable month for SGE gold deliveries at 250 tonnes or more – around 90% of global newly mined gold output for the month.  And remember this is physical gold, not paper gold!

We also note that July gold imports into mainland China from Hong Kong recovered sharply, which also suggests surging demand for physical gold on the Chinese mainland.  And to this has to be added the unreported gold imports direct to the mainland from other nations, plus China’s own gold output all of which stays in the country.  China is the world’s largest gold producer with output of 460 tonnes last year and believed to be running a few percent higher still this, but it is still hard to see where all this physical gold being delivered out of the SGE is coming from.  There may be an element going through the International section of the Exchange, SGEI, which is not reported separately and relates to gold traded through the SGE which may not actually be landed in China, but this has generally been at an extremely low level to date by all accounts.

What is perhaps most significant is that we are now heading into ‘Gold Season’ in the world’s two largest gold markets – China and India.  In China gold flows tend to build strongly towards the end of the year ahead of the Chinese New Year, while in India they rise following the monsoon and harvest, and the start of the ‘festival’ and wedding seasons with demand tending to increase sharply from September onwards.

In the West too gold seems to be showing some strength again after a knockback at the beginning of last week after a strong surge the week before when global stock markets showed signs of a potential collapse.  Gold has been on the up again towards the end of the past week, despite a rising dollar which is usually accompanied by a gold downturn.  The Dow continues to show signs of nervousness after a strong recovery.  There is an element of fear in the markets still which could be positive for the yellow metal.

All this points to the potential for a real tightness in the supply of physical gold.  In truth this has been building for some time now, but it could be getting near the crunch point.  Only recently Zero Hedge reported that COMEX warehouse inventories had to be bailed out by a massive re-classification of its warehoused gold by JP Morgan into the Registered category which represents physical gold available for delivery  (See: JPMorgan Helps Comex Avoid Gold Depletion, Boosts Registered Gold By 78% Overnight).  COMEX Registered gold stocks are still over 50% lower than they were a year ago even after the JP Morgan transaction.

Sooner or later, physical gold supplies may thus become tight enough to start driving the markets – rather than the paper gold which has been doing so to date.  This day may be fast approaching if current gold flows are maintained – or increase as they usually do in the latter part of the year.

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29 Aug 2015 | Categories: Gold, China

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