China’s Physical Gold Demand Surges

The Shanghai Gold Exchange (SGE) is back on schedule publishing their trade reports on Friday that cover the previous trading week. Last Friday’s report covered the trading week February 17 – 21. For me the most important numbers is always the amount of physical gold withdrawn from the vaults as this equals Chinese wholesale demand. Withdrawals in week 8 (February 17 – 21) accounted for 49 tonnes, year to date there have been 369 tonnes withdrawn from the vaults. If we divide the later by the number of days of the corresponding period (52) we come up with an average demand of 7.09 tonnes per day – this includes weekends and the one week holiday at Lunar year when the SGE was closed.

I got a few request regarding demand compared to last year and daily moving averages. Great ideas which I have carried out (request are always welcome, we’re doing this together). Compared to last year demand is up 51 % over the same period. Of course we had the shocker in April 2013 when withdrawals exploded to 117 tonnes in week 17. I don’t expect any spikes that big this year so probably this year’s growth compared to 2013 in percentages will be decreasing when we’ll pass April. Nevertheless, the daily average of 2013 was (2197/365) 6.02 tonnes, while this year we’re up to 7.09 tonnes. China is on schedule to establish a new record, if the world can supply any more gold.

Although I’m not much of a technical guy, I made the following calculation for the 200 DMA. Because the withdraw numbers are weekly disclosed I divided 200 by 7 (days in a week) which equals 28.57. The 200 DMA in the chart below is the trend line of 28.57 red columns (weeks), which boils down to 200 days. The height of the trend line still corresponds to the (weekly) withdrawal numbers on both axes. (200 DMA = 28.57 WMA).

We can see the 200 DMA rising in 2013 to nearly 50 tonnes a week in June, then it fell slightly at the end of the year. Before the new year wholesale demand picked up again prior to an unprecedented buying spree on retail level and moved the trend line up at currently just under 50 tonnes a week.

The longer this insatiable demand continues the more I start to ask myself where this gold is coming from. We know from Swiss refineries they’re having a very hard time to source this much gold for China.

According to the World Gold Council all above ground gold accounts for 170,000 tons, in my opinion it’s impossible to know this amount. It’s a rather Keynesian thought that an institution can know how much grains of gold every single human being across the globe extracted from the earths crust in the history of humanity, and how all these grains were allocated or maybe lost throughout history. I think the total amount of above ground gold is as invisible as the hand that regulates the free market. Every economic agent can only be positive about its own gold holdings and decide to exchange these against goods or services, depending on the exchange rates set by the free market. Although all exchange rates are currently set by Keynes’ descendants, that doesn’t mean any institution knows the total amount of above ground gold.

It’s just a matter of strong and weak hands now. Most gold bugs are strong hands – because they not only hold gold for investment purposes, they also hold it because of their view on economic theory – while a random US citizen on food stamps that owns a golden earring is a weaker hand. Anyway, based on certain parameters (import, demand, mining) one would think that in coming months the price of gold and Chinese demand will get in conflict; the situation simply can’t go on like this forever.

Meanwhile the mainstream media is slowly waking up to the possibility the price of gold has been manipulated for decades through the London fix, which in my opinion is just one aspect of the manipulation process. Although I’m sure this aspect will unravel the rest of the process as well. All in all lots of stress in the gold market, reflected by long periods of negative GOFO.

This chart shows SGE gold premiums based on data from the SGE weekly reports (it’s the difference between the SGE gold price in yuan and the international gold price in yuan).

Below is a screen shot of the premium section of the SGE weekly report; the first column is the date, the third is the international gold price in yuan, the fourth is the SGE price in yuan, and the last is the difference.

(Courtesy: http://www.ingoldwetrust.ch/  )