Gold and silver news and views - December 28 , 2013 .... Data , pertinent articles and views on and / or touching on the precious metals ..... bonus items exposing the fake fed taper , Turkey corruption scandals and their gold focal point , 4 missives from Koos Jansen , who discusses not just China in detail ( West to East transit of gold very interesting ) , but also gives granular analysis of Shanghai Gold Exchange Physical Delivery = China demand ( projected at over 2500 tons , net imports 2000 tons )

Things to ponder  - GLD holdings ( back up data can be found by perusing Harvey Organ for years in question)  :

1)  1280 tons   -  12/30/10 ;

2)  1254 tons  -  12/31/11 ;

3)   1350 tons -  12/31/12 ;

4)   801 tons   - 12/27/12 .

      Year over year change - 550 tons ! Wonder who gathered those 550 tons from the GLD ETF ?

And look at Comex for similar data comparison for 2012 to 2013 for the registered gold .....


Comex dealer gold - 12/31/12  ....  71 tons

Comex dealer gold - 12/27/13   ..... 15.4 tons


2014 should be interesting based on the past twelve months ......


Two from Koos Jansen....

More On The West To East Gold Exodus

The most significant parameter to measure the gold distribution from west to east is the trade vein that runs from the UK through Switzerland through Hong Kong, eventually reaching Shanghai.

The UK Source

In October the UK has net exported 90 tons of gold to Switzerland, – 16 % m/m, year to date the Swiss have net received 1199 tons. The UK net exported 1326 tons in total in the first ten months of this year, of which 477. 9 tons were sourced by GLD. The unusual outflows remain elevated throughout the entire year. Also note, the UK is hardly importing any gold this year, as if physical gold is difficult to source.

From 1 January until 31 October GLD lost 15.3 million shares. Can it be the Chinese redeem physical gold from GLD through “agents” like Blackrock that have sold huge amounts of shares this year and possibly redeemed these shares for physical gold through GLD’s authorized participants? Just a theory..

This is a picture taken on 25 November 2013.

On the right we can see Mr. Xie, president of China’s third largest Sovereign Wealth Fund NSSF, on the left Mr. Lawrence Fink, chairman and CEO of BlackRock.

Pass The Swiss

The Swiss only publish their total gold trade numbers every 3 months; last data was from September. As we can see from the chart, all the gold that is being imported into Switzerland this year is being remelted and exported; this was also confirmed by a Swiss refinery. Exports stand at an all time record this year at 2184 tons, and there are 3 months left on the calendar. Annualized exports would be 2912 tons, which is 1362 tons more than what the Swiss exported in 2012. We may assume this difference in exports is additional supply for the east.

The bulk of Swiss gold export is heading east, some directly to Shanghai, some first to Hong Kong. From the Hong Kong Census And Statistics Department we know 779 tons were net imported from Switzerland into Hong Kong year to date. 651 tons more than what was net imported in total in 2012.

The Hong Kong Trading Hub

We can see a correlation between the net amount of gold that comes into Honk Kong from Switzerland and the net amount that goes out to the mainland. Concluding, most mainland net gold imports through Hong Kong are being supplied by Switzerland.

We can also see strong UK net export of gold to Switzerland prior to April (in April the price of gold crashed and Chinese physical buying exploded), but this not unusual as we can see from the “UK Gold Trade” chart ranging from 2009-2013. Often huge volumes are shipped between the UK (LBMA) and Switzerland (refineries).

If SGE delivery is mainly supplied by import from Hong Kong, demand is certainly not waning. In November 168 tons were withdrawn from the SGE vaults, up + 21 % from October.  (compared to 0.121 tons of physical delivery at the COMEX in November. More information on the differences between physical delivery at the SGE and COMEX can be found here and here)

A remarkable phenomenon that has happened in Hong Kong trade earlier this year was this:

There was a huge spike in gold export from Hong Kong to the mainland in March. As if someone knew there was going to be immense demand for physical in April in the mainland. But why would anybody import expensivegold  in March to sell it for bottom prices in April? The answer: Chinese import doesn’t have to work like that. Like I  described in this article gold can be consigned by, in example, HSBC and ICBC.

This is how it works; the consigner HSBC (Hong Kong and Shanghai Banking Corporation) can ship the gold to the Mainland, without selling it at this stage. On arrival it has to be registered within 7 days at the SGE and move into the vaults. The gold is now merely transported, not sold.

The consignee ICBC will then ask HSBC for a quote in USD/oz (International Spot) and then decides the offer RMB price at the SGE. The SGE Premium is based upon freight costs, insurance costs, customs declaration fee, storage fee, ICBC’s profit, etc.

After the gold is sold on the SGE, ICBC must pay HSBC in USD within 2 days and also needs to let the State Administration of Foreign Exchange verify the payment.

I am aware that there was an arbitrage opportunity  in early 2013 that could have explained some of the high volumes of gold trade between Hong Kong and the mainland. Though this couldn’t have explained the record net gold export, just before the price dropped in April and the SGE was stormed for physical gold.

In between 22 and 26 April 117 tons of physical gold was withdrawn from the SGE vaults. That is an exceptional amount of gold to hold in stock, unless one knew demand would rise significant and had made pre orders accordingly. Just a theory..

In any case, the main vain has brought the mainland 957 tons of gold in the first ten months of this year, annualized 1148 tons. But Hong Kong is certainly not the only port through which the mainland is importing gold,  my analysis shows the mainland’s total net gold import can reach up to 2000 tons this year.

Hong Kong net imported 510 tons of gold in this period. Further research should point out how much of this was smuggled into the mainland.

Written by Koos Jansen on December 29, 2013 at 12:25 am

AND........










http://www.ingoldwetrust.ch/sge-delivery-16-20-december-55-tons-2128-tons-ytd

SGE delivery 16-20 December 55 Tons, 2128 Tons YTD

In end-stage of 2013, in between 16 – 20 December, the “Chinese Aunties” have withdrawn 55 tons of gold from the vaults of the Shanghai Gold Exchange. That’s more than the official gold reserves of Finland and most likely more than what has been globally mined that week. The Chinese gold rush has been in an upward trend in recent weeks. Lets see how much gold will be drawn from the vaults in the last trading week of 2013. The yearly total of withdrawals, which equal Chinese gold demand, are on track to reach 2169 tons.

SGE gold premiums remained stable over this period around 1 %.

Overview Shanghai Gold Exchange data week 51

- 55 metric tonnes withdrawn in week 51 (underlined in blue two images below), 16-12-2013/20-12-2013
- w/w  + 8.81 %
- 2128 metric tonnes delivered year to date (underlined in red two images below)
- weekly average 41.7 tonnes YTD, 2013 estimate yearly total 2169 tonnes.

Source: SGE, USGS

For more information on SGE withdrawals read this, this, this and this.

This is a screen dump from Chinese SGE trade report; the second number from the left (本周交割量) is weekly gold withdrawn from the vault, the second number from the right (累计交割量) is the total YTD.

This chart illustrates 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 dump 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.

On December 28 there was a podcast released on SilverDoctors.com named: PM FUND MANAGER: 57 TONS OF GOLD DRAINED FROM SHANGHAI VAULTS IN PAST WEEK! It’s a conversation between the Doc and Dave Kanzler.

My comment on the part where they talk about the SGE (starts at 6:50):

The Doc states correctly that in between 9 and 13 December 2013 there were 50 tons of gold withdrawn from the SGE vaults (look a few images up at the screen dump from the Chinese SGE weekly report, I drew a green line under this amount of withdrawals). The Doc also states there has been roughly 2100 tons of gold withdrawn year to date which equals Chinese demand according to the PBOC (underlined in red). Again correct, IMVHO.

Then Dave Kanzler responds that is was actually 57 tons in that week (9-13 December). From this moment on Dave an the Doc start talking about two different subjects. The Doc refers to gold withdrawn from the vaults, where Dave refers to the amount of gold in the vaults that changes ownership at the end of a trading day through settlement between long and short contracts (a process that can be repeated into infinity, not quite significant data for gold investors that are interested in demand). I know this not only because they state different numbers, I know this because it’s clear where Dave gets his data from. Dave looks at the English SGE website that only publishes data on gold ownership changes in the vaults (if you check the website it exactly coincides with Dave’s numbers). The Doc looks at the Chinese SGE website (or my blog) that publishes how much physical gold actually leaves the vaults and tells us a lot about Chinese demand.

On a second note the title of the podcast bears a false statement. In week 50 (nor 51) there has not been 57 tons of gold being withdrawn from the vaults of the Shanghai Gold Exchange.

I wrote an open letter to Andrew Maguire once on the same matter.

Happy new year!

http://www.caseyresearch.com/gsd/edition/cheaper-gold-brings-new-customers-to-dubai-in-droves

¤ YESTERDAY IN GOLD & SILVER

Despite the big decline in the dollar index, there was almost no sign of that in the price action for gold in Far East and early London trading on their Friday.  The smallish rally in late-afternoon Far East trading got dealt with in the usual manner at the London open---and the gold price was back below the Thursday New York close by the London morning gold fix.

After that, the gold price didn't do a lot until around 8:45 a.m EST in Comex trading.  Then, in less than five minutes, the gold price popped six bucks or so, but that rally got cut off at the knees at 9 a.m.  By around 12:15 p.m. most of that gain had vanished---and after that the gold price chopped sideways in a very tight range into the 5:15 p.m. EST electronic close.

The CME recorded the low and high as $1,208.50 and $1,218.90 in the February contract.

Gold closed in New York on Friday afternoon at $1,213.80 spot, which was up $2.60 from Thursday.  Volume was pretty light at 88,000 contracts, net of December and January---but it was about 40% higher than Thursday's volume.

It was almost the same price pattern in silver.  The only noticeable difference was that once the price got capped at 9 a.m. EST in New York on Friday morning, silver traded within a ten cent price range for the remainder of the day.

The high and low were recorded as $19.75 and $20.105 in the March contract.

Silver finished the Friday session above the twenty dollar mark at $20.075 spot, which was up 27.5 cents from Thursday's close.  Net volume was about 24,000 contracts, about 20% more than Thursday's volume.

Platinum rallied quietly for most of the Friday session.  Palladium did as well, but that rally became far more robust once trading began on the Comex at 8:20 a.m. EST yesterday morning.  Then it appeared that a willing seller showed up around 10:30 a.m.---and that, as they say, was that.  Here are the charts.

The dollar index closed late on Thursday afternoon in New York at 80.51---and then traded sideways until 9 a.m. in Tokyo on their Friday morning.  At that point it began to head south with a vengeance.  It cut through the 80.00 mark like the proverbial hot knife through soft butter---but someone was standing by to catch that falling knife about 11:35 a.m. GMT in London, as it appeared that the dollar's decline was about to become terminal.  The low at that point was 79.75.  From there the index "recovered" back up to the 80.37 level before trading more or less sideways into the close.  The index finished the Friday session at 80.33---which was down only 18 basis points from Thursday.  At its low, the index was down 76 basis points, so the "rally" off that low was quite a save.

The dollar index would have most certainly crashed if a buyer of last resort hadn't put in an appearance.  Here's the 3-day chart so you can see the whole move in some sort of perspective.

****

The CME's Daily Delivery Report was a bit of a surprise in gold.  I was only expecting a handful of contracts, but 108 were posted for delivery on Tuesday.  The big short/issuer was Canada's Bank of Nova Scotia with 99 contracts---and the only long/stopper worth mentioning was JPMorgan Chase in it's in-house [proprietary] trading account with 105 contracts.  As Ted Butler pointed out in his column last Saturday, JPMorgan Chase has stood for delivery on more than 96% of the 6,493 gold contracts issued so far in the December delivery month.

In silver, there 19 contracts posted for delivery---and JPMorgan stopped 6 of those.  For the December delivery month, JPMorgan Chase has taken delivery of just about 61% of the all the December deliveries in silver, which comes to 2,015 contracts, or 10 million troy ounces in total.  That's five days of world silver production.  The link to yesterday's Issuers and Stoppers Report is here.

Another day---and another withdrawal from GLD.  This time an authorized participant withdrew 96,435 troy ounces.  There was also a withdrawal from SLVas well, but that wasn't reported on the ishares.com Internet site until well into Friday evening EST.  This time they reported a withdrawal of 1,636,397 troy ounces.  In the last three business days there has been about 5.8 million troy ounces withdrawn from SLV---and in retrospect, none of this looks like "plain vanilla" liquidation to me, as it appears that the silver was more desperately needed elsewhere.  I'll be very interested in Ted Butler's take on this in his weekend commentary coming out later this afternoon.

And, not surprisingly, there was no sales report from the U.S. Mint on Friday.

And also not surprisingly, there wasn't much in/out activity in gold at the Comex-approved depositories on Thursday.  Only 8,503 troy ounces were reported received---and 225 troy ounces were shipped out.  The link to that activity is here.

It was somewhat busier in silver, as 370,292 troy ounces were reported received [all into Scotia Mocatta]; and 1,960 troy ounces were reported shipped out.  The link to that action is here.

As I mentioned in Tuesday's column, because of the Christmas holiday, the Commitment of Traders Report won't be posted on the CFTC's website until 3:30 p.m. EST on Monday.

****

Selected news and views - focus on global markets and precious metals ......

Twirmoil Strikes; Treasury Yields Surge To 29-Month Highs As EUR/USD Insanity Ensues

TWTR collapsed ~15% off its highs (losing 1 BBRY or 2 JCPs) and FB tumbled 4%. Stocks overall broke their winning streak with a modestly red close but it was the action in the bond, commodity, and FX markets that stood out. Following copper's flash smash Tuesday, gold and even more so silver held their gains from the surge yesterday and pressed higher still today (silver's best week in 4 months). WTI crude closed at 2-month highs above $100.

A massive range day in the USD driven by a EUR surge to test 1.39 (2-year high and fail) swung the world's reserve currency down 1% and back up 1% (in a mini-Bitcoin-like panic). Yield rose modestly on the day with 10Y crossing 3% early on, pulling back, then hovering there into the close for the highest close in 2.5 years. VIX was a one-way street higher all day. All in all - a glance at these charts will make you wonder WTF...

This Zero Hedge piece from yesterday afternoon just after the markets closed is definitely worth your time.  The cartoon at the beginning pretty much sums up the equity markets as we know them today.  I thank reader U.D. for today's first story.

Doug Noland...Credit Bubble Bulletin: 2013 Year in Review

In a CBB titled “Do Whatever it Takes” back in August 2012, I discussed a television program I had viewed (sometime back) that provided an intellectual framework for better understanding the escalation of aerial attacks against civilians during World War II.

From “Do Whatever it Takes:” “In September of 1939, President Roosevelt issued an “Appeal… on Aerial Bombardment of Civilian Populations” to the governments of France, Germany, Italy, Poland and Britain”… As the war commenced, efforts were indeed made by most “belligerents” to limit aerial attacks to military targets away from innocent civilians. It wasn’t long, however, before civilian deaths mounted as bombs were unleashed ever closer to population centers. And then not much time elapsed before industrial targets were viewed as fair game, with civilians paying a progressively devastating price. Somehow, an increasingly desperate war mindset saw targeting population centers in much less unacceptable terms. Soon it was perfectly acceptable. War-time justification and rationalization saw conventional bombing of civilian targets regress into direct firebombing and incendiary raids on major cities in Europe and Asia. Less than six years passed between President Roosevelt’s “Appeal” and the dropping of nuclear bombs on Hiroshima and Nagasaki.”

My worst fears from the summer of 2012 central banker “Do Whatever it Takes” chorus came to fruition in 2013. The Fed injected a Trillion dollars (BOJ providing somewhat less) of new “money” directly into overheated financial markets in a non-crisis environment. And following several years of mind-numbing escalation, this year’s egregious monetary inflation was met with nary a protest. To be sure, “war time” rationalizations and justifications turned more creative and sophisticated, as previously unimaginable monetary measures were heralded as “enlightened.”

Doug CBB is always a must read...and his year-end review certainly qualifies as well.  I found it posted on theprudentbear.com Internet site earlier this morning.

Four King World News Blogs

1. Egon von Greyerz: "We Face Chaos and Destruction For Generations to Come".  2. Keith Barron: "Despite Propaganda, "The West Continues to Destroy Itself".  3. Art Cashin: "Fed May Have to Disastrously Reverse Q.E.".  4.Investors Intelligence: "We Haven't Seen Shocking Numbers Like This in Years".

LME to continue with planned warehouse policy changes

The London Metal Exchange said on Tuesday it will go ahead with planned changes to its warehousing policy aimed at addressing massive queues for metal despite top aluminium producer Rusal challenging the proposal.

The LME proposed new rules to overhaul its delivery system from next April that would force warehouses to release more stocks once the waiting time breaches 50 days. The exchange said in November it was determined to press ahead with the changes.

The upcoming changes in the world's largest and oldest metals marketplace come following intense regulatory and legal pressure over its storage system, with complaints about queues of more than a year and large surcharges to withdraw material from its warehouses.

Fifty days?  Why should anyone have to wait even five days foranything if its in stock.  Back in the late 1970s I was the inventory manager for a specialty steel company, and they stocked several grades of aluminum bar, and if a customer ordered it, we could have it out the door the same day under most circumstances...depending, of course, on how much bar cutting was involved.  This story was posted on the mineweb.comInternet site the day before Christmas.

Cheaper gold brings new customers to Dubai in droves

Lower gold prices are driving massive sales in the Gulf region, with new, younger customers getting in on the act.

More than 40% of the gold jewellery from India is exported to Dubai and other Gulf countries.

With the price of gold diving nearly 28% this year, from $1,700 an ounce in January to nearly $1,200 this month, Indian jewellers operating in the Gulf region have never had it so good.

``Gold has fallen 36% since the record high in 2011, largely due to heavy selling by institutional investors. Given the high demand at our 25 odd stores across the Gulf region, we often tend to sell and then buy on the same day,'' said Manishbhai Patel, an official of Manubhai Zaveri Jewellers in India.

This gold-related story, filed from Mumbai, was posted on themineweb.com Internet site yesterday sometime...and it'sdefinitely worth reading.

****

¤ THE WRAP

Against stupidity, the gods struggle in vain. - Friedrich Schiller

****

It was the second day in a row where precious metal prices took off like a NASA space launch at the start of the Comex trading session---and the second day in a row where prices were capped within a few minutes of the start of these rallies. There's nothing free market about this, as no "for profit" seller would ever sell their position in such a way that would not only stop these rallies cold, but reverse the price trend in the process.  Never happen---ever!!!

So JPMorgan et al are still at it.

But, having said that, with volumes as low as they've been over the last few days, Ted Butler is not sure if much damage has been done in the Comex futures market structure, as he feels that the vast majority of the short positions in both silver and gold are still firmly in the hands of the technical funds.  Unfortunately, the price action on both Thursday and Friday won't be in Monday's COT Report.

No significant moving averages in gold have been penetrated to the upside during the current rally, but the 20-day moving average in silver has been well penetrated---and the 50-day moving average beckons.  Here are the one-year gold and silver charts with the 20 and 50-day moving averages embedded.

The Comex structure is still locked and loaded for a gigantic move to the upside in all four precious metals if JPMorgan et al wish it---or are instructed to stand aside and let it happen.

The gold/silver highlights for me over the last 12 months was Her Majesty's visit to the Bank of England gold vaults last December, Germany's repatriation request from the New York Fed in January--and the ongoing massive amounts of gold disappearing into China this year, and now the vaults of JPMorgan Chase.  We should be getting China's import figures through Hong Kong for the month of November any day now.

How long this situation can be kept under control from a price perspective is hard to fathom, however it's obvious that all four precious metals are being kept on a tight leash, at least for the moment.  But as Ted Butler has said several times during December, there's never been a better time for "da boyz" to step out of the market for good.

All we can do is wait it out, which is what we were doing this time last year as well.  However, it's obvious to me that this price management scheme in the precious metals is on its last legs---and as I've said before, only the timing of the end game is unknown, and unknowable.

That's all for today---and I'll see you on Tuesday.

• Email
 
• Print

Add ons......

ZH comment on recent  Fed actions ...... spoiler alert , much more going on than " stated QE levels " 

Thu, 12/26/2013 - 11:55 | 4276897madbraz

Zerohedge needs to concentrate on the NY Fed and it's alarming increase in operations/manipulations in the last 18 months to sustain and increase leverage in the system to keep this turd of a time bomb called a market from capsizing.

The so-called "reverse repo" operations, disguised by Bill Dudley to seem like an innocuous operation of "readiness" in money markets, have grown to alarming volumes.  The intent is simple - to provide collateral (treasuries) to parties to utilize in the tri-party repo market that can be multiple times.  Cash doesn't work for re-hypothecation purposes.

Recent reverse repos:  $42 billion on Tuesday, $28 billion on Monday, $26 billion last Friday.  All this while we have the lowest trading volumes in 14 years.  The higher the stock market goes, the more insane these figures will become.  To show you how bad things are, the NY Fed just increased the daily limit that can be allotted to each participant (30 to 50 financial gamblers) from $1 billion a day to $3 billion on December 20th!

On top of that, every day some $21 billion on average is lent to dealers in the form of treasury collateral to further support their bets without the need to go to market and buy treasuries (last thing in the world the FED wants, idiotic thinking).  Numbers are usually 10-20 billion in new daily loans and some 8 billion that is rolled over from the day before (this is supposed to be an emergency lending facility, not a line of credit to banks that can be rolled over repeatedly!!!  

Let's add up:  $40 billion in reverse repo collateral, $20 billion in securities lending collateral ($8 billion rolled over daily) and POMO cash of $5 billion.  $65 billion every day, of which $60 billion is treasury collateral that is leveraged X times, maybe $200 billion in ammunition every day.

Despite assertions from zero hedge to the contrary, FED balance sheet expansion can't keep this going.  You can't expand their balance sheet by a trillion and have the stock market value go up by $4 trillion - the collateral needed to support that makes it mathematically impossible as growth is exponential.  That's why you see players asking for $50 billion in collateral per day at the end of 2013, as opposed to less than $20 billion last year.

Call me skeptical, but it won't work in 2014 - unless the NY FED can have daily operations of $200 billion by the end of next year.

It will end soon.

Then consider what happened Friday ! 

Today The Fed Soaked Up A Record $95 Billion In Excess Liquidity Sloshing Around

Submitted by Tyler Durden on 12/27/2013 15:48 -0500

• Liquidity Bubble
 
• Reverse Repo

inShare

Once upon a time, back in 2010 and 2011, the Fed's Primary Dealers would engage in a furious game of window dressing at the end of every quarter, when they would sell their risky assets, and convert them into cash to appears idiot accountants and even greater idiot regulators, a phenomenon which could be followed on the Fed's Primary Dealer asset holding page, and which we would showcase periodically such as on the chart below from October 2011.

Well, in the intervening period, when the Fed managed to soak up another $1.3 trillion in "high quality collateral", and replace it with fungible reserves (used exclusively as collateral for marginable risk-on positions) courtesy of QEternity, something changed. Whether it is a regulatory matter, or simply liquidity preference, but holding Treasury paper has become more attractive to US financial firms (mostly Primary Dealers) than holding cash.

Enter the Fed's recently announced (read more here) Fixed-Rate Reverse Repo facility, which earlier today saw its greatest use to date in history, when a record $95 billion in Treasury paper was repoed out to the street for a 3 day term, at an 0.03% annual rate. Since there were 68 bidders in the operation, the average participant had an extra $1.4 billion in cash lying around to give to the Fed in exchange for holding Treasurys into year end.

So for all those wondering about all those sophisticated technical and fundamental reasons why the Fed is pushing hard on the Reverse Repo pedal, and how this is indicative of the Fed's far-sighted approach of how to best executed a tightening when the time comes, turns out the FRRR facility was nothing more than yet another way that the Fed allows banks to paint their books for t month, quarter and year end purposes.

But while the Fed enabling its real owners is nothing new, what is perhaps more troubling is that earlier today there was $95 billion in excess liquidity floating around. With a B.

So yes, keep repeating that there is no liquidity bubble (which incidentally, is about $2.5 trillion or the size of US banks' excess deposits).





Turkey corruption scandals - centered in large part on gold ?


http://www.zerohedge.com/news/2013-12-28/blame-petrogold-how-turkish-government-may-be-casualty-119-billion-golden-loophole

Why The Turkish Government May Be The Casualty Of A $119 Billion PetroDollar "Loophole"

Submitted by Tyler Durden on 12/28/2013 15:13 -0500

• China
 
• Cohen
 
• Corruption
 
• India
 
• Iran
 
• Israel
 
• Natural Gas
 
• None
 
• Obama Administration
 
• Precious Metals
• President Obama
 
• Reuters
 
• Saudi Arabia
 
• Turkey

inShare

It was in October 2012 when we explained how Iran evades the Western blockade (ostensibly with the implicit nod of none other than the US), and when we first defined the concept ofPetroGold in the context of the Turkey-Dubai-Iran crude-for-gold triangle. For those who need a quick refresher, here it is:

In recent months there has been a lot of incorrect speculation that because Iran has been shut off from the petrodollar, SWIFT-mediated regime, its economy will implode as the country has no access to the all important greenback and can thus not conduct international trade - the driving factor behind the international sanctions that seek to topple the local government as Iran dies an economic death. And while there have been bouts of substantial inflation, which so far the local government appears to have managed to put a lid on by curbing gray market speculation, Iran continues to more or less operate on its merry ways with international trade most certainly taking place, especially with China, Russia and India as main trading partners. "How is this possible" those who support the Western-led embargo of all Iranian trade will ask? Simple - gold. Because while Iran may have no access to dollars, it has ample access to gold. This in itself is not new - we have reported in the past that Iran has imported substantial amounts of gold from Turkey, despite the Turkish government's stern denials. Today, courtesy of Reuters, we learn precisely what the 21st century equivalent of the Great Silk Roadlooks like, and just how effective Iran has been as a lab rat in escaping the great petrodollar experiment, from which conventional wisdom tells us there is no escape. Presenting: petrogold.

One year later, following Iran's unperturbed ability to exist in a world without US dollars, the blockade of Iran is a thing of the past, and the west has engaged in a full-blown detente with the country, much to the fury of both Israel and Saudi Arabia, in exchange for the symbolic gesture that Iran will limit its nuclear enrichment, lowering and in many cases outright eliminating Iran sanctions, which proved completely futile.

So a happy ending for Iran, if only for now thanks to the fact that despite all the status quo's lies gold is and always has been money and can substitute for dollars.

However, one country that has seen better days, whose government may be on the edge of collapse due to an unprecedented corruption scandal precisely for enabling said PetroGold scheme, and which has been in the news on a daily basis recently, is Turkey. As Turkey's Today's Zaman explains in "Iran's Turkish Gold Rush", the political crisis Turkey finds itself in may be nothing but a consequence of the PetroGold scheme conceived over a year ago, and in which Turkey played a crucial role. 

Here is how the Turkey-Dubai-Iran PetroGold triangle, or as the Zaman calls it, "gas for gold", may soon result in the toppling of yet another government, simply because it showed that existence outside of the clutches of the 'Petrodollar' is perfectly possible...

* * *

From Iran's Turkish Gold Rush, highlights ours:

Turkey's Islamist government is being rocked by the most sweeping corruption scandal of its tenure. Roughly two dozen figures, including well-connected business tycoons and the sons of top government ministers, have been charged with a wide range of financial crimes. The charges ballooned into a full-blown crisis on Dec. 25 when three ministers implicated in the scandal resigned, with one making a dramatic call for Prime Minister Recep Tayyip Erdogan to step down as well. An exhausted-looking Erdogan subsequently appeared on television in the evening to announce a cabinet reshuffle that replaced a total of 10 ministers.

The drama surrounding two personalities are particularly eye-popping: Police reportedly discovered shoeboxes containing $4.5 million in the home of Süleyman Aslan, the CEO of state-owned Halkbank, and also arrested Reza Zarrab, an Iranian businessman who primarily deals in the gold trade, and who allegedly oversaw deals worth almost $10 billion last year alone.

The gold trade has long been at the center of controversial financial ties between Halkbank and Iran. Research conducted in May 2013 by the Foundation for Defense of Democracies and Roubini Global Economics revealed the bank exploited a "golden loophole" in the US-led financial sanctions regime designed to curb Iran's nuclear ambitions. Here's how it worked: The Turks exported some $13 billion of gold to Tehran directly, or through the UAE, between March 2012 and July 2013. In return, the Turks received Iranian natural gas and oil. But because sanctions prevented Iran from getting paid in dollars or euros, the Turks allowed Tehran to buy gold with their Turkish lira -- and that gold found its way back to Iranian coffers.

This "gas-for-gold" scheme allowed the Iranians to replenish their dwindling foreign exchange reserves, which had been hit hard by the international sanctions placed on their banking system. It was puzzling that Ankara allowed this to continue: The Turks -- NATO allies who have assured Washington that they oppose Iran's military-nuclear program -- brazenly conducted these massive gold transactions even after the Obama administration tightened sanctions on Iran's precious metals trade in July 2012.

Turkey, however, chose to exploit a loophole that technically permitted the transfer of billions of dollars of gold to so-called "private" entities in Iran. Iranian Ambassador to Turkey Ali Reza Bikdeli recently praised Halkbank for its "smart management decisions in recent years [that] have played an important role in Iranian-Turkish relations." Halkbank insists that its role in these transactions was entirely legal.

The US Congress and President Obama closed this "golden loophole" in January 2013. At the time, the Obama administration could have taken action against state-owned Halkbank, which processed these sanctions-busting transactions, using the sanctions already in place to cut the bank off from the US financial system. Instead, the administration lobbied to make sure the legislation that closed this loophole did not take effect for six months -- effectively ensuring that the gold transactions continued apace until July 1. That helped Iran accrue billions of dollars more in gold, further undermining the sanctions regime.

In defending its decision not to enforce its own sanctions, the Obama administration insisted that Turkey only transferred gold to private Iranian citizens. The administration argued that, as a result, this wasn't an explicit violation of its executive order.

It's possible that the Obama administration didn't have compelling evidence of the role of the Iranian government in the gold trade.However, the president may have also simply sought to protect his relationship with Ankara and didn't want to get into a diplomatic spat with Erdogan, who he considers a key regional ally.

If the administration didn't feel that the sanctions in place at the time were sufficient to take action against Halkbank, after all, it could have easily shut down the gold trade by amending its executive order. But at the time, Turkey was also playing a pivotal role in US policy in Syria, which included efforts to strengthen the more moderate opposition factions fighting President Bashar Assad's regime.

It's also possible, however, that the Obama administration's decision had less to do with Turkey, and more to do with coaxing Iran into signing a nuclear deal. In the one-year period between July 2012, when the executive order was issued, and July 2013, when the "golden loophole" was closed, the Obama administration's non-enforcement of its own sanctions reportedly provided Iran with $6 billion worth of gold. That windfall may have been an American olive branch to Iran -- extended via Turkey -- to persuade its leaders to continue backchannel negotiations with the United States, which reportedly began as early as July 2012. It could also have been a significant sweetener to the interim nuclear deal eventually reached at Geneva, which provided Iran with another $7 billion in sanctions relief.

Indeed, why else would the administration have allowed the Turkish gold trade to continue for an extra six months, when Congress made clear its intent to shut it down?

This brings us back to the current corruption drama in Turkey. The ruling Justice and Development Party (AKP) has been claiming that it is a victim of a vast conspiracy, blaming everyone from Washington to Israel to US-based Islamic cleric Fethullah Gulen for its woes. Some Turkish media have pointed a finger at David Cohen, the Treasury Department's undersecretary for terrorism and financial intelligence, who happened to be in Turkey as the news began to break. Erdogan even raised the possibility of expelling the US ambassador to Ankara, Francis Ricciardone.

But if the charges stand against the panoply of well-connected figures fingered, the AKP will have only itself to blame. While the gas-for-gold scheme may have been technically legal before Congress finally shut it down in July, it appears to have exposed the Turkish political elite to a vast Iranian underworld. According to Today's Zaman, suspicious transactions between Iran and Turkey could exceed $119 billion -- nine times the total of gas-for-gold transactions reported.

Even if the Turkish-Iranian gold trade represents only a small part of the wider corruption probe, the ongoing investigation could provide a window into some nagging questions about the relationship between Ankara and Tehran. Perhaps we will finally learn why the Turkish government allowed Iran to stock up on gold while it was defiantly pursuing its illicit nuclear program -- and whether the Obama administration could have done more to prevent it.

* * *

Bottom line: dare to mess with the Petrodollar and the wrath of the US government will hunt you down... sooner or later.

and...

Gold at center of corruption, money laundering allegations hitting Turkish gov't

MUSTAFA SÖNMEZ - mustafasnmz@hotmail.com

Gold has been the focus of corruption allegations that are hitting the Turkish government, as some of the suspects of the case are alleged of being involved in Turkey’s gold-for-gas trade with Iran and money laundering through gold deposits

Print PageSend to friend »

• Share

 

This Jan 19 file photo shows a plane that was allegedly carrying 1.5 tons of unregistered gold worth $65 million from Istanbul, revealed to be belonging Reza Zarrab. DHA photo

Corruption operations that topped Turkey’s agenda and caused ministers’ resignations are continuing with focus on gold.

The operations, encompassing three different investigations, including land planning frauds, the exploitation of public assets and else, but for now the most striking allegations that horrified the public are the ones including “gold,” briberies paid over it and minister’s sons accused of receiving those briberies...

Gold has become the main subject of “money laundering” claims since recognizing Turkey’s bullion gold trade’s boom since 2011. Turkey exported $1.5-billion worth of gold, while importing $6.2-billion gold in 2011, but the export explosion came in 2012 and reached $13.3 billion in one year. The country’s import was $7.6 billion that year. In 2013, import came to the forefront again and reached $13 billion. What was happening, why did gold trade burst?

Turkey could not pay for the natural gas it buys from Iran in foreign exchange due to U.S. sanctions on banks. So, how could it return the money? A way to bypass sanctions was found: Iran was going to be paid in Turkish Liras and then the country would use those liras to buy gold in Turkey, which would look like Turkey is exporting gold to Iran. Since there are not billions of dollars’ worth of gold bullion in Turkey, it needed to be imported from Switzerland. An intermediate station was also found to avoid the U.S.’ rage and that was the United Arab Emirates (UAE). A part of the gold looked like it was exported from Turkey to the UAE and was transferred to Iran’s accounts. In the same way, gold was imported from the UAE.

Overall, Turkey’s gold exports within the past four years, between 2010 and 2013, have amounted to $27 billion and

its imports have appeared to be $18 billion. Some $8 billion of the exports seem to be exported to Iran, while exports to the UAE also constitutes $6 billion, which can also be regarded as going to Iran.
Therefore, $15 billion of

Iranian natural gas was paid for in this way. Most of this gold was procured by Switzerland, while a small part has been brought by Dubai.

Many argued this payment system’s being recorded as “export,” caused export figures to falsely rise; the country’s current account deficit looks smaller than it actually is and national income is exaggerated. Moreover, some analysts also warned the transfer method may cause headaches for Halkbank and others involved in the scheme.

Question and answer

I dealt with this subject in about 10 of my columns in 2012. The Republican People’s Party (CHP) Istanbul deputy Umut Oran filed a parliamentary question in July 2012 referring to my column to ask Deputy Prime Minister Ali Babacan about the issue.

Babacan sought to clear the issue on November 2012 with this answer; “We put the money for Iranian gas into Iran’s bank account in Turkey in liras. However, it is impossible for Iran to bring that money to its country in the dollar because of international restrictions and U.S. sanctions. Therefore, Iran withdraws that money from its account and buys gold from the market to bring it back. I don’t how it does so, but this is how it works.”

The claims are saying Reza Zarrab and his team were one of the mediators that used to do what Babacan said he didn’t know and they were earning a great amount of money.

Gold deposits

According to claims, Zarrab needed some convenience support in the transaction of transferring the gold bullion with planes and couriers. Mediator bank Halkbank’s General Manager Süleymen Arslan, Economy Minister Zafer Çağlayan and his son, Interior Minister Muammer Güler and his son and EU Minister Egemen Bağış are claimed to be the ones helping him with citizenship, residence and business permits in return for bribery.

The Turkish banks’ gold deposit practices, which are presented with an innocent reason of inclusion of under-the-pillow gold into market through economy management, have also been regarded as being a part of these money laundering claims.

It was said there were approximately 5,000 tons of gold with a value of $300 billion under pillows and they were aimed to be drawn to recoded finance.

Banks were allowed to keep 30 percent of the reserves they have to allocate for the Central Bank in gold, which was alluring for them.

However, the risk of this gold to be brought by citizens to be used for money laundering wasn’t taken care of much and banks kicked-off the gold rush.

The Total value of gold deposits was almost 2 billion liras in 2010 reached 21.8 billion liras by of the end of October. This means more than a 990 percent increase! Three years ago, only 0.3 percent of the bank deposits were in gold, but in October the ratio was 2.5 percent.

Not only ordinary people, many companies engaged in the gold business and foreign investors are among the banks’ gold deposit customers. Gold accounts are usually non-interest accounts. The gold owner opens an account and the bank sends the gold jewelry to a refinery to transform it into gold bars, which can be withdrawn by the customer if they want. The refining cost is paid by the banks, but it earns commission. What is the Central Bank’s benefit here? This way, its reserves swell so $21 billion of foreign exchange reserves that looked like $135 billion in November was gold at hand. Many international money launderers, like Zarrab, are claimed to be using these gold deposit accounts. Some mind-blowing numbers, like 85 billion euros, are voiced for the amount of laundered money and banks other than Halkbank are accused of being involved as well.

FATF

The Financial Action Task Force (FATF) describes Turkey as one of the countries that have flaws in its fight against Money Laundering Legislation, along with Indonesia, Pakistan, Syria, Yemen Ethiopia, Ecuador and Nigeria.

Is it possible the government’s attempts to control the probe through changing investigation officials and regulation amendments to push Turkey from the gray zone to the black zone on the OECD level? Would Turkish banks face international blockage? It was clear that such a measure would create a great hole in a Turkish economy that is dependent on foreign capital inflow. Claims of Turkey’s financing and supporting al-Qaida-like organizations in Syria could be added and the Justice and Development (AKP) leadership could face serious accusations. It wasn’t coincidence the U.S. Treasury Undersecretary David Cohen met with banks in Istanbul and discuss Halkbank.



China.....


http://www.ingoldwetrust.ch/shanghai-gold-exchange-physical-delivery-equals-chinese-demand

Shanghai Gold Exchange Physical Delivery Equals Chinese Demand

Year to date physical delivery on the Shanghai Gold Exchange stands at 1546 tons. Apart from an article on Bloomberg there has been little coverage in the mainstream media on this extreme amount of physical gold that is being sold in China, nor do they report on unusual high gold export from the UK to Switzerland, nor on equally remarkable export from Switzerland to China. They seem blind for the current shift in wealth and power that is taking place right in front of their eyes; for the distribution of gold to the east.

Commentators must wonder if the numbers the Shanghai Gold Exchange publishes regarding deliveries are truly about physical gold that leaves the SGE vaults. And if so, their relation to Chinese demand. In a previous post on this blog l’ve already shown that the delivery numbers I publish are about gold that is being withdrawn from one of the 49 designated warehouses in the mainland. Now we just have to connect a few dots to put this in perspective.

Chinese Demand

First let’s take a look at total Chinese gold demand, that is jewelry, industrial and investment demand (bars and coins) summed up. Oddly there is a difference between the data from the World Gold Council and the Peoples Bank Of China. Oncoming quote is from a Reuters article in which they report on 2011 total Chinese gold demand, their source is the WGC.

“We were still some distance away from the possibility that China might be the larger market in annual demand terms. What we’re doing, based on those figures for last year, is sticking our neck out a bit and suggesting that 2012 will be the first year that China does exceed India in terms of tonnage demand,” WGC managing director, investment, Marcus Grubb said.

Total demand for gold in China in 2011 rose 20 percent to 769.8 tons, driven by jewelry and investment demand.

770 tons is much lower than what the PBOC reports. Every year there is a little known document published called the China Gold Market Report, compiled by the PBOC (and by the SGE, Shanghai Futures Exchange and China Gold Association, but these are all controlled by the PBOC). 

A screen dump from the China Gold Market Report

The annual report states Chinese gold demand is divided into six categories:

1. Jewelry manufacturing ..starting from 2003, China‘s gold use in the jewelry industry has been growing for 9 consecutive years, reaching 456.66 tons in 2011..

2. Industrial raw materials ..gold used in 2011 amounted to 53.22 tons, up 5.94 tons or 12.53 percent over the previous year.

3. Gold coin casting In 2011, the China Gold Coin Corporation planned to issue 1.486166 million gold coins in 15 categories, while the actual gold used reached 21.55 tons..

4. Investment gold bars for hoarding purposes In 2011, 213.85 tons of mini-sized gold bars were sold for hoarding purpose..

5. Other industrial purposes Throughout 2011, gold used for other purposes amounted to 13.52 tons..

6. Net investment Gold used for net investment refers to the demand arising from the transfer process of gold as an investment tool, which amounted to 284.88 tons in 2011..

The conclusion in the report (straight from the PBOC!):

Deregulation of the gold control to open the gold market to the public in 2002 led to the constant rise in Chinas gold demand, which unprecedentedly exceeded 1,000 tons in 2011..

Although the WGC claims demand was 770 tons, it was actually more than 1000 tons. If we add up all six categories the outcome is 1043.68 tons, which indeed exceeds 1000 tons. Worth mentioning is that the PBOC not only controls the SGE , but also the commercial banks (that do a lot of trading for their clients on the SGE) and all gold mines. This supports the presumption that the PBOC has a clear view on Chinese demand.

SGE Delivery

The Chinese gold market is constructed by the PBOC such that by law all gold supply (import and mine) is required to be sold through the SGE. Once sold this gold is not aloud to return to the vaults of the SGE. Below a quote on legislation from the PBOC (link page 15):

On October 30, 2002, the Shanghai Gold Exchange commenced operation under the supervision of the State Council. Thereafter, the PBOC ceased its gold allocation and gold purchase operations. All PRC gold producers are now required to sell their standard gold bullion through the Shanghai Gold Exchange, and prices of gold on the Shanghai Gold Exchange are determined by market demand and supply, which essentially converge with the price of gold in the international market. On February 27, 2003, the State Council cancelled the approval requirements for the production and sale of gold and gold products. As a result, although the Administrative Regulations have not been abolished, the policy of “centralized purchase and allocation of gold” as stipulated under the Administrative Regulations has been terminated in practice.

Since July 2004, the State Council reformed the administrative approval system and cleared the outstanding projects which were subject to administrative approval by its ministries and departments. However, the import and export of gold and gold products remain subject to administrative examination and approval. The authority responsible for such examination and approval is the PBOC.

Read point 2 of a considerations segment from an ICBC gold product.

This rule does not mean investors can‘t sell their gold back to the ICBC, as we can see from ICBC’s Gold Repoprogram.

Now let’s take a look at SGE physical delivery. In the the screen dump below, taken from the last monthly SGEreport in 2011, the second number from the right (which says 本年累计交割量) is total delivery in Kg.

1043 tons, where have we seen this number before? That‘s right, it’s exactly total demand. Coincidence? I think not, but let’s double check with the numbers from 2010. From the China Gold Market Report 2010 we learn:

1. Jewelry manufacturing 357.12 tons

2. Industrial raw materials 47.38 tons

3. Gold coin casting 8.52 tons

4. Investment gold bars for hoarding purposes 141.88 tons

5. Other industrial purposes 16.61 tons

6. Net investment 265.7 tons

All six summed up is 837.21 tons. Total SGE physical delivery:

Exactly 837.21 tons, confirming that SGE physical delivery equals Chinese demand. Let this sink in for a minute. Although the price of gold has come down sharply in recent months and the west is getting more bearish by the day, year to date SGE physical delivery on 17 September 2013 stood at 1546 tons, heading for +2000 tons in total this year. This is more gold than the sovereign reserves of India, Japan, the UK and Saudi Arabia combined. At this very moment above ground gold is being moved on a massive scale, in the first seven months of this year1018 tons were exported by the UK – out of GLD and the LBMA, most of this gold is refined by the Swiss into kilo bars and then sent to China.

The difference between WGC and PBOC data on Chinese demand

The WGC reports on gold demand from Greater China and from the separate regions China (mainland), Hong Kong and Taiwan.

For our comparison we focus on data from China, because the PBOC does likewise – in terms of trade and statistics the PBOC treats the regions as different countries, all having their own customs department and currency.

The fact that demand calculated by the PBOC equals SGE delivery suggests that gold purchases by jewelers on the SGE are counted as jewelry demand, not actual jewelry sales. Same as with other demand categories from the China Gold Market Report such as industrial and coin. Purchases by the China Gold Coin Corporation on the SGE are counted, not the amount of coins sold. This could partially explain the difference between total demand calculated by the WGC and the PBOC, that each count on different levels. When I asked the WGC on the reason for the difference they replied:

The data that we publish in Gold Demand Trends are collected for us by Thomson Reuters GFMS. Our data represent jewelry and bar & coin demand and do not incorporate any industrial demand or fabrication, which is included in the PBoC figures. As I am sure you will appreciate, data collection of this sort relies on a number of proprietary sources and these will not necessarily be the same for both GFMS and PBOC. It is, therefore, perhaps not surprising that the estimates of demand differ somewhat. Without a greater level of transparency as to the nature of the PBOC data and their collection method, I am unable to comment in more detail on the reasons for the differences.

Industrial demand, 66.74 tons in 2011, can’t make up the WGC-PBOC gap of 273 tons. 

A plausible explanation for the remaining +200 tons is physical investment not seen by the WGC, hidden in category six of the China Gold Market Report; net investment. When confronting Thomson Reuters GFMS with the matter they replied: 

Thomson Reuters: 

We have checked with our Data Specialist and confirmed that we use a different methodology. Total Chinese demand used by Thomson Reuters GFMS only include jewelry, physical bullion bars/coins and all industrial demand. Any stock movement change (which is essentially the item 6 net investment) will not be included as underlying demand. If you will add items 1-5 by the SGE report and then compare the total with our demand, we have a higher number.

Me:

So according to you category six is “stock movement change”? This would be gold added to the stocks from jewelers, the mint, industrial companies, etc? (this is a few hundred tons each year!)

Thomson Reuters:

That’s correct based on the resolution provided by our data specialist.

From the beginning of 2009 to the first half of 2013 “category six” in total was 1279 tons of gold. A stock pile this size is absolutely inexplicable for jewelers and the mint to hold.

Redistributing the chips

The drop in the price of gold early April and the exodus to the east that followed were conceived coherent events to distribute core money prior to a change in monetary order. How else can we interpret the fact that SGE delivery in between 22 – 26 April was 117 tons, though mainland import from Hong Kong peaked in March! Net import was 61 tons in February, in March it broke all records reaching 130 tons.  After this all-time import record, and the vaults were sufficiently packed, the price of gold plunged and the Chinese could buy inordinate amounts of physical gold on the SGE. 

If you think about it, the redistribution of gold is the only logical thing to happen given the state the world economy is in. China is sitting on a pile of $3.3 trillion dollars, the possibilities for the developed economies of printing money and kicking the can are ending, the reserves of gold in the west are an imbalance relative to the economic power acquired by Asia during the last decade; gold has to go to China in order to equalize the chips. Not only Chinese official reserves are far behind, also grams per capita have a lot of catching up to do.

Written by Koos Jansen on September 18, 2013 at 10:01 pm

http://www.ingoldwetrust.ch/shanghai-gold-exchange-physical-delivery-equals-chinese-demand-part2

Shanghai Gold Exchange Physical Delivery Equals Chinese Demand, Part 2

If you haven’t read part one, you can find it here.

In this post I will further analyze the structure of the Chinese gold market, display new findings on how we can measure Chinese gold demand by the amount of gold withdrawn from the Shanghai Gold Exchange (SGE) vaults, discuss the consequences from these findings and touch upon a few other aspects of Chinese demand. Because of my belief that this is highly important information, I will try to be painstakingly accurate in this post and support my analysis by appending various sources. 

SGE physical delivery year to date is 2023 tons, second number from the right (累计交割量) is gold withdrawn YTD in Kg, and will be 2146 tons by year end. Total demand including PBOC purchases will be over 2500 tons en net import 2000 tons.

The key institutions of the Chinese gold market are the Shanghai Gold Exchange (SGE), the Shanghai Futures Exchange (SHFE), the People’s Bank Of China (PBOC) and the China Gold Association (CGA). A good part of my information is based on three types of reports published by these institutions: the CGA Gold Yearbooks, the SGE Annual Reports and the China Gold Market Reports. I will refer to them as the gold reports or just the reports. Some editions are publicly available on the SGE website, some were sent to me by contacts in the mainland. Although most of these reports are compiled through a collaboration of the four institutions, in this post the PBOC will be referred to as the writer.

When I speak of total Chinese demand in this post, I mean total demand as described by the China Gold Market Reports, written by the PBOC. This includes jewelry, coin, bar and all sorts of industrial demand, it excludes PBOC purchases. Thomson Reuters GFMS and the World Gold Council use different measures of demand as I will discuss later. When I speak of SGE delivery I refer to the amount of gold withdrawn from the SGE vaults. 

The Structure Of The Chinese Gold Market

Let’s start with a few basics about the Chinese gold market. Like the title of this posts suggests and like I have exposed in part one, we can measure Chinese demand by how much gold is withdrawn from the SGE vaults. This is possible because of how the Chinese gold market is designed by the PBOC. In China all fresh gold (my term for mine and import supply) is required to be sold through the SGE, and once bars are withdrawn from the SGE vaults they are not allowed to be re-deposited. These facts are essential for our understanding of this market. Let me explain further:

China Mainland Gold Import

Although the rules might change sometime soon – the PBOC recently published a draft of new import rules – at this moment there are nine commercial banks that are allowed to import and export gold, and engage in gold consignment.

1. Industrial and Commercial Bank of China
2. Shenzhen Development Bank
3. Agricultural Bank of China
4. China Construction Bank
5. China Minsheng Bank
6. Bank of Shanghai
7. Industrial Bank
8. Bank of China
9. Ping An Bank

There are also 6 other companies that are allowed to import and export gold products like jewelry. Individuals are officially allowed to import and export 50 grams of bullion, though customs is less stringent on the import side.

This is how Consignment works, from the China Gold Market Report 2009:

Gold consignment business

China imposes stringent controls over import and export of gold raw materials; only the big four state owned commercial banks are allowed to engage in the agency business of gold import and export, and “gold consignment” is the main means for import. Under the gold consignment scheme, a foreign commercial bank consigns its gold to the coffers of a Chinese commercial bank which determines the price of the gold consigned and sells it through SGE in accordance with China’s gold regulatory policy, international gold prices, exchange rates and other factors.

Consignment licenses were first to handed out by the PBOC in 2003 to four banks, as part of China’s three transformation gold market strategy. Five other banks were handed licenses in 2010. I came across a very informative article on sina.com from the same year: 

“我们也是刚获得进口黄金资质，一切都在学习中。”一股份制银行黄金业务人士表示，“听同行介绍，每一笔进口业务都要向央行报告；我们进口黄金都是标准金，也要先进入上海黄金交易所交易，即便是自用，也需要先进入交易所市场。”

“We too just got the qualification to import gold, everything is being studied now.” A banker responsible for gold business at a banking corporation said, “according to the introduction by fellow bankers in the same business. Every import deal must be reported to the central bank. The gold we import is standard gold, which must be traded on the SGE first. Even if it’s for self-use, the gold must go through the SGE market first.“

There we can read the rule on gold import being required to be sold through the SGE first. The same rule was reported by Bloomberg this year:

Commercial banks that are qualified to import gold are required to sell their shipments into the bourse[SGE].

 

Chinese Gold Mining 

Although I also touched upon this in part one, here’s the mining rule once again: 

On October 30, 2002, the Shanghai Gold Exchange commenced operation under the supervision of the State Council. Thereafter, the PBOC ceased its gold allocation and gold purchase operations. All PRC [People's Republic of China] gold producers are now required to sell their standard gold bullion through the Shanghai Gold Exchange, and prices of gold on the Shanghai Gold Exchange are determined by market demand and supply, which essentially converge with the price of gold in the international market.

SGE Bars Can’t Re-enter the Vaults 

Fact three is that gold bars withdrawn from the SGE vaults are not allowed to return. This means that all numbers from bars that are deposited in the vaults are registered*, and these bars are blocked from re-entering. A clear overview of the structure of the Chinese gold market later on may help understand the function of this rule. Bear with me. 

Article 23 from the SGE rulebook states:

第二十三条 会员及客户提取的黄金实物，不能再入库交易。

23. Gold in kind withdrawn by members and customers, can not be re-deposited. 

SGE standard gold bar 100 gram

*This is what a SGE bar looks like.

1. 上海黄金交易所标准金条 Shanghai Gold Exchange Standard Gold Bar.

2. 上海黄金交易所标志 Shanghai Gold Exchange Logo.

3. 品牌标志 Brand Logo.

4. 金条品牌 Gold Bar Brand (In this case, it’s 泰山 Mount Tai, which is produced     by Shandong Gold).

5. 成色 Fineness.

6. 重量 Weight.

7. 金条编号 Gold Bar Number.

If you are a Chinese citizen you can buy gold or trade derivatives on the SGE only through a commercial bank. You’re required to open two SGE accounts at the bank, you pay 50 RMB and get 10-digit trading number. This number will stay with you forever, even if you switch banks. One of the accounts is the funds account, which records how much money you have deposited at the SGE, and the other is the gold account, which records how much gold you have. If you prefer to withdraw your physical gold from the vaults, beware of the second rule noted below.

Screen dump from ICBC website

This rule has been confirmed to me by my Chinese contacts in the mainland and over the phone by the SGE. This is not unique, on the Borsa Istanbul the same rule applies. When owners of SGE bars, or other bars, would like to sell their gold through the SGE this has to be melted again and assayed. The new SGE bars (with a new registration number), are allowed to enter the SGE vaults. In this process the gold is counted as scrap supply by the measures the China Gold Market Report dictate. From the China Gold Market Report 2008:

ICBC bank bar (gold)

Gold scrap

At present, gold scrap in China mainly is in two major forms: repurchase of gold bars, only applicable to brand gold bars in reference to real-time gold price, and repurchase of gold jewelry through retailers.

SGE Physical Delivery Equals Chinese Demand 

As demonstrated in part one total demand in 2010 and 2011 reported in the China Gold Market Reports exactly equaled the amount of gold withdrawn from the SGE vaults over the same periods. Before we start connecting dots I would like to display more evidence regarding Chinese gold demand being equal to withdrawals from the SGE vaults.

As stated by the China Gold Market Report 2011 total demand was 1043 tons, according to the SGE Annual Report 2011 gold withdrawn from the SGE vaults was also 1043 tons:

Screen dump from SGE Annual Report 2011

The China Gold market Report 2010 states total demand was 837 tons, the SGE Annual Report 2010 shows a matching amount was withdrawn from the vaults:

Screen dump from SGE Annual Report 2010

In the CGA Gold Yearbook 2008 it was stated total demand was 543.2 tons, as we can see from the following table (the first column relates to demand):

首饰制造用金 = Jewelry

工业用金 = Industrial

金币生产用金 = Coins

金条囤积 = Bar hoarding

推断净投资 = Inferred net investment

合计 = Total

In the SGE Annual report 2008 we can read the following paragraph:

Affected by the global financial turbulence, growing investment demand for physical gold, including gold bars and coins, led to the rapid growth in spot gold trading and delivery volume. Spot gold traded through SGE totaled 1229.75 tonnes, an increase of 32.53%, or 301.83 tones compared to last year.Delivered Gold amounted up to 543.19 tonnes, an increase of 49.56%, or 180 tones compared to that of 2007. Physical delivery volume broke 500 tonnes for the first time and over passed the domestic gold production for a consecutive second year.

Screen dump of SGE Annual Report 2008

In all these reports we can see the gold withdrawn from the SGE vaults exactly matching total demand. In the CGA Gold Yearbook 2007 it was even spelled out for us:

2007年，上海黄金交易所黄金出库量363.194 吨，即我国当年的黄金需求量，比2006年增长了48.02%，低于供给增长率8.82个百分点。

In 2007, the amount of gold withdrawn from the warehouses of the Shanghai Gold Exchange, gold demand of that year, was 363.194 tons of gold, compared to 2006 increased by 48.02 percent, 8.82 percentage points lower than the growth rate of supply.

Implications Of The Structure Of The Chinese Gold Market

When we put together the facts presented above we are able to draw conclusions that not only provide detailed insight into the Chinese gold market, but will also help us understand the reasoning behind its design.

In any country there can be three sorts of gold supply to meet demand: mine, import and scrap. In China mine and import supply must be sold through the SGE, scrap supply can be sold through the SGE. For me, interested in Chinese demand and import, scrap supply is the pivot of the Chinese gold market.

import + mine + scrap = total supply

total supply = total demand

total demand = SGE delivery

import + mine + scrap = total supply = SGE delivery = total demand

We already know total Chinese demand by the SGE delivery numbers, but we want to know import to measure Chinese demand relative to foreign demand and reserves. The amount of scrap supply over any given period can tell us import numbers as, import = SGE delivery – mine – scrap, whereof SGE delivery and mine numbers are published. Unfortunately it is impossible to be accurate about scrap, we’ll have to settle for an estimate.

The PBOC works the other way around, they calculate scrap by knowing import numbers. From the China Gold Market Report 2008:

Physical gold withdrawals on Shanghai Gold Exchange (SGE) topped 543.19 tons in the year, including gold imports of 81.44 tons by commercial banks, stock carry-over of 31.661 tons from 2007 and 282.007 tons of gold produced in the year. In theory, the gap of 148.082 tons was filled by recycled gold. Therefore the gold recycled in China in 2008 should have amounted to more than 100 tons in 2008.

We can read from the quote the PBOC uses the same basis equation (for the sake of simplicity I left stock carry-over out), which not only confirms once again that SGE delivery equals Chinese demand, it also confirms everything I’ve just stated about the structure of the market. Or the equation the PBOC presents us would not hold. Because fresh gold must be sold over the SGE and bars cant return to the SGE vaults without being counted as scrap, SGE delivery – fresh gold = scrap. Especially note “In theory, the gap of 148.082 tons was filled by recycled gold”.  The PBOC calculates scrap by subtracting import and mine from SGE delivery.

The PBOC has designed the Chinese gold market like it is to centrally monitor and track all fresh gold entering China – a side effect is that we are handed the same tools. Fresh gold supply is controlled by the PBOC because it complements total reserves held amongst the population, one of the objectives of the central bank. China is granted to be supplied by fresh gold of the finest quality.

WGC Demand vs True Demand

As exposed in part one, GFMS (who provides the data for WGC demand trends) and the PBOC calculate demand on different levels. For example, GFMS measures newly-made jewelry, the PBOC measures the gold jewelers’ purchases at the SGE; hence some differences in jewelry demand. The same can be seen on the supply side, GFMS doesn’t measure the bars that are remelted to supply the SGE as scrap, where the PBOC does measure this as scrap. Narrow versus broad measurements. However, these differences do not explain the great disparity in total demand.

The big difference in total Chinese gold demand measured by Thomson Reuters GFMS and the PBOC is caused by net investment, disclosed by the PBOC as demand category six in the China Gold Market Reports. The other categories, jewelry, coin, bar and industrial, roughly coincide. So what is net investment?

I had a phone call with the SGE a few weeks ago after which everything fell into place. The employee I spoke to told me net investment relates to gold withdrawn from the vaults by individual account holders. From here we can connect the remaining dots. According to my analysis the PBOC uses the net investment demand category to suppress demand from other categories – mainly bar hoarding.

As we all know the Chinese are very secretive about their gold dealings. China is one of the few countries that doesn’t publish its gold trade in regular customs reports and the PBOC updates their official gold reserves just once every six years. China likes to hoard in the dark, this is typical if you understand the Chinese mindset.

Around 2008 the State Council realized gold was more important than thought in 2002. They wanted to accelerate gold hoarding without drawing too much attention and without altering the structure of the market set up six years before. For this new strategy they commenced manipulating net investment numbers on the demand side and scrap on the supply side. Since 2007 SGE delivery remained equal to Chinese demand, though in the gold reports jewelry and bar demand was being suppressed by gushy net investment, and import was suppressed by overstated scrap (see overview chart above). Apparently GFMS was mislead by the PBOC to treat net investment as stock movement change at jewelers and the mint.

Have a look at some numbers from the past years I have collected from the gold reports and GFMS:

The numbers in red can be disputed. We can see net investment jumping from 18 tons in 2007, to 129 tons in 2008. From 2008 until 2013 net investment in total is over 2000 tons. GFMS’ statement about net investment being stock movement change is untenable.

From 2002 to 2007 scrap numbers from the PBOC and GFMS were equal. Then in 2008 PBOC scrap jumps nearly 80 tons from GFMS scrap, in 2011 the difference reaches 282 tons. These numbers are hard to swallow. Also bear in mind not all gold that enters Chinese refineries ends up at the SGE, as some is made into wire or powder for jewelry and industrial purposes. For these reasons I highly doubt PBOC scrap numbers since 2008.

Scrap numbers were overstated to suppress imports, this scheme cracked in 2011. Hong Kong net exported 335 tons of gold to the mainland in 2011, transcending the 277 tons the PBOC claims to have net imported that year. Implying import must have been more than 277 tons, and thus scrap must heave been less than 406 tons.

In the China Gold Market Report 2011 import is disclosed as others.

2013 Total Chinese Demand

With a few weeks left on the calendar we can safely calculate total demand and supply numbers for 2013. WGC calculates Chinese demand will be roughly 1100 tons, SGE delivery will be 2146 tons.

The difference in the chart can be read as net investment, accounting for 1000 tons in 2013. Im curious how the PBOC is going to hide this demand in the China Gold Market Report 2013, if ever released, the China Gold Market 2012 has never been released either.

Suppose scrap supply is what the reports claim it is. Lets say 300 tons for 2013 (in 2011 it was 400 tons on record high gold prices). These would be the annualized numbers:

2146 tons  SGE delivery

410 tons mine

300 tons scrap

———————      -

1436 tons net import

Is that all? No. This excludes PBOC purchases of 500 tons (I have been told by all my sources the PBOC does not buy 1 gram of gold through the SGE) and jewelry imports from Hong Kong by mainland tourists – a phenomenon I will discuss in a future post. 2013 total Chinese demand including PBOC purchases will be well over 2500 tons and net import will likely reach 2000 tons.

Written by Koos Jansen on December 12, 2013 at 10:48 am