Chinese Physical Gold Deliveries Match World Gold Production

by: Willem Middelkoop

Gold is down 29%, after a correction that has lasted two years to date. However, we could well be on the verge of a significant move up again. Our research has shown that, since the start of this bull market in 2000, after each serious correction, gold has gained at least 80% from the bottom of the correction within three years. Previous corrections lasted between 16 and 19 months.

Gold Price

Clearly, a correction seems long overdue and all technical indicators show oversold levels not seen in years.

History shows that, in an ideal investor-world, every bottom in gold provides for huge opportunities in buying gold shares (HUI-index). We have seen major bottoms once every four years (2000, 2004, 2008/2009 and now 2012/2013?). Returns from these bottoms to new highs returned between 310% and 417%, within three years.


Based on today's exceptionally oversold levels, we expect gold shares to gain at least as much as during the last move up (2009-2011). Although ignored by most investors, only the gold producers are capable of adding new ounces to the expanded demand by the central banks of countries like China, Russia and other investors around the world. Physical demand has exploded since the paper-gold-attack on the COMEX mid-April.

gold attack

Interestingly, we also found that, while the COMEX is responsible for most of gold-paper-trading, only less than one percent of all traded gold futures result in actual physical delivery. However, paper gold is also traded at other future exchanges like the TOCOM Exchange in Tokyo and the Shanghai Gold Exchange (SGE/SHGE). After reports of physical delivery problems in Asia, we decided to study physical deliveries in Asia in more detail.

Data published on the Chinese section of the Shanghai Gold Exchange website shows that over 45% of all traded gold futures (only a small amount in absolute terms compared to COMEX trading) result in actual physical delivery.


Where the COMEX is focused on making physical delivery as difficult as possible (only 20 tons are delivered each month), the Shanghai Gold Exchange actually welcomes contract holders to take delivery. It should be noted that besides thousands of institutional accounts, the SGE has over three million individual account holders. China's policy to try to get their hands on as much physical gold as possible, has resulted in an explosion of Chinese physical demand across the board.


After only five months trading this year, physical deliveries from the SGE alone averaged around 180 tons per month. Deliveries in April and May were just shy of the total worldwide gold mine production. Annualized, we can expect total physical deliveries from the SGE to amount to at least 2,000 tons this year. When we add the physical demand from India, currently around 300-400 tons per quarter, we end up with a physical demand from these two Asian countries alone of over 3,000 tons this year.

Since worldwide gold mine production is only around 2,800 tons we need a lot of scrap gold to fill the gap. The recent sales of around 300 tons from gold ETF's are insufficient to fill the gap. The World Gold Council noted that many investors who are selling their gold ETF, are actually trading it for physical positions. The sale of ETF positions does not mean demand is leaving gold.

Refineries are also reporting decreasing availabilities of scrap gold, following two years of gold price declines. Only higher prices can bring back large supplies of this scrap gold again.

Long short

A study of open interest figures (CFTC Bank Participation Report) shows that banks have turned their record short position in gold over the last two years, into a record long position. Could they be anticipating a future large move of the gold price?

(special thanks to @koosjansen for additional research)

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.