SGE Withdrawals In Perspective

by: Koos Jansen

Originally published on

Chinese gold market essentials

In 2014, SGE withdrawals, which can be used as a proxy for Chinese wholesale gold demand, have lost their accuracy since the Shanghai International Gold Exchange (SGEI) was launched in September, providing foreign enterprises to trade gold in renminbi, take delivery and export the gold from the Shanghai Free Trade Zone (FTZ). SGE and SGEI withdrawals are not published separately and thus SGEI activity can distort SGE withdrawals (being a proxy for Chinese wholesale demand). This post is about what we know at this stage about SGEI activity in relation to SGE withdrawals. It's not exact science, but it's the best we have right now.

It's recommended reading The Mechanics Of The Chinese Gold Market, Chinese Gold Financing Deals Explained and The Workings Of The Shanghai International Gold Exchange for a better understanding of this post.

The SGEI facilitates gold trading in the Shanghai Free Trade Zone (FTZ). The physical gold flows through the FTZ are completely separated from the Chinese domestic gold market, which is a closed market. Would we get our clear view back if SGE and SGEI withdrawals would be disclosed separately? Unfortunately not. This is because Chinese domestic banks are also trading on the SGEI, when they withdraw from the vaults in the FTZ they can import this gold into the Chinese domestic gold market (without it being required to be sold through the SGE).

The trading volume/purchases on the SGEI (contracts iAu100g, iAu99.99 and iAu99.5) can be:

  1. Not withdrawn at all and thus not distorting SGE withdrawals - our view on Chinese wholesale demand.
  2. Withdrawn by Chinese domestic banks to be imported into the mainland and thus being part of Chinese wholesale demand.
  3. Withdrawn by foreign traders and exported from the FTZ, distorting SGE withdrawals. If we knew how much these withdrawals accounted for we could subtract them from total SGE withdrawals to have a clear view on Chinese wholesale demand. Unfortunately, we don't know these numbers.

Technically, as I've reasoned previously, Chinese wholesale gold demand is at most equal to SGE withdrawals, at least equal to SGE withdrawals minus SGEI trading volume. Because, it can be every contract traded on the SGEI is bought by a foreign trader that takes delivery, withdraws and exports the gold out of the FTZ.

For example, in week 50, 2014, total SGE withdrawals accounted for 50,027.5 Kg. SGEI trading volume over this period accounted for 6,159 Kg. We could argue Chinese wholesale gold demand must have been somewhere in between 50,027.5 Kg and 43,868.5 Kg (50,027.5 - 6,159).

More clarity was provided by chairman of the SGE, Xu Luode, who recently disclosed useful SGEI data in an article he wrote for Bullion Bulletin. Xu confirmed we don't have to use the most extreme scenario (total SGEI volume) as a base. In February 2015, he noted:

As of November 2014, international members have traded more than 100 metric tons of gold in aggregate with a total turnover of around RMB 25 billion; imported gold tipped in at around 12 metric tons, and a total of 15 metric tons of gold have been deposited into the International Board Certified Vault.

With the numbers from Xu, we can make a far better estimate of Chinese wholesale demand in relation to SGEI activity.

The SGEI was launched September 18, 2014. From the end of November until February, SGEI trading volume was 122 tonnes. Before November, SGEI volume was weaker, which makes me think Xu neglects this period, as the SGEI was merely making its first steps.

From November until February, SGEI volume was 122 tonnes, total SGEI deposits accounted for 15 tonnes of which 12 tonnes had been imported into the Chinese domestic gold market. SGE withdrawals reached 859 tonnes over these four months.

Concluding, most of SGEI withdrawals (at most 15 tonnes) were imported into the Chinese domestic gold market (12 tonnes), the SGEI is primarily used by Chinese banks to import gold, instead of through consignment, not distorting SGE withdrawals (Chinese wholesale gold demand).

Furthermore, SGE withdrawals (Chinese wholesale gold demand) at 859 tonnes were at most distorted by 3 tonnes - though it was likely less than 3 tonnes. If a volume of 122 tonnes could have distorted SGE withdrawals at most by 3 tonnes, SGE withdrawals are still a fairly accurate proxy for Chinese wholesale gold demand. Until new evidence comes out that would prove otherwise, that is.

For now, the SGE withdrawal distortion ratio is at most 0.0246 (3/122). Measuring Chinese wholesale gold demand conservatively would be

SGE withdrawals - (0.0246 X SGEI volume)