Posted on 21 Dec 2015
A thorough examination of cross-border gold trade between Australia and China mainland.
While withdrawals from the vaults of the Shanghai Gold Exchange (SGE) continue at an unprecedented pace - 46 tonnes in week 48, year to date 2,541 tonnes - our job here at BullionStar is to track where this gold is coming from. The short answer would be it's mainly supplied by gold imports. But, more important is the question how much is imported and from what country or warehouse? Partially, the gold is being sourced from Australia.
The second largest gold producer globally is Australia with an annual production of 270 tonnes, according the US Geological Survey. The majority of Australia's mine output is exported, as suggested by foreign trade statistics. In 2014 total gross gold export from the land of down under was valued at 12 billion US dollars, which is roughly 296 tonnes, gross gold import was valued at 3.4 billion US dollars, or 85 tonnes. Australia's net gold export accounted for 211 tonnes in 2014.
When it comes to Australia's net gold export to China we'll have to do some analysis, simply subtracting import from export won't work in this case. Strangely, Australia discloses gold shipments as "export to China" even when it's transferred via Hong Kong. Implying Australia records its gold export by country of destination, not the first stop, which is unusual to my knowledge.
First, let's compare data from COMTRADE on Australia's gross gold export to Hong Kong with data from the Hong Kong Census And Statistics Department on Hong Kong's gross gold import from Australia. These two data points should be equal, but they're not. Have a look at the chart below.
Australia reports to export a lot less to Hong Kong than Hong Kong reports to import from Australia. I should mention these mismatches are not uncommon in global gold trade, though in this instance there is an obvious explanation.
When we compare data from COMTRADE on Australia's gross gold export to China with data from the Hong Kong Census And Statistics Department on Hong Kong's gross gold import from Australia, remarkably we can see matching values in nearly all months until January 2015. Have a look at the chart below (please focus on the months until January 2015 for now).
At this point we can conclude that Australia (COMTRADE) disclosed gold shipments as "export to China" from January 2013 until December 2014 even though these first arrived in Hong Kong. How do we know the exports from Australia to Hong Kong were re-exported to China mainland (the SGE system)? Because Australia does make a difference between Hong Kong and China for its gold export, it just doesn't reveal the transfer. If Australia's gold export to Hong Kong wasn't re-exported to China mainland after its 'initial arrival' Australia wouldn't have disclosed the trade as "export to China", but as "export to Hong Kong" or "export to XXX".
Now we know (presumably) all gold Australia exported to China from January 2013 until December 2014 was shipped via Hong Kong. If we would add Hong Kong's gold "export to China" to Australia's gold "export to China" in order to compute Chinese gold import, this would result in double counting.
At least for the past decades Hong Kong has been the main entry point for (non-monetary) gold into China. This changed early 2014 when China openly stated to stimulate direct gold imports from all over the world, bypassing Hong Kong. Subsequently, we've witnessed the birth of direct gold export to China from the UK in 2014:
The strategic move from Beijing to stimulate direct imports was also mentioned on Chinese state television channel CCTV in early 2014, in the clip below starting from 1:30.
Whenever Australia exported gold to China mainland before 2014 it was shipped via Hong Kong (see exhibit 2). After early 2014 gold exports from Australia to China could travel directly. Not surprisingly, what Australia reported as "export to China" since January 2015 has exceeded what Hong Kong reported as "import from Australia". According to my analysis the difference reflects what Australia has directly exported to China mainland. Have another look at exhibit 2 for the months after December 2014, when Australia's direct gold export to China accelerated.
By subtracting Hong Kong's "import from Australia" from Australia's "export to China", what remains is what Australia directly exported to China, which is the figure we were looking for. By and by, Australia's gross import from China and Hong Kong is close to nil.
According to my calculations Australia directly net exported 13 tonnes of gold in August 2015 to China mainland, which is an all time record. In the first 7 months of 2015 Australia directly net exported 61 tonnes of gold to China mainland, annualized that's 105 tonnes.
SGE withdrawals were strong in August, hence strong gold import from Australia. Proven Chinese net gold imports in 2015 from Australia (including August) and Hong Kong, Switzerland and the UK (the latter three including October) has reached 1,164 tonnes, which is 1,429 tonnes annualized.
Annual Chinese domestic mine output will reach 476 tonnes this year. Total Chinese physical gold supply in 2015 will thus be (476 + 1,429 = ) 1,905 tonnes (without counting scrap supply!), though the media wants you to believe it's about a thousand tonnes less. The World Gold Council has reported Chinese gold demand in the first three quarters of 2015 was 736 tonnes, annualized that's 982 tonnes. Obviously this cannot be when compared to apparent supply. Sadly, the media simply copies the numbers from the World Gold Council, no questions asked.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Additional disclosure: PUBLISHED IN COLLABORATION WITH JaN nIEUWENHUIJS