Reuters recently analysed global trade data and concluded that a further 133 tonnes has been shipped directly to Shanghai this year. If we add that to the Hong Kong imports, we arrive at 989 tonnes. But as you’re about to see, even that still significantly understates the real numbers.
To dig a little deeper I spoke to Koos Jansen, a gold analyst who’s carried out a considerable amount of research in this area. This is what he had to say:
Simon Popple: “Koos, as we know, the main gold vein runs from the UK through Switzerland, through Hong Kong, eventually reaching Shanghai. What’s happening this year that’s so unusual?”
Koos Jansen: “Well Simon, although the Swiss, don’t publish country specific information on their gold trades, their numbers are very clear. Being one of the largest trading, refining and storage centres in the world, vast amounts of gold cross their borders. In 2012, they imported 2,267 tons of gold and exported 1,550 tons.
“On average, imports have transcended exports by 25% in recent years. But this has recently changed as the Swiss have imported 2,420 and exported 2,184 tons in just the first three quarters of this year. So not only is trade surging, but also the gap between import and export is tightening.”
SP: “So they’re exporting far more than normal.”
KJ: “Yes, and Switzerland’s biggest refinery has confirmed to Alex Stanczyk, who I interviewed in September, that all gold coming in from London is being re-melted into kilobars and sent to China.”
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SP: “Does this all go through Hong Kong?”
KJ: “No, most is shipped to Hong Kong but some goes straight to Shanghai.”
SP: “But business with Hong Kong is booming?”
KJ: “Yes, so far this year Switzerland has net exported 697 tons of gold to Hong Kong. A surge of 445%(emphasis mine) compared to total net gold exports to Hong Kong in 2012.”
SP: “That’s incredible. What about your forecasts for the year. The World Gold Council is estimating Chinese consumer demand will be over 1,000 tons. But you think it’ll be more than double that.”
KJ: “I estimate Chinese demand for 2013 is 2,000 tons. This is because we can read from the “China Gold Market Reports”, which are written by the PBOC (People’s Bank of China), and anyone can download these from the SGE (Shanghai Gold Exchange) website, total Chinese demand is exactly the amount of gold withdrawn from the SGE vaults.
“Year to date there are 1,844 tons of gold withdrawn from the vaults, so it’s likely this will be more than 2,000 tons at the end of December.
“Supply includes domestic mining, though the bulk comes from the UK, the GLD and LBMA vaults that send it via Switzerland to China. Net exports from the UK to Switzerland are 1,109 tonnes year to date.”
Now, you’d think with this huge demand, the price should be going through the roof. But it’s important to remember two things: first, at the moment it’s in the best interests of the Chinese to acquire as much gold as they can as cheaply as possible; and second, the paper market is still in control and that’s how the price is fixed.
When there’s insufficient gold to settle these paper contracts and the trust in the systems starts to evaporate, then it gets interesting. We could be rapidly approaching that day.