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By 2007, physical gold withdrawals from the SGE (SGE Gold Withdrawals) were fully meeting Chinese wholesale gold demand. Therefore SGE Gold Withdrawals are a suitable proxy for Chinese wholesale gold demand.




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Since nearly all physical gold supply in the Chinese market flows through the SGE vault network, by definition nearly all Chinese gold demand has to be met by withdrawing physical gold from the SGE (i.e. SGE gold withdrawals). Therefore an analysis of SGE gold withdrawals provides a realistic window into the true size of the Chinese gold market and the true size of Chinese gold demand.


Physical gold withdrawal volumes from the SGE vaults are now remarkably large each year, and have continued to ramp up noticeably since 2013. In 2012, SGE gold withdrawals totalled 1139 tonnes. By 2013, gold withdrawals from the SGE vaults nearly doubled to 2197 tonnes. In 2014, the Exchange saw 2102 tonnes of gold withdrawn, and in 2015 a huge 2596 tonnes of gold left the SGE vaults. Gold withdrawals in 2016 were slightly down on 2015 with 1970 tonnes withdrawn.


The adjustment from centralised allocation of gold to free market allocation of gold took a few years to reach a stage at which the Exchange was fully playing the allocation role. This is evident from the fact that between 2002 and 2006 inclusive, annual Chinese wholesale gold demand still exceeded SGE gold withdrawals, which meant that SGE gold supply was only partially meeting the national wholesale gold demand, with the PBoC still facilitating residual supply by direct allocation.


Then in 2007 for the first time, physical gold withdrawals from the SGE began to equal Chinese wholesale gold demand. This signalled that the SGE had begun to fully fulfilling its gold allocation function for the entire Chinese gold market.


The relevant CGA Gold Yearbooks from 2008 to 2011 also confirm that in each of these years SGE withdrawals exactly matched Chinese wholesale gold demand. Following this, from 2012 to the present, annual SGE withdrawals have approximately matched Chinese wholesale gold demand.


At a high level, Gold Supply in the Chinese domestic gold market equals Gold Demand in the Chinese domestic gold market. This is so because nearly all gold supply in the Chinese domestic gold market flows through the SGE. Correspondingly, the volume of gold withdrawn from the SGE gold vaults is a suitable proxy for Chinese wholesale gold demand.


When Standard Gold is traded on the SGE, it is exempt from Value-Added Tax (VAT). When Standard gold is not traded over the SGE it is not exempt from VAT. There is therefore an incentive for the gold owner to trade Standard Gold on the SGE. Note that these VAT rules also apply to the Shanghai Futures Exchange (SHFE), where Standard Gold is VAT-exempt on the SHFE but not off the SHFE.


The SGE operates a gold bar chain of integrity system wherein only SGE approved gold refineries can supply gold bars to the SGE system (aka the Chinese wholesale market) and once gold bars are withdrawn from SGE certified vaults they leave the chain of integrity. This means that gold bars withdrawn from the SGE vaults are precluded from re-entering SGE vaults except if they have been melted down and recast into new gold bars by an SGE approved refinery. This chain of integrity is similar to the one employed by the London Bullion Market Association (LBMA).


In 2011, for the first time ever, Chinese gold imports exceeded Chinese domestic gold production, with China importing 380 tonnes of gold against domestic gold mining output of 360 tonnes of gold. This trend has persisted in all years since 2011. most recently, for the full year 2016, China net imported an estimated 1300 tonnes of gold from abroad[12].


In general, gold bullion exports from the Chinese domestic gold market are prohibited. However, a number of forms of gold exports out of China are allowed. These include gold exports via processing trade, China Panda gold coin exports by the Chinese Mint, and small individual limits (50 grams) on individuals legally carrying gold across the border when leaving China.


Note that overseas gold mining output from Chinese owned mines abroad can also be imported into the Chinese domestic gold market and then refined into Standard Gold by an SGE approved refinery before being traded over the SGE.


Scrap Gold: Scrap gold refers to old gold products (from either jewellery or industrial products) that are sold for cash by consumers at the retail level. Scrap gold boosts real gold supply and has a net effect on the gold price. Both GFMS and the CGA include scrap gold flows in their respective gold supply statistics.


Disinvestment: Disinvestment has an effect on institutional gold supply and also has a net effect on the gold price. In China, any individual or institutional investor can buy gold directly at the wholesale level on the SGE (investment demand) and then withdraw this gold from the SGE. If some of these investors subsequently decide to sell (supply) their gold again, they can sell it directly to a gold refinery. These gold flows are defined as disinvestment and these flows can then make their way back to the SGE vaults for trading on the SGE.


On a cumulative basis from January 2007 to September 2016, the difference between SGE gold withdrawals and GFMS gold demand reaches a massive 5922 tonnes of gold, as can be seen in the following chart:


Some of the difference between GFMS consumer gold demand numbers and SGE gold withdrawals can legitimately be explained by phenomena that would inflate Chinese gold demand, such as inventory / stock movement changes and gold-for gold scrap (process scrap). Inventory / stock movement changes would, for example, be gold that jewellery manufacturers, gold refineries, industrial companies and the mint have bought at the SGE, but not yet sold in the retail market. But after adjusting for these legitimate explanations, whatever is left is genuine gold demand, created by direct purchases from individual and institutional customers on the SGE.


Along with central bank demand, analysts are also keeping an eye on investment demand for the precious metal. Although gold prices rallied more than $300 from their November two-year lows and saw the best start to the year in a decade, investors remained roughly on the sidelines.


"Anytime government spending comes up, it makes gold more attractive because it's a neutral asset. It's not subject to government policy in terms of going up or down in value like the U.S. dollar could," Gainesville Coins precious metals expert Everett Millman told Kitco News. "The 2011 example is an interesting parallel because when there are fears that the financial system is on shaky ground, the debt ceiling can turn from a non-issue into something that makes people more fearful about the government's stability and the financial system's stability."


The machine carries a more symbolic than practical meaning: for individuals, selling gold has never been easier. And this new invention may grab the attention of the young generation and help them to realise the intrinsic monetary value of the gold jewellery pieces they are wearing. Gold demand in China could also benefit from all these new developments in gold recycling.


There is no specific regulation concerning online gold recycling business, creating credit risk in the gold recycling process. To gain credibility, online recycling platforms must co-operate with credible banks and certified institutions (e.g. accredited refineries of SGE). Moreover, regulatory guides and requirements for establishing such platforms should be considered by the authorities. More clearly defined requirements and responsibilities of online gold recycling platforms could be key to the healthy and sustainable development of the industry.


Slaying ogres and competing for magical powers may not sound like a very adult way to make a living. But for some in China, playing online games is a full time job. They're engaged in what's called gold farming; that's earning game points in a virtual world that can be traded or used in the real world.


LIM: Robin Chin is a gold farm boss. He demonstrates how his gold farmers make money - basically by staying in the same spot for an entire 12-hour shift, killing the same monster over and over again. Most play the world's top online game, the World of Warcraft, which has eight million players worldwide. He explains how the laws of economics work in the virtual world.


LIM: It's by exploiting the differences and selling to cash-rich, time-poor gamers that Chinese gold farms prosper. Former Wall Street banker Alan Chiu(ph) founded an online trading platform for virtual currency, a virtual stock exchange, if you will. And he sees videogame work as another opportunity for outsourcing.


LIM: It doesn't matter how I make a living as long as it's not immoral, says gold farmer Ming Xing Hai. He earns under $100 a month and is among the gold farmers featured in a documentary made by Ph.D. student Ge Jin, from the University of California, San Diego.


Pretend to be dead, they shout at each other. Don't run. This type of group raid and the territoriality of gold farmers protecting their patch can earn them enmity from American gamers. There's also an argument that the extra gold produced by gold farmers brings more currency into the game, creating inflation.


LIM: This music accompanies one response, a murderous online rampage by a gamer who posted this clip of his avatar or character hunting down and killing gold farmers. These massacres - the earliest and most famous was known as bomb the farmer's day, are not uncommon. On this video, the last words are American gold.


Mr. JIN: My feeling is it does playing to the overall xenophobia towards Chinese. I feel American public imagination that China is the threatening force (unintelligible) many jobs are taken away from the U.S. and, you know, outsourced to China. I think many gamers see it as that too. They see gold farmers as someone who take away resource from them and intrude into their spaces. 041b061a72


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