The Shanghai Gold Exchange is the only major official physical gold trading market in the world. All trades on the exchange are settled with the exchange of ownership on physical gold bullion. Paper future contracts do not trade on the SGE. In contrast, trading occurs on the LBMA and Comex in paper gold. The Comex is de facto a 99.999% paper gold exchange for which the percentage metal backing the paper traded is minuscule. The LBMA has been rapidly “catching up” to the Comex in this regard, although on a percentage basis the LBMA experiences a higher amount physical gold exchanged than the Comex.
Because of the way in which the SGE functions, gold withdrawn from the SGE measures the true demand for gold in China in a given time period. All gold – except for the gold purchased by the Peoples Bank of China – purchased by any form of end user must pass through the SGE by law. It is for this reason that “withdrawals” represent the most accurate measurement of demand for gold in China – except the Central Bank’s demand.
In the past two weeks, 106.1 tonnes of gold were withdrawn from the SGE. As Smaulgld.com has observed:
Gold withdrawals on the Shanghai Gold Exchange the past two weeks were larger than the amount of gold delivered on COMEX during 2014 and greater than the amount of gold Germany has repatriated from the New York Fed since 2013. LINK
I’ll point out one minor correction to the fact above: it’s more gold than the U.S. Government has been able to repatriate back to Germany.
Year to date SGE withdrawals are 1,260 tonnes. This translates into an approximate annualized run-rate of 2400 tonnes – with one of heaviest seasonal periods of Chinese gold demand still to come.
I find it fascinating how the entire world, including and especially the U.S. media, has summarily dismissed the unwillingness of the U.S. Government to return Germany’s gold. Recall, Germany originally asked for over 600 tonnes of gold to be returned. This was after the Fed refused a request by a German delegation to inspect its gold (the Fed allowed the delegation into one of the nine vaults where the gold is supposedly being “safekept”).
If the gold is there and it belongs to Germany, why is the U.S. Government dragging it’s feet on this matter? The question, of course, is highly rhetorical. With China moving more gold into the country and delivering to the entities who pay for this gold, transportation and delivery is not the issue.
At some point in the future, I have no idea when and neither does anyone else, there will be a massive upward explosion in the price of gold which is ignited by investors and Governments holding paper gold and who make move to take delivery of physical gold that no longer exists in the custodial vaults listed on their paper claims.