Philip Klapwijk: “Shanghai Gold Exchange overstates Chinese gold demand”

According to Precious Metals Insights analist Philip Klapwijk the withdrawals at the Shanghai Gold Exchange (SGE) do not equal the physical gold demand in China. He made this statement during a Q&A session at the 2015 Reuters Global Gold Forum. He gave the following explanation:

“The withdrawals show what the big picture is for physical “demand”. They are not per se an indication of the total demand for jewelry, investment products or industry. This is because a good part of the withdrawals represent gold that is used purely for financing and other end-uses that are not equivalent to real consumption. Therefore relying on SGE withdrawals to measure the size of and change in true demand is highly misleading. For example, withdrawals in 2013 came to 2197t and in 2014 to 2102t. This both overstates the true size of demand and, of course, completely understates the drop in jewelry and especially bar demand last year.”

Gold used for financing purpose

Because a large part of the total gold withdrawals at the SGE is used for financing purposes, it is difficult to define the real demand for gold coins, gold bars and jewelry. Regarding the use of gold for financing purposes, Klapwijk gave the following explanation:

“The use of gold for financing… a kind of “gold carry trade”….has developed tremendously in recent years. Essentially borrowers in the shadow banking milieu are taking advantage of the availability of gold at comparatively very low rates of interest compared to straight forward RMB loans. An indication of this is that at end 2013 the SGE reported gold loans by members totalled over 1,100 tonnes. My understanding is that number will have grown quite a bit in 2014. The important thing though to take into account is that nearly all these gold transactions are hedged…the idea is not to speculate on the gold price. Spreads on the loans in the shadow banking market are easily large enough to allow intermediaries to hedge their exposure and still make large profits. Potential defaults, of course, from the ultimate borrowers of RMB in the shadow banking market is another matter.”

Chinese New Year

During the Q&A session, Klapwijk was asked about the impact of the Chinese New Year on the demand for physical gold in China. This is what he said:

“A substantial amount of buying, especially of jewelry takes place in the run up to and even during the Lunar New Year holiday. The market impact is now largely over…until we see post New Year re-stocking. In terms of the YoY, my sense is that 2015 is up moderately on 2014 but well below the exceptional demand seen in the same period in 2013. The SGE premium in recent weeks gives some insight into this…$3-$6 is substantially below what was seen in the run up to the Lunar New Year in 2013 when double-digit levels were seen.”

And regarding the investment demand for gold coins and gold bars:

The demand for bars and ornaments has been lacklustre. This is in part due to a lack of investor interest (even for gift bars this rubs off) and the anti-corruption campaign. They see it as both jewellery and as an investment. The mark-up on plain 9999 is very low and it is easy to re-sell. I recently saw gold chain being sold for 261/RMB per gramme, this was barely above the gold price on the day. The model is to turnover stock very rapidly…pile it high and sell it cheap!”

Gold as a safe haven?

Philip Klapwijk, former analist of Thomson Reuters GFMS, was asked about how the Chinese look at gold as a safe haven asset. He said:

“I think the volatility and the lower trend in the last couple of years has taken a bit of the shine off gold. However, this is at the margin only when it comes to plain gold jewelry. For bars, it is a somewhat different story as shown by the 2014 data for bar and coins sales. These slumped by half YoY.”


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