Yin and Yang

During gold’s bear market from 2011, the flow of gold out of ETFs drove the popularity of the West to East narrative not just among goldbugs but also bullion market professionals. It was a life raft I suppose that many clung to, to find hope as the price relentlessly fell, notwithstanding how much gold was flowing into “the East”. Today, investors have abandoned the raft as they step out on to the terra firma of $1050 and stagger about basking in the lush tropical greenery of a rising gold price.

It did strike me as odd that my fellow raft-mates talked of gold flowing out of the ETFs, I seem to remember that the talk on the deck of the good ship gold, before the terrible price storm, was that ETFs were suppressing the price as they didn’t buy or hold any physical gold. In that case how could real gold be flowing out of them? Possibly I was affected by sunstroke while drifting on those bearish seas, those pre-2011 days do now seem like a dream and much has been lost to the Internet winds (and convenient content destruction as website were redesigned).

So how to navigate this new terrain? While one can never avoid subjective interpretation, we feel it helps to take one’s bearings from the reality of market prices and in particular, spreads. Therefore it is with interest that I read the following from Reuters:

  • Dealers in India were offering a discount of up to $100 per ounce to the global spot benchmark
  • Prices in China were seen at a discount of $1-$2 per ounce
  • A discount of 50 cents to $1 was being offered in Japan
  • Hong Kong prices were at a discount of $1 this week

On the flow front, Platts reported Indian “gold bar imports at only around 215 mt so far this year, just under half the 2015 level, many are expecting a much lower total for full-year 2016” and SCMP noted that Chinese “sales of gold jewellery across the sector have slumped 20-40 per cent”.

While just a reduction and not a reversal of flow to the East, the West is certainly Yang-ing to the East’s Yin-ing. Koos Jasen notes that the “UK is now one of the largest net importers. In April 2016 the UK net imported 195 tonnes of gold – while export to China was nil”, reflecting gold ETF accumulation.

I take comfort from the fact that the gold price has held up while Indian and Chinese demand, as revealed by discount spreads to London gold, has fallen. One thing I learnt early on at the Perth Mint was that Indian demand (and later Chinese as they opened up their market) would moderate and sometimes completely stop in the face of a signficant move up in prices. As Jayant Bhandari explains in this Al Korelin interview, Indians will watch to see if the gold price holds at the higher levels before coming back into the market. It is as if they pull their bids to see if the Western demand has legs or is speculative froth.

Speculative versus fundamental demand is something Monetary Metals also aims to identify with our weekly report on the carry and decarry spreads in the futures market. While some survivors are euphorically shouting “bull ahoy”, our proprietary indicators are saying it is too early to tell whether we have reached the New Gold World or washed up on the deserted (demand) Island of Speculators.

33 replies
  1. Theosebes Goodfellow says:

    Left out of this naughtical (pun intended) allegory are the “cash for gold” pawn shop reefs that were the rage a couple of years ago which have now all but sunk under the waves of the 2011 economic storm. Have the occidentals been drained of their heirloom gold? Hardly. Methinks they sit and wait alongside the Indians, to see wither the winds blow. The Chinese have a separate set of problems, (namely horrible yuan devaluation), which may very well impact their ability to full engage in the PM markets, but they are oft inscrutable to round eyes. Powder dry, gentlemen, keep you powder, dry.

  2. rowingboat says:

    “While just a reduction and not a reversal of flow to the East…”

    I disagree, there has been an overall reversal since February 2016 when one includes other eastern countries such as UAE, Hong Kong and Thailand et al (not just India and China). I will post supporting data in the next day or two.

      • rowingboat says:

        That’s most kind of you, thanks Bron:

        2015, February to May inclusive: net flow from Switzerland to the East of 425mt (East = China, HK, India, Malaysia, Saudi Arabia, Singapore, Thailand, Turkey and UAE).

        2016, February to May inclusive: net flow to Switzerland from the East of 41mt.

        So there has been a 466mt swing which is similar to the 439mt that Switzerland and UK imported on a net basis from Feb –> May this year, i.e. Switzerland and UK are pulling in gold by diverting formerly eastward flow and there has been a small reversal through Switzerland. The components of the swing are as follows (the only country against the trend is Turkey whose exports to Switzerland have fallen this year, perhaps reflecting an easing of the refugee crisis):

        UAE: 142mt
        HK: 132mt
        India: 101mt
        Thailand: 53mt
        Singapore: 40mt
        Saudi Arabia: 20mt
        China: 14mt
        Malaysia: 7mt
        Turkey: -43mt
        TOTAL: 466mt

        PS: I’m not sure how long the large net flows out of Hong Kong and exports from UAE are sustainable. Note also that Indian imports in May rose to 50mt with a fall back toward $1200/oz… maybe we see a similar increase in July with a pull-back toward $1300/oz? So there could be front running by very clever specs. Pater Tenebrarum wrote about this at the very beginning of the last bull market, a large spec position (I forget exactly 100k maybe 200k contracts) that was held all the way to 2013.

        • Bron Suchecki says:

          Interesting, 41t East doesn’t sound like much but the change is 466t as you note, which is a material number. Refinery economics are very simple, if a market is at a discount then you can’t make money making kilobars, so you make 400oz bars and ship them to London. Regarding UAE and HK, there may be some transit flow there, eg an accumulation point then onforwarded to Switzerland/UK.

          • rowingboat says:

            Note the minimal change for China, Bron. In fact, adding its dominant supplier Hong Kong to the Swiss data, Chinese net imports actually increased year-on-year (Feb-May), 399mt vs. 360mt. So while retail consumers have apparently backed off, what did the Chinese presenter conclude at last year’s LBMA conference, the one who won the award for best speech? That Chinese gold investors were looking in the same direction as their Western counterparts, US macroeconomic policy?

            I haven’t analyzed UAE other to note that net exports from UAE to Switzerland are occurring at (by far) their greatest rate since records are available, 32 years. However I have examined the other transit route Hong Kong, which has seen interesting changes this year in relation to “re-export” and “export” classification. If my understanding is correct re-export is the ‘transit’ component of the gold flow and export is the ‘sink’ component to borrow your terminology.

            Since 2010 Hong Kong has exported approximately 6250mt: 85% to China, 4% Thailand, 3% Singapore, 2% Switzerland and a few 1 percents (UK, Taiwan, India, Korea, Vietnam). In 2016 exports to Switzerland and UK have increased to 8% and 5% and China reduced to 70% of the total.

            Since 2010 Hong Kong has imported 7000mt from far and wide: Switzerland 28%, China 16%, America 10%, Australia 7%, South Africa 7%, Philippines 6%, UK 6%, Thailand 5%, Japan 4%, Singapore 3%, Canada 2% etc. In 2016 overall imports have fallen by 35% vs. 2015 (more from its Western trading partners).

            So if HK is taking in less gold from the West and exporting more to it, while at the same time exporting a similar amount to China as last year, then Hong Kong’s stock could be falling… indeed I calculate a net annualized outflow of nearly 600mt in 2016 as indicated by a much lower proportion of re-exports to total exports this year, 54% in 2016 vs. 84% in 2015. So for me this is unsustainable and a similar situation to the UK that was formerly net-exporting at a similar level, with the result that something eventually had to give.

          • Koos Jansen says:

            Yes, Hong Kong is slowly exporting the gold it had accumulated in 2013 and 2014. See the following charts:



            And yes, Hong Kong’s “exports” are growing relative over its “re-exports”. The definition of “re-exports” by the Hong Kong Census and Statistics Department (and all other customs departments to my knowledge) is:

            “Re-exports are products which have previously been imported into Hong Kong and which are re-exported without having undergone in Hong Kong a manufacturing process which has changed permanently the shape, nature, form or utility of the product.”

            As a consequence an “export” is metal “changed permanently in shape, nature or form”. So, possibly some 1K9999 bars imported into Hong Kong in 2013 and 2014 are being recast in large bars and “exported” (to the West / UK).


            On the other hand, if one puts a new sticker on a bar technically this has changed the product into an export.

          • Bron Suchecki says:

            Thanks Koos. Do you really think a “new sticker” would be enough? I know there are a lot of import-“fabricate”-export scams, but just send the same bar back out and calling it an export seems pretty brazen.

          • rowingboat says:

            How long does a gold bar need to stay in H.K (or elsewhere for that matter) before it is reclassified from “re-export” to “export”, a week month year decade?
            Much of the gold which entered H.K via Switzerland in 2013/14 and now leaving in 2015/16 are presumably the same bars which haven’t been recast (especially if they are 1K9999 bars now being exported to China).
            According to the Hong Kong Census and Statistics definition provided by Koos, these would be “re-exports” but that doesn’t seem right to me.

          • Bron Suchecki says:

            If the HK rules are that the bar has to be made in HK, or gold has to be refabricated, to be classified as export then it isn’t complicated for a custodian to know when and where the bars came from (generally the custodian, eg Brinks, would help or do the export paperwork).

          • Koos Jansen says:

            Firstly, have a read on my latest post re this subject https://www.bullionstar.com/blogs/koos-jansen/australia-customs-department-confirms-bullionstars-analysis-on-gold-export-to-china/ I learned a great deal about international merchandise tarde statistics when researching this post. Information was given by the WTO, HKCDS and ABS.

            Re our discussion.
            1) the definition is “a re-export is not changed permanently in shape, nature, form or utility of the product”. The sticker I might not be positive about, but if the bars for example would be repackaged, in smaller or bigger lots, It’s possible that’ll make them into an export. In any case, I think there is a possibility that bars do not have to be recast before they fall into the export category (speculation). The customs departments themselves don’t control whether something is an export or a re-export, the data sets are merely assembled from what traders declare on the forms (customs checks occasionally).

            2) It doesn’t take much effort by scammers to declare as export – just bang the metal with a hamer or something and fill in the forms.

            3) The WTO wrote me that “AFAIK there’s no time limitation for imported gold to be stored locally and then going out later on declared as re-export”.

            4) Actually, I bought data from HKCSD on what gold ever imported from Australia (as country of origin) was when re-exported to China. I compared it to data by HKCSD publicly disclosed on monthly imported gold from Australia (as country of first consignment). Because Australia mines all gold exported, in this case Hong Kong’s import from Australia as country of origin or first consignment makes no difference.


            In the chart we can see the purple bars and orange bars are not equal. Meaning Hong Kong re-exports gold to China that can be formerly imported from Australia as country of origin many months or years ago. I didn’t want to include this chart in my post coz it would make things unnecessary convoluted. (and coz I was writing about formulas, my reader base was already halved :-). And it doesn’t really make a difference for computing China’s gold import.

            5) Bron, do you think any custodian knows the “identity and origin” of any gold bar they hold, subsequently being able to judge whether it will be an export or re-export when the gold is going out?

            6) The HKCSD rule book is http://www.legislation.gov.hk/blis_pdf.nsf/4f0db701c6c25d4a4825755c00352e35/8B45A10D6DBD5BAC482575EE00363092/$FILE/CAP_60E_e_b5.pdf

          • Bron Suchecki says:

            Thanks Koos. Yes scammers could do what they want and they choose the export classification with customs only randomly checking, but I think it would be a pretty brave scammer to attempt to classify something as export if all they did was repackage it. Yes they could just bang it or roll a bar flat or similar, but that would have to happen at a non-vault facility – it would be a red flag to customs if bars never left a vault and were classified as export, as vaults don’t have an fabrication equipment. I think scammers would at least ship bars into a “factory” so as not to attract customs attention because the vault operators would see the export paperwork and they would not want to be complicit in scams by allowing people to classify something as export when it clearly never left their vault. For the whole LBMA chain of integrity to work LBMA “approved” vaults have to know and track where bars came from, so HK customs could argue that they should have known if someone was systematically incorrectly classifying reexports as exports.

            Re “Australia mines all gold exported” this cannot be assumed, Perth Mint does some scrap refining and I know the Perth Mint will ship in bars to melt/refine into Perth Mint bars if demand is greater than their usual refinery output. It doesn’t affect your calculations.

          • Koos Jansen says:

            Thanks Bron. Yes, probably the scammers do something to the gold very cheap. With respect to “round tripping” between HK-CN they probably reshape the metal. In this round tripping example I know the gold HAS the be processed in China or the import/export is not allowed. https://www.bullionstar.com/blogs/koos-jansen/chinese-cross-border-gold-trade-rules/ In China one can only import and export under processing trade (mostly done in FTZs), which obviously requires PROCESSING.

            In other scams I’m not familiar with, obviously I don’t know if the metal must be an “export” above “re-export”. From what customs departments around the world tell me, traders also have some room for their own interpretation, ie THEY can choose commodity classification code etc.

            “For the whole LBMA chain of integrity to work LBMA “approved” vaults have to know and track where bars came from”

            But of course. Question is, is all bullion in HK in the LBMA chain of integrity? Would make sense ….

            “Re “Australia mines all gold exported” this cannot be assumed”

            Correct, but all gold leaving Australia (AU) is an export, no re-export IMO. Of course, the Perth Mint does some scrap, etc, and I also noticed Australia does import gold (likely dore) from Asian nations. Most notably I saw through COMTRADE that AU imports gold from Papua New Guinea (PNG).

            AU gross import from PNG for 2015 was valued at $1,715,340,303, weighing 51 t. With an average annual gold price in 2015 of $1,160.1, I estimate the fine content of the PNG gold export to AU is 46 t. I assume PNG (that mines roughly 50 t a year http://minerals.usgs.gov/minerals/pubs/commodity/gold/mcs-2016-gold.pdf) has most of its mine output refined in AU? Can that be?

            According to my data. Australia mined 300 t in 2015, BUT gross imported 78 t, gross exported 287 t, so net exported 209 t. Where did the 91 t go? AU consumption? Consumption by global investors stored at the Perth Mint? Or sneaky PBOC purchases in AU?

            Other gold imports by AU in 2015 https://www.bullionstar.com/blogs/koos-jansen/wp-content/uploads/2016/08/Screen-Shot-2016-08-06-at-8.49.23-pm.png

          • Bron Suchecki says:

            Perth Mint does refining for most countries close to it and I think most of PNG as that is the Lihir mine so Newcrest would sign one refining contract. 300t sounds a bit much http://www.minerals.org.au/resources/gold/production_and_resources and while there has been a resurgence of bullion dealers in Australia 91t seems too high, certainly not monetary gold purchases as far as I’m aware – Perth Mint can sell everything as kilobars, it would not waste profit selling 400oz bars.

          • Koos Jansen says:

            Any AU gold dore output exported out by Chinese (Zijin) before it has reached the Perth Mint?

          • Bron Suchecki says:

            Zinjin’s Australian interests are about 6t a year http://www.zijinmining.com/business/product-detail-26913.htm. Are their other Chinese owned Australian mines, not something I’ve followed closely. Note that mining companies usually sign 1-2 year refining agreements so they may still be contracted to Perth Mint. For a west australian mine site any dore would have to go through the international airport, which is a few hundred meters away from the refinery – the cost of freighting dore (with extra weight) for refining rather than getting it done locally in a highly competitive market where rates are under pressure would not make sense economically. It is not like China has problems sourcing gold, I’m not sure I see the point of shipping dore rather than money.

          • rowingboat says:

            Three more months of data and no material change, Bron. There is still a continuing small reversal of the formerly eastward flow through Switzerland. The swing Feb –> Aug has increased to 803mt vs. 2015.

            So where is the gold flowing to? The answer is the UK predominantly. The swing of flow into the UK through Switzerland Feb –> Aug is 718mt vs. 2015, representing 89% of the eastward swing.

            Swiss flow into the UK in August was the highest this year (85mt). Flow from U.A.E into Switzerland continues at record pace, 300mt year to date.

          • rowingboat says:

            Well, falling prices have finally had their impact with the swing peaking at 861mt, Feb –> Sept. In October more gold flowed through Switzerland to the East than October last year. At the same time during this eight month period (Feb –> Sept 2016) a whopping 1,100mt entered the UK net.

            I’m expecting the trade data for the UK in October to show a dramatic fall of imports with November seeing a resumption of “normal” these past several years with gold leaving the UK again. Surprising to me is how far the price needed to fall, which is probably a reflection of USD strength as gold in other currencies had soared even higher.

        • Bel Suave says:

          Good numbers work. A small rejoinder to “Switzerland and UK are pulling in gold by diverting formerly eastward flow ” … I don’t see the diversion part – we can’t make any firm declaration about the ownership of the gold flowing to the UK.

          If, as I strongly suspect, much of that flow is a result of ICBC getting properly set up there and ready to vault bars which formerly went east – then the flow is a relocation/diversion in the geographic sense only. Ownership being a separate – and more significant issue.

          There’s much to the City of London situation post-Brexit that is not being discussed in financial circles the way it needs be. Much that may be leading to the ‘opaque world of gold’ becoming even more ‘opaque’ for a while – as new power structures and alliances get built behind scenes.

          Bron is quite right about both HK and UAE being transit points. Turkey, for instance is increasingly in thrall to it’s Gulf State sponsors, and has moved the gold it scooped up into the hands of it’s Central Bank via the infamous “gold monetization” scheme to it’s bankrollers there. India probably likewise, though much less was purloined.

          Egypt is on it’s way to becoming a strong player – whether or not it gets placed in the west or east category. Suffice to say – the meanings of those words, east and west are going to become much more fluid than most imagine!

          • rowingboat says:

            Thanks for your comments. When the Swiss made their trade data available several years ago my goal was to observe how the cross-border gold flows were affected by gold’s established correlations with macroeconomic drivers, i.e. how did the flow adjust during bull and bear markets? Then I moved onto other hubs UK, America, Canada and HK (see my reply to Bron above). There are interesting and recurring patterns and other fascinating details, like the 500mt exported from the Soviet Union to Switzerland in the two years prior to its collapse.

            In keeping with your reply and the changing winds, I note that gold imports into Switzerland from 47 mine producing nations, after a steep if volatile uptrend from 1982 –> 2008, has fallen rather precipitously since… 968mt (2008) to 518mt (annualized 2016).

    • Bron Suchecki says:

      I think that statement is PR spin in aid of promoting the new standards. From my dealings with Malaysia there certainly isn’t any problem for people to buy physical gold and Dubai is a major gold hub. I think the standards are more about allowing gold in financial product structures – there is no “confusion” about the Shariah legality of average Muslims buying physical gold.

  3. Sage8964 says:

    Well said Keith, another great article. One of the few things the mainstream media has right is that gold and silver are overvalued here. There are a few (but loud) voices out there exclaiming that there are shortages in silver and that its headed to $30 an ounce. As my money manager recently said, NOW is a good time to liquidate your gold/silver positions as another PM bubble is forming. Anyone remember 2011? Don’t be the one holding the bag

      • Bel Suave says:

        few could mistake the dulcet tones of a Bron Sucheki post for the triumphalist tootings of a Keith W one! It’s like taking a ride in a Rolls after climbing out of a haywagon!

        Hay! Just kiddin Keith… it’s only because it took so long to get Bron posting here that the difference is worthy of note – I began to fear after seeing nothing of the new fellows work over the winter that you had hired him merely to shut him up! A conspiracy theory we can happily dismiss now. Your genius is hiring the guy immediately comes to full light once he is poppin the gears here. Where else on the web can the non-factionalist goldnsilver holder come anymore to relax and bathe in the warmth of views that don’t reek of self interest and cant?

        As in … why “cant” the world o gold n silver folks ever seem to get along? We share, after all, much the same goals and strategies, but only seem to have what divides us in common.

        This is going to be a memorable quote: “As my money manager recently said, NOW is a good time to liquidate your gold/silver positions as another PM bubble is forming. Anyone remember 2011? Don’t be the one holding the bag” Sounds like a call that will join the most infamous of the pumpers wrong-headed predictions – who would have thought it? A reverse Bo Polony is born!

        • Bron Suchecki says:

          Thanks. Regarding “much the same goals and strategies”, that is maybe questionable. In many cases (and often explicitly with the “gold to $10,000” type articles) those marketing gold are just appealing to greed to accumulate more dollars, but which as Keith has pointed out, avoids the question of what will those dollars be worth. Hence the viseral reaction I have always received whenever my articles do not clearly contain some statement that gold will (always) go higher.

          The links to those articles reporting the various discounts to London I got from a daily email from Nick Laird of http://www.goldchartsrus.com/. His email list contains all of the key gold commentators, which you can see by how often his charts appear in various articles. Yet no one I saw picked up on the discounts and felt it was a useful data point to let their readers know about.

          • Bel Suave says:

            Yes the discounts are indicative of something going on that every serious pm investor should be made aware of – but will not be, for the usual reasons.

            I quite agree that there is no possibility of reconciliation or even peaceful coexistence at the talking heads level of the pm community. The pumpers have stepped too far beyond sanity for too long to ever be able to get back down to earth safely. For them – it’s double down or nuthin!

            I was speaking more towards the grassroots, or great unwashed level in making that comment. Excluding the hard core of cultists who basically worship the stuff – and hate everyone who does not – most everyone else holding pms is doing so for similar reasons. Hence the endless rancor seems pointless and overdone. Cui bono?

  4. BRADLEYGOLDBUG619 says:


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