Are The London Gold Vaults Running Empty?
As I have extensively covered in the past months the majority of the unprecedented demand for gold from China, which started in January 2013, was being supplied by the UK, home of the London bullion market and many bullion bank (and private) gold vaults. Via Switzerland, where the gold was remelted into kilobars, it was shipped towards Hong Kong where most of it was re-exported to China mainland. Whilst in 2013 it was clear that the world’s largest gold-backed ETF, GLD, was the predominant supplier from the UK, since January 2014 GLD inventory has more or less stabilized.
But UK gold export at the time remained elevated. In January 2014 the UK net exported 143 metric tonnes of gold (118 tonnes net to Switzerland), in February net export accounted for 107 tonnes (119 net to Switzerland). This gold must have been fully supplied from other vaults than GLD’s, which raises the question; how much floating supply is there left in London. I believe there is still a lot of physical gold in London (I will do a future post on some estimates), but I don’t know how much of this is floating supply.
Let’s head over to the east and see how much physical gold China has imported year to date, based on official trading statistics. If we look at the trade stats from Hong Kong we can see net export to the mainland in January was 89.7 tonnes, in February it was 112.3 tonnes and in March 85.1 tonnes. The amount that crossed the border in March was down 24 % from February, but still strong – 85.1 tonnes annualized is 1021.2 tonnes. The total in Q1 accounted for 287 tonnes, annualized 1148 tonnes (just to give you an idea).
As we all know by now Hong Kong is not the only port through which China is importing gold. Though the Chinese are reluctant to disclose their gold trade numbers – guess why that is – from the trade statistics of other countries we can see a portion of how much gold officially vanishes in the black hole (China’s strong hands) not to return in the foreseeable future. Switzerland, where 70 % of the world’s gold refining capacity is located among four refineries, has been so kind to publish monthly reports on whom they trade gold with, and how much, since January 2014. The Swiss net exported 12 tonnes to China in January, 36.9 tonnes in February and 26 tonnes in March. If we add up Hong Kong and Switzerland net export to China in Q1 the outcome is 362 tonnes, annualized 1448 tonnes (just to give you an idea). Remember, this is only from two countries, it doesn’t include the kilobar shippings from the Perth Mint to China for example. Chinese gold import in Q1 has definitely been more than 362 tonnes – also because the official trade numbers I’ve used for this post do not include monetary gold, PBOC purchases will not show up in these stats.
It’s remarkable that Chinese net import in March, at least 111.1 tonnes (85.1 + 26), hasn’t been sourced from London, as it has been in the past year. UK total net gold export in March collapsed 85 % m/m from 107 tonnes in February to 16 tonnes in March, net export to Switzerland fell by 72 % from 119 in February to 34 tonnes inMarch.
The main gold vein, as I’ve called it, that ran from the UK, through Switzerland, through Hong Kong finally reaching the mainland, is drying up. Switzerland net gold export to Hong Kong fell 76 % from 97.9 tonnes in February to 23.9 tonnes in March, according to Swiss customs.
In the coming months I’ll be watching very closely if any more gold will be squeezed out of London and how Swiss exports to Hong Kong and the mainland will evolve. I believe the largest floating supply is/was in London, it will be decisive for the gold market if these stocks are gone. Additionally I will search more customs databases to get hard numbers on gold export to China mainland.
The following video was broadcasted in December 2013. Kenneth Hoffman states that the London gold vaults were virtually empty at the time. Are the last bars being moved out at this very moment? The managing director of Switzerland’s biggest gold refinery stated this is exactly what is happening.
Because net export from Hong Kong to the mainland in March didn’t collapse, but Swiss export to Hong Kong did, two things could have happened. Or Hong Kong, which has net imported 924.6 tonnes of gold since 2010, shared a little of its yellow metal to supply the mainland, or other countries than Switzerland increased their export to Hong Kong. To find out I made a chart combining Hong Kong net import with Hong Kong’s main trading partners.
From looking at the chart I think this is what happened; during Q1 Hong Kong net import dropped (Switzerland and UK imports down, Australia and the US quite stable in March), which means a bigger share of what they imported was sent forward to the mainland supplemented by inventory build up in Hong Kong over the past years.
From stats of the Shanghai Gold Exchange I know Chinese wholesale demand came down after Q1 without premiums going up. This suggest there hasn’t been a supply shortage in the mainland in April. However, even China’s non-government demand pace in April combined with demand from the PBOC, India, Russia and the rest of the world can transcend global mining and scrap supply, pressuring the floating supply. Let alone if Chinese demand will spring back, which is quite likely to happen at these prices and given the fact the Chinese government is officially stimulating its people to buy gold.
In Gold We Trust
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Additional charts: Hong Kong net import in Q1 accounted for 193 metric tonnes.
Chinese net import from Hong Kong in Q1 accounted for 287 metric tonnes.