Gold Demand within the Chinese Gold Market

from BullionStar, via Goldseek:

In China, nearly all physical gold supply flows through the Shanghai Gold Exchange (SGE). Likewise, nearly all gold demand in China is met by physical gold withdrawals from the Shanghai Gold Exchange’s nationwide network of precious metals storage vaults.

Therefore, using the broadest definition of gold demand, SGE gold withdrawals are a suitable proxy for overall gold demand in China. This gold demand can be labelled as “Chinese Wholesale Gold Demand” and comprises two main categories, namely, consumer gold demand and institutional gold demand. Consumer gold demand generally refers to gold jewellery fabrication demand, retail physical gold bar and coin demand, and in some cases also includes industrial fabrication demand. Institutional demand can be viewed as individual and institutional investor purchases of gold bullion directly on the SGE trading bourse, and withdrawal of this gold from the SGE vaults.

SGE gold withdrawals for 2016 totalled 1970 tonnes. Although this was 24% lower than 2015’s record 2596 tonnes of SGE gold withdrawals, it was still in line with 2014’s total of 2102 tonnes of gold withdrawals[1].



  • The vast majority of overall gold demand in China is met by gold withdrawals from the Shanghai Gold Exchange (SGE).

  • This ‘Wholesale’ gold demand consists of 2 main components, namely consumer gold demand and institutional gold demand.

  • Institutional gold demand is a term used to reflect direct purchases of physical gold on the SGE by both institutions and individuals with SGE trading accounts.

  • Western precious metals consultancies are infamous for only reporting consumer gold demand (gold jewellery fabrication, gold bar and coin demand, and industrial gold demand), and by and large ignoring direct purchases of gold on the SGE.

  • Western precious metals consultancies therefore vastly understate the true magnitude of gold demand in China, which, based on SGE gold withdrawals, is far larger than the consumer demand figures would suggest.

Chinese Wholesale Gold Demand

Controversially, a number of Western precious metals consultancies, such as  the World Gold Council, limit their definitions of Chinese gold demand solely to consumer gold demand[2].

For example, for 2016, the World Gold Council (which uses gold demand data collected by consultancy Metals Focus) reported Chinese gold demand of 913.6 tonnes, comprising jewellery demand of 629 tonnes, and gold bar and coin demand of 284.6 tonnes. This total is less than half of total SGE gold withdrawals for 2016.


SGE Gold Withdrawal components, an illustrative example

What these consultancies methodologies fail to take into account, however, is that direct purchases of gold by institutions and individuals with trading accounts on the Shanghai Gold Exchange represent a substantial additional component of overall Chinese gold demand above and beyond consumer gold demand.

BullionStar Gold University article “Mechanics of the Chinese Domestic Gold Market” illustrates that a series of simple equations generally hold true for gold supply and demand in the Chinese gold market[3], and that any comprehensive definition of true Chinese gold demand must take into account both consumer gold demand and direct purchases of gold at the SGE.


SGE Physical Gold Supply = SGE Gold Withdrawals = Chinese Wholesale Gold Demand

On the Supply side:

SGE Physical Gold Supply = Gold Imports + Domestic mine gold supply + Gold Scrap / Recycling + Disinvestment + Recycled Distortion

Here, disinvestment refers to the sale of gold which was previously purchased directly for investment. Recycled distortion is a term that refers to recycled gold that is not scrap and that is not disinvestment. An example would be process scrap. Recycled distortion flowing through the SGE vaults overstates both the supply and demand sides of the equation, and needs to be subtracted from SGE withdrawals since it could be scrap that re-entered the supply chain.

When Recycled distortion is subtracted from SGE withdrawals, the result can be viewed as ‘True Chinese gold demand’.

On the Demand side:

Chinese Wholesale Gold Demand = Consumer Demand + Institutional Demand + Recycled Distortion

where Institutional Demand = Direct Gold Purchases At The SGE

SGE Gold Withdrawals – Recycled Distortion = “True Chinese gold demand”

and “True Chinese Gold Demand” = Consumer Demand + Institutional Demand

As a reminder, standard gold ingots and bars are VAT exempt when sold on the SGE but not when sold outside the SGE (off SGE). In contrast, non-standard gold is VAT exempt when sold outside the SGE, and non-standard gold cannot be traded on the SGE.

Standard gold refers to gold ingots of 1 kg, 3 kg (both 999.9 fine), and 12.5 kg  (995 fine) weights, and also gold bars of 0.1 kg and 0.05 kg (both of which 999.9 fine). An example of non-standard gold would be a 0.2 kg (200 gram) gold bar.

Direct Gold Purchases at the SGE

Given that ‘True Chinese Gold Demand’ comprises both consumer demand and institutional demand, it’s important to look beyond the consumer demand categories of gold jewellery fabrication, gold bar and gold coin demand and industrial fabrication, and to also examine the ‘institutional demand’ category, i.e. a category which really refers both individual and institutional direct purchases of gold on the SGE.

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