by Koos Jansen, Bullion Star:
The Shanghai Gold Exchange launched a smartphone app for customers to trade gold.
It’s advised to have read The Chinese Gold Market Essentials Guide before you continue.
The main reason there is such a large discrepancy between Chinese gold demand as disclosed by the World Gold Council (WGC) and the amount of gold withdrawn from the vaults of the Shanghai Gold Exchange (SGE), the latter being a measure for Chinese wholesale gold demand, is because of direct purchases by individual and institutional clients at the SGE. Whilst the WGC, and many other consultancy firms, measure Chinese gold demand strictly by how much gold is sold through retail channels, the reality is that in China every citizen can open an SGE account and buy gold directly in the wholesale market (the SGE). Such direct purchases at the SGE are not captured in retail demand.
As we all know many wealthy Chinese invest in gold. In the knowledge these people all have direct access to the wholesale market, we can ask ourselves, why would any of them buy gold at retail level? Naturally, Chinese women prefer to buy gold in the form of jewelry because that’s an investment they can flaunt with. But if gold is not bought to flaunt with rational investors would always prefer to pay the lowest price for the gold content. That is, at the SGE.
A Chinese investor that wants to invest, for example, 100,000 RMB in gold will likely open an SGE account through which he can exchange his fiat money for physical metal. At the SGE the investor is granted to pay the lowest price. His purchase at the SGE , however, would then not be counted in retail demand.
My estimate is that half of the gold withdrawn from the vaults of the SGE is bought by wholesale customers that process the metal into gold products, like jewelry, that are eventually sold to the private sector. The other half of the gold withdrawn from the vaults is purchased directly by the private sector (individual and institutional clients). Have a look at the next chart:
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