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I don’t think so. Here again, most analysts got the Shanghai Gold Exchange (SGE) completely wrong.
The SGE was established in October 2002 by China’s central bank, the People’s Bank of China (“PBOC”) upon approval by State Council and supervised by PBOC.
Officially and fully open for business in September 2014, I personally was the first foreigner to visit the SGE in October 2004 and spoke with the president. Construction was underway, communications, quote pits for the different products and more. It was an interesting visit, under armed guard.
But for the record, let me explain the myth that the SGE is going to boost gold demand and send it to the moon.
The chief reason for the SGE is to officially allow two
types of cross-border trade in gold in China:
To promote general trade and processing trade.
In a nutshell, that means the gold is not brought in to the SGE for investment …
But instead, for manufacturing or assembling purposes after which the finished goods are required to be exported.
On BullionStar.com, columnist Koos Jansen reveals the byzantine details of the Chinese gold trade:
Usually processing trade is conducted through Customs Specially Supervised Areas (CSSAs) – also called Free Trade Zones, Customs Specially Regulated Areas, Special Customs Supervision Areas or Customs Special Supervision Regions, these are all the same.
When processing trade is performed outside CSSAs (the rest of the mainland, non-CSSA) the materials will be strictly monitored by Chinese customs. Through processing trade gold cannot enter the Chinese domestic gold market where the SGE operates. Processing trade and CSSAs are strictly separated from the Chinese domestic gold market.
Processing trade is meant for China’s manufacturing industry to efficiently connect with the rest of the world. The Chinese and foreign companies engaging in processing trade are exempt from, in example, import duties and Value-Added Tax (VAT).
General Gold in China Trade
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| PBOC controls all forms of gold in general trade. |
When gold is imported into the Chinese domestic market, this is referred to as general trade. The agency that controls all forms of gold in general trade is China’s central bank, the People’s Bank of China (PBOC).
Only financial institutions and gold enterprises that carry the Import and Export License of the People’s Bank of China for Gold and Gold Products (the License hereafter) can get gold to pass customs into the Chinese domestic gold market.
The rules for cross-border gold trade in general trade have been lastly drafted by the PBOC in March 2015 and are called Measures for the Import and Export of Gold and Gold Products (the Measures hereafter). In the Measures it’s stated:
For the import and export customs clearance of gold and gold products as included in the Catalogue for the Regulation of the Import and Export of Gold and Gold Products, the Import and Export License of the People’s Bank of China for Gold and Gold Products issued by the People’s Bank of China or a People’s Bank of China branch shall be submitted to the Customs.
The Catalogue for the Regulation of the Import and Export of Gold and Gold Products describes all forms of gold (coins, ore, bullion, unwrought, scraps, jewelry) that can cross the Chinese border. For all gold to be imported into the Chinese domestic gold market the material is required to be accompanied by the License.
Currently there are 15 commercial banks that are approved by the PBOC to apply for the License to import standard gold, which in China is bullion in bars or ingots of 50g, 100g, 1Kg, 3Kg or 12.5Kg, having a fineness of 9999, 9995, 999 or 995. The 15 commercial banks are:
Agricultural Bank of China
ANZ
Bank of China
Bank of Communications
Shenzhen Development Bank/Ping An Bank
Bank of Shanghai
China Construction Bank
China Merchants Bank
China Minsheng Bank
Everbright
HSBC
Industrial and Commercial Bank of China
Industrial Bank
Standard Chartered
Shanghai Pudong Development Bank
All standard gold imported through general trade into the Chinese domestic gold market is required to be sold first through the SGE (the core of the Chinese domestic gold market). In the Measures, it’s stated:
… An applicant for the import and export of gold … shall have corporate status, … it is a financial institution member or a market maker on a gold exchange [SGE] approved by the State Council.
… The main market players with the qualifications for the import and export of gold shall assume the liability of balancing the supply and demand of material objects on the domestic gold market. Gold to be imported … shall be registered at a spot gold exchange [SGE] approved by the State Council where the first trade shall be completed.
Next to standard gold there are non-standard gold (for example bullion bars weighing 200g 9999 fine and doré bars), gold products (jewelry, coins and ornaments) and ore.
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Non-standard gold, gold products and ore are not required (and not allowed) to be sold through the SGE when imported into the Chinese domestic gold market. Only a limited number of gold enterprises can apply for the License to import non-standard gold, gold products and ore under general trade. Although, the Measures released in March 2015 by the PBOC loosened the requirements for such enterprises.
An example of a gold enterprise that can import non-standard gold into the Chinese domestic gold market: On May 26, 2015, Zijin Mining Group bought a 50% stake in Barrick Gold Corp’s Porgera mine in Papua New Guinea for $298 million.
On October 9, 2015, China Gold Network wrote that Zijin Mining was one of the first mining companies to be granted the qualification by the PBOC to import gold under general trade, allowing Zijin to import doré from Papua New Guinea into the Chinese domestic gold market.
Either way, you can clearly see this is all about regulation, not boosting demand. And indeed, demand through the SGE has declined, pretty much year-over-year, per this table, courtesy of BullionStar.com
You can see the surge in trading in mid-2015, but from there on out, it’s pretty much a downtrend.
The SGE will NOT boost gold demand, at least not enough to turn a bear into a bull. And neither will the new Sharia law on gold you’re hearing about.
The only three things that will turn gold around to the upside are …
1. A crash in the dollar. Highly unlikely, though a short-term pullback is in order.
2. A collapse in global stock markets. Unlikely.
3. A new black market in gold, which is forming.
Best wishes,
Larry
P.S. Time to pack your “bug-out bag” and run? Or would you rather get rich? Well, some people have built a little cabin in the woods. They’ve stocked it with food, guns, and ammunition. They call it a “bolt hole.” You know what? It’s not such a bad idea! But it’s not for everyone. I’ve got a better way to protect myself. And you do, too. The answer is to get rich. Rich enough to weather the storm and keep your assets out of danger. The best defense, in other words, is a good offense. And guess what? The K Wave itself will give you the perfect way to do that. -Make sure to click here to download my new free report Stock Market Tsunami!
Larry Edelson, one of the world’s foremost experts on gold and precious metals, is the editor of Real Wealth Report and Supercycle Trader.
Larry has called the ups and downs in the gold market time and again. As a result, he is often called upon by the media for his investing views. Larry has been featured on Bloomberg, Reuters and CNBC as well as The New York Times and New York Sun.
{ 20 comments }
YOU like me live in Bangkok , do you recommend this as a bug out cabin to your readers. ?
Or is it we can buy and sell gold down in china town with anyone asking one single word as to where our money came from or who we are. ? your thoughts please. yours jack black.
Larry,
This article leads me to believe that you believe gold is going no where for a long time. You seem to be giving us RWR members conflicting signals on gold. If you believe gold stocks are a bad investment now I would like to know it and why.
Thanks,
Tom
Larry:
You told us not to purchase any gold until you give us the word. I subscribe to
your letters and so I am waiting to hear from you. (All kinds of experts out there )
Raymond
Learn to ride the wave!!
What??? Now you’re bearish on gold? What happened to the “war cycles”? Absolutely no evidence of that since you claimed war cycles “converged” in Oct 2015.
since you feel oil will pullback. what would be a good play to ride this down trend. a double or triple leveraged play to the downside
The only three things that will turn gold around to the upside are …
1. A crash in the dollar. Highly unlikely, though a short-term pullback is in order.
2. A collapse in global stock markets. Unlikely.
3. A new black market in gold, which is forming.
So no bull in gold guys
Larry, the closing 1, 2, 3, statements sound like you don’t see gold turning up any time in the near future! Am I taking this out of context?
Dear Larry,
Your article is horribly wrong. You mix up the “Shanghai INTERNATIONAL Gold Exchange” with the “Shanghai Gold Exchange”. Read this https://www.bullionstar.com/blogs/koos-jansen/workings-shanghai-international-gold-exchange-part-one/
Koos,
Very informative read Koos, thanks for clearing this up for us. Your thoughts Larry…?
I can’t believe, after all the years you have been talking about “backing up the truck” for gold, that you are now all but ruling price appreciation out, except perhaps via the very uncertain mechanism of the black market which is, at least in the short and possibly medium term, very likely a non-factor. Anyone can predict price increases, as they are the one certainty in the very uncertain world of finance. But without a reasonably good indication of the timing the information is essentially useless.
Larry,
You say gold will go to $5,000 starting in 2017 but stated above nothing really to push it upward except potentially forming a black market. That does not sound optimistic to me at all for $5,000 gold.
The US economy continues to thrive and will do so for the duration, therefore it is unlikely that gold will turn the corner for many years yet. Buy shares-that is the best way to make a fortune; gold only thrives on economic adversity which will never happen.
Sorry Larry, but I largely disagree with your analysis:
1.) If Trump attempts to re-industrialize the US, he needs a weaker US-$. Otherwise the US industry will not be competitive. Furthermore, the profitability of the large international companys (such as Apple) will drop.
2.) One main driver for gold is real interest rates resp. inflation. The latter seems to pick up, whilst the central banks are not allowing interest rates to rise to the same extent. In Germany the infaltion rate, as announced yesterday, rose to 1.7%, whilst the German 2-Y bonds yield MINUS 0.8%. Same trend is seen throughout the whole euro-zone AND the US. This is a very strong argument for buying Gold.
Larry, if you are not sure or turning bearish on Gold at least for a mid term, should not you be notifying your PAYING subscribers accordingly? So MUCH happened in the last couple months but we, subscribers, have not received any proper update. TONS of opportunities have been missed this couple months not to mention the year. I get 3 -5 advertising emails from you a day. But nothing from RW subscription. As per Gold, if you are not certain or turning bearish on Gold you should be advising to sell in to this current spike. By the way, your Oil call is wrong too. NO sell in Oil as per your AI charts.
Chinese and Indian folks always have a black market in gold. I have been in physical gold for years. Chinese regularly ship gold home mixed with Granite or limestone and other ore in 40 ft containers it goes into inner provinces and is then smelted with the miller process. African countries like Nigeria do not get it and Chinese customs in not gonna stop it. They also do this with conflict gold in the Congo lots of illegal gold leaves Africa like this to China. I dont know exactly how India does it but they also do something similar. Physical going after gold in Africa is well something else. You deal with many factors.
You have a black market in Chinese gold and how it is commonly smuggled back into china from for example the fun country of Nigeria. Nigeria has huge amounts of gold CHina companies invested in Nigeria but legally because of the 6.5 percent fees off spot to cover the royalty and their technical fee is a huge amount. No financing to bring it out. First the Chinese have no problem illegally mining property and they ship gold dust back to China they process with the miller process and then grind the 99.5 pure gold into dust. Its mixed with crushed limestone or granite and shipped to china. I know it goes into a interior chinese province and the dust falls to the bottom of the 40 ft LCL. It is then sold into the market. This physical business is dangerous stuff its for indiana jones not paper traders.
Larry- very conflicting as you now seem bearish on gold…..
Ok So What I am doing is putting all my speculative Gold and mineral stocks on the watch list. Moving away from the maybe to buy low and sell high even if its multiple times over the year or next four years. I didnt want to be a short term trader but if I am to make any income with the little resources i have I will need too be vigilant to whats happening to my money. At this point everyone needs to remember to pull the sell trigger, on just about everything invested, if needed. Remember the adage, Fool me once shame on you, Fool me twice Shame on Me.
There is no “new Sharia law” on gold. Gold and silver were mandated under Sharia law, from the days of Mohammed, to be used as money. (Mohammed worked in the merchant trade, moving cargo by camel caravan and one-mast sailboat. He handled money for a living.). What did change this year, is that a commission of Sharia-law scholars from the Muslim clergy, got paid by the Sultan of Oman to study the various paper-gold products traded on exchanges in the West, to see if any of them met Sharia-law standards of trade, and is to publish it’s findings. Chiefly, this means that a trader who buys or sells the securities, neither pays nor accepts interest on money. It is expected by the operators of the SPDR gold trust, ticker symbol GLD, that their product will meet this standard and be acceptable as a portfolio holding, on religious grounds.
If and when there is some growth in the use of such paper-gold as Sharia-compliant money, I suspect that Saudi Arabia will announce that it’s gold holdings are overweight, and the Kingdom will try to sell some gold into these paper-gold exchange traded products. Basically, this will facilitate Saudi Arabia’s ability to survive on low oil prices. But the problem with selling gold to Sharia-obedient businessmen, is that few such people have demand for it. The poor who flee to the West as refugees, take jobs that pay them in debt-based euros or dollars. Most cannot afford to transact business in GLD shares, as the $100+ price makes them inconveniently large, although a Walhalla-type business in them might develop.
The King of Saudi Arabia’s immediate challenge from the Muslim clergy, is to prove himself a better ruler of his subjects, than the folks at ISIS who want to murder people live on TV to save their souls. The Sultan of Oman has the same problem. Getting agreement among a large group of Muslim theologians, that a God-fearing Muslim who lives in the West, can obey Sharia law by saving his money and holding it as GLD shares, removes from those Kings the stigma, that by trading their oil with American companies, for the debt-based US dollar, they are harming Muslins worldwide. Publicizing the advice, “Obey God. Hold GLD shares instead of dollars.”, simply puts the shoe on the other foot. If Muslims of modest means know that there are ways to obey Sharia in their household financial dealings, but go right on using dollars and euros, then clergymen need to preach to those people of modest means, to persuade them to comply with Sharia and trade in gold, instead of in dollars and euros.
In summary, the King of Saudi Arabia wins here, by losing a little. If he dumps a little gold to make it easier for Muslims of modest means, to acquire some and use it for trade, but the Muslims of modest means go right on using dollars and euros, he gets the clergy off his back…just as he would equally have gotten the clergy off his back, had a billion Muslims raced to buy GLD shares last Tuesday.