Facing Facts: Higher SGE Gold Withdrawals Trigger Demand Optimism in China, but Elevated Premium Remains a Drag?

Debajit Saha

By Debajit Saha
Head of Precious Metals Research, Indian Sub-Continent, Middle East Region, Refinitiv Metals Team

After a massive dip in gold withdrawals from Shanghai Gold Exchange (SGE) over the past four months, August data – showing a withdrawal of 161 tonnes – has triggered a fresh wave of optimism for a recovery in China’s gold demand. This higher level of withdrawals could be attributed to stocks replenishment by both retailers and manufacturers in preparation to various jewellery exhibitions taking place in September and ahead of the annual Qixi Festival, an equivalent of Valentine’s Day, which typically sees average Chinese consumers go shopping.

After strong Q1 gold demand, we have observed a sharp drop in Q2, as average Chinese buyers shied away from the market due to a persistently high gold price in local currency terms and a lack of optimism about the domestic economy. We estimated gold jewellery demand at the retail level at 132 tonnes during Q2, down by 31% compared to the previous quarter.

Meanwhile, investment demand was estimated at 37 tonnes, representing a 38% drop from the previous quarter.

Positive News

Following subdued demand in Q2, a steep increase in SGE gold withdrawals reported in August has been viewed as positive news for the market. To put this into context, SGE monthly withdrawals averaged 118 tonnes of gold over the past four months. This represents a rather disappointing number for a country like China, with a strong natural affinity for gold, albeit Q2 tends to be relatively weaker compared to other quarters, when we consider seasonality.

Interestingly, SGE gold premium over London spot hit a record of $128/oz this month, as per calculations made by LSEG metals research based on publicly available data. Higher premiums are generally a reflection of strengthening demand. However, in the current scenario, we believe that a jump in the premium might have been driven by curbs on gold imports previously imposed by the People’s Bank of China to defend the Renminbi, which hit a 16 year low against the US dollar in September.

Following a slight easing in import restrictions, the premium has dropped to around $89/oz at the time of writing this article, although it has remained at an extremely elevated level, signaling that dealers are anticipating higher demand and an extreme supply crunch in the near term.

It is expected that the Chinese government will continue to protect its currency from further decline, and gold import restrictions will likely to be a natural choice. Physical demand tends to pick
up in the last two quarters, and, if gold imports remain restricted during that time, premium is likely to stay elevated, with a possibility to retest the September high.

Calls for Stabilisation

A weakening currency, fragile real estate sector, subdued exports demand for manufactured goods and shrinking private investment are among the key challenges the world’s second largest economy is currently facing. And while August industrial and retail sales data were slightly encouraging, more needs to be done to stabilise

the economy and to bring back consumers’ confidence. We estimate gold jewellery demand to remain at around 150 tonnes in Q3, assuming consumers may prefer to go for comparatively low-priced items rather than high value ones, while investment demand is expected to remain stable at an estimated 45 tonnes.

Debajit Saha

By Debajit Saha
Head of Precious Metals Research, Indian Sub-Continent, Middle East Region, Refinitiv Metals Team

Based in Mumbai, he is responsible for precious metals research in Indian Sub-continent, Middle East region. He has a Bachelor’s degree from the University of North Bengal, India.