Making Sense of Chinese Gold Flows and Gold Demand . PHILIP KLAPWIJK - PowerPoint PPT Presentation

� Making Sense of Chinese Gold Flows and Gold Demand . PHILIP KLAPWIJK � Managing Director, Precious Metals Insights Limited Bloomberg Intelligence and CME Group Precious Metals Forum London, 22 nd May 2015 www.preciousmetalsinsights.com

2 SGE DELIVERIES & DEMAND* IN CHINA 2500 SGE Deliveries 2000 Tonnes 1500 1000 Gold Demand 500 0 2010 2011 2012 2013 2014 *Demand from private sector (jewellery fabrication, industrial fabrication, physical investment in bars & coins) Source: Metals Focus; Shanghai Gold Exchange

3 CHINA SUPPLY/DEMAND STRUCTURE SUPPLY Mine Production • Scrap • Bullion Imports • DEMAND Jewellery Fabrication • Industrial Fabrication • Physical Investment • Bullion Exports • Other Exports • ‘Financial Demand’ • Official Sector Demand? •

4 CHINA MINE PRODUCTION & SCRAP SUPPLY Mine production Scrap 600 500 400 Tonnes 300 200 100 0 2010 2011 2012 2013 2014 Source: Metals Focus

5 CHINA GOLD IMPORTS HONG KONG* DIRECT UNOFFICIAL OTHER 2000 1800 1600 1400 Tonnes 1200 1000 800 600 400 200 0 2010 2011 2012 2013 2014 *Hong Kong data refers to gross exports of bullion to mainland China Source: GTIS; Metals Focus; Precious Metals Insights

6 CHINA DOMESTIC SUPPLY & GOLD BULLION IMPORTS DOMESTIC SUPPLY IMPORTS 2500 2000 Tonnes 1500 1000 500 0 2010 2011 2012 2013 2014 Source: GTIS; Metals Focus; Precious Metals Insights

7 JEWELLERY FABRICATION & LOCAL GOLD PRICE JEWELLERY FABRICATION 400 1000 LOCAL GOLD PRICE 350 300 800 Yuan / gramme 250 Tonnes 600 200 150 400 100 200 50 0 0 2010 2011 2012 2013 2014 Source: Metals Focus; Shanghai Gold Exchange

8 CHINESE PHYSICAL INVESTMENT* & INDUSTRIAL FABRICATION DEMAND PHYSICAL INVESTMENT INDUSTRIAL FABRICATION 500 400 Tonnes 300 200 100 0 2010 2011 2012 2013 2014 *Private sector loco-China demand for bars, coins, GAPs Source: Metals Focus

9 CHINA GOLD DEMAND: METALS FOCUS & GFMS 1600 METALS FOCUS 1400 1200 GFMS 1000 Thomson Tonnes Reuters 800 600 400 200 0 2010 2011 2012 2013 2014 Source: Metals Focus (Fabrication plus Physical Investment); GFMS Thomson Reuters (Fabrication plus Bar + Coin Demand)

10 GOLD DEMAND* & SUPPLY** IN CHINA 3000 SUPPLY 2500 Tonnes 2000 1500 1000 DEMAND 500 0 2010 2011 2012 2013 2014 *Fabrication and investment demand (from the private sector); **Domestic supply from mines & scrap plus bullion imports Source: Metals Focus; Precious Metals Insights

11 CHINESE EXPORTS OF GOLD BULLION* Hong Kong Others 300 Chinese Exports of Gold Bullion* 250 200 (tonnes) 150 100 50 0 2009 2010 2011 2012 2013 2014 *Derived from bullion import data Source: GTIS; Precious Metals Insights

12 CHINESE EXPORTS OF GOLD* Bullion Jewellery Articles 1200 Chinese Exports of Gold* 1100 1000 900 (tonnes) 800 700 600 500 400 300 200 100 0 2009 2010 2011 2012 2013 2014 *Chinese Exports of Gold = Bullion and estimated gold content of Jewellery and Articles (latter two based on exports to HK only) Source: GTIS; Precious Metals Insights

13 CHINESE EXPORTS OF GOLD TO HONG KONG 18 17 Chinese Exports of Gold to Hong Kong Jewellery Articles 1 Articles 2 16 15 14 13 12 (US$ Billions) 11 10 9 8 7 6 5 4 3 2 1 0 09.Q1 09.Q3 10.Q1 10.Q3 11.Q1 11.Q3 12.Q1 12.Q3 13.Q1 13.Q3 14.Q1 14.Q3 15.Q1 Source: GTIS; Precious Metals Insights

14 TOTAL SOCIAL FINANCING IN CHINA Source: Deloitte

15 GOLD LOANS VOLUME IN CHINA Gold Lending (end year) 1800 1500 1200 Tonnes 900 600 300 0 2010 2011 2012 2013 2014 (estimated) Source: Shanghai Gold Exchange; Precious Metals Insights

16 CHINA OFFICIAL MONETARY GOLD RESERVES 1200 60 Value of Gold Reserves 1000 50 800 40 US$ Billion Tonnes 600 30 400 20 200 10 0 0 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 Source: IMF; Precious Metals Insights

17 CHINA FOREX RESERVES & GOLD’S SHARE OF TOTAL RESERVES Foreign Exchange Reserves 9% 4,000 8% 3,500 7% Forex reserves in US$ billions 3,000 Gold’s share in % 6% Gold’s Share of 2,500 Total Reserves 5% 2,000 4% 1,500 3% 1,000 2% 500 1% 0% 0 Source: IMF; Precious Metals Insights

18 CONCLUSIONS Supply of gold to the Chinese market (whether measured by an independent supply calculation • or SGE deliveries) exceeds demand (defined as jewellery, industrial & investment) by a wide margin, especially in 2013 and 2014. It is most improbable that demand (defined as jewellery, industrial & investment) is currently • being undercounted. The ‘surplus’ in the Chinese gold market is being absorbed by several ‘non-standard’ sources • of demand from the private sector. Some of these overlap and can give rise to double counting. Moreover, the (only partial) data available on these ‘non-standard’ sources of demand needs to be carefully interpreted and not simply taken at face value! It is possible that official sector purchases in the domestic market (directly or indirectly) may • account for part of the apparent China gold market ‘surplus’ in recent years. A substantial quantity of gold has been relocated from the West to China as a result not only of • ‘genuine’ demand growth but also because of the explosion in ‘non-standard’ demand. A major policy or market driven unwinding of the ‘non-standard’ demand would probably result • in China trading at a considerable discount to the international market. The impact of such a development on the global gold price level (as opposed to premium/discount) is less clear cut.

19 DISCLAIMER The information and opinions contained in this presentation have been obtained from sources believed to be reliable, but no representation, guarantee, condition or warranty, express or implied, is made that such information is accurate or complete and it should not be relied upon as such. Accordingly, Precious Metals Insights Limited accepts no liability whatsoever to the people or organizations attending this presentation, or to any third party, in connection with the information contained in, or any opinion set out or inferred or implied in, this presentation. This presentation does not purport to make any recommendation or provide investment advice to the effect that any gold, silver, platinum or palladium related transaction is appropriate for all investment objectives, financial situations or particular needs. Prior to making any investment decisions investors should seek advice from their advisers on whether any part of this presentation is appropriate to their specific circumstances. This presentation is not, and should not be construed as, an offer or solicitation to buy or sell gold, silver, platinum or palladium or any gold, silver, platinum or palladium related products. Expressions of opinion are those of Precious Metals Insights Limited only and are subject to change without notice.