Overview
Discussion with Eric Young on China’s November 1 gold VAT rule changes, implications for Shanghai Gold Exchange (SGE) liquidity, and new export controls on silver. Broader effects on LBMA/COMEX, recycling flows, and international storage trends.
China’s New Gold VAT Rules (Effective Nov 1)
- Goal: Concentrate liquidity and price discovery within the SGE; reduce OTC leakage.
- State-owned banks: Still buy/sell “investment standard” SGE bars VAT-exempt to retail.
- SGE members: Withdrawals from SGE vault remain VAT-exempt at withdrawal point.
- Post-withdrawal sales: First off-exchange sale carries 7% VAT; subsequent sale 13% with offset via special invoice for that seller’s next sale.
- Jewelry/non-investment gold: Withdrawal VAT cut from 13% to 7%, but no offset on resale; 7% becomes a real cost.
- Recycled gold: Now traceable and more costly off-SGE; sellers to institutions incur 13% VAT unless routed via SGE.
Structured Summary of Gold VAT Flow
| Entity/Step | Product Type | Before Nov 1 VAT | After Nov 1 VAT | Offset/Credit | Notes |
|---|
| State-owned bank (buy/sell to retail) | Investment SGE bars | 0% | 0% | N/A | No change; drives retail demand at banks. |
| SGE member withdrawal | Investment SGE bars | 0% | 0% | N/A | VAT arises only if sold off-exchange. |
| 1st off-exchange sale (by SGE member) | Investment SGE bars | N/A | 7% | Regular invoice; no special offset | Discourages off-SGE distribution. |
| 2nd off-exchange sale | Investment SGE bars | N/A | 13% | Special VAT invoice for seller’s next sale | Reinforces keeping trade on SGE. |
| SGE withdrawal (jewelry maker) | Non-investment gold | 13% | 7% | Before: full offset; After: none | Lower carry cost; no recovery after resale. |
| Recycled gold sale to institutions | Recycled/non-investment | Often untaxed in practice | 13% | As applicable | Closes “wild west” tax gap; improves traceability. |
Effects on Market Structure and Pricing
- Liquidity shift: SGE share of originating gold trade projected from ~60% to ~80% within two years.
- Recycler economics: Recycled gold loses VAT advantage; often pricier than SGE gold now.
- Retail behavior: Lines at banks to withdraw VAT-free bars; increases bank delivery standings at SGE.
- International pressure: Chinese bullion banks (e.g., ICBC) likely to demand more physical, increasing pressure on LBMA/COMEX.
SGE Positioning and Internationalization
- SGE contracts are backed 1:1; ~70% withdrawal rate, >1,400 metric tons withdrawn in 2024.
- ICBC roles: LBMA member and London Precious Metals Clearing Limited member; potential to escalate physical delivery demands.
- Hong Kong and Shenzhen vaults: Offshore flow facilitation; Hong Kong seen as capital-controls-free gateway.
- Cambodia to store gold at SGE Shenzhen bonded vault; Hong Kong SGE vault clearing system being finalized.
Silver Export Controls and Strategic Metals
- New controls: From Jan 2026, silver, tungsten, antimony require review and quota for export; silver previously only reported, not restricted.
- Implications: Likely reduced/controlled silver shipments to LBMA; adds pressure to Western markets.
- U.S. recognition: USGS added silver to 2025 critical minerals list; potential Section 232 outcome to fully designate silver strategic.
- Industrial demand: AI and broader tech intensify silver’s strategic importance; limited U.S. mine supply elevates geopolitical sourcing concerns.
Emerging National Moves
- South Korea: Reported purchase of ~US$60B of physical gold and silver from SGE; aligns with recent China–Korea currency swap renewal (~US$56B equivalent).
- Anticipated storage: South Korea likely to store at SGE Hong Kong/Shenzhen given strong bilateral trade.
- Broader trend: Shift of gold reserves storage from West (U.S., London) to SGE-linked vaults; confidence driven by withdrawal ease and policy reliability.
Strategic Rationale and Outlook
- China’s aims: Centralize liquidity at SGE, end two-tier pricing, strengthen SGE’s global hub role.
- Trade finance: Physical gold envisioned as future repo collateral; supports gold in international settlement architecture.
- Eastward pull: Policies accelerate metal flows east; increases structural pressure on Western paper markets.
- Near-term path: Expect SGE volumes to rise 10–30% over 6–24 months; watch implementation of offshore vault clearing and silver controls.
Decisions
- China: Implemented gold VAT changes to concentrate SGE liquidity and enforce VAT compliance.
- China: Announced export control regime for silver (and tungsten, antimony) starting 2026.
Action Items
- Monitor: SGE trading/withdrawal data and Chinese commercial banks’ delivery standings.
- Track: Finalization of SGE Hong Kong clearing and movements from Shenzhen bonded vault.
- Watch: U.S. Section 232 determination on silver and potential export implications.
- Observe: Further central bank and sovereign storage shifts to SGE-aligned vaults.