This is Paul and welcome to the serious report. Obviously I'm joined today by Ken, but more importantly we're joined today by again once again Eric Young. He's good friend of mine and it's always a pleasure to have him on our podcast. He's a minefield of information and understanding more importantly of what's going on with China and Hong Kong in relation to gold and silver. and given there's been a number of developments recently, we thought it'd be a good time to bring him back. So, Eric, welcome back and thanks for joining us. Well, thank you Paul for having me on. Oh, it's always a pleasure. So, where we thought we'd start is talking about these changes that are being made to taxation regulations in with respect to gold in China. And ordinarily, people would think that was probably not that interesting, but this is immensely interesting because it has very significant ramifications. And Eric's going to break it down and explain why it's important. And uh so far away, Eric. So yeah, um you know there's been some new um gold taxation rules that were implemented by China on November 1st and it um made the news uh with Bloomberg. Bloomberg um had an article out saying that oh China is um cancelling or like uh you know uh avoiding some tax incentives and that's going to be bad for um Chinese code demand going forward. I'm just parap paraphrasing right that's essentially what Bloomberg said and as I explained to you Paul and also Ken um off camera this is not exactly true I mean I think Bloomberg jumped the gun and I did too I went on a show with um Mano 64 Mario just two days ago and uh at that point not all the information came out so but now what we have is I would say 90 to 99% of the full picture of what is going on. So basically I'll just give your audience a quick rundown. What happened in the past is that you have um investment gold at the SGE and you have um non-investment gold. So non-investment are the jewelry gold and investment are the um the bars um you know from the SGE. Okay. So what they call st investment standard gold bath at the SGE. So in the past what h before November 1st what happened? You have um gold uh VAT exemption for the investment uh standard uh investment standard gold bars from the SG. So right off the bat, if you have um if you're a member of the SGE or if you're a client of the SGE and you buy investment uh standard invest investment standard gold bars from the SG, UV takes accept and the retail customers of um Chinese stateowned commercial banks in the golden committee program buying the recasted investment standard gold bars are also VAT except so that's what happened before November 1st and then on the gold jewelry side which is the noninvestment gold in the past when uh the SG members or the clients withdraw the physical gold from the SG vote they have to pay a 13% VAT but they get something um which is called a uh special VAT invoice, a short form SVI to offset that cost when they make their first sale after they are out of the SG. So off exchange once they make the first sale they can recoup the 13% VAT or or you know the proper term is offset that they paid when they work through the gold. So essentially again zero right for these guys but for the uh non uh investment gold the final customer or consumer has to pay through VAT so the 13% and that's usually rolled in and it's like an honor system. So if you are a um SGE member or a customer of the SG member, you obligated to remit the 13% VAT to the Chinese tax authorities minus the uh VAT um credit so to speak that you have from the um SVI that I mentioned. Okay. So basically again like if you are a seller you don't pay because you fully you know it's fully offset right it's the end customer who pay the 13%. For the gold jewelry non-investment gold for the investment gold um you just simply don't pay because uh VAT because it's um fully exempt. So that's before November 1st. Now the problem with that Paul and Ken is that um in with that system you also have a lot of recycle gold in the past and the recycle gold um when they traded amongst themselves none of these guys paid VAT. So it's like the wild wild west essentially this like I'm talking about before November 1st. So They would when they compete like these these Wawa West guys they buy recycled gold usually the small jewelry stores their price to the end consumer is often cheaper than a let's say a big jewelry store because the big jewelry store they obligated to remit the 13%. to the Chinese authorities. Whereas if you are a small jewelry store, a lot of the times these guys just buy recycled gold and they don't remit the 15%. Because the recycled gold in the past is not really traceable. Now interesting uh real quick India has because of the uh tendency of the government to add these premiums these VAT taxes uh etc when they want to control the um the flow of gold or silver in the country that it would lead of course to much more smuggling. Now, not I'm not implying at all that China is going to have a big big issue with smuggling, but when you have these smaller entities that are not able to compete per se with the big ones who do pay that VAT, um is there going to be any type of uh regulation or has this been given any thought uh for the potential for there be that opaque sort of black market for gold and over that's outside of the system. So, it's the other way around. Actually, before November 1st, it's the big guys that that can't compete with the small guys because the small guys were more willing to buy recycle gold and and when they sell that gold, they don't remit the VAT to the tax authorities. You see what I'm saying? Whereas, if you are a big guy, big guy, right? you you pay up front. You pay up front the 13% and then you you collect from the consumer and then you get the offset. That's how that's how it worked in the past. So the small guys had all the advantages in the past because they were committing I don't want to say it but essentially the other one just they committed tax fraud and they thrived okay in that gray area right so the small guy so reverse of what you just said Ken they thrived because there's that gray area where they able to buy all this recycled gold and they simply did not remit VAT Right. Okay. And and actually the SG in the past ended up being the backup for the for the Jew jewelry small jewelry stores, right? Because when they run out of recycling gold, they have the SG as a backup for for the legitimate uh gold string where they can, you know, collect the VAT from their end customer and they re well they probably didn't even remit. They probably pocketed everything. Okay, in the past that's what happened. But and I I can see I can see why they would they would want this because the SGE uh is seeking to not just be the forefront for Asia, but the forefront for the world as the uh center center of uh center of the universe for gold trading, I'm sure. Correct. So you Well, I'm getting to that. So that's like I just described what happened in what happened in the past which um basically diverted liquidity away from the SG as as you can see what I described to you right. So what happened on November 1st is this. What the Chinese government did is that for investment gold, if you are a Chinese stateowned bank, you can still buy the investment gold VAT exempt and you sell to the end customer VAT exempt. So nothing changed for like the state owns, right? you're a customer at a at ICBC or BOC or you know any of these uh state-owned Chinese banks and you buy um you know gold via the gold accumulative program and you get up to let's say 10 grams and you withdraw you don't pay VAT okay has been proven already in the last week so um that didn't change if you are a SGE member and you withdraw draw physical gold from the SGE, you are still VAT except, okay, no change. You take the gold out from the SG vault, you're a member, right? You don't pay VAT. And again, that has been, you know, tested and proven already. So those guys that don't pay VAT, but once you are outside of the SGE and you are a SG member, you sell it to the next guy, you have to charge that guy a 7% VAT. Okay. Yeah, that's what happens. All right. So you get they they get an in regular invoice and the regular invoice is 7%. Okay. So after that second sale, so imagine this, you are a member, you sell it to a second guy, the second guy buys it from you. You don't pay VAT, but the second guy buys it from you. The second guy pays 7%. And then that second guy sell it to a third guy. That third guy have to pay 13%. But he get a SBI where he can offset that. Okay. When he make the next sale. So that you see that sales how the Chinese government is stopping the SPE gold from you know basically flowing out any further than the first guy unless that second guy is willing to pay that 7%. Does that make any sense? Because let's say you're the first guy you pay you pay nothing. You get it out from the SG vault. How can you how can you know that gold remain VAT except you sell it through the SG? You don't sell it outside. If you sell it outside of the SG, you automatically incur a 7% VAT in that's okay for the investment standard investment gold. Now let's say you are a um jewelry maker and you want to buy um what they call noninvestment go from the SG. What what changed? What happened? So now instead of paying 13% that you can offset later, you now only pay 7%. Okay. So what do we see here? Your cost of carrying the physical gold from that step from withdrawing the gold from the SG vault is less than before because before you pay 13%. Now you pay only seven. Okay. But the difference is that once you sell it outside of the SG, the non-investment gold, you do not get any offset. So the 7% you pay, you don't get it back. Whereas before you pay 13%, but you get all of it back. Yeah. So So it's a way to keep it within the ecosystem. That's exactly it. So, I don't like I don't I I mean a lot of people get um pretty confused with this, right? Because it's not, as you can see, it's not simple. It's pretty convoluted. I have every single step outlined on my ex account. So, if people want to really get into it, they can read it on my ex account. It's step by step, very fairly simple. If you read it step by step slowly, you'll get it right. But like you said, Ken, the whole point is to keep liquidity within the SGE system because before you have like, you know, all these OTC stuff going on, people directly buying from miners, etc., right? That divert liquidity away from the SGE. But with the new rules, basically to put it simply, if you want VAT exempt gold, you have to go to SGE for that. That's it. That's the only place that you can get V accept gold is at the SGE Shanghai gold exchange. Gotcha. Okay. So, I guess the next question is why why is China doing that? Why is China concentrating all liquidity at the SGE? Why is that happening? So, I talked to a couple CTAs in China. They're the commodity trading advisors, the SGE members. And they said that within two years with this new system, new rules in place, SG's trading volume is going to go from 60% around 60% right now of total gold trading volume in China to 80%. So we're talking about gold originate. Okay? not not like you know total trading volume in terms of like daily we're talking about the gold that is where the gold is originating from okay where the gold is originating from right now 60% of that trading is from the SG the rest OTC recycling etc and with news these new rules 60% is going to go back go to 80 and one of the reasons behind this Ken and is because the recycling guys with the new rules. If they sell the gold that they got back from consumers to an other institution or business that would incur a 13% VAT whereas be before nobody cared. You see how that works? So the only way that the recyclers can get VAT exemption is to take that gold and sell it um sell it through the SGE or they or they can you know men their own bars and sell it um through their own retail channels right but I'm I'm guessing that you know even with the um with this recycle volume probably potentially um shrinking in the future because of these new tax rules. I think um 80% is still going to go uh go through retail. Okay? Because some people they just don't want to wait to buy their physical gold bars from the Chinese commercial banks. It takes sometimes like a week to get your go. they like to go to the recycler because the recycler usually has the stuff ready ready to go. So 80% probably the recyclers m their own bus and they charge the 13% and they remit it to the Chinese tax authorities and the 20% of those of that recycled gold is probably going to go through the SGE. Yeah, I think a good point to make now is the fact as well this will go a long way to encouraging everybody to not speculate but also to buy gold and hold on to it and I think that's an important development as well to remove as much of this speculation as possible and to get gold into hands with people who'd rather just hold on to it because it's gold and it's real money etc. And I think that's an important part of the development. Absolutely. It's like a butterfly effect, Paul. What's happening now, right after the uh new rules were introduced, people are lining up at the Chinese commercial banks to withdraw the physical gold because right off the bat, think about this. The investment gold bars, like I'm putting these this in quotation marks because they're not really really, you know, real investment gold bars according to the Chinese government or the SGE, right? But the bars that you get from the small um gold jewelry stores that they mint themselves, like I said, now there's a 13% VAT on those. Whereas if you go to a Chinese commercial bank is still zero VAT. So what happened there, right? All of a sudden your volume at the Chinese commercial banks jumped up like of people buying physical gold or withdrawing physical gold. And the Chinese commercial banks are all tier one SGE members. So they have to increase whatever you know SGE gold buying contracts that they have. They have to stand for delivery for more physical gold. And not only that, by the way, ICBC, which is the Industrial Commercial Bank of China, we're all familiar with these guys. They are a LBMA member and they also are a um London Precious Metals Clearing Limited member um which is pretty important because that's that's the engine that uh runs the LBMA for um you know bilateral bilateral trade um clearing right the yeah so I think what's going to happen having keeping all this in mind is that the trading volume of the SG is going to shoot up. It's already shooting up um because of the reasons I'm telling you and eventually ICBC and a lot of these Chinese bullion banks are going to stand for physical delivery even more than what they are doing already. Okay. At the LBMA and that's going to put a lot of pressure on the LBMA. Yeah, absolutely. I mean, I think that's uh that's another important point to make uh with regards to all this. So, I think at the end of the day, this is why it's good to get Eric to discuss this because it's not just a dry subject. There are huge ramifications underpinning this and this again is just and Ken mentioned it of course is the the objective for the Chinese is to make the SG and all its affiliate vaults that will be opened whether it's in Saudi Arabia or anywhere else in the world to be the biggest go international gold hub. And again, it's the old thing of if you add well, you can't have a 1 oz contract, but if you did, for every ounce contract, it's backed by an ounce of physical metal, guaranteed. The 1:1 ratio, and that is going to make Shanghai a very appealing destination internationally for people to trade and buy gold. Yes, the Shanghai gold exchange is uh backed one to one and by the way has a approximately a 70% withdrawal rate. So that's pretty high. That's like 70% of the contracts at the SGE are physically withdrawn by its members compared to the COMX. I think it's like less than less than 10%. Yeah. Yeah. Withdraw in the past. Right. So um and then at the SGE I believe the uh number for 2024 of physical gold withdrawn was more than 1,400 metric tons withdrawn. So that's substantial because that's the entire vault number like the amount of gold that the comx has entire vault is for like if you believe that they have that much 1,400 metric tons. Yeah. And of course what it will do in the end is will further squeeze all the markets in the west and encourage more and more gold to head east. And that's always been China's objective for well over a decade going back to when I first talked about enormous sums of gold heading from west to east. It's all part of the ongoing I wouldn't even call it an endgame. It's just an evolving move to drive as much metal east and this is another policy initiative that will absolutely do that. I think sorry. Go ahead, Chad. I'm sorry, Eric. Uh just to just to add on to what Paul was saying, um the the validation that so much gold has been withdrawn. uh not it gives the SG SGE credibility because one they're trying and inviting the uh other nations around the world to store their gold central banks to store their gold in the SGE whereas in the past of course they sto stored it uh in the United States or in London and then secondly uh by the fact that they have uh facilitated or for all intents and purposes backs stopped the uh the currency the yuan uh with gold where you can take your yuan go to the SGE and exchange it for gold and take it out by the fact that it's relatively easy process to go ahead and do the withdrawals that's going to give asurances to the rest of the world like hey it's safe to store gold here I mean you can just use the example of Venezuela if the politics of the west says you can't have your gold back you can't have your gold back it appears that's not going to happen in China. Agree. Ken, I think um a lot of things interesting things are happening while they um you know um launch these new new rules. If you you guys probably know already um just yesterday, Bloomberg came out with an article saying that uh Cambodia took China up on its offer of storing it gold is it's new new gold. They're buying some new gold probably from probably from the SGE and they're going to store it at the SGE Shenzhen vault, the bonded vault. That's what they call it. So my theory on that is that eventually they're going to move that go to Hong Kong because Hong Kong again Bloomberg last week um had an article saying that Chinese officials are in talks with Hong Kong officials um at finalizing the clearing system for the SG vote that got set up in back in June this year in Hong Kong. So Hong Kong, if you guys don't know or your audience don't know, the international banking system consider Hong Kong to be offshore to China because Hong Kong doesn't have capital controls. You can move money in and out very easily. And as a matter of fact, there's no control on physical gold at all. You can, you know, move gold in and out of Hong Kong without any tax whatsoever. So I think yeah so I think what's going to happen is eventually that gold is going to be moved to the Hong Kong vault. Now another interesting thing that I got wind of and this is not um reported yet by any media mainstream media is that South Korea one of my friends you know have some contacts with u people in the central banking circle and he told me that South Korea recently bought approximately $60 billion dollar US dollars worth of physical gold and silver from the SG. If you guys recall, just a couple days ago, um, South Korea and China um, renewaled their currency swap agreement, which is around, I think, 56 billion US worth. So all this kind of coincides because the second country I think that is going to store gold um at SG votes in Hong Kong or or Shenzhen, you know, if Hong Kong is not ready, I think it's going to be South Korea because of the amount of business that South Korea does with China back and forth. Yeah, absolutely. It's worth noting this is also on the back of the US trying to make ridiculous demands for South Korea to give them 350 billion US dollars to spend on whatever they wanted to spend. So I think it's interesting to see these developments with the currency swap and them then buying all that gold and silver. I think that just tends to put the relationship that's developing between South Korea and China in in the context of what the US thinks is going on with South Korea and clearly isn't. So Eric, I think if if you want to now we could move on to the subject of another development that's going on in China with respect to silver. Oh yeah. So um again this is uh very recent news. On November 1st the Chinese Ministry of Commerce announced that silver and platinum uh sorry not platinum it's silver and um and tungsten and antimony are going to be Yeah. and tungsten. Correct. And abomin Okay. Yes. and antimony are going to be uh restricted metals that are going to be export controlled starting January 2026. So what does that mean? Because before silver I'm just going to focus on silver because silver in the past when you export it out of China there's no restriction. You just need to re do like a you know quarterly report to the um Chinese uh Ministry of Commerce. That's it. or or an annual report. I'm not sure, but you can check check it out. It's just a report that you need to submit, but there's no restriction. There's no control. Now, what they implementing is called a review and quer process. So, they review your your sub. So, whatever you want to export, they got to review it first and then they give you a quot to export the silver. So, in my opinion, that's pretty much export control. They they're not going to probably not going to ship any silver to the LBMA from this point on in my opinion. Yeah, absolutely. I think that's that's the whole purpose this it's also because I mean China's imported huge amounts of silver for the last few years particularly and that's deemed to be strategic metal and it's a matter of national security. Okay, that's silver that doesn't find its way into into obviously being utilized for industrial purposes. This is entirely different. This is silver that can be utilized for industrial purposes and as you say previously you could just sell it and it went wherever some of it stayed inside China of course and other it went wherever in the world. Well this is just to yeah ultimately put it export controls in place. Why? Because that is going to put enormous pressure again on the comx. It will put enormous pressure on the LBMA and it and also it will I again it's part of this process that China and India for that matter have been driving enormous amounts of silver from west to east. I think the desire is to keep that silver going east and uh but I noticed I mentioned this to to both of you before we came on that the USGS has just added silver in the United States to the 2025 critical minerals list. So even the United States is waking up to the fact that silver is an extremely important industrial metal now and going forward and uh as usual with the US it's a little bit too little too late but they are finally at least recognizing how the importance of silver and this is just another development where China is ensuring that we don't there's no point in us buying enormous amounts of silver it come and then whatever percent just goes goes out the back door and we have no visibility as to where it's going and and principally I think you know it's one of those things for argument's sake if if a substantial amount was to go to Russia they wouldn't care for argument sake but if it's going west to the United States or the UK or Europe somewhere that's an entirely different matter and they don't want that to happen I agree Paul I think um silver is probably going to be declared a strategic mineral in the US. It already is declared a strategic mineral, but I think the um you know um when the when the federal government in the US come back to work because they're still not able to pay these guys right now. They're not working. But when they come back to work, the 232 analysis is going to be complete on silver and silver is probably going to be fully declared as a strategic mineral. And at that point, you know, maybe nobody is going to be shipping any silver to the LBMA. Well, that there's a significant risk of that because yeah, if the US designate it that way, then yeah, that will start to put yeah, further enormous pressure on them. Um, yeah, and there's so that's a very logical uh progression of thought and like you said, well, when eventually the government comes back to work, but yeah, at some point that will be realized and then that then puts further pressure on the LBMA for sure. Yeah, I think it's interesting too. Um, the US back in the 1940s put a made silver a national interest obviously for the Manhattan project and then once the war was over, silver was uh, you know, not restricted as much. But with AI and the fact that um the US has made it a uh specific and absolute uh necessity to win the AI war. It's not surprising not only for the fact that there's really not a lot of silver uh produced and silver mines in the United States anymore, but geopolitically where does the US have to go? They're having to go to Canada. they're having to go to a lot of the c countries in the Caribbean, etc. So, this is going to end up, I think, more be also being a geopolitical problem rather than just an economic one. Yeah, for sure. Absolutely. So, Eric, anything else you do you like to add to that or to discuss? Well, I think um at this stage of the game uh we just need to wait for the dust to settle at the SGE. Like I said, I think China is in the middle of number one concentrating all liquidity through the SGE. So, like I said off camera is better bang for the buck. Basically, they don't want liquidity to be spread out to other OTC platforms to purchase physical gold. They want all the liquidity to be concentrated at the SGE so that the SGE may potentially be a bigger buying power um at the um at the ComX and also the LBMA primarily the LBMA but um not to say that it's not already big it's big but it can get even bigger like like some people estimated it can get um you know 30% bigger and probably 10% % bigger within the next uh 6 months. So that's number one. Number two is that I think um with these new gold tax rules in China, China will no longer have a two-tier pricing system. So in the past, like I explained, the recycle recycling gold in China is often cheaper than the gold that you can buy from the SG. Even even when the SG was VAT except the recycling gold was cheaper. So with these new rules, we already immediately we're already seeing that recycling gold is higher in price than the SGE gold price and for the reasons I mentioned because um you can no longer get V exemption unless your gold originates from the SG. for the for the details you can you know your viewers can read my friends and like I said I explained it step by step. So in terms of the um you know silver uh restriction and um you know China uh open up the Hong Kong offshore vault and other offshore vaults and potentially using physical gold as a repo collateral. I think I believe we talked about that on your show last time. Yes. All this stuff is probably going to materialize in the next 6 months to a year. So I think what we just got to do at this point is to sit tight, wait and let these things play out. Yeah, absolutely. And it's not something that for me or you or at will that actually is remotely surprising. I mean for me it was said to me over a decade ago that in the future China will utilize gold as an important mechanism for international trade. That's exactly part of what they're doing and will be doing in the future. And it's like I think can't remember who it was some Chinese government official just came out with a very pathy remark going this was about 3 years ago saying well gold will be a very important component of the new financial system and that was it. Nobody asked any questions just a very blunt statement but basically admitting exactly all the things that is being discussed today and how obviously gold will be a reserve asset and will depose the US dollar US treasury complex which it is doing anyway this is not a surprise to anyone and it's very clear also and interesting how China's really accelerating things because I think it's it has in mind and if and it senses that things in the west is becoming untenable and there's only so much longer whatever's going on will continue to go on. So it's best to get all their ducks lined up and and obviously to insulate themselves in the global south as much as possible from the fallout of what's inevitably coming the way of the west. So, anything else you'd like to add, Eric? I think uh that's pretty much it. Paul, like I said, um you know, we just need to wait and see what happens. You know, we know uh what's happening right now and um if there any new developments, I'm sure that you'll bring it to your to your viewers's attention and I will share it on my exacons. Yeah. and we can obviously discuss things as and as those developments as and when uh and uh in the future. So well obviously Eric thanks again for joining us today. It's much appreciated and for you know imparting people with your knowledge and understanding and your wisdom with these things and it's ext for me it's extremely helpful because because then at least someone else is saying what I'm saying because I've tend to find that that has been a big problem for a long time. So, I appreciate that you, you know, that you're there to also reinforce these points cuz I think that it's extremely important for people to understand that rather like many other things, gold and silver markets are going to and are in the process of radically changing. And this is another one of those discussions that exemplifies that point very clearly. So, thanks again, Eric. We Ken and I really appreciate you joining us today. And for the broader listeners, thanks for all the support you're giving us. Please like, share, subscribe, comment, let us know what you think about this. And obviously, uh, we appreciate, as I said, all the support we're getting. And with that, I'll say goodbye.