The Shanghai Gold Exchange (SGE) is the world’s largest physical gold exchange and nearly all physical gold bars in China flow through the SGE. Gold trading volumes and gold withdrawal statistics for the SGE are certainly impressive. For the year 2016, total SGE gold trading volumes reached 24,338 tonnes, a 43% increase over the 2015 figure of 17,033 tonnes. SGE trading volumes include physical contracts, deferred contracts, OTC trades settled through the SGE, and also trading volumes on the Shanghai international Gold Exchange (SGEI). In 2016, physical gold withdrawals from the SGE totalled 1,970 tonnes, down 24% from 2015’s withdrawals of 2,596 tonnes, but still huge on an absolute basis because these withdrawals represent actual physical gold taken out of the SGE vaults.

By the end of 2016, the SGEI (International Bourse), which was launched in September 2014, had recorded cumulative trading of nearly 9,000 tonnes of gold. The Shanghai Gold Benchmark Price (a.k.a. Shanghai Gold Fix), which was launched on 19 April 2016, is a gold auction for 1 kilo gold bars of 99.99 purity quoted in RMB. Over the 8 months from launch to end of 2016, the Shanghai Gold Fix had traded 569 tonnes, which equates to over 1.5 tonnes per day on average.

All in all, the SGE has generated impressive physical gold trading volumes (24,338 tonnes for 2016) and withdrawals (1970 tonnes for 2016). For the sake of comparison, compare these annual SGE physical gold trading volumes to the bloated London OTC gold market where trading volumes of approximately the equivalent of 6,500 tonnes of gold per day are the norm. Such a comparison reveals the fractional-reserve nature of the London gold market and the fact that physical transactions can only be a minuscule fraction of the London market.

But does SGE trading affect the international gold price as derived in the London OTC and COMEX markets, or is the SGE a price taker?

The short answer is that the SGE does not influence the international price and the SGE is a price taker. There may be some lagged influence by the SGE on the international price but this would require further study. The Chinese gold market is still a closed gold market with market frictions and distortions. Gold can be imported into China but cannot in general be exported out of China. There is therefore no freedom of movement of gold out of China. Gold imports into China are strictly controlled via import licenses and these licenses are only issued to a small number of Chinese and foreign banks.

But it’s worth looking at SGE premiums to see if changes in SGE premiums ever provide any signalling ability for subsequent changes in the international gold price. SGE premiums arise when the Shanghai gold price trades above the international gold price. SGE premiums are a possible gauge to determine whether SGE trading affects the international gold price. In November and December 2016, SGE premiums rose sharply from less than 0.5% to over 3% which was a period in which gold imports into China surged. However, during that same period, the international gold price fell. So in this case, the expanding SGE premiums had no effect on the international gold price.

https://www.bullionstar.com/blogs/bullionstar/what-sets-the-gold-price-is-it-the-paper-market-or-physical-market/