One of the best explanations for the Shanghai-London gold price increase is the Chinese government’s ability to manipulate the price of gold. China is a large, physical market, and it has the ability to control the arbitrage between paper and physical gold in the East, allowing it to set a yuan denominated fix. This could further increase the drain on physical gold in London and cause pain to the bullion banks.
Citibank
Citibank is increasing the Shanghai-London gold price based on demand. The bank’s decision is in line with the broader trend of gold prices. It’s been a while since gold prices rose by this much. In fact, the price of gold rose by 6% in the third quarter of 2017. Gold prices have now surpassed $1,300 per tonne. Citibank has forecast a price range of $1,260-1,360 per tonne in the third quarter of 2017. Should the geopolitical situation deteriorate further, gold prices could move higher.
The Chinese gold market remains a critical part of the global gold trading landscape. Despite the waning supply of the metal in the country, demand for it has grown to outpace supply. In fact, the Shanghai premium has risen to a premium of $43 over its London counterpart. The Shanghai premium is likely to remain relatively strong for some time to come, but investors are increasingly turning to the Shanghai Gold futures as a means of accessing the Chinese gold market and taking advantage of trading opportunities in the world’s largest physical gold market.
Commerzbank
The recent increase in the Shanghai-London gold price could be an indicator that gold demand in China is weakening, a concern noted by Commerzbank’s commodities team. China is the world’s biggest buyer of raw materials, and the country is pushing to set pricing benchmarks for a number of commodities. As a result, gold is likely to be among the first commodities to be opened to foreign players. Meanwhile, crude oil futures are set to launch in the Shanghai free trade zone.
Historically, gold has been a safe haven asset. But with global economic growth slowing, many governments are concerned about their national treasuries. The recent US/China trade war has also had a negative impact on supply and demand.
HSBC
The company is refocusing its business to Asia and is closing operations it considers irrelevant. As a result, investors are watching HSBC’s comments closely. The firm has said it will cut back on its workforce by 35,000 people and focus on its core businesses. If it continues to shrink, it will probably pull out of the gold market. That will force remaining market-making bullion banks to mark up the prices they charge for supply contracts.
The move comes at a time of increasing scrutiny over the gold benchmark price setting process. Last week, the Barclays Plc was fined for attempting to manipulate the London gold market daily “fix.” Meanwhile, the state-backed Shanghai Gold Exchange (SGE) is seeking to recruit bullion banks to its global trading platform. It is the world’s largest physical gold exchange and is the place where domestic miners and banks buy and sell gold. But it is also looking to open its international trading platform to foreign brokerages and gold producers.
CGSE
The Hong Kong gold market is one of the most active physical gold markets in the world. It is also the only exchange in Hong Kong that trades gold and silver. The Chinese Gold and Silver Exchange Society (CGSE) was founded in 1910 and currently has 171 members. The CGSE trades 99 tael gold and silver through an open outcry system.
Demand for gold increased by 34% y-o-y, reaching 1,234 tonnes, the highest quarterly level since Q4 of 2018. Overall, gold demand grew by 19% YTD. The resurgence of COVID-19 cases and tough new lockdowns in China have dampened retail investment, but demand remains 11% higher than the five-year quarterly average.
SGX
Shanghai Futures Exchange gold futures trading is the second largest gold futures contract in the world. However, trading is limited to the domestic market. It is possible that the Shanghai board of futures trading will merge with the main exchange after the yuan is fully convertible.
The Shanghai exchange is aiming to make its gold trading platform available to foreign participants. This could make it a more viable competitor to New York and London, which dominate gold trade globally.
ScotiaMocatta
The LBMA gold price is calculated by six direct participants: Barclays Bank, Goldman Sachs International, HSBC Bank USA NA, Societe Generale, ScotiaMocatta, and UBS. The Committee is responsible for ensuring the credibility and longevity of the benchmark. Members meet four times a year.
According to ScotiaMocatta, the price of gold will fall further in the coming years, but it is not yet over. The company says this is due to a combination of factors including decreased investor demand for safe-haven assets, weak physical demand in China and India, and the equity market correction.