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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.
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There are many reasons that the central bank purchases gold. These include rising interest rates worldwide and exchange rate risk. They also hold onto it as a safety net. In the past, these banks would have sold gold at high prices and converted the proceeds into paper money. But today, the central bank still holds on to gold as a hedge against future risks.

Exchange rate risk

The central bank has been buying gold for nearly a decade, a trend that continues today. According to the World Gold Council, central banks have become net buyers every year since 2008. Demand for gold rose from less than two percent of world total in 2010 to fourteen percent in 2014. The U.S. Treasury holds the largest official gold holdings, at approximately a third of the total global supply.

Central banks are responsible for overseeing monetary policy, setting interest rates, and controlling the printing and circulation of legal tender notes. They also manage a nation’s financial reserves, which include foreign currencies and precious metals. Last year, central bank gold purchases reached record levels, pushing global gold reserves to their highest levels in 30 years.

The primary function of a central bank is to promote stability and promote economic growth, and gold is a key part of that. It also helps to control the size of the market. In particular, emerging economies are vulnerable to free market excesses, and central banks can protect them from the ill effects of such excesses by owning gold.

Inflation

The People’s Bank of China has been increasing its purchases of gold for years. The central bank expects to import a record 1,000 metric tons of gold in 2017. Historically, central banks have used gold as a way to increase their foreign reserve holdings. But with the recent financial crisis, central banks have become net buyers, rather than sellers.

Gold is attractive to central banks as it provides diversification benefits. In times of economic instability, central banks are exposed to pronounced fluctuations in currency value, which makes them vulnerable to devaluation. Gold’s scarcity and limited supply make it a natural inflation hedge. This diversification helps central banks manage their reserves and protect their currency against devaluation.

The World Gold Council reports monthly data on the amount of gold purchased by central banks. Its latest figures show that central banks around the world bought more gold in May. This marks the second consecutive month of increased central bank buying. The increase in gold purchases is part of the longer-term trend of central banks’ appetite for gold.

Rising interest rates worldwide

One of the biggest reasons for central banks to buy gold is that it is a highly liquid asset. As a result, it can provide a safe haven in an unstable economy. But central banks need to exercise caution. It is possible for prices to drop significantly if the central bank increases interest rates too quickly.

In recent years, the Russian Central Bank has been one of the largest buyers of gold. Last year, it surpassed China to become the fifth largest gold hoarder. It bought 224 tonnes of gold, which helped the country diversify its investments away from the U.S. dollar. The move came after the country sold a large percentage of its U.S. treasury holdings to raise cash.

Several central banks have added to their gold reserves in the past year. According to the Federal Reserve, they added 650 tons to their reserves in 2019. The same trend has been in place since the 2007-09 financial crisis, when central banks worldwide sold a net amount of gold. This buying spree has been led by China, Russia, Turkey, Kazakhstan, and Uzbekistan. In addition, central banks have repatriated gold that was previously held in London and New York.

Management of gold reserves

Central banks have historically held gold reserves as a form of safe-haven. Gold’s inverse relationship to the US dollar makes it a valuable collateral, particularly during times of market volatility. While traditional economic powerhouses, such as the United States, have largely withdrawn from the gold market, it still represents a substantial portion of a central bank’s reserves. In fact, the United States alone holds eight and a half tonnes of gold, equivalent to 78% of the country’s total foreign fund reserves. Germany, meanwhile, has 3,300 tonnes of gold, equivalent to about 74% of its reserves.

The European Payments Union (EPU) has played a major role in the accumulation of gold reserves in the eurozone. Since the member states had to offset bilateral surpluses and deficits against one another, an increasing portion of outstanding net amounts had to be settled in gold or dollars. Germany was a net-sovereign country within the EPU from 1951 until its dissolution in 1958.
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