Shanghai gold prices spike after holiday week, supporting global rally

Tue Oct 10 2023

Gold prices in China are spiking once again after the Shanghai market reopened following the Golden Week holiday, helping to support a broad-based rally for the precious metal that began with the outbreak of the Israel-Hamas conflict over the weekend.

The Shanghai spot gold price was trading not far from the record premiums set in September on Tuesday, with the precious metal hitting a high of $2067.45, more than $112 an ounce higher than London prices on Monday, according to exchange data compiled by Bloomberg.

The spread between the spot price of gold in Shanghai and in London hit a record $121 per ounce on Sept. 14, but narrowed somewhat after the central bank issued an informal order to some state and midsized commercial banks the following day that the limits had been relaxed. The premium started to climb again almost immediately, however, before the Golden Week market closures created a temporary lull.

The gap in the gold price had been steadily widening since early July, with industry insiders saying the rising premium was partially due to a curb on gold imports. In August, the PBoC decided to cut existing quotas and stop issuing new quotas to banks for the importation of international gold after the renminbi fell to its lowest level against the dollar in 16 years.

With the Chinese market effectively dormant, gold prices tumbled last week, hitting 7-month lows on spot and futures markets. But when local markets began trading again on Monday, gold traded up as high as 2.7% on the Shanghai Gold Exchange, its largest single-day spike since mid-August when the import controls were put in place. The Chinese price increase was nearly double the one seen on international markets, despite the safe-haven bid created by the attack by Hamas on Israel.

The Golden Week holiday provided further confirmation of the growing influence that China’s domestic gold market has on the international benchmark price. In a recent interview with Kitco News, Everett Millman, Chief Market Analyst at Gainesville Coins, said the Chinese market is exerting significant influence on gold prices outside the country, and the Golden Week holiday would provide an interesting test case by removing Shanghai’s support.

“In addition to government policy in China, the fact that their markets are going to be closed for that period of time, that removes one of the largest consistent buyers in the market,” he said. “So I do think it removes some of the floor beneath the gold price. If you get selling pressure coming from the West, you don't have as much to counteract that in China.”

Millman predicted that when Chinese traders returned to the office and the economy came out of holiday mode, “that could give a pretty strong boost to the gold price.”

Everett said that Shanghai’s high gold premiums could be helping to maintain the floor under global gold prices even if the import limits mean domestic buyers can’t actually buy enough gold for the full impact of their demand to be reflected in the benchmark prices. “It is undeniable that they're not able to buy as much as they want,” he said.

Millman said the premium, and the sustained buying activity from China as a whole, influences the psychology and the sentiment surrounding the global gold market. “In terms of direct effect, I don't think it's the end-all, be-all. I don't think it's the only factor that's driving gold prices,” he said. “But I would expect to see again, when Chinese buyers are back in the fold, that premium would perhaps again rise, and then we would see the gold price worldwide play catch-up and try and close that gap.”

This dynamic appears to be playing out as predicted, with spot gold maintaining the lion’s share of its Monday gains, last trading at $1858.63, less than $7 off yesterday’s high of $1865.22.

Source: https://www.kitco.com/