China Gold Price Hits $2000
Monday, 9/25/2023 21:47
Gold's Yuan price bull market beats stocks, cash, property...
The BULLION MARKET has already seen a big shift in how gold prices works since Russia invaded Ukraine,
writes Adrian Ash in these notes first shared on Monday last week with readers of BullionVault's Update
emails and now updated for the latest 7 days' action.
In short, the surge in interest rates – back to the highest since before the financial crisis – has failed to crush gold prices like the mere expectation of rising interest rates did back in 2013.
Is there now another big shift starting to show in China?
The sudden fireworks in Shanghai's gold market say "maybe".
China is gold's No.1 consumer, mining, central-bank buying and importing nation.
So it matters a lot to the gold price's underlying level and direction.
But just to confuse things, Chinese
exports of gold bullion are banned, and new imports must be licensed by its central bank. Welcome to Communism, comrade, with
mercantalist characteristics.
China's gold imports come from all over the world. But at some stage, pretty much the primary source for all shipments of wholesale gold bullion anywhere is London, and as the central hub for gold trading, storage and transit worldwide, London bullion also sets the price for freely-traded gold worldwide, too.
Added together, all this means that the price on the Shanghai Gold Exchange – the only legal entry-point for bullion into China's domestic market – almost always shows a small difference to London.
Is domestic demand weaker than domestic supplies? Chinese prices will fall relative to London's global price. Because who needs to import more gold when there's already plenty around?
That rarely happens, as you can see in our chart above.
Indeed, it only really took hold when Covid struck and China's jewellery-loving consumers couldn't leave their homes, never mind visit the shopping mall.
Outside of that out-sized crash versus London prices in 2020, such 'discounts' have tended both to be small and only to come when global gold prices jumped. That dented China's gold demand as consumers sat back and waited for the cost of a new bracelet or gold coin or small bar to stabilize if not retreat.
See late 2012 for instance, or early 2014, or the start of 2022. That
big 2020 slump to record discounts also hit when global prices jumped.
Much more often, China's demand is strong, outstripping domestic supplies and therefore pushing Shanghai's wholesale prices higher than London, because that gap...
...known as the Shanghai premium...
...offers an incentive for new imports, bought in London (or elsewhere) and shipped into gold's No.1 consumer nation.
And in mid-September, that premium exploded.
Across the 20 years to 2023, Shanghai gold prices typically showed a premium to London of 0.3%.
That's worth on average around $3.80 per Troy ounce over the last 2 decades.
That same 0.3% gap has applied more recently too, so that – across the 4 years to the end of June – the premium shown by the Chinese market offered bullion banks a typical gross incentive of $5 per ounce to buy in London and sell in Shanghai.
Out of that they would pay their dealing and shipping costs, and then take the rest in profit.
But since the start of July, in contrast, the Shanghai premium has now jumped to average 1.9% versus London prices. And last week it leapt to a record 6.3%...
...a massive $120 per ounce on Thursday 14 September, running almost as high as the Covid Crash discounts were low...
...as surging demand met restricted supply.
Restricted how?
Back in July, we heard that
a lack of new gold import licences had hit Chinese importers. This coincided with the Chinese Yuan falling hard on the currency market...
...driven down by China's fast-worsening
economic outlook.
So that replayed the pattern seen a few times before, when the People's Bank of China – spooked by a steep drop in the Yuan's exchange rate – put its foot on the pipeline of new gold-import licences to try and slow the outflow of foreign currency needed to pay for those imports. Back in
late 2016, for instance, or
summer 2019.
Here in 2023, and without new metal coming in, Shanghai gold went to a solid premium in July...
...offering importers a very tasty $25 per ounce (which few if any could actually get, however) and even though domestic demand turned soft during the Chinese market's typical summer lull.
The premium then raced higher in August, leaping above $50 per ounce as Chinese Valentine's Day approached (22nd August) and "footfall in Shenzhen showrooms [started] recovering materially" to quote specialist analysts Metals Focus, reporting from China (and the world's) No.1 manufacturing hub.
That then snowballed into September, with the Yuan price of gold setting 4 new all-time highs around the start of the month...
...before setting 5 new records in a row in the week-ending last Thursday...
...and taking the premium to global prices up to that historic record of $120.
The response of consumers? It's highly unusual, too.
"This is despite Chinese gold price being US$100+ higher than the international benchmark!" gasps Samson Li, the guy who took this photo in mid-September at a Shenzhen jewellery store.
"And don't forget," adds Li – now a researcher for the Dutch Commodity Discovery Fund (working just across the bay in Hong Kong) and formerly a precious metals analyst at Thomson Reuters and then Citi – "China's consumption sentiment in all things is actually soft this year."
Should that worry gold investors? Might Asia's household consumers fail to step in and support gold around $1900 if the market drops?
"The lacklustre Chinese economy and deteriorating consumer sentiment may undermine domestic gold sales," Metals Focus say, pointing to the long-running link between China's economic performance and Chinese households' ability and appetite to buy gold...
...something BullionVault
examined in depth back at New Year.
Longer-term, many pundits and even gold-market executives fear a shift away from jewellery buying among younger Chinese consumers.
But instead, at least in 2023, there's an "ongoing shift away from high margin pieces and a growing preference for quasi-investment and value preservation collections," say
Metals Focus after their recent field-trip to Shenzhen's jewellery manufacturers.
"Interestingly, we have seen this phenomenon occur not only among middle-aged and elderly consumers but also among the younger generation. Comments featured in live streaming sales and on social media platforms suggest that these consumers are developing a greater awareness of gold's appeal as a safe-haven asset and [therefore] gold jewellery's quasi-investment qualities."
Let's call it bull hunting, rather than the 'safe haven' demand (to which most journalism – if it bothers to look at gold at all – attributes any rise in buying or even just prices). China's savers and investors famously love fast-rising markets, and gold had already been rising in CNY for more than a year, now up 23% from the mid-point of Sept '22.
That bull market contrasts sharply with China’s poor returns on cash, stocks and real estate (the only other accessible assets for Chinese households and smaller corporations). Indeed, while PBoC import restrictions first triggered the move, Shanghai gold really kicked higher in the days following Beijing's relaxation of mortgage-borrowing rules in late-August.
Added to the authorities' other moves to ease credit and reflate the property sector – plus the widespread public knowledge of trouble at Evergrande, Country Garden etc via WeChat and Weibo – that move may have triggered yet more unease about real estate. But the likely rebound in apartment sales to first-time buyers will come as a relief to would-be sellers, who will now be looking for the best place to park their funds. Again, gold will stand out.
Of course, one swallow doesn't make a summer, and two massive weeks of Shanghai premiums – pushing the Dollar-equivalent price up above $2000 in the metal's No.1 consumer market so far this month, something achieved by the global price on April's mini-crisis in US banking – doesn't mean Chinese households are going to keep buying gold up at these levels.
But the current break with the norm has a) been strong enough to see the People's Bank
rush to issue new import permits, initially taking some of the heat out of the premium as the key season of Chinese New Year pulls into view, just behind Christmas and (before that) India's Diwali, but b) the premium has since rebounded back towards $100 per ounce, twice what was already a record when this surge really began 2 weeks ago, and c) this has all come amid a flurry of doom and gloom for the Chinese economy.
Combine this with the "ongoing shift" towards more high-purity jewellery than lower-carat 'fashion' pieces, and it suggests that the world's No.1 gold buyers might be switching behaviour...
...moving away from price-conscious 'consumers' more towards price-following 'investors' when it comes to gold.
Again, only a straw in the wind so far. And there are other things maybe adding to the sudden leap in Chinese gold premiums (such as a need,
apparently, for quicker handling and transit times at SGE-approved warehouses).
But with the world's 2nd largest economy showing signs of distress, it's a $2000 straw nonetheless. And outside China, the question for investors and the bullion market is to what extend its uptrend in gold will feed into global prices.
Evidence so far says it's having a big impact, not only supporting Western bullion but helping it
overcome new multi-year record highs in cash and bond interest rates, which more usually would act as kryptonite.
Should China's household demand for gold flip into a 'mania' – long forecast as delivering
the rapture of gold $5000 by Western internet pundits as well as by legendary mining boss
Pierre Lassonde – then who knows how strong global prices could prove, even with Western central banks vowing to keep interest rates higher for longer as well.
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