Premium on China's Shanghai Gold Exchange hits record highs as supply constraints and demand converge
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Analysts note that both Japanese and Chinese investors have become significant gold buyers in recent weeks as the precious metal has hit record highs against the Japanese yen. At the same time, gold premiums on the Shanghai Gold Exchange vs. prices in Comex gold futures have hit record highs.
The price premiums in China have started to attract significant attention on social media, with many analysts commenting on this unprecedented environment.
In an interview with Kitco News, John Reade, chief market strategist at the World Gold Council, said that a perfect storm is brewing in China's gold market as the government appears to be curbing imports as demand remains reasonably elevated.
Reade noted that premiums on the SGE vs. Comex futures were up 6.4% Thursday, the highest level he has seen since he started monitoring the gold market.
Some analysts have said that it's not surprising that the Chinese government has curbed gold imports as it starts to loosen its monetary policy. Higher premiums for gold make it less of a competition against a weakening yen.
Reade said that there is no hard proof behind this speculation. At the same time, he added that it might not work as investors appear willing to pay elevated prices for gold.
"There are some investors on the margins who are buying gold at higher premiums to protect themselves," he said. "Demand, while elevated, is nothing major to write home about, so I think this is more about supply than anything. It's not the first time we've seen the premium blow up. But it is the first time we've seen the premium blow this high. So it probably does show you that there's something different going on."
Some analysts on social media have speculated that the higher SGE premiums are due to China's push to strengthen the yuan's international credibility and promote the petro-yuan.
However, Reade said he doesn't put much faith in this speculation as there are better, cheaper ways for the People's Bank of China to build its gold reserves.
"China buys gold on the international market because it doesn't want to influence its domestic market," he said. "Why would the Central bank pay a premium and force that premium higher when it can buy gold internationally through [over-the-counter] markets."
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As for the impact that this could have on the broader market, while premiums won't necessarily impact Comex futures, this is still a significant trend to watch.
"China is the biggest gold consumer on the planet. It's the biggest gold importer; it's the biggest gold refinery; it's the biggest jewelry market and one of the biggest investment markets. It has the potential to grow," he said. "What happens in China doesn't stay in China."
Naeem Aslam, chief investment officer at Zaye Capital Markets, said that while Chinese demand will provide some broader support for gold prices, the market still faces some significant challenges in the near term.
"The current price action for the gold price doesn't indicate that bulls can hold for much longer, as we are on track to record another week with losses. I think going into the next week, traders are going to laser focus on bigger factors, such as the Fed's stance towards its monetary policy in light of the recent inflation reading, and the level for the gold price you want to keep an eye on will be the support at 1,900," he said.