Shanghai becoming dominant gold market

Gold TodayGold closed in New York at $1,266.40 down from Monday’s $1,288.20. On Wednesday morning in Asia it rose to $1,271.00, as the Yuan continued to weaken against a dollar that began to weaken against other currencies, before the LBMA price setting in London.

LBMA price setting:  $1,271.80 up from Monday’s $1,277.75.

Yuan Gold Fix

Trade Date Contract Benchmark Price AM Benchmark Price PM
2016  05  11

2016  04  9

SHAU

SHAU

266.31

269.25

267.09

268.27

Dollar equivalent @ $1: 6.5377

$1: 6.5290

$1,266.98

$1,282.68

$1,270.70

$1,278.01

The Gold Fixing in Shanghai’s morning was the same as New York’s close. London’s opening was the same as Shanghai’s afternoon Fix giving the impression that the global gold market is in synch.

We find it hard to believe that New York saw six tonnes of gold purchased in the day and yet fell. China’s physical market continuing to see demand and the gold price rose later in the day, due to physical demand.

Take a look at currencies and we see a weakening dollar, a weakening Yuan and a stable sterling. This leaves Shanghai the dominant market in the last day. The Technical picture points to consolidation with a stronger bias, but only for today. Gold was sitting on support yesterday and moved higher in the day, in a typical consolidation pattern implying that dealers are moving prices based on this consolidation pattern.

The dollar index is at 93.98 down from Monday’s 94.02. The dollar is weaker against the euro at $1.1411 up from $1.1387 on Monday.

The gold price in the euro was set at €1,114.15 up from Monday’s €1,120.47.

Ahead of New York’s opening, the gold price was trading at $1,277.55 and in the euro at €1,119.58.  

Silver Today –The silver price closed in New York on Monday at $17.10 lower than Monday’s $17.45. Ahead of New York’s opening the silver price stood at $17.49.

Price Drivers

The jobs numbers from the U.S. last Friday were disappointing. In this environment it is most unlikely that we will see rate hikes anytime soon. What is for sure is that if there is no rate hike in June, U.S. demand for gold will rise again. We called the end of the dollar’s ‘bull’ run months ago. We continue to see it hold current levels or fall further. This is what the Fed wants!

The oil price will continue to fall because Saudi Arabia is pumping all it can until the frackers are out of business. This, we feel, has been their intention all along!

China’s reserves of gold rise – China increased its gold reserves 10.89 tonnes last month. We have come to expect around 21 tonnes a month increases over the last few months. We don’t think there has been a change in policy. As these reserves come mainly in the form of 400 oz bars, they would have to have been bought on the London market. We see China’s policy as taking what’s offered to them by dealers, so as to not chase prices. With the heavy U.S. demand ongoing, it may be that there was little on offer.

On top of that it is becoming clearer that not only is New York very low on physical gold, but London is moving that way. It appears that London is becoming more like COMEX every day, dealing in ‘paper gold’ on contracts that are closed out before they mature. That negates the need for physical gold.  

With Shanghai being a physical gold market, the osmotic pressure from China is on London and is slowly draining gold liquidity from there. If this continues, there will come a time when London loses its pricing power and passes it to China. And that may be sooner than we think! Bear in mind that the People’s Bank of China is the key counterparty and in a position to control prices now, in Shanghai.

Gold ETFs – Monday saw purchases of 5.052 tonnes of gold bought into the SPDR gold ETF and another 1.35 tonnes bought into the Gold Trust. This leaves their holdings at 839.246 and 197.78 tonnes in the SPDR & Gold Trust, respectively.  

The purchases of the last four business days totaled over 20 tonnes into these two gold ETFs and should continue to have a positive impact on the gold price.  HSBC, the custodian of the SPDR gold ETF has to buy physical gold in London when SPDR shares are bought, but when selling happens, they have a choice of where to sell, London of Shanghai. They cannot buy in Shanghai for U.S. delivery.

Silver – The Silver price continues stable and keen to move. It is chomping at the bit still.

 

Julian D.W. Phillips

GoldForecaster.com | SilverForecaster.com | StockBridge Management Alliance

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