Gold’s Pricing Power Moving East – Part 1

By Julian D.W. Phillips – | | StockBridge Management Alliance 
How is the gold price made?

When we hear commentary on why the gold price has moved, we usually hear of U.S. economic or political factors and a move in the U.S. Dollar. Most times these do not precipitate the buying of physical gold.

What they do do, is to spur the buying or selling of futures or Options on the COMEX gold market. Many commentators attribute moves in the physical gold price to moves on COMEX.

But this link is tenuous, as COMEX does not [except for a maximum of 5% and minimum of 1% of contracts that disclose they will deal in physical gold, upfront] deal in physical gold.

The dollar gold price is the one that most investors look at, even though they may deal in a different currency to the dollar. This is because the dollar is the key global currency against which all others are measured.

Price differential between Shanghai and London/New York

U.S. gold prices today are primarily driven by demand for physical gold in gold ETFs, such as the Gold Trust and the SPDR gold ETF [GLD].

But the bulk of physical gold traded in the world now happens on the Shanghai gold exchange. There are 10 million investors, including 10,000 institutions that are able to deal over their cell phones at any time on the Shanghai Gold Exchange. Such a market dwarfs both London and New York on the physical front, as all transactions have to be backed by physical gold.

With gold exports not permitted from China, there are obstacles to the free flow of gold globally. The International Gold Exchange in Shanghai has not yet attracted sufficient numbers to allow this. But the major banks can and do hold stock both in Shanghai and London and by running a dollar/Yuan currency book can arbitrage gold between the markets to smooth out the bulk of price differences between markets.

While there are frequent fingers pointing to the ‘premium’ of Shanghai prices over those of London and New York of $5 all the time, it is because Shanghai prices 0.9999 quality gold whereas London prices 0.995 quality gold. One has to deduct this before comparing the prices in the two markets.

On top of this we see between $5 – $15 an ounce difference on a daily basis, which can include the cost of moving the gold from London to Shanghai.

Overlying this cost lies the difference in liquidity between the markets and the differences in local demand and supply. In the very liquid Shanghai market, bullion banks do not exert the same influence as in London and New York, so speculation is restricted. It is further restricted by the much higher costs of taking large speculative positions in Shanghai. These costs were increased at the beginning of the year to discourage speculation.

Shanghai, as a result, gives less volatile prices, more indicative of [Chinese] physical demand. While no gold flows out of China [removing its downside pressure on the gold price] Chinese demand draws from the rest of the world.

Gold enters China from the rest of the world’s gold markets primarily via Switzerland where it is refined into metric bars. We see metric measures of gold dominating the global gold market in the future. Imports comes from all over the world in all forms, with a reducing amount coming in via Hong Kong.

Consequently, the Shanghai Gold Exchange gold price, although higher [for reasons given above] is exerting a growing influence on the global gold price in all currencies and better reflects the physical gold price of gold.

London, New York and the Gold Price

With London having been the global center of the physical gold world until recently, one would have thought that the influence over the gold price would have resided in London. But this is no longer so, as history over the last few years, has shown that London has usually followed COMEX prices.

Of course, this would give rise to charges of ‘manipulation’ from U.S. and other sources.  The not uncommon bear-raids by the big U.S. banks and high frequency traders ensured that the gold price bore little resemblance to the real global physical gold demand and supply factors.

But on closer examination of the chart above, one sees that all but a small percentage of “gold” is traded not in gold but in some form of derivatives, such as shares in GLD, futures, options, or even gold shares, where the buyer does not own physical gold but a piece of paper to the gold price.

Take out this ‘paper’ gold and London and New York’s 88% of gold traded, falls to around less than 1% compared to Shanghai’s 5% of physically traded gold. i.e. five times as big.

When there is a real premium in Chinese gold prices over London and New York’s Chinese gold importers [Like the ICBC/Standard bank and HSBC bank] then export gold bullion to China to meet that higher demand and smooth out price differentials. Consequently, we have witnessed a steady very, very large flow of gold pass through the refineries of Switzerland [to be upgraded to 0.999 fineness] and onto the Far East.

This has allowed both Russia and China in particular, to acquire huge tonnages of gold [on top of their own production] at what really are, discount prices over the last decade!

With gold now an integral part of the Chinese financial and banking systems, China cannot afford to be at the mercy of the capricious, non-representative, U.S., physically-small gold market, even though the volumes of paper gold traded are huge as you can see in the pie chart above.

Day to day news items are not the real reasons gold is bought and sold in the west. It is theprofit motive inherent in western financial markets, driving traders and funds to buy and sell gold frequently. Gold holdings are changed even by large funds from day-today positions to monthly or three monthly. There are few that hold a long-term holding.  The demand for short-term performance prevents that.

The Chinese view of gold

The motive east of Greece is to acquire gold holdings as a prime financial asset that, over time, provides secure wealth for the long term. Trading of gold is an ancillary function only. East of Greece it is the sheer volume of gold kilos held that’s important.

China’s gold holdings are far greater than the available statistics tell us. Gold is held as jewelry at retails levels, on the balance sheet of banks, in the Shanghai Gold Exchange, for clients, as well as for the Exchange itself, in government agencies, for the government and by the People’s Bank of China, for the nation.

In summary, as the People’s Bank of China put it, “We own gold through the people of China!”

This is resulting in China moving to take over gold’s global pricing power.


Gold pulled back by stronger dollar and big sale out of GLD

 Gold Today –New York closed at $1,251.80 yesterday after closing at $1,260.30 Monday. London opened at $1,250.30 today. 

Overall the dollar was stronger against global currencies, early today. Before London’s opening:

         The $: € was stronger at $1.1189 after yesterday’s $1.1252: €1.

         The Dollar index was stronger at 97.33 after yesterday’s 96.90

         The Yen was weaker at 111.88 after yesterday’s 111.24:$1. 

         The Yuan was barely changed at 6.8905 after yesterday’s 6.8901: $1. 

         The Pound Sterling was barely changed at $1.2978 after yesterday’s $1.2980: £1.

Yuan Gold Fix
Trade Date Contract Benchmark Price AM 1 gm Benchmark Price PM 1 gm
      2017    5    24

     2017    5    23

     2017    5    22








Trading at 281.30



$ equivalent 1oz at 0.995 fineness

@    $1: 6.8906

       $1: 6.8901

       $1: 6.8903     





Trading at $1,264.77



Please note that the Shanghai Fixes are for 1 gm of gold. From the Middle East eastward metric measurements are used against 0.9999 quality gold. [Please note that the 0.5% difference in price can be accounted for by the higher quality of Shanghai’s gold on which their gold price is based over London’s ‘good delivery’ standard of 0.995.]

 New York closed $13.55 lower than Shanghai yesterday. London opened today at a $14.47 discount to Shanghai.

London today and New York yesterday, took gold lower with Shanghai remaining steady at yesterday’s prices. If pricing power lies in Shanghai, gold price will climb this week in London and New York. This is a test of where that power lies [very short-term].

Silver Today –Silver closed at $17.07 yesterday after $17.14 at New York’s close yesterday.

LBMA price setting:  The LBMA morning gold price was set today at $1,251.35 from yesterday’s $1,259.90.  The gold price in the euro was set at €1,118.77 after yesterday’s €1,119.61.

Ahead of the opening of New York the gold price was trading at $1,252.80 and in the euro at €1,111.82. At the same time, the silver price was trading at $17.07 

Price Drivers

Again it was a day for the gold price to change because of the dollar’s influence as it strengthened a little, but remained at low levels. There was a significant sale of gold from the SPDR gold ETF (GLD) which assisted the fall. The discounts of London and New York to China widened quite heavily yesterday, but only to the extent that held the euro price of gold relatively steady. As we said yesterday, “For a convincing breakout in the gold price we need to see it rise strongly in the euro too. With the Chinese Yuan doing its best to stay close to the moves in the dollar, we expect Shanghai to remain stable.” Overall it is a day for gold to mark time waiting for an event to move it strongly either way.

The Fed

It is quite clear that the markets now expect a June rate hike from the Fed and, by the end of the year, a third hike. We don’t see these moves as promoting a fall in the gold price, except maybe for a short time. We do see inflation rates remaining negative, further encouraging gold price rises.

Gold’s seasonality in India

We are entering the quiet time of the year for Indian demand as they plant crops ready for the monsoon. This quiet period should last until the beginning of September, after crops are harvested. A good Monsoon is forecast, so we expect demand to be strong in the fourth quarter of the year.

In the past few years as the path of urbanization remains strong there, gold demand’s seasonality has diminished. The resulting enrichment of urban Indians has helped enhance overall gold demand. With last year’s ‘de-monetization’ of the two highest denomination banknotes in the country causing havoc and postponing gold demand, we expect a better year for Indian demand this year than last. Of course, with the threat of 3% [?] General Sales Tax being added to ‘legitimate’ purchases of gold and to the reporting of them to the authorities, the quest for ‘unofficial’ gold purchases [from smugglers] grows. We are certain that Indian gold buyers will buy, whether they do it legally or illegally. We therefore estimate that Indian demand will reach 1,000 tonnes + this year, but a significant portion of this will not be reported.

Gold ETFs – Yesterday, saw sales of 5.031 of a tonne from the SPDR gold ETF but no change in the holdings of the Gold Trust. Their holdings are now at 847.452 tonnes and at 202.82 tonnes respectively. This relatively heavy sale of gold was sufficient to lower gold prices on the back of a weaker dollar.

Since January 6th 2017 38.678 tonnes have been added to the SPDR gold ETF and the Gold Trust.

 Julian D.W. Phillips | | StockBridge Management Alliance 

Gold and silver struggling at support

Gold TodayNew York closed at $1,317.40 Friday after the previous close of $1,321.40.  London opened at $1,314.

    • The $: € was stronger at $1.1237: €1 from $1.1173: €1 Friday.
    • The Dollar index was stronger at 95.82 from 95.82 Friday.
    • The Yen was stronger at 101.21: $1 up from 101.21: $1 Friday against the dollar.
    • The Yuan was stronger at 6.6720: $1 from 6.6720: $1 Friday.


  • The Pound Sterling was weaker at $1.2956: £1 from Friday’s $1.2956: £1.


Yuan Gold Fix

Trade Date Contract Benchmark Price AM Benchmark Price PM
     2016  10  3

     2016  09  30







Dollar equivalent @ $1: 6.6720

$1: 6.6720





Once again we see lower prices dominating while Shanghai is on holiday. New York prices dominate when China is closed.

The Yuan is now part of the SDR of the IMF, for the Chinese an important step on the way to international acceptability as a global currency. We expect to see its use accelerate from now on. Today’s Yuan exchange rate is merely academic because of the holiday there.

LBMA price setting:  The LBMA gold price setting was at $1,318.65 against Friday’s $1,327.90.

The gold price in the euro was set at €1,173.49 against yesterday’s €1,188.49.

Ahead of the opening of New York the gold price was trading at $1,315.80 and in the euro at €1,170.85.  At the same time, the silver price was trading again at $19.09.

Silver Today –The silver price rose slightly to $19.16 at New York’s close Friday from $19.07, Thursday.  

Price Drivers

The story of the week, this week, is Deutsche Bank. The media and Deutsche bank are telling the markets everything is OK. Deutsche Bank is facing an up to $14 billion fine from the Justice department and now is facing charges from Italy.  You have all read the papers and what they say, but the real problem is that the ongoing reports of bad behavior continue alongside the belief that the German government will break its own rules and rescue them no matter what. This is despite their heavy handedness over Italian and Greek banks. In turn this speaks of lack of confidence ‘in the system’ and cohesion within the E.U. needed to resolve the problems.

This is now being demonstrated by hedge funds removing their funds from the bank. There is no doubt that no matter what state Deutsche bank is in, if it loses the confidence of its clients and the system sticks to its rules Deutsche bank could fall. But everything will be done to protect it no matter what it has done. The story is gold positive.

As a reminder of what can happen if the banking system loses the trust of the financial world, in 1933 there were a host of ‘bad banks’ in the U.S. forcing the government under Roosevelt to close down the banking system for a long weekend. The bad banks were then closed, gold was confiscated and placed behind the dollar in its support. The banking system of all countries will be made to stand no matter what and no alternative to national currencies will be permitted to compete with them, including gold or cash held in or outside the banking system.

Gold ETFs – There were sales of 1.187 tonnes from the SPDR gold ETF but no change in the Gold Trust Friday, leaving their respective holdings at 947.952 tonnes and 226.68 tonnes

Since January 4th this year, the holdings of these two gold ETFs have risen by 374.33 tonnes.

Silver – Silver prices are holding above $19, above support.

Julian D.W. Phillips | | StockBridge Management Alliance

Shift of gold pricing power to Shanghai inevitable

The New York gold price closed at $1,071.70 down from $1,072.70 on yesterday’s close.  In Asia prices held at the same level then the dollar strengthened to 97.90 up from 97.67 on the dollar Index. The euro is at $1.0956 down from $1.0975 yesterday against the dollar. The London a.m. LBMA gold price was set at $1,067.20 down from $1,072.00, on Thursday.  In the euro the fixing was €972.79 down from yesterday’s $979.00. Ahead of New York’s opening, the gold price was trading at $1,064.40 and in the euro at €970.33.  

The silver price in New York closed at $14.11 down 4 cents. Ahead of New York’s opening the silver price stood at $13.92.

Price Drivers

The big news of the day is the announcement that the Yuan gold Fix, based on a 1 kilo bar of gold will begin in April. It had been expected by the year’s end but now we have a firm date.  It will be based on physical demand and supply, not on futures positioning as on COMEX.

We do see it having a major impact on global gold prices despite London and New York basing prices on ounces, not kilos [to move from one to the other would require re-refining]. Nevertheless, we do expect arbitrage activity to smooth out prices across the world. With suppliers moving their gold more towards the physical markets in Asia and re-refining gold bars into kilos, new supplies will veer more to the metric measurements than ounces. Over time, we do expect both London and New York to accept kilos as well as ounce sized bars and coins. It is the dealing in gold that matters not the weights they are dealt in, that impacts price. Therefore, the shift in pricing power to Shanghai is inevitable.

In the meantime, the flow of re-refined kilo bars continues to rise to Asia and in particular China. The shift is inexorable as Chinese middle classes continue to grow at the expense of those in the developed world. It is only a matter of time before physical deals overwhelm futures and options trading in determining prices.

As we wrote this we saw speculators coming into the market to attack the gold price once more taking the price away from currency moves.

(Correction: The Fed’s announcement is due on Wednesday of next week, not Monday, after the 2-day meeting of the FOMC. So, we expect little drama in the markets until then. This applies to all the world’s financial markets.)

Once again, we saw no sales from the SPDR gold ETF and nothing from the Gold Trust, on Thursday. The holdings of the two gold ETFs, the SPDR gold ETF and the Gold Trust remain at 634.63 tonnes in the SPDR gold ETF and at 157.07 in the Gold Trust.

Julian D.W. Phillips for the Gold & Silver Forecasters – and


Another 49 t withdrawn from China’s SGE in week 46 – huge 2,362 t YTD

China’s Shanghai Gold Exchange withdrawals continue strong with another 49 tonnes taken out in the week ended November 27th bringing the year to date total to just over 2,362 tonnes.  For comparison the previous full year record total achieved in 2013 has already been exceeded by around  180 tonnes, with just over a month to go until this year end.  We are downgrading our full year forecast to 2,580 tonnes from the previous 2,600 tonnes plus, but this would still be 18% higher than the previous record – and around 23% higher than last year’s total withdrawal figure.

Much is made in the West of the downturn in the Chinese economy – but this is a reduction in percentage growth – not a recession.  Sometimes the two seem to be confused by the media.  The Chinese middle classes are continuing to grow and employment is being pushed in the government’s economic reboot to the services and domestic consumption sectors which tend to pay higher wages than manufacturing and thus the disposable wealth within this ever growing population segment is growing rather than diminishing.

As one of the speakers at this week’s Mines & Money conference in London pointed out, for thousands of years China and India were the world’s richest countries – a position they mostly lost in the 19th and 20th centuries.  They are becoming so again – a return to the status quo ante perhaps – and with their huge inherent disposition to accumulate gold (which has served their people well over the centuries as a store of wealth and protector against economic downturns and inflation) we can only see the gold acquisition trend continuing to build.

We are already close to the crunch situation in the supply/demand equation for gold and again, as a number of highly respected speakers suggested at Mines & Money, the gold price will go up, and likely go up very sharply, although none would really commit themselves on a timescale for this to occur.  Perhaps the nearest was Pierre Lassonde who reckoned the U.S. Fed has talked itself into virtually having to start raising rates this month, or lose all credibility, but that it will be forced to backtrack before the middle of next year, cutting rates again – or even implementing QE4 – and this would be the trigger for the start of a gold perception resurgence.  Grant Williams (no relation) talking at the same event somewhat concurred and commented that when gold does rise it will likely move rapidly and comfortably take out the previous all-time price high.  Good fodder for the remaining gold bulls!

Events gold positive once markets settle

On Tuesday New York closed at $1,139.50 down $13.60. The dollar was stronger at $1.1496 this morning up from 1.1539, against the euro, with the dollar Index stronger at 94.10 up from 93.39 yesterday. This morning the LBMA gold price was set at $1,134.40 down $19.85. The euro equivalent was €990.05 down €12.16. Ahead of New York’s opening, gold was trading at $1,124.70 and in the euro at €984.42.  

The silver price closed at $14.64 down 14 cents over Tuesday’s close in New York. Ahead of New York’s opening today it was trading at $14.15.

Price Drivers

The Shanghai equity market is trying to stabilize, after the People’s Bank of China cut interest rates. There was a lot of short covering there as the market got over its shock of being ‘let loose’ by the government and the Yuan acclimatized to a floating exchange rate.

The Fed has been right to take note of the global economy when deciding to raise rates as we can now see just how the global economy and financial markets are able to affect each other. As global liquidity is tightening [despite QE] volatility is instantly contagious. Even a small Fed rate hike could have the same impact on markets and particularly foreign exchanges. More to the point, these are out of the control of central banks. Volatility can be an expression of that lack of control as we have seen last week and this. As we head towards a different monetary system inclusive of the Yuan [which will not be directed by the U.S.] we expect such volatility to rise, damaging confidence in the monetary system even more.

Let’s be clear on this, the great fall of China sent waves even through U.S. markets, due to structural faults and were not a brief shakeup to be followed by calm for the foreseeable future. We see it as a sign of things to come.

But, the Fed will act in the interests of the U.S. as mandated, so a rate rise could still ignore the potential impact on the rest of the world’s financial markets?

During the last week the gold price has remained steady to slightly lower, despite large amounts of buying into the SPDR gold ETF. We feel the last week’s events will turn out positively for gold once markets have settled. There were no purchases or sales into or from the SPDR gold ETF or the Gold Trust yesterday. This leaves the holdings of the SPDR gold ETF at 681.105 tonnes and 162.07 tonnes in the Gold Trust.

Julian D.W. Phillips for the Gold & Silver Forecasters – and

SGE gold withdrawals an enormous 1464 tonnes so far this year

While physical gold withdrawals from the Shanghai Gold Exchange (SGE) in the latest reported week were lower than the massive 72 tonnes a week earlier at 53 tonnes it remains high for the time of year.  But the key to what has been happening with Chinese demand as represented by SGE withdrawals is where the total for the year to end-July stands compared with previous years.

Looking at this metric we can see from the chart below that SGE withdrawals this year so far have totalled a massive 1,464 tonnes – which is running around 116 tonnes ahead of the huge record 2013 year at the same time and an enormous 370 tonnes ahead of the 2014 figure at the end of July when the annual total came to 2,136 tonnes.  If the average monthly withdrawal level (49 tonnes a month so far) for the current year keeps up we will be looking at annual withdrawals totalling more than 2,500 tonnes for the full year – and with Chinese demand tending to be strongest in the last four months and the first two months of the year this level could indeed be a possibility.

If we compare this potential level of annual demand with the likely total of new mined gold this year, China would account for around 75% of the yearly total on its own!

sge jul


Chart from Nick Laird’s excellent website

These high SGE withdrawal levels do not necessarily mean that the gold price will pick up accordingly, as witness what happened in 2013 when the SGE figure hit a then record 2,186 tonnes, yet the gold price collapsed from $1681.50 at the beginning of the year to $1201.50 by the year end.  However what we are seeing are continuing huge gold flows from West to East (Indian gold imports too are predicted to hit over 1,000 tonnes again this year) which will continue to run down gold inventories in the West, where the price tends to be set.  At some stage any loosely held Western physical gold holdings will be depleted to the extent that the low levels will almost certainly have a positive impact on the gold price – although by that time it may well be China which is setting the price anyway.

ETF gold sales used in Chinese take-down

New York closed at $1,103.20 down $30.70 on Monday it closed at $1,100.20 on Tuesday. This morning in Asia the gold price fell again to $1,094.  The dollar was weaker at $1.0940 down from $1.0854 against the euro, with the dollar Index down to 97.28 from 97.89.  The LBMA gold price was set this morning at $1,096.80 down $11.20. The euro equivalent was €1,002.74 down from €1,029.31 yesterday. Ahead of New York’s opening, gold was trading in London at $1,094.00 and in the euro at €1,001.33.

The silver price rose to $14.81 up 10 cents in New York. Ahead of New York’s opening it was trading at $14.77.

On Monday there was a sale of over 11 tonnes of gold in the SPDR gold ETF [GLD], which was arbitraged across into the Chinese market on Monday morning. Once again at the close yesterday a large amount of gold was sold out of the SPDR gold ETF of 4.77 tonnes and sold into the Chinese market overnight, pushing prices down there. The holdings of the SPDR gold ETF are at 689.693 tonnes and 167.76 tonnes in the Gold Trust.

Until demand jumps up in China such sales will push prices down. What does this mean? HSBC is the Custodian of the SPDR gold ETF and so responsible for sales and purchases of gold to the fund from the gold market. They have to be able to do that easily, so as not to be caught with stock on its own books and so risking moves in the gold price itself. It may also act on its own account too. But it needs to ‘set off’ its risks [or support the ‘bear raid’] and be able to dispose or acquire gold to match moves by its clients. In the heavy selling in Asia following the sale from the SPDR ETF the U.S. HSBC [et al] ‘laid off’ this position in Shanghai. This shows that western banks can and do ‘arbitrage’ gold into China immediately. The Chinese market is seeing this for the first time.  For more –

These sales are a well coordinated ‘bear raid’, which has made the market emotional, as support levels are broken and have turned into resistance. We do expect Asian demand to return, as prices they have not seen for years are offered. They need time to factor in what is happening and react. So it is pertinent to ask, “Is this a final sell-off?” These sales are not currency related. Investors are wise to use calm forethought before acting.

For the first time in years the silver price has refused to follow gold down showing that traders believe that while gold is being hit hard, it may well recover just as fast as it fell. Silver rose when gold fell again. Investors should ask why?

Julian D.W. Phillips for the Gold & Silver Forecasters – and