first majestic silver

Key Trade In Gold Market Signals China’s Intentions

Author, Editor, Founder, and Executive Director @ USAGold.com
August 27, 2015

“In recent years, China has come to shape the very way in which commodities are bought and sold, traditionally the preserve of financial centers such as London and New York. Late last month, the price of gold fell sharply, to a five-year low, within minutes of Asian markets opening. That came after almost five metric tons of gold—close to $200 million of the metal—was sold on the Shanghai Gold Exchange, according to ANZ Bank. The trade was seen by market participants as a key moment reflecting how China had moved Asian commodity markets away from just following the overnight pattern of U.S. and European trading.”  -- Wall Street Journal/Ese Dheriene and Biman Mukherji/

The premise of this article is that China will continue to play a key role in shaping commodities’ markets in the years to come, despite the current slowdown, based on its sheer scale.   If you follow this blog, you already know of the infrastructure China is putting in place to influence the gold trade and insert itself as a third gold trading center along with London and New York. We should note that the five tonne trade cited above came after the price had dropped.  Keep in mind that Shanghai is a physical market exchange. In other words, someone in China took advantage of the price drop to force the market into a delivery of five metric tonnes of the metal.  You might recall too that there have been reports in the background of Goldman Sachs and HSBC looking to purchase significant amounts of physical metal for delivery around the time of the five tonne trade.  Are the two events related?  They very well might be.  And this might be the very first signs of China flexing its muscle in the gold market in the way we outlined in this News & Views Special Report titled, The Shanghai Stock Crash And China Gold Demand

Quoting that Special Report:

In addition, an institution wishing to bet against gold would be forced to do so by delivering the physical metal itself in kilo bar form (the standard trading unit) upon settlement – an expensive and cumbersome process likely to further discourage excessive speculation or attempts at price manipulation. Gold Forecaster’s Julian Phillips, who has analyzed activity in the gold market for a number of years, points out that the seminal changes taking place in the gold market centering around Shanghai “will allow Chinese banks to participate in the gold market on a global basis.” It will be a market, he says, “that is not distorted by the banks, their proprietary trading, or control of the gold distribution system globally. China will hold these reins.”

Gold as a wealth building asset – East and West

In short, the physical flow of metal – its purchase and sale in real terms – will govern pricing in Shanghai, not leveraged paper trades, as is the case in the West. This emphasis on physical pricing in Shanghai, particularly when the new Shanghai Fix comes into play later this year, could signal the birth of a whole new gold market unlike anything we have experienced since the United States detached the dollar from gold in 1971.

At the moment, there is a strong, steady flow of gold through the London-Zurich-Hong Kong-Shanghai pipeline. Should the supply slow, prices in yuan terms could receive a strong jolt. Don’t forget too that the newly structured London fix now includes one Chinese bank with perhaps two others soon to be accepted as members, the situation Julian Phillips touches upon above. These banks will be on the constant lookout for arbitrage opportunities that could be purchased and shipped to their home country. Competition, as they say, is good for the soul, and in this case, it could be curative.

********

If you appreciate the kind of gold-based analysis you just read, you would probably enjoy and gain from News & Views – Forecasts, Commentary & Analysis on the Economy and Precious Metals. Published by USAGOLD, this newsletter service is linked by e-mail whenever a new issue is published.

We invite you to sign-up for the service. It comes free of charge and you can opt out of the service at anytime. Last, we will not deluge you with e-mails.  

Michael J. Kosares has over 40 years’ experience in the gold business. He is the founder and executive director of USAGOLD (both the website and gold brokerage service), the author of three books on the gold market, and the editor of "News, Commentary & Analysis," the firm's client letter. He has written numerous magazine and internet essays and is well-known for his ongoing commentary on the gold market and its economic, political and financial underpinnings. 


Gold is widespread in low concentrations in all igneous rocks.
Top 5 Best Gold IRA Companies

Gold Eagle twitter                Like Gold Eagle on Facebook