14 NOVEMBER 2023
Something big seems to be brewing in the gold bullion market.
The chart below shows two different gold prices. The blue line is the cost of gold traded on the London exchange, which is currently around U$1,930/oz. The gold line shows the cost to buy the exact same amount of bullion on the Shanghai exchange. It is currently trading over U$100 higher, at U$2,036/oz.
Typically the two prices move in unison with any divergence tending to be modest and short-lived. But the gap has risen materially in recent weeks with the “Shanghai premium” reflecting a surge in demand for gold traded in China.
What’s driving this?
One explanation is likely to be the recent weakness in the Chinese RMB, especially as gold denominated in RMB has just hit a record high. Bullion is a well-regarded hedge against fiat currency debasement, particularly in Asia, and with the RMB selling off this year many savers are seeking to protect their purchasing power by investing in gold. In fact, the recent surge in domestic demand prompted the Central Bank to temporarily limit the amount of gold imports into the country in the hope it would ease pressure on the RMB.
Another explanation could stem from the thorny and complicated world of geopolitics. It is no secret that China is seeking to internationalise the RMB and a number of emerging markets intend to become less reliant on the US dollar. These twin aims are playing out in commodity markets and the “Shanghai premium” could signal an acceleration in global demand for RMB based crude oil contracts that, in turn, allow the oil producers to convert the RMB into gold.
#Chartoftheweek
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