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Quietly gold has started to register gains in the overnight Shanghai market. For a very long time, the overnight market (from a U.S. perspective) more or less followed along with the prevailing trend in London and New York. Over the past few weeks, the Shanghai market has taken on a life of its own with solid gains over the London and New York closes registered on a regular basis. In fact, as the chart below illustrates, a case could be made that much of the recent rise in the price of gold has occurred in the Hong Kong-Shanghai markets. These overnight price adjustments could foreshadow the gold market’s future. By this I do not mean to say that the direction is going to be exclusively to the upside. The real point is that China’s presence is going to be felt – up or down – and that presence is going to play significantly in the flow of real metal. The Shanghai Gold Exchange, as readers of this newsletter are already aware, is slated to launch its new fix by the end of 2015. In addition, the new London price setting regime already includes one Chinese bank with two others scheduled to join in the near future. As a result, China’s influence in the gold market, already a key factor, should increase markedly.
With its appetite for the physical metal now a well-established fact of life, China will likely serve as a foil to the current paper-based pricing regime. Chinese banks in London will be on the constant lookout for arbitrage opportunities that can be purchased and shipped to their home country. Meanwhile, the price posted in Shanghai will be for physical delivery only – no paper settlements or rollovers. In this new gold market, China, perhaps inadvertently, will act as a proxy for gold coin and bullion owners all over the world.
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