Gold prices in China fell to three-year lows on Friday following the government’s decision to allow more imports of the precious metal, according to reports.
Gold was down 3.8% on the Shanghai Gold Exchange, closing the final day of the trading week only $10 per ounce higher than the international spot price according to calculations by Bloomberg and virtually eliminating the record high price premium that had persisted through September.
According to local traders, the price drop was largely the result of a fresh round of authorized import quotas issued by Chinese authorities. Nicholas Frappell, global head of institutional markets at ABC Refinery in Sydney, told Bloomberg that the decline in gold prices was probably also impacted by “low levels of liquidity ahead of major holidays in China starting this weekend.”
In August, the PBoC decided to cut existing quotas and stop issuing new quotas to banks for the importation of international gold in an attempt to slow the surge in domestic gold purchases after the renminbi fell to its lowest level against the dollar in 16 years. The gap in the gold price had been steadily widening since early July, with industry insiders saying the rising premium was partially due to the curb on gold imports.
The spread between the spot price of gold in Shanghai and in London hit a record $121 per ounce on Sept. 14, but narrowed somewhat after the central bank issued an informal order to some state and midsized commercial banks the following day that the limits had been relaxed.
But the premium started to climb again almost immediately. On the morning of Sept. 26, Shanghai was charging 5.31% higher for an ounce of gold than the global spot price. By the afternoon’s close, the premium had risen to 5.48%.
With the Chinese real estate market in freefall, youth unemployment skyrocketing, and a deepening trade war with the United States only exacerbating the ongoing global economic slowdown, many analysts believe that sustained demand from Chinese investors will continue indefinitely.
In a recent interview with Kitco News, John Reade, chief market strategist at the World Gold Council, said that a perfect storm is brewing in China's gold market. Reade noted that premiums on the SGE vs. Comex futures hit 6.4% on Sept. 14, the highest level he has seen since he started monitoring the gold market.
“It's not the first time we've seen the premium blow up. But it is the first time we've seen the premium blow this high,” he said. “So it probably does show you that there's something different going on.”
Reade said China’s domestic premiums will have an impact on the broader market.
“China is the biggest gold consumer on the planet,” he said. “It's the biggest gold importer; it's the biggest gold refinery; it's the biggest jewelry market, and one of the biggest investment markets. It has the potential to grow.”
“What happens in China doesn't stay in China,” Reade said.
Gold prices have fallen sharply around the world since the Federal Reserve’s latest interest rate decision on Sept. 20, with spot gold last setting new session lows at $1,853.70, down 0.60% on the day and 3.7% on the week.
Source: kitco.com
BDST: 1251 HRS, SEP 30, 2023
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