Gold News

Gold: Buy Shanghai, Sell London

Goodbye Shanghai gold discount, hello London gold premium...
 
SO TWELVE months after gold and silver's first post-crash rally ($1475 anyone?) the earthquake of Spring 2013's slump has shuffled the world's available stockpiles of metal, writes Adrian Ash at BullionVault.
 
Contrary to what some internet pundits will tell you, Chinese wholesalers have plenty of bullion stockpiled today, ready for when consumer demand picks up. 
 
That's visible in Switzerland too, where dealer-level premia being asked by Swiss refiners for kilobars and other retail units have fallen. Prices have come down since New Year, suggesting ample supply.
 
US warehouses are meantime accumulating more metal as well, thanks in the main to China's lower imports of gold bars. Because it leaves US miners and refiners needing somewhere to park their output until demand turns higher.
 
Only here in London, in contrast, is metal looking a bit tight. Only a little, and only according to the gold borrowing rates quoted by the biggest bullion banks. Heart of the world's bullion trade, however, London saw more than 1,700 tonnes of gold exported from the UK thanks to 2013's price crash.
 
That metal is now stacked up elsewhere, much nearer the refiners and end-consumers they serve. Seeing how China is also the No.1 mine producer, as well as importer and consumer, last year's shake-up has tilted the gold market on its axis.
 
Instead of a Shanghai premium, therefore, we've now had a London premium...over and above Chinese prices...for more than two months. What gives?
 
Renaming the more usual China premium a "London discount" was an idea first floated by Matt Turner at Macquarie back in late March. But if a big buyer now wants metal in London, the world's central market and traditional terminus for vaulting, dealing and shipping, he or she has had to pay more than they would in China since late February.
 
This might be an abberation, of course. The gold market has grown accustomed to Chinese wholesalers paying up to receive metal. Indeed, that Shanghai premium has been precisely what pulled metal into China from London vaults...all 1,700 tonnes of it in 2013...as importers were incentivized to book shipments by that "buy London, sell Shanghai" arbitrage.
 
But what if that Shanghai premium, as Macquarie suggested (albeit playfully) was in truth a London discount? China is the No.1 miner, consumer and importer. Whereas the UK barely registers. Viewing China's pricing as the benchmark might seem controversial today...the kind of nonsense you could find anywhere on the internet. But might it yet be the gold market's future?
 
Either way meantime, China really isn't a one-way street for higher prices. Not now its wholesalers are holding more metal closer at hand. Consumer markets tend to like low prices, after all. And here in spring 2014, amid a seasonally quiet patch for Chinese demand, the heaviest consumers of gold still seem to find current prices uninspiring.
 
Here in London, in contrast, there's a little premium to pay compared to Shanghai. Trouble is, that "buy Shanghai, sell London" arb isn't available. Chinese gold exports don't run anything like as freely as imports, which themselves are closely controlled. For now.

Adrian Ash is director of research at BullionVault, the world-leading physical gold, silver and platinum market for private investors online. Formerly head of editorial at London's top publisher of private-investment advice, he was City correspondent for The Daily Reckoning from 2003 to 2008, and he has now been researching and writing daily analysis of precious metals and the wider financial markets for over 20 years. A frequent guest on BBC radio and television, Adrian is regularly quoted by the Financial Times, MarketWatch and many other respected news outlets, and his views from inside the bullion market have been sought by the Economist magazine, CNBC, Bloomberg, Germany's Handelsblatt and FAZ, plus Italy's Il Sole 24 Ore.

See the full archive of Adrian Ash articles on GoldNews.

Please Note: All articles published here are to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. Please review our Terms & Conditions for accessing Gold News.

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