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Through: Frank Knopers
Premiums on gold and silver in China have risen significantly in recent weeks, even reaching the highest level since 2016. The gold price on the Shanghai precious metals exchange was about $25 per troy ounce higher than in New York, a difference of 1.5%. For silver, the premium was even greater, because with a price difference of $0.80 per troy ounce, we end up with a premium of almost 4.5%. It is not unusual for prices on the Shanghai Gold Exchange (SGE) to differ from those in trading centers such as London and New York, but the difference is not often as great as it is now. Why are premiums so high now and what does this mean for the gold market?
The main cause of the Difference is the increasing demand for precious metals in China, which is increasing the tightness in the domestic gold market. The Shanghai Gold Exchange plays an important role in the Chinese gold market, as all imports of gold and silver go through this exchange. Only licensed commercial banks are allowed to trade through this exchange, which means that Chinese authorities can control how much precious metal enters the country. Market parties such as jewellers and gold dealers are therefore dependent on the amount of gold and silver that licensed banks are allowed to import.
In recent months, the demand for precious metals in China has been strong Increased due to the removal of lockdown restrictions and a drop in the price of precious metals in July. For example, Chinese banks imported more than 80 tonnes of gold from Switzerland in July, double the previous month and even eight times as much as in May. During the corona crisis in 2020, the demand for gold in China dried up, as many households had to draw on their savings in the form of gold to pay the bills. It was only in the course of 2021 that the Chinese gold market picked up again and the country became a net importer of precious metals, as it was before the corona crisis.
Now that many Chinese jewellers have reopened, the geopolitical turmoil in the world has increased and the gold price has fallen somewhat, Chinese people are buying more precious metals again. This results in higher premiums on the domestic gold market. China is one of the most important markets for gold in the world. Not only does the country have the largest population with 1.4 billion inhabitants, the Chinese also have a strong tradition of Buy gold as a form of savings. They are price-conscious consumers, who buy more gold when the price is low and buy less gold when the price rises. In doing so, the Chinese are laying a solid foundation under the international gold market. Decreases the Gold price, then the precious metal flows towards China from different angles. If the gold price rises again, savers and investors in Western countries in particular will buy the precious metal as a safe haven.
The price differential of precious metals between the Shanghai and New York exchanges may increase if Chinese imports of precious metals lag behind domestic demand. For example, if the central bank sets the import quotas too low to meet demand. However, the premium is not yet so high that there is a major disruption in the gold or silver market or a decoupling in the gold or silver price, but we will of course continue to monitor this development.
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