WGC:8 strategic gold allocation rises upstream gold demand improves

SMM News: abstract: in August, the (LBMA) morning trading price of London gold denominated in US dollars and the midday price of Shanghai gold denominated in RMB fell, mainly due to the decline of risk aversion.

Although the economic indicators on the supply side of China's economy continue to improve, the recovery on the demand side is relatively slow.

, Au (trading volume rose further due to the volatility of gold prices in early August. In that month, China's total gold ETF position increased by 4 tons;

China's upstream gold demand increased in August, mainly because gold jewellers were preparing for the Qixi Festival at the end of the month and various promotions in September.

The real spread between China and major Western markets continued to widen, bringing the discount of domestic gold against Loco-London gold to an all-time high of $69 an ounce in August.

In August, the PBoC's gold reserves remained unchanged at 1948 tonnes, accounting for 3.7 per cent of its total foreign exchange reserves.

Gold's rally slowed after it hit an all-time high in early August. The strong performance of the stock market, the rebound in interest rates and the increase in global economic activity have all brought resistance to the rise in gold prices. As a result, the dollar-denominated London gold (LBMA) morning trading price and the renminbi-denominated Shanghai gold midday price (SHAUPM) fell 0.95 per cent and 2.13 per cent respectively in August. In addition, the good news about novel coronavirus vaccine development also makes investors more and more optimistic.

As the domestic economy continues to improve and policy makers are cautious about monetary easing, the renminbi appreciates and Chinese government bond yields rose further in August. as a result, the price of gold in yuan terms has fallen more sharply than that in dollar terms.

Domestic economic indicators send mixed signals. Although the manufacturing purchasing managers' index (PMI) continued to improve, the production price index (PPI) remained weak in August. In fact, PPI has been falling since February, while the consumer price index (CPI) has fallen sharply. This may indicate that the rapid recovery of the domestic economy so far is mainly driven by the supply side of the economy, because after the novel coronavirus epidemic was effectively contained in the first quarter, most factories quickly returned to normal operation, while the recovery on the demand side was relatively slow.

With the decline in consumers' real disposable income in the first half of the year, the far-reaching impact of the epidemic on the demand side of the economy continues to emerge. For example, the CPI of the service industry decreased significantly from the same period last year, while the CPI of education and entertainment basically showed no year-on-year growth in August. Therefore, when the supply-side recovery rate rises to the normal level, the marginal improvement to the overall economy begins to decline, and consumer demand, which is much slower than the recovery of production, is the key to further economic growth.

, Au (trading volume rose to 2472 tons in August. As the domestic gold price hit another record high and the gold price fluctuated sharply in early August, the gold market also attracted the attention of many tactical investors, which further increased the trading volume of Au contracts in August. But, Au ('s popularity declined in the second half of the month as gold prices cooled.

In August, China's total gold ETF holdings reached 64.3 tons, the second highest level in history, with a month-on-month increase of 4 tons [4]. Meanwhile, gold ETF assets under management (AUM) totaled $4 billion in August, surpassing the record $3.7 billion in July. Despite the strong performance of the stock market and the record price of domestic gold, strategic investors still choose to keep or increase their gold allocation to guard against possible economic risks in the future.

Demand for physical gold upstream in China boosted in August. First of all, August coincides with Qixi Festival's Day, China's Valentine's Day, which is the peak time for young consumers to buy gold jewelry, which boosted gold jewelry sales in the last week of August, thereby boosting overall upstream demand for the month.

Second, although the Shenzhen jewellery show in September may not be as large as in previous years because of the epidemic, many jewellers in Shenzhen held their own promotions, attracting retailers from all over the country.

The discount on domestic gold prices has expanded to the largest level in history. Shanghai gold midday (SHAUPM)? On average, it was below the London gold (LBMA) morning trading price of $69 / oz, with a discount of more than twice as much as in July.

* Note: after April 2014, the Shanghai gold midday price (SHAUPM) is compared with the London gold (LBMA) morning trading price; previously, the Au9999 is compared with the London gold (LBMA) morning trading price.

As we mentioned in our previously released July review of China's gold market, the difference in real interest rates between China and Western countries such as the United States due to the accelerated domestic economic recovery may be the main driver of the accelerated expansion of gold price discounts, although domestic upstream gold demand has risen slightly. In other words, the opportunity cost for Chinese investors to hold gold is relatively higher than that for Western investors.

* Note: Chinese real interest rate = Chinese 10-year Treasury yield minus inflation; US real interest rate = US 10-year Treasury real yield; European real interest rate = European 10-year Treasury yield minus inflation.

In August, the people's Bank of China's gold reserves remained unchanged. As of August, the people's Bank of China's foreign exchange reserves totaled $3.1646 trillion, up $10.2 billion from July, according to the State Administration of Foreign Exchange ((SAFE)). The PBoC's gold reserves have remained at 1948 tonnes since September 2019 and now account for 3.7 per cent of total foreign exchange reserves.