After falling to a low slightly above $3,100 last week, international gold prices staged another strong rebound this week amid escalating geopolitical tensions in the Middle East and the impact of Moody's downgrade of the US's Aaa sovereign credit rating, with overnight prices rebounding above the 3,300 integer mark once again.
In response, Adam Gillard, an FICC analyst at Goldman Sachs, believes there is a clear logical support behind this trend: the buying power from China is returning once again.
Specifically, gold buying initiated in the Chinese domestic market during the night session of the Shanghai Futures Exchange (SHFE) triggered a follow-up rally in the New York Mercantile Exchange (COMEX) market. The total open interest in COMEX increased by 3% (4% for silver), while the arbitrage spread between the two major markets, SHFE/CMX, widened significantly.
Gillard particularly emphasized that despite gold prices having pulled back 8% from their highs, what impressed him was that the scale of gold holdings in China remained stable at a high level. This indicated that, unlike the typical behavior pattern of domestic momentum traders who tend to rush to buy amid continuous price rise and sell amid continuous price decline, the pullback in gold prices did not trigger a massive wave of selling.
As shown in the chart below, the open interest in gold futures on the SHFE is now returning to high levels, having once again reached the highest level since Q4 2019.
Meanwhile, the overall gold holdings in the Chinese market (ETF + Shanghai Gold Exchange + SHFE) also remain high.
Note: Light blue represents gold prices, and dark blue represents overall gold holdings.
Previously, Chinese customs data released on Tuesday showed that China's total gold imports last month reached 127.5 mt, hitting an 11-month high. Despite gold prices hitting record highs in April, touching $3,500 per ounce at one point, this import figure still surged 73% from March.
Some institutions have suggested that the central bank's move to allocate new import quotas to some commercial banks in April may have been a key factor driving the surge in imports.
In response, Goldman Sachs pointed out that China's gold imports (excluding central bank purchases) rebounded to a one-year high in April, likely related to arbitrage activities triggered by the pricing advantage of the Shanghai Gold Exchange over the London Bullion Market Association (LBMA).
It is worth noting that despite gold prices remaining high overall, physical gold demand remains strong.
This also explains, to some extent, why the premium level of gold prices on the Shanghai Gold Exchange has remained resilient—even as the precious metals market is currently facing a high-price environment.
Note: Premium of gold prices on the Shanghai Gold Exchange.
In fact, when gold prices surged last month, many market participants noticed the leading role of the Chinese market in the gold bull market. Goldman Sachs said at the time that the new highs and sharp corrections in gold prices over the past month "almost all occurred around the opening of the Chinese market", and pointed out that the impact of capital flows through the Shanghai Gold Exchange and the Shanghai Futures Exchange on gold price trends was more significant than that of futures and options on the US New York Mercantile Exchange.
