China will save us

 Posted by at 10:02 pm  China, Narratives
Oct 162015

I have a lot of respect for Michael Kosares of bullion dealer USAGOLD but his recent commentary has a bit of the “China will save us” meme which has been around for many years and had its fullest expression in the Pan Asian Gold Exchange farce.

Michael notes the upcoming launch of a benchmark gold price by the Shanghai Gold Exchange and increasing involvement of Chinese banks in the setting of the London Price benchmark and says that “as a result, China’s influence in the gold market, already a key factor, should increase markedly and that “Chinese banks in London will be on the constant lookout for arbitrage opportunities that can be purchased and shipped to their home country”, concluding that “in this new gold market, China, perhaps inadvertently, will act as a proxy for gold coin and bullion owners all over the world” (my emphasis).

The tense of these comments – “increase markedly”, “will be”, “new” – implies that somehow China is not currently influencing the market to the fullest extent and involvement in benchmark pricing will help. This is just not the case. The Chinese government has approved all of its major banks to import gold and these banks have been very active in the kilobar market for many years now, something that the Perth Mint has experienced first hand.

As proof, consider this chart of the SGE premium. If there was any consistent restriction on China importing and impacting on the physical spot market this premium would not be near zero. Every week the Perth Mint offers 5 tonnes or so of physical gold to the market and we have rarely had a problem with banks, Chinese or otherwise, not being interested on bidding on it.


Yes, there have been periods where premium develops, often due to demand surges which clear out onshore inventories and then the banks scramble for new supply from refineries worldwide, but the chart shows that in the long run the premium reverts back to more modest levels. As Adrian Ash of BullionVault says “it’s the Shanghai premium which, thanks to the magic of profit-seeking capitalism, draws in metal from abroad” – arbitrage is doing its thing.

So it isn’t a case that “China will likely serve as a foil to the current paper-based pricing regime” as Michael says, China already is serving as a foil.