Gold spread, what is implying?

It is well known that the market that determines international gold price movements is the Come (New York Mercantile Exchange) in the United States, which mainly influences the global price of gold through the trading volume of gold futures that far exceeds that of other markets.

However, there are currently two other more important gold spot markets in the world.

The London spot gold market, where the London gold price represents the international spot price of gold

The Shanghai Gold Exchange spot gold market, which represents the spot price of gold in China

Looking at the spread between London gold and Shanghai gold reveals some interesting things.

The first thing we should note is that both London and Shanghai gold, are greatly influenced by the Come futures gold price, and the trading hours in London and Shanghai, are not synchronized with New York, so there is no way to compare their price differences at all times unless both markets are open at the same time.

Given that the time difference between London and Shanghai is 8 hours, in order to analyze the gold price difference at home and abroad, I used the daily closing price of gold T+D on the Shanghai Gold Exchange to compare the morning dollar pricing of London gold, because at this time the two are extremely close in time and can basically be considered synchronized.

Then, we use the offshore exchange rate of RMB for that day to convert the USD price of London gold into RMB price and unify the unit to “Yuan/gram” to observe the spread between the two.

The golden line in the chart below is the RMB price based on the morning pricing of London gold, converted according to the FOB exchange rate on that day, the red line is the closing price of Shanghai Gold TD, and the light green bar (right vertical axis) represents the spread between the domestic price and the international price.

Clearly, the international spot price of gold, after conversion at the FOB rate, is essentially identical in trend to the domestic spot price of gold, with the spread between the two, for the vast majority of the time, being around 1%.

We can see that most of the time, the domestic RMB gold price is higher than the international USD price converted gold price, the higher range is generally 2-5 Yuan/gram.

Why is the domestic gold price generally higher than the international gold price?

On this issue, I wrote an article “The weird moment of gold spreads”, which is briefly summarized here.

1) The credit expectation differential between the RMB and the USD.

2) China has been an importer of gold for the last 20 years, which represents a portion of the import cost.

3) Domestic gold investment is dominated by small and medium investors, which often follow the rise but not the fall phenomenon.

4) The impact of holiday consumption.

5) Shanghai gold and London gold delivery ingot color and delivery standards are different, domestic purity is higher and delivery weight is smaller.

(Shanghai gold delivery standard object, is the weight of 1 kg and color not less than 99.99% of the ingot, and London gold is not less than 99.50% of the gold content of 400 ounces of ingots, so the purity of domestic ingots, unit weight of production costs, are higher than London gold)

However, if you look carefully at the above chart, you can find that –

There are certain time periods when the domestic-international gold spread can be significantly more than $5 and last for some time.

Which time periods?

Generally periods when gold prices are overall undervalued, especially on the eve of explosive gold price rallies, such as May-June 2013, December 2013-January 2014, December 2016-January 2017, April 2019, and September-October 2022.

In a way, investors who hold RMB are more willing to pick up gold when it is low.

In addition to the “normal period” when the domestic gold price is higher than the international gold price, you can also find in the chart that in the whole year of 2020, the domestic gold price is continuously lower than the international gold price, especially in July-October 2020 when the gold dollar price reaches the stage top, the domestic gold price has been far below the international gold price, and even there For quite a long time, the domestic and international gold price spread was above -5 Yuan per gram, and in August-September when the gold dollar price topped out, the spread was even higher than -10 Yuan per gram.

In 2020, the global epidemic broke out, the U.S. stock meltdown several times, and then, almost all the world’s risk assets, again under the Federal Reserve’s sky-high money printing, the outbreak of a shocking reversal, the economic and social environment uncertainty is extremely high, in this case, the international price of gold rose all the way to the highest level in history, and domestic investors are obviously not willing to take over, so there is a situation where the international gold price is much higher than the domestic gold price .

Another situation is that China took the lead in 2020 in recovering production from the epidemic and exports soared all the way up, but the RMB exchange rate did not show a corresponding adjustment, which brought about an obvious undervaluation of the RMB currency, and the international gold price continued to be higher than the domestic gold price, which itself implied a strong expectation of RMB appreciation.

In fact, from June 2020 to January 2021, when the RMB exchange rate gradually changed from 7.2 to 6.3, this negative domestic and international gold spread gradually disappeared and became positive again, and within this period, the gold price also fell all the way, which seems to corroborate the “foresight” of RMB investors “. The price of gold also fell within this period, which seems to support the foresight of RMB investors.

We can summarize the situation of domestic and international gold spreads.

1) Most of the time, the domestic spot price of gold is higher than the international spot price.

2) The low level of gold price or on the eve of the rise, the domestic gold price will significantly exceed the international gold price.

3) The high level of gold price, especially during the period when RMB appreciation is in sight, the domestic gold price will be significantly lower than the international gold price.

The domestic and international gold price spread since September 2022 has been above $5 most of the time, and from this historical logic, the current gold price is likely to be a low rather than a high level.

Of course, in our little red circle, I also made a point to analyze the long and short positions of hedge funds, the short selling positions of gold miners and the changes in real interest rates, so you can scan the code if you are interested.



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