GOLD – We need to talk about China…


A few years ago I was invited to speak to a group of about 120 Chinese investors visiting the UK to explain how the gold market in London, as the global epicentre, operates – essentially infrastructure. They were wealthy, influential and from right across the country. None of them, it seemed, spoke English, so the presentation was via an interpreter.

At the conclusion I was met with a stoney silence – a sense of antipathy pervaded … perhaps hostility. 

Even with minimal expectations, this marked a new low.  

I asked the interpreter what was going on and she huffed and replied that they just wanted to know about massive leverage in these markets … the financial equivalent of a WMD. So we spoke about the OTC options markets and the relief was palpable – the atmosphere eased and the mood lightened. My other abiding memory was looking at this hot, fast and even aggressive group and thinking how incongruent it was with the leisurely ambiance of the gentlemen’s club atmosphere we were in. 

Point is, Chinese people like to gamble … on stilts, with a very tall hat. 

And here’s the thing … gold is currently in hock to Chinese demand so it pays to understand what is happening there as, likely as not, it will dictate the immediate price action … at least, for a while. 

In my last article HERE I drew attention to the massive buying on the Shanghai Futures Exchange (SHFE or “Shiffy”) … and I think I now have a better understanding what is at play …  

There is a psychological phenomenon called “false consensus bias” which is a condition where we essentially think that everyone thinks like we do … but they don’t. I think many of us make that mistake. Well China has it own cognitive bias towards gold which is at odds with the rest of the planet… and that view is supported empirically by weak demand elsewhere – at these price levels. 

The thing about China is not only is it large, it is also deeply communed – especially as regards financial markets. On MetalsDaily this article I can comfortably predict will be read by about 2,500 people, on Zerohedge maybe 15/20,000 – but in China the WeChat gold groups extend to well above a million participants (not just readers) and there are many groups. Further, they have a herd-like desire to hunt out what is hot. 

Shiffy (let’s get informal now) has a history of having huge numbers of CTAs, day traders and other investors that swamp commodity markets and make massive bets. And that’s why the trading is on Shiffy and not the SGE … in a word – leverage. It is hard as someone from Europe to comprehend the scale and the fervour. We had something similar in the West which proved immensely powerful – especially for those countries with global ambitions – called exchanges – places were traders met … now almost everything is silo’ed and digital. Chat rooms do exist but they are pretty grim and dull.  

Coming to the point … the Chinese are absolutely aware that gold is ‘interesting’- fashionable even and at many different parts of the financial eco-system ; PBoC demand is steady, albeit modest, for traditional gold buyers called dama (or Chinese grandmothers) the demand is very strong and they are joined by millennials and Gen Z new buyers who are acquiring gold ‘beans’ – (this is China’s “costco-moment” – interesting but actually not all that significant). Chinese ETF demand is again small on a global basis, but growing. So, gold coming onto the radar at Shiffy was inevitable and they don’t do half measures – it was previously copper and even soda ash futures (for glass – for buildings) and they have now thrown themselves at gold.  

We have seen this before. 

There was massive gold buying on Shiffy back in 2019 but then it was buy-and-hold and hence prices, volumes and open interest rose together. 

Cutting to the chase, gold is in fashion in China but only for so long as it is interesting and has momentum in my view. Currently gold futures volumes on Shiffy are running at about six-fold the run-rate of the last 5 years. 

I maintain the view that gold is defying gravity just now (by maybe $100 or so) … but the good news is physical demand in Europe is just coming in … in dribs and drabs … so a modest correction should find that physical floor and then gold can re-engage with its traditional physical buyers.  

Back to China, ever seen videos of a large shoal of fish at sea … they all seem to turn at exactly the same time – I never understood that. So it seems, it is for markets. 

And I know what 120 of them are thinking. 


Ross Norman – London


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