In the next part of our on-going look at the global gold market we now turn our attention to the Shanghai Gold Exchange. An exchange which has received more interest of late, than any other in the world of gold and silver.
Previously we have looked at the global gold market, COMEX, and more recently the London Gold Market. The next logical focus of our investigations is the Shanghai Gold Exchange. We also have a great infographic providing you with the top figures.
Given the significant rise of gold exports from Hong Kong to China, 68% year-over-year, this is a timely and informative research piece which shines a spotlight on the Eastern gold market in a time when many are declaring the end of the gold bull market. Given the huge demand for physical and reportedly high premiums on the gold price, we ask if this market may well be a better indicator of gold demand, and subsequently true gold prices, than either COMEX or London.
We do not yet believe that the SGE will become a gold price driver, but the significant volumes and deliveries seen on the exchange suggest that its role in gold price discovery will become significant…, if it is not already.
Much of the below is inspired and aided by @KoosJansen who has been hugely helpful on helping us to understand the workings and numbers of the SGE.
Compared to our studies of the secretive London gold market, access to data from the SGE was considerably easier to access. I hope you enjoy our deep dig into the white hot heat of the Chinese gold market.
A quick glance at previous data released by the SGE previously shows that the three largest gold contracts traded on the exchange are as follows: Au 99.95 (3kg contract) Au 99.99 (1 kg) Au (T+D) (also 1kg of 99.95). These are the contracts we focus on given their monopoly on liquidity at SGE, and thus gold price setting impact.
In 2011, the total trading volume of Au 99.99 exceeded that of Au 99.95, for the first time.
This continues to be the case today -a gradually widening gap between the two contracts is clear – particularly during peak demand periods such as April this year.
The Au (T+D) contract accounts for over 75% of activity on the SGE. When the gold price fell back in April, many gold fans were quick to point to the huge volumes being seen on the SGE. However, on a quarterly basis volumes for Au (T+D) were not as high as those seen in Q3 and Q4 2011, when the gold price climbed to, and then fell from, the all-time high of $1,920/oz.
It is worth mentioning that the SGE has a night trading session. This allows it to present a price which is more in line with the ‘international price’ as well as increase in volume. According to 2011 statistics the night session accounts for one-third of total trading volume on the exchange.
Whilst the volume on the SGE may seem impressive, compared to both the London market and COMEX it is exceptionally small. In the chart below SGE is represented in yellow, or it’s supposed to be…
As we stated in our previous work on the London Gold Market, despite the significant volumes passing through our capital, price discovery can be seen in both COMEX and London, despite New York’s significantly smaller volumes.
For anyone hoping the SGE might play a very large rolein gold price discovery, this does not appear to be obvious. A future key role might indeed occur, but for now the SGE is growing in the shadows of COMEX and the London Gold Market.