(The opinions expressed here are those of the author, a
columnist for Reuters.)
* GRAPHIC - Spot gold vs. Shanghai futures: https://tmsnrt.rs/3gb7zje
LAUNCESTON, Australia, July 30 (Reuters) - One of the
features of the current rally to a record gold price is that it
has been driven largely by investment products, with virtually
no support from the major physical demand centres in Asia,
namely China and India.
This has resulted in some unusual pricing dynamics, with
gold futures in Shanghai trading at a discount to both
spot gold and U.S. futures.
The Shanghai contract ended at 426.62 yuan ($61) per gram on
Wednesday, which is equivalent to $1,897.10 an ounce.
U.S. futures ended at $1,953.40 an ounce, while spot gold
finished the day at $1,970.40, not far off the record high of
$1,980.60 reached during Tuesday's trade.
The Shanghai discount is a reversal from earlier this year,
when the Chinese price was at a premium to spot gold.
For example, Shanghai futures closed at the equivalent of
$1,629.03 an ounce on March 16, a premium of $115.12, or 7.6%,
to the close of the spot price on the same day.
While there are brief periods when the spot price has been
higher than the price in Shanghai, the consistent pattern of
recent years is for the price in China to trade at a small
premium to the international price.
The reversal of this dynamic now is most likely a reflection
of the lower physical demand for gold in China, largely as a
result of the economic lockdowns imposed to combat the spread of
the novel coronavirus pandemic.
China's gold jewellery demand dropped 54% in the first
quarter of 2020 from the same period last year, according to
While China's jewellery demand may have recovered somewhat
in the second quarter, the weakness in the rest of Asia deepened
as the coronavirus spread outside of China and hit economies
across the region.
India, the second-biggest gold consumer after China, saw a
64% slump in demand in the first half of 2020, with Refinitiv
GFMS data showing imports of only 99 tonnes in the first six
months of 2020, down from 436 tonnes for the same period last
The coronavirus lockdown and the high price of gold in local
currency terms are largely to blame for the collapse in India's
While India is perhaps the worst-hit country among major
gold consumers, it's worth noting that Refinitiv GFMS data show
that physical demand was battered across the globe in the second
quarter of 2020, sliding 36% to just 677 tonnes, from 1,054 in
the same quarter in 2019.
However, flows into investment products such as exchange
traded funds (ETFs) soared, jumping 361% to 436 tonnes in the
second quarter, Refinitiv GFMS said.
The gold dynamic so far this year is pretty clear, the
massive investor interest has been more than enough to outweigh
the decline in physical demand.
Ongoing concerns over the global economic outlook, and low
to negative real interest rates should serve to keep investor
buying robust, even if there is a risk of profit-taking as gold
nears the psychological mark of $2,000 an ounce for the first
The question of weak physical demand in Asia's two
powerhouse consumers is somewhat trickier.
The most logical expectation is that demand will recover in
line with an improvement in the economy, already being seen in
China and with some early signs in India.
If this does occur, then gold gets another bullish factor to
drive a sustained rally, assuming investor demand continues.
(Editing by Christian Schmollinger)