For those who have been noticing the wide spreads in gold and silver pricing between China and the West, it now appears that China is seeing physical gold shortages.
Gold shortages in China
March 6 (King World News) – Alasdair Macleod: ICBC and Agricultural Bank of China have run out of investment gold bars. And silver premiums over London spot are 13%. Comex silver contract is sinking into irrelevance.
Last weekend, the US and Israel attacked Iran and the week’s news was dominated by another Middle East war. Markets’ gut reaction was to mark down investment assets and mark up dollars. Consequently, in the confusion gold and silver declined on the week as the dollar rallied. In European trade this morning gold was $5090, down $230 from last Friday’s close, and silver at $82.70 was down $11 over the same timescale. Turnover on Comex in both contracts remained very low.
Meanwhile, premiums for silver in Shanghai held in the 12%—14% band. Given that silver imported into China bears 13% VAT and the cost of delivering from London or New York adds an extra 2%, this price difference is not enough to trigger an arbitrage. Nonetheless, silver is still being drained from all vaults, China’s included.
The delivery situation on Comex is dire, with the equivalent of only 16,250 silver contracts registered for delivery. Compare this with the 6,466 contracts delivered in the March contract to date. The March contract is still being bought with the obvious intention of standing for delivery, as is the April contract which can be delivered from the last week in March onwards.
Comex silver is the most oversold it has been in over 20 years, with open interest on Wednesday at 112,794 contracts. This means that speculative activity is the lowest it’s ever been, discouraged by shorts not willing to sell any more contracts by widening their spreads. This is reflected in the next chart:
With over nine times paper liabilities compared with deliverable silver which is also rapidly declining, this Comex contract is heading for trouble. Registered for delivery silver is being withdrawn along with eligible. Since the silver crisis in London on 9th October last, 175 million ounces have gone from Comex vaults, presumably to London where lease rates have remained elevated.
To summarise the position, paper silver in all markets is being encashed for physical, despite the fall in prices since 29th January when silver peaked at over $120. And with China being more of a physical delivery market, Comex and London paper contracts are declining into irrelevance.
Meanwhile, gold marches on with demand ranging from central banks to retail buyers and remaining strong despite the volatility. Yesterday, it transpired that two of China’s largest banks, ICBC and the Agricultural Bank have run out of investment bars. Additionally, we can assume that there is strong demand for gold accumulation accounts at all Chinese retail banks with household savings running at an additional annual $5—$6 trillion equivalent and mirroring public demand for investment bars.
As with silver, there is minimal speculative interest in gold, with Comex’s open interest at the lowest levels since the covid pandemic:
It is remarkable that despite gold being in a strong bull market that speculative interest is so low, particularly when most of the major banks expect higher prices by the yearend. For now, hedge funds pair trading would sell paper gold short to buy dollars, which will lead to a short squeeze later.
The logarithmic chart demonstrates the underlying strength of gold’s uptrend despite short-term dollar demand:
As noted above, the market’s gut reaction to a new war on Iran is to presume that safety is to be found in cash dollars. Accordingly, the US$ trade weighted index has been marked higher against other currencies, shown next:
Most important of all, the blockade of Hormuz is driving energy prices skywards, as the oil chart shows:
Far from Iran rapidly admitting defeat, it is becoming obvious that this conflict will last some time. That being the case, we can expect yet higher oil and LNG prices and investor’s attention turning to the unexpected consequences for inflation later this year. Hopes of lower interest rates are vanishing and beginning to destabilise bond and equity markets, leading to a dash for cash.
It is worth recalling the move to higher interest rates and bond yields which followed Russia’s invasion of Ukraine and sanctions against Russian oil and gas. This is almost certain to happen again with even greater consequences, in which case bond yields will soar again and financial bubbles will be bursting everywhere.
In that event, any attempt to mark down gold and silver will be manna from heaven for stackers. Both metals are already in high demand, particularly in China, which cannot be satisfied.
A word to the wise: if gold and silver are marked down, stack, stack, and stack again!
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